SEARS MEXICO MAPS MISSION
Byline: Valerie Seckler, New York / Joanna Ramey, Washington
NEW YORK — With its planned purchase of money-losing Sears Mexico, turnaround expert Grupo Carso aims to boost the chain’s buying clout as it capitalizes on synergies it perceives in real estate and buying operations.
Also being planned: A big cost-cutting effort at the 45-store chain, according to Fernando Chico Pardo, a managing director of Grupo Carso SA de CV.
In taking these steps, Carso, a diversified holding company based in Mexico City, will try to return Sears Mexico to profit.
“If you look at the assets of the company, they are attractive, but you also have to realize that the stores and the company are losing money,” Pardo said during a conference call with analysts and media last Friday.
“If we were to compare the price of the deal with the sales per square meter produced in the stores, the price would be attractive,” he said. “But we’re not in the business of buying real estate — we’re in the business of operating shops. We have to make the Sears stores work to make the purchase price attractive.”
As reported, Grupo Carso will pay $103 million in cash, or about a 40 percent premium over Sears Mexico’s recent stock price, and will assume what Pardo termed “incremental debt,” in the deal expected to close late this month. Pardo said he is comfortable with Carso’s cash production and debt-to-equity ratio, and noted the firm would continue to pay a cash dividend despite the hit its operating margin will take as a result of the Sears Mexico deal.
“We don’t plan to change the Sears concept, or we wouldn’t have asked to buy the brand,” Pardo explained. “Obviously, we’ll take a page from [Sears, Roebuck ceo] Arthur Martinez’s book, in terms of how he’s altered the mix of apparel and soft home goods, and modernized stores at Sears USA,” the Carso executive continued.
“That’s what the Sears Mexico stores should have to offer, rather than an ambience and merchandise that look 40 years old.”
Grupo Carso, with sales of $3.04 billion in 1996, is well known on Wall Street for acquiring and turning around distressed companies in Mexico. One recent makeover followed the 1993 acquisition of the tire companies Corporacion Industrial Llanteria and Euzkadi.
“They merged administrations, closed factories, increased capacity and improved profitability,” said Alberto Montagne, Latin American retail analyst at Lehman Brothers. “That’s just one example. They have so many.”
However, Montagne noted that the task for Sears Mexico will not be easy.
“Department stores are different than industrial companies,” the analyst observed. “It will require a lot more savvy, which they may have acquired through their management of Sanborn’s. Sears also has several stores that are still not up to par and need some heavy renovations. They also have a lot of work to do on merchandising.”
Grupo Carso’s holdings also include interests in the Prodigy on-line service, the manufacture of Marlboro cigarettes, and retailers such as Mix-Up, a chain of record stores, and the Denny’s restaurant business in Mexico.
Carso’s Pardo pointed out that he intends to continue the course of current management in the realignment of merchandise assortments, aiming Sears Mexico at a lower-middle-to-middle-class consumer. Previously, the chain targeted middle-to-upper-middle-income shoppers.
In addition, Pardo highlighted an opportunity to build Sears Mexico’s buying muscle with the added purchasing clout of its 150-unit Sanborn’s chain. Roughly the size of American discount stores, Sanborn’s offers an eclectic mix of goods, ranging from apparel to general merchandise and food.
“We should benefit by combining Sanborn’s and Sears’ buys,” said Pardo.
In response to a question following the conference call, the Carso official refuted rumors that the company was shopping the Sanborn’s business it has expanded from the 30 stores it acquired in 1989.
“We know the talk is out there, but we have no intent to sell Sanborn’s,” Pardo said. “The buying expertise in women’s apparel and other areas at Sanborn’s is something we can bring to the Sears business.”
Real estate is another area in which Carso sees synergies that could lift Sears Mexico business — including the recent purchase of a site in Cancun that “we should consider for Sears,” Pardo noted.
In response to another question, Pardo said Carso would not sell the Sears Mexico store in Santa Fe, southeast of Guadalajara, but said current management had been seeking to unload the unit.
“The problem is that it was too costly to build,” the executive explained. “Now we will try to turn it around.”
Also in the works, Pardo revealed, are plans to implement point-of-sale technology similar to systems used in Sears’ U.S. stores, so that Carso can micro-merchandise the Mexico units.
Changes are in store in the expense arena as well, where Prado cited opportunities to slash costs in Sears Mexico’s administrative operations and its credit card business. He cited a need to retain a separate management infrastructure at Sears Mexico, while making it more cost-efficient.
In addition, Pardo cited a costly promotion last year that offered interest-free purchases for six months if they were made using the Sears Mexico credit card.
“That was a very expensive campaign, and you have to keep such a consideration in mind,” he said. “There is a lot of work to be done in this area.”
According to Pardo, Sears Mexico’s credit card unit has lost money for the past two years, but has substantial business potential, with about 900,000 of its 1.9 million credit card customers using their accounts each year. Around 64 percent of the chain’s sales last year were made on the card, and the balance were transacted in cash, Pardo estimated.
Sears doesn’t break out sales of its international subsidiaries, although Sears Mexico, Sears Canada and a small export business generated a combined $3.4 billion in sales last year. Analysts estimated Sears Canada produced volume of about $3 billion.
Past-due loans stood at 5 percent of the 1.3 billion-peso Sears Mexico credit card business in 1996 — “a figure that is outstanding in Mexico,” according to the Carso official. Sears Mexico approves about 25 percent of the applicants for its card and has a low initial line of credit, Pardo said, without specifying.
“Although it is losing money, we believe the Sears Mexico credit card has created an important customer base,” Pardo maintained. “Believe me, that business is worth money. We wouldn’t like to sell it; we’d like to grow it.”
Another payoff for the acquisition could come from Sears’ hardlines business, even though the sector’s sales have slumped about 25 percent since December 1994, when Mexico’s economy began its roller-coaster ride.
“The peso crisis has had a big impact on consumers’ ability to buy durable appliances like washing machines, refrigerators and stoves,” Pardo said. “When Mexican shoppers get back on their feet, the category should see strong growth.
“You’d be surprised how many people want to buy their big-ticket appliances at Sears because of the guarantees, and we’ll push that image.”