Coto Centro Integral de Comercializacion S.A.

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Coto Centro Integral de Comercializacion S.A.

Paysandu 1842/62
Buenos Aires, C.F. C1416CDP
Argentina
Telephone: ( +54) (11) 4586-7777
Fax: ( +54) (11) 4586-7825
Web site: http://www.coto.com.ar

Private Company
Incorporated: 1975 as Carnecerios Integrales S.R.L.
Employees: 17,000
Sales: 2.02 billion pesos ($684.75 million) (2003)
NAIC: 445110 Supermarkets and Other Grocery (Except Convenience) Stores; 445210 Meat Markets

Coto Centro Integral de Comercializacion S.A. (Coto C.I.C.S.A.) runs one of the largest retail chains in Argentina and is the only large retailer that remains wholly under Argentine ownership. Each Coto store is carefully planned and laid out in accordance with the company motto: "Everything under one roof." In order to achieve lower costs and higher quality standards, Coto implements advanced technology to optimize its production, distribution, and storage processes. In addition to food, Coto sells an array of home appliances—some of them under its own label—and household products. The vertically integrated Coto empire includes cattle ranches, slaughterhouses, a manufacturing plant, and shopping centers with food courts, multiplex film theaters, and other entertainment areas.

Beef for Argentina: 1963–87

The son of a Spanish immigrant who became a Buenos Aires butcher, Alfredo Coto started working at his father's market stall at the age of nine. There was no freezer, so the side or two of beef had to be cut and sold by midday. In 1963, when he was 21 years old, Coto became a wholesaler when he purchased the nonkosher rear parts of animals from a Jewish meatpacker. He got out of the wholesale business, however, because he was plagued by non-paying clients and in 1969 returned to retailing by opening a butcher shop with four counters in a neighborhood market. He and his helpers sold, each week, the meat from 100 sides of beef. Because there was so little counter space for cutting the meat, Coto had the sides suspended on three hooks, thereby serving the function of shop windows. For reasons of hygiene, he obliged his workers to wear face masks and place meat remnants in a cold box. This store proved so successful that he began to open more, starting in 1970; soon he was opening four a year. By 1976, he owned a chain of 20 butcher shops. Coto also sold meat to 30 other butcher shops and a dozen restaurants.

As the business grew, Coto and his wife Gloria developed a system that he called ironclad management. This plan consisted, in essence, of cutting costs to the bone. He was vigilant in checking to make sure employees were not shortweighting the customers and pocketing the difference, while his wife organized a group of "women spies" who pretended to be shoppers and checked to see if the employees were holding back money. In order to reduce costs further as the business grew, Coto bought a cattle ranch in 1978 and founded, in 1981, a distribution company with its own refrigeration plant. He now had an integrated system of supply and distribution, bringing live cattle to the company's own slaughterhouse and refrigerating the meat. The shops also began selling milk, cooking oil, cheese, and cans of beans. Coto's success attracted the attention of the criminal element, and in 1981 he was kidnapped, beaten, held for 11 days, and released for a ransom payment.

Hypermarkets and Shopping Centers: 1987–2000

However, he had already reached what he considered the saturation point of the meat-selling business, and a visit to the Food Marketing Institute in Chicago in 1981 persuaded him to seek wider horizons. Back in Argentina, Coto opened his first supermarket in Mar de Ajo, a seaside resort where his family vacationed each summer. Soon he was converting some of his butcher shops to supermarkets. In 1991, he bought six stores from a cooperative. By 1992, the recently reorganized Coto Centro Integral de Comercialization consisted of 23 butcher shops and 16 supermarkets.

In the same year, Coto advanced to the next stage: building "maximarkets" that averaged some 3,000 square meters (about 30,000 square feet) in size and included takeout bakery, pasta, and rotisserie counters. The chain accepted all credit cards and made a point of speedy home delivery. Sales grew to $450 million in 1992, ranking Coto second only to Carrefour S.A. in its field. Expansion continued, with about half the stores opened in the poorest parts of the Buenos Aires metropolitan area, since Coto maintained that the poor spend more in supermarkets than the rich because they do not eat out often and never go on diets. A profit margin of 17 percent surpassed the typical 15 percent of other chains.

During this period, Coto came to realize that his company needed to achieve greater economies of scale to compete with its rivals. In 1994, he decided to establish "hypermarkets": stores of 10,000 square meters (100,000 square feet) that offered a much larger array of nonfood products, including clothing and home electronics. The company also made a $20-million acquisition of the Spinetto shopping mall, which it reopened in 1995 after remodeling. The mall included a food court that seated 900 and the support of some 100 lessees representing top-name stores. Later the same year, Coto opened its first hypermarket, with 6,900 square meters of selling space. Sarandi shopping center, opened in 1996, encompassed 11,000 square meters, had 72 checkout counters, and parking space for 750 cars. The following year, Coto bought the block next to the big Abasto market—once the central market for Buenos Aires—for $9 million, purchased the five Acassuso supermarkets in the northern suburbs of Buenos Aires for $25 million, and acquired the Metro supermarket in the capital's Belgrano neighborhood for $10 million. Coto passed the $1-billion mark in annual revenue in 1996, thereby ranking second only to Carrefour in its field. By 1997, Argentine supermarkets and hypermarkets were accounting for half of all food sales, compared to a quarter in 1989.

Coto and his close associate, Arribal Sanchez, filled Buenos Aires's newspapers with ads trumpeting price cuts on 500 items at a time. Most of them were not true bargains, but 30 or 40 loss leaders lent credibility to the rest of the offers. One 1997 study of the price of a basket of 15 staples found that three chains—Wal-Mart, Carrefour, and Supermercados Norte—offered lower prices than Coto. Moreover, Coto was charged with stocking second-rate brands in place of their "name" counterparts, poor service, and lack of hygiene in its older stores. These were not especially serious issues for Coto, since the company did not generally compete with Supermercados Norte, which was usually found in better neighborhoods, or Carrefour, which concentrated on the suburbs.

Controversies shadowed, but did not impair, Coto's growth. In 1994, the company was accused of defrauding the state by paying employees under the table to evade taxes, a practice that allegedly was costing the government $1.5 million a month. Coto was not prosecuted, but it was also accused by rival chains of evading the value-added tax on the difference between sales and expenses. Spokespersons for the firm replied that the refrigeration plant had paid part of what was due and that the heavy costs of building hypermarkets and shopping centers explained the rest. Some of Coto's suppliers said the company solicited them for more and more goods, and when they had become dependent on the chain for survival, it demanded ruinous price cuts. Residents living near Coto branches complained that vehicles took up space for loading and unloading that they were not entitled to use.

By early 1998, Coto had three hypermarkets, the largest and most recent of which consisted of 14,000 square meters covering seven blocks and included an entertainment area with movie theaters, a bowling alley, and a food court for 1,800 people. The company also had a shopping center, 14 maximarkets, 20 supermarkets, 19 butcher shops converted into minimarkets, a refrigeration plant, three cattle ranches, and 11,000 employees. In November 1998, the company opened a huge multistory unit in La Recoleta, one of the best neighborhoods in Buenos Aires.

Coto was up against a formidable international cast of competitors: French, Chileans, Spanish, and Americans (in the form of Wal-Mart stores). "We are facing savage capitalism," Coto told Daniel Weigandt of America economia. "But if Wal-Mart or Carrefour begin selling at below-market prices, we'll tell our suppliers that we have to match them. The strategy is to take 50 leading high-volume products, offer them at 30 percent below cost to attract an enormous clientele for the 100,000 articles of a hypermarket." A table at company headquarters stacked with Pepsi Cola, Gatorade, Oreos, and many other goods bore the notice "Products bastardized by Carre-four" to remind suppliers that the French retailer, and not Coto, had initiated the price war.

Built at a cost of $30 million in suburban Temperley, a new Coto hypermarket that opened in November 2000 stocked more than 50,000 items, with 60 percent of the space devoted to food. A food court on the second floor served beef dishes, cutlets, chicken risotto, cannelloni pasta, pizza, wine, and desserts. There was a bowling alley with 14 lanes, a 12-screen movie multiplex, an Internet café, a video arcade, bumper cars, and pool tables. By this time, the latest in a series of Argentine recessions had begun to bite deeply, yet Coto had held its operating margins steady the previous year while increasing both sales and operating profit. The company now had seven hypermarkets, two slaughterhouses, and its own distribution center just outside Buenos Aires, built at a cost of $40 million.

Company Perspectives:

We understand the sole way to grow is under a full commitment. Commitment to any product we elaborate, to any supplier we deal with, to any employee we hire, to any product we sell, and, mainly, to any customer we assist.

Keeping up with the Competition: 2000 and Beyond

By late 2001, Argentina was entering the fourth year of its latest recession, and Coto's reputation for low prices was increasingly working to its advantage. Even residents of La Recoleta, which was better known for stores like Ralph Lauren and Louis Vuitton, were now shopping at Coto, not only for groceries but cosmetics, kitchenware, clothes, and even motor oil and tools for customers doing their own auto repairs to save money. In the previous year, Coto also had introduced its own line of television sets and stereo equipment to compete against better-known but more expensive brands.

By that time, Carrefour had been merged with Super-mercados Norte and a smaller chain to form Grupo Promodes, a French-owned entity that was now by far the largest retailer in Argentina. Grupo Disco-Ekono—a joint venture of the Dutch firm Koninklijkol Ahold N.V. and Argentina's Velox Retail Holding—also had passed Coto in revenue. To open more stores, Coto took a $175-million credit line from J.P. Morgan Chase & Co. and Rabobank Nederland in 2001. By contrast, some 70 percent of the $755 million that the company invested between 1993 and 2001 had come from its own resources. With the recession deepening in late 2001 and the peso on the verge of collapse, even food sales were falling per square meter of space. Coto began studying the possibility of selling furniture, household goods, and construction materials, plus its own brand-name textiles and toiletries, which came to 10 percent of its annual revenues.

The devaluation of the peso near the end of 2001 was followed by a fall of about 11 percent in national income during 2002. Nevertheless, although the company lost 225 million pesos (about $67.5 million) during the year, Coto raised its revenues by two-thirds, passing Grupo Disco-Ekono. This increase was aided by aggressive promotions based on large discounts for customers who paid with credit or debit cards. It was also attributed to the company's skill in opening stores in good locations at a cost much lower than that of its rivals and to its reputation for low prices. Some 93 percent of its sales were coming from food, the category that falls less in price during times of economic crisis, and Coto was leading the competition in sales per square meter.

The question raised was whether Coto could continue its head-to-head struggle against multinational giants. The devaluation of the peso had almost tripled its debt to Morgan and Rabobank, and this debt had to be restructured in late 2002. This apparently resulted in downsizing, as the company's revenues fell by 28 percent. This placed Coto behind Disco in sales, although it still registered a profit of 172 million pesos (about $58 million).

The future direction of Coto was another source of speculation. According to the Argentine business magazine Mercado, Coto had nine hypermarkets, 60 supermarkets, and 26 minimarkets in the fiscal year ended June 30, 2002. There were also three commercial centers, three slaughterhouses, and a warehouse and manufacturing plant. The company ranked first in greater Buenos Aires with one-quarter of the market share in its segment.

The company's private labels were Coto (for products including salad dressings, dairy, ice cream, bakery goods, pasta, and canned and frozen foods), Ciudad del Lago (for groceries, canned products, and dairy), and Top (for home appliances). In addition to its supermarket products, Coto stores offered hot foods for takeout and home delivery. The company's ranches, stocked with Aberdeen Angus and Hereford steers, provided its stores with beef and were considered a future source for leather and beef exports. It was reported in early 2003 that some Coto supermarkets had begun to operate as wholesalers as well as retailers, selling in this form to gastronomical enterprises, small supermarkets, and large kiosks.

Principal Competitors

Carrefour S.A.; Disco S.A.; Supermercados Norte S.A.

Key Dates:

1969:: Alfredo Coto opens a butcher shop in a Buenos Aires neighborhood market.
1978:: Coto now owns a chain of 20 butcher shops, a cattle ranch, and a slaughterhouse.
1987:: Having reached saturation with 50 butcher shops, Coto opens a supermarket.
1992:: Coto C.I.C.S.A. has 23 butcher shops and 16 supermarkets.
1995:: Coto opens its first hypermarket and its first shopping mall.
1996:: The company passes $1 billion in annual revenues.
2000:: A new Coto hypermarket is stocking more than 50,000 items.
2003:: Some Coto supermarkets are now also functioning as wholesalers.