Latin CEO / August 2001
By Larry Luxner
One of Argentina's largest duty-free retailers is poised to open an enormous duty-free retail shop along the country's border with Brazil -- in a move that'll likely draw business away from nearby Ciudad del Este, the so-called "contraband capital of Latin America."
London Supply S.A., based in Buenos Aires, says that when it opens later this summer, the Puerto Iguazu Free Zone (known in Spanish as Zona Franca Puerto Iguazu S.A.) will cover 46 hectares on a coveted spot of land along the Argentine side of the Tancredo Neves International Bridge to Brazil. The site is only a few kilometers away from Paraguay and the famous Iguazu Falls, one of South America's top tourist destinations.
"This will be the first retail duty-free shop on the Argentine-Brazilian border," says Francisco "Paco" Heredia La Fuente, director of London Supply and president of the Montevideo-based Association of South American Duty-Free Shops (Asutil).
"There's an unsatisfied demand for such a shop, because for the tourist, it's very complicated and risky to buy in Ciudad del Este," says Heredia. He adds that "we won't compete directly with Ciudad del Este," but it's fairly obvious that London Supply's new free zone -- at least its retail aspect -- will target pretty much the same market over the long run.
Despite its name, London Supply is a 100% Argentine company, founded 56 years ago in Buenos Aires by the father of the current president, Teddy Taratuty. In recent years -- and especially following the Menem government's 1998 decision to privatize 33 government-owned airports throughout Argentina -- the company has been active in the extreme southern Patagonia region, with contracts to manage airports in Trelew, Calafate and Ushuaia.
London Supply, with 2000 sales of around $100 million, also has a 46% stake in Uruguay's Punta del Este International Airport, which caters mainly to upscale Argentine and Brazilian tourists. Other partners in the $40 million airport venture include Uruguayan bus company COT and the World Bank.
Besides airport management, London Supply runs wholesale liquor distribution and ship chandling in many Argentine ports, and owns several Nissan, Hyundai and Honda car dealerships in the province of Tierra del Fuego. In addition, it owns and operates the Atlantico Sur department store in Ushuaia, capital of Tierra del Fuego and an important market in its own right because, as Heredia says, "98% of all cruise ships on their way to Antarctica stop in Ushuaia."
But the Puerto Iguazu venture could eventually exceed everything else in London Supply's porfolio. Part of the impetus for the project came from passage in the 1990s of Argentina's Law 24-331, which allows each province to establish duty-free shops for tourists. But the project is also being driven by population growth and tourist traffic in neighboring Brazil and Paraguay.
"Currently, Puerto Iguazu has only 30,000 people," said Heredia. "Foz do Iguaçu, Brazil, has more than 400,000, and Ciudad del Este around 200,000. Ten years ago, Ciudad del Este almost didn't exist, and Foz and Puerto Iguazu had the same population."
While certainly bigger, Ciudad del Este has a rather seedy reputation as the "contraband capital of Latin America." Although prices on the Paraguayan side are ridiculously cheap, merchandise is frequently not what it seems to be, with smuggled watches, bootlegged computer software and falsified liquor the rule rather than the exception.
A few years ago, merchants in Ciudad del Este warned that a huge free-trade zone being proposed in Foz do Iguaçu would have "disastrous consequences" for local businesses. The sprawling, 40-hectare free zone was to have been constructed by mainland Chinese entrepreneurs in direct competition with a Taiwan-backed project planned for Ciudad del Este, though neither project ever materialized.
London Supply's project, however, has been in the planning stages for a year and a half, and enjoys strong backing from the Argentine government.
Asked why the busy Argentine-Brazilian border, which sees six million crossings a year, never had a duty-free store up until now, Heredia said "because it didn't occur to anyone before."
According to Heredia, London Supply has an 80% interest in Zona Franca Puerto Iguazu. The remaining 20% is held by Miyar S.A., operator of Zona Franca Colonia in Uruguay. Heredia says his company defeated two other Argentine companies for the bid "based on the quality of our project, our know-how and the fee we'll pay to the government."
He added that the Argentine government required a commitment to invest at least $2 million, and that London Supply has committed to invest at least $5 million initially.
In fact, total investment over the 40-year life of the project could exceed $100 million. That figure includes construction of a private port on the Río Iguazu, which runs into the Río Paraná and forms the natural border separating Argentina, Brazil and Paraguay.
"This is a 30-year concession, with an option to extend it for another 10 years," said Heredia. "It's very difficult to predict how it will develop. It all depends on the market."
At least 90% of that market is Brazil. At present, hordes of Portuguese-speaking tourists from São Paulo and other large Brazilian cities cross the border to Paraguay every day in search of bargains on duty-free items, despite a Brazilian law restricting them to $150 in duty-free purchases every three months. Heredia is hoping they'll come to Argentina instead -- and he plans to entice them with an attractive, clean and safe environment in which to shop.
For starters, he plans to build a 3,000-square-meter retail shopping mall, with four megastores -- one in each corner. The store will be divided into departments featuring cosmetics, liquors, tobacco, fashions and gift items, and will employ between 100 and 150 salespeople fluent in both Spanish and Portuguese.
"In the beginning, we're not going to do anything very differently from the airport duty-free shops, with the exception of maybe selling electrical appliances," he said.
In addition to retail customers, the project envisions a large wholesale distribution operation catering to customers throughout the Mercosur trade bloc, whose members include Argentina, Bolivia, Brazil, Chile, Paraguay and Uruguay.
"The big advantage we have is that we're at the center of Mercosur," he said. "A 1,500-kilometer circle around Puerto Iguazu would include every major city of Mercosur," including Buenos Aires, Rio de Janeiro, São Paulo and Montevideo.
To that end, future plans call for around 4,000 square meters of warehousing space, a 1,500-square-meter administration building and, in the future, a multi-purpose building with showrooms and office rental space. Heredia predicts that London Supply will reap a return on its initial project investment within five to eight years.