Chile moves to center stage as South America's home improvement pioneer

Home Channel News, Nov 9, 1998

Chile is arguably the most developed home improvement market in South America, with a handful of retailers and buying groups actively courting consumers and contractors in a range of modem store formats. The total Chilean market for home improvement and building products is in the neighborhood of US$4 billion, according to the trade office of the United States consulate in the country. Three-quarters of that market is construction-related, according to dealers here, though DIY is rapidly gaining ground. Chilean government estimates indicate that more than 250,000 of the country's households undertake DIY work and that 30 percent of its 14 million people buy DIY products.

As a result, DIY-store sales have grown 15 percent annually over the past decade, with home decor, finishing and electrical products among the fastest-moving items.

"The total market is still dominated by construction," notes Eduardo Laclaustra, president of the member-owned buying group MTS. "But the growth is driven by DIY."

One reason for the relatively advanced DIY market in Chile has been the success of home center pioneer Sodimac.

With stores spread from Arica in Chile's north to Punta Arenas at its southern tip, the Santiago-based dealer -- whose name in Spanish, ironically, is an acronym for the Association for the Distribution of Construction Materials -- has made substantial inroads in building a DIY culture and introducing one-stop shopping for the necessary products. In the process, it has established itself as the market's dominant dealer.

The company reported total sales of $611 million in 1997, and rival dealers put its market share at anywhere from 15 percent to 25 percent, depending on how they define the market.

Still, Sodimac was far from alone even before U.S.-based Home Depot became the first international competitor here in the summer of 1998. In 1994, a collection of noncompeting, small to midsize dealers selling predominantly to professionals formed the buying group MTS, and today it serves 38 members that operate 64 stores. In late 1997, three building material and hardware distributors joined forces and opened the first of what they hope will be a chain of drive-through lumberyards with attached hardware stores, called Construmart. Together, according to MTS' Laclaustra, these three companies capture roughly 50 percent of the market's total sales.

Whatever its size and breakdown, the Chilean home improvement market clearly revolves around Chile's largest city and capital, Santiago. Home to around 75 percent of all Chile's economic activity, Santiago also accounts for approximately half of all its product sales, according to Enzo Peirano, director of local trade magazine FerMarket. Not surprisingly, half of the country's home improvement/home center stores are based from there as well.

Still, FerMarket research shows that aside from Sodimac, Construmart, MTS and dealers affiliated with a second buying group, Chilemat, some 1,960 small hardware stores operate throughout Chile.

"That leaves a whole lot of small independent, family businesses that survive," Peirano says.

Not surprisingly, how well Home Depot will fare in this unique marketplace is cause for much speculation. Executives at the world's largest home improvement chain chose Chile to be its first truly international market because of what they call similarities in culture and market sophistication. Some observers have gone so far as to suggest that in Santiago Home Depot has found "the next Atlanta," the best city from which to launch its conquest of a new continent.

But dealers and observers here are quick to point out that despite some similarities, Chile is not the United States. Only three cities -- Santiago, Valparaiso and Concepcion -- boast populations of one million or more, which they believe could severely limit Home Depot's expansion opportunities.

Similarly, Chile's existing competitors are relatively well positioned and in no mood to simply surrender market share.

"As much a threat as Home Depot is what Sodimac and Construmart do in reaction to Home Depot," notes Laclaustra.

Finally, Depot's leverage over vendors -- a powerful component of its operating success in the United States -- won't necessarily translate to Chile, where locally produced products add up to 70 percent of the market's sales.

"Because of the structure of this market, Home Depot will never be more than 5 percent of the market," one longtime market observer predicts. "They will drop prices and margins for everyone and change the cost of doing business, but the market is not set up for Home Depot's success."

Whether that sentiment ultimately holds true, only time will tell. Clearly, though, Home Depot already has made an indelible mark on this market.

Through its efficient approach to operations, aggressive pricing and savvy marketing, Home Depot has given new meaning to the term "competition" here, observers say. Scenes of orange-aproned employees chanting in the store's parking lot and raids on competitors' employees -- Home Depot's Chilean general manager, Julio Campos, and four of its five merchandisers came from Sodimac -- have only accentuated that point.