Spanish retail: Deep cuts in store

One by one they stepped out of their limousines, a sombre, black-suited roll call of Spanish power. Banker followed business leader, minister followed media mogul, a princess left and a veteran socialist arrived. They had come to pay their respect to a dead tycoon. José María Aznar, the former prime minister, hailed the deceased as a “great friend”. Luis de Guindos, the economy minister, said the dead man’s company had become “part of daily life for every Spaniard”.

It sounded like hyperbole but the minister was making a simple statement of fact. Isidoro Álvarez, the man they were mourning on a hot September day two years ago, had spent a quarter of a century as chairman of El Corte Inglés. He had presided over Spain’s great retail empire, the largest department store chain in Europe by sales and the fourth-largest in the world.

The group’s department stores have for decades occupied the heart of every major Spanish city. But they are also lodged deeply in the nation’s collective consciousness.

For generations of Spaniards, El Corte Inglés (“The English Cut”) offered a route to middle-class respectability, the place where young men bought their first suit and aspiring families ordered their first dishwasher.

Founded in 1940, the group’s real expansion began in the 1960s, a decade of high economic growth. It built store after store and swallowed one competitor after the other, branching out into every corner of the retail market.

Today, aside from its 89 department stores, it operates hypermarkets, opticians, convenience stores, travel agents and DIY centres. Close to 2m enter its premises every day.

The group sells insurance and provides consumer credit. It owns property worth an estimated €16bn, and employs more than 90,000 workers. Only the Spanish state has more people on its payroll.

Trouble behind the tributes

Yet, for all the wealth and power, and despite the effusive tributes, it was obvious that Mr Álvarez was leaving behind a troubled legacy. Sales and earnings had plummeted in the final years on his watch, and the group was engaged in a frantic effort to cut its debt.
Spain’s brutal economic crisis had exposed serious flaws in the way El Corte Inglés was set up and managed — from a board dominated by septuagenarians to an ageing customer base and the group’s near-exclusive reliance on its domestic market.

“El Corte Inglés was hit harder by the crisis than anyone,” says a senior Madrid banker. “This was a company without any escape. Santander and BBVA and other large Spanish groups had their operations in Latin America and other places to compensate for the downturn here. El Corte Inglés was the only top 10 company in Spain that was still essentially 100 per cent Spanish.”
Since Mr Álvarez’s death, discussion about the group’s future has only gained in urgency. Last year, despite the economic recovery and rebound in consumer spending, El Corte Inglés posted a profit margin of less than 1 per cent across all of its divisions. Earnings at its Hipercor chain of hypermarkets have fallen 97 per cent since the crisis. The group’s supermarkets have been lossmaking every year since 2006. As a whole, the group has lost market share to a panoply of nimbler, cheaper, better-financed and more focused rivals.

The troubles of El Corte Inglés in many ways reflect those of the country at large. The group has long been seen as the ultimate bellwether of the Spanish economy, flying high during times of boom and expansion, but suffering more than almost any other company when recession bites.
In the first quarter, the Spanish economy grew by more than 3 per cent year on year, prompting speculation that El Corte Inglés, too, will report healthier numbers when it releases results in August. Indeed, the company predicts that even its super and hypermarkets will return to profit.

Yet the deeper challenges, for country and company alike, remain. They range from the financial legacy of a decade-long debt-fuelled spending spree to the question of whether the old growth model still works in the face of a radically changed competitive landscape.

According to Euromonitor, El Corte Inglés has seen its overall market share sales fall by 8 per cent over the past five years, while supermarket chain Mercadona, the market leader, saw its share increase 17 per cent. In online sales, El Corte Inglés is growing its revenues but at a much slower pace than rivals such as Amazon and Inditex, the owner of clothes retailer Zara.

Despite its national profile, the privately held group largely remains a mystery to outsiders. It publishes results only once a year, on the last weekend in August at the height of the summer holiday season.

The information it releases to the public is sparse and includes little more than the sales and profits at its main divisions. Its executives never give interviews, and have guarded the privacy of the company with rare intensity.

According to analysts and people close to the group, that approach is in part the product of its ownership structure. The majority of shares are held by the descendants of the founder, Ramón Areces, and by the foundation that bears his name. Mr Álvarez was the founder’s nephew, and he was in turn replaced by a nephew of his, Dimas Gimeno. Outside pressure to become more transparent is minimal.

It is places like Getafe that offer a glimpse of the struggle that lies ahead for the group. A working class suburb south of Madrid, it is home to an El Corte Inglés department store and attached Hipercor, the group’s hypermarket chain. On a recent afternoon, the three floors of the store were almost deserted, with staff outnumbering customers in all but a handful of departments. In the Hipercor checkout area, only four of 52 lines were open (and even they were not overly busy). Shoppers and staff alike said it was a fairly typical day.

Reckless expansion

The Getafe centre was opened a decade ago, just before Spain entered into its worst economic crisis in modern history. It was part of what — with hindsight — was a reckless expansion that took El Corte Inglés into out-of-town areas and suburbs a million miles from the natural habitat of an upmarket department store. Remarkably, that campaign went on even as Spain slipped deeper into recession.

In 2012, the nadir of the crisis and the year Madrid had to ask for a €100bn EU bailout for its collapsing banking system, El Corte Inglés proudly announced the opening of stores in Zaragoza, Córdoba and Badajoz. The last two were sited in regions with unemployment rates above 30 per cent.

That expansion drive has saddled El Corte Inglés with billions of euros worth of debt, which it has been battling to reduce. Over the past three years, it has issued bonds, sold a majority stake in its consumer finance business and is now trying to raise €1bn by selling part of its family silver — the group’s property portfolio. Last year, it invited a Qatari investor to buy a 10 per cent stake in the group, raising €1bn in the process.

Perhaps more problematic in the long run, though, is the string of underperforming or lossmaking El Corte Inglés stores that dot the Spanish landscape.
“There are two El Corte Ingleses right now,” says José Luis Nueno, a professor at IESE business school. “They have a small group of stores — maybe 15 or so — that are tremendously profitable and valuable. But there are also many that should never have been built.”

Like many retail experts, Prof Nueno argues that department stores can and do function well as long as they are located in major world cities, draw a large number of tourists and sell lots of high-margin luxury goods. Beyond that, however, the competition from cheaper and more specialist stores such as Ikea, Zara, H&M and Carrefour, plus online retailers, may prove too strong.

The group’s fundamental problem is compounded by its overreliance on Spain, a midsized European economy with a history of boom-and-bust cycles.
A different kind of group would have started culling its store network years ago, or would have at least tried to offload chronically underperforming divisions. But, says Prof Nueno, “there is a lot of internal resistance to closing them down. It is not company policy.”

Even at group level, El Corte Inglés is barely profitable. For 2014 it posted net profits of €118m on sales of €14.59bn. Sales showed a slight uptick last year for the first time since the crisis hit, but earnings still drifted lower.
One of the key reasons El Corte Inglés remained profitable in the first place was tax. The group has not paid a single euro in tax over the past four years. On the contrary: in 2015 it received a tax refund of €103m, and the year before of €126m. Without those contributions from the taxman, profits would have melted into the low double digits. El Corte Inglés said in a statement that the tax benefits were due to legal changes and the losses at Supercor and Hipercor.

Another warning sign — at least to outsiders — was the deal struck by the group last year with Sheikh Hamad bin Jassim bin Jabr al-Thani, a former Qatari prime minister and one-time head of the Qatar Investment Authority. The sheikh agreed to provide €1bn in fresh financing to the group, in exchange for a convertible loan that will eventually hand him 10 per cent of El Corte Inglés, or more if certain targets are not met.

The transaction prompted fierce opposition from a minority shareholder, who attacked it as a symbol of the group’s “opaque” ways. The response from the rest of the family was swift: the opposing shareholder was kicked off the board for “repeated violations” of its legal obligations.
In Madrid the fact that El Corte Inglés preferred to cut a quiet deal with the Qataris rather than raise money through more conventional means, such as a sale-and-leaseback agreement, raised eyebrows. “The only reason why you would accept that kind of funding is because ordinary sources of financing have dried up,” says a Madrid-based investment banker.

The company said at the time that the investor would not just provide capital but would also help with the group’s “strategic development”.

‘A lonely fight’

The man who now steers the group is Mr Gimeno, who joined the board in 2010 and was appointed chief executive by his uncle a year before his death. His relatively young age marks him out — he turned 40 in December — but he is steeped in the company tradition.

Outside the group, many regard the affable Mr Gimeno as the group’s best chance of modernisation. He is said to understand its challenges, though some observers caution that he is surrounded by men almost twice his age, and reluctant to embrace change. As one Spanish business leader remarks, “Dimas is fighting a very lonely fight.”

There are signs of change. The sheer number of measures it has taken recently to reduce debt makes clear that El Corte Inglés has woken up to the urgency of the problem. Retail analysts have also noticed an effort to adapt store offerings to the economic reality that surrounds them.

In Getafe, for instance, there are relatively few branded luxury goods on sale, though it still offers €300 bottles of wine and bespoke tailoring on the ground floor. El Corte Inglés says that it will continue to “improve the position of our own-label goods, adjust the portfolio of our divisions and department stores … and optimise operating expenses”.

It retains formidable strengths, from its dominant position in Spain’s leading cities to its long association with some of the world’s most popular brands. Selling down its property portfolio, meanwhile, will allow El Corte Inglés to cover operational weakness for years to come.

“The easy answer is that the business model is probably dead. But the truth is also: Spain still loves to shop at El Corte Inglés,” says the Madrid banker. “The mere fact that they are still here after the crisis is testament to its strength.”

On that hot September day in 2014, Mr Álvarez was laid to rest in San Ginés, the same church where his uncle lies buried, right in the centre of Madrid’s shopping district. Both tombs are located a stone’s throw from the El Corte Inglés department store in Calle Preciados, the very street on which Ramon Areces made his first foray into retailing.

Their decision to be buried at this emblematic site might be read as a posthumous reminder to the current leadership not to stray too far from the group’s traditions and roots.

But it may be wise to draw a different conclusion from the peculiar proximity: that business models, like the leaders who embody them, cannot live forever.

Article written by Tobias Buck and published by The Financial Times Limited 2016.

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