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Retailers Sing The Blues

A sluggish economy, low consumer confidence, higher energy prices, and stiffer competition have forced the local retail industry to brace for a slump.


April 5, 2001
Copyright © 2001 CARIBBEAN BUSINESS. All Rights Reserved.

This too shall pass: Whether Mother’s Day or Back-to-School, Christmas or next year, no one knows; but there will be an end to the retail blues. And consumers will start to spend again.

It was not a December to remember. After years of double-digit increases topped with record sales in 1998 and 1999, this past Christmas shopping season was a drag.

Indeed, lackluster sales gave local retailers–like their stateside counterparts–no reason to be jolly. It was a bitter-cold shopping season in the tropics. Now with spring almost here, flowers are about to bloom but sales are not.

Sale! Super-Sale! Liquidation-Sale! 50, 60, 70% off! Retailers almost had to give stuff away in January and February to get rid of excess inventory.

From boom to gloom, retail sales in Puerto Rico are down 8% to 15% compared to the same period last year. And experts believe these are conservative figures as many retailers claim to be down by 20% from last year’s numbers. Even retailers located at the one-and-only, thought-unbeatable, Plaza Las Americas are feeling the pinch.

"It’s death," said one retail consultant. "Horrible numbers last Christmas. People are still not going out to shop. Everyone is complaining. Stateside home offices of local tenants are calling to see what is going on in Puerto Rico."

There is no one factor to blame. Stock market fumbling, economic slowdown, government transitions both here and in the U.S., loud grumbling by incoming administrations here and stateside about large government deficits and impending economic disaster, the resulting nosedive in consumer confidence, high gasoline and electricity prices, burgeoning retail space, and increased competition all contribute to the dreary situation.

Announcements of massive layoffs in U.S. and local manufacturing companies aggravate the problem. In the first three months of this year alone, more than 6,000 people in Puerto Rico have been or will be left without jobs due to plant closings, the latest ones hogging headlines being Star-Kist in Mayaguez and Sun-Oil in Yabucoa which combined will leave 2,800 jobless.

But this is just the latest in a string of ongoing layoffs during the past years. In the last five years more than 11,400 jobs have been cut in the local manufacturing industry, from 152,600 people in 1995 to 141,200 in 2000, according to Puerto Rico’s Work & Human Resource Department statistics.

"People are being careful, they are not spending as they did. Many of them are suddenly without jobs, others are scared about their jobs in the future," said a landlord. "Some retailers had gone crazy expanding before the downturn and now the sales aren’t there."

Although many in the retail industry feel the current slump is not a permanent situation, still no one knows for sure when will it end. Industry estimates vary from Mother’s Day in May, to the pre-holiday season in this year’s last quarter. Others don’t see the end of the retail slump until next year. And still others are wondering whether the slump will turn into a full recession. No one really knows. And uncertainty is business’ worst enemy.

"It will probably take one and a half years for sales to start picking up," an industry source said. "To a certain extent, our recovery depends on the revival on the U.S. mainland. Still, there are certain local situations that could tip the balance in either direction."

The industry speaks out

An industry source warns that when it comes to consumer confidence, talk of gloom and doom can become a self-fulfilling prophecy. "If we keep telling people how badly off we are they will respond accordingly," he said. Still, the fact can’t be overlooked.

"There is a slump and I think every retailer is feeling it," said Mary Ann Savarese, vice president of real estate for RD Management, owners and operators of Plaza Centro, Los Colobos, and Plaza Mayor among others. "People are concerned because of the situation in the manufacturing industry. They are also waiting to see what the governor will be able to do and they are slow to go out and spend other than on basic necessities. I think sales are down all over the island, but sales will climb back up."

Big-ticket items such as furniture are hardest hit, however, women’s and men’s ready to wear, and music are also down.

A landlord who did not want to be identified said so far this year, three retailers have sent in letters requesting rent concessions "I usually receive one letter every 12 or 18 months. The fact that they are sending these letters shows that someone in another shopping center is offering these concessions. It’s a spillover effect," said the landlord.

Rent concessions are reduction in rent on a permanent or temporary basis. Tenants request them when business is bad or during renegotiation of a lease.

"It’s survival of the fittest," said Jorge Fournier, executive vice president of Commercial Centers Management, owners of Plaza Caparra and Santa Rosa Mall. "Retailers who have cash will start lowering margins to spur sales, which will definitely affect their profitability. Retail construction is probably going to decline. But we will see the continued expansion of the big-box discounters, and a heavy-discount environment for the upcoming holidays."

"Sales are down all across the board," said real estate consultant Atilio Zepeda. "Retailers are definitely not selling what they were last year. A big percentage of retailers have said sales are pretty tight at the moment."

All is not bleak. "It’s not the end of retail. Retailing goes in cycles," said Mike Nolla, senior vice president of Manley-Berenson Assoc. Puerto Rico, operators of Rio Hondo and Montehiedra Town Center. "The last cycle when sales slowed down was in the early 1990s during the Persian Gulf War. Still, these are times when you can tell the men from the boys," he continued.

"We have a strong underground economy and we have the capacity to survive these things," he continued, estimating "the worst that can happen is that sales will be flat compared to last year." He added, "Business people just have to adjust their inventory and their costs to a lower level of sales and they’ll survive the year."

"We started feeling the slowdown last year and things are not very good this year," said Juliana Castillo, marketing manager Plaza Carolina. "We expect to end this year flat," she added. According to Castillo, music and women’s clothing are affected the most. Although sales in December 2000 were down compared to December 1999, Plaza Carolina ended the year with a cumulative 2% increase compared to the year 1999.

For other retailers, however, things are going rather well. Erasmo-Don Zabala, owner of Centro Gran Caribe Mall in Vega Alta said, "Compared to last year, sales have been modestly good. I think it is because now, as a regional mall, we receive an influx of new customers." Besides Rio Hondo and Plaza del Sol, Centro Gran Caribe doesn’t have any significant competition in the north coast. Last year Centro Gran Caribe expanded the shopping center from 170,000 square feet to 420,000 square feet.

Plaza Las Americas general manager Franklin Domenech said the shopping center ended the year 2000 with 20% increase compared to 1999, thanks to the extensive expansion the mall opened before Christmas. Still, in terms of same-store sales, which include only stores that have been open at least a year, the mall recorded only single-digit growth.

Across town, at San Patricio Plaza, overall sales are flat compared to last year. But Miguel Gonzalez, operations manager at Caparra Center Assoc., owners and operators of San Patricio, says it’s six of one, half a dozen of the other. "While some stores are affected, others have even posted double-digit increases."

Tough Competition

Retailers are not yet claiming saturation, but stiffer competition is definitely taking the local retail industry to another level.

"There has been so much new retail construction in the past years that there has to be a catch-up period for sales to level off as people run to the new places to shop," said Larry Campbell, president of Sterling Consulting. "Business gets spread. People have only so much money and if you add 100 stores they will spend it among those stores."

"Its not about saturation," said Nolla. "Puerto Rico is not saturated and will not be for a very long time." He added, "Under normal economic conditions, there’s enough for everyone and more."

Fournier attributes the sluggish sales more to the economic slowdown than to market saturation. "Some categories are way down, but others have remained strong," he said, noting that Santa Rosa mall first-quarter sales of women’s clothing are down by 20% compared to the same period last year. To fight the sales slowdown, which he thinks may last several months, Fournier is adding stores targeting low and middle-income markets. This year the mall will open lower priced Payless Shoe Source, Parade of Shoes, and KB Toys.

Although casual-clothing retailer Bora-Bora recorded double-digit increases in its Plaza Las Americas store this January and February, company president Oscar Juelle was prepared. "We’d made our adjustments," he said. "It’s tough out there right now. One has to think on one’s feet and look for ways to be efficient. I know a lot of people in the industry that are crying. The No.1 and No.2 in each category will survive, but there is not going to be any room for numbers three and four any more. There’s too much competition," he said.

Department stores down; discount stores up

The big winners in the present shuffle are discount stores. As on the mainland, the trend in Puerto Rico is toward the expansion of the big-box retailer, which offers merchandise at rock-bottom prices.

While JCPenney in Puerto Rico is closing the furniture and home appliance departments in its Plaza Las Americas and Plaza Carolina stores, rumors persist about Macy’s local store not making its sales projections, and Sears sales coming in below expectations. Even Wal-Mart is all but showing signs of weakness.

Macy’s executives were not available to comment on the store’s situation, but a Macy’s employee said sales were very weak.

CARIBBEAN BUSINESS has learned that Macy’s is shuffling employees. Peter Sachse, director of stores for Macy’s East has moved to work in Burdines, another Federated Department Stores company, and Nancy Cruz of public relations is no longer with the company.

Sears ended the year 2000 below projections and its January and February sales are still below last year, Jose Burgos, vice president of marketing told CARIBBEAN BUSINESS. He expects sales to pick up during the summer. In order to boost sales, the company is trying different kinds of advertising, said Burgos.

Federico Gonzalez Denton, director of corporate affairs for Wal-Mart Puerto Rico, said whenever there is an economic slowdown, people look to save money, which benefits discount retailers. "Traditionally, this is not a strong time for retailers. As the economy slows down, we are being very conservative. But we are hopeful in our estimates for the year, as we were for this past Christmas," he said. Wal-Mart Puerto Rico was one of the few big winners last Christmas, posting double-digit increases compared to last year’s numbers.

This month Wal-Mart will open its first supercenter on the island, an 180,000-square-foot department store and full supermarket in one site. Besides the supercenter, the company plans to open two additional Sam’s Club stores in Hatillo and Canovanas at an investment of some $28 million.

Costco will open shop before year’s end in Plaza Centro and Bayamon.


There is no crystal ball but there is always a sense.

"I hope people will be feeling more comfortable by Christmas and we’ll see people with more confidence, spending more freely," said Savarese. "This too shall pass. Puerto Rico is still an incredibly good market."

"We don’t expect sales to increase before next fall. The government’s deficit, continued layoffs, and without any tax-cuts here, I don’t see any reason why things are going to get better before that," said Campbell.

"I don’t think sales will pick up before this year’s fourth quarter," said Fournier.

Gonzalez from San Patricio said, "I think that it will be in the year’s last quarter that sales will kick off because by then the adjustments in terms of interest rates, and new government initiatives will have had their impact." Meanwhile, Hernan Charneco, president of San Patricio, believes things may start to move for the Mother’s Day and Father’s Day holidays.

"A lot of people feel business will come back but the big question is when; and how retailers will survive till that time," and industry source said. " So fasten your seatbelts and pray."

This Caribbean Business article appears courtesy of Casiano Communications.
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