Wednesday, May 3, 2017

JC Penney in Chile: Lessons from its failed entry in the 1990’s

In Latin America Chile has been one of the fastest-growing economies over the past decade. The fast economy growth experienced in the 1990s resulted in an average annual rate of above 5% for a decade, characterized by the country’s return to democratic governments[1]. Such growth woke up the interest of major companies in developed countries to expand their businesses in this fast-growing market. Along with fast-food chains such as McDonald’s and Burger King, one of the first companies to explore this market opportunity was JC Penney.
In the 1990s JC Penney was the largest department store chain in the United States. It had about 1,000 stores in the U.S. and Puerto Rico. In 1995 JC Penney opened two stores in Santiago. The institutional context could have been seen adequate at that time, as several criterion from Khanna et al[2] were evaluated positively; relatively stability of political and social systems, openness to global markets with international trade agreements like APEC and the beginning of the Free Trade Agreement with the US, governmental commitment to level-up the infrastructure network, and apparent ease of labor markets with low salaries in the retail sector and lack of trade unions due to previous dictatorship period.
 
However, JC Penney strategy failed to take into account a series of differences between US the Chilean retail market. Firstly, the store focused its business in the supply of clothing, following the US model. However, in Chile retail stores offered a wider range of products and services such as appliances and electronics. In addition, most of the clothing followed the American format, in style and size, which did not fit the Chilean taste and measures. Secondly, in Chile the retail introduced credit to support their sales, due to the low salary nature of the country where low and middle-low segments constituted the vast majority of the population; JC Penney never offered financial aid to their chilean customers. In third place, JC Penney executive roster consisted exclusively of north american managers, who failed to make local partnerships that supported and advised its business. Lastly, the executive team failed to establish relationships with local suppliers and failed to respond to a market as competitive as the Chilean retailing, characterized by very low margins, high levels of service and a strong supply of quality products for a small market of around 12 million inhabitants in the 1990’s.
After five years of operating in the red, JC Penney felt obliged to sell its assets to its local competitor, Almacenes Paris[3]. JC Penny was not an isolated example, as many other important business in North America tried to enter the Chilean market during that decade. Home Depot, the largest U.S. retailer of hardware launched its first Chilean store in 1998, thanks to a strategic alliance with Falabella, its Chilean partner. In desperation, Home Depot decided to sell the seven stores it wound up operating in the country within less than four years of its arrival.

Most recently, companies in retail seemed to have learnt these lessons and taken different strategies when entering this market, most of them characterized by partnership with local business, reliance in a robust network of local suppliers and long term plans involving several milestones to undergo major investments. Walmart entered Chile in 2009 acquiring D&S a leading food retailer, a process highly sensitive to the local rules and regulations. The ownership change was almost imperceptible for consumers, as it remain using the same brands, infrastructure and local supply networks. Three years after entering Chile, Walmart controlled 34 percent of the entire market[4].

[2] Khanna, T, Palepu, K, Sinha, J (2005). Strategies that fit emerging markets. Harvard Business Review.
[3] “Foreign Investment in Latin America and the Caribbean”. Economic Commission for Latin America and the Caribbean (ECLAC), 2005.
[4] “Walmart Took Over Chile In Only Three Years And Other Countries Are Terrified”. In: http://www.businessinsider.com/walmart-controls-the-chilean-market-2012-9

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