On April 15th in Mexico City, the second largest retailer in Mexico Soriana, signed an agreement with the Latin American corporation of Falabella to establish a chain of home improvement stores and financial services.
The agreement announced on April 15th between Soriana and Falabella to develop DIY and finance in Mexico was unexpected. Falabella has indicated for a number of years an interest in entering the Mexican market with its large homeowner population and relatively stable macro-economics to balance out their Latin America holdings. But Soriana is a major surprise given they recently concluded a major purchase of 160 stores from Comercial Mexicana (CCM). The depth of energy and investment needed to merge that group into their existing stores was learned from their prior purchase of the stores of Gigante, which took over five hard years to rebanner and format to standards. Partnering with Falabella was not an expected development in 2016. However, this may well be a case of real synergies that both companies can well afford without placing existing plans in jeopardy. And with low risk create a new entity in the strong Mexican consumer market.
Soriana has extensive real estate holdings across Mexico, now with an additional 160 stores along with strong partnerships with two mall management companies. Overall it is primarily a grocery stores company with hypermarts and small format stores along with a club store chain called City Club. It had issues during the recession having taken on debt to buy Gigante in 2007 and its home market in the north of the country was hit by the downturn in 2013 and 2014. However it has had solid sales and comparable store growth for the last 6 quarters and despite soft sales in prior periods was consistently profitable.
Figure #2: Falabella Formats and Sales across Latin America
Source: Corporate Report to Investors March 2016
Falabella is based in Chile which is still about 40 % of its overall sales with a range of companies in Peru, Colombia, Brazil, Uruguay and Argentina. These consists of a department store banner of Falabella, the home improvement group of Sodimac, supermarkets and hypermarks, financials service under the brand CMR (Crédito Multi-Rotativo), and a commercial real estate group of Mall Plaza. It also had to contend with soft economies across the region for the last few years though it still is showing strong metrics in sales, profitability, and comp stores in double digits for 2015. It had sales roughly (exchange rates vary) of $11 billion, the same as Soriana.
Falabella offers Soriana a unique set of new capabilities; Sodimac home improvement with its strong brand and attractive store formats and CMR, a proven multi-product financial service for retail and consumer credit, insurance, travel, and investment branches. Soriana does partner with Banamex for finance, but this has not been a differentiator. The hypemarts also carry a range of home goods, but does not offer a competitive edge versus the far larger Walmart de Mexico or other stores in that category such as Liverpool Department store, Coppel mass merchandiser, and Home Depot.
Falabella gets quick and relatively easy access to a huge market via Soriana large real estate holdings or which an estimated 40% are assumed to be waiting development. There is also the potential of taking some of the larger non-performing properties in the hypermart group and converting to home improvement.
Home ownership is strong in Mexico with a range of programs to assist buyers. As these programs have been ramped back due in part to government finances private mortgage lenders have expanded into the gap. The economy is doing well as industry continues to move into higher quality and complex manufacturing for export to the strong US market along with increasing exports to Central America and Colombia. Mexico joined Colombia, Peru, and Chile in the free-trade zone of the Pacific Alliance in 2012 and that has slowly grow into a solid base for additional trade. Combined with the North America Free Trade Agreement (NAFTA) and relatively low tariffs and barriers to trade, Mexico has been able to continue the growth of the middle class and in turn the expansion of a consumer society.
Home Depot has the largest share of DIY in Mexico with 115 stores and plans for 20 more in the coming five years. Lowe’s is also in Mexico but has had difficulty establishing its brand and is stagnating in performance, it is rumored they are open to selling the stores. It should be noted there is no IKEA in this market, so Home Depot carries a much larger range of home furnishing and products than in the US.
This is important in considering how Sodimac may be established since they have three formats:
• Sodimac Constructor – 150,000 – 250,000sqft they focus on large and medium contractors B2B (business-to-business) trade. The stores and websites offer a range of training, certification, and financial services to the smaller business community. They are not merchandised for DIY (Do-It-Yourself) consumers. It is unlikely these will be built in Mexico with its strong network of existing suppliers and distributors, but still possible if combined with Homecenter.
• Sodimac Homecenter – Usually about 150,000sqft or larger, these stores a much more merchandised for home & garden, furnishing, and overall improvement along with a DIY selection of product. The mix depends on the location, but given the breadth of procurement for the department store group the range of home products is broader than found in a Home Depot.
• HOMY – are in the 100,000sqft range they are a pure home goods store modelled after IKEA. This format is the most recent and found only in Chile to date.
Sodimac combines these formats along with Falabella’s hypermart format Tottus. So there may be a Constructor in the same plaza as a Homecenter or a Homecenter will be built underneath a Tottus. HOMY may well be built on top of both. In all cases their credit and financing for shopper is via CMR.
CMR Falabella started as a department store credit card program with travel stores. Like other companies in Chile Falabella established a bank (Banco Falabella) that quickly expanded into insurance, car loans, and brokerage services in the late 1990’s. Commercial credit was slow to take hold in Chile, Argentina, and Peru CMR pushed quickly into very broad acceptance agreements with hundreds of retailers of all types, professional services, and 3rd party electronic bill payment. It also added telecommunications services in 2013.
As the company expanded into Colombia, Brazil and Uruguay it has used CMR as a means of quickly creating a client base for it retail stores. It co-brands the CMR card in some countries with MasterCard. Overall it has 5 million active card holders in the region.
Kantar Retail Analysis
This agreement came as a surprise due to Soriana’s purchase of CCM becoming final in January of this year. However, given the lack of competitive overlap between the companies and Falabella’s strategic direction into Mexico it is a relatively low-risk means for both to change the market. The real estate market in Mexico is complex and is difficult for outsiders to navigate much less find suitable locations. Partnering with Soriana provides a quick means of getting past that barrier and into key locations, especially in the central regions of the country where the majority of the population is found. And it is a market that has a clear consumer need for home products and improvement that will drive DIY growth for a number of years.
For the first time Soriana gains the potential to out-position the #1 retailer, Walmart. To date its formats have a competitive match to not only Walmarts’ banners, but also to the other multi-channel retailer Chedraui. Sodimac provides a proven and profitable business with existing supplier base. And it is a format that Walmart has shown no interest in opening to this market. To the contrary, Walmart continues to divest non-core channels. It also opens the potential for taking some of the weaker larger store locations and converting to DIY stores. If locations are combined with Soriana Hipers, the synergy will drive additional traffic.
CMR is a longer-term business opportunity. The credit market in Mexico is already quite competitive between banks and retailers. But the ability to leverage CMR’s expertise to create new in-house consumer financing is a new tool for Soriana. The brand will likely remain CMR, but how much of additional services of insurance and travel will be introduced remains to be seen.
This partnership has been clearly stated as 50/50 between Soriana and Falabella with the plan to set aside $300 million in the next three months to start development. Mr. Solari of Falabella and Mr Bringas of Soriana are regarded as strong leaders of their respective companies and their cooperation will be critical to make this work effectively.
David Marcotte, Kantar Retail – Senior Vice President Retail Insights Americas (2014 – present). Director of Analytics & Information Management at Wipro Technologies (2013 – 2014). Kantar Retail – Senior Vice President Retail Insights Americas (2007 – 2013) David on LinkedIn.
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