FINANCE-CENCOSUD A large South American Retail Company

CENCOSUD
A large South American Retail
Company
Case study
Reference No. E311-088-1
ABSTRACT
CENCOSUD is a retail company that
was started in Chile by the Chilean-German businessman Horst Paulmann. With a
base of operations located in that distant country of South America, the
conglomerate’s founder set out the conquer Latin America, seeking as it says its
mission “To be the most profitable and prestigious retailer in Latin
America, based on excellence in our quality of service, respect for the communities
we live and the commitment of our team of collaborators with the basic tenets
of our company’s vision, challenge, entrepreneurship and perseverance “.
The road is not easy, despite its strong
presence in Latin America many analysts are wondering, what should do Paulmannto
project his business to the level he thinks in Latin America? Does the
conglomerate the appropriate expertise to try it? Is the company prepared to do
so? Does the company have corporate governance that will consolidate the steps already
taken? Additionally, at age 75 declared by founder Horst Paulmann, the ghost of
succession could become a very important trigger for the maintenance of the
family inside this huge conglomerate named Cencosud.

INTRODUCTION
CENCOSUD operations extend to the
business of supermarkets, home centers, department stores, shopping centers and
financial services, being the American owned company most diversified in the
Southern Cone and the increased supply of square meters. Additionally, developing
other business lines that complement its core businesssuch as insurance
brokerage, family entertainment center and travel agencies.
The main objective of CENCOSUD is
becoming the largest retail company in Latin America, reaching their maximum
quality of service, excellence and commitment to hundreds of thousands of
customers. To achieve this task, since the late eighties the Company has been
involved in an ambitious plan for internationalization, which today has
consolidated operations in Chile and Argentina and expansion plans under
development, which has provided new horizons, beginning operations in Colombia,
Peru and Brazil.

Argentina

Brazil

Chile

Colombia

Peru

Hypermarkets

15

16

22

11

Supermarkets

234

26

125

43

Homecenters

34

24

2

Shopping
Centers

13

8

2

Department
stores

In
Analysis

27

In
development

Insurance
and Cards (million)

0.17

1

3.5

1.5

The road is not easy, and despite
its strong presence in Latin America, many analysts wonder What should Paulmanndo
to project his business to the level he thinks about Latin America? Does the
conglomerate the appropriate expertise to try? Is the company prepared to do
so? Does the company have corporate governance that will consolidate the steps
already taken? Additionally, at age 75 declared by founder Horst Paulmann, the
ghost of succession could become a very important trigger for the maintenance
of the family inside this huge conglomerate named Cencosud.
ORIGINS
Horst PaulmannKemna was born in
Kassel, Germany in 1935. The family of seven brothers and his parents emigrated
from Germany to Argentina in 1948. There, the father of Horst Paulmann got his
first job as a telephone operator in the capital, Buenos Aires. Because of
language barriers was dismissed for his constant errors in transferring calls.
Also produced dolls beds sold to “Gath & Chávez,” a company of
the time.
In 1950 the family moved to Chile
and settled in La Union, where they take the grant of the German Club and Union
Club. The first acquisition of the Paulmann family was the restaurant Las
Brisas, La Union. First he became self-service deli, before long, he was moved
to Temuco, where in 1952, inaugurated the Las Brisas Restaurant in Temuco. When
his father died in 1957, Horst and his brother Jurgen take care of the business.
And then a simple factoccurred, which results in a huge development process. A
friend gives them some strawberries to sell them at their site. Just last half
an hour reached in the window and all were sold. The signal was clear. The
brothers fitted out a space adjacent to a deli, which gradually expanded.
In 1960 he closed the restaurant to
begin with self-service, and family Paulmann gives a central step, whenr HorstPaulmannand
his brother Jurgen inaugurate the first self-service Las Brisas in Temuco, expanding
toValdivia and Concepción. In this latter city opened Hiperbrisas supermarket
in 1970, being highly beaten by the crisis 1970-1973, during which assumes the executive
power in Chile the socialist government of UnidadPopular, headed by President
Salvador Allende G.
In a period of expansion, Paulmann
brothers finish their society some years later and Horst issettled in the
capital of Chile, Santiago. In this square, he builds the Supermarket
Wholesaler “Pasando y Pasando”, located in Santa Rosa 3570, a popular
district of Chile where he distributed to retailers, implementing the business
model of wholesale sales self-serviced. After several trips to Europe in 1976,
Horst creates a new kind of business in Chile: the “hypermarkets”, or
large supermarkets, that sell all kinds of products, an innovative idea for
Chile at the time. The first is the Jumbo hypermarket of 7,000 m², whose first
store was built where now stands the Mall Alto Las Condes, in an exclusive area
of ​​Santiago, and then open a second Jumbo supermarket in 1979, in Francisco
Bilbao Latadia, an area of ​​upper-middle socio-economic characteristics.
The Process of Internationalization
In 1982 begins the process of
internationalization, inaugurating a Jumbo hypermarket and a shopping center in
Argentina, and then opened Unicenter, one of the largest shopping centers in
Argentina. The year 1993 will mark the income and the holding Cencosud the
business of home centers, inaugurating the first Easy in Argentina, beside Lomas
Shopping Centre, another large shopping center in Argentina. The success of
these formats is moved to Chile, where Cencosud launches the largest and most
important commercial center of the country, in the land where the first
hypermarket Jumbo was built, Mall Alto Las Condes.
The following year, in 1993, Easy
opened its first store in Chile, Alto Las Condes and parallel open the gates
San Martin Factory Mall in Argentina, and in 1996 opened the Mall Palermo in
Argentina.
From that moment, the Elephant
stampede begins, referring to the typical mascot Jumbo supermarket, which is an
Elephant, opened in Argentina between 1997 and 2000, shopping centers Quilmes
Factory, Las Palmas del Pinar, El Portal Escobar, Portal of Patagonia and Mall
Centro de Rancagua, this latter in Chile. In 2001, opens Centro Comercial Los
Andes in Mendoza, Argentina, continuing its strong growth in 2002, which
Cencosud acquired the operations of Home Depot, with its four stores in
Argentina, the operations of Proterra, a regional supermarket chain in Chile,
with its seven locations in the south and opens the shopping center Portal La
Reina in Santiago, Chile.
2003 would bring a huge growth toCencosud,
when it acquires the operations of Santa Isabel supermarkets in Chile and
became the second operator of supermarkets in that country. He also opens Florida
Center and Portal La Dehesa commercial centers, both in Santiago de Chile and
Cencosud gives a major step in forming “Cencosud Credit Card Manager,
SA” and the launch of credit cards, “Jumbo More”,Cencosud enters
the credit market.
In 2005, Cencosud surprised the
Chilean market by purchasing one of the largest department stores
“Paris”, which also operated a travel agency, an insurance broker,
the BancoParis and the Credit Card Administrator ACC SA. The following year,
acquired the supermarket Economax, Santiago and Infante, Antofagasta, Chile. As
a part of that expansion, acquires the retailer chain Foster /Eurofashion in
Chile, which sells apparel brands Foster, Maritime and JJO. That year he began
the construction of Chile’s largest mega project, the iconic tower Costanera
Center, a project unprecedented in the country and was suspended in early 2009,
as a result of the subprime crisis that hit Chile.
In 2007, with the aim of developing
the business of homecenters in Colombia, signed an agreement with Casino
Guichard-Perrachon, to build 15 Easy stores in that country over the next five
years. However, it continues to surprise and Cencosud signs the agreement to
acquire the specialist chain of ceramics, fittings, bathroom and kitchen
Blaisten in Argentina and entered the largest market in Latin America, Brazil,
through the purchase of the chain of supermarkets and hypermarkets GBarbosa and
also acquires WONG chain, which operates supermarkets and hypermarkets formats
and malls in Peru. In 2008, consolidates 100% control of operations in Colombia
and the large structure Easy subsidiary in Colombia, which is consolidated in
line sale of building materials and home improvement.
CENCOSUD TODAY
Administration and Property
The origins of the business of the
company date back to 1960 with the opening of the first supermarket Las Brisas
in Temuco. Until May 2004 the company was fully controlled by businessman Horst
Paulmann and his family, directly and through mutual funds. In making the
placement of shares in the stock market in 2004, together with the exchange OPA
shares of the Paris stores in March 2005, Horst Paulmann reduced its stake in
the company up to 65%. However, in March 2010, the PaulmannGroup controls 65% of
the company’s property.

Ownership
Structure
(March
2010)

%

Quinhamalli Investments Ltd.

25.69

Latadua Investments Ltd.

24.33

Tano Investments Ltd.

10.48

Banco de Chile for others

2.82

Banco Santander – JP Morgan

2.79

PaulmannKenna Horst

2.47

BancoItau on behalf of investors

1.76

Banchile Brokers SA

1.71

Larrain Vial SA Stockbrokers

1.55

Provida Pension Fund C

1.53

Provida Pension Fund B

1.20

Celfin Capital SA

1.19

Total

77.52

Strengths and Risks
Strengths

Strong business profile. Cencosud is the main operator
of the retail sector of the country. It is one of the leading supermarket
chains in an industry consolidation around large operators. It is the
second operator on the supermarket industry in Chile and Argentina, a
leading home improvement industry in Argentina and Chile and the second
participant in one of the largest operators of shopping centers in both
countries. Also involved in the administration of department stores in
Chile and in the financial business through financing to customers through
own credit cards and BancoParis. In Peru, it is the main operator of the
supermarket industry, while in Brazil has a significant presence in the
supermarket industry in the Northeast.
Strong and well positioned brands. The concept Jumbo
has a strong and clear market positioning in the segment that is targeted
in Chile and Argentina, allowing it to maintain positive sales margins and
sales per square meter higher than the average supermarket industry. Easy
stores in Argentina have a privileged position and brand recognition.
Furthermore, chains Wong and GBarbosa have a high presence in their
countries of operation. Meanwhile, Paris stores, due to a long tradition
of 100 years in business and strong investment in advertising, is positioned
as one of the most important department stores in the country. Also, the
department store format has a high level of acceptance by consumers.
Business model. The company operates a multi-format
scheme that enhances and complements their business. Thus, the location of
Jumbo, Easy and Paris, into the malls owned by holding company,
strengthens the business of shopping centers to generate a significant
number of people. Meanwhile, the supermarket business has a regular
attendance of customers with high transactional. In addition, this
business is considered less sensitive, relative to the levels of economic
activity than other retailers because of the commercialization of more
basic goods like groceries.
Strategic properties. Cencosud possesses urban
properties of high strategic value for the development of real estate,
supermarkets and home centers. The company owns land and facilities as
well as land that will ensure the implementation of its development plan
in the area of ​​supermarkets, shopping for home improvement, shopping
centers and department stores, which represent a competitive advantage
over other chains whose operations depend on the rental of properties.
Increasing level of acceptance and development achieved
by the concept of shopping as a distribution channel. The comfort, range
of hours of operation, security, entertainment and variety of products and
services offered, has made that malls displace, in large part, traditional
shopping venues.

Risks

High competition. The supermarket industry in Chile is
highly competitive, characterized by consolidation around large
supermarket chains such as D & S, Cencosud, SMU and Supermercadosdel
Sur and Falabella, its main competitor in the retail trade through
supermarkets Totus and San Francisco. In Argentina there is strong
competition, primarily from large global supermarket chains such asCarefour
and Wal-Mart, among others. Meanwhile, Paris stores face competition not
only from major department stores (Falabella, Ripley and Polar), but also
of a wide range of retailers. In the home improvement industry, Easy faces
competition mainly Sodimac, industry leader and subsidiary of S.A.C.IFalabella.

Risk integration of new operations and over-expansion.
The proper development of their aggressive business strategies and costly investment
plans require Cencosud to maintain management high capacity, competent staff
and efficient distribution systems and inventory control, deficient
elements that could affect the profitability of new investments. The
future profitability may also be affected by the saturation of certain
geographic markets where Cencosud participates.
Risk of investments abroad. The concentration, in March
2009, approximately 36% of its operating income in Argentina classified as
“B-” / Stables by Standard & Poor’s, 12% jointly in Brazil
and Peru, sorted in ‘BBB-‘ / Stables international level by Standard &
Poor’s, implies a significant increase in their relative risk compared to
flows generated only in Chile (A + / Stables). Regional expansion gives
the company opportunities for growth and the possibility of strengthening
its position as a regional provider. However, involves the challenge of
integrating new operations and may increase the relative share of risky
countries and markets more volatile. The company has recently opened
operations in Colombia (rated at “BB +” / Stables).
Income sensitivity to variations in the level of economic
activity. Activities related to trade in consumer goods, are sensitive to
variations in the level of economic activity, especially in the presence
of adverse economic cycles. Additionally, the lowest level of sales
experienced by the retail sector during these periods (given the
contraction in spending) can influence both the rate of occupancy of the
shopping centers as potential recoverability of loans granted to
customers.
Loan portfolio. The granting of credit is a key factor
in the profitability of companies and requires substantial amounts of
financing working capital. It is therefore essential that the portfolio
maintains an adequate quality, especially in periods of low economic
activity or sales growth. Increases in customer delinquencies could affect
cash flow of companies. Changes in the regulatory framework governing the
provision of credit and greater restrictions in this market can affect the
ability to generate operating cash flows.

Competitive Position
Cencosud SA has business in Chile, Argentina,
Brazil, Peru and Colombia: supermarkets (Jumbo, Santa Isabel, Disco, Wong,
GBarbosa, among other brands), shopping for home improvement (Easy), real
estate transactions (Shopping Centers), department stores (Paris), financial services
(Paris cards, Easy Más and Jumbo Más, Banco Paris and insurance brokerage) and
entertainment facilities for children, among others.
In March 2009, operates in Chile
Jumbo hypermarkets (26 stores), supermarkets Santa Isabel (135), stores for
home improvement Easy (25 locations), the Paris department stores (30 outlets),
shopping centers (8) and commercial off the line of boxes in the Jumbo
hypermarkets, Santa Isabel supermarkets and stores Easy.
In Argentina, by Cencosud SA
(Argentina), operates 16 Jumbo hypermarkets, 238 supermarkets Disco, 46 Easy stores
and 12 shopping centers. In Brazil, operates 31 supermarkets and 19
hypermarkets, plus outlets in drugstores and other formats (25). In Peru, the
company operates 41 supermarkets, 12 hypermarkets and 2 shopping centers.
Meanwhile, in Colombia operates 1 Easy store.
Revenue by country (March 2009)
Peru,
Brazil, Colombia – 12%
Argentina –
36%
Chiles – 52%

After the incorporation of
acquisitions in Brazil and Peru, the relative importance of revenue and
operating income from Chile has been reduced to 47% and 52% respectively. The
revenue base has been diversified incorporating operations that have experienced
significant growth in recent years in their respective countries, however,
potentially more volatile and higher relative risk.
The evolution of EBITDA by country
has undergone changes as shown in the table below, reflecting the relative
importance that businesses have been taking to the conglomerate.

Evolution EBITDA by country

2004

2005

2006

2007

2008

March 2009

Chile

59%

73%

72%

70%

59%

52%

Argentina

41%

27%

28%

29%

28%

36%

Brazil, Peru and Colombia

0%

0%

0%

1%

13%

12%

Revenue by business area and gross
margin, focus heavily on the area of ​​supermarkets, where they represent
approximately 73% and 66%, as shown below:
Income by business area
(March 2009)
Shops – 8%
Easy – 13%
Malls – 3%
Card – 4%
Other – 0%
Supermarkets – 73%
Gross profit by business area
(March 2009)
Easy – 15%
Department stores – 6%
Malls – 5%
Cards and insurance – 7%
Supermarkets – 66%
THE BIG CHANGE
In December 2008, there was one of
the most surprising changes in Cencosud, when founder and controller, Horst
Paulmann, announced the departure of corporate general manager, Laurence
Golborne, who had led the growth of Cencosud in recent years. Golborne resigned
from Colombia, a decision which was accepted by the board in an emergency meeting
that met some of its members, as Robert Philipps, Sven Von Appen and Erasmo
Wong, outside the capital.
The staff of the company moved their
pieces, defining that, despite the economic crisis that worries the world, was
“the right time to welcome the second generation” of the founding
family conglomerate through Manfred Paulmann.
The son of the businessman will take
the vice presidency of the board, since until now did not exist. In addition,
the vacancy of Golborne was occupied by Daniel Rodriguez, who had arrived a few
months ago the company as Financial Manager.
These movements were made known
through a surprise conference convened at the offices of Cencosudin Alto Condes
and which Golborne from Colombia participated via videoconference.
In the market repeatedly speculated
about the possible departure of Golborne. In due course it transpired that
there were some discrepancieswith Paulmann mainly by the rhythm of expansion of
the company, especially in real estate and the financing of this growth. Sources
from the same company say that the executive has resigned at least three
previous occasions.
However, Paulmanntook care of
discard these versions. “Often the market has declared me dead and said I
had cancer and that I was fighting with Laurence. As in all marriages, there
are good and bad days, but the differences are arranged talking face to face,
“said Paulmann.
Laurence Golborne, perhaps the
brightest of Cencosud executives, joined the company in March 2001. In 2002 he
led the purchase of the Home Depot chain in Argentina. In 2003, and already
become Paulmann’s right arm creates the credit business of holding and
strengthens the area of ​​supermarkets nationwide, through the acquisition of
the chain Santa Isabel, which ranked Cencosudsecond in the industry.
In 2004, Golborne takesCencosud
toBolsa de Santiago and acquires Disco in Argentina. In 2005, Horst Paulmann,
with the help of Golborne, buys AlmacenesParis from Galmez brothers. This marks
the entry of Cencosud to the banking. In 2006, construction began flagship
project: Mall Costanera Center.
In 2007, Golbornelead the arrival of
the elephant to Colombia, through a joint venture with the French group Casino,
allowing the entry of Easy to the coffee country. This arrival was the result
of the failure in the attempt to acquire the chain AlmacenesÉxtos. In the
middle of this year, Laurence Golborneheaded Cencosud entry to Brazil. The
retail group acquired the supermarket chain GBarbosaand at the end of that year
the purchase of the Peruvian supermarket chain Wong. The latter also marks the
entry of the Peruvian family to the property holding.
A GREAT OBSTACLE
Costanera Center, a real estate
project is located in the Providencia district in Santiago, Chile, whose
construction was halted in 2008 and was revived in 2010. Construction began on
March 3, 2006. The project is estimated to cost 600 million dollars, but it
will be rewarded with annual revenues, estimated at around U.S. $150 million
after the inauguration.
It will have a total of 700 thousand
square meters. The design of the Torre Gran Costanera, was designed by
architect Cesar Pelli, who has worked in construction and design of Torres
Petrona in Kuala Lumpur, among others buildings and skyscrapers around the
world. The design of the mall and the three towers remaining is in charge of
the office of Chilean architects. AlemparteBarreda y Asociados. The structural
analysis was developed by the Chilean company René Lagos and Associates. As
reviewers, structural engineers from US Company ThortonTomasetti Group, among
others, designed the Taipei 101, one of the tallest skyscrapers today. The
project electrical medium voltage distribution was made by the company
Fleischmann Project Engineering and it is the first commercial project of these
characteristics in the country.
In October 2008, announced the
suspension of the construction of towers 1 and 3 of the Costanera Center
project (both 170 meters high) for economic reasons caused by the global
economic crisis of that year. However, the Torre Gran Costanera and Torre 4
(109 meters) continued with its construction. This, until January 28, 2009,
through a press release, Cencosudgroup reported a complete shutdown and
indefinite construction of the project arguing that the current economic
scenario “did not justify continuing the current pace of
construction.”
During the shutdown, they have
analyzed the traffic mitigation plan in the Costanera Center environment to
avoid major traffic congestion once inaugurated this project. Although it
initially announced to even build a Metro station Line 4 subway of Santiago,
has not reached a decision, especially because of conflicts between Cencosud
and the Ministry of Public Works on who should be responsible of work.
Costanera Center is the flagship
project of holdingCencosud. The shopping center will occupy seven floors
with a total of 300 stores. It will include two hypermarkets: one Santa Isabel and
one Jumbo of two levels and 15,000 square feet of surface and one store Easy.
It will have local department store
Paris, Ripley and Falabella, the latter two, the more fierce competition in
department stores, a food court with a panoramic view that will house more than
2,000 users, an amusement Aventura Center and 14 movie theaters. Added to this
are five levels of underground parking with a capacity of 4,500 vehicles and
tolls, with automatic billing system. It will also feature two hotels of four
and five stars respectively.
Costanera Center, a real estate
project is located in the Providencia district in Santiago, Chile, whose
construction is now paralyzed. It consists of a set of four buildings located
at the intersection of Avenida Andres Bello in NuevaTajamar, a few meters from
the Metro station Tobalaba, Santiago. Its main building, the Torre Gran
Costanera, will have a total area of ​​128,000 m² and have a height of 300
meters including spiral, 265 m to the last of its 70 floors and be equipped
with 48 high speed elevators that will move a speed of 6.6 meters per second. With
these features, Costanera Center would have the tallest skyscraper in the
country and South America and the second in the Southern Hemisphere (after the
Q1 Tower in Australia). The towers 1, 3 and 4 have a height of 170, 170 and 109
meters respectively.
The group of buildings, owned by
Cencosud consortium, will feature a shopping center and five star hotels. Three
of the four buildings will be used for offices. The opening of the mall was
planned for mid-2009, however, the effects of the economic crisis of 2008,
resulted that in January 2009 they halt the work until it is overcome economic
uncertainty. The “dream” of Paulmann of having the tallest building
in South America, literally paralyzed after Cencosud announced the postponement
of all works of the Costanera Center project, leaving about two thousand
workers without their source of income and over 200 companies providing
products and services.
Analysts wonder again if this is the
first sign of weakening the power of Horst Paulmann in Cencosud, and although
the building was returned in the first half of 2010, he has not the light
shines than before, keeping a low profile and weighs very heavily in the announcement
on their progress.
The Founder
Horst Paulmann, since it began as an
entrepreneur with a small restaurant in the Chilean city of Temuco, in 1952,
likes to be on top of everything. Despite its huge size, the company still has
the style of a family organization in which the owner, controller of, 65%,
interferes in the day to day and in almost all decisions.
He is an innate businessman, a brilliant;
recognize those who have worked with him. But this style is becoming a problem
for a group that sold more than U.S. $10.000 billion a year and has operations
in five countries. The company, and he knows it, has tried to enter a
modernization process to catch up with management models of large
multinationals, with a defined corporate governance and administration
professionalized. But , while Paulmann is inside, the task will not be easy.
At 75 years, the Chilean-German
businessman has been determined to take the lead. The company does not have clear
corporate governance and has delegated the management of a professional manager
of record, as large family conglomerates often do. Nearly half of its board is comprised
by him and his sons, Manfred, Peter and Heike: four family members in a group
of nine people. It is not known for his succession plan and he has avoided the
issue to press inquiries.
Paulmann often questioned the
decisions of his executives and is known for being tough and aggressive, even
with first-line managers. This style has led to the resignation of at least 10
executives in recent years, most recently in mid-July. “Almost all they were
from multinational companies and had experience,” says a consultant close
to the company that prefers not to reveal his name. “And when they see
that decisions are taken by the family, they feel that their role is not
clear.”
Possibly this would go unnoticed if it
was not for the rapid growth of Cencosud. In 2001 he sold U.S. $1.400 million
and had operations in Chile and Argentina. Last year revenues were of U.S.
$10.500 million, earning the label of the third largest company in Chile, after
Codelco and Enersis. It is the most internationalized Latin American retailer
with operations in Brazil, Peru, Argentina and Colombia, as well as Chile.
For
now,Paulmannisfocused on itsflagship project, CostaneraCenter,which will be thetallest building inSouth
Americawhen it opens inthe second half of2011.The workis the symbolof the
contradictions ofCencosud.Aproject of more thanUD $700 millionthat
Paulmann did not want to postpone in crisis,against the advice
oftheir executives.Timeproved them rightandhad to be postponedtoearly
2009.Butlate last yearwas re-launchedas a symbol ofthe revival ofthe Chilean
economy.According to itsclose, the real estate
divisionof the group, whose manager, Victor Ide, resigned in February thisyear-isthe
one that is sufferingthe largestintrusionsof the
employer.”Heis the chief architect,” says an
executiveof the Chilean market. “Drawand intervenesplans
andmakes all decisions.”

Problems were increased.The latest isa conflictwith the
Ministryof Public Works forroadmitigationworks. The
statesays the companymust make atunnel under AvenidaAndresBelloto mitigate the
impactof the complex.ButPaulmannhastold the mediathat this”is notour
problem.”Add that to thefailure ofa mall ina landof $30 million in
theeastern sector of thecapital,after65% ofthe neighborsrejectedin a
referendum.

Anyway,everyone recognizes thatwithout himthis workwould never
haveexisted.He answers to thesame obsession thatled him
tocreate one of thelargestretailconglomeratesin Latin America.What will
happenwhen he dies? Todaynobody wants
toimagine,”Everything depends onthe signsthat controllers giveat that time,”
says Barros,FitResearch, “The market would have to doitsreading.”
After carefulanalysis and critical thought,
write an essay evaluation between 4 to
6 pages (excluding Title page and References page).
Cencosud’s mission is as follows: “To
be the most profitable and prestigious retailer in Latin America, based on
excellence in our quality of service, respect for the communities we live and
the commitment of our team of collaborators with the pillars core of our
company: vision, challenge, enterprise and perseverance.”
Visit the internet site ofCencosud
(http://www.cencosud.cl/) and review the financial statements. For the
industry:
1. What key financial ratios (e.g.
liquidity ratio) is needed to comply Cencosud the goal described in its
mission?
2. What financial ratios may
indicate the current financial condition of the organization?
Prepare an analysis using the Extended
Du Pont Equation, and present key financial ratios forCencosud.Make sure you
understand the numbers either because it would be embarrassing and damaging to
your career as a manager and your organization failing to provide a meaningful
answer. After that, please prepare the following:
Considering that you could change your mind in the future:

Do you think Cencosud should get a loan through a
commercial bank?
How much it should borrow and why or why not?
Could the goal be achieved as
stating inCencosud’s mission statement?

CENCOSUD
A large South American Retail
Company
Case study
Reference No. E311-088-1
ABSTRACT
CENCOSUD is a retail company that
was started in Chile by the Chilean-German businessman Horst Paulmann. With a
base of operations located in that distant country of South America, the
conglomerate’s founder set out the conquer Latin America, seeking as it says its
mission “To be the most profitable and prestigious retailer in Latin
America, based on excellence in our quality of service, respect for the communities
we live and the commitment of our team of collaborators with the basic tenets
of our company’s vision, challenge, entrepreneurship and perseverance “.
The road is not easy, despite its strong
presence in Latin America many analysts are wondering, what should do Paulmannto
project his business to the level he thinks in Latin America? Does the
conglomerate the appropriate expertise to try it? Is the company prepared to do
so? Does the company have corporate governance that will consolidate the steps already
taken? Additionally, at age 75 declared by founder Horst Paulmann, the ghost of
succession could become a very important trigger for the maintenance of the
family inside this huge conglomerate named Cencosud.

INTRODUCTION
CENCOSUD operations extend to the
business of supermarkets, home centers, department stores, shopping centers and
financial services, being the American owned company most diversified in the
Southern Cone and the increased supply of square meters. Additionally, developing
other business lines that complement its core businesssuch as insurance
brokerage, family entertainment center and travel agencies.
The main objective of CENCOSUD is
becoming the largest retail company in Latin America, reaching their maximum
quality of service, excellence and commitment to hundreds of thousands of
customers. To achieve this task, since the late eighties the Company has been
involved in an ambitious plan for internationalization, which today has
consolidated operations in Chile and Argentina and expansion plans under
development, which has provided new horizons, beginning operations in Colombia,
Peru and Brazil.

Argentina

Brazil

Chile

Colombia

Peru

Hypermarkets

15

16

22

11

Supermarkets

234

26

125

43

Homecenters

34

24

2

Shopping
Centers

13

8

2

Department
stores

In
Analysis

27

In
development

Insurance
and Cards (million)

0.17

1

3.5

1.5

The road is not easy, and despite
its strong presence in Latin America, many analysts wonder What should Paulmanndo
to project his business to the level he thinks about Latin America? Does the
conglomerate the appropriate expertise to try? Is the company prepared to do
so? Does the company have corporate governance that will consolidate the steps
already taken? Additionally, at age 75 declared by founder Horst Paulmann, the
ghost of succession could become a very important trigger for the maintenance
of the family inside this huge conglomerate named Cencosud.
ORIGINS
Horst PaulmannKemna was born in
Kassel, Germany in 1935. The family of seven brothers and his parents emigrated
from Germany to Argentina in 1948. There, the father of Horst Paulmann got his
first job as a telephone operator in the capital, Buenos Aires. Because of
language barriers was dismissed for his constant errors in transferring calls.
Also produced dolls beds sold to “Gath & Chávez,” a company of
the time.
In 1950 the family moved to Chile
and settled in La Union, where they take the grant of the German Club and Union
Club. The first acquisition of the Paulmann family was the restaurant Las
Brisas, La Union. First he became self-service deli, before long, he was moved
to Temuco, where in 1952, inaugurated the Las Brisas Restaurant in Temuco. When
his father died in 1957, Horst and his brother Jurgen take care of the business.
And then a simple factoccurred, which results in a huge development process. A
friend gives them some strawberries to sell them at their site. Just last half
an hour reached in the window and all were sold. The signal was clear. The
brothers fitted out a space adjacent to a deli, which gradually expanded.
In 1960 he closed the restaurant to
begin with self-service, and family Paulmann gives a central step, whenr HorstPaulmannand
his brother Jurgen inaugurate the first self-service Las Brisas in Temuco, expanding
toValdivia and Concepción. In this latter city opened Hiperbrisas supermarket
in 1970, being highly beaten by the crisis 1970-1973, during which assumes the executive
power in Chile the socialist government of UnidadPopular, headed by President
Salvador Allende G.
In a period of expansion, Paulmann
brothers finish their society some years later and Horst issettled in the
capital of Chile, Santiago. In this square, he builds the Supermarket
Wholesaler “Pasando y Pasando”, located in Santa Rosa 3570, a popular
district of Chile where he distributed to retailers, implementing the business
model of wholesale sales self-serviced. After several trips to Europe in 1976,
Horst creates a new kind of business in Chile: the “hypermarkets”, or
large supermarkets, that sell all kinds of products, an innovative idea for
Chile at the time. The first is the Jumbo hypermarket of 7,000 m², whose first
store was built where now stands the Mall Alto Las Condes, in an exclusive area
of ​​Santiago, and then open a second Jumbo supermarket in 1979, in Francisco
Bilbao Latadia, an area of ​​upper-middle socio-economic characteristics.
The Process of Internationalization
In 1982 begins the process of
internationalization, inaugurating a Jumbo hypermarket and a shopping center in
Argentina, and then opened Unicenter, one of the largest shopping centers in
Argentina. The year 1993 will mark the income and the holding Cencosud the
business of home centers, inaugurating the first Easy in Argentina, beside Lomas
Shopping Centre, another large shopping center in Argentina. The success of
these formats is moved to Chile, where Cencosud launches the largest and most
important commercial center of the country, in the land where the first
hypermarket Jumbo was built, Mall Alto Las Condes.
The following year, in 1993, Easy
opened its first store in Chile, Alto Las Condes and parallel open the gates
San Martin Factory Mall in Argentina, and in 1996 opened the Mall Palermo in
Argentina.
From that moment, the Elephant
stampede begins, referring to the typical mascot Jumbo supermarket, which is an
Elephant, opened in Argentina between 1997 and 2000, shopping centers Quilmes
Factory, Las Palmas del Pinar, El Portal Escobar, Portal of Patagonia and Mall
Centro de Rancagua, this latter in Chile. In 2001, opens Centro Comercial Los
Andes in Mendoza, Argentina, continuing its strong growth in 2002, which
Cencosud acquired the operations of Home Depot, with its four stores in
Argentina, the operations of Proterra, a regional supermarket chain in Chile,
with its seven locations in the south and opens the shopping center Portal La
Reina in Santiago, Chile.
2003 would bring a huge growth toCencosud,
when it acquires the operations of Santa Isabel supermarkets in Chile and
became the second operator of supermarkets in that country. He also opens Florida
Center and Portal La Dehesa commercial centers, both in Santiago de Chile and
Cencosud gives a major step in forming “Cencosud Credit Card Manager,
SA” and the launch of credit cards, “Jumbo More”,Cencosud enters
the credit market.
In 2005, Cencosud surprised the
Chilean market by purchasing one of the largest department stores
“Paris”, which also operated a travel agency, an insurance broker,
the BancoParis and the Credit Card Administrator ACC SA. The following year,
acquired the supermarket Economax, Santiago and Infante, Antofagasta, Chile. As
a part of that expansion, acquires the retailer chain Foster /Eurofashion in
Chile, which sells apparel brands Foster, Maritime and JJO. That year he began
the construction of Chile’s largest mega project, the iconic tower Costanera
Center, a project unprecedented in the country and was suspended in early 2009,
as a result of the subprime crisis that hit Chile.
In 2007, with the aim of developing
the business of homecenters in Colombia, signed an agreement with Casino
Guichard-Perrachon, to build 15 Easy stores in that country over the next five
years. However, it continues to surprise and Cencosud signs the agreement to
acquire the specialist chain of ceramics, fittings, bathroom and kitchen
Blaisten in Argentina and entered the largest market in Latin America, Brazil,
through the purchase of the chain of supermarkets and hypermarkets GBarbosa and
also acquires WONG chain, which operates supermarkets and hypermarkets formats
and malls in Peru. In 2008, consolidates 100% control of operations in Colombia
and the large structure Easy subsidiary in Colombia, which is consolidated in
line sale of building materials and home improvement.
CENCOSUD TODAY
Administration and Property
The origins of the business of the
company date back to 1960 with the opening of the first supermarket Las Brisas
in Temuco. Until May 2004 the company was fully controlled by businessman Horst
Paulmann and his family, directly and through mutual funds. In making the
placement of shares in the stock market in 2004, together with the exchange OPA
shares of the Paris stores in March 2005, Horst Paulmann reduced its stake in
the company up to 65%. However, in March 2010, the PaulmannGroup controls 65% of
the company’s property.

Ownership
Structure
(March
2010)

%

Quinhamalli Investments Ltd.

25.69

Latadua Investments Ltd.

24.33

Tano Investments Ltd.

10.48

Banco de Chile for others

2.82

Banco Santander – JP Morgan

2.79

PaulmannKenna Horst

2.47

BancoItau on behalf of investors

1.76

Banchile Brokers SA

1.71

Larrain Vial SA Stockbrokers

1.55

Provida Pension Fund C

1.53

Provida Pension Fund B

1.20

Celfin Capital SA

1.19

Total

77.52

Strengths and Risks
Strengths

Strong business profile. Cencosud is the main operator
of the retail sector of the country. It is one of the leading supermarket
chains in an industry consolidation around large operators. It is the
second operator on the supermarket industry in Chile and Argentina, a
leading home improvement industry in Argentina and Chile and the second
participant in one of the largest operators of shopping centers in both
countries. Also involved in the administration of department stores in
Chile and in the financial business through financing to customers through
own credit cards and BancoParis. In Peru, it is the main operator of the
supermarket industry, while in Brazil has a significant presence in the
supermarket industry in the Northeast.
Strong and well positioned brands. The concept Jumbo
has a strong and clear market positioning in the segment that is targeted
in Chile and Argentina, allowing it to maintain positive sales margins and
sales per square meter higher than the average supermarket industry. Easy
stores in Argentina have a privileged position and brand recognition.
Furthermore, chains Wong and GBarbosa have a high presence in their
countries of operation. Meanwhile, Paris stores, due to a long tradition
of 100 years in business and strong investment in advertising, is positioned
as one of the most important department stores in the country. Also, the
department store format has a high level of acceptance by consumers.
Business model. The company operates a multi-format
scheme that enhances and complements their business. Thus, the location of
Jumbo, Easy and Paris, into the malls owned by holding company,
strengthens the business of shopping centers to generate a significant
number of people. Meanwhile, the supermarket business has a regular
attendance of customers with high transactional. In addition, this
business is considered less sensitive, relative to the levels of economic
activity than other retailers because of the commercialization of more
basic goods like groceries.
Strategic properties. Cencosud possesses urban
properties of high strategic value for the development of real estate,
supermarkets and home centers. The company owns land and facilities as
well as land that will ensure the implementation of its development plan
in the area of ​​supermarkets, shopping for home improvement, shopping
centers and department stores, which represent a competitive advantage
over other chains whose operations depend on the rental of properties.
Increasing level of acceptance and development achieved
by the concept of shopping as a distribution channel. The comfort, range
of hours of operation, security, entertainment and variety of products and
services offered, has made that malls displace, in large part, traditional
shopping venues.

Risks

High competition. The supermarket industry in Chile is
highly competitive, characterized by consolidation around large
supermarket chains such as D & S, Cencosud, SMU and Supermercadosdel
Sur and Falabella, its main competitor in the retail trade through
supermarkets Totus and San Francisco. In Argentina there is strong
competition, primarily from large global supermarket chains such asCarefour
and Wal-Mart, among others. Meanwhile, Paris stores face competition not
only from major department stores (Falabella, Ripley and Polar), but also
of a wide range of retailers. In the home improvement industry, Easy faces
competition mainly Sodimac, industry leader and subsidiary of S.A.C.IFalabella.

Risk integration of new operations and over-expansion.
The proper development of their aggressive business strategies and costly investment
plans require Cencosud to maintain management high capacity, competent staff
and efficient distribution systems and inventory control, deficient
elements that could affect the profitability of new investments. The
future profitability may also be affected by the saturation of certain
geographic markets where Cencosud participates.
Risk of investments abroad. The concentration, in March
2009, approximately 36% of its operating income in Argentina classified as
“B-” / Stables by Standard & Poor’s, 12% jointly in Brazil
and Peru, sorted in ‘BBB-‘ / Stables international level by Standard &
Poor’s, implies a significant increase in their relative risk compared to
flows generated only in Chile (A + / Stables). Regional expansion gives
the company opportunities for growth and the possibility of strengthening
its position as a regional provider. However, involves the challenge of
integrating new operations and may increase the relative share of risky
countries and markets more volatile. The company has recently opened
operations in Colombia (rated at “BB +” / Stables).
Income sensitivity to variations in the level of economic
activity. Activities related to trade in consumer goods, are sensitive to
variations in the level of economic activity, especially in the presence
of adverse economic cycles. Additionally, the lowest level of sales
experienced by the retail sector during these periods (given the
contraction in spending) can influence both the rate of occupancy of the
shopping centers as potential recoverability of loans granted to
customers.
Loan portfolio. The granting of credit is a key factor
in the profitability of companies and requires substantial amounts of
financing working capital. It is therefore essential that the portfolio
maintains an adequate quality, especially in periods of low economic
activity or sales growth. Increases in customer delinquencies could affect
cash flow of companies. Changes in the regulatory framework governing the
provision of credit and greater restrictions in this market can affect the
ability to generate operating cash flows.

Competitive Position
Cencosud SA has business in Chile, Argentina,
Brazil, Peru and Colombia: supermarkets (Jumbo, Santa Isabel, Disco, Wong,
GBarbosa, among other brands), shopping for home improvement (Easy), real
estate transactions (Shopping Centers), department stores (Paris), financial services
(Paris cards, Easy Más and Jumbo Más, Banco Paris and insurance brokerage) and
entertainment facilities for children, among others.
In March 2009, operates in Chile
Jumbo hypermarkets (26 stores), supermarkets Santa Isabel (135), stores for
home improvement Easy (25 locations), the Paris department stores (30 outlets),
shopping centers (8) and commercial off the line of boxes in the Jumbo
hypermarkets, Santa Isabel supermarkets and stores Easy.
In Argentina, by Cencosud SA
(Argentina), operates 16 Jumbo hypermarkets, 238 supermarkets Disco, 46 Easy stores
and 12 shopping centers. In Brazil, operates 31 supermarkets and 19
hypermarkets, plus outlets in drugstores and other formats (25). In Peru, the
company operates 41 supermarkets, 12 hypermarkets and 2 shopping centers.
Meanwhile, in Colombia operates 1 Easy store.
Revenue by country (March 2009)
Peru,
Brazil, Colombia – 12%
Argentina –
36%
Chiles – 52%

After the incorporation of
acquisitions in Brazil and Peru, the relative importance of revenue and
operating income from Chile has been reduced to 47% and 52% respectively. The
revenue base has been diversified incorporating operations that have experienced
significant growth in recent years in their respective countries, however,
potentially more volatile and higher relative risk.
The evolution of EBITDA by country
has undergone changes as shown in the table below, reflecting the relative
importance that businesses have been taking to the conglomerate.

Evolution EBITDA by country

2004

2005

2006

2007

2008

March 2009

Chile

59%

73%

72%

70%

59%

52%

Argentina

41%

27%

28%

29%

28%

36%

Brazil, Peru and Colombia

0%

0%

0%

1%

13%

12%

Revenue by business area and gross
margin, focus heavily on the area of ​​supermarkets, where they represent
approximately 73% and 66%, as shown below:
Income by business area
(March 2009)
Shops – 8%
Easy – 13%
Malls – 3%
Card – 4%
Other – 0%
Supermarkets – 73%
Gross profit by business area
(March 2009)
Easy – 15%
Department stores – 6%
Malls – 5%
Cards and insurance – 7%
Supermarkets – 66%
THE BIG CHANGE
In December 2008, there was one of
the most surprising changes in Cencosud, when founder and controller, Horst
Paulmann, announced the departure of corporate general manager, Laurence
Golborne, who had led the growth of Cencosud in recent years. Golborne resigned
from Colombia, a decision which was accepted by the board in an emergency meeting
that met some of its members, as Robert Philipps, Sven Von Appen and Erasmo
Wong, outside the capital.
The staff of the company moved their
pieces, defining that, despite the economic crisis that worries the world, was
“the right time to welcome the second generation” of the founding
family conglomerate through Manfred Paulmann.
The son of the businessman will take
the vice presidency of the board, since until now did not exist. In addition,
the vacancy of Golborne was occupied by Daniel Rodriguez, who had arrived a few
months ago the company as Financial Manager.
These movements were made known
through a surprise conference convened at the offices of Cencosudin Alto Condes
and which Golborne from Colombia participated via videoconference.
In the market repeatedly speculated
about the possible departure of Golborne. In due course it transpired that
there were some discrepancieswith Paulmann mainly by the rhythm of expansion of
the company, especially in real estate and the financing of this growth. Sources
from the same company say that the executive has resigned at least three
previous occasions.
However, Paulmanntook care of
discard these versions. “Often the market has declared me dead and said I
had cancer and that I was fighting with Laurence. As in all marriages, there
are good and bad days, but the differences are arranged talking face to face,
“said Paulmann.
Laurence Golborne, perhaps the
brightest of Cencosud executives, joined the company in March 2001. In 2002 he
led the purchase of the Home Depot chain in Argentina. In 2003, and already
become Paulmann’s right arm creates the credit business of holding and
strengthens the area of ​​supermarkets nationwide, through the acquisition of
the chain Santa Isabel, which ranked Cencosudsecond in the industry.
In 2004, Golborne takesCencosud
toBolsa de Santiago and acquires Disco in Argentina. In 2005, Horst Paulmann,
with the help of Golborne, buys AlmacenesParis from Galmez brothers. This marks
the entry of Cencosud to the banking. In 2006, construction began flagship
project: Mall Costanera Center.
In 2007, Golbornelead the arrival of
the elephant to Colombia, through a joint venture with the French group Casino,
allowing the entry of Easy to the coffee country. This arrival was the result
of the failure in the attempt to acquire the chain AlmacenesÉxtos. In the
middle of this year, Laurence Golborneheaded Cencosud entry to Brazil. The
retail group acquired the supermarket chain GBarbosaand at the end of that year
the purchase of the Peruvian supermarket chain Wong. The latter also marks the
entry of the Peruvian family to the property holding.
A GREAT OBSTACLE
Costanera Center, a real estate
project is located in the Providencia district in Santiago, Chile, whose
construction was halted in 2008 and was revived in 2010. Construction began on
March 3, 2006. The project is estimated to cost 600 million dollars, but it
will be rewarded with annual revenues, estimated at around U.S. $150 million
after the inauguration.
It will have a total of 700 thousand
square meters. The design of the Torre Gran Costanera, was designed by
architect Cesar Pelli, who has worked in construction and design of Torres
Petrona in Kuala Lumpur, among others buildings and skyscrapers around the
world. The design of the mall and the three towers remaining is in charge of
the office of Chilean architects. AlemparteBarreda y Asociados. The structural
analysis was developed by the Chilean company René Lagos and Associates. As
reviewers, structural engineers from US Company ThortonTomasetti Group, among
others, designed the Taipei 101, one of the tallest skyscrapers today. The
project electrical medium voltage distribution was made by the company
Fleischmann Project Engineering and it is the first commercial project of these
characteristics in the country.
In October 2008, announced the
suspension of the construction of towers 1 and 3 of the Costanera Center
project (both 170 meters high) for economic reasons caused by the global
economic crisis of that year. However, the Torre Gran Costanera and Torre 4
(109 meters) continued with its construction. This, until January 28, 2009,
through a press release, Cencosudgroup reported a complete shutdown and
indefinite construction of the project arguing that the current economic
scenario “did not justify continuing the current pace of
construction.”
During the shutdown, they have
analyzed the traffic mitigation plan in the Costanera Center environment to
avoid major traffic congestion once inaugurated this project. Although it
initially announced to even build a Metro station Line 4 subway of Santiago,
has not reached a decision, especially because of conflicts between Cencosud
and the Ministry of Public Works on who should be responsible of work.
Costanera Center is the flagship
project of holdingCencosud. The shopping center will occupy seven floors
with a total of 300 stores. It will include two hypermarkets: one Santa Isabel and
one Jumbo of two levels and 15,000 square feet of surface and one store Easy.
It will have local department store
Paris, Ripley and Falabella, the latter two, the more fierce competition in
department stores, a food court with a panoramic view that will house more than
2,000 users, an amusement Aventura Center and 14 movie theaters. Added to this
are five levels of underground parking with a capacity of 4,500 vehicles and
tolls, with automatic billing system. It will also feature two hotels of four
and five stars respectively.
Costanera Center, a real estate
project is located in the Providencia district in Santiago, Chile, whose
construction is now paralyzed. It consists of a set of four buildings located
at the intersection of Avenida Andres Bello in NuevaTajamar, a few meters from
the Metro station Tobalaba, Santiago. Its main building, the Torre Gran
Costanera, will have a total area of ​​128,000 m² and have a height of 300
meters including spiral, 265 m to the last of its 70 floors and be equipped
with 48 high speed elevators that will move a speed of 6.6 meters per second. With
these features, Costanera Center would have the tallest skyscraper in the
country and South America and the second in the Southern Hemisphere (after the
Q1 Tower in Australia). The towers 1, 3 and 4 have a height of 170, 170 and 109
meters respectively.
The group of buildings, owned by
Cencosud consortium, will feature a shopping center and five star hotels. Three
of the four buildings will be used for offices. The opening of the mall was
planned for mid-2009, however, the effects of the economic crisis of 2008,
resulted that in January 2009 they halt the work until it is overcome economic
uncertainty. The “dream” of Paulmann of having the tallest building
in South America, literally paralyzed after Cencosud announced the postponement
of all works of the Costanera Center project, leaving about two thousand
workers without their source of income and over 200 companies providing
products and services.
Analysts wonder again if this is the
first sign of weakening the power of Horst Paulmann in Cencosud, and although
the building was returned in the first half of 2010, he has not the light
shines than before, keeping a low profile and weighs very heavily in the announcement
on their progress.
The Founder
Horst Paulmann, since it began as an
entrepreneur with a small restaurant in the Chilean city of Temuco, in 1952,
likes to be on top of everything. Despite its huge size, the company still has
the style of a family organization in which the owner, controller of, 65%,
interferes in the day to day and in almost all decisions.
He is an innate businessman, a brilliant;
recognize those who have worked with him. But this style is becoming a problem
for a group that sold more than U.S. $10.000 billion a year and has operations
in five countries. The company, and he knows it, has tried to enter a
modernization process to catch up with management models of large
multinationals, with a defined corporate governance and administration
professionalized. But , while Paulmann is inside, the task will not be easy.
At 75 years, the Chilean-German
businessman has been determined to take the lead. The company does not have clear
corporate governance and has delegated the management of a professional manager
of record, as large family conglomerates often do. Nearly half of its board is comprised
by him and his sons, Manfred, Peter and Heike: four family members in a group
of nine people. It is not known for his succession plan and he has avoided the
issue to press inquiries.
Paulmann often questioned the
decisions of his executives and is known for being tough and aggressive, even
with first-line managers. This style has led to the resignation of at least 10
executives in recent years, most recently in mid-July. “Almost all they were
from multinational companies and had experience,” says a consultant close
to the company that prefers not to reveal his name. “And when they see
that decisions are taken by the family, they feel that their role is not
clear.”
Possibly this would go unnoticed if it
was not for the rapid growth of Cencosud. In 2001 he sold U.S. $1.400 million
and had operations in Chile and Argentina. Last year revenues were of U.S.
$10.500 million, earning the label of the third largest company in Chile, after
Codelco and Enersis. It is the most internationalized Latin American retailer
with operations in Brazil, Peru, Argentina and Colombia, as well as Chile.
For
now,Paulmannisfocused on itsflagship project, CostaneraCenter,which will be thetallest building inSouth
Americawhen it opens inthe second half of2011.The workis the symbolof the
contradictions ofCencosud.Aproject of more thanUD $700 millionthat
Paulmann did not want to postpone in crisis,against the advice
oftheir executives.Timeproved them rightandhad to be postponedtoearly
2009.Butlate last yearwas re-launchedas a symbol ofthe revival ofthe Chilean
economy.According to itsclose, the real estate
divisionof the group, whose manager, Victor Ide, resigned in February thisyear-isthe
one that is sufferingthe largestintrusionsof the
employer.”Heis the chief architect,” says an
executiveof the Chilean market. “Drawand intervenesplans
andmakes all decisions.”

Problems were increased.The latest isa conflictwith the
Ministryof Public Works forroadmitigationworks. The
statesays the companymust make atunnel under AvenidaAndresBelloto mitigate the
impactof the complex.ButPaulmannhastold the mediathat this”is notour
problem.”Add that to thefailure ofa mall ina landof $30 million in
theeastern sector of thecapital,after65% ofthe neighborsrejectedin a
referendum.

Anyway,everyone recognizes thatwithout himthis workwould never
haveexisted.He answers to thesame obsession thatled him
tocreate one of thelargestretailconglomeratesin Latin America.What will
happenwhen he dies? Todaynobody wants
toimagine,”Everything depends onthe signsthat controllers giveat that time,”
says Barros,FitResearch, “The market would have to doitsreading.”
After carefulanalysis and critical thought,
write an essay evaluation between 4 to
6 pages (excluding Title page and References page).
Cencosud’s mission is as follows: “To
be the most profitable and prestigious retailer in Latin America, based on
excellence in our quality of service, respect for the communities we live and
the commitment of our team of collaborators with the pillars core of our
company: vision, challenge, enterprise and perseverance.”
Visit the internet site ofCencosud
(http://www.cencosud.cl/) and review the financial statements. For the
industry:
1. What key financial ratios (e.g.
liquidity ratio) is needed to comply Cencosud the goal described in its
mission?
2. What financial ratios may
indicate the current financial condition of the organization?
Prepare an analysis using the Extended
Du Pont Equation, and present key financial ratios forCencosud.Make sure you
understand the numbers either because it would be embarrassing and damaging to
your career as a manager and your organization failing to provide a meaningful
answer. After that, please prepare the following:
Considering that you could change your mind in the future:

Do you think Cencosud should get a loan through a
commercial bank?
How much it should borrow and why or why not?
Could the goal be achieved as
stating inCencosud’s mission statement?

CENCOSUD
A large South American Retail
Company
Case study
Reference No. E311-088-1
ABSTRACT
CENCOSUD is a retail company that
was started in Chile by the Chilean-German businessman Horst Paulmann. With a
base of operations located in that distant country of South America, the
conglomerate’s founder set out the conquer Latin America, seeking as it says its
mission “To be the most profitable and prestigious retailer in Latin
America, based on excellence in our quality of service, respect for the communities
we live and the commitment of our team of collaborators with the basic tenets
of our company’s vision, challenge, entrepreneurship and perseverance “.
The road is not easy, despite its strong
presence in Latin America many analysts are wondering, what should do Paulmannto
project his business to the level he thinks in Latin America? Does the
conglomerate the appropriate expertise to try it? Is the company prepared to do
so? Does the company have corporate governance that will consolidate the steps already
taken? Additionally, at age 75 declared by founder Horst Paulmann, the ghost of
succession could become a very important trigger for the maintenance of the
family inside this huge conglomerate named Cencosud.

INTRODUCTION
CENCOSUD operations extend to the
business of supermarkets, home centers, department stores, shopping centers and
financial services, being the American owned company most diversified in the
Southern Cone and the increased supply of square meters. Additionally, developing
other business lines that complement its core businesssuch as insurance
brokerage, family entertainment center and travel agencies.
The main objective of CENCOSUD is
becoming the largest retail company in Latin America, reaching their maximum
quality of service, excellence and commitment to hundreds of thousands of
customers. To achieve this task, since the late eighties the Company has been
involved in an ambitious plan for internationalization, which today has
consolidated operations in Chile and Argentina and expansion plans under
development, which has provided new horizons, beginning operations in Colombia,
Peru and Brazil.

Argentina

Brazil

Chile

Colombia

Peru

Hypermarkets

15

16

22

11

Supermarkets

234

26

125

43

Homecenters

34

24

2

Shopping
Centers

13

8

2

Department
stores

In
Analysis

27

In
development

Insurance
and Cards (million)

0.17

1

3.5

1.5

The road is not easy, and despite
its strong presence in Latin America, many analysts wonder What should Paulmanndo
to project his business to the level he thinks about Latin America? Does the
conglomerate the appropriate expertise to try? Is the company prepared to do
so? Does the company have corporate governance that will consolidate the steps
already taken? Additionally, at age 75 declared by founder Horst Paulmann, the
ghost of succession could become a very important trigger for the maintenance
of the family inside this huge conglomerate named Cencosud.
ORIGINS
Horst PaulmannKemna was born in
Kassel, Germany in 1935. The family of seven brothers and his parents emigrated
from Germany to Argentina in 1948. There, the father of Horst Paulmann got his
first job as a telephone operator in the capital, Buenos Aires. Because of
language barriers was dismissed for his constant errors in transferring calls.
Also produced dolls beds sold to “Gath & Chávez,” a company of
the time.
In 1950 the family moved to Chile
and settled in La Union, where they take the grant of the German Club and Union
Club. The first acquisition of the Paulmann family was the restaurant Las
Brisas, La Union. First he became self-service deli, before long, he was moved
to Temuco, where in 1952, inaugurated the Las Brisas Restaurant in Temuco. When
his father died in 1957, Horst and his brother Jurgen take care of the business.
And then a simple factoccurred, which results in a huge development process. A
friend gives them some strawberries to sell them at their site. Just last half
an hour reached in the window and all were sold. The signal was clear. The
brothers fitted out a space adjacent to a deli, which gradually expanded.
In 1960 he closed the restaurant to
begin with self-service, and family Paulmann gives a central step, whenr HorstPaulmannand
his brother Jurgen inaugurate the first self-service Las Brisas in Temuco, expanding
toValdivia and Concepción. In this latter city opened Hiperbrisas supermarket
in 1970, being highly beaten by the crisis 1970-1973, during which assumes the executive
power in Chile the socialist government of UnidadPopular, headed by President
Salvador Allende G.
In a period of expansion, Paulmann
brothers finish their society some years later and Horst issettled in the
capital of Chile, Santiago. In this square, he builds the Supermarket
Wholesaler “Pasando y Pasando”, located in Santa Rosa 3570, a popular
district of Chile where he distributed to retailers, implementing the business
model of wholesale sales self-serviced. After several trips to Europe in 1976,
Horst creates a new kind of business in Chile: the “hypermarkets”, or
large supermarkets, that sell all kinds of products, an innovative idea for
Chile at the time. The first is the Jumbo hypermarket of 7,000 m², whose first
store was built where now stands the Mall Alto Las Condes, in an exclusive area
of ​​Santiago, and then open a second Jumbo supermarket in 1979, in Francisco
Bilbao Latadia, an area of ​​upper-middle socio-economic characteristics.
The Process of Internationalization
In 1982 begins the process of
internationalization, inaugurating a Jumbo hypermarket and a shopping center in
Argentina, and then opened Unicenter, one of the largest shopping centers in
Argentina. The year 1993 will mark the income and the holding Cencosud the
business of home centers, inaugurating the first Easy in Argentina, beside Lomas
Shopping Centre, another large shopping center in Argentina. The success of
these formats is moved to Chile, where Cencosud launches the largest and most
important commercial center of the country, in the land where the first
hypermarket Jumbo was built, Mall Alto Las Condes.
The following year, in 1993, Easy
opened its first store in Chile, Alto Las Condes and parallel open the gates
San Martin Factory Mall in Argentina, and in 1996 opened the Mall Palermo in
Argentina.
From that moment, the Elephant
stampede begins, referring to the typical mascot Jumbo supermarket, which is an
Elephant, opened in Argentina between 1997 and 2000, shopping centers Quilmes
Factory, Las Palmas del Pinar, El Portal Escobar, Portal of Patagonia and Mall
Centro de Rancagua, this latter in Chile. In 2001, opens Centro Comercial Los
Andes in Mendoza, Argentina, continuing its strong growth in 2002, which
Cencosud acquired the operations of Home Depot, with its four stores in
Argentina, the operations of Proterra, a regional supermarket chain in Chile,
with its seven locations in the south and opens the shopping center Portal La
Reina in Santiago, Chile.
2003 would bring a huge growth toCencosud,
when it acquires the operations of Santa Isabel supermarkets in Chile and
became the second operator of supermarkets in that country. He also opens Florida
Center and Portal La Dehesa commercial centers, both in Santiago de Chile and
Cencosud gives a major step in forming “Cencosud Credit Card Manager,
SA” and the launch of credit cards, “Jumbo More”,Cencosud enters
the credit market.
In 2005, Cencosud surprised the
Chilean market by purchasing one of the largest department stores
“Paris”, which also operated a travel agency, an insurance broker,
the BancoParis and the Credit Card Administrator ACC SA. The following year,
acquired the supermarket Economax, Santiago and Infante, Antofagasta, Chile. As
a part of that expansion, acquires the retailer chain Foster /Eurofashion in
Chile, which sells apparel brands Foster, Maritime and JJO. That year he began
the construction of Chile’s largest mega project, the iconic tower Costanera
Center, a project unprecedented in the country and was suspended in early 2009,
as a result of the subprime crisis that hit Chile.
In 2007, with the aim of developing
the business of homecenters in Colombia, signed an agreement with Casino
Guichard-Perrachon, to build 15 Easy stores in that country over the next five
years. However, it continues to surprise and Cencosud signs the agreement to
acquire the specialist chain of ceramics, fittings, bathroom and kitchen
Blaisten in Argentina and entered the largest market in Latin America, Brazil,
through the purchase of the chain of supermarkets and hypermarkets GBarbosa and
also acquires WONG chain, which operates supermarkets and hypermarkets formats
and malls in Peru. In 2008, consolidates 100% control of operations in Colombia
and the large structure Easy subsidiary in Colombia, which is consolidated in
line sale of building materials and home improvement.
CENCOSUD TODAY
Administration and Property
The origins of the business of the
company date back to 1960 with the opening of the first supermarket Las Brisas
in Temuco. Until May 2004 the company was fully controlled by businessman Horst
Paulmann and his family, directly and through mutual funds. In making the
placement of shares in the stock market in 2004, together with the exchange OPA
shares of the Paris stores in March 2005, Horst Paulmann reduced its stake in
the company up to 65%. However, in March 2010, the PaulmannGroup controls 65% of
the company’s property.

Ownership
Structure
(March
2010)

%

Quinhamalli Investments Ltd.

25.69

Latadua Investments Ltd.

24.33

Tano Investments Ltd.

10.48

Banco de Chile for others

2.82

Banco Santander – JP Morgan

2.79

PaulmannKenna Horst

2.47

BancoItau on behalf of investors

1.76

Banchile Brokers SA

1.71

Larrain Vial SA Stockbrokers

1.55

Provida Pension Fund C

1.53

Provida Pension Fund B

1.20

Celfin Capital SA

1.19

Total

77.52

Strengths and Risks
Strengths

Strong business profile. Cencosud is the main operator
of the retail sector of the country. It is one of the leading supermarket
chains in an industry consolidation around large operators. It is the
second operator on the supermarket industry in Chile and Argentina, a
leading home improvement industry in Argentina and Chile and the second
participant in one of the largest operators of shopping centers in both
countries. Also involved in the administration of department stores in
Chile and in the financial business through financing to customers through
own credit cards and BancoParis. In Peru, it is the main operator of the
supermarket industry, while in Brazil has a significant presence in the
supermarket industry in the Northeast.
Strong and well positioned brands. The concept Jumbo
has a strong and clear market positioning in the segment that is targeted
in Chile and Argentina, allowing it to maintain positive sales margins and
sales per square meter higher than the average supermarket industry. Easy
stores in Argentina have a privileged position and brand recognition.
Furthermore, chains Wong and GBarbosa have a high presence in their
countries of operation. Meanwhile, Paris stores, due to a long tradition
of 100 years in business and strong investment in advertising, is positioned
as one of the most important department stores in the country. Also, the
department store format has a high level of acceptance by consumers.
Business model. The company operates a multi-format
scheme that enhances and complements their business. Thus, the location of
Jumbo, Easy and Paris, into the malls owned by holding company,
strengthens the business of shopping centers to generate a significant
number of people. Meanwhile, the supermarket business has a regular
attendance of customers with high transactional. In addition, this
business is considered less sensitive, relative to the levels of economic
activity than other retailers because of the commercialization of more
basic goods like groceries.
Strategic properties. Cencosud possesses urban
properties of high strategic value for the development of real estate,
supermarkets and home centers. The company owns land and facilities as
well as land that will ensure the implementation of its development plan
in the area of ​​supermarkets, shopping for home improvement, shopping
centers and department stores, which represent a competitive advantage
over other chains whose operations depend on the rental of properties.
Increasing level of acceptance and development achieved
by the concept of shopping as a distribution channel. The comfort, range
of hours of operation, security, entertainment and variety of products and
services offered, has made that malls displace, in large part, traditional
shopping venues.

Risks

High competition. The supermarket industry in Chile is
highly competitive, characterized by consolidation around large
supermarket chains such as D & S, Cencosud, SMU and Supermercadosdel
Sur and Falabella, its main competitor in the retail trade through
supermarkets Totus and San Francisco. In Argentina there is strong
competition, primarily from large global supermarket chains such asCarefour
and Wal-Mart, among others. Meanwhile, Paris stores face competition not
only from major department stores (Falabella, Ripley and Polar), but also
of a wide range of retailers. In the home improvement industry, Easy faces
competition mainly Sodimac, industry leader and subsidiary of S.A.C.IFalabella.

Risk integration of new operations and over-expansion.
The proper development of their aggressive business strategies and costly investment
plans require Cencosud to maintain management high capacity, competent staff
and efficient distribution systems and inventory control, deficient
elements that could affect the profitability of new investments. The
future profitability may also be affected by the saturation of certain
geographic markets where Cencosud participates.
Risk of investments abroad. The concentration, in March
2009, approximately 36% of its operating income in Argentina classified as
“B-” / Stables by Standard & Poor’s, 12% jointly in Brazil
and Peru, sorted in ‘BBB-‘ / Stables international level by Standard &
Poor’s, implies a significant increase in their relative risk compared to
flows generated only in Chile (A + / Stables). Regional expansion gives
the company opportunities for growth and the possibility of strengthening
its position as a regional provider. However, involves the challenge of
integrating new operations and may increase the relative share of risky
countries and markets more volatile. The company has recently opened
operations in Colombia (rated at “BB +” / Stables).
Income sensitivity to variations in the level of economic
activity. Activities related to trade in consumer goods, are sensitive to
variations in the level of economic activity, especially in the presence
of adverse economic cycles. Additionally, the lowest level of sales
experienced by the retail sector during these periods (given the
contraction in spending) can influence both the rate of occupancy of the
shopping centers as potential recoverability of loans granted to
customers.
Loan portfolio. The granting of credit is a key factor
in the profitability of companies and requires substantial amounts of
financing working capital. It is therefore essential that the portfolio
maintains an adequate quality, especially in periods of low economic
activity or sales growth. Increases in customer delinquencies could affect
cash flow of companies. Changes in the regulatory framework governing the
provision of credit and greater restrictions in this market can affect the
ability to generate operating cash flows.

Competitive Position
Cencosud SA has business in Chile, Argentina,
Brazil, Peru and Colombia: supermarkets (Jumbo, Santa Isabel, Disco, Wong,
GBarbosa, among other brands), shopping for home improvement (Easy), real
estate transactions (Shopping Centers), department stores (Paris), financial services
(Paris cards, Easy Más and Jumbo Más, Banco Paris and insurance brokerage) and
entertainment facilities for children, among others.
In March 2009, operates in Chile
Jumbo hypermarkets (26 stores), supermarkets Santa Isabel (135), stores for
home improvement Easy (25 locations), the Paris department stores (30 outlets),
shopping centers (8) and commercial off the line of boxes in the Jumbo
hypermarkets, Santa Isabel supermarkets and stores Easy.
In Argentina, by Cencosud SA
(Argentina), operates 16 Jumbo hypermarkets, 238 supermarkets Disco, 46 Easy stores
and 12 shopping centers. In Brazil, operates 31 supermarkets and 19
hypermarkets, plus outlets in drugstores and other formats (25). In Peru, the
company operates 41 supermarkets, 12 hypermarkets and 2 shopping centers.
Meanwhile, in Colombia operates 1 Easy store.
Revenue by country (March 2009)
Peru,
Brazil, Colombia – 12%
Argentina –
36%
Chiles – 52%

After the incorporation of
acquisitions in Brazil and Peru, the relative importance of revenue and
operating income from Chile has been reduced to 47% and 52% respectively. The
revenue base has been diversified incorporating operations that have experienced
significant growth in recent years in their respective countries, however,
potentially more volatile and higher relative risk.
The evolution of EBITDA by country
has undergone changes as shown in the table below, reflecting the relative
importance that businesses have been taking to the conglomerate.

Evolution EBITDA by country

2004

2005

2006

2007

2008

March 2009

Chile

59%

73%

72%

70%

59%

52%

Argentina

41%

27%

28%

29%

28%

36%

Brazil, Peru and Colombia

0%

0%

0%

1%

13%

12%

Revenue by business area and gross
margin, focus heavily on the area of ​​supermarkets, where they represent
approximately 73% and 66%, as shown below:
Income by business area
(March 2009)
Shops – 8%
Easy – 13%
Malls – 3%
Card – 4%
Other – 0%
Supermarkets – 73%
Gross profit by business area
(March 2009)
Easy – 15%
Department stores – 6%
Malls – 5%
Cards and insurance – 7%
Supermarkets – 66%
THE BIG CHANGE
In December 2008, there was one of
the most surprising changes in Cencosud, when founder and controller, Horst
Paulmann, announced the departure of corporate general manager, Laurence
Golborne, who had led the growth of Cencosud in recent years. Golborne resigned
from Colombia, a decision which was accepted by the board in an emergency meeting
that met some of its members, as Robert Philipps, Sven Von Appen and Erasmo
Wong, outside the capital.
The staff of the company moved their
pieces, defining that, despite the economic crisis that worries the world, was
“the right time to welcome the second generation” of the founding
family conglomerate through Manfred Paulmann.
The son of the businessman will take
the vice presidency of the board, since until now did not exist. In addition,
the vacancy of Golborne was occupied by Daniel Rodriguez, who had arrived a few
months ago the company as Financial Manager.
These movements were made known
through a surprise conference convened at the offices of Cencosudin Alto Condes
and which Golborne from Colombia participated via videoconference.
In the market repeatedly speculated
about the possible departure of Golborne. In due course it transpired that
there were some discrepancieswith Paulmann mainly by the rhythm of expansion of
the company, especially in real estate and the financing of this growth. Sources
from the same company say that the executive has resigned at least three
previous occasions.
However, Paulmanntook care of
discard these versions. “Often the market has declared me dead and said I
had cancer and that I was fighting with Laurence. As in all marriages, there
are good and bad days, but the differences are arranged talking face to face,
“said Paulmann.
Laurence Golborne, perhaps the
brightest of Cencosud executives, joined the company in March 2001. In 2002 he
led the purchase of the Home Depot chain in Argentina. In 2003, and already
become Paulmann’s right arm creates the credit business of holding and
strengthens the area of ​​supermarkets nationwide, through the acquisition of
the chain Santa Isabel, which ranked Cencosudsecond in the industry.
In 2004, Golborne takesCencosud
toBolsa de Santiago and acquires Disco in Argentina. In 2005, Horst Paulmann,
with the help of Golborne, buys AlmacenesParis from Galmez brothers. This marks
the entry of Cencosud to the banking. In 2006, construction began flagship
project: Mall Costanera Center.
In 2007, Golbornelead the arrival of
the elephant to Colombia, through a joint venture with the French group Casino,
allowing the entry of Easy to the coffee country. This arrival was the result
of the failure in the attempt to acquire the chain AlmacenesÉxtos. In the
middle of this year, Laurence Golborneheaded Cencosud entry to Brazil. The
retail group acquired the supermarket chain GBarbosaand at the end of that year
the purchase of the Peruvian supermarket chain Wong. The latter also marks the
entry of the Peruvian family to the property holding.
A GREAT OBSTACLE
Costanera Center, a real estate
project is located in the Providencia district in Santiago, Chile, whose
construction was halted in 2008 and was revived in 2010. Construction began on
March 3, 2006. The project is estimated to cost 600 million dollars, but it
will be rewarded with annual revenues, estimated at around U.S. $150 million
after the inauguration.
It will have a total of 700 thousand
square meters. The design of the Torre Gran Costanera, was designed by
architect Cesar Pelli, who has worked in construction and design of Torres
Petrona in Kuala Lumpur, among others buildings and skyscrapers around the
world. The design of the mall and the three towers remaining is in charge of
the office of Chilean architects. AlemparteBarreda y Asociados. The structural
analysis was developed by the Chilean company René Lagos and Associates. As
reviewers, structural engineers from US Company ThortonTomasetti Group, among
others, designed the Taipei 101, one of the tallest skyscrapers today. The
project electrical medium voltage distribution was made by the company
Fleischmann Project Engineering and it is the first commercial project of these
characteristics in the country.
In October 2008, announced the
suspension of the construction of towers 1 and 3 of the Costanera Center
project (both 170 meters high) for economic reasons caused by the global
economic crisis of that year. However, the Torre Gran Costanera and Torre 4
(109 meters) continued with its construction. This, until January 28, 2009,
through a press release, Cencosudgroup reported a complete shutdown and
indefinite construction of the project arguing that the current economic
scenario “did not justify continuing the current pace of
construction.”
During the shutdown, they have
analyzed the traffic mitigation plan in the Costanera Center environment to
avoid major traffic congestion once inaugurated this project. Although it
initially announced to even build a Metro station Line 4 subway of Santiago,
has not reached a decision, especially because of conflicts between Cencosud
and the Ministry of Public Works on who should be responsible of work.
Costanera Center is the flagship
project of holdingCencosud. The shopping center will occupy seven floors
with a total of 300 stores. It will include two hypermarkets: one Santa Isabel and
one Jumbo of two levels and 15,000 square feet of surface and one store Easy.
It will have local department store
Paris, Ripley and Falabella, the latter two, the more fierce competition in
department stores, a food court with a panoramic view that will house more than
2,000 users, an amusement Aventura Center and 14 movie theaters. Added to this
are five levels of underground parking with a capacity of 4,500 vehicles and
tolls, with automatic billing system. It will also feature two hotels of four
and five stars respectively.
Costanera Center, a real estate
project is located in the Providencia district in Santiago, Chile, whose
construction is now paralyzed. It consists of a set of four buildings located
at the intersection of Avenida Andres Bello in NuevaTajamar, a few meters from
the Metro station Tobalaba, Santiago. Its main building, the Torre Gran
Costanera, will have a total area of ​​128,000 m² and have a height of 300
meters including spiral, 265 m to the last of its 70 floors and be equipped
with 48 high speed elevators that will move a speed of 6.6 meters per second. With
these features, Costanera Center would have the tallest skyscraper in the
country and South America and the second in the Southern Hemisphere (after the
Q1 Tower in Australia). The towers 1, 3 and 4 have a height of 170, 170 and 109
meters respectively.
The group of buildings, owned by
Cencosud consortium, will feature a shopping center and five star hotels. Three
of the four buildings will be used for offices. The opening of the mall was
planned for mid-2009, however, the effects of the economic crisis of 2008,
resulted that in January 2009 they halt the work until it is overcome economic
uncertainty. The “dream” of Paulmann of having the tallest building
in South America, literally paralyzed after Cencosud announced the postponement
of all works of the Costanera Center project, leaving about two thousand
workers without their source of income and over 200 companies providing
products and services.
Analysts wonder again if this is the
first sign of weakening the power of Horst Paulmann in Cencosud, and although
the building was returned in the first half of 2010, he has not the light
shines than before, keeping a low profile and weighs very heavily in the announcement
on their progress.
The Founder
Horst Paulmann, since it began as an
entrepreneur with a small restaurant in the Chilean city of Temuco, in 1952,
likes to be on top of everything. Despite its huge size, the company still has
the style of a family organization in which the owner, controller of, 65%,
interferes in the day to day and in almost all decisions.
He is an innate businessman, a brilliant;
recognize those who have worked with him. But this style is becoming a problem
for a group that sold more than U.S. $10.000 billion a year and has operations
in five countries. The company, and he knows it, has tried to enter a
modernization process to catch up with management models of large
multinationals, with a defined corporate governance and administration
professionalized. But , while Paulmann is inside, the task will not be easy.
At 75 years, the Chilean-German
businessman has been determined to take the lead. The company does not have clear
corporate governance and has delegated the management of a professional manager
of record, as large family conglomerates often do. Nearly half of its board is comprised
by him and his sons, Manfred, Peter and Heike: four family members in a group
of nine people. It is not known for his succession plan and he has avoided the
issue to press inquiries.
Paulmann often questioned the
decisions of his executives and is known for being tough and aggressive, even
with first-line managers. This style has led to the resignation of at least 10
executives in recent years, most recently in mid-July. “Almost all they were
from multinational companies and had experience,” says a consultant close
to the company that prefers not to reveal his name. “And when they see
that decisions are taken by the family, they feel that their role is not
clear.”
Possibly this would go unnoticed if it
was not for the rapid growth of Cencosud. In 2001 he sold U.S. $1.400 million
and had operations in Chile and Argentina. Last year revenues were of U.S.
$10.500 million, earning the label of the third largest company in Chile, after
Codelco and Enersis. It is the most internationalized Latin American retailer
with operations in Brazil, Peru, Argentina and Colombia, as well as Chile.
For
now,Paulmannisfocused on itsflagship project, CostaneraCenter,which will be thetallest building inSouth
Americawhen it opens inthe second half of2011.The workis the symbolof the
contradictions ofCencosud.Aproject of more thanUD $700 millionthat
Paulmann did not want to postpone in crisis,against the advice
oftheir executives.Timeproved them rightandhad to be postponedtoearly
2009.Butlate last yearwas re-launchedas a symbol ofthe revival ofthe Chilean
economy.According to itsclose, the real estate
divisionof the group, whose manager, Victor Ide, resigned in February thisyear-isthe
one that is sufferingthe largestintrusionsof the
employer.”Heis the chief architect,” says an
executiveof the Chilean market. “Drawand intervenesplans
andmakes all decisions.”

Problems were increased.The latest isa conflictwith the
Ministryof Public Works forroadmitigationworks. The
statesays the companymust make atunnel under AvenidaAndresBelloto mitigate the
impactof the complex.ButPaulmannhastold the mediathat this”is notour
problem.”Add that to thefailure ofa mall ina landof $30 million in
theeastern sector of thecapital,after65% ofthe neighborsrejectedin a
referendum.

Anyway,everyone recognizes thatwithout himthis workwould never
haveexisted.He answers to thesame obsession thatled him
tocreate one of thelargestretailconglomeratesin Latin America.What will
happenwhen he dies? Todaynobody wants
toimagine,”Everything depends onthe signsthat controllers giveat that time,”
says Barros,FitResearch, “The market would have to doitsreading.”
After carefulanalysis and critical thought,
write an essay evaluation between 4 to
6 pages (excluding Title page and References page).
Cencosud’s mission is as follows: “To
be the most profitable and prestigious retailer in Latin America, based on
excellence in our quality of service, respect for the communities we live and
the commitment of our team of collaborators with the pillars core of our
company: vision, challenge, enterprise and perseverance.”
Visit the internet site ofCencosud
(http://www.cencosud.cl/) and review the financial statements. For the
industry:
1. What key financial ratios (e.g.
liquidity ratio) is needed to comply Cencosud the goal described in its
mission?
2. What financial ratios may
indicate the current financial condition of the organization?
Prepare an analysis using the Extended
Du Pont Equation, and present key financial ratios forCencosud.Make sure you
understand the numbers either because it would be embarrassing and damaging to
your career as a manager and your organization failing to provide a meaningful
answer. After that, please prepare the following:
Considering that you could change your mind in the future:

Do you think Cencosud should get a loan through a
commercial bank?
How much it should borrow and why or why not?
Could the goal be achieved as
stating inCencosud’s mission statement?

CENCOSUD
A large South American Retail
Company
Case study
Reference No. E311-088-1
ABSTRACT
CENCOSUD is a retail company that
was started in Chile by the Chilean-German businessman Horst Paulmann. With a
base of operations located in that distant country of South America, the
conglomerate’s founder set out the conquer Latin America, seeking as it says its
mission “To be the most profitable and prestigious retailer in Latin
America, based on excellence in our quality of service, respect for the communities
we live and the commitment of our team of collaborators with the basic tenets
of our company’s vision, challenge, entrepreneurship and perseverance “.
The road is not easy, despite its strong
presence in Latin America many analysts are wondering, what should do Paulmannto
project his business to the level he thinks in Latin America? Does the
conglomerate the appropriate expertise to try it? Is the company prepared to do
so? Does the company have corporate governance that will consolidate the steps already
taken? Additionally, at age 75 declared by founder Horst Paulmann, the ghost of
succession could become a very important trigger for the maintenance of the
family inside this huge conglomerate named Cencosud.






















INTRODUCTION
CENCOSUD operations extend to the
business of supermarkets, home centers, department stores, shopping centers and
financial services, being the American owned company most diversified in the
Southern Cone and the increased supply of square meters. Additionally, developing
other business lines that complement its core businesssuch as insurance
brokerage, family entertainment center and travel agencies.
The main objective of CENCOSUD is
becoming the largest retail company in Latin America, reaching their maximum
quality of service, excellence and commitment to hundreds of thousands of
customers. To achieve this task, since the late eighties the Company has been
involved in an ambitious plan for internationalization, which today has
consolidated operations in Chile and Argentina and expansion plans under
development, which has provided new horizons, beginning operations in Colombia,
Peru and Brazil.















Argentina

Brazil

Chile

Colombia

Peru

Hypermarkets

15

16

22

11

Supermarkets

234

26

125

43

Homecenters

34

24

2

Shopping
Centers


13

8

2

Department
stores


In
Analysis


27

In
development


Insurance
and Cards (million)


0.17

1

3.5

1.5

The road is not easy, and despite
its strong presence in Latin America, many analysts wonder What should Paulmanndo
to project his business to the level he thinks about Latin America? Does the
conglomerate the appropriate expertise to try? Is the company prepared to do
so? Does the company have corporate governance that will consolidate the steps
already taken? Additionally, at age 75 declared by founder Horst Paulmann, the
ghost of succession could become a very important trigger for the maintenance
of the family inside this huge conglomerate named Cencosud.
ORIGINS
Horst PaulmannKemna was born in
Kassel, Germany in 1935. The family of seven brothers and his parents emigrated
from Germany to Argentina in 1948. There, the father of Horst Paulmann got his
first job as a telephone operator in the capital, Buenos Aires. Because of
language barriers was dismissed for his constant errors in transferring calls.
Also produced dolls beds sold to “Gath & Chávez,” a company of
the time.
In 1950 the family moved to Chile
and settled in La Union, where they take the grant of the German Club and Union
Club. The first acquisition of the Paulmann family was the restaurant Las
Brisas, La Union. First he became self-service deli, before long, he was moved
to Temuco, where in 1952, inaugurated the Las Brisas Restaurant in Temuco. When
his father died in 1957, Horst and his brother Jurgen take care of the business.
And then a simple factoccurred, which results in a huge development process. A
friend gives them some strawberries to sell them at their site. Just last half
an hour reached in the window and all were sold. The signal was clear. The
brothers fitted out a space adjacent to a deli, which gradually expanded.
In 1960 he closed the restaurant to
begin with self-service, and family Paulmann gives a central step, whenr HorstPaulmannand
his brother Jurgen inaugurate the first self-service Las Brisas in Temuco, expanding
toValdivia and Concepción. In this latter city opened Hiperbrisas supermarket
in 1970, being highly beaten by the crisis 1970-1973, during which assumes the executive
power in Chile the socialist government of UnidadPopular, headed by President
Salvador Allende G.
In a period of expansion, Paulmann
brothers finish their society some years later and Horst issettled in the
capital of Chile, Santiago. In this square, he builds the Supermarket
Wholesaler “Pasando y Pasando”, located in Santa Rosa 3570, a popular
district of Chile where he distributed to retailers, implementing the business
model of wholesale sales self-serviced. After several trips to Europe in 1976,
Horst creates a new kind of business in Chile: the “hypermarkets”, or
large supermarkets, that sell all kinds of products, an innovative idea for
Chile at the time. The first is the Jumbo hypermarket of 7,000 m², whose first
store was built where now stands the Mall Alto Las Condes, in an exclusive area
of ​​Santiago, and then open a second Jumbo supermarket in 1979, in Francisco
Bilbao Latadia, an area of ​​upper-middle socio-economic characteristics.
The Process of Internationalization
In 1982 begins the process of
internationalization, inaugurating a Jumbo hypermarket and a shopping center in
Argentina, and then opened Unicenter, one of the largest shopping centers in
Argentina. The year 1993 will mark the income and the holding Cencosud the
business of home centers, inaugurating the first Easy in Argentina, beside Lomas
Shopping Centre, another large shopping center in Argentina. The success of
these formats is moved to Chile, where Cencosud launches the largest and most
important commercial center of the country, in the land where the first
hypermarket Jumbo was built, Mall Alto Las Condes.
The following year, in 1993, Easy
opened its first store in Chile, Alto Las Condes and parallel open the gates
San Martin Factory Mall in Argentina, and in 1996 opened the Mall Palermo in
Argentina.
From that moment, the Elephant
stampede begins, referring to the typical mascot Jumbo supermarket, which is an
Elephant, opened in Argentina between 1997 and 2000, shopping centers Quilmes
Factory, Las Palmas del Pinar, El Portal Escobar, Portal of Patagonia and Mall
Centro de Rancagua, this latter in Chile. In 2001, opens Centro Comercial Los
Andes in Mendoza, Argentina, continuing its strong growth in 2002, which
Cencosud acquired the operations of Home Depot, with its four stores in
Argentina, the operations of Proterra, a regional supermarket chain in Chile,
with its seven locations in the south and opens the shopping center Portal La
Reina in Santiago, Chile.
2003 would bring a huge growth toCencosud,
when it acquires the operations of Santa Isabel supermarkets in Chile and
became the second operator of supermarkets in that country. He also opens Florida
Center and Portal La Dehesa commercial centers, both in Santiago de Chile and
Cencosud gives a major step in forming “Cencosud Credit Card Manager,
SA” and the launch of credit cards, “Jumbo More”,Cencosud enters
the credit market.
In 2005, Cencosud surprised the
Chilean market by purchasing one of the largest department stores
“Paris”, which also operated a travel agency, an insurance broker,
the BancoParis and the Credit Card Administrator ACC SA. The following year,
acquired the supermarket Economax, Santiago and Infante, Antofagasta, Chile. As
a part of that expansion, acquires the retailer chain Foster /Eurofashion in
Chile, which sells apparel brands Foster, Maritime and JJO. That year he began
the construction of Chile’s largest mega project, the iconic tower Costanera
Center, a project unprecedented in the country and was suspended in early 2009,
as a result of the subprime crisis that hit Chile.
In 2007, with the aim of developing
the business of homecenters in Colombia, signed an agreement with Casino
Guichard-Perrachon, to build 15 Easy stores in that country over the next five
years. However, it continues to surprise and Cencosud signs the agreement to
acquire the specialist chain of ceramics, fittings, bathroom and kitchen
Blaisten in Argentina and entered the largest market in Latin America, Brazil,
through the purchase of the chain of supermarkets and hypermarkets GBarbosa and
also acquires WONG chain, which operates supermarkets and hypermarkets formats
and malls in Peru. In 2008, consolidates 100% control of operations in Colombia
and the large structure Easy subsidiary in Colombia, which is consolidated in
line sale of building materials and home improvement.
CENCOSUD TODAY
Administration and Property
The origins of the business of the
company date back to 1960 with the opening of the first supermarket Las Brisas
in Temuco. Until May 2004 the company was fully controlled by businessman Horst
Paulmann and his family, directly and through mutual funds. In making the
placement of shares in the stock market in 2004, together with the exchange OPA
shares of the Paris stores in March 2005, Horst Paulmann reduced its stake in
the company up to 65%. However, in March 2010, the PaulmannGroup controls 65% of
the company’s property.











































































































Ownership
Structure
(March
2010)




%

Quinhamalli Investments Ltd.

25.69

Latadua Investments Ltd.

24.33

Tano Investments Ltd.

10.48

Banco de Chile for others

2.82

Banco Santander – JP Morgan

2.79

PaulmannKenna Horst

2.47

BancoItau on behalf of investors

1.76

Banchile Brokers SA

1.71

Larrain Vial SA Stockbrokers

1.55

Provida Pension Fund C

1.53

Provida Pension Fund B

1.20

Celfin Capital SA

1.19

Total

77.52

Strengths and Risks
Strengths


Strong business profile. Cencosud is the main operator
of the retail sector of the country. It is one of the leading supermarket
chains in an industry consolidation around large operators. It is the
second operator on the supermarket industry in Chile and Argentina, a
leading home improvement industry in Argentina and Chile and the second
participant in one of the largest operators of shopping centers in both
countries. Also involved in the administration of department stores in
Chile and in the financial business through financing to customers through
own credit cards and BancoParis. In Peru, it is the main operator of the
supermarket industry, while in Brazil has a significant presence in the
supermarket industry in the Northeast.
Strong and well positioned brands. The concept Jumbo
has a strong and clear market positioning in the segment that is targeted
in Chile and Argentina, allowing it to maintain positive sales margins and
sales per square meter higher than the average supermarket industry. Easy
stores in Argentina have a privileged position and brand recognition.
Furthermore, chains Wong and GBarbosa have a high presence in their
countries of operation. Meanwhile, Paris stores, due to a long tradition
of 100 years in business and strong investment in advertising, is positioned
as one of the most important department stores in the country. Also, the
department store format has a high level of acceptance by consumers.
Business model. The company operates a multi-format
scheme that enhances and complements their business. Thus, the location of
Jumbo, Easy and Paris, into the malls owned by holding company,
strengthens the business of shopping centers to generate a significant
number of people. Meanwhile, the supermarket business has a regular
attendance of customers with high transactional. In addition, this
business is considered less sensitive, relative to the levels of economic
activity than other retailers because of the commercialization of more
basic goods like groceries.
Strategic properties. Cencosud possesses urban
properties of high strategic value for the development of real estate,
supermarkets and home centers. The company owns land and facilities as
well as land that will ensure the implementation of its development plan
in the area of ​​supermarkets, shopping for home improvement, shopping
centers and department stores, which represent a competitive advantage
over other chains whose operations depend on the rental of properties.
Increasing level of acceptance and development achieved
by the concept of shopping as a distribution channel. The comfort, range
of hours of operation, security, entertainment and variety of products and
services offered, has made that malls displace, in large part, traditional
shopping venues.










































Risks

High competition. The supermarket industry in Chile is
highly competitive, characterized by consolidation around large
supermarket chains such as D & S, Cencosud, SMU and Supermercadosdel
Sur and Falabella, its main competitor in the retail trade through
supermarkets Totus and San Francisco. In Argentina there is strong
competition, primarily from large global supermarket chains such asCarefour
and Wal-Mart, among others. Meanwhile, Paris stores face competition not
only from major department stores (Falabella, Ripley and Polar), but also
of a wide range of retailers. In the home improvement industry, Easy faces
competition mainly Sodimac, industry leader and subsidiary of S.A.C.IFalabella.










Risk integration of new operations and over-expansion.
The proper development of their aggressive business strategies and costly investment
plans require Cencosud to maintain management high capacity, competent staff
and efficient distribution systems and inventory control, deficient
elements that could affect the profitability of new investments. The
future profitability may also be affected by the saturation of certain
geographic markets where Cencosud participates.
Risk of investments abroad. The concentration, in March
2009, approximately 36% of its operating income in Argentina classified as
“B-” / Stables by Standard & Poor’s, 12% jointly in Brazil
and Peru, sorted in ‘BBB-‘ / Stables international level by Standard &
Poor’s, implies a significant increase in their relative risk compared to
flows generated only in Chile (A + / Stables). Regional expansion gives
the company opportunities for growth and the possibility of strengthening
its position as a regional provider. However, involves the challenge of
integrating new operations and may increase the relative share of risky
countries and markets more volatile. The company has recently opened
operations in Colombia (rated at “BB +” / Stables).
Income sensitivity to variations in the level of economic
activity. Activities related to trade in consumer goods, are sensitive to
variations in the level of economic activity, especially in the presence
of adverse economic cycles. Additionally, the lowest level of sales
experienced by the retail sector during these periods (given the
contraction in spending) can influence both the rate of occupancy of the
shopping centers as potential recoverability of loans granted to
customers.
Loan portfolio. The granting of credit is a key factor
in the profitability of companies and requires substantial amounts of
financing working capital. It is therefore essential that the portfolio
maintains an adequate quality, especially in periods of low economic
activity or sales growth. Increases in customer delinquencies could affect
cash flow of companies. Changes in the regulatory framework governing the
provision of credit and greater restrictions in this market can affect the
ability to generate operating cash flows.


































Competitive Position
Cencosud SA has business in Chile, Argentina,
Brazil, Peru and Colombia: supermarkets (Jumbo, Santa Isabel, Disco, Wong,
GBarbosa, among other brands), shopping for home improvement (Easy), real
estate transactions (Shopping Centers), department stores (Paris), financial services
(Paris cards, Easy Más and Jumbo Más, Banco Paris and insurance brokerage) and
entertainment facilities for children, among others.
In March 2009, operates in Chile
Jumbo hypermarkets (26 stores), supermarkets Santa Isabel (135), stores for
home improvement Easy (25 locations), the Paris department stores (30 outlets),
shopping centers (8) and commercial off the line of boxes in the Jumbo
hypermarkets, Santa Isabel supermarkets and stores Easy.
In Argentina, by Cencosud SA
(Argentina), operates 16 Jumbo hypermarkets, 238 supermarkets Disco, 46 Easy stores
and 12 shopping centers. In Brazil, operates 31 supermarkets and 19
hypermarkets, plus outlets in drugstores and other formats (25). In Peru, the
company operates 41 supermarkets, 12 hypermarkets and 2 shopping centers.
Meanwhile, in Colombia operates 1 Easy store.
Revenue by country (March 2009)
Peru,
Brazil, Colombia – 12%
Argentina –
36%
Chiles – 52%
























After the incorporation of
acquisitions in Brazil and Peru, the relative importance of revenue and
operating income from Chile has been reduced to 47% and 52% respectively. The
revenue base has been diversified incorporating operations that have experienced
significant growth in recent years in their respective countries, however,
potentially more volatile and higher relative risk.
The evolution of EBITDA by country
has undergone changes as shown in the table below, reflecting the relative
importance that businesses have been taking to the conglomerate.









Evolution EBITDA by country

2004

2005

2006

2007

2008

March 2009

Chile

59%

73%

72%

70%

59%

52%

Argentina

41%

27%

28%

29%

28%

36%

Brazil, Peru and Colombia

0%

0%

0%

1%

13%

12%

Revenue by business area and gross
margin, focus heavily on the area of ​​supermarkets, where they represent
approximately 73% and 66%, as shown below:
Income by business area
(March 2009)
Shops – 8%
Easy – 13%
Malls – 3%
Card – 4%
Other – 0%
Supermarkets – 73%
Gross profit by business area
(March 2009)
Easy – 15%
Department stores – 6%
Malls – 5%
Cards and insurance – 7%
Supermarkets – 66%
THE BIG CHANGE
In December 2008, there was one of
the most surprising changes in Cencosud, when founder and controller, Horst
Paulmann, announced the departure of corporate general manager, Laurence
Golborne, who had led the growth of Cencosud in recent years. Golborne resigned
from Colombia, a decision which was accepted by the board in an emergency meeting
that met some of its members, as Robert Philipps, Sven Von Appen and Erasmo
Wong, outside the capital.
The staff of the company moved their
pieces, defining that, despite the economic crisis that worries the world, was
“the right time to welcome the second generation” of the founding
family conglomerate through Manfred Paulmann.
The son of the businessman will take
the vice presidency of the board, since until now did not exist. In addition,
the vacancy of Golborne was occupied by Daniel Rodriguez, who had arrived a few
months ago the company as Financial Manager.
These movements were made known
through a surprise conference convened at the offices of Cencosudin Alto Condes
and which Golborne from Colombia participated via videoconference.
In the market repeatedly speculated
about the possible departure of Golborne. In due course it transpired that
there were some discrepancieswith Paulmann mainly by the rhythm of expansion of
the company, especially in real estate and the financing of this growth. Sources
from the same company say that the executive has resigned at least three
previous occasions.
However, Paulmanntook care of
discard these versions. “Often the market has declared me dead and said I
had cancer and that I was fighting with Laurence. As in all marriages, there
are good and bad days, but the differences are arranged talking face to face,
“said Paulmann.
Laurence Golborne, perhaps the
brightest of Cencosud executives, joined the company in March 2001. In 2002 he
led the purchase of the Home Depot chain in Argentina. In 2003, and already
become Paulmann’s right arm creates the credit business of holding and
strengthens the area of ​​supermarkets nationwide, through the acquisition of
the chain Santa Isabel, which ranked Cencosudsecond in the industry.
In 2004, Golborne takesCencosud
toBolsa de Santiago and acquires Disco in Argentina. In 2005, Horst Paulmann,
with the help of Golborne, buys AlmacenesParis from Galmez brothers. This marks
the entry of Cencosud to the banking. In 2006, construction began flagship
project: Mall Costanera Center.
In 2007, Golbornelead the arrival of
the elephant to Colombia, through a joint venture with the French group Casino,
allowing the entry of Easy to the coffee country. This arrival was the result
of the failure in the attempt to acquire the chain AlmacenesÉxtos. In the
middle of this year, Laurence Golborneheaded Cencosud entry to Brazil. The
retail group acquired the supermarket chain GBarbosaand at the end of that year
the purchase of the Peruvian supermarket chain Wong. The latter also marks the
entry of the Peruvian family to the property holding.
A GREAT OBSTACLE
Costanera Center, a real estate
project is located in the Providencia district in Santiago, Chile, whose
construction was halted in 2008 and was revived in 2010. Construction began on
March 3, 2006. The project is estimated to cost 600 million dollars, but it
will be rewarded with annual revenues, estimated at around U.S. $150 million
after the inauguration.
It will have a total of 700 thousand
square meters. The design of the Torre Gran Costanera, was designed by
architect Cesar Pelli, who has worked in construction and design of Torres
Petrona in Kuala Lumpur, among others buildings and skyscrapers around the
world. The design of the mall and the three towers remaining is in charge of
the office of Chilean architects. AlemparteBarreda y Asociados. The structural
analysis was developed by the Chilean company René Lagos and Associates. As
reviewers, structural engineers from US Company ThortonTomasetti Group, among
others, designed the Taipei 101, one of the tallest skyscrapers today. The
project electrical medium voltage distribution was made by the company
Fleischmann Project Engineering and it is the first commercial project of these
characteristics in the country.
In October 2008, announced the
suspension of the construction of towers 1 and 3 of the Costanera Center
project (both 170 meters high) for economic reasons caused by the global
economic crisis of that year. However, the Torre Gran Costanera and Torre 4
(109 meters) continued with its construction. This, until January 28, 2009,
through a press release, Cencosudgroup reported a complete shutdown and
indefinite construction of the project arguing that the current economic
scenario “did not justify continuing the current pace of
construction.”
During the shutdown, they have
analyzed the traffic mitigation plan in the Costanera Center environment to
avoid major traffic congestion once inaugurated this project. Although it
initially announced to even build a Metro station Line 4 subway of Santiago,
has not reached a decision, especially because of conflicts between Cencosud
and the Ministry of Public Works on who should be responsible of work.
Costanera Center is the flagship
project of holdingCencosud. The shopping center will occupy seven floors
with a total of 300 stores. It will include two hypermarkets: one Santa Isabel and
one Jumbo of two levels and 15,000 square feet of surface and one store Easy.
It will have local department store
Paris, Ripley and Falabella, the latter two, the more fierce competition in
department stores, a food court with a panoramic view that will house more than
2,000 users, an amusement Aventura Center and 14 movie theaters. Added to this
are five levels of underground parking with a capacity of 4,500 vehicles and
tolls, with automatic billing system. It will also feature two hotels of four
and five stars respectively.
Costanera Center, a real estate
project is located in the Providencia district in Santiago, Chile, whose
construction is now paralyzed. It consists of a set of four buildings located
at the intersection of Avenida Andres Bello in NuevaTajamar, a few meters from
the Metro station Tobalaba, Santiago. Its main building, the Torre Gran
Costanera, will have a total area of ​​128,000 m² and have a height of 300
meters including spiral, 265 m to the last of its 70 floors and be equipped
with 48 high speed elevators that will move a speed of 6.6 meters per second. With
these features, Costanera Center would have the tallest skyscraper in the
country and South America and the second in the Southern Hemisphere (after the
Q1 Tower in Australia). The towers 1, 3 and 4 have a height of 170, 170 and 109
meters respectively.
The group of buildings, owned by
Cencosud consortium, will feature a shopping center and five star hotels. Three
of the four buildings will be used for offices. The opening of the mall was
planned for mid-2009, however, the effects of the economic crisis of 2008,
resulted that in January 2009 they halt the work until it is overcome economic
uncertainty. The “dream” of Paulmann of having the tallest building
in South America, literally paralyzed after Cencosud announced the postponement
of all works of the Costanera Center project, leaving about two thousand
workers without their source of income and over 200 companies providing
products and services.
Analysts wonder again if this is the
first sign of weakening the power of Horst Paulmann in Cencosud, and although
the building was returned in the first half of 2010, he has not the light
shines than before, keeping a low profile and weighs very heavily in the announcement
on their progress.
The Founder
Horst Paulmann, since it began as an
entrepreneur with a small restaurant in the Chilean city of Temuco, in 1952,
likes to be on top of everything. Despite its huge size, the company still has
the style of a family organization in which the owner, controller of, 65%,
interferes in the day to day and in almost all decisions.
He is an innate businessman, a brilliant;
recognize those who have worked with him. But this style is becoming a problem
for a group that sold more than U.S. $10.000 billion a year and has operations
in five countries. The company, and he knows it, has tried to enter a
modernization process to catch up with management models of large
multinationals, with a defined corporate governance and administration
professionalized. But , while Paulmann is inside, the task will not be easy.
At 75 years, the Chilean-German
businessman has been determined to take the lead. The company does not have clear
corporate governance and has delegated the management of a professional manager
of record, as large family conglomerates often do. Nearly half of its board is comprised
by him and his sons, Manfred, Peter and Heike: four family members in a group
of nine people. It is not known for his succession plan and he has avoided the
issue to press inquiries.
Paulmann often questioned the
decisions of his executives and is known for being tough and aggressive, even
with first-line managers. This style has led to the resignation of at least 10
executives in recent years, most recently in mid-July. “Almost all they were
from multinational companies and had experience,” says a consultant close
to the company that prefers not to reveal his name. “And when they see
that decisions are taken by the family, they feel that their role is not
clear.”
Possibly this would go unnoticed if it
was not for the rapid growth of Cencosud. In 2001 he sold U.S. $1.400 million
and had operations in Chile and Argentina. Last year revenues were of U.S.
$10.500 million, earning the label of the third largest company in Chile, after
Codelco and Enersis. It is the most internationalized Latin American retailer
with operations in Brazil, Peru, Argentina and Colombia, as well as Chile.
For
now,Paulmannisfocused on itsflagship project, CostaneraCenter,which will be thetallest building inSouth
Americawhen it opens inthe second half of2011.The workis the symbolof the
contradictions ofCencosud.Aproject of more thanUD $700 millionthat
Paulmann did not want to postpone in crisis,against the advice
oftheir executives.Timeproved them rightandhad to be postponedtoearly
2009.Butlate last yearwas re-launchedas a symbol ofthe revival ofthe Chilean
economy.According to itsclose, the real estate
divisionof the group, whose manager, Victor Ide, resigned in February thisyear-isthe
one that is sufferingthe largestintrusionsof the
employer.”Heis the chief architect,” says an
executiveof the Chilean market. “Drawand intervenesplans
andmakes all decisions.”


























































































































































































Problems were increased.The latest isa conflictwith the
Ministryof Public Works forroadmitigationworks. The
statesays the companymust make atunnel under AvenidaAndresBelloto mitigate the
impactof the complex.ButPaulmannhastold the mediathat this”is notour
problem.”Add that to thefailure ofa mall ina landof $30 million in
theeastern sector of thecapital,after65% ofthe neighborsrejectedin a
referendum.







Anyway,everyone recognizes thatwithout himthis workwould never
haveexisted.He answers to thesame obsession thatled him
tocreate one of thelargestretailconglomeratesin Latin America.What will
happenwhen he dies? Todaynobody wants
toimagine,”Everything depends onthe signsthat controllers giveat that time,”
says Barros,FitResearch, “The market would have to doitsreading.”
After carefulanalysis and critical thought,
write an essay evaluation between 4 to
6 pages (excluding Title page and References page).
Cencosud’s mission is as follows: “To
be the most profitable and prestigious retailer in Latin America, based on
excellence in our quality of service, respect for the communities we live and
the commitment of our team of collaborators with the pillars core of our
company: vision, challenge, enterprise and perseverance.”
Visit the internet site ofCencosud
(http://www.cencosud.cl/) and review the financial statements. For the
industry:
1. What key financial ratios (e.g.
liquidity ratio) is needed to comply Cencosud the goal described in its
mission?
2. What financial ratios may
indicate the current financial condition of the organization?
Prepare an analysis using the Extended
Du Pont Equation, and present key financial ratios forCencosud.Make sure you
understand the numbers either because it would be embarrassing and damaging to
your career as a manager and your organization failing to provide a meaningful
answer. After that, please prepare the following:
Considering that you could change your mind in the future:




























Do you think Cencosud should get a loan through a
commercial bank?
How much it should borrow and why or why not?
Could the goal be achieved as
stating inCencosud’s mission statement?





Answers

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