the growth and international expansion of an emerging market retailer in latin america

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The Growth and International Expansion of anEmerging Market Retailer in Latin AmericaConstanza Bianchi a ba School of Advertising, Marketing and Public Relations, Faculty of Business , QueenslandUniversity of Technology , Brisbane, Queensland, Australiab School of Business , Universidad Adolfo Ibañez , Santiago, ChilePublished online: 09 Sep 2011.

To cite this article: Constanza Bianchi (2011) The Growth and International Expansion of an Emerging Market Retailer in LatinAmerica, Journal of Global Marketing, 24:4, 357-379, DOI: 10.1080/08911762.2011.602324

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Journal of Global Marketing, 24:357–379, 2011Copyright c© Taylor & Francis Group, LLCISSN: 0891-1762 print / 1528-6975 onlineDOI: 10.1080/08911762.2011.602324

The Growth and International Expansion of an EmergingMarket Retailer in Latin America

Constanza Bianchi

ABSTRACT. This study contributes to the literature on international retailing by addressing a gapin the literature regarding how retailers from emerging markets expand internationally. This historicalcase study analyzes the growth and internationalization process of Chilean retailer Falabella, whichis one of the largest retailers in Latin America and has been able to compete with multinationalsfrom developed countries. The research is based on primary and secondary data sources including33 oral interviews with company managers and family executives, as well as industry data, corporatereports, and trade journals. Drawing on institutional theory, the findings show that belonging to afamily conglomerate, engaging in networks, partnerships, and organizational learning, and having anexperienced management team helped Falabella gain legitimacy in all international markets.

KEYWORDS. Retailing, international marketing, emerging markets, Chile, Latin America

INTRODUCTION

The author conducted an historical case studyof the national and international expansion ofthe Chilean retailer Falabella S.A.I.C. (referredto here as Falabella). Falabella is the largestdepartment store in Latin America and one ofthe most diversified, respected, competitive, andprofitable retail corporations in the region (e.g.,Deloitte, 2009; Estrategia, 2010). At the end of2009, this company celebrated its 120th anniver-sary with the following slogan, “Falabella withyou . . . all your life.” Falabella has operationsin Chile, Argentina, Peru, and Colombia and isa remarkable example of an emerging marketretailer that has become an important regionalactor in Latin America.

Constanza Bianchi is a teaching and research fellow in the School of Advertising, Marketing and PublicRelations, Faculty of Business, Queensland University of Technology, Brisbane, Queensland, Australia. Sheis also Professor of Marketing in the School of Business, Universidad Adolfo Ibanez, Santiago, Chile.

Address correspondence to Constanza Bianchi, PhD, School of Advertising, Marketing and Public Re-lations, Queensland University of Technology, 2 George St. Z1034, Brisbane, Queensland 4000, Australia.E-mail: [email protected]

Academic research on international retailinghas focused predominantly on retail corpora-tions from developed countries such as Wal-Mart, Tesco, M&S, and Home Depot, amongothers (Arnold, 2002; Bianchi & Ostale, 2006;Lowe & Wrigley, 2009). Moreover, historicalresearch on retailing is directed mostly at com-panies from the United States, Europe, and Japan(Cohen, 1996; Stanger, 2010). Nevertheless, re-tail companies from emerging market are alsoexpanding abroad and competing successfullywith large companies from developed nations,yet scant historical research has addressed thisphenomenon.

Emerging markets are becoming more noto-rious in the world economy as a result of the in-creasing levels of development and government

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358 JOURNAL OF GLOBAL MARKETING

policies that favor economic liberalization(Hoskisson, Eden, Lau, & Wright, 2000).However, their contexts are characterized byinstitutional turbulence and lower levels of eco-nomic development compared to developed na-tions (Welsh, Lon, & Falbe, 2006). Althoughsome research on emerging market firms hasbeen conducted in Asian and Eastern Euro-pean countries (e.g., Mathews, 2006; Singh,Pathak, & Naz, 2010; Tsai & Eisingerich, 2010),most of this research considers the manufac-turing sector. Thus, there is little understand-ing in the academic literature concerning howretail firms from emerging markets expandinternationally.

Moreover, emerging markets are hetero-geneous in their level of development andenvironmental surroundings (Gaur & Kumar,2010). This can lead to differences in the inter-nationalization process of firms that are locatedin different geographical areas. Consequently,conducting research in different regions of theworld therefore provides an opportunity toverify existing theories, as well as to extendand develop new theoretical frameworks (Gaur& Kumar, 2010; Gaur, Kumar, & Sarathy,2011). Furthermore, fewer studies have beenconducted on the internationalization process ofLatin American firm, and these predominantlyconsider Brazilian companies (Arbix, 2010;Cyrino, Barcellos, & Tanure, 2010). Since LatinAmerica’s current strategies of market liber-alization rely heavily on private initiative andentrepreneurship, it is essential to learn moreabout how firms in other countries of the regionare perusing international expansion. Thus,insights from a historical case study on Chileanretail internationalization will aid in a better un-derstanding of the internationalization processof retailers from the Latin American region.

The theoretical framework for the analysisis institutional theory, which suggests that ev-ery country has a set of relevant institutionalnorms to which retailers must conform to be per-ceived as legitimate by the relevant social actors(DiMaggio & Powell, 1983; Meyer & Rowan,1977). According to this theory, survival in in-ternational markets will be more likely whenorganizations achieve legitimacy from social ac-tors or adapt their practices and structures to the

relevant institutional norms of the foreign mar-ket (strategic isomorphism).

This article begins with a review of the lit-erature on retail internationalization and emerg-ing markets. Next, the theoretical framework ispresented and followed by a narrative of thehistorical case study, where several phases areidentified. Then, a discussion of the findingsand implications for understanding how retail-ers from emerging markets become internationalplayers is followed by the contribution of thisstudy and avenues for future research.

LITERATURE REVIEW

Internationalization Process

The internationalization process has beenthe focus of increasing theoretical and em-pirical research in the marketing and retail-ing discipline (e.g., Alexander & Myers, 2000;Cavusgil, 1980). The internationalization pro-cess is described in general as the stages com-posing the gradual international expansion of afirm’s operations. The literature on internationalbusiness has contributed to the development ofseveral theoretical frameworks for understand-ing the process of retail internationalization.The stages model (Cavusgil, 1980; Johanson &Vahlne, 1977) holds that firms internationalizethrough a process of incremental stages, and asthey gain more experience, they increase theircommitment to international activities and ac-cept higher risks of entering and operating innew and more distant markets. This model as-sumes that international expansion is influencedstrongly by managerial learning and commit-ment, which enables them to overcome the risksand costs associated with internationalization.

A different model of internationalization isthe eclectic theory (Dunning, 1981, 1988),which is based largely on the idea that interna-tional companies have specific advantages thatcan be exploited in a foreign market in a timelyway. This approach to internationalization sug-gests that there are three factors that must bepresent for international expansion: ownership-specific, location-specific, and internalizationadvantages. Ownership advantages refer to firm

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Constanza Bianchi 359

specific assets and skills, innovative products,processes, or business methods, which providethe firm with a competitive advantage in the mar-ket. Location advantages relate to particular ad-vantages or market opportunities that are presentin the host country. Internalization advantagesrefer to the benefits of retaining assets and skillswithin the firm.

A third approach to internationalization isnetwork theory, which draws on the theoriesof social exchange and resource dependencyand focuses on firm behavior in the contextof interorganizational and interpersonal relation-ships. This network approach suggests that in-ternationalization is a result of interaction andthe development of relationships over time andviews international growth as based largely onsharing complementary competitive advantageswith other firms (Johanson & Mattsson, 1988).

The stages and eclectic models of interna-tionalization have mainly considered the processof manufacturing firms, yet retail scholars havefound these models useful to develop specific in-ternationalization frameworks for retailers (e.g.,Alexander & Myers, 2000).

Retail Internationalization

The history of international retailing indi-cates that retailers from the United States andEurope were among the first to establish inter-national operations in the early part of the 20thcentury (Alexander, 1997; Hollander, 1970). Forexample, the U.S. variety retailer Woolworth ex-panded to Canada in 1897, to the United King-dom by the end of 1909, and to Germany by theend of 1926. The department store Sears Roe-buck also expanded from the United States tocontiguous markets such as Cuba in 1942 andMexico in 1947 (Alexander, 1997). Just dur-ing the 1970s, European retailers such as thehypermarket Carrefour have developed enoughcapabilities to enter the U.S., Pacific Rim, andLatin American markets (Fernie, 1992). Over-all, these retailers have had an important impacton the diffusion of retail formats such as super-markets, hypermarkets, department stores, andvariety stores around the world, and this inter-national activity has grown exponentially in thepast 20 years (Alexander & Doherty, 2010).

A vast amount of retail literature has emergedexamining international activities of Europeanand North American retailers, such as inter-national retail involvement (Vida, Reardon, &Fairhurst, 2000), the extent and direction ofinternational retail activity (Sternquist, 1997;Treadgold, 1991), market selection (Gripsrud& Benito, 2005; Swoboda, Schwarz, & Halsig,2007), market entry method (Doherty, 2009),and, recently, international retail divestment andfailure (Alexander & Quinn, 2002; Bianchi &Ostale, 2006). A few studies have attempted todevelop theoretical frameworks to assess the re-tail internationalization process (Alexander &Myers, 2000; Vida & Fairhurst, 1998). Thesestudies draw from the internationalization theo-ries, but they also incorporate specific elementsof retailing found in the literature.

When retailers internationalise, they transfertheir source of competitive advantage to a newmarket and usually attempt to operate in for-eign markets in the same way as they do intheir domestic market (Evans, Bridson, Byrom,& Medway, 2008). Even though retail firms per-form exceptionally well in their domestic coun-try, when they internationalize, many encounterdifficulties in dealing with the complexities ofdifferences in local regulations and consumertastes. These obstacles hinder retailer interna-tional performance and in some cases lead thefirm to withdraw from certain foreign markets(e.g., Bianchi & Ostale, 2006).

Theoretical frameworks on retail internation-alization suggest that international retailer com-petitive advantage is associated to the firm’sinternal organizational and managerial capa-bilities as well as the necessary resources forinternational expansion (Alexander & Myers,2000; Dawson, 1994; Sternquist, 1997; Vida &Fairhurst, 1998). Firm characteristics refer to theretailer’s source of competitive advantage, suchas the uniqueness of products, merchandise as-sortment, unique retail concept, or competitivepricing, along with the necessary resources forinternational expansion. Management character-istics refer to the experience, attitude, and lead-ership qualities of managers that participate inthis process. Alexander and Myers (2000) ar-gue that the source of advantage exploited by aretailer is formulated within a set of domestic

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environmental factors, and when transferringthis source of advantage to a different mar-ket, conditions may change and the retailerwill receive the influence of host environmentalpressures. Thus, both theoretical frameworks foraddressing retail internationalization acknowl-edge that an ownership advantage is developedwithin certain environmental characteristics thatmay not be present in a new market.

Moreover, recent research in this area alsostresses the importance of the learning processesfor retail internationalization (Palmer & Quinn,2005). The learning process is perceived as fun-damental for retailers operating in the interna-tional market as mentioned by Alexander andMyers (2000, p. 347): “Within the internationalenvironment, the organisation’s internal facili-tating competencies will alter as the organisa-tion learns, or fails to learn, from the collectionof markets in which it operates.”

In conclusion, the previous studies have con-tributed to the understanding of many aspectsof retail internationalization; however, interna-tional performance as such has been overlooked,particularly for retailers from emerging markets(Alexander & Doherty, 2010). Specifically, howretail firms modify their operations and strate-gies in light of international experience is lessknown.

Internationalization of Emerging MarketFirms

Theoretical approaches to retail internation-alization have predominantly focused on man-ufacturing firms located in developed markets(Luo & Peng, 1999). Some scholars argue thatthese theories may not suitable to explain the in-ternationalization process of firms from emerg-ing countries, which are generally less resourceendowed and competitive than firms from devel-oped markets.

Emerging markets are defined as low-income,rapid-growth countries using economic liber-alization as their primary engine of growth(Hoskisson et al., 2000). Their market contextsare characterized by institutional turbulence andlower levels of economic development comparedto developed nations (Welsh et al., 2006). Firmsfrom emerging markets may not have innova-

tive technology, superior human and financialcapital, or world-recognized brands (Arnold &Quelch, 1998; Wright, Filatotchev, Hoskisson,& Peng, 2005). Thus, the previous theories maynot suitably explain the internationalization be-havior of firms from emerging countries, whichare generally less resource endowed and com-petitive than firms from developed markets.

According to studies in the manufacturingsector, emerging market firms may succeed ininternational markets by attaining specific assetsthat enable them to catch up with internationalplayers from developed markets (Sinha, 2005;Wright et al., 2005). For example, managersfrom emerging countries may possess knowl-edge about operation conditions, regulations,customers, networks, and marketing methods inless developed countries (Elango & Pattnaik,2007; London & Hart, 2004). Luo and Tung(2007) argue that firms from emerging mar-kets use internationalization as a springboardto acquire strategic assets needed to competemore effectively internationally, such as tech-nology, manufacturing knowledge, managerialexpertise, and consumer access, in key foreignmarkets.

Moreover, differences might exist amongemerging market regions that are important toassess for theoretical development of retail inter-nationalization models (Gaur & Kumar, 2010).For example, most studies on Asian economieshighlight the important role of government in theprovision of information concerning foreignmarket conditions (Lu, Zhou, Bruton, &Li, 2010; Yeoh, 2000). However, researchconducted with Latin American does notacknowledge the role of government supportfor internationalization but rather strategiessuch as engaging in alliances with competitorsand networks with regional players (Brenes,2000). Family businesses are also found to bemore legitimate than companies from developedmarkets due to their well-established networksand deep understanding of consumers (Guillen,2000; Kim, Kandemir, & Cavusgil, 2004).

In the retailing sector, Latin American coun-tries such as Brazil, Mexico, Colombia, and Ar-gentina have experienced the arrival of largeAmerican and European retail chains suchas Wal-Mart, Carrefour, and Casino (Deloitte,

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2009). Nevertheless, Chilean retailers are alsorelevant players in these markets and have beenable to expanded regionally. Retailers such asdepartment store chains Falabella and Ripley,grocery store chain Cencosud, drugstore chainFASA, and home improvement retailer Sodi-mac have become familiar outlets for consumersin the Latin American region. Thus, althoughChilean retailers have fewer endowments thanAmerican or European retail chains, they havebeen able to internationalize successfully in theLatin American region.

According to institutional theory, the ultimategoal of a firm is survival, and organizations con-form to institutional norms to achieve legitimacyand increase survival capabilities (DiMaggio &Powell, 1983; Meyer & Rowan, 1977). The prac-tice of conforming to institutional norms in theenvironment has been defined as strategic iso-morphism (DiMaggio & Powell, 1983). Com-pliance with the institutional norms helps to es-tablish the organization’s legitimacy in the eyesof other social actors who also subscribe to thesenorms. Institutional theory directs the attentionto the relevant social actors such as competi-tors, suppliers, employees, or consumers, whichshape the relevant institutional norms in the or-ganization’s environment. These norms act asunwritten rules of proper social conduct to whichorganizations must adhere to become legitimate(Scott, 1987). In an international context, orga-nizations are simultaneously subject to institu-tional pressures from the domestic and foreignmarket, and they must comply to institutionalnorms in all markets (Westney, 1993). In conclu-sion, the theoretical premise of the study is thatretail internationalization for emerging marketretailers is largely dependent on the ability of aretailer to achieve legitimacy in the domestic aswell as in the international marketplace throughstrategic isomorphism. The main research ques-tions of this study are as follows:

R1: How do Chilean retail firms internation-alize compared to retailers from developedcountries?

R2: How do they compete against largermultinational retailers from developedcountries?

The purpose of this study is to address thesequestions through a historical case study of Fala-bella, the leading department store and one of thelargest retail conglomerates in the Latin Ameri-can region. Institutional theory is introduced as atheoretical approach for examining the researchquestions.

METHODOLOGY

Case study methodology was used to assessthe internationalization process of Chilean re-tailer Falabella. Case studies allow researchersto study an organization and its environment in anatural setting and obtain rich insights into com-plex processes (Yin, 1994). This single case wasconsidered to be appropriate because it is highlypertinent to the objective of the study (Perry,1998), and the single case approach has beenan increasingly popular methodology within theretail internationalization literature (Palmer &Quinn, 2007; Sparks, 2000) and is recognized asparticularly useful for examining internationalstrategies of emerging market firms (Hoskissonet al., 2000).

More specifically, this research is based on asingle historical case study of Falabella since itsfoundation and growth as well as its regional ex-pansion into Latin America. The narrative startsin 1889 when the company was funded as a tailorshop and continues up to 2009. Over the years,Falabella has shown consistent growth comparedto other local retail competitors and internation-alization has been a major focus for the companyin the past 15 years, which is uncommon for re-tailers from the Latin American region. In fact,Latin American retail international operationscomprised only of 9.9% in sales in 2009; thusthese retailers have been the laggards in goingglobal compared to other regions of the world.

This historical case study rests on acomprehensive study of primary and sec-ondary data sources. Moreover, the narrativeis based on 33 oral interviews with Falabellamanagers, executives, and family owners,conducted from 2001 to 2009. These interviewsfollowed McCracken’s (1988) long interviewapproach, and respondents were selected to pro-vide a broad representation of the organization,

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encompassing managers from different areassuch as marketing, operations, finance, andcorporate development, as well as country man-agers and executives of the foreign operations ofthe firm. Secondary sources included corporatereports, newspaper articles, historical articles,photographs, and business periodicals.

Oral interviews were of a semistructurednature and lasted an average of 90 minutes.Interview questions for managers focused onFalabella’s growth and internationalizationprocess as well as its performance in eachmarket. Oral interviews with company ownersand family members focused specifically onnarratives, stories, and personal recollections re-garding the first 100 years of the company. Mostinterviews with managers and company ownerslocated in the Chilean market were conductedin person; however, the interviews held withcountry mangers or executives located in Peru,Argentina, and Colombia were conductedvia telephone due to geographical distance.Interviews were also conducted with managersof external organizations directly and indirectlyinvolved in the internationalization process ofFalabella, such as banks and partner firms. Allinterviews were recorded and transcribed, andfor confidentiality reasons, the identities ofrespondents are not disclosed.

Due to the longitudinal nature of the case be-ing studied, an historical approach was takenwhen analyzing the secondary data and the em-phasis was to use previous events that provideinsights into the present environment (Golder,2000). The historical method is defined byGolder (2000) as a process of collecting, verify-ing, interpreting, and presenting evidence fromthe past, with a strong emphasis on criticallyevaluating the sources of evidence and the evi-dence itself in terms of competence, objectivity,and reliability. This process required looking fororiginal documents and determining the authen-ticity of the author and adequacy of the timeperiod. Newspaper and magazine articles andcorporate reports were screened to ensure theybelonged to credible sources. Evidence that didnot meet these conditions was eliminated.

The process of analysis and interpretation re-sulted in inferences, insights, and connections tothe research question (Spiggle, 1994). Interpre-

tation of the data occurred by iterating back andforth from the data to the theory and back to thedata again in order to make sense of the data. Themain goal was to obtain a holistic and illuminat-ing grasp of meaning (Spiggle, 1994). Overall,triangulation from interpretations of the inter-view data and secondary sources, along with in-stitutional analysis, resulted in common themesthat provided evidence for supporting the re-search questions stated.

Falabella: Overview

We have come a long way since 1889when Salvatore Falabella inaugurated thefirst large tailor’s shop in Chile. All ofus at Falabella thank our shareholders,suppliers, customers, directors, manage-ment, as well as our collaborators andthe business community for their contribu-tions in making Falabella a regional leader.(Falabella chairman at the 2007 AnnualDinner of the Chamber of Commerce inSantiago, Chile, April 25, 2007)

The company owners consider Falabella’sleadership and brand recognition as a conse-quence of the company’s ability for synchroniz-ing an excellent purchase experience in termsof exceeding customer’s expectations, servicequality, and adaptation to the needs of customersbut. most of all, of the excellent relationshipwith the business community and the high repu-tation of the Solari family. Falabella has a ro-bust presence in Chile, Argentina, Peru, andColombia, with 212 stores, 10 shopping cen-ters, over 70,000 employees, 1.5 million squaremeters of floor space, more than 5 million ac-tive credit accounts (CMR), and 454 financialcenters. The company’s consolidated sales in2008 were US$5,856 million, with an increaseof 21.3% compared to the previous year. Of thetotal sales, Chile represents 73.5%, Peru 16.7%,Argentina 6.2%, and Colombia 3.6% (Table 1).

Falabella participates in different retail sec-tors through department stores, home improve-ment stores, food retailing, shopping malls,real estate agencies, financial services, insur-ance services, and travel agencies. The companyhas an integrated multiformat business model,

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TABLE 1. Falabella’s Corporate Information (December 31, 2009)

Item Chile Argentina Peru Colombia Total

Revenues (MM US$) 5,108 431 1,161 202 6,950Market weight in total sales 73.5% 6.2% 16.7% 3.6% 100%Department stores (N) 39 10 15 9 73Home improvement stores (N) 65 4 13 19 101Food retail stores (N) 26 0 17 0 43Real estate (No. of malls) 11 0 2 0 13Floor space (m2) 867,768 105,737 274,318 246,494 1,494,317CMR accounts (N) 26,000,000 720,000 1,300,000 430,000 5,050,000Employees (N) 43,000 4,000 16,000 6,000 69,000

Source: Developed by the author based on Annual Report 2009 (www.falabella.com).

supported by financial retail and the CMR creditcard, which allows achieving synergies withregard to purchasing volumes and consumer in-formation. In general, it targets middle- andhigh-income consumers with a variety of mer-chandise composed of apparel, household prod-ucts, electronics, and furniture, and the companyis an exclusive distributor of several national andinternational brands. It has developed its ownprivate label brands that attempt to offer a goodvalue-for-price ratio. Falabella also participatesin the real estate and travel business by owningshopping centers and travel agencies in Chileand Peru.

Company History: First 100 Years

The origins of Falabella date back to 1889,the year in which Salvatore Falabella, an Italianimmigrant, opened in Chile the first large fash-ion tailor shop for men located in the city centerof Santiago, named Sastreria Falabella (“Tailorshop Falabella”). During the 19th century, sev-eral entrepreneurial immigrants from Italy, GreatBritain, Germany, and Croatia came to Americaand became important pillars for industry growthand contributed to the development of the re-tail industry in Chile (Salazar & Pinto, 1999).It is estimated that approximately 10,000 Italianimmigrants arrived in Chile between 1880 and1930 (Pellegrini & Aprile, 1926). These immi-grants consisted mainly of young men who leftbehind family, relatives, and friends with aspi-rations to become wealthy in the new continent(Memoriachilena, 2004). They settled mainly in

urban cities such as Santiago and Valparaiso andfocused on industry and commercial activities.

Salvatore Falabella left his natal town ofCaserta in 1888 to look for new horizons inAmerica (Torres Cautivo, 2000). His fatherowned a velvet manufacturing company in Italy;consequently, the young Salvatore imported finecashmeres and fabrics from the old continent tomanufacture fashionable men’s suits of his owndesign (Memoriachilena, 2004). A few years af-ter his arrival, Salvatore married another Italianimmigrant, Miss Finizzio, and from this unionthey had six children, two of whom (Arnaldo andRoberto Falabella Finizzio) remained in chargeof the family business.

The distinguished politician and journalistTancredo Pinochet LeBrun wrote in those yearsthat “the family name is important among theelite society, as well as the family fortune, andthe shop where they bought their apparel. Ayoung man from a good family would have stud-ied in a French or English school, and wouldhave bought their clothing in Europe or at Fal-abella in Chile” (Pinochet, 1909).When Salva-tore died, the brothers renamed the store GranSastreria A&R Falabella and took over the man-agement of the tailor shop during the 1920s and1930s, with the goal of maintaining the high-quality shop image to attract wealthy consumerswho desired international fashion styles.

Arnaldo was predominantly the one in chargeof the company. He had six children, four girlsand two boys, but one of the boys died young andthe other one was in charge of the industrial areabut never worked in the store, so the issue of suc-cession relied on the daughters. Over the years,

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Eliana, daughter of Arnaldo Falabella, marriedAlberto Solari Magnasco, a young man from anItalian immigrant family who had a wide visionand interest in the commercial activity. AlbertoSolari was the eldest of 10 siblings and after suf-fering a heart attack, Arnaldo realized that hisson-in-law was the only one able to continuethe family legacy (Torres Cautivo, 2000). As aresult, he passed on his knowledge to Alberto,who took hold of the company in 1937, and inthe following years, with the support of the ad-ministrative manager Jorge Mellafe, he becamepresident of the company and remained so un-til this death in 1986. According to Teresa, oneof Alberto’s daughters, Eliana also had a goodmind for business and Alberto always consultedher in his decisions (Torres Cautivo, 2000).

With Alberto in charge, the family businessinitiated a growth process by incorporating newproduct lines such as fashion items, electronics,and homeware items. Alberto repositioned thetailor shop into a clothing store by incorporatingnew complementary product lines for men, suchas shoes, hats, gloves, and shirts. Some of theseproducts were imported from Europe. Further-more, in 1940 Alberto made the assertive deci-sion to incorporate imported women’s apparellocally manufactured but using fashion stylesfrom Europe and the United States. Falabellasoon became a very successful business, and asa result of these changes, the company beganto develop a strong brand name. Ultimately, in1958, Falabella became a prestigious departmentstore with eight stores and a vast array of homeproducts and apparel.

During 1962, the company initiated its na-tional expansion by opening the first departmentstore in Concepcion, the country’s second largestcity. The glamour of Falabella grew steadily overthe years, and in 1971, it had become the manda-tory place to shop for the elite class of Chileanswith the following advertisement: “Dress as youwish, but dress in Falabella . . . in one of the eightstores of Ahumada, the street of Falabella.” Theperception of consumers at that time was thatwithout having to leave the country, you couldshop at Falabella and find the latest worldwidefashion styles, with authentic models from Paris,London, and New York. Although Falabella wasvery much a family business at that point, fam-

ily members acknowledge that it was the teamof Alberto Solari and Jorge Mellafe who startingthinking about the real transformation of Fala-bella from a tailor shop into a regional retailer.

At the beginning of 1970, a mayor politi-cal turmoil impacted the country and companieswere expropriated by the left-wing governmentof President Salvador Allende (Collier & Sater,1996). During this period Falabella was seizedby the state, but its loyal employees kept peo-ple from entering the premises and protected themerchandise from being taken until a change ingovernment brought stability back to the country(Ampuero, 2005). Business was so bad, accord-ing to Juan Cuneo Solari, who later became vicepresident of the firm, that at times the employeespassed the hours playing chess in the office “be-cause there was nothing to sell” (interview withSolari in Ampuero, 2005).

This period of instability, along with the deathof Arnaldo Falabella, led some members of theFalabella family, such as the Falabella-Peragallosisters (Eliana’s sisters), to sell their shares inthe company. As a result, 75% of the companywas acquired by a group comprising ReinaldoSolari Magnasco (brother of Alberto), Juan Cu-neo Solari (nephew), Jorge Mellafe, Sergio Car-done Solari, and the Lombardi family. Reinaldoowned his own apparel business, Mavesa, formanufacturing women’s clothing. He also man-aged the Falabella store in Concepcion so he hadexperience in the company ropes. During this pe-riod, an internal reorganization of the companyallowed Juan Cuneo Solari, nephew of AlbertoSolari, to acquire shares in the company, and thisdecision would have a huge impact in the futuregrowth of the company.

Juan Cuneo Solari became Falabella’s generalmanager in 1978 with the aim of modernizingand professionalizing the company. Cuneo wasthe driving force behind the ensuing expansionof the Falabella chain. His previous experiencein the banking industry allowed the company todiversify into new sectors such as finance, insur-ance, real estate, and tourism. Furthermore, Cu-neo was convinced that to succeed in businessit was necessary to hire highly educated profes-sionals and to empower them. His managementstyle included promotion and the formation ofautonomous management teams, which would

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be essential for the next phase of company pro-fessionalization.

Professionalization and Growth

The year 1980 was to be a breakthrough yearin Falabella’s history, as the company launchedthe first retail corporate credit card in the coun-try, known as CMR, which grew to become themarket leader in Chile. The idea to launch acorporate credit card emerged from examiningSears’ credit card business in the United States,but at the same time this needed adaptation to thelocal reality of Latin American consumers. Thefinancial crisis had hit the Latin American regionand consumers had less income and purchasingpower. Through retail credit, lower-income con-sumers have had access to a wider assortment ofquality products, as well as to different partner-ing businesses in gas, telecommunication, healthcare, photography, and fast food. This creditcard also enabled Falabella to acquire valuableinformation about consumer purchasing behav-ior and to establish a customer loyalty programwith points that result in discounts and free mer-chandise. CMR would become very important inFalabella’s internationalization process, allow-ing consumers from all international markets topurchase merchandise from any of Falabella’sstores and alliance partner (EIU, 2004).

In 1983, Juan Cuneo decided that the firmshould move its 70-year-old store from centralSantiago to the recently vacated site of the Searsdepartment store in the posh Parque Araucoshopping center, located in the western suburbanresidential sector of the city (Ampuero, 2005).His decision was supported by Reinaldo Solaribased on trends in the rest of the world, wherepeople were living farther from the city cen-ter and retailers had to follow them (Ampuero,2005). The American retailer Sears Roebuck hadentered the Chilean market in 1981 and openedone store in Santiago in the Parque Arauco Shop-ping Center. The retailer did not perform welland withdrew from the market at the end of1982 (Ampuero, 2008). Cuneo’s commitment tothis move was so strong, he confessed that forthe first time in his life he had used a sleepingbag and stayed overnight to make sure the storewas finished on time because it had to be ready

for opening in 30 days (Ampuero, 2008). Theinauguration of this store along with the newcorporate credit card established a new businessculture in the company, with a focus on marketresearch, loyalty programs, and a better under-standing of customer preferences.

Meanwhile, two important Chilean com-petitors closely followed Falabella’s path. Al-macenes Paris was founded in 1900 by theGalmez family as a furniture store, and bymid 1950s it had expanded its merchandise of-fering to include apparel, which resulted in adepartment store format. Ripley, on the otherhand, started operations in 1964 as a cloth-ing store and in 1985 inaugurated its firstdepartment store, incorporating electronic prod-ucts and house wares. Both family-based retailfirms were becoming strong competitors tfo Fal-abella in the department store business. Nev-ertheless, competition encouraged Falabella toinnovate and to focus even more on consumersatisfaction. The company was always one stepahead and developed a permanent first mover ad-vantage of satisfying consumers by anticipatingconsumer needs and preferences, remaining theleader in retail development domestically andinternationally.

At the beginning of the 1990s, Falabellacreated an expansion plan composed of foursteps: internationalization, the development ofthe financial business area, real estate growthby means of malls, and the development of newretail areas. For this purpose, several key actionswere taken by Falabella as the basis for fu-ture development and became embedded in thecompany’s business model. First, corporate gov-ernance was changed by establishing a board ofdirectors separate from the management teamthat would guide the company. In addition,a technological orientation was consideredessential for the future growth of the companyso investments in equipment and technologicalsystems were carried on permanently, and thecompany began to promote sales through theInternet. Finally, a new focus on alliances withother companies following a win-win strategyfor both partners was established as a way toprovide a better service for customers.

In the following years, Falabella also enteredthe real estate business by taking a stake in the

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Mall Plaza group, which is the largest shoppingcenter operator in Chile, and opened Mall PlazaVespucio, the first of several Santiago shoppingcenters catering to the middle class. This wasthe first Chilean mall that incorporated featuressuch as a food court, a play area for children,and the country’s first multiplex cinema. MallPlaza group later opened nine shopping centersin different cities in Chile, with Falabella hold-ing a half-share in each. This business wouldbecome strategic for Falabella’s domestic andinternational growth strategy.

Falabella’s Internationalization Process(1993 to 2009)

Falabella’s aim is to become the leadingretail operator in Latin America, both interms of presence as well as financial re-sults, combing world-class managementquality with commitment to local commu-nities. (Falabella chairman at the 2007 An-nual Dinner of the Chamber of Commerce,Santiago, Chile, April 25, 2007)

In 1993, Falabella initiated its international-ization process with the opening of its first de-partment store in Mendoza, Argentina, using aGreenfield strategy. The main goal of this pro-cess was to shift their focus to foreign marketswithin the region because of Chile’s relativelymature and saturated retail environment. Fromthe beginning, Juan Cuneo aimed for Falabella tobecome a leader in the department store businessthroughout the Latin American region. Thus, itneeded to internationalize as soon as possible be-cause large retailers such as Wal-Mart and Car-refour were starting to look at expanding throughthe region and would compete with Falabellawith apparel, electronics, and home products.

Argentina

Falabella entered the Argentinean marketmainly because of geographic closeness and sizeof the market. Although the prestigious U.K.department store Harrods had operated its onlySouth American store in Buenos Aires, Fala-bella was a pioneer in introducing the depart-ment store format to middle-income consumers

in Argentina, and maintained the same merchan-dise assortment as in Chile due to the knowledgeand experience in serving this group of people.Without properly researching the Argentineanmarketplace, the large flow of tourists comingfrom Argentina (especially Mendoza) led thecompany to believe that there would be similarconsumer tastes and preferences in both coun-tries. Only a few executive roles were held byChilean executives who knew the company’soperations well, but most of the employees inArgentina were local. During the early 1990s, theChilean peso was favorable to Argentineans dueto the exchange rate between the two currencies.This resulted in many Argentineans traveling toChile for holidays and led to massive shoppingat Falabella.

During the first few years, Falabella continuedits expansion in this market, hoping to achieveeconomies of scale to make the business prof-itable. The company expanded, opening storesin Rosario, Cordoba, San Juan, and BuenosAires. However, Falabella’s first internationalexperience did not turn out as the company pre-dicted, as sales were lower than expected. Fala-bella’s executives regretted having opened theirfirst store in Mendoza instead of Buenos Aires,where sales volumes could be higher. Moreover,the environment that Falabella confronted inArgentina was different from the one in Chile.Legal norms, consumer preferences, and shop-ping habits were different and the difficulties ofimporting were also more pronounced than inChile. As an example, Argentinean consumersfrequently tried to avoid asking for the invoicewhen shopping at small stores to avoid payingthe consumer taxes.

Argentina is known as the capital of the fash-ion industry in Latin America and is consideredthe fashion leader due to its European heritageand immigrants; thus, consumers preferred toshop at boutiques for clothes and hypermarketsfor electronics. Market research conducted byFalabella in Argentina showed that Argentineansvalued exclusivity in their apparel and avoidedtaking risks in finding others dressed in the sameway. The majority of Falabella’s offerings werefocused on selling women’s clothes and the maincompetitions for Falabella in this sector werespecialized stores and boutiques. Hypermarkets

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were also competitors to Falabella for mass con-sumer items such as children’s clothing and elec-tronics. Falabella did not have local knowledgeand thus had trouble trying to understand localtastes. They made mistakes with the product andservice assortment. For example, women did notlike the style of their clothes and jeans, and thesize of the beds was too large. In addition, con-sumers were not used to shopping in departmentstores. They valued exclusivity and preferred toshop at boutiques or specialty stores. Thus, thefirst international experience of Falabella did notmeet the initial expectations of the company inthis market.

Peru

Realizing its mistakes in Argentina, the com-pany entered the department store format in Peruin 1995 by acquiring 70% of Sociedad Andinade Grandes Almaneces (SAGA). This companywas formerly Sears, Roebuck & Co. The Ameri-can retail chain had left the Peruvian market andhad sold the stores to the Roca family group. Thecompany owned two SAGA department stores inLima, and a third store located in the city cen-tre of Lima was opened in 1998. SAGA hada strong brand image in the local market andhad a strong knowledge of the Peruvian con-sumer. It was perceived by consumers and thegeneral business community as a legitimate Pe-ruvian brand. SAGA was owned by a very well-respected Peruvian family group, the Roca fam-ily, and the CEO and representative of the Rocafamily, Juan Xavier Roca Mendenhall, becamegeneral manager of SAGA Falabella. He holds adegree in economics from Amherst College anda masters of business administration degree fromHarvard University.

The fact that SAGA already had establishedretail stores in the marketplace, as well as lo-cal brand recognition and reputation and marketunderstanding, facilitated the initial operation ofSAGA Falabella in Peru and helped protect Fal-abella from nationalistic demonstrations by con-sumers due to a latent rivalry between both coun-tries as a result of historical events dating back tothe 19th century. Having a partner in Peru facil-itated the market entry operations for Falabellaexecutives; therefore, they invested much effort

in developing a trustworthy relationship with theRoca family. Falabella considered SAGA to bean excellent partner and Xavier Roca was per-ceived as a very professional executive. Overall,they thought that there was a good fit between theRoca and Falabella family groups. An interviewwith Juan Xavier Roca reflects his opinion to-ward the relationship with Falabella: “Partneringwith Falabella has been a wonderful experience!We get along very well. We have common objec-tives, and we have grown in a very satisfactoryway. We have developed new business in Peru to-gether with [the home improvement chain] Sodi-mac, and [the supermarket chain] Tottus, and wehave always been treated like a real partner byFalabella” (2003).

In 1996, the company continued its nationalexpansion in Peru by renovating one of thestores in Lima and inaugurating a new storein the same city at the end of that year. Fromthe beginning, SAGA Falabella implemented thesame processes and best practices from FalabellaChile but maintained the local administrationand employees of SAGA. Falabella decided tostandardize several elements of its internationalretail mix, such as the layout, design of stores,merchandise, quality of products, and private la-bel brands. However, learning from the mistakesmade in Argentina, Falabella adapted some ele-ments of the retail mix that made the retail of-fer more appealing to the local consumer. Forexample, within the deco-home category, a sig-nificant portion of the textiles came from Brazil,Pakistan, or China. However, within the samecategory, the furniture was manufactured locallyin each market due to the high transport cost ofimporting large volumes of large-sized gear.

Due to the strong need to fund its internation-alization activities, Falabella became a publiclytraded company in 1996, when it first sold shareson the Chilean stock market. One hundred mil-lion shares, corresponding to 5% of the firm,were traded, and for the first time in the com-pany’s history, more than 2700 employees be-came shareholders of the firm. During this year,the company also established the financial ser-vices affiliates, the real estate branch for theirreal estate projects, and the textile firms Italmodand Mavesa for increasing their capacity to man-ufacture apparel. A year later, the company

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diversified its service offering by creating Vi-ajes Falabella (travel business) and Seguros Fal-abella (insurance business), both supported bythe credit card CMR.

Even though there were economic difficultiesin Peru during 1997, it was an important year forSAGA Falabella because it widened its offering,created the travel agency, introduced the CMRcard, and partnered with a local insurance com-pany. The role of CMR was crucial for the inter-nationalization of Falabella because consumerscould use it in all of Falabella’s businesses help-ing to improve sales, and it allowed the companyto establish an important link with customers byproviding relevant information regarding theirpreferences for products and services. Similar tothe Argentinean market, Falabella opened a dis-tribution center in Peru in 1998, which allowedmore efficiency in the logistics and sourcing ofthe stores.

Challenges of Internationalization

An important phase of Falabella’s internation-alization process occurred in 1997, when thecompany decided to enter the home improve-ment business and engaged in a joint venturewith the U.S. retailer Home Depot to operatehome improvement stores in Chile. At that time,Home Depot was the world’s largest home im-provement retailer, selling a broad assortment ofmerchandise at competitive prices. Home Depothad been ranked by Fortune magazine as Amer-ica’s Most Admired Specialty Retailer (Marcus& Blank, 2001), so Falabella owners thought thatit was a wonderful opportunity to partner witha knowledgeable and prestigious retailer. Theowners thought that partnering with Home De-pot provided them with knowledge on the homeimprovement industry as well as financial re-sources and brand reputation.

The first Home Depot store outside of NorthAmerica opened in Santiago in August 1998,with 400 Chilean employees denominated asso-ciates by the company. The president of Chileand his wife attended the opening and thousandsof consumers visited the store during the firstmonths (Marcus & Blank, 2001). Home Depotimplemented a standardized version of its re-tail format in Chile because it had worked well

in the United States and Canada. The ownersbelieved that no adaptation to their retail for-mat was necessary and that Home Depot wouldsoon dominate the Chilean market because of itslow prices and excellent service quality (Marcus& Blank, 2001). A second Home Depot storeopened in December 1998, and by the end of2000, Home Depot operated five stores in Chile,four in Santiago, and one in Concepcion.

The following year, a strong financial crisis hitthe Latin American region, which led Falabellato improve its processes and make the necessarychanges to confront this crisis. In Chile, the com-pany emphasized more affordable apparel andhomeware merchandise offerings which led tothe development of several private label brandsin electronics, apparel, and homewares. Thesechanges in the retail merchandise helped thecompany survive the crisis and defend its lead-ership in each market. In addition, through thelicense of ING Bank, Banco Falabella, the fi-nancial business, was launched with small of-fices within the stores and offered consumerscredit in the form of mortgages and auto loans.A year later, Falabella started its online sales inChile and acquired 20% of Farmacias Ahumada(FASA), the largest drugstore chain in Chile.The associations with Home Depot and FASAgave CMR cardholders access to credit at thesechains. In turn, Falabella began selling the lat-ter’s cosmetics and personal care products in itsown stores. The company also acquired TextilVina Ltda., a textile manufacturer located out-side of Santiago, with the intent to increase itsmanufacturing capacity.

In 2001, there was a slow reactivation of theChilean economy, which led Falabella to lookinternally to the Chilean market and improve itsprocesses. In a poor year for Chilean business,Falabella excelled and maintained its position asthe largest department store chain in Chile, with43% of market share. The company decided tostrengthen the construction, property business,and home improvement format in Chile. Fala-bella continued professionalizing the companyby incorporating modern technology, providinga wider product range, opening local distributioncenters, improving customer service, improvingcustomer service, developing loyalty programsand credit cards for consumers, and engaging

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in strong national expansion. The company alsoopened an office in Shanghai to achieve close-ness and better purchase conditions with Chinesesuppliers. The same year, Falabella Viajes be-came the travel agency with the largest extensionin Chile and was among the top four agencies inthe country. Based on the company’s achieve-ment and trajectory in the marketing area, Fal-abella was inducted into the Marketing Hall ofFame Chile, which distinguishes the most ex-ceptional brands in Chile.

Although the Chilean market was showingsigns of improvement, Peru and Argentina wereimmersed in their own local crises, which mo-tivated the company to make some changes toconsolidate its international presence. In Peruthere were many difficulties to overcome, suchas political turbulence, economic recession, andthe entry of the Chilean competitor Ripley. Toadjust to this crisis, in 2001 Falabella decidedto launch the Express format, a smaller versionof their department store format. In Argentina, astrong financial crisis hit and consumer spendingdropped. Instead of withdrawing from the mar-ket, the company decided to make structural andstrategic changes to their merchandise assort-ment and sourcing before continuing expandingin the market. Efforts were concentrated in com-mercialization and optimization of its logisticand store operations rather than opening newstores. To become more competitive in this mar-ket, Falabella incorporated more local brandsand renovated product lines by improving theirquality to satisfy the needs of more demandingconsumers.

In the meantime, it was becoming increas-ingly obvious to Falabella that the Home Depotventure was not delivering the expected results.According to news press articles, Home DepotChile only reached 3% of market share (Mer-curio, 2001).The earliest trouble came from sig-nificant differences between Home Depot andFalabella executives as to how to run the busi-ness in Chile. Much of the failure and losses ofHome Depot Chile were due to the unwillingnessof the American retailer to listen to Falabella’ssuggestions for improvement (Bianchi & Ostale,2006). The American executives in charge ofHome Depot’s operation in Chile were consid-ered to be indifferent to Falabella’s suggestions

to adapt the retail format to local preferences.At the end of 2001, when faced with contin-uous losses, Home Depot decided to leave theChilean market. Although Home Depot neverdisclosed publicly its financial losses, Falabellamentioned in a press conference that during thefirst half of 2001 Home Depot Chile had lossesof over US$1.2 million (Mercurio, 2001). Beforethe end of that year, Falabella bought out HomeDepot’s two-thirds interest in the Chilean op-eration for approximately US$50 million, alsoassuming its debts. Despite the failed venturewith Home Depot, Falabella learned much fromthis experience regarding logistics, technology,customer service, and merchandising. Falabellasoon reversed 3 years of losses under a new brandname: Home Store. This brand was developedby a Chilean advertising agency to resemble theHome Depot brand. The company saw this chainas the vehicle it lacked to continue growing retailsales and made plans to invest for the construc-tion of new outlets.

Becoming a Multiformat Retailer

The year 2002 strengthened the internation-alization process of Falabella. The company in-troduced the CMR credit card in Argentina anddecided to expand and enter the food retail busi-ness by inaugurating the first Tottus hypermarketin Lima. The company realized that the Peruvianmarket was underdeveloped in the food retailsector and viewed this as an opportunity to gain alarger market share in Peru. Moreover, the Peru-vian market was perceived as a low-risk marketin case the format did not work out as plannedbecause it would not affect Falabella in its do-mestic market, where it was market leader. Twomore stores were opened in 2003 and 2004 inthe affluent districts San Isidro and San Miguel.

Another important step for Falabella’s in-ternationalization process came about as aresult of the company’s interest in havinga larger share of the home improvementbusiness. With only a few existing stores, Fal-abella’s market share in this sector was muchsmaller than that of the leader, Sodimac S.A.,which had 51 stores in Chile (and 6 in Colom-bia). After extended negotiations, in 2003 Fala-bella decided to merge with Sodimac, which was

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at the time the largest home improvement retailerin Latin America with operations in Chile andColombia (EIU, 2003). Sodimac was created bya group of construction firms for supply purposesin 1952. During the next 30 years, Sodimac be-came the main distributor of materials for con-struction in Chile. The industry at this time wascomposed of many small stores called ferrete-rias, which sold construction materials, tools,and accessories for home maintenance to profes-sionals and constructors but not to home ownersor general public. In 1982, Sodimac was boughtby Empresas Dersa (Del Rio Family group), andstores were reoriented toward a new format inthe market, Home Center, which offered prod-ucts and services for home improvement to endconsumers and constructors.

Falabella issued to Sodimac’s owners (thefamily group Del Rio) new shares of its stockvalued at US$550 million for 80% of the com-pany and paying cash for the remainder (EIU,2003). This group was lead by Jose Luis delRio, civil engineer, and CEO of Sodimac. As aresult of the acquisition, the brand Home Storewas eliminated and Home Center became thebrand of home improvement stores for Falabella.After the deal was confirmed, the parties spokeenthusiastically about extending Falabella’s in-ternational reach. Thus, this merger not onlyconsolidated Falabella in the home improvementbusiness but also boosted the internationaliza-tion process of the company. At this point, Fala-bella was owned by three family groups: Solari,Cuneo, and Del Rio. According to an interviewto Juan Cuneo, the merging of both sets of fam-ily groups was beneficial for Falabella becauseit allowed the firm to open to new ideas and to anew team of professional executives (Ampuero,2005).

During 2004, the company introduced itshome improvement format in the Peruvianmarket, inaugurating the first Sodimac store inLima. During its first year of operation, thishome improvement format showed good results,confirming its acceptance among Peruvian con-sumers. At the same time, benefiting from theknowledge obtained through Tottus in Peru, Fal-abella decided to enter the food retail business inChile and acquired 88% of San Francisco fromthe Leyton family group, the third largest food

retail chain in Chile. Francisco Leyton was theprevious CEO and owner of the San Franciscochain, and after the acquisition he remained assuch. During that same year, Pablo Turner, theprestigious general manager of Falabella, causeda stir when he left the company after 21 yearsto join one of its closest rivals in the departmentstore sector, Almacenes Paris. He was succeededby Juan Benavides, who was at the time thegeneral manager of the credit card business andwho still remained as CEO of Falabella in 2009.

During 2005, local competition strengthenedin Chile. Falabella’s competitor, Cencosud, ac-quired the department store chain Paris from theGalmez family group and became an imminentthreat to the company due to its multiformatmodel. As a result of this competitor’s action,Falabella decided to retaliate and increase itsfood retailing business, so it opened its first hy-permarket Tottus store in Chile. At that point,Falabella was starting to realize that the key tosucceed in its internationalization process wasto operate integrally as a multiformat retailer inevery market.

The integrated multiformat retailing model isshown in Figure 1. This model suggests that byoperating different retail formats such as depart-ment stores, home improvement stores, and gro-cery stores, the company can achieve economiesof scale in purchasing, distribution, marketing,and with the implementation of private labelbrands. Furthermore, the financial and real estatebusinesses binds it all together because it pro-vides customers with credit to purchase goodsand services from these retail formats. Overall,the model acts as a virtual cycle for obtainingsynergies from purchases and customer intelli-gence to support further international growth.

Colombia

Colombia was an attractive market for Fal-abella because it is a country with more than40 million habitants and several cities had morethan 2 million residents, which is critical forthe retail business. Sodimac had been operat-ing in Colombia since 1995 through a 49%/51%joint venture with the Colombian family con-glomerate Corona. Similar to SAGA, the fam-ily group Corona was highly respected and

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FIGURE 1. Virtuous Cycle Model of Integrated Multiformat Retailing (Color Figure Available Online)

legitimate, with over 125 years of operations inColombia. Its core activity is the production anddistribution of construction materials and homeimprovement products. The group exports tomore than 25 countries, the United States beingits main market.

During 2004 and 2005, three Sodimac storeswere opened in Barranquilla, Pereira, and El Do-rado, and it became the most important homeimprovement retailer in the market. In October2005, the company introduced CMR in Colom-bia and by the end of the year the companyincreased its participation in the joint venturewith the Corona group from 35% to 49%. Thus,even before opening their first department storein Colombia, Falabella had already introducedthe financial business, insurance, and travel ser-vices.

In November 2006, the first Falabella depart-ment store was inaugurated in the Santa Fe shop-ping center located in Bogota, which is one ofthe most modern in Colombia with an excel-lent location and large spaces. The newly ap-pointed country manager was the previous Pe-ruvian country manager and had already beenliving in Colombia for 6 months. He recognizedseveral challenges for the department store for-mat in the Colombian market while he was livingthere. It became evident for him that this marketwas different from that of Peru and Chile butmore similar to Argentina in fashion trends andpurchase behavior, although with a strong baseof local suppliers. The main competitors for Fal-

abella department store in Colombia were spe-cialized boutiques and local tailor shops, as wellas local and international supermarkets.

In Colombia, Falabella top managers decidedto modify their merchandise offer with a mixof 50% apparel and 50% in electronics andhomewares. This decision was made because theelectronics business was less developed in thismarket. Electronic products could only be foundat hypermarkets and some specialized stores, sothe company decided to widen their merchan-dise offerings. Colombia as a textile manufac-turer offered many opportunities to Falabella interms of suppliers for all four international mar-kets, since some Colombian suppliers have beenin Falabella’s stores for many years. Falabellaincorporated local brands within the stores, suchas the coffee giant Juan Valdez. Private labelbrands from Chile and Peru were incorporatedalongside local brands due to the nationalisticcharacteristics of Colombians, which was seenin strong consumer preferences for local brands.Introducing CMR was a challenge for Falabelladue to the lack of financial information and highlevels of informal credit with high rates. Never-theless, by the end of 2007 Falabella had opened400,000 accounts.

Consolidation

Opening department stores in Colombia con-solidated Falabella as a regional integrated mul-tiformat retailer and encouraged the company

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to continue investing in the region to expandtheir retail formats. The company also decidedto engage in organizational changes to increasesynergies and to expand brands in all of themarkets to reinforce its integrated multiformatbusiness model. This led Falabella to make avery important bid in 2007 to acquire D&S, thelargest food retail chain in Chile, in an attempt tostrengthen its food retail format and become thesecond-largest retailer in Latin America (afterWal-Mart in Mexico). This merger could havecreated South America’s biggest retailer. How-ever, the Chilean Anti-Trust Tribunal hesitatedand did not allow the merger, to avoid monopo-listic power (Vargas, 2008).

Although disappointed with the outcome, thecompany continued its consolidation stage as aregional retailer by investing in their integratedbusiness model that allowed achieving synergieswith regard to purchasing and importing vol-umes and customer service. At this point, Fal-abella was able to offer similar products andthe same credit card in all its retail formats andmarkets. The corporation had implemented amatrix organizational structure (employees re-ported directly to country managers and di-vision managers), which allowed informationsharing among country and division managersin Peru, Argentina, or Colombia. The engine be-hind this accelerated international developmentwas a group of highly qualified country man-agers who shared the best practices in all fourmarkets, although the rest of the managementteam was local. Country managers had the roleof communicating to achieve synergy among allbusinesses, which was the essence of the in-tegrated business model. Falabella also placedstrong emphasis on making this conglomerateefficient and competitive by improving stockcontrol processes, technology to have a cus-tomized offering in each store, stronger devel-opment of private label brands, and certificationon sustainability. The company also developedrelationships and links with regional trade asso-ciations and professional bodies in each market,which provided Falabella with regional marketintelligence.

As a result of the consolidation in all fourmarkets, in 2008, the company received severalrecognitions. Tottus, SAGA Falabella, and Sodi-

mac were chosen by the Great Place to WorkInstitute among the 10 best places to work inPeru (GPWI, 2008). Falabella was also incor-porated into the Boston Consulting Group’s listof 100 global companies from emerging mar-kets capable of competing with multinationalsfrom developed markets (BCG, 2009). In ad-dition, Sodimac was acknowledged as a brandwith a high reputation among Chilean consumersand in 2008 published its first sustainability re-port, becoming one of the first retailers in LatinAmerica aligned with the requirements of GlobalReporting Initiative (GRI), which implied re-vealing and systematize a series of good prac-tices in the global business model. GRI is a largemulti–stakeholder-governed institution collabo-rating to provide global standards in sustainabil-ity reporting. Overall, the company had grownin sales and number of stores (see Table 2) to be-come a regional multiformat and financial retailconglomerate.

Falabella had in effect come a long way since1889 when Salvatore Falabella inaugurated thefirst tailor’s shop in Chile. Nevertheless, severalchallenges lay ahead in Falabella’s international-ization journey. Chilean strong competitor Cen-cosud had become an aggressive multiformat re-tailer and was also attempting to become oneof the largest retailers in Latin America. During2007, this company started operations in Colom-bia, Brazil, and Peru, engaging in joint venturesand acquisitions with local chains. Strong com-petition has led both companies to be locatedin the top five retailers of the Latin Americanregion in 2008 (Deloitte, 2009). In addition, astrong recession has started worldwide, whichhas shown to strongly affect retail sales in ev-ery country. However, Falabella announced thatslower economic growth was not affecting theirinvestment plans in the long run (2009 to 2012)and projections of becoming the largest retailerin the Latin American region (Wall Street Jour-nal, 2008).

DISCUSSION

The previous narrative of Falabella’s growthand internationalization illustrates how a re-tailer from an emerging market was capable of

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TAB

LE2.

Fala

bella

Gro

wth

1993

–200

9(in

Ch$

)

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Con

solid

ated

reve

nues

inM

MC

h$

381,

233

466,

254

512,

757

559,

812

632,

359

771,

537

849,

372

1,06

3,09

91,

607,

096

1,97

4,57

22,

278,

193

3,07

1,79

83,

727,

187

3,52

4,44

1

Con

solid

ated

profi

tsin

MM

Ch$

54,5

5961

,538

47,9

2346

,406

49,2

1453

,615

70,5

6410

0,87

212

5,48

116

1,20

121

7,09

217,

0919

7,36

719

9,01

8

CM

R acco

unts

(tho

u-sa

nds)

N/A

N/A

2,20

02,

500

2,60

02,

700

3,00

03,

200

3,40

03,

900

4,30

04,

800

5,00

05,

100

Tota

lnum

ber

ofst

ores

2631

3837

3948

5210

212

113

011

417

521

223

0

Tota

lfloo

rar

ea(m

2 )14

1,19

018

7,60

022

0,80

025

7,56

027

2,40

029

4,57

031

4,57

072

1,00

074

3,17

083

1,26

595

4,41

01,

215,

110

1,45

7,80

01,

494,

317

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becoming leader in the domestic market and animportant player in Latin America. Drawing onthe literature on retail internationalization andthe theoretical perspectives of institutional the-ory, this case provides insights into how a retailerfrom a Latin America expanded internationallyand has been able to compete with large retailersfrom developed markets.

How Do Chilean RetailersInternationalize Compared to RetailersFrom Developed Markets?

The previous narrative shows that Falabella’sinternationalization process followed initially astages approach to internationalization. Initially,the company started operations in a neighboringcountry, Argentina, where it expanded graduallyby learning and committing resources to interna-tionalization. After learning from its mistakes inArgentina, the company entered another neigh-boring country, Peru, through the acquisition ofa local retail chain, which implies higher lev-els of economic and managerial commitment.As the company gained more experience in themarketplace, Falabella grew in these markets byintroducing new retail formats, such as super-market and home improvement stores (Johanson& Vahlne, 1977, 1990). This is consistentwith other studies conducted in Asian countrieson emerging market internationalization, whichfind that emerging market firms tend to investin less developed and geographically proximatecountries (Lall, 1983; London & Hart, 2004).

Moreover, the data from the case study alsosuggest that in later years, Falabella continuedwith an eclectic approach to internationalization(Dunning, 1981). The company’s latest inter-national expansion was Colombia, a more dis-tant market, and the decision to internationalizewas based mostly on the company’s ownershipand location advantages. Falabella has acquiredmanagerial and firm skills to manage an inter-national operation and adapt accordingly to themarket as well as location advantages due to theopportunity of foreign market.

Further, the data from the case studysuggest that Falabella’s internationalizationstrategy included engaging in networks and part-nerships that enabled them to catch up with

more resourceful players from developed mar-kets (Bonaglia, Goldstein, & Mathews, 2007).This was necessary to draw resources and learn-ing from domestic and international partners tobuild the capabilities to operate internationally(Elango & Pattnaik, 2007; Yiu, Bruton, & Lu,2005; Yiu, Lu, Bruton, & Hoskisson, 2007). Inaddition, Falabella faced a lower knowledge gapcompared to retailers from developed countrieswhen operating in these Latin American mar-kets, because these new contexts presented asimilar economic and institutional environmentto the domestic context.

Why Are These Retail Firms SuccessfulInternationally?

Although emerging market firms face finan-cial and technological resource scarcities due tothe lower level of development in their homecountries compared with developed nations, ac-cording to the data, Falabella acquired spe-cific assets and skills to compete internationally.Drawing on institutional theory, Falabella’s in-ternational competitive advantage is associatedwith the firm’s ability to achieve legitimacy inevery market it operates by conforming to the in-stitutional norms of the market. Belonging to afamily conglomerate, engaging in networks andpartnerships and organizational learning, andhaving an experienced management team helpedFalabella gain legitimacy in all its internationalmarkets.

Networks with home and foreign actorshelped Falabella identify the salient norms ofeach market. Ties with regulatory agents, banks,trade associations, universities, and financial in-stitutions provided this retailer with access tocritical resources and information regarding reg-ulations and policies, international data, andmarket opportunities. Moreover, links with re-gional trade associations and professional bodiesprovided Falabella with market intelligence. En-gaging with local partners in Peru and Colombiaallowed Falabella to adopt an appropriate busi-ness style in each market and avoid problemswith nationalistic feelings from host consumers.For example, in Peru they entered through theacquisition of the local chain SAGA and op-erated in this market under the name SAGA

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Falabella. The fact that SAGA had alreadyestablished retail stores, as well as local brandrecognition, reputation, and market understand-ing, facilitated the operation of Falabella inPeru and protected Falabella from nationalisticdemonstrations by consumers due to a latent ri-valry between both countries as a result of histor-ical wars dating back to the nineteenth century.Similarly, in Colombia the family conglomer-ate Corona was highly respected and legitimateand thus helped Falabella introduce the creditcard CMR to the market prior to the openingof its first department store in 2006. Thus, firmsfrom emerging markets can draw on the inter-national experience of their parental and foreignnetworks to operate internationally.

Further, the company is owned by the So-lari family, a well-known conglomerate in Chileand in the Latin American region with a well-established distribution network. Belonging to afamily conglomerate with so many years in themarketplace has helped Falabella achieve sev-eral advantages over foreign companies fromdeveloped markets and made the firm legitimatein the eyes of other emerging-market-relevantactors due to the reputation and tradition pro-vided by the family name. The company exhibitsstrong shared values rooted in the founder’s vi-sion and legacy and a deep understanding ofthe local market and customers. Additionally,Falabella engaged in diverse ownership of es-tablished retail and manufacturing businesses.Top executives well known by the communityand are highly regarded as experienced execu-tives. In fact, in 2007 Falabella was chosen asone of the best-managed companies in LatinAmerica (Euromoney, 2007). Overall, the datasuggest that family groups are substitutesfor imperfect market institutions in emergingeconomies and facilitate legitimacy in emergingeconomies (Martınez, Stohr, & Quiroga, 2007).

In addition, Falabella went through a learn-ing process that included not only expandingabroad but also learning from its own domesticexperience of opening stores across the coun-try. Likewise, Falabella managers learned fromtheir own international mistakes. Falabella’s ini-tial attempt to operate in Argentina did not goas expected. Based on the experience in the Ar-gentinean market, the company made a consid-

erable effort to understand the host marketplaceand consumer preferences better before enteringthe Peruvian and Colombian markets. This sup-ports previous research on retail organizationallearning that argues that increased performanceis more likely for companies that learn as muchas possible from their foreign operations andfrom their mistakes to conform to the relevantinstitutional norms (Palmer & Quinn, 2005). Amain theme that arises from this study is the factthat Falabella also learned a great amount frombeing exposed to mistakes from foreign retailersthat operated in Chile. In particular, due to theclose relationship with Home Depot, Falabellalearned about best practices, service and train-ing, and technology. This allowed the companyto improve its operations abroad by applying thebest practices of foreign retailers but at the sametime adapting the necessary elements of the retailmix. As one manager mentioned, “The arrival ofHome Depot was the best thing that could havehappened to us, it made us a better company.”

Furthermore, Falabella’s managers werehighly professional and internationally experi-enced on how to operate in other emergingeconomies and the adaptations needed in theoverall strategy. Managerial competencies werereflected in human resource management, theeffectiveness of information flow, coordination,organizational structure, and international expe-rience. According to competitors and the busi-ness community, Falabella managers are oneof the most valuable assets of the company.These highly qualified executives with post-graduate degrees had a profound knowledge ofthe industry and remained in the firm longerthan the industry average. Thus, these execu-tives had strong managerial know-how to op-erate in emerging economies. Furthermore, thefact that the company encouraged the hiring oflocal management in each international marketagain allowed the company to be perceived as le-gitimate among suppliers, competitors, and thegeneral business community, even though therewere nationalistic barriers within these markets.

In conclusion, overtime Falabella acquiredspecific knowledge on how to operate success-fully in other emerging markets. The companyhad the capability to research and understandwell each international market and was able to

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standardize several elements of the retail mixacross markets, such as the layout and decora-tion of stores, the communication strategy, andmanagement practices, to achieve a standardizedmarket position focusing on middle-income con-sumers and to create important synergies amongdifferent business areas. Falabella hired as manylocal employees as possible, but the country di-rector was always Chilean with many years ofexperience in the company. These findings areconsistent with previous literature in interna-tional business, which suggests that emergingmarket firms possess marketing knowledge thatmight be unavailable to firms from developedcountries since their strategies consider lowereconomic development (Sinha, 2005; Wrightet al., 2005). This is an important contributionto the international retailing discipline and helpsexplain why retailers from developed countriesfail in emerging markets (Bianchi & Ostale,2006).

CONCLUSIONS

Following several calls for research in emerg-ing markets as a way to advance science (Burgess& Steenkamp, 2006; Wright et al., 2005), theaim of this exploratory study was to examinethe growth and internationalization process of aretailer from an emerging country. This narra-tive of Falabella’s domestic growth and regionalinternationalization process shows that interna-tional success depends on how well a retailerfrom an emerging market conforms to the salientinstitutional norms in each country in which itoperates in order to obtain legitimacy from rel-evant social actors—in other words, how a re-tail firm develops strategic isomorphism of bestpractices in each international market.

Most of the environmental factors mentionedin the international literature as barriers thatinternational firms encounter when expandingabroad were reflected in the institutional normsof retailing. For example, host government laws,cultural factors, competitive factors, and socialelements were all reflected in the institutionalnorms of each country, because they had to op-erate in a new environment with different salientnorms that were sometimes difficult to perceive.

These findings support the notion that retail firmsmay be very successful in their home markets,but they must also acknowledge the environmen-tal differences and the barriers that can exist in anew market, especially those related to the cul-tural and social environment.

Managers that participate in the international-ization process should be aware that differencesexist among countries, even between geograph-ically close countries such as the United States,Mexico, and Canada. The main issue for inter-national retail managers is that they must adapttheir retail practices and formats to fit the needsand expectations of host consumers, suppliers,employees, families, and business community.They must make modifications to their retail con-cept in such a way that they still maintain theirsource of competitive advantage. The main ob-jective, therefore, is to implement this source ofadvantage effectively and gain legitimacy fromall key social actors. In conclusion, internationalretailers from developed countries should not as-sume that their format would necessarily be suc-cessful in foreign markets. The level of saliencyof the institutional norms and the strength of lo-cal competitors are both important to considerwhen deciding on the international retail strat-egy.

Finally, the case study of Falabella suggeststhat the top managers of the domestic headquar-ters must be committed and flexible to adaptationduring the whole internationalization process,not only prior to entering the market. This is acontinuous and dynamic process and does notfinish once the retailer is already operating in anew market. On the contrary, this period is whenretail executives must be most alert and com-mitted to this endeavor. Future research shouldexamine the managerial characteristics of inter-national retailers necessary to increase the like-lihood of success in foreign markets.

The growth and international expansion ofretailers from emerging countries are in theirearly stages of development and future researchis recommended to investigate the experienceof other emerging markets retailers to identifyaspects that are new and unique to emergingmarket firms. Thus, the themes identified in thedata should be explored in more depth with dif-ferent samples and retail formats, in order to

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develop broader theoretical frameworks of retailinternationalization. Additionally, this study isbased on a single case, which limits its gen-eralizability. Several of the themes identifiedin the data should be explored in more depthand quantitatively with different industry sec-tors. This will provide important insights fordeveloping broader and more generalizable the-oretical frameworks of emerging market retailinternationalization.

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the growth and international expansion of an emerging market retailer in latin america

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