CENCOSUD
A large South American Retail Company
Case study
Reference No. E311-088-1
ABSTRACT
CENCOSUD is a retail company that was started in Chile by the Chilean-German businessman Horst Paulmann. With a base of operations located in that distant country of South America, the conglomerate's founder set out the conquer Latin America, seeking as it says its mission "To be the most profitable and prestigious retailer in Latin America, based on excellence in our quality of service, respect for the communities we live and the commitment of our team of collaborators with the basic tenets of our company's vision, challenge, entrepreneurship and perseverance ".
The road is not easy, despite its strong presence in Latin America many analysts are wondering, what should do Paulmannto project his business to the level he thinks in Latin America? Does the conglomerate the appropriate expertise to try it? Is the company prepared to do so? Does the company have corporate governance that will consolidate the steps already taken? Additionally, at age 75 declared by founder Horst Paulmann, the ghost of succession could become a very important trigger for the maintenance of the family inside this huge conglomerate named Cencosud.
INTRODUCTION
CENCOSUD operations extend to the business of supermarkets, home centers, department stores, shopping centers and financial services, being the American owned company most diversified in the Southern Cone and the increased supply of square meters. Additionally, developing other business lines that complement its core businesssuch as insurance brokerage, family entertainment center and travel agencies.
The main objective of CENCOSUD is becoming the largest retail company in Latin America, reaching their maximum quality of service, excellence and commitment to hundreds of thousands of customers. To achieve this task, since the late eighties the Company has been involved in an ambitious plan for internationalization, which today has consolidated operations in Chile and Argentina and expansion plans under development, which has provided new horizons, beginning operations in Colombia, Peru and Brazil.
Argentina / Brazil / Chile / Colombia / PeruHypermarkets / 15 / 16 / 22 / 11
Supermarkets / 234 / 26 / 125 / 43
Homecenters / 34 / 24 / 2
Shopping Centers / 13 / 8 / 2
Department stores / In Analysis / 27 / In development
Insurance and Cards (million) / 0.17 / 1 / 3.5 / 1.5
The road is not easy, and despite its strong presence in Latin America, many analysts wonder What should Paulmanndo to project his business to the level he thinks about Latin America? Does the conglomerate the appropriate expertise to try? Is the company prepared to do so? Does the company have corporate governance that will consolidate the steps already taken? Additionally, at age 75 declared by founder Horst Paulmann, the ghost of succession could become a very important trigger for the maintenance of the family inside this huge conglomerate named Cencosud.
ORIGINS
Horst PaulmannKemna was born in Kassel, Germany in 1935. The family of seven brothers and his parents emigrated from Germany to Argentina in 1948. There, the father of Horst Paulmann got his first job as a telephone operator in the capital, Buenos Aires. Because of language barriers was dismissed for his constant errors in transferring calls. Also produced dolls beds sold to "Gath & Chávez," a company of the time.
In 1950 the family moved to Chile and settled in La Union, where they take the grant of the German Club and Union Club. The first acquisition of the Paulmann family was the restaurant Las Brisas, La Union. First he became self-service deli, before long, he was moved to Temuco, where in 1952, inaugurated the Las Brisas Restaurant in Temuco. When his father died in 1957, Horst and his brother Jurgen take care of the business. And then a simple factoccurred, which results in a huge development process. A friend gives them some strawberries to sell them at their site. Just last half an hour reached in the window and all were sold. The signal was clear. The brothers fitted out a space adjacent to a deli, which gradually expanded.
In 1960 he closed the restaurant to begin with self-service, and family Paulmann gives a central step, whenr HorstPaulmannand his brother Jurgen inaugurate the first self-service Las Brisas in Temuco, expanding toValdivia and Concepción. In this latter city opened Hiperbrisas supermarket in 1970, being highly beaten by the crisis 1970-1973, during which assumes the executive power in Chile the socialist government of UnidadPopular, headed by President Salvador Allende G.
In a period of expansion, Paulmann brothers finish their society some years later and Horst issettled in the capital of Chile, Santiago. In this square, he builds the Supermarket Wholesaler "Pasando y Pasando", located in Santa Rosa 3570, a popular district of Chile where he distributed to retailers, implementing the business model of wholesale sales self-serviced. After several trips to Europe in 1976, Horst creates a new kind of business in Chile: the "hypermarkets", or large supermarkets, that sell all kinds of products, an innovative idea for Chile at the time. The first is the Jumbo hypermarket of 7,000 m², whose first store was built where now stands the Mall Alto Las Condes, in an exclusive area of Santiago, and then open a second Jumbo supermarket in 1979, in Francisco Bilbao Latadia, an area of upper-middle socio-economic characteristics.
The Process of Internationalization
In 1982 begins the process of internationalization, inaugurating a Jumbo hypermarket and a shopping center in Argentina, and then opened Unicenter, one of the largest shopping centers in Argentina. The year 1993 will mark the income and the holding Cencosud the business of home centers, inaugurating the first Easy in Argentina, beside Lomas Shopping Centre, another large shopping center in Argentina. The success of these formats is moved to Chile, where Cencosud launches the largest and most important commercial center of the country, in the land where the first hypermarket Jumbo was built, Mall Alto Las Condes.
The following year, in 1993, Easy opened its first store in Chile, Alto Las Condes and parallel open the gates San Martin Factory Mall in Argentina, and in 1996 opened the Mall Palermo in Argentina.
From that moment, the Elephant stampede begins, referring to the typical mascot Jumbo supermarket, which is an Elephant, opened in Argentina between 1997 and 2000, shopping centers Quilmes Factory, Las Palmas del Pinar, El Portal Escobar, Portal of Patagonia and Mall Centro de Rancagua, this latter in Chile. In 2001, opens Centro Comercial Los Andes in Mendoza, Argentina, continuing its strong growth in 2002, which Cencosud acquired the operations of Home Depot, with its four stores in Argentina, the operations of Proterra, a regional supermarket chain in Chile, with its seven locations in the south and opens the shopping center Portal La Reina in Santiago, Chile.
2003 would bring a huge growth toCencosud, when it acquires the operations of Santa Isabel supermarkets in Chile and became the second operator of supermarkets in that country. He also opens Florida Center and Portal La Dehesa commercial centers, both in Santiago de Chile and Cencosud gives a major step in forming "Cencosud Credit Card Manager, SA" and the launch of credit cards, "Jumbo More",Cencosud enters the credit market.
In 2005, Cencosud surprised the Chilean market by purchasing one of the largest department stores "Paris", which also operated a travel agency, an insurance broker, the BancoParis and the Credit Card Administrator ACC SA. The following year, acquired the supermarket Economax, Santiago and Infante, Antofagasta, Chile. As a part of that expansion, acquires the retailer chain Foster /Eurofashion in Chile, which sells apparel brands Foster, Maritime and JJO. That year he began the construction of Chile's largest mega project, the iconic tower Costanera Center, a project unprecedented in the country and was suspended in early 2009, as a result of the subprime crisis that hit Chile.
In 2007, with the aim of developing the business of homecenters in Colombia, signed an agreement with Casino Guichard-Perrachon, to build 15 Easy stores in that country over the next five years. However, it continues to surprise and Cencosud signs the agreement to acquire the specialist chain of ceramics, fittings, bathroom and kitchen Blaisten in Argentina and entered the largest market in Latin America, Brazil, through the purchase of the chain of supermarkets and hypermarkets GBarbosa and also acquires WONG chain, which operates supermarkets and hypermarkets formats and malls in Peru. In 2008, consolidates 100% control of operations in Colombia and the large structure Easy subsidiary in Colombia, which is consolidated in line sale of building materials and home improvement.
CENCOSUD TODAY
Administration and Property
The origins of the business of the company date back to 1960 with the opening of the first supermarket Las Brisas in Temuco. Until May 2004 the company was fully controlled by businessman Horst Paulmann and his family, directly and through mutual funds. In making the placement of shares in the stock market in 2004, together with the exchange OPA shares of the Paris stores in March 2005, Horst Paulmann reduced its stake in the company up to 65%. However, in March 2010, the PaulmannGroup controls 65% of the company’s property.
Ownership Structure
(March 2010)
%Quinhamalli Investments Ltd. / 25.69
Latadua Investments Ltd. / 24.33
Tano Investments Ltd. / 10.48
Banco de Chile for others / 2.82
Banco Santander - JP Morgan / 2.79
PaulmannKenna Horst / 2.47
BancoItau on behalf of investors / 1.76
Banchile Brokers SA / 1.71
Larrain Vial SA Stockbrokers / 1.55
Provida Pension Fund C / 1.53
Provida Pension Fund B / 1.20
Celfin Capital SA / 1.19
Total / 77.52
Strengths and Risks
Strengths
- Strong business profile. Cencosud is the main operator of the retail sector of the country. It is one of the leading supermarket chains in an industry consolidation around large operators. It is the second operator on the supermarket industry in Chile and Argentina, a leading home improvement industry in Argentina and Chile and the second participant in one of the largest operators of shopping centers in both countries. Also involved in the administration of department stores in Chile and in the financial business through financing to customers through own credit cards and BancoParis. In Peru, it is the main operator of the supermarket industry, while in Brazil has a significant presence in the supermarket industry in the Northeast.
- Strong and well positioned brands. The concept Jumbo has a strong and clear market positioning in the segment that is targeted in Chile and Argentina, allowing it to maintain positive sales margins and sales per square meter higher than the average supermarket industry. Easy stores in Argentina have a privileged position and brand recognition. Furthermore, chains Wong and GBarbosa have a high presence in their countries of operation. Meanwhile, Paris stores, due to a long tradition of 100 years in business and strong investment in advertising, is positioned as one of the most important department stores in the country. Also, the department store format has a high level of acceptance by consumers.
- Business model. The company operates a multi-format scheme that enhances and complements their business. Thus, the location of Jumbo, Easy and Paris, into the malls owned by holding company, strengthens the business of shopping centers to generate a significant number of people. Meanwhile, the supermarket business has a regular attendance of customers with high transactional. In addition, this business is considered less sensitive, relative to the levels of economic activity than other retailers because of the commercialization of more basic goods like groceries.
- Strategic properties. Cencosud possesses urban properties of high strategic value for the development of real estate, supermarkets and home centers. The company owns land and facilities as well as land that will ensure the implementation of its development plan in the area of supermarkets, shopping for home improvement, shopping centers and department stores, which represent a competitive advantage over other chains whose operations depend on the rental of properties.
- Increasing level of acceptance and development achieved by the concept of shopping as a distribution channel. The comfort, range of hours of operation, security, entertainment and variety of products and services offered, has made that malls displace, in large part, traditional shopping venues.
Risks
- High competition. The supermarket industry in Chile is highly competitive, characterized by consolidation around large supermarket chains such as D & S, Cencosud, SMU and Supermercadosdel Sur and Falabella, its main competitor in the retail trade through supermarkets Totus and San Francisco. In Argentina there is strong competition, primarily from large global supermarket chains such asCarefour and Wal-Mart, among others. Meanwhile, Paris stores face competition not only from major department stores (Falabella, Ripley and Polar), but also of a wide range of retailers. In the home improvement industry, Easy faces competition mainly Sodimac, industry leader and subsidiary of S.A.C.IFalabella.
- Risk integration of new operations and over-expansion. The proper development of their aggressive business strategies and costly investment plans require Cencosud to maintain management high capacity, competent staff and efficient distribution systems and inventory control, deficient elements that could affect the profitability of new investments. The future profitability may also be affected by the saturation of certain geographic markets where Cencosud participates.
- Risk of investments abroad. The concentration, in March 2009, approximately 36% of its operating income in Argentina classified as "B-" / Stables by Standard & Poor's, 12% jointly in Brazil and Peru, sorted in 'BBB-' / Stables international level by Standard & Poor's, implies a significant increase in their relative risk compared to flows generated only in Chile (A + / Stables). Regional expansion gives the company opportunities for growth and the possibility of strengthening its position as a regional provider. However, involves the challenge of integrating new operations and may increase the relative share of risky countries and markets more volatile. The company has recently opened operations in Colombia (rated at “BB +” / Stables).
- Income sensitivity to variations in the level of economic activity. Activities related to trade in consumer goods, are sensitive to variations in the level of economic activity, especially in the presence of adverse economic cycles. Additionally, the lowest level of sales experienced by the retail sector during these periods (given the contraction in spending) can influence both the rate of occupancy of the shopping centers as potential recoverability of loans granted to customers.
- Loan portfolio. The granting of credit is a key factor in the profitability of companies and requires substantial amounts of financing working capital. It is therefore essential that the portfolio maintains an adequate quality, especially in periods of low economic activity or sales growth. Increases in customer delinquencies could affect cash flow of companies. Changes in the regulatory framework governing the provision of credit and greater restrictions in this market can affect the ability to generate operating cash flows.
Competitive Position
Cencosud SA has business in Chile, Argentina, Brazil, Peru and Colombia: supermarkets (Jumbo, Santa Isabel, Disco, Wong, GBarbosa, among other brands), shopping for home improvement (Easy), real estate transactions (Shopping Centers), department stores (Paris), financial services (Paris cards, Easy Más and Jumbo Más, Banco Paris and insurance brokerage) and entertainment facilities for children, among others.
In March 2009, operates in Chile Jumbo hypermarkets (26 stores), supermarkets Santa Isabel (135), stores for home improvement Easy (25 locations), the Paris department stores (30 outlets), shopping centers (8) and commercial off the line of boxes in the Jumbo hypermarkets, Santa Isabel supermarkets and stores Easy.
In Argentina, by Cencosud SA (Argentina), operates 16 Jumbo hypermarkets, 238 supermarkets Disco, 46 Easy stores and 12 shopping centers. In Brazil, operates 31 supermarkets and 19 hypermarkets, plus outlets in drugstores and other formats (25). In Peru, the company operates 41 supermarkets, 12 hypermarkets and 2 shopping centers. Meanwhile, in Colombia operates 1 Easy store.
Revenue by country (March 2009)
Peru, Brazil, Colombia - 12%
Argentina - 36%
Chiles - 52%
After the incorporation of acquisitions in Brazil and Peru, the relative importance of revenue and operating income from Chile has been reduced to 47% and 52% respectively. The revenue base has been diversified incorporating operations that have experienced significant growth in recent years in their respective countries, however, potentially more volatile and higher relative risk.
The evolution of EBITDA by country has undergone changes as shown in the table below, reflecting the relative importance that businesses have been taking to the conglomerate.
Evolution EBITDA by country
2004 / 2005 / 2006 / 2007 / 2008 / March 2009Chile / 59% / 73% / 72% / 70% / 59% / 52%
Argentina / 41% / 27% / 28% / 29% / 28% / 36%
Brazil, Peru and Colombia / 0% / 0% / 0% / 1% / 13% / 12%
Revenue by business area and gross margin, focus heavily on the area of supermarkets, where they represent approximately 73% and 66%, as shown below:
Income by business area
(March 2009)
Shops - 8%
Easy - 13%
Malls - 3%
Card - 4%
Other - 0%
Supermarkets - 73%
Gross profit by business area
(March 2009)
Easy - 15%
Department stores - 6%
Malls - 5%
Cards and insurance - 7%
Supermarkets - 66%
THE BIG CHANGE
In December 2008, there was one of the most surprising changes in Cencosud, when founder and controller, Horst Paulmann, announced the departure of corporate general manager, Laurence Golborne, who had led the growth of Cencosud in recent years. Golborne resigned from Colombia, a decision which was accepted by the board in an emergency meeting that met some of its members, as Robert Philipps, Sven Von Appen and Erasmo Wong, outside the capital.
The staff of the company moved their pieces, defining that, despite the economic crisis that worries the world, was "the right time to welcome the second generation" of the founding family conglomerate through Manfred Paulmann.
The son of the businessman will take the vice presidency of the board, since until now did not exist. In addition, the vacancy of Golborne was occupied by Daniel Rodriguez, who had arrived a few months ago the company as Financial Manager.