Friday, June 17, 2011
Chile ´s own sub prime crisis: The retail industry under scrutiny
It has been widely said that the market oriented Chilean economy, strongly depend upon an economic institutional framework almost crisis proof. It means there is no chance the regulatory authority, do not have the proper tools to protect market confidence, consumer rights, small investor interest and systemic risk. In fact from time to time, there are new development to match such an institutional framework with the steady growth within the retail industry ,and the market as a whole as well(credit cards massive availability, better access to credit market to different segment ).All of that ,coupled with the increasing share of middle class consumers in total sales of almost every kind of goods.-
The retail industry in Chile, has grown steadily in the last ten years. Although with an oligopoly structure, it is very competitive .JC Penney ,Home Depot stores and Carrefour could not consolidate positions on this market. At the same time ,It has also managed to focus on consumers needs basically throughout credit , issuing its own credit cards which have allowed a 25% share of total domestic credit. Within the retail industry, 50% to 80% of daily sales are based on the use of its own credit cards which firms encourage with special discounts and offers on the spot.
Actually, this industry has five players whose key indicators for 2009 are (ROE,ROA ): Cencosud (4,43%,1,94%), Ripley,(1.04%,0,6%)Fallabella, (11.12%,4.81%),La Polar,(14.15%,6.13%),and Hites (4.68%,2.42%). (Source:CORPRESEARCH.2009).According to this data, the Chilean retail industry as a whole look healthy, and in good shape to get investors preference, but with some exceptions. “La Polar” store, is actually in deep trouble because of its practices of hiding real default debt ratios, replacing it by debt reprogramming based on its own terms ,making up financial returns to look better than otherwise .With a market value of U$$ 1335 million and more than 30 local stores, Its property share is divided among local institutional investors (27%),domestic investment funds (12%),Foreign investors (20%), and stock options traders (31%). Moreover It is placed at the fourth place among Chilean retail players .La Polar store was under scrutiny since 2009 by some risk agencies and consultants. At that time it was rated by Fitch-Ratings(April 2009), with negative perspectives. Since then, key managers started to sell their stock options, anticipating by two years in advance expected losses, all of that at sight of local authorities who obviously did not react as quickly as managers did.
Besides, nobody seemed to care about some facts concerning risk and management debt of La Polar : Focused on low income customers, their average debt was almost U$$1200, ,well above average income level of its target(roughly U$$600), and its competitors debt levels(U$$800) .It follows that risk defaults were high enough to impose a threat on reported earnings (EBITDA of 15.4% in September of 2010)and expansion plans.
What went wrong? Reality has proved once more that the institutional framework is a necessary but not sufficient condition, to protect markets from internal or external shocks .It is as much important to have the people ready and prepared to apply the tools they have at their disposal, if not they should resign. At the end of the day ,It is a matter of credibility.