Cifra, S.A. de C.V.

José Maria Castorena 470
Delegacion Cuajimalpa
05200 Mexico City, DF
Mexico
52-5-327-9211
Fax: 52-5-327-9259

Public Company
Incorporated: as Aurrera S.A.
Sales: $4.6 billion
Employees: 39,934
Stock Exchanges: Bolsa
SICs: 5310 Department Stores; 5411 Grocery Stores; 5812
Eating Places

Cifra, S.A. de C.V. is Mexico’s largest retailer, its second largest publicly owned company, and, according to a 1993 Euromoney survey, Latin America’s best-run company. Among Mexican retailers Cifra was the first to be publicly owned, offer generic brands, and include clothing, food, and hardware within a single store. The Cifra empire was vast in the mid-1990s, including department stores, discount warehouse stores, supermarkets and hypermarkets, and restaurants. More than three-quarters were in the Mexico City area, which was the largest metropolitan area in Latin America and was Mexico’s largest and fastest-growing region. In 1991 Cifra began greatly expanding its operations, forming joint ventures with Wal-Mart Stores, Inc., the largest retailer in the United States.

Cifra was founded in 1958 by Jerónimo Arango. The son of a Spanish immigrant to Mexico who prospered in the textile business, Arango spent his youth studying art and literature at several American universities and traveling in Spain, Mexico, and the United States. While in New York City he saw a crowd waiting patiently for the opportunity to enter E.J. Korvette, then a pioneering Fifth Avenue discount department store. Impressed by Korvette’s success, he persuaded his father to lend him the equivalent in pesos of $240,000 so that he could organize a similar venture with his two brothers, Placido and Manuel. Called Aurrera Bolĺvar, this discount store was opened in downtown Mexico City in 1958.

Like the Korvette store, Aurrera Bolivar immediately drew the public, and—also like Korvette’s—it attracted the hostility of established retailers, who felt threatened by competition engendered by Aurrera Bolivar’s low prices. In fact, the store was selling household goods and clothing at 20 percent below manufacturers’s list prices, while established retailers were marking them up by 40 to 45 percent. Soon the brothers had to locate alternate sources of goods as far away as Guadalajara and Monterrey because the Arangos’s suppliers were threatened with boycott by angry rivals. Nevertheless, Aurrera reportedly won sympathy by publicizing its competitors’s tactics during its sponsorship of the popular television show “The 64,000 Peso Question.” By 1965 eight Aurrera stores were in existence, drawing $16 million in sales. The company’s first Superama supermarket opened in 1960 and the first Vip restaurant in 1964.

In 1965 Jewel Cos. of Chicago organized a joint venture with the Arango brothers to start new stores, and a year later Jewel acquired a 49 percent stake in the business for about U.S. $20 million. While Manuel and Placido Arango took their part of the money and left the business to establish other enterprises, Jerónimo studied modern retailing at Jewel headquarters in Chicago. In 1970 he opened the first of the firm’s Bodega Aurrera discount warehouse stores and Suburbia department stores. Aurrera S.A. became publicly owned in 1976, the year it opened its first hypermarket, and was so successful that by 1981 Jewel’s Mexican operations accounted for nearly one-third of its income. Jewel’s stake had dropped to 41.7 percent of the outstanding shares by 1980 and would eventually fall to 36.1 percent.

Hard times came in 1982, when the peso collapsed because of huge foreign debt, touching off an inflationary crisis and a severe recession that lasted for years. But Arango was confident enough of the future to buy back Jewel’s share in the business (which he renamed Cifra in 1984) from its successor, American Stores Co., for about $53.4 million. He kept all existing stores open and retained its employees, although they were expected to work longer hours and those who left were not replaced.

Cifra’s emphasis on discounting helped sustain the company during these dark years. Located in the poorer neighborhoods of Mexico City, the Bodega Aurrera stores, for example, stocked all types of nonperishable goods to the ceiling and offered prices as low as half those of other retailers. By the end of 1989 Cifra was in its best financial shape ever. It had grown in sales by 20 percent or more in every year of the decade. Its sales in 1989 were about $550 million, and its stock more than tripled in value during the year.

In 1990 Cifra’s sales grew by 26 percent, and between 1990 and 1991 its stock shot up almost fivefold. At the end of 1991 there were 38 Almacenes Aurrera self-service department stores, selling general merchandise, clothing, and supermarket items. The high-income Superama chain consisted of 34 freestanding community supermarkets. Next came the 29 Bodega Aurrera discount warehouse stores and the 29 Suburbia family-oriented department stores, selling discount clothing and dry goods. The Vips restaurant operations consisted of 59 cafeterias, 15 El Porton restaurants (initiated in 1978), and four more specialized restaurants. Gran Bazar was the name for Cifra’s hypermarkets, and Sigla for its real estate interests in opening new shopping centers.

In May 1992 Cifra announced that it intended to invest $211 million to open 12 new stores during the year and another $68 million to renovate 78 existing ones. The restaurants were modernized to attract new and younger customers. In addition, an investment of $80 million was to be made in such technological developments as information and point-of-sale systems, satellite-based communications, and complex data-processing units. By this time, the implementation of a computerized inventory-control system had made the company the leader in the industry for inventory management. Its point-of-sale systems allowed it to collect, analyze, and make use of vast amounts of data concerning consumer preferences and the effects of price changes. Cifra’s sales per square foot were almost twice as high in 1992 as those of its competitors, and its liquidity in cash and equivalents as well as its inventory turnover were the highest in the industry.

Cifra’s growth remained impressive in 1992. Twenty-three units were built that year. Sales rose by 20.7 percent to $3.7 billion. Operating profits increased by 32 percent during 1992. As much as 31 percent of the company’s earnings came from interest income on its considerable cash surplus. An investor buying $1 of Cifra B shares at the start of 1988 had seen his investment reach $39.46 at the end of 1992. Sales in fiscal 1993 rose to $4.6 billion and were the best per square foot in Mexico.

Cifra formed two joint ventures with Wal-Mart in 1991. One, Commercializadora Mexico-Americana, promoted trade between Mexico and the United States. The other, Club Aurrera, was directed at small businesses and their employees and was patterned on Wal-Mart’s Sam’s Club. In fact, after a short period of time the Club Aurrera stores renamed Sam’s Club. The first Club Aurrera opened late in 1991 and three more were opened in 1992. This joint venture was serving many customers wishing to buy in quantity. Like Sam’s Club, Club Aurrera members-only stores typically offered just one brand of an item stacked to the rafters in cartons. The customer base was expected to include restaurants, discos, and clubs.

In May 1992 the Cifra-Wal-Mart joint venture was expanded to oversee all the new Almacenes Aurrera, Superama, Bodega, and Gran Bazar stores. The rationale behind this move was that Wal-Mart’s technology and marketing know-how would fuel Cifra’s growth to otherwise unattainable levels. One analyst also noted that it precluded the prospect of Wal-Mart forming links with another Mexican retailer or opening stores in Mexico on its own.

By June 1994 there were three Almacenes Aurrera stores, 18 Bodega stores, three Superama Supermarkets, two Suburbia stores, 11 Vips restuarants, ten Sam’s Clubs, and three Wal-Mart Supercenters. combination stores. Wal-Mart had built three Supercenters in 1993 and early 1994, one of which, with 244,000 square feet, became the largest Wal-Mart Supercenter in the world. And a revision of the agreement added the field of collaboration to Cifra’s restaurant and clothing-store divisions, previously excluded.

Wal-Mart’s expertise was considered especially important in the creation of regional distribution centers. Because Cifra had concentrated on the Mexico City metropolitan area, it was relatively inexperienced in the efficient delivery of supplies to other cities, including Guadalajara, León, and Monterrey to the north and west and Villahermosa and Mérida to the south and east. During this time, the collaboration between Cifra and Wal-Mart was managed primarily by Mexican nationals in Mexico. Wal-Mart was contributing a few dozen Mexican expatriates to help out, but their roles were shifting increasingly to Mexican citizens as skills were passed on to local personnel, according to Bob Martin, president and chief executive officer of Wal-Mart International.

A prototype Almacenes Aurrera was erected in the Mexico City suburb of Las Auguilas. Executed by Fitch Inc. of Worthington, Ohio, the store featured white walls and color codes for the major merchandise categories. New fixtures allowed more prominent opportunities for display and highlighting than in the past, with red—Aurrera’s signature color—drawing attention to new merchandise, sales items, and other promotions. Freestanding archways in the back corners were intended to draw customers to the perimeter. The parqueteria, an outside bottle-return, bag-check, and security checkpoint standard in Mexico, was sheltered to shield shoppers from the elements.

The creation of the North American Free Trade Agreement (NAFTA) at the beginning of 1994 deepened the collaboration between Cifra and Wal-Mart. In January 1994 the joint venture was extended to include all future Suburbia stores and Vip restaurants. And in October 1994 Cifra and Wal-Mart announced a 50-50 joint venture with Dillard Department Stores, Inc. to build and operate Dillard stores in Mexico. The first Dillard store was expected to open in Monterrey in late 1995.

In late 1994 Cifra was reportedly planning to invest heavily in the expansion of its store and restaurant chains. By that time the Cifra empire, by itself and in combination with Wal-Mart, consisted of 35 Almacenes Aurrera, 58 Bodegas Aurrera, 36 Superamas, 33 Suburbias, 22 Sam’s Clubs, and 11 Wal-Mart stores, in addition to 114 Vips cafeterias and restaurants.

The mid-1990s presented some challenges for Cifra. The company’s financial reportings for 1993 proved disappointing to many analysts, and the company’s stock was trading at about 28 times estimated 1994 earnings, although a cost-cutting campaign helped the company’s operating profits to climb 23 percent during the first quarter of 1994. A blow was then dealt to all publicly traded Mexican companies in 1994, when the value of shares on the Bolsa stock exchange experienced a sharp drop. Mexican stocks ended the year down by 44 percent. Finally, the devaluation of the peso in December 1994 triggered a financial panic, and during the first half of January 1995 Mexican stocks dropped another 28 percent. Wal-Mart and Cifra announced during the month that plans to open 24 new stores in Mexico during 1995 were “temporarily on hold” due to the country’s economic conditions. Cifra representatives noted, however, that this decision did not affect the long term growth strategy of the joint venture, nor did it change the level of commitment by both partners in the association. Moreover, analysts noted that one point in favor of Cifra’s future was its lack of foreigncurrency debt.

Principal Subsidiaries

Controladora de Tiendas de Descuento; Cifra-Mart; Wal-Mart Holding Company Mexico; Comerciali-zadora Mexico-Americana.

Further Reading

“Cifra: Aiming to Be a Mexican Wal-Mart,” Euromoney, May 1993, pp. 107–108.

“Cifra, SA,” Latin Finance, November 1992, pp. 33–34.

“Merger of Merchandising Magnates,” Business Mexico, June 1994, pp. 22–24.

Millman, Joel, “The Merchant of Mexico,” Forbes, August 5, 1991, pp. 80–81.

Moffett, Matt, “Mexican Retailers Jockey for Position, Hoping to Win Big as Nation Recovers,” Wall Street Journal, August 26, 1991, p. A4.

Sandier, Linda, “Retailer Cifra Lights Up Mexican Stock Market, But Its Spectacular Run-Up Raises Caution Flag,” Wall Street Journal, September 9, 1991, p. C6.

Torres, Craig, “Mexican Retailer Cifra, with a High Multiple and Disappointing Results, Falls into Disfavor,” Wall Street Journal, February 23, 1994, p. C2.

—Robert Halasz