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OIL RUSH

Venezuela’s oil wealth fuels retail development boom

By María Bird Picó

The economic and political uncertainty plaguing Venezuela two years ago obliged hardware chain Ferretotal to put expansion plans on hold. But now an oil-fueled recovery has things looking up, economically, at least, not just for Ferretotal but for many developers and retailers.

Certainly, the presence of a left-leaning president, Hugo Chávez Frías, promises some political turbulence ahead, but the economy is cheering such entrepreneurs as Carlos Pérez, Ferretotal’s chief executive.

“At least the economic outlook does not look so bad, and this is a good time to grow,” said Pérez. As for those political problems, “we have been in this business for 30 years, and Venezuela has never been stable. We have grown accustomed to survive in difficult and hard-to-manage business environments.

The opportunities this year are enormous as the government pours billions into public works prior to December’s presidential election — a common practice in Latin America during presidential election years.

Ten new shopping centers are slated to open this year, according to the Cámara Venezolana de Centros Comerciales, Comerciantes y Afines, Venezuela’s mall developer association, and another 10 are to open next year. In Caracas alone two large shopping centers are under construction: the Millennium and Centro Comercial Líder. Existing malls, meanwhile, are fully occupied. Sales were up 45 percent at the 258,300-square-foot (24,000-square-meter) El Tolón Fashion Mall, one of three high-end malls owned by Fondo de Valores Inmobiliario, in the eastern part of Caracas.

“Setting aside the political problems, the reality is that there is more money flowing throughout the economy,” said Michele De Prisco, general manager of the Tolón mall.

Mall development firm Grupo Sambil is in expansion mode too, focusing primarily on Venezuela, though also glancing elsewhere, says Alfredo Cohen, vice president of Grupo Sambil, which owns and operates six malls in Venezuela. A 484,300-square-foot Sambil mall will be opening this year in the city of San Cristobal, and an existing Sambil center in Isla Margarita is expanding to accommodate 45 new tenants.

“We are still looking at opportunities in countries like Colombia, Costa Rica and Puerto Rico, because we want to prove that the Sambil concept is a Latin American phenomenon,” said Cohen, “But Venezuela is, of course, our natural and main market with growth potential.”

At stores throughout Venezuela, shoppers are buying — overall sales rose 20 percent last year. Malls saw sales rise by 40 percent last year, amounting to $8.3 billion.

Fueling this growth is the rising price of oil, without which Venezuela and its population of 26.5 million would be in economic trouble.

Petroleum accounts for roughly a third of Venezuela’s gross domestic product and furnishes 80 percent of its export earnings and over half its government revenues. Higher oil prices have translated into more jobs, greater disposable income and increased consumption.

“The demand for consumer goods exists, and if you do not fulfill it, someone else will,” said Juan Gramage Gallart, a retail consultant in Caracas. Fortunately for domestic retailers, no one else has stepped in, at least not so far. “Hardly any new foreign retailer is entering our market,” said Gallart, “and Venezuelan retailers know that the payback of their investment is guaranteed with the current economic boom.”

Following a depression in 2002 and 2003, when the economy contracted by 8.9 percent and 9.2 percent, respectively, thanks largely to an oil production strike, the economy grew by 18 percent in 2004 and 9.4 percent last year.

The economy will grow an additional 6 percent to 7 percent this year, predicts economist Vicente León, director of Caracas-based Datanálisis. Banking, construction, retail and telecommunications are among the sectors reaping the highest growth rates, he says. Manufacturing is less robust, owing to a lack of private investment.

Projections are that worldwide demand for oil will continue to grow over the next decade, boding well for Venezuela and other oil producers, says León.

“Our economic growth is a complex one,” said León. “Regardless of the engine, the fact remains that all economic sectors are growing and that there are plenty of growth opportunities now, particularly for certain sectors, such as retailers and shopping centers.”

Retail executives and others are heeding the call, though not without some trepidation. “The common denominator among Venezuelan business executives is to ride this wave,” said Alvaro Diez, president of Caracas-based Fondo de Inversión Comercial de Venezuela, which owns the Allegro y Trattorno, Full Pizza and Picolle Italiana fast-food chains as well as a restaurant, Restaurante Antillana. “But we are all conscious this economic bonanza is not going to last forever.”

Full Pizza, its main chain, will open 11 new units this year, eight more than last year, all in Venezuela. The company also operates two Full Pizza restaurants in Panama and one — called Gogie’s — in Dallas.

Following a 40 percent rise in sales last year, Graffiti, a leading family fashion retailer with 24 stores throughout the country, will be opening three or four stores this year. “We are experiencing real growth not seen here in many years,” said Graffiti owner Carlos Sultán. “Sales in December were spectacular.”

But there is reason for caution, some say. EPA, a 13-store chain of home improvement stores in Venezuela, is opening three units this year, but Juan España, its general manager, remains wary about the country’s economic outlook. Though retail sales are up, he says, GDP and per capita income still hover around the pre-2001 crisis levels when measured in dollars. He says the current $5,000 per capita income is one-third of what it used to be.

And developers and retailers say business is challenging under Chávez, in part because of a constant stream of regulations and taxes. Taxes, now the government’s second-highest source of revenue after oil, will fund 53 percent of the budget this year.

Companies needing to tap a foreign currency to import or exports goods must get government permission, a measure designed to stem the flow of Venezuelan capital.

Three years ago the government established its own chain of supermarkets, Mercal, where basic staples such as sugar, rice, meat and milk are sold at controlled prices. By some estimates, these stores account for roughly half of Venezuela’s supermarket sales — great for shoppers, but not so healthy for private supermarket chains or the economy in general.

And business owners are tripped up by trivial, day-to-day regulations. Diez says his restaurant holding company is subject to as many as 14 weekly audits from various state and municipal government entities. Regulations require that accounting be done by hand, not computer, and that the minutes of board meetings be recorded by hand as well. “There are many obsolete and absurd rules, but we have little choice,” said Diez.

Not all business executives have stayed around to enjoy this economic boom. Juan Alberto Suárez, a former mall consultant and mall administrator, left almost two years ago after losing faith in the country’s prospects and is now involved in the real estate business in Miami. Suárez theorizes that the current retail boom is tied to a worry among many cash-flushed Venezuelans that the value of their cash will be eroded by inflation. They no longer have the choice of converting into a stronger currency without limit, at least not through official channels.

“With no investment alternatives, they are spending the money in consumer goods,” said Suárez. “I sincerely hope the economic growth lasts for many years, but the ups and downs of the Venezuelan economy are abrupt. Long-term economic planning in Venezuela is extremely difficult.”