Keynote Address by Stan Eichelbaum to the International Council of Shopping Centers Conference of the Americas

Latin America: An Overview of the Shopping Center Industry

Miami, Florida, Session Chair: Stanley Eichelbaum, President, Marketing Developments, Inc.

Speech text begins:

Good Morning,

I am happy to have been asked to chair this very important session with an exceptional group of panelists. This morning we are going to discuss Latin America and the Caribbean as a region of retailing opportunity – Is it a desirable place to do business? But we will differ in process … and in findings from most past panels. How will we differ? The norm of process is to bring in a noted economist who ponders on about production economics, usually totally GDP based, with highly appropriate, but unflexing concern about stability.

Again, this morning we take a different view…an assessment I believe more focused toward the issues related to retail performance. We acknowledge perceptions questioning about Latin America…in moderation described as an economically challenging history. And, as often described, perception is reality…Wrong reality, you will soon believe, if described as the future. Let’s turn the corner and say “The past is the past” and the “Future is the Future". This morning we look at Latin America on a consumption, absorption of retail product basis…The substance of retail performance.

As a company, we at Marketing Developments, Inc. have been fortunate over the past several years to be involved in feasibility research, productivity studies, tenant mix coordination and development planning of a number of retail, entertainment and mixed use projects throughout Latin America and over twenty other countries around the world. Our role is to decide the retail and/or entertainment potential…to review for investors the performance realities likely from their investment…to coordinate right market demand driven tenant mixes…to review from a retail operational perspective project soundness…and to create plans that assure competitive and maximized performance. We, as a company have assembled and been privy to market and operational data of all regions permitting capability of area comparisons. For this specific session, we have gone even further in information assemblage to assure fair assessment of the region. We have surveyed a number of firms and utilized many other research sources and I can report that after all assessment we have been reinforced in our beliefs of the high potential of retail performance…of the great opportunity in Latin America.

We acknowledge the past performance turbulence…and that there are some seemingly high concern statistical realities…the high overall poverty number…the high inflation pockets …devaluation vulnerability…government regulatory practices and the reported challenges in assembling quality data, though as a company we can claim regular success at gathering high levels of statistical material.

In this session we will talk about the quality…what can be termed the mature shopping centers of the region and for common reference the mature market stats assembled, in large part, from the developers of the mature centers…and we will compare all to the other high expansion markets U.S. and global retailers seem to be assessing for expansion. The one area left out will be China because of their always immense scale and continuing economic and operational complexities.

Before we start the facts and research assessment part of the session, let me introduce our distinguished panelists who will answer yours and my questions at the end of the presentation. As a group, they represent properties in eleven countries and territories. They, with high levels of experience, cover the disciplines of development, leasing, brokerage and operations. Hold on as we start a very interesting and enlightening tour of the statistics of Latin America and the Caribbean. Per the time constraints of the session we will move at very fast pace.

It is a shockingly favorable statistic that Latin America represents a higher economically active population than not only the United States and Canada but also Western and Eastern Europe and other regions of the world. In awareness of retailers’ desires for major markets with high population densities, Latin America has seven mega markets of over 5 million people versus the United States only having three markets. We all know retailers’ desire for a network for sake of transportation and servicing of major markets in a constant geographical flow. This slide exhibits all of Latin America’s trade areas of over 2 million in population, tracking continuously down both coasts of Latin America for easy servicing.

Another very important statistic telling the potential of Latin America is that the median age of Latin America and the Caribbean is 24.0 years versus 35.9, in the United States. Latin America again, on a world scale, ranks well below Asia, eastern Europe and Western Europe in median age.

And more importantly, as this chart exhibits, Latin America represents 52.1 million people between the ages of 15 and 19 compared to 21.7 million 15-19 year olds in the United States; almost a 250% advantage.

As you can see, Latin America ranks double most of the other critical areas highlighted within this map graph. What this truly tells us is that Latin America is the market of the next decade. These 15-19 year olds will carry it forward with terrific levels of momentum. And, yes, while inflation does exist at high levels in several markets of Latin America, there must be recognition that today there are 10 trade areas in Latin America and the Caribbean where inflation has been curtailed to under 10% representing, overall, a market of 270 million people in trade areas with inflation under 10%. Also highlighting this great region’s potential is the fact that Latin America and the Caribbean ranks very high in average percentage growth of private consumption. Yes, East and South Asia as very dynamic markets rank highest but Latin America ranks almost 45% higher than either Europe or central Asia and over 70% higher than the United States and Canada or sub-Sahara Africa.

Next, we took a look at the state of the art of shopping centers in Latin America. The region represents emerging world class chains,strong local retailing representation…aggressive new centers and center concepts…entertainment innovation…quality renovations and very aggressive marketing. The quality projects in the region are exemplified by MetroCentro in San Juan, Costa Rica, Plaza Del Sol's food court in San Juan, Puerto Rico, a new entertainment concept, Show Center, in Buenos Aires, the renovated Plaza Rio Hondo in San Juan, Puerto Rico, Arrowstreet’s recent renovation of the long deserted Abasto Marketplace in Buenos Aires now featuring a state-of-the-art Hoyt Cinema, exceptional retail space at MetroCentro in San Salvador and retailing concept progressions such as the highly successful Nova America outlet center in Rio De Janeiro. Stateside and global retailers are finding great success throughout the region including Walmart, Carrofour and Zara who spoke so favorably about the region this morning. And there are great retailers emerging from the region who are now talking about their own globalization programs such as Liverpool Department Stores from Mexico, Musimondo Mega Stores from Buenos Aires and the exceptionally tasty Freddo Ice Cream from Buenos Aires and Chocolate from the same region. Substantial marketing efforts in the region are exemplified by the exceptional Christmas initiative at Barra Shopping in Rio de Janeiro, this extraordinary advertising campaign by Montevideo Shopping in Uruguay or this type of value promotion by centers throughout the region.

And what does the future spell? A project we have been fortunate enough to handle the planning of exemplifies the future quality of development – multi-use very dramatic Crystal Shopping in Porto Alegro, Brazil and DDG's currently active renovation of Unicentro El Marques shopping center in Caracas, Venezuela which will make it into a state-of-the-art entertainment shopping place as well as DDG’s effort at Guayaquil, Ecuador with San Marino shopping center. Exemplifying the great entertainment efforts is New York City Center by Grupo Multiplan opening soon in Rio de Janeiro and the dramatic RTKL created shopping presentation intended at Jockey Plaza in Sao Paulo.

We also thought it worthwhile to look at comparisons of income and operating costs of shopping centers in Latin America and the Caribbean against those of the United States and Canada. In the area of sales, the averaging of the nine portfolios from leading developers showed them performing at 60% over the United States super regional center performance. The centers of Latin America and the Caribbean average $4,174 per sq. meter versus the reported $2,528 per sq. meter in the United States. Specialty rents generated by developers within the sampling averaged $326 per meter annually against a stateside average of $228. On the expense side, United States developers are charging retailers almost 55% higher in CAM at $114 per sq. meter versus $73 per meter for Latin America and the Caribbean. There may be questioning of the stability of retailing in the region, but the sampling reality was that, in fact, Latin America achieves a slightly higher occupancy rate among mature developers than reported in super regional centers in the United States. And in what could be termed problem or additional potential, Latin American shopping centers average six days closed per year for holidays versus only two in the United States. Again, we would in assessment, say this exemplifies potential for further performance if the closing days are bought down.

And the most telling statistic of all, is the fact that Latin America averages .04 meters per capita of retail space versus 1.7 meters in the United States – 40 times as much. Even Puerto Rico in the Caribbean operates with of the competitive levels prevalent stateside with Uraquay, Costa Rica, Chili, Paraguay and other countries having the retail space of many European countries and at 1/30 the space in the United States.

In related sales data this chart shows sales performance in shopping centers by retailers in Venezuela, Brazil, Chili and Uruguay at 40-180% higher than in the United States.

Other additional dynamics worth noting from the survey of developers, seven out of nine countries reported hypermarket activity. The category killer proliferation is just starting to happen in the region permitting specialty retailers higher performance potential for some time yet. Most countries have a department store infrastructure but not as severe as the U.S. as competition to specialty store productivity. All but one country in the survey reported, as mentioned earlier, occupancy rates above U.S. norms. In the assessment of the region, we found it also worthwhile to go back through our own company’s recent feasibility and demand studies to review the potential in different categories. Those statistics, again, are just a quick sampling recap of recent specific feasibility and tenant mix analysis findings from recent Marketing Developments, Inc. studies of Latin America and U.S. Centers. As you’ll see, they highlight the terrific opportunity retailers can find in select categories. Exemplary were the recent Marketing Developments, Inc. theater feasibility demand studies in Latin America with our last three studies showing demand for 25-75 additional screens per market as compared to the last study undertaken in the United States which revealed a market already seven screens overbuilt in which a project, if developed, would create a 30 screen excess.

In the area of women’s clothing, our last three studies in Latin America have shown a 31-60% space shortfall or under representation of women’s apparel stores within the tenant mixes. In the area of family apparel, two recent studies showed a 38% and 50% shortfall of family apparel selling space but a third study showed a 26% excess of space highlighting again a need for exacting demand studies in the feasibility and tenant mix planning within shopping centers within the region. This is reinforced by the fact that our last three studies in Latin America have shown the centers to have from 36-39% space excesses allocated to the shoe category.

As a final assessment, we thought a report card on Latin America a worthwhile endeavor and asked our staff experienced in the new center feasibility and operating property productivity studies and development in the region to rate the Latin American shopping center indicators versus the United States in several categories. And these comparisons were passed to several others in the industry who reaffirmed pretty much the same ratings. As to development standards based on the many new, exciting concepts and designs, consensus was that Latin America and the Caribbean ranks at an A-. In the inventory of specialty retailers prevalent in the region, it was rated at a B+ fairly far ahead of the B- rating given to the United States. Contradictory to the thoughts of many, substantially more concepts are coming ahead in Latin America than stateside… and possibly more than in any of the area of the world. Also, the retailers are often better defined for customers clarity in merchandising and operations. In entertainment concepts which as feasibility specialists and development planners, for us there’s an overall concern on most concepts coming forward and how many do not move to actual construction but fail the test of feasibility. Latin America and the Caribbean ranked at a C+, far ahead of the USA ranking at a C- to D+. In operational standards, the Latin America report card was a very high B+ recognizing the fact that Latin America was ahead of the United States in creating information centers, family restrooms, medical facilities within shopping centers, improved services, in many cases 5-10 years ahead of the United States centers which were given also a strong B to B- rating. And in consumer marketing, the better developers of Latin America were given an A to B- rating because there is great variance between developers, but this is still substantially ahead of the USA which ranked at C to D based on the low levels of funding that developers provide for programs.

In summary, it was assessed that Latin America ranks substantially higher in tenant mix refinement, consumer marketing and retailer development. The areas where there was almost a tie – tenant interaction and maintenance. The areas where the region lagged behind the United States and Canada is in physical plant updating – renovations and updating are not undertaken at the same pace as the USA - and in feasibility analysis and use assessment per structuring and disciplining the planning initiative. Areas of caution that were highlighted as concerns for the future of Latin American development include:

• First of all, the individual market overbuilding that seems to be occurring in several markets and following the path of over-saturation that occurred in several markets of Asia before their recent turmoil.
• The accelerating hypermaket dominance in many markets and the need for developers to have price sensitive tenant mixes to assure appeal to the masses
• The government policies and regulations still making it difficult for globalized retailers in many regions.
• The desirability to provide partnership potential for retailers coming into the market for their local understanding.
• The challenge of too high of a share of retail performance being absorbed by the informal retailing community or the underground markets.
• The fact that many markets are single fashion season exemplified by the fact that major European retailers recently closed their Latin American office set up to spearhead expansion to the region several months ago when they realized that as a Northern European retailer, they had little understanding of how to make money in a single climate market.
• Lastly, the ego overbuilding of facilities per the tenants’ necessary operating expenses. The design and grandeur of the shopping center must be controlled to assure the retailer, who will ultimately support the expense structure of the property, can afford the lavishness and still make money. This of course, was part of the United States problem in the early 1990’s with the overbuilding affecting escalating cam costs.

The pluses of the region include:

• High excelerating demand levels as described in the population figures earlier in the presentation
• The high percentages and totals of population moving into high consumption years of life again was described in the dramatic 15-19 year old population figure so much higher than in other regions of the world
• There is of course a higher aspirational product fashion desire with Latins spending at much higher rates on apparel, brand names and designer wear
• And currently the market benefits from very low supply ratios in most categories
• And a low cost of labor factor benefiting tenant margin

In summary of assessment, we believe Latin America and the Caribbean on a consumption versus production/GDP economic basis reveals a region with exceptional strength for the immediate future… A region with growth potential in the next decade far exceeding the United States, Eastern and Western Europe and many other regions of the world.

We thank all of the groups who helped us assemble the described information and now will turn to questions for our esteemed panel.