Bloomberg Línea — Despite the bleak outlook for Latin American economies in 2023, Gaston Bottazzini, department store chain Falabella’s CEO, believes it will be a better year for his business.
“The whole operation will be better off. In terms of sales, we see very moderate growth compared to the current year,” he says in an interview with Bloomberg Línea in Miami, where he received the Bravo Digital Transformation of the Year Award from the Council of the Americas.
The company, one of the leading retail outlets in Latin America, has a presence in seven countries in the region, where it expects to strengthen its operations under a multi-format and omnichannel scheme.
The following conversation was edited for length and clarity:
Bloomberg Línea: How are you planning to diversify your revenue streams, and which markets are you betting on to do so?
Gaston Bottazzini: Revenue diversification has two dimensions. There is one related to geographic expansion, where there are a number of plans, such as growth in Mexico and, probably, further growth in the home improvement and financial businesses. We have an operation in Brazil, where there is also room for growth with a focus on São Paulo, in the home improvement segment. In addition, there is the expansion of the IKEA operation, with a plan to open more stores in Chile; three in Colombia and eventually in Peru. That, as well as the expansion of our physical footprint.
This is complemented by another dimension that, in terms of growth, we believe is more important: the conversion of Falabella into a platform. We want to move towards platforms for developing relationships with customers, with platforms that are already consolidated, such as e-commerce, digital banking, and other new ones that drive or enhance growth.
Why are you ceasing to operate department stores in Argentina?
The reason has to do, in the first place, with the fact that it is a business that is highly dependent on the permanent import of products. Secondly, and as a consequence of the above, it is a business highly affected by exchange-rate volatility. Therefore, it was a business that had very little capacity to compete in Argentina.
In fact, in that country the department store model does not exist, and we are the only ones. It was decided, after several years, to adapt the model in different ways. When we saw that it was not a model that was well adapted to that market, we decided to close it. The balance is positive because it is based on a concrete rationale, which had to do with how the format was adapted to the market.
In several markets where you operate, including Chile, consumption is slowing and a recession is even foreseen. How is Falabella preparing for a more restrictive scenario in terms of consumption?
The moderation of consumption is a logical consequence of the boom that occurred for various reasons, including the distribution of pension funds in Chile at the tail end of the pandemic. We are expecting a quite pronounced drop in demand there. However, we believe that it will not continue with the same strength going forward, but that a drop in consumption is coming. How do we prepare? Falabella and retail, in general, have to adapt to a context where volatility - not only in consumption, but in several macroeconomic variables - is greater than it has been historically.
How can we adapt? Firstly, by operating much more efficiently and, in that sense, there is a whole efficiency plan that we announced to the market at our last investor day in New York, which aims at a lighter structure that provides more flexibility in the face of more volatile scenarios. Secondly, by being much more conservative, but above all analytical when it comes to purchase planning. So, more use of data in purchase planning. And thirdly, shortening the purchasing time through different ways, including diversifying sources in terms of geography.
What is your assessment of how the business and investment climate in Chile has changed this year?
This year the business climate was very volatile, because we had a process of definition of the new Constitution and we have a series of processes of changes to tax regulation that, beyond whether one thinks they are positive or negative, generate a certain level of uncertainty.
The change in the business climate seen in recent times responds to that, with less certainty about what the rules of the game will be and, in that sense, today there is a little more certainty.
The government is giving clearer guidelines as to which direction it is going and the level of depth of the changes. But still, in order to really generate a favorable context to improve the business climate, we need more clarity and certainty as to the steps to be taken, and this will be seen in the next months. As a result, I hope, there will be a gradual improvement in the business climate.
Regarding the decision to reduce the number of stores in Colombia, Peru and Chile by 10% in five years, is that related to having a lighter structure? What will happen to the employees of those stores?
Although we are growing in terms of square feet in some formats and regions, we also see potential for space reductions. We are not talking about 10% of the stores, but of square feet, which is a combination of some stores that are closing and square feet that are redistributed or negotiated with the malls.
Considering this, which is a gradual process, and the turnover levels that already exist structurally in the businesses, this is not going to have a strong impact in terms of a mass reduction of worker numbers.
It is a relatively long period, they are gradual changes that respond to contract expirations. It is not a mass closing of stores that will imply the exit of many people, but in general what happens is good; this is accompanied by non-hiring as a result of rotation, some relocations, and also a permanent evaluation and rotation that results from the performance of the people themselves. We do not see something very different from what normally happens in the management of people in organizations.
Regarding the transition from physical to digital retail, how many stores do you expect to have in five years’ time?
We do not visualize closures in the supermarket format, and we do not envision closures in the home improvement format beyond one or two stores that may have to be relocated. In general, in both the supermarket and home improvement formats, we do not foresee mass store closures. That narrows the universe of stores to 100 out of the 500 that are department stores, and that is where the closure of that approximate 5% to 10% is, which would be five or 10 stores.
If you put all that in the juicer and add that we are opening four to six stores in Mexico and two or three in Brazil per year, in addition to the IKEA stores, in reality what we will have is a very gradual growth of stores going forward.
As the biggest growth will be in e-commerce, the relative weight of stores versus e-commerce will change over time and that is already happening. Before the pandemic, stores represented around 90% of our total sales and today they represent around 80%, and going forward that percentage as a proportion of the total will gradually decrease. We project that physical stores could represent 60% or 70% of total saleswithin five years.
When might IKEA stores open in Colombia and Peru, and how is the rollout in Chile going?
The rollout is going very well. Hand-in-hand with IKEA we are carrying out some innovations, some innovations in how the stores work. Unlike traditional IKEA stores, we are locating them at the core of urban areas.
The experience with the first store in Santiago, which opened two months ago, has been very positive. IKEA, being a new brand in the country, generates a big initial boom; the issue is whether we are able to maintain continuity over time with the novelties that the store has to bring, the operation, the service, all the start-up challenges.
The roll-out will continue with the opening of a second store in Santiago in December and three in Bogotá, Medellín and Cali for 2023 and early 2024. In Peru we are evaluating locations and, therefore, we do not have concrete timelines. While it is in the plan, it is probably coming a couple of years after these initial five stores.