Love on the Rocks.

Retailers are divorcing in Latin America over the three Cs: control, capital and conflict of interest.

AS PRESIDENT OF THE INTERNATIONAL division of U.S.-based Office Depot, Bruce Nelson manages two joint ventures abroad: one in Israel and one in Mexico. But they are as different as night and day.

When Office Depot decided to make an acquisition in Israel, it took countless meetings with lawyers, stacks of paperwork and constant bickering with its local partners before the deal could go forward. When Office Depot attempted to buy an office supply company in Mexico with joint venture partner Gigante, all it took was a few telephone calls and a fax detailing the transaction before the two agreed to make their move. "It all comes down to trust," Nelson says.

The Office Depot/Gigante marriage is one of the few that has survived past the honeymoon period. Over the last five years, five retail joint ventures in Latin America have ended in divorce, four in Mexico and one in Brazil

Why have so many of these sweet conplings turned sour? Many of the retailers wouldn't talk to LATIN TRADE about their failed marriages. But analysts say love is usually lost over one of the three Cs: control, capital or conflict of interest.

Control has tended to be the biggest breaking point, according to Meredith Prichard, who follows Latin American retailers for U.S. investment firm JP Morgan. "When they say they're both going to run it, it inevitably doesn't work," she says. "It has only worked in the ones where one group has definitive power.

Debra Wang Smith, a Latin America retail analyst at Goldman Sachs, says she's seen this phenomenon in almost all the joint ventures that have been signed so far "The two companies that go into this [are] used to running a business, but then they have a business they're only halfway running," she says. "So at some point, it's always a question of, whose business is it? And that's usually a big question."

That was the case at U.S.-based WalMart and Cifra, which signed a joint-venture agreement back in 1991 to open Wal-Mart Superstores and Sam's Clubs across Mexico. While the two worked well together, they occasionally had runnins over the management of the stores. Wal-Mart did away with that by acquiring 51% of Cifra in 1997 for $1.2 billion. After a restructuring that eliminated redundancies and married their individual strengths in distribution (Cifra) and systems (Wal-Mart), things have been running smoothly ever since.

Money talks. Capital is usually the second-most common issue that comes into play. The partner that has it usually calls the shots; the partner that doesn't finds itself playing second fiddle, even if it's supposed to be a 50/50 joint venture.

That was the situation between Wal-Mart and Lojas Americanas, an operator of five-and-dime stores in Brazil. Deeppocketed Wal-Mart wanted to move fast and was willing to spend gobs of money and spill a lot of red ink until it reached critical mass; its smaller Brazilian partner just couldn't keep up. And because Wal-Mart was the one throwing the money at it, Lojas tended to take a back seat in terms of management. The two eventually decided to part company.

"Wal-Mart was willing to take losses for a far longer period of time and was prepared to grow more rapidly if the opportunity manifested itself," says Robert Ford, the Latin America retail analyst at Merrill Lynch. "Lojas never could."

It's not always the Latin American partner without the dowry U.S.-based Kmart had to kiss Mexican partner Puerto de Liverpool goodbye because of financial problems at home. It sold its stake in the venture--which had three stores in Mexico City, one in Cuemavaca and one schedaled to open in Puebla--to Controladora Comercial Mexicana (Comerci) in 1997 for $148.5 million.

Conflict of interest has also put stress on these marriages. That was true in the case of Gigante and French partner Carrefour. Both had similar formats, and arguments arose over site location. Carrefour eventually bought Gigante's interest at the beginning of last year. "When Carrefour wants to open a new store and it falls within the perceived trade area of Gigante stores, how does Gigante feel about cannibalizing its own space?" Merrill Lynch's Ford says. "Whether they say it's an issue or not, it's gotta be."

Future store purchases. Sometimes it's simply failed concepts that are to blame. Early last year, Fleming Cos., the U.S.-based food distributor, sold its 49% stake in its Mexican joint venture back to partner Gigante after shoppers were not thrilled with the product mix at their five "Supermart" stores (two were closed and three were converted into "Bodega Gigante" stores, which offer more clothing and other non-food items). And France's Auchan and Comerci called it quits in 1996 when its single store in Mexico City proved to be too big, even for the selection-hungry Mexican consumer.

Analysts agree that retail joint ventures are probably dead in Latin America. They think the future will probably be in foreign companies buying equity stakes in their Latin American counterparts. Most recently Dutch supermarket chain Ahold has been on a buying spree, scooping up stakes in Disco of Argentina, Bompreco in Brazil and Santa Isabel in Chile. Portuguese chains Sonae and Jeronimo Martins are also expanding via acquistions in Brazil.

Still other foreign retailers may choose to enter Latin America on their own, much like Texas-based H-B-B Grocery Co., which has opened a handful of stores in the Monterrey area. But it's risky without the distribution, real estate contacts and marketing know-how of a local partner.

There may still be a place for joint ventures between retailers with different concepts and product lines, such as the one between Office Depot and Gigante, which now operates 35 stores in Mexico, 21 of which opened last year. The two plan to open two more stores this summer.

It's helped that the two sides trust each other "It's simple," Office Depot's Nelson says. "Both partners put in capital, both partners have had the patience to make it work and each partner brought something to the table," All signs of a good marriage.

                                SPLITSVILLE
So far, five retail joint ventures in Latin America have gone bust in the
last five years.

COMPANY/ORIGIN   COUNTRY    FORMAT     LOCAL PARTNER
Auchan/France    Mexico  Hypermarkets     Comerci
Carrefour/France Mexico  Hypermarkets     Gigante
Fleming/U.S.     Mexico  Supermarkets     Gigante
Kmart/U.S.       Mexico  Hypermarkets     Comerci
Wal-Mart/U.S.    Brazil  Hypermarkets/     Lojas
                          Warehouses    Americanas


SOURCE: JP Morgan