NY Times. Despite Uncertain World Markets, a Big U.S. Retailer [Home Depot] Bulls Into Latin America
nytimes.com
September 6, 1998
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By CLIFFORD KRAUSS
ANTIAGO, Chile -- Arthur M. Blank, the president of Home
Depot, was brimming with optimism as he left Atlanta the other
day on his way to visit his first store outside North America, a store
that sits at the foot of the snow-capped Andes, flies the Chilean flag
and houses a McDonald's franchise.
This cultural hybrid is the beachhead for a planned expansion that
Blank hopes will take Home Depot's name-tagged orange aprons,
do-it-yourself home-improvement workshops and steady sales
growth first across Chile, then to Argentina and eventually to Peru,
Brazil and beyond.
"We could be successful almost anywhere," Blank said. "Over the
long haul, we are going to be a truly global company."
But as he stepped off the plane in Chile on Aug. 28, just a day after
the Santiago store opened, Blank was greeted by this headline in the
country's leading newspaper, El Mercurio: "Worldwide Landslide:
Black Thursday in Latin America's Markets."
Only three years ago, Home Depot, which has 679 stores in the
United States and Canada, scrapped plans to expand into Mexico
because of a currency crisis that sent similar shivers across Latin
America. Once the region got back on track, the company was ready
to test the Latin waters again. But this time it turned to Chile, whose
expanding middle class and predictable free-market Government
policies over nearly two decades have made it a model of stability for
emerging markets around the world.
Now the economic pendulum may be swinging back again -- just at
the wrong time for Home Depot, and underscoring the vulnerability of
even the most stolid Latin American economies to global turmoil.
Santiago's stock market, down more than 44 percent since Jan. 1 and
at its lowest level in five years, plummeted 6.2 percent on the day
before Blank arrived.
Chilean consumers, taking their cues from the stock slump and the
worsening news from Asia and Russia, are tightening their belts. Car
sales and, more important to Home Depot, construction starts are
grinding down quickly. Local economists predict that the
unemployment rate, now at 6 percent, will climb to 8 percent in
coming months. Politicians who just a few weeks ago predicted
confidently that Chile could withstand the icy winds blowing from Asia
have begun to advise consumers to take it easy with their credit cards.
The Asian and Russian contagions have been racing through Latin
America at an accelerating rate, pushing commodity prices lower and
chasing away foreign investment dollars, trends that in turn are forcing
up interest rates. In Venezuela, for instance, short-term bank interest
rates have shot up to 120 percent.
Colombia devalued its currency on Wednesday, sending Latin
markets down sharply even as the region's finance ministers traveled
to Washington to tell the International Monetary Fund that their
economies were sound. Reassurances aside, J. P. Morgan has cut its
prediction of 1999 growth for Argentina from 4 percent to 2 percent;
for Brazil, whose large economy is South America's main economic
motor, the forecast has been cut from 2 percent to minus 2 percent.
Net outflows of foreign exchange from Brazil were nearly $8 billion in
August alone.
So is Blank worried?
"It does not affect our plans at all," he said. In fact, he sees an
opportunity to pick up real estate for more stores at lower prices.
"Over the next 40 years, 50 years, we'll be here," Blank said,
thumping his palms on a table in his Chilean headquarters. And when
he sees customers and employees "with smiles on their faces, I don't
even have to work out the numbers," he added. "The numbers are
going to come."
Blank's gung-ho Yankee optimism has been reinforced by Home
Depot's 20 years of sensational growth -- the company's stock has
risen fortyfold over the past decade.
The growth has held up in good times and bad; after all, even when
Americans stay home at vacation time to save on air fares and hotels,
they often build bookshelves or paint the den. And a leaking roof or
faucet must be repaired or replaced no matter how much the Dow
Jones industrial average falls that week.
Home Depot is betting that the same verities will apply to Chile, a
country whose demographics -- one third of the country's 15 million
people are between the ages of 20 and 39 -- fit neatly into the
company's marketing strategies. Company executives were publicly
exuberant about sales and customer reaction in the first few days after
the Santiago store opened, although they refused to release any
numbers.
In the end, Home Depot's experiment in Chile -- though complicated
at the outset by the specter of a worldwide recession -- will serve as
a fascinating case study of whether a highly successful American
corporation can take its winning culture abroad and make it work
despite language barriers, long supply lines and differing customer
tastes. Simply put, are the American middle-class values woven into
Home Depot's image transferable to Chile, a Spanish-speaking nation
half a world away from the company's Georgia headquarters? ANY
local business executives say Home Depot is pushing an open door.
"Chileans always say if it's American, it's good," said Alexander
Fernandez, president of the American Chamber of Commerce in
Chile. "You can call it a mystique, a respect."
But the answer will ultimately lie with families like the Chilcumpas,
who were so eager to shop in Home Depot on opening day that they
fought through Santiago's heavy traffic for 45 minutes in their beat-up
1986 Dodge Colt.
Jimmy Chilcumpa, 35, finished graduate school two years ago and
now teaches geology at the University of Chile. His wife, Marcela,
30, is a bookkeeper at a local finance company. Both dress in blue
jeans and wear designer sunglasses.
Their 8-year-old daughter, Mariel, says her sweetest dream is to fly
to Orlando someday to see Disney World, as an estimated 70,000
Chileans do every year.
Concerned about the slowing economy just after having a new baby,
the Chilcumpas say they are watching their pesos. Still, they have a
new house on the outskirts of Santiago that they need to fix up and
furnish.
Walking up and down the wide aisles of the new store, Chilcumpa
expressed disappointment. "I thought I'd find American products at a
cheap price," he said. "What I see is not cheap." Indeed, 70 percent
of the store's stock is made in Chile, and prices are comparable to
those of local competitors.
Chilcumpa was shopping for a wall mount for a television set; what he
found instead in the furnishings aisle was a mount intended to be
suspended from the ceiling. He shook his head. Just then, a Chilean
employee named Carlos came by to help, wearing a wide, inviting
smile.
"Is that all you have?" Chilcumpa asked sharply.
"For now, yes," Carlos replied. "We're just starting, so we are strong
in some things, weak in others."
In other stores in Chile, or in the United States, for that matter, the
exchange might have ended then and there. But this is Home Depot,
where employees are trained to listen to customers. Carlos pulled out
a pad and pen and began interviewing Chilcumpa, asking exactly what
he was looking for. He promised to forward the information to
management.
The exchange instantly warmed Chilcumpa's mood. He slowed his
pace and wandered about the store, taking a special interest in the
displays that gave point-by-point instructions on topics like how to fix
a toilet, solder pipes or lay tiles. He stopped at a display of 31-piece
titanium drill sets, made in Taiwan, costing the equivalent of $23 each,
and put one in his cart. A sale was made.
"They definitely have a wide variety," his wife said. "That's what will
make them successful."
The Chilcumpas then drove to a nearby outlet of Sodimac
Homecenter, a chain that is Home Depot's direct competitor here, to
find the television mount they were looking for.
As Home Depot moves from a 110-volt world where most houses
are built of wood and nails to a 220-volt world where most houses
are built of cement and metal reinforcement rods, it will have to adjust
its inventories.
"In retail, no concept is 100 percent portable," said Enrique Ostale,
executive director of Distribuci¢n y Servicio, a leading Chilean
supermarket and houseware chain holding company. "They will have
to adapt."
For the most part, the record of American companies is good in Chile
and the rest of Latin America, but their success in transporting
American-style services and products is not guaranteed.
McDonald's is a hit everywhere, as are the mini-markets connected
to Exxon stations. But Sears, Roebuck flopped in Chile in the early
1980's and pulled out.
J.C. Penney made some early mistakes when it put a store in the
affluent Santiago neighborhood of Las Condes in 1996. The company
misread Chilean taste, which favors simple clothes, and offered
expensive lines in the flashy colors popular in more tropical markets
like Miami and Mexico. After a disappointing performance, the store
replaced American managers with local talent, put greater emphasis
on less expensive items and went after Chile's growing maternity
market, offering a huge department for expectant mothers. Sales
picked up, and Penney recently opened a second store.
Home Depot has taken pains to avoid similar slips. It mixes what is
American and what is Chilean as carefully as its employees mix paints
to get exactly the right color.
"It's a balancing act," said Bill Pe¤a, 44, Home Depot's regional
president for Argentina and Chile.
First, the company looked for the right management combination. It
teamed up with Falabella, an upscale Chilean department store
chain, which has a 33 percent interest in the project. Falabella advised
Home Depot on where to put stores, plugged the company into its
public relations and market research firms, and, most important,
provided a base of two million customers who can use their Falabella
credit cards at Home Depot.
The first Home Depot store is in La Florida, a sprawling
lower-middle-class Santiago neighborhood with the fastest
construction growth rate of any urban community in Chile. The
second and third Santiago stores, to open over several months, will
be in Maip£, a neighborhood similar to La Florida, and in Las
Condes. The goal for 2000 is to have five stores in Chile.
Home Depot executives said they were opening the La Florida and
Maip£ stores first to send a message that the chain was
price-conscious and would appeal to the lower middle class, the large
majority of Chilean society.
In accord with its tradition of decentralized management, Home
Depot put a Chilean in charge of its operations in the country -- Julio
Campos, who, as a senior Sodimac executive, led the team that
adapted the home-center concept for Chile.
Campos spent six months in the United States, learning Home Depot
culture. He sometimes worked in the aisles or even as a bagger at the
checkout counter.
"I worked 11 years in this industry in Chile, and the first time I
soldered anything was in a store in the United States," Campos said.
"Most companies in Chile are very hierarchical, with executives in ties.
At Home Depot we all wear smocks, and when an associate has a
suggestion he speaks up," he added, using the company's term for an
employee.
With Campos as his guide, Pe¤a spent more than six months studying
the Chilean market. They used focus groups and research, but most
of all they wore out shoe leather, walking through Chilean shopping
centers and hardware stores and interviewing hundreds of
contractors.
As a result, Home Depot's shelves have a different look here than
they do in the United States. There are fewer rugs and more ceramic
tiles. Instead of automatic garage-door openers, there are
remote-control gate openers. Concrete and metal are the construction
materials of choice, so there is a large stock of jackhammers, welders
and grinders for cutting metal. Many of Home Depot's American
suppliers have opened operations in Chile as well, shortening supply
lines as they also learn to satisfy Chilean tastes.
Central to Home Depot's philosophy in the United States is sound
employee relations, and it is no different here. "Some people think of
us as a cult or a religion, and they are right," Pe¤a said with a laugh.
LEVEN thousand Chileans applied for just over 200 positions at the
La Florida store, and Home Depot used extensive interviews, exams
on practical math, and psychological tests to choose people with
experience and friendly, open attitudes. The pay scale is lower than in
the United States -- company officials wouldn't say by how much --
but Chilean employees, like American workers, can buy Home Depot
stock at a 15 percent discount, and supervisors, beginning with
assistant managers, receive stock options.
To learn the ropes, 30 Chilean employees were sent to the United
States for three to six months to shadow their American counterparts.
Once they returned to Santiago, they helped train their Chilean
colleagues. And a group of bilingual American managers came here to
train workers and instill the company's esprit de corps.
Two nights before opening day, the store gave a party for local
employees and their families, complete with games and a barbecue;
1,600 people showed up. There was also a pep rally.
As in the United States, employees here are told that they can
question management, but the sometimes aggressive, almost
confrontational approach taken in American stores to hash out ideas
has been softened to fit the more reserved personal interactions
typical in Chile.
It is too early to know whether such corporate strategies will let
Home Depot eventually dominate the Chilean hardware market. But
Sodimac, which modeled itself in part after Home Depot more than a
decade ago, is taking no chances. The chain has opened more stores,
lowered prices, expanded parking lots, improved service and updated
its computerized systems.
"I am not afraid, but I do respect them," said Carlos Wulf Urrutia,
Sodimac's vice president for home center operations. "Construction
activity is decelerating, and we are much more prepared because of
our long-term relationships with contractors. Home Depot should
have come two years ago. They waited too long."
Wall Street analysts are cautiously optimistic that Home Depot can
succeed in Chile despite the economic slowdown, saying the
company has far more to gain than to lose. As Home Depot saturates
the American and Canadian markets over the next 10 years, they
said, it needs to look abroad for expansion.
"The next 8 to 12 months are iffy," said Francisco Chevez of Salomon
Smith Barney, "but over the long haul the underpinnings for this type
of retailing are great in Chile and around Latin America."
Aram H. Rubinson, a retail analyst at Paine Webber, said that for a
chain the size of Home Depot, a less-than-expected return from five
stores in Chile "is not even a rounding error."
"From what they learn in Chile," he added, "they are going to be able
to attack and succeed in some of the bigger countries of the world."
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