(01-03-2010) - Risk Factors

Risks Relating to our Business and the Industries where We Compete
We face intense competition in each of our markets
The retail industry in each of Chile, Argentina, Brazil, Peru and Colombia is characterized by intense
competition and increasing pressure on profit margins. The number and type of competitors and the degree
of competition experienced by individual stores varies by location. Competition occurs on the basis of
price, location, and quality of products, service, product variety and store conditions. We face strong
competition from international and domestic operators of supermarket, retail stores and internet retail
businesses, including Carrefour, Wal-Mart and Casino, and it is possible that in the future other large
international retailers may enter the markets in which we compete, either through joint ventures or directly.
Some of our competitors have significantly greater financial resources than us and could use these
resources to take steps that could adversely affect our financial condition and competitive position. We
also compete with numerous local and regional supermarket and retail store chains, as well as with small,
family-owned neighborhood stores, informal markets, and street vendors.
Food Retail
In Chile, we compete across the full spectrum of food retailing, including hypermarket and supermarket
chains, smaller chains and unaffiliated independent food stores. Our principal competitor is D&S (recently
acquired by Wal-Mart) which is the largest food retailer in Chile and has significantly greater market share
than we do. If our competitors are successful in capturing additional market share in Chile, our results of
operations or sales volume may be adversely affected.
The food retail market in Argentina is highly fragmented and competitive, and the presence of large
international food retailers, including Carrefour (Argentina) and Wal-Mart has increased pressure on
already low profit margins. Moreover, during the past crisis in Argentina, competition increased from a
strong informal market of low cost, low quality, basic necessity goods sold in informal settings with low
overhead costs. Sales of lower price products in the informal market have diverted sales from our stores in
Argentina.
The three dominant players in the food retail industry in Brazil are Companhia Brasileira de Distribuiçao,
Wal-Mart Brasil Ltda. and Carrefour Comércio e Indústria Ltda. The retail food market in Brazil is highly
competitive, and we face intense competition from informal, small, regional, national and multinational
food retailers. Informal and small retailers are often able to benefit from inefficiencies in the Brazilian tax
collection system, and to access merchandise from irregular and informal distribution channels at lower
prices than those charged by manufacturers and stores in the conventional supply chain of the organized
retail food market. In addition, in the locations where we operate, we compete with a number of large
multinational retail food and general merchandise chains, including Wal-Mart, which may have access to a
broader range of financial resources than we do. We expect that competition will continue to increase in the
areas where we operate in Brazil.
The Peruvian is highly concentrated and competitive with three main participants. In addition, we face
intense competition from informal, small, regional, national (Supermercados Peruanos) and multinational
retailers (Falabella). We expect that competition will increase in the areas where we operate in Perú and
that this competition will extend to geographic areas outside of Lima which is where most of the formal
supermarkets operate.
Department Stores
In the department store market in Chile, our principal competitor is Falabella which is substantially larger
than our subsidiary Almacenes Paris. The department store industry in Chile is very mature and highly
competitive. We compete directly with Falabella, Ripley, La Polar and many other smaller and regional
retailers. Department store revenues have declined due to the financial crisis and continuous pressure on
margins. In addition, this business segment’s results are closely related to the financial services division,
since a high percentage of sales are paid with credit cards that we provide our customers.
Home Improvement
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In the home improvement market, our principal competitor in Chile is Sodimac which is substantially
larger than us and dominates the market share in this segment. In addition, we recently entered the home
improvement sector in Colombia and face substantial competition from large, established companies.
Shopping Centers
We also face strong competition in the shopping center sector, including competition from Parque Arauco
and Mall Plaza, in Chile and Alto Palermo in Argentina.
Historically, there have been relatively few companies competing with us for shopping center properties.
However, if in the future new competitors emerge, such additional competition could have a material
adverse effect on our financial condition, results of operations and prospects.
Increasing competition may cause us to lower our prices and take other actions that materially and
adversely affect our profitability or compel us to reduce our planned capital expenditures or otherwise
forego growth opportunities. As other retailers expand their operations in Chile, Argentina, Brazil, Peru
and Colombia, and other international retailers enter these markets, competition will continue to intensify.
Our inability to respond effectively to competitive pressures and changes in the retail markets would
materially and adversely affect our financial performance or cause us to lose market share. There can be no
assurance that future competition will not materially and adversely affect our financial condition and results
of operations.
Our growth has been in part due to a series of significant acquisitions which are not likely to be
repeated in the future.
In November 2007, we acquired GBarbosa, the largest supermarket retailer in the northeast region of
Brazil, and in January 2008, we acquired GSW S.A. (“Wong”), the largest supermarket retailer in Peru.
Through these two significant and recent acquisitions we significantly increased the size and breadth of our
operations. These are the largest acquisitions in our history (other than our 2005 acquisition of Almacenes
Paris) and as a result our future consolidated financial results will be highly sensitive to GBarbosa and
Wong’s future performance.
As a result, a significant component of our growth in recent years has occurred through acquisitions. We
cannot assure you that in the future there will be continued availability of suitable acquisition candidates at
favorable prices and upon advantageous terms and conditions, and as a result our growth rate is likely to be
significantly lower than it has been in recent years which may adversely affect our financial condition,
results of operations, cash flows and prospects.
We may not be able to obtain the capital we need for further expansion
We expect to continue to have substantial liquidity and capital resource requirements to finance our
business. We intend to rely upon internally generated cash from our operations and, if necessary, the
proceeds of debt and/or equity offerings in the domestic and international capital markets. There can be no
assurance, however, that we will be able to generate sufficient cash flows from operations or obtain
sufficient funds from external sources to fund our capital expenditure requirements. Our future ability to
access financial markets in sufficient amounts and at acceptable costs and terms to finance our operations
and fund our proposed capital expenditures will depend to a large degree on prevailing capital and financial
market conditions over which we have no control, and accordingly there can be no assurance that we will
be able to do so. Our failure to generate sufficient cash flows from operations or to obtain such financing
could cause us to delay or abandon some or all of our planned capital expenditures, which, in turn, could
adversely affect our competitive position, business and financial condition, results of operations, cash flows
and prospects.
We are subject to risks affecting shopping centers which may adversely affect our financial
performance
Shopping centers are subject to various factors that affect their development, administration and
profitability. These factors include the accessibility and the attractiveness of the area where the shopping
center is located and of the shopping center itself; the flow of people and the level of sales of each shopping
center rental unit; oversupply of retail space or a reduction in demand for retail space which could result in
lower rent prices and lower revenues; increases in competition from other shopping centers which drive
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down our prices and profits; our inability to collect rents due to bankruptcy or insolvency of tenants or
otherwise; the ability of our tenants to provide adequate maintenance and insurance; and fluctuations in
occupancy levels in our shopping centers.
Many of our Jumbo, Parisand Easy stores are located in shopping centers, and as a result a substantial
portion of our revenues is sensitive to factors affecting these and other shopping centers. Also, an
economic downturn in the countries or regions in which our shopping centers are located may materially
and adversely affect our financial condition and results of operations, due to bankruptcy of tenants and
reduction in sales due to lower disposable income.
We are subject to risks associated with development and construction activities
In our development, renovation and construction of hypermarkets, supermarkets, department stores, home
improvement stores and shopping centers, we generally engage third-party contractors. Risks associated
with such development, renovation and construction activities include failure to correctly anticipate
construction costs; occupancy rates and rents at newly completed projects lower than anticipated; failure to
obtain financing on favorable terms; delays in construction; failure to obtain necessary zoning, land use,
building, occupancy and other required governmental permits and authorizations.
We are currently in the process of constructing several ambitious new projects, including Costanera
Center in Chile, a large commercial development which we have not yet completed.. Any significant
difficulty, cost overrun or delay in successfully completing these or other future construction or renovation
projects could have a material adverse effect on our financial condition and results of operations.
The growth of our credit card and banking operations expose us to increased credit, financial and
regulatory risks which may adversely affect our financial condition and results of operations
Our credit card and consumer finance operations are an important and growing segment of our business.
We hope to promote greater use of our credit cards and other financing activities in each of Chile,
Argentina and Brazil and also plan to introduce our own credit card in Peru (under which we would assume
all credit risk). We currently bear all of the credit risk associated with our credit cards in Chile and
Argentina and 50% of the credit risk associated with our cards in Brazil where we operate together with
Bradesco.
As a result of the above, our credit risk exposure is likely to increase and our results of operations may be
materially and adversely affected by delinquency on credit card accounts and loans, defaults in payments
by credit card holders or other customers, judicial enforcement for the collection of payments, doubtful
accounts or write-off of receivables. There can be no assurance that any expansion of our credit card
operations (including the assumption of account approval and credit risk by us) or our other lending
operations will not result in a deterioration of the credit portfolio of our credit card and banking business in
Chile, Argentina and Brazil or that other factors, including macroeconomic factors, will not materially and
adversely affect our business, financial condition, results of operations, cash flows or our prospects. The
actual rates of delinquency, collection proceedings and loss of receivables may vary and be affected by
numerous factors, such as economic downturns, acceptance of applicants in inferior credit situation,
inability to predict future charge-offs, changes in credit card use, operational problems, and adverse
economic changes in regional economies. These and other factors may have an adverse effect on present
rates of delinquency losses, any one or more of which could have a material adverse effect on our financial
condition and results of operations.
Also, our credit card and banking operations are subject to substantial regulation. There can be no
assurance that regulators will not in the future impose more restrictive limitations on the activities of our
credit card or bank operations than those currently in effect. Any such change could have a material and
adverse effect on our financial condition or results of operations.
We are dependent on key personnel
Our development, operation and growth has depended significantly upon the efforts and experience of
Mr. Horst Paulmann as well as other senior managers and key personnel. Although we currently expect
that Mr. Paulmann and the other senior managers will continue in their current positions, we cannot assure
you that they will do so. The loss of their services, or our inability to attract and retain sufficient qualified
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additional management personnel, could have a material adverse effect on our business, financial condition
and results of operations.
Our results are highly seasonal and may fluctuate quarterly as we open new stores and any
circumstance that may negatively impact our business during an otherwise busy season may adversely
affect us
Our retail businesses are seasonal in nature and our net sales and operating results frequently vary
significantly from quarter to quarter. We have historically experienced seasonality in our sales, principally
due to stronger sales during the Christmas and New Year holiday season, and reduced sales during the
months of January and February due to the summer holidays in Chile, Argentina, Brazil and Peru. In 2009,
[•]% of our consolidated revenues were generated during the fourth quarter, while the first quarter of that
year accounted for only [•]% of our consolidated revenues for such year. Any economic slowdown or
interruption to our business or to the business of our suppliers during the last quarter of any fiscal year may
therefore adversely affect our financial condition and results of operations. In addition, our quarterly
results of operations and profitability may fluctuate significantly due to the timing of the opening of new
stores and their operating results.
In preparation for the holiday season, we must increase inventory to levels substantially higher than those
maintained during the rest of the year, as well as hire temporary staff for our stores. Any unforeseen
reduction in demand, any mistake in our demand forecasts during the holiday season or any delay by our
suppliers in meeting our demand could force us to sell inventory at significantly lower prices, which would
adversely affect our business, financial condition, results of operations and prospects.
Our financial statements will be reported in accordance with International Financial Reporting
Standards (“IFRS”) starting in 2010
Pursuant to existing regulations by the Superintendencia de Valores y Seguros (the Chilean securities
regulator), we are required to adopt IFRS standards, effective January 1, 2010, and prepare interim
financial statements under IFRS for the first quarter of 2010. We cannot ensure that changing to IFRS
accounting principles will not affect our financial statements. If our financial statements vary significantly,
rating agencies, banks and investors could re-evaluate our risk, which in turn could adversely affect our
financial costs. These changes could have a material adverse effect on our financial condition and results of
operations.
Our business is subject to the political and economic climates of the countries in which we operate
In the past, the economies of Chile, Argentina, Peru and Colombia, where we have substantial operations,
have been subject, in varying degrees, to political and economic uncertainties, volatility and crises. We are
particularly vulnerable to the political and economic environments of Chile and Argentina, where we
generated 50%and 30% of our revenues, respectively, for the year ended December 31, 2009. We cannot
control over and cannot predict how each of these governments might intervene to direct their own political
and economic environment. However, any significant changes in monetary policies, tax policies, capital
controls, price controls, inflation or the devaluation of local currencies, among other things, in each of such
countries may adversely affect our business, results of operations and financial condition.
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