Chile Retail – Country Overview
June 2013
Retail Opportunity Assessment Overview Chile has become one of the world’s most sophisticated and attractive destinations for global retailers, as its retail market is highly concentrated with very few players vying for the major share. Moreover, the country’s growing economy over the years has helped it create a positive business environment for the retail sector. Rising purchasing power – fueled by easy availability of credit, high urbanization and strengthening of the middle class – has helped fire the growth of Chile’s retail sector in the past and will continue to do so in the future. Chile has been ranked the number two among top developing countries for global retail expansion two years in a row, ahead of other developing nations like Uruguay, China and India, clearly depicting optimism about the country in general, and about its retail in particular. The country also offers a wide range of investor-friendly regulatory reforms, be it to invest in retail equity or to buy property, further making it a friendly destination for foreign retailers. This research paper documents in brief some of the macroeconomic, regulatory and business aspects of ‘Retailing in Chile’.
Macroeconomic Environment
GDP 8.7% 5.8%
5.9%
5.5%
5.2% 4.4%
3.3%
3.1% 1.5%
3.0%
4.9%
2.1%
4.6%
4.6%
4.6%
4.6%
4.6%
3.0%
3.0%
3.0%
3.0%
3.0%
1.4%
-0.9% 173.1
179.5
172.1
217.3
251.0
268.2
285.7
305.5
329.9
356.2
383.6
413.2
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Source: IMF
GDP (USD Bn)
GDP Growth Rate (%)
Inflation (%)
Backed by high levels of foreign trade and sound policies, the Chilean economy remains one of the most stable and prosperous developing economies within South America. It is characterized by a substantial contribution from the services sector (c. 59.5%), followed by industry (c. 37%) and agriculture (c. 3.5%). In 2009-10, the World Economic Forum’s Competitiveness Report ranked Chile the highest in Latin America in terms of competitiveness. As of 2012, Chile is estimated to have a GDP of USD268.2 Bn, which is forecast to reach USD413.2 Bn by 2018 – an average growth of c. 7.5% (at current prices). At real prices too, the Chilean economy has been registering positive growth, except in 2009 when the GDP shrank by c. 1%. Per capita GDP in 2012 is USD15,410, which is projected to grow at a CAGR of 6.6% to reach USD22,607 by 2018. At current prices, inflation has been moderate for the past four years, and the trend is projected to continue in the near future. In past, inflation saw a massive drop from 8.7% in 2008 to 1.5% in 2009.
Population 1.0%
1.0%
1.0%
1.0% 0.9%
16.8
16.6
2007
2008
16.9
2009
17.1
2010
17.2
2011
0.9% 17.4
17.6 0.9%
2012
2013
Population (Mn)
Source: IMF
17.7 0.9%
2014
17.9
18.0
18.3
18.1
0.9%
2015
0.8%
0.8%
0.8%
2016
2017
2018
Population Growth (%)
Chile is a relatively small market, with an estimated population base of 17.4 Mn as of 2012. Approximately, 89% of the population, as of 2011, resides in the urban areas of the country, which is projected to increase at an average rate of 1.1% till 2015 (source: CIA and World Bank). Chilean population is considered to have advanced to a stage of demographic transition and is slowly becoming an aging society. The country’s median age is 33 years, which is the second highest in South America after Uruguay with 34.1 years. As per the latest estimates of 2013, 37.6% of the population falls in the age range of 0-24 years, while 52.8% falls in the range of 25-64 years. Only 9.7% people make the older generation of 65 years and above (Source: CIA). Overall increase in population till 2018 is projected to be relatively stable at an average annual rate of 0.8-0.9% p.a. About 15.1% of Chilean population was considered poor as of 2009, a decrease from 20.6% in 2000 (source: CIA and World Bank).
Unemployment
10.8% 7.1% 7.0%
2007
8.2%
7.8%
2008
Source: IMF
2009
2010
2011
6.5%
6.5%
6.6%
6.6%
6.6%
6.6%
6.6%
2012
2013
2014
2015
2016
2017
2018
Unemployment Rate (%)
Chile has a small labor pool of about 8.2 Mn people, out of which c. 99% are literate as of 2012. The country exhibits high levels of gender inequality in its workforce, where the labor participation rate among persons aged 15 years and above is as high as 74% for men and 47.1% for women. Unemployment rate in Chile decreased to 6.5% in 2012 from a high of 10.8% in 2009, and is projected to stagnate at this level over the next six years (source: IMF). Lower unemployment rate, along with sizeable per capita income, is often quoted as the key reason for overall optimism in the Chilean consumers.
Business Environment Market 16.0%
17.8%
128.4 116.9 106.2
76.8 59.0
65.2
83.0 8.1%
56.2
90.7
97.3
9.3% 7.3%
9.1%
10.1%
9.8%
-4.7%
2008
2009
2010
2011
2012
2013
Retail Sales (USD Bn)
2014
2015
2016
2017
Growth Rate(%)
Chile is considered the most sophisticated retail market in Latin America. Despite global slowdown and the disastrous earthquake of February 2010, the country’s retail industry has been witnessing growth in sales during the last three years. However, the impact of global recession was registered by the Chilean retail industry as the retail growth shrank 4.7% in 2009. Chilean retail industry is estimated to be USD83 Bn in 2012 and is forecast to grow at an average rate of 9.1% annually during 2012-17. By 2017, the industry is forecast to reach USD128.4 Bn. This growth is fueled by the rising incomes, an expanding middle class, and relatively easy access to consumer credit. According to EIU estimates, by 2017, the number of households earning over USD25,000 will rise to 51% from 36% in 2012. Moreover, factors such as currency appreciation since mid-2010 have made the peso stronger, contributing to an increase in purchasing power and raising demand for imports. Chile’s retail sector has been traditionally controlled by domestic chains, whose dominance is now challenged by the likes of Wal-Mart, who made an entry in the market in 2009, through its acquisition of a local firm, D&S. Chilean food retailing industry is dominated by the three largest grocery retailers – Cencosud (Chile), Wal-Mart (previously D&S) and SMU (Chile). The three firms account for nearly 90% of total supermarket sales.
“…We were aware of Chile’s political, economic and institutional stability as an political, incentiveeconomic for foreign “…We were aware of Chile’s and investment and of its interesting network bilateral institutional stability as an incentive forofforeign trade agreements a wide range of countries. This investment and ofwith its interesting network of bilateral made Chilewith the aright toof invest…” trade agreements wideplace range countries. This
“…The whole sector is benefiting from positive economic data in Chile and the region. Inflation is low, growth in Chile is above 5 percent and retail sales are expanding more than gross domestic product…”
made Chile the right place to invest…” >> Eduardo Solorzano, President and CEO, Wal-Mart Latin AmeriA >> Eduardo Solorzano, Former President and CEO, Wal-
>> Juan Pablo Castillo, Analyst, Banco Penta
Mart Latin America
Consumers 59.2 58.1
56.5
45.9
46.2
46.0 44.1
46.5
Q4 12
Apr-13
Mar-13
Jan-13
Q3 12
Feb-13
Oct-12
Q2 12
Nov-12
Q1 12
Sep-12
Q4 11
Jul-12
Q3 11
Jun-12
Q2 11
Apr-12
Q1 11
May-12
Sep-11
Jul-11
Q4 10
Aug-11
Q3 10
Jun-11
Apr-11
May-11
Q2 10
Mar-11
Jan-11
Q1 10
Feb-11
Dec-10
Oct-10
Q4 09
Nov-10
Sep-10
Jul-10
Q3 09
Aug-10
Jun-10
Apr-10
May-10
Feb-10
Mar-10
Q2 09
108
106
42.8
42 Q1 09
52.7 105
44.8
Mar-12
45.1
89
100 44.7
Jan-12
46.7 46.9
46.5 94 47.2
50.3 110 108 48.7 50.4
49.6 105 48.7 104 46
108 10447.2
Feb-12
104 49.4
Dec-11
47.9 101
Oct-11
48.3
51.7 109
56.8
53.4
52.4
Nov-11
52.2 108
58.1 58
53.6
53.7
Aug-12
53.8
Dec-12
56.9
Consumer Confidence Index Consumer Confidence Index Note: Consumer confidence index values above 50 indicate an optimistic assessment in consumer sentiment, while values below 50 indicate a pessimistic assessment
Over the last 10 months, Chile’s consumer confidence index has been consistently above 50, suggesting an overall optimism on the part of consumers. But previously, from February 2011 to May 2012, consumer confidence was below the 50 mark. In August 2011, consumer confidence declined to 42, the lowest level since July 2009. Over the past one year, high employment – especially with booming of the mining and construction sector – and unprecedented access to credit had led to the change in the shopping habits of an average Chilean, increasing the stimulated household spending thereby.
"...A key element in the evolution of consumer spending has been the tight labor market: the unemployment rate is at 6%, near its minimum from a historic perspective, and real wages are growing at 4% to 5% annually..." >> Rodrigo Vergara, Governor, the Central Bank of Chile
“… Many people consider South America to be an underdeveloped region… however many of its stores are better than some stores in Europe. Chile is quite a sophisticated market and it’s definitely the most advanced retail market in South America. Chile’s economy is developed within South American standards, although it’s not caught up to Western Europe as yet. There is room for further increases in retail sales, both in food and non-food, as more Chileans become wealthier and eager to consume…” >> Carlos Hernandez, Retail Analyst, Planet Retail
Regulatory Environment FDI and Taxation
FDI in multi-brand or single-brand retail in Chile is permitted to the extent of 100%, and there is no limit on the foreign equity participation
Despite FDI being allowed, Chile’s retail sector is highly dominated by domestic players like Cencosud, Falabella and D&S (now Wal-Mart). Major foreign retailers like Sears, JC Penney, Royal Ahold, Carrefour, and Home Depot have entered the Chilean retail market during 1995-2000, but they all withdrew later after a poor performance
In 2009, Wal-Mart made its debut in Chile after acquiring a majority stake in the D&S chain. Wal-Mart currently operates with almost 331 stores in the country. On the apparel side, Gap and TopShop have already forayed into the country in 2011. Swedish retailer Hennes & Mauritz AB also has announced a plan to open its first store in Chile in the first half of 2013
Chile has one of the lowest and most investor-friendly corporate tax rates of just 20% (as of January 2013) in Latin America. The tax rate was increased to 20% from 17% to fund reconstruction following the 2010 earthquake. In 2012, it was decreased to 18.5%, but eventually returned to 20%
Real Estate
Acquiring real estate property is very easy in Chile, as the country has strong legal protection for property rights, including secured investments in real property. In general, there is no government permission required for foreign investors to acquire real estate in Chile. Any individual or corporate body can buy and possess land, whether or not they are residents. However, there are limitations imposed on the acquisition of land located near the national boundaries
Acquisition of property by a foreign investor is subject to various taxes, including stamp duty of 0.2%-0.3% and transfer tax of 0.1%. Moreover, real estate in Chile is subject to a “real estate property tax” (impuesto territorial), calculated on the basis of the fiscal valuation of the real estate. The real estate property tax is paid annually in four installments. All sale agreements should be notarized before registration. Failure to register a property transfer will make the contract void
A city like Santiago is fairly populous and has the real estate vacancy rate of around 1%, very low by international standards, However, Santiago has lots of older, underperforming retail space which is often easier to obtain and can be converted into new retail space
Labor
The Chilean government requires that at least 85% of the workforce in any Chilean company having more than 25 employees should be Chilean citizens. However, there are exemptions in certain cases where specialized technical personnel are not available locally, as well as for foreigners married to the Chileans. Moreover, foreigners who have been resident in the country for more than five years are also exempted
Chile features four types of employment contracts, (1) indefinite contracts; (2) fixed-term contracts – contracts with maximum duration of one year or, exceptionally, two years; (3) piecework contracts – contract for a worker hired for a specific task of a finite duration; and (4) professional services contracts
There is a minimum monthly wage fixed as per the law – Pesos 193,000 (c.USD386) for workers aged 18 to 65 years and Pesos 144,079 (c. USD288) for workers aged over 65 or under 18 years. Employees with more than one year on the job are entitled to 15 paid leave vacations a year, while workers in the Chilean Antarctica and certain other regions are entitled to 20