Grupo Gigante, S.A. de C.V.

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Grupo Gigante, S.A. de C.V.

Avenida Ejercito Nacional 769-A
11520 Mexico, D.F.
Mexico
Telephone: (525) 269-8369
Fax: (525) 269-8308
Web site: http://www.gigante.com.mx

Public Company
Incorporated: 1983
Employees: 21,192
Sales: 19.07 billion pesos (US$2.04 billion) (1998)
Stock Exchanges: Mexico City OTC (ADRs)
Ticker Symbols: GIGANTE; GBGTY
NAIC: 44511 Supermarkets and Other Grocery Stores; 45299 All Other General Merchandise Stores; 5551112 Offices of Other Holding Companies; 72211 Full-Service Restaurants

Grupo Gigante, S.A. de C.V. is a holding company that, through its subsidiaries, constitutes one of the largest retailers in Mexico. The company’s Tiendas Gigante, Bodegas Gigante, and Super G chain stores sell both groceries—including Gigante’s own line of private-label goods—and general merchandise. Grupo Gigante also owns the Cafeteria Toks restaurant chain and operates Office Depot and Radio Shack stores in joint ventures with these respective U.S. companies. Grupo Gigante opened two Gigante supermarkets in the Los Angeles metropolitan area in 1999.

Growing by Acquisition: 1962-92

Angel Losada Gomez was born in Spain in 1908 and came to Mexico at the age of 15. He started his business career in Tulancingo, a town about 100 miles northeast of Mexico City, in 1948 with a store selling groceries, beer, and garden seeds. It was not until 1962 that, at the age of 54, he founded his first Gigante (Spanish for giant) store, in Mexico City with seven partners. Appropriately named, it was the largest commercial establishment in Latin America—about 320,000 square feet in size, with 64 departments selling not only supermarket items but also clothing, shoes, household appliances, books, records, gifts, and even automobiles. All but one of the partners sold out after losing a third of their investment in the first year, and the remaining partner soon gave up, too, but Losada eventually made Gigante a paying proposition.

In 1971 Losada opened the first unit of his Cafeteria Toks chain (which, in spite of the English interpretation of the name, is not self-service). In 1975 Gigante’s sales came to 2.29 billion pesos ($183.2 million), placing it second among Mexican self-service chains to Aurrera, S.A. (which later became Cifra, S.A. de C.V.). There were 12 Gigante outlets by 1978, when Losada purchased the Hemuda retail chain in Guadalajara, Mexico’s second largest city. These were placed under the Gigante banner and increased the chain’s revenues from 3.45 billion pesos (about US$150 million) in 1977 to 6.25 billion pesos (about US$275 million) in 1979, when Gigante was the nation’s third largest retail chain, with 21 units. By 1986 nearly a third of Gigante’s 60-odd stores were in Guadalajara.

In 1987 Losada added the 23-store Astra chain to his holdings. This acquisition, which buttressed Gigante’s position in northern Mexico, was the first to require significant borrowing, a practice that Losada previously had sought to avoid. With the Astra purchase, Losada’s 82-unit Gigante chain now had 500,000 square meters of selling space. There were 19 Cafeteria Toks restaurants, the majority in Mexico City. Also under the corporate umbrella were three auto agencies and—together with Spanish interests—an outlet for pharmaceutical and drugstore items plus a factory for making sweets. Gigante had no less than 7,500 suppliers, was selling 65,000 items, and was serving 105 million customers a year.

Grupo Gigante was still Mexico’s third largest retailer in 1991, when it had 97 stores in more than 20 cities. It made its initial public offering in July 1991, selling ten percent of the company to new shareholders. Net sales came to 5.64 billion pesos (US$1.82 billion) and net income to 293 million pesos (US$94.7 million) that year. These figures (in new pesos) retrospectively included the 1992 93.6 percent acquisition, for US$30 million, of Blanes, S.A. de C.V., owner of 89 Blanco Sucesores supermarkets. The purchase made Gigante Mexico’s largest retailer in number of stores. Business observers, however, described Blanco as a drag on profits, especially since Gigante assumed its debt of 400 million pesos (about US$130 million). Writing in Forbes, Ronald Fink called Blanco’s operations“a basket case, even by Latin American standards, with most of its stores in the poorest areas of the country.”Fink added that, unlike rival Cifra, Gigante still lacked a sophisticated computer system.

Grupo Gigante sold one Blanco store and transferred to other operators the leases of 23 stores in outlying areas—the Yucatan Peninsula and the Gulf Coast state of Tamaulipas. Some 32 others were placed under the Gigante banner, and another became a Toks coffee shop. Another 30 stores were converted into a new store group, Bodegas Gigante, which stocked a wider variety of apparel and other nonfood items. Of these, 20 were in central Mexico, with ten within 100 miles of the capital.

Counting on Joint Ventures: 1992-94

By March 1992 there were 109 stores under the Gigante banner in 25 Mexican cities. The chain was especially strong in the Guadalajara area, where 24 outlets had a market share of about 70 percent. The 20 Monterrey stores had a market share of 50 to 55 percent. In Mexico City, 24 stores had a market share of 20 percent. Gigante stores averaged about 58,000 square feet of space and featured up to six specialty departments, including pharmacies and bakeries. They stocked apparel as well as perishables and grocery items. The chain had seven distribution and storage centers with a total of 630,000 square feet of space.

In 1993 Gigante introduced in Guadalajara the first of an upscale line of supermarkets called Super G.

In 1991 Cifra formed an alliance with Wal-Mart Stores Inc., and Grupo Gigante’s other big competitor, Comercial Mexicana, signed a similar pact with Price Co. Losada countered in 1992 by agreeing to join Fleming Cos. in a joint venture to establish a chain of 40,000- to 55,000-square-foot supermarkets stocking 10,000 to 14,000 items, mostly branded ones. Investment analysts were hopeful that Fleming’s expertise would lead to technology transfer and a consequent improvement in Gigante’s inventory control.

The first of the joint venture outlets was opened under the SuperMart name at a former Blanco site in San Juan del Rio in December 1992. Three more opened in early 1993, one at a former Blanco location and the other two newly constructed. They carried a wide assortment of dry goods and perishables, with most packaged goods national brands from both Mexico and the United States. Losada’s son Angel Losada Moreno was chairman of the joint venture, named Gigante Fleming, S.A. de C.V. He was kidnapped for ransom in 1994 and held for more than three months until released after an undisclosed payment by his family.

These SuperMarts were the first of a projected chain of 50 price-impact stores that Gigante Fleming planned to open over the next five years, but the number peaked at five. It became clear in 1994 that customers preferred the wider variety of clothing and other nonfood items that Grupo Gigante was offering under its bodega format. Consequently, the joint venture stores were converted to the Bodegas Gigante name and integrated into that group. Only three remained when Fleming sold its 49 percent share in the joint venture to Grupo Gigante in 1998.

In 1994 Grupo Gigante established a second joint venture, this time with Carrefour S.A., a French mass marketer. Plans called for the establishment, under Carrefour management, of a chain of“hypermarkets”of more than 8,000 square meters (86,000 square feet) each, selling both groceries and general merchandise. This European-style format, which had not proven successful in the United States, started with a Mexico City Hiper G outlet that included 40,000 items.

In 1993 Grupo Gigante also established a joint venture with Tandy Corporation, which opened 18 Radio Shack stores that year and 30 more in 1994. At the end of 1993 there were 135 Gigante supermarkets and 32 Toks coffee shops. There were also 33 Bodega Gigante stores, four Gigante-Fleming Super-Marts, the Hiper G, and two Super G’s. In 1994 Grupo Gigante signed an agreement with Office Depot, Inc. to establish Office Depot outlets in Mexico.

Grupo Gigante’s profits were not keeping up with the company’s expansion, however, falling 77 percent in 1992 and then sliding to only 79.1 million pesos (about US$25 million) in 1993. In 1994 it dropped from second to third among self-service chains, falling behind Comercial Mexicana.

Restructuring in the Late 1990s

Like other retailers, Gigante suffered from the national recession that followed the peso devaluation of late 1994. Sales dropped 25 percent the following year. Its problems were aggravated by demands from the owners of the acquired Blanco chain for payments due. In addition, federal agents accused Losada Gomez of selling pirated goods. Grupo Gigante dismissed some 6,000 workers and closed some of its stores. To pay its debts it borrowed money at high rates of interest and sold 20 percent of its shares to two banks: Banamex and Inbursa. The founder of Gigante retained a fortune valued at US$800 million, but this sum was down from US$1.3 billion in 1993.

Key Dates:

1962:: Founder opens Latin America’s largest store.
1975:: Gigante ranks second among Mexican self-service chains.
1987:: Gigante is serving 105 million customers a year.
1992:: Gigante is Mexico’s largest retailer in number of stores.
1998:: Angel Losado Moreno, the founder’s son, becomes CEO.
1999:: Gigante opens its first U.S. store, in Los Angeles.

Grupo Gigante gradually recovered from the crisis. Sales rose from 11.8 billion pesos in 1995 (about US$1.8 billion) to 19.07 billion pesos (US$2.04 billion) in 1998. Profits, which dipped to a low of 270 million pesos (US$41.3 million) in 1995, increased each year to 870 million pesos (US$93 million) in 1998. There were 13 Hiper G stores when Grupo Gigante sold its share of the joint venture in 1998 to Carrefour for 1.76 billion pesos (US$188.27 million), a sum it badly needed to modernize its stores and pay down its short-term debts. Gigante had been unable to properly finance its share of the undertaking and also had come to feel Carrefour was acting as a rival rather than a partner.

The largest unit of the Grupo Gigante empire in 1999—located in 51 cities of 28 states—remained the 116 Tiendas Gigante stores, establishments selling food items, general merchandise, and articles for the home in Mexico City and the states of Baja California Norte, Jalisco, and Nuevo Leon. These stores, aimed at middle-class and upper-middle-class consumers, accounted for almost 70 percent of the company’s total sales in 1998. The 42 Bodegas Gigante outlets were located in Mexico City and the central and southern areas of the country. Accounting for 18 percent of sales, they were generally smaller and less well appointed than the Tiendas Gigante stores, catered to lower-income consumers, and sold mainly food items, general merchandise, and clothing. Each of these chains made about two-thirds of its sales in food and the remaining third in general merchandise.

The 26 Super G stores, located in Mexico City and the states of Jalisco and Nuevo Leon, were smaller in size but catered to an upper- and upper-middle-income clientele, selling groceries and perishable food items. They accounted for seven percent of the company’s sales, and 79 percent of that was in food. For all three chains, the company’s private-label Marca Gigante line of 650 products accounted for seven percent of total sales. The 39 Toks coffee shops—all in Mexico City—accounted for only two percent of Grupo Gigante’s sales in 1998. The 37 Office Depot stores, in Mexico City and Nuevo Leon, accounted for three percent, and the 45 Radio Shack outlets for.6 percent. Grupo Gigante was also operating 47 real estate companies that owned land where company stores were located. There were two big warehouses in Mexico City, responsible for 75 percent of the chain’s deliveries to its stores. A joint Gigante-Banamex credit card was introduced in 1998.

Grupo Gigante was, according to analysts, continuing to suffer a competitive disadvantage because of overcentralization and a low level of technology. Its sales of 30,700 pesos (about US$3,285) per square meter in 1998 were the lowest in the self-service field. A strategic plan adopted in 1998 called, by the end of 2000, for the chain to deploy optical-reading cash registers in the stores and software intended to reduce inventory turnover from 54 to 44 days, measures intended to save US$30 million in labor costs. The technological gains also would make it easier for Grupo Gigante to identify its most salable items, target its campaigns of discounting and promotion, and reorder and deploy merchandise from its suppliers.

On the succession of Angel Losada Moreno, the founder’s son, to the position of chief executive officer in 1998, Grupo Gigante entered a period of more professional management. He hired as director general of the firm Robert Salvo, a top executive of the rival Cifra-Wal-Mart joint venture, introduced a discounting campaign to match the competition, and intended to preside over, by late 2000, the renovation of 80 percent of Gigante’s stores with better illumination and wider aisles.

Although more cautious than his father about assuming new obligations, Losada Moreno authorized the opening of Grupo Gigante’s first U.S. store in May 1999, in Pico Rivera, a community in the greater Los Angeles area. The new 60,000-square-foot outlet was promptly picketed by members of the United Food & Commercial Workers, who contended it would threaten union jobs at nearby supermarkets. A second outlet opened in the metropolitan area’s San Fernando Valley before the end of the year, and a third was planned for Covina.

Principal Subsidiaries

Bodega Gigante, S.A. de C.V.; Cafeteria Toks, S.A. de C.V.; Controtiendas, S.A. de C.V.; Gigante, S.A. de C.V.; Gigante-Fleming, S.A. de C.V.; Gigante Holding International (U.S.A.); Office Depot de Mexico, S.A. de C.V. (50%); Servicios Gigante, S.A. de C.V.; Servicios Toks, S.A. de C.V.