Despite
Uncertain World Markets, a Big U.S. Retailer
Bulls Into Latin
America
By CLIFFORD
KRAUSS
SANTIAGO, 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 Distribución 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 Peña, 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 Maipú, 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
Maipú
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, Peña 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," Peña 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."