Sales guys: Chile's big retailer slash prices, and margins, to grow in a hot retail market.

Chile's largest supermarket chain, D&S, continues to break new ground as it battles to boost its growth in the super-competitive domestic retail industry. The company already takes in an estimated 7.5% of what Chilean families spend a month in supermarkets, and it aims to raise that figure to 15%. There is still great potential for growth, the retailer says. "That means doubling the size of the company over a reasonable time frame and that's what we're working towards," says Miguel Nunez, chief financial officer at D&S.

Over the first three quarters of last year, total sales reached US$1.69 billion. After investing $1.10 billion over the last seven years, the chain now owns 75 stores, employs 27,000 and leads the industry, controlling 34% of Chile's supermarket sector, according to company figures. D&S is testing the waters to see if its "low prices, always" strategy, launched in the second half of 2003, will fly with shareholders. The plan cuts prices--and profit margins, Nunez says. The initiative resulted in an 84% decline in profits reported during the first half of 2004. D&S says the strategy will increase consumer traffic and lift sales volumes, and it expects the plan to generate returns in early 2006. "We are pursuing a very purposeful strategy to reduce margins and win over the consumer with a distinctive pricing policy," Nunez says. "That is an investment that is going to take two or three years to deliver full results."

Foreign and domestic investors so far have warmed to the company's new, low-price game plan. The company raised $252.5 million by issuing stock in Chilean and in global markets, a placement that equaled 20% of the company's capitalization. Controlled by Chile's Ibanez family, D&S Hill use part of the capital increase to pre-pay debt it took on in early 2004, when the company bought seven Chilean hypermarkets from French retail giant Carrefour. Some of the money also Hill help finance an aggressive capital-spending budget of between $100 million and $120 million a year. In 2005, D&S plans to open eight hypermarkets under its Lider banner. Seven were opened in 2004.

The retailer also wants to expand its Farmalider drugstore chain, which has a 5% market share, and promote the use of its Presto credit card, which currently rings up some $200 million per year, 18% of all sales. Also, in September 2004, D&S announced an alliance allowing Banco del Estado, Chile's third-largest bank measured by loans, to offer financial services in its network of stores.

Rivals. D&S rival Cencosud, the nation's second-largest supermarket chain, isn't slacking off in the face of the D&S charge. Cencosud, whose best-known trademark is the Jumbo hypermarket chain, raised $331 million in May 2004 by selling 20.3% of its stock. Cencosud is owned by Chilean-German businessman Horst Paulmann.

But, unlike D&S, which has focused on growing in Chile, Cencosud's Jumbo chain has established a significant presence in Argentina. The company paid $315 million in November for Argentina's second-largest supermarket chain, Disco, which has 16% of the market there. (At press time, the purchase was still awaiting the approval of Argentine authorities.) When D&S bought Carrefour's stores in Chile, Cencosud turned its attention back home and bought the Montecarlo supermarket chain, which has 14 outlets in Santiago, 3% of the market and sales estimated to reach $175 million in 2005. Claudio Haase, Jumbos chief executive officer, says the company will open a store in the deep south of Chile during the first half of 2005 and several more during the remainder of the year. To those stores the company will add two new outlets under the Santa Isabel brand, a smaller supermarket format in Santiago.

Cencosud posted revenue of $1.10 billion over the first three quarters of 2004, and in January 2005 the company rang in the Southern Hemisphere's summer by offering to buy 40% of Almacenes Paris, the country's third-largest department store chain after Falabella and Ripley, all of which are domestically controlled. If the deal is finalized, Paulmann will own 67% of the resulting entity; he agreed to buy 27% of Almacenes Paris from businessman Jorge Galmez.

Even with these heavy deals on its to-do list, Cencosud doesn't have it easy. In addition to winning the good graces of Chile's tough regulators, Cencosud has a fight on its hands with Galmez's partners in Almacenes Paris, the powerful Luksic family and financial group Consorcio. Those partners are building up formidable barriers to block Cencosud. But Paulmann, refusing to back down in the face of his competitors, in late January managed to convince Cencosud's board to approve a $1 billion capital increase to finance the acquisition.

If he succeeds, Paulmann would control a Cencosud-Paris retailing entity worth $3.30 billion and have a firm grip on the second-place spot in Chile's retail market. The country's top overall retailer is Falabella-Sodimac, a department store chain owned by Chile's Solari and Del Rio families. Worth $5.36 billion, it's one of South America's largest retailers, and a powerhouse--it bought U.S. hardware giant Home Depot's assets in the country upon its exit from Chile, and it has faced down foreign competitors such as U.S. department stores JCPenney and Sears without batting an eye, thanks to a keen sense of Chilean tastes. Via its San Francisco grocery-store subsidiary, Falabella-Sodimac holds third place in the supermarket segment, with a much smaller 3.1% market share.

Trimming fat. D&S and Cencosud both recognize that they must learn to survive on thinner margins. D&S is stocking its shelves with more store brands in order to lower prices. For its part, Cencosud says Jumbos policy is to have "the best quality of service and a wider range or lower prices" Even so, fierce competition between the two has not gone unchecked. In early 2004, the Chilean anti-monopoly regulator accused the companies of unfair competitive practices, including selling products at below cost.

Some say that each chain should follow whatever business strategy it wants, and that doing so is good for the consumer and for the economy. "What's important is that there is a healthy business framework that respects commitments and eliminates unilateral changes," says attorney Vasco Costa, president of the Chilean suppliers' association Asociacion Gremial de Industrias Proveedoras.

D&S and Cencosud's storming attack on the market hasn't caught supermarket chains outside the capital surprise. Combined, the two chains control more than 59% of Chile's supermarket sales, yet they set up shop in Chile's urban areas, giving family-owned regional supermarkets room to cater to rural customers. These small stores operate on less floor space and offer a more limited range of products, yet they have established alliances among each other to generate economies of scale.

"We decided to get together with eight other family-owned companies in the central south and make our own chain--Cadesur--so we could import the same products that Lider and Jumbo bring in from Asia," says Enrique Bravo, the owner of the BRYC supermarkets chain. BRYC, a Spanish acronym for "cheap, fast and convenient," (barato, rapido y conveniente) owns 27 stores and expects to ring up sales of $100 million in 2005. "We also have our own store brands, and we're building a plant in [the southern Chilean city of] Coronel to produce our own soft drinks," says Bravo.

Bravo thanks Chile's "crazy geography" for his success. "If I were alone in Santiago, I would obviously face a tremendous threat. BRYC has no more than 1.3% of the national market, but through Cadesur we're the third-largest chain in the country," he says. "In the regions where we operate, our market share is more than 50%."

SHOP SHAPE

Powerhouses D&S Cencosud dominate Chile's supermarkets.

D&S            33.9%
Cencosud       25.4%
San Francisco   3.1%
Unimarc         3.0%
Monserrat       3.0%
Rendic          2.7%
Others         28.9%

Source: Fitch Ratings

Note: Table made from pie chart.

EDUARDO CORONADO * SANTIAGO