Cencosud S.A.

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Cencosud S.A.

Avenida Kennedy 9001
Las Condes, Santiago
Chile
Telephone: (56) (2) 299-6999
Fax: (56) (2) 299-6978
Web site: http://www.cencosud.com.ar

Public Company
Incorporated: 1978
Employees: 27,700
Sales: CLP 921.29 billion ($1.55 billion) (2003)
Stock Exchanges: Bolsa de Comercio de Santiago New York
NAIC: 444110 Home Centers; 445110 Supermarkets and Other Grocery (Except Convenience) Stores; 522210 Credit Card Issuing; 531120 Lessors of Nonresidential Buildings (Except Miniwarehouses); 713110 Amusement and Theme Parks

Cencosud S.A. is one of the largest retailers in Chile and Argentina, with Jumbo hypermarkets (supersized supermarkets), Easy home centers, commercial centers (shopping malls), and theme parks in both countries. Founded by Horst Paulmann Kemna, an immigrant, Cencosud also owns the Santa Isabel and Las Brisas supermarket chains in Chile and issues its own credit card there. Subsidiaries arrange for the siting, development, and construction of its stores, and for the purchase, distribution, and sale of its perishable merchandise. The company's name is a contraction of Centros Comerciales Sudamericanos.

Hardscrabble Beginnings: 1957–75

Born in Germany, Paulmann came to Argentina in 1948 in the wake of World War II as a boy of 13, with his parents and six brothers and sisters. When the Perónist regime prohibited the imports on which his father's business depended, the family moved to Chile, where his parents had obtained the concession to operate a property that consisted of a hotel, restaurant, and bar. After three years of hard work, Paulmann's father and a brother-in-law were able to buy a small restaurant called Las Brisas, in Temuco, and the whole family moved there. Following the death of Horst's father in 1957, he and his older brother Jurgen took over the business. Interviewed for the Chilean business magazine Capital, Paulmann, speaking in a marked German accent despite a half-century in South America, recalled to M. Angelica Zegers, "The first years in the restaurant I was in the kitchen and between 25 and 35 I got up every day at four in the morning to arrive at five sharp in the central market for the best deals. That's what's known as the university of life."

The brothers added a takeout rotisserie in 1959 and closed the restaurant two years later, converting it to their first Las Brisas supermarket. Horst Paulmann told Zegers how he plied the streets with a microphone, mooing like a cow to tell people they could buy condensed milk for 2 pesos, 20 centavos at the store. Asked what was most important in managing a supermarket—the relation with the suppliers, the employees, the customers, the products, or the prices—he replied: "First, the customers; second, the customers; and third, the customers." Jurgen and Horst Paulmann opened Las Brisas super-markets in Concepción in 1965 and Valdivia in 1967. Two years later they installed a purchasing center in Santiago, which allowed them better control over their supplies and prices. In 1970 they opened another store in Concepción and one in Temuco, and in 1974 they opened two stores in Santiago: one a supermarket and the other, the first self-service store for wholesalers purchasing goods in large quantities.

Hypermarkets and More: 1975–95

Toward the end of 1975, the Paulmann brothers started construction of the first hypermarket in Chile, a Jumbo in the Las Condes neighborhood of Santiago. At the same time, however, the two decided to separate, because Jurgen did not like taking the risk of building a store of 7,000 square meters (about 75,000 square feet) in an area that was then almost depopulated. He retained the five Las Brisas supermarkets in southern Chile, while Horst kept the stores in Santiago. On the heels of years of political and economic crisis, Paulmann gambled, successfully, that the military government was ready to end import restrictions and thereby allow him to stock the store with high-quality imported items previously unavailable, as well as domestic delicacies such as fresh trout and lobster. In addition, he was aided by his suppliers in a time of high inflation; they warned him when a product was going to climb in price, and he bought in great quantities before it did so.

The success of the first Jumbo allowed Paulmann to build a second one on the site, which he bought very cheap, of a failing Santiago trolley-bus line. With prosperity returning, residents of Chile's capital and largest city flocked to it, buying large quantities of its meat, fish, vegetables, baked goods, pasta, and deli items. At about the same time he established Inmobilaria Las Verbenas, which began to act as a holding company and in which he grouped the properties of his enterprise. Incredibly, considering the severity of the economic crisis that struck Chile in 1982, Paulmann had sufficient resources to keep expanding. He now looked, however, toward Argentina. The country had its own problems—including triple-digit inflation—but the greater Buenos Aires area had in itself more inhabitants than all of Chile. He opened the first Jumbo in Argentina in 1982, a 9,282-square-meter (almost 100,000-square-foot) store in the Parque Brown area of Buenos Aires. Unicenter, the first regional shopping center in Argentina, was constructed in 1988 in suburban Martínez and eventually grew to 91,771 square meters (987,811 square feet) of rentable space. The success of this gigantic project led Paulmann to build an $80 million, 110,000-square-meter (1.18-million-square-foot) shopping center, Alto Las Condes, near the first Jumbo in Santiago.

Paulmann introduced the Easy chain, offering products for the home and garden, in 1993. The "do-it-yourself" concept of materials for construction, remodeling, and decoration was slow to catch on in Chile and Easy lost money during the first five years of its existence. Also, by 1993, Paulmann had established Aventura Play Centers. Run by his daughter, Heike, they eventually grew into theme parks located in both Chile and Argentina.

During these years Paulmann—a perfectionist obsessed with getting every detail right—acquired a reputation as difficult to deal with. Although extremely rational on one hand, he was given to micromanagement—even seen directing traffic in the parking lots of his malls—and to unexpected changes in direction on a moment's notice. Often he would call his subordinates late at night or in the early hours of the morning. On at least one occasion he dispatched his Chilean executives to an urgent meeting in Argentina, then, once they had arrived, postponed the meeting until the next day. One of Paulmann's closest associates quit after 18 years, seemingly because he tired of presenting projects that in the end never came to fruition. After longtime aide Oscar Wandanter resigned from Cencosud in 1996, the organization was left without a visible second in command. Self-financing was another key component of Paulmann's go-it-alone entrepreneurial style. "The banks loan umbrellas when the sun shines and not when it rains," he told Zegers in 2001. "That's why we have been able to construct an enterprise where more than 12,000 people work in Chile and Argentina today and where we have always invested our own resources."

But for all his efforts, Paulmann could not foresee every difficulty. While planning the Costanera Center mall in Santiago, he fired the local architectural firm after working with them for almost two years, then hired an office of better-known U.S. architects and ended with the same result. Even seemingly routine commissions could result in unforeseen problems. After Cencosud turned to an experienced Canadian firm for the rede-sign of a Jumbo, its staffers were stunned to find aisles at least 12 feet wide to handle the crush of shoppers, and 50 to 70 checkout lanes in service. Fixtures and materials had to be designed to withstand much heavier levels of traffic than American retailers experience. Nor did completed projects always meet expectations. In 1994 Cencosud announced that it would build the biggest mall in Chile, Alto La Florida in Santiago, with more than 200,000 square meters (nearly 2.2 million square feet) of space, at a cost of almost $100 million. The plan included a Jumbo, an Easy, a 16-screen cinema, and an office tower. This proved to be more space than even Paulmann could fill with his own retail chains, so he had to rent to rival ones.

Shuttling Between Argentina and Chile: 1993–2004

At the end of 1996 Cencosud opened another Santiago mall, Maipú, but most of the company's activity during the decade was in Argentina, where inflation had ended with the tying of the nation's peso to the dollar. In 1993 Cencosud opened Lomas Center, the first commercial center in the southern part of greater Buenos Aires, and in 1994 San Martín Factory. During 1996–97 Cencosud invested more than $200 million to raise four commercial centers in the province of Buenos Aires, which surrounds the city on three sides. Centro Comercial Palermo, located in the Buenos Aires neighborhood of that name, opened in 1996, and in 1997 the first mall in the western part of greater Buenos Aires, Plaza Oeste Shopping, opened its doors. Between 1997 and 2001 Cencosud completed Quilmes Factory, Las Palmas del Pilar, and El Portal de Escobar, all in the province of Buenos Aires; Portal de la Patagonia, in the province of Neuquén; and Portal de los Andes, in the city of Mendoza.

Cencosud bought Home Depot's four Argentine stores for $90 million in 2001, converting them into Easy units and taking out a $125 million syndicated loan from four banks to help pay for the acquisition. This was the first significant debt that Paulmann had taken on, but by the end of the year his company had issued bonds equivalent to another $144 million. Although Cencosud owned large tracts of property in the Chilean cities of Puerto Montt, Rancagua, Temoco, and Viña del Mar as well as Santiago, Paulmann was spending 80 percent of his time in Argentina, and his two chief lieutenants also were based there. Argentina accounted for some 70 percent of Cencosud's sales as late as 2001. Although the Chilean business press expressed pique at this development, Capital named him its entrepreneur of 2001.

Company Perspectives:

The mission of all the enterprises that make up the Cencosud group is to fully satisfy its customers by means of the best offer of the market in all its business units.

As Argentina fell into recession, Cencosud turned back to Chile for a $250 million program of expansion through 2003 to include four commercial centers, two Easy stores, and a Jumbo. Portal Rancagua, a shopping mall in the city of that name, was completed in 2000. Three years later, the company owned Portal La Dehesa, a $130 million mall in the eastern part of Santiago with 45 checkout counters on two floors, five movie screens with 1,180 seats, a bowling alley, a food court, and a game room. Also in 2003, Cencosud bought Santa Isabel S.A., a 75-unit chain of Chilean supermarkets, from the Dutch retailer Koninklijke Ahold N.V. for $94.5 million. By 1996 this chain had become the largest of its kind in Chile but had subsequently lost market share and fallen into the red. The purchase made Cencosud the second largest operator of supermarkets in Chile, with 19 percent of the total sales volume. Then, in January 2004, Paulmann acquired the 17-unit Las Brisas chain from his brother Jurgen for about $30 million. In August Cencosud purchased Supermercados Montecarlo S.A., a chain of 14 Santiago units, for $78.5 million. These additions raised its share of Chilean supermarket sales to 24 percent.

Cencosud, in December 2003, took out a syndicated loan of $243 million from international and local banks. It became a public company in 2004 with an initial offering of shares on the Borsa de Comercio de Santiago. The offer to sell 20 percent of the company, eight times oversubscribed, raised $228.19 million and was accompanied by a sale of American depositary receipts in the United States that raised an additional $105.38 million. These funds were expected to be used in investments of about $133 million between 2004 and 2006 to build eight supermarkets and seven Easy stores in Chile. Some $25 million was spent to complete a Jumbo and Easy in La Serena in 2004. Due to open before the end of the year were Jumbo units in Temuco and Chillán, with others pending in Antofagasta and Valparaiso. A Cencosud shopping center in Rosario, Argentina, also opened in 2004.

Cencosud made even bigger news in 2004 with the announcement that it hoped to buy the Disco supermarket chain in Argentina—the nation's second largest retailer—from Koninklijke Ahold. Such a transaction, at a cost of $315 million, would add no less than 237 units to the company portfolio and raise Cencosud's annual sales to at least $2.2 billion and perhaps $3 billion. Because of antitrust issues the sale was not expected to close until 2005, if at all.

At the end of 2003 Cencosud had 21 Jumbo hypermarkets, 72 Santa Isabel supermarkets, 35 Easy home centers, 17 commercial centers (all of which had a Jumbo and an Easy), and seven Aventura Centers, totaling about one million square meters (nearly 11 million square feet) of selling space in 35 cities. In that year the company issued its own credit card, Jumbo Más, in Chile. The card allowed its holders to make credit purchases in Jumbo and Easy, paying monthly without interest over a period as long as 36 months.

Cencosud's sales came to CLP 921.29 billion ($1.55 billion) in 2003, and its net income to CLP 44.17 billion ($74.38 million). Chile now accounted for 65 percent of the total and Argentina only 35 percent. Jumbo sales came to 54 percent of the total, Easy to 27 percent, Santa Isabel to 14 percent, and the commercial centers to the remaining 5 percent. The long-term debt at the end of the year was CLP 303.33 billion ($510.8 million). By late 2004 company holdings were considerably larger, with the addition of the 17 Las Brisas and 14 Montecarlo units, plus another Jumbo and Santa Isabel and six more Easy units. The number of employees had now reached 27,700.

Principal Subsidiaries

Cencosud S.A.; Cencosud Internacional S.A.; Cencosud Shopping Centers S.A. (93%); Easy Argentina S.R.L. (Argentina); Inversiones Jumbo S.A. (Argentina); Jumbo S.A. (92%); Santa Isabel S.A.

Principal Divisions

Commercial Centers; Credit Card; Real Estate; Supermarkets.

Principal Competitors

Coto C.I.C.S.A.; Disco S.A.; Empresa D&S S.A.; S.A.C.I. Falabella.

Key Dates:

1961:: Jurgen and Horst Paulmann open their first super-market, in Temuco, Chile.
1975:: The two brothers open the first Jumbo hypermarket, in Santiago, Chile's capital.
1982:: Horst Paulmann opens the first Jumbo in Argentina.
1988:: Unicenter, Argentina's first regional shopping mall, is inaugurated.
1993:: The Easy home-center chain is introduced in Chile.
1996–97:: Cencosud builds four commercial centers in the province of Buenos Aires, Argentina.
2001:: The company buys Home Depot's four Argentine stores and converts them to Easy units.
2003:: Cencosud buys Santa Isabel, a chain of 75 Chilean supermarkets.
2004:: Cencosud becomes a public company, selling about 20 percent of its common stock.