Mexico’s El Palacio Moves to Limit Pandemic Losses With Online Push

El Palacio de Hierro is rushing to bolster online sales as Mexico’s retail market suffers from the coronavirus pandemic, leaving the upmarket retailer reeling with losses.

“We are working to add the entire catalogue [physical] online as soon as possible and improve logistics and customer service,” Samuel Tapia, head of men’s suit buying, told WWD, adding that online accounts for 5 percent to 10 percent of the retailer’s total sales.

The bulk of the strategy to boost e-commerce will go to correct snafus linked to online orders and delivery timelines, reconcile existing inventory with what the web site shows and improve the retailer’s ability to predict customer demand.

“There have been some failures and cracks in the system, which are now being corrected and we have added CRM [customer relationship management] systems with algorithms that help suggest items for customers to purchase, as well as discounts,” Tapia said.

Those discounts are naturally higher than in previous years as El Palacio and other Mexican retailers face “their worst year in history,” analysts say.

Tapia said discounts now hover at 70 percent in some cases versus 50 percent in the past. Men’s suit sales, including for Tommy Hilfiger and Calvin Klein’s tailored lines, dropped 50 percent in the first half with online sales unable to offset the declines.

Though most retailers have reopened following three months of quarantine, the government has curbed opening hours, complicating El Palacio’s operations, according to Tapia.

“We have reopened but hours are restricted and people sometimes queue outside shops to come in” amid occupancy and even fitting-room constraints, he noted.

Conversion rates have increased, helping limit losses. “Conversion rates are very high, at around 60 percent compared to 30 to 40 percent before,” the buyer added.

Analysts say El Palacio’s sales are on track to decline 30 to 40 percent this year, slightly less than some competitors, which could see declines of more than 50 percent.

While the retailer has yet to release first-half results, first-quarter operating profits declined 147 percent to 236 million pesos, or $10.5 million at current exchange, on revenues down 11.7 percent to 6.8 billion pesos. Net profits plunged 347 percent.

In 2019, the Mexico City-based chain reported a 2.6 percent revenue jump to 35.6 billion pesos but operating profits faltered, slipping 18.4 percent to 3.8 billion pesos. Net profits totaled 2.7 billion pesos, versus 3 billion pesos in 2018, according to its annual report.

Apart from opening its 14th department store in the port city of Veracruz, the company “achieved certain remodelings” to boost retail space in some divisions, increasing its operating surface by 35 percent, according to the annual report. Children’s wear spaces were revamped in 11 stores and Carolina Herrera Kids, Burberry and BCBG Girls were added as new brands. Men’s wear also saw Boggi and Vineyard Vines introduced as exclusive brands, according to the report. The retailer added designer wear labels such as Alexander McQueen, Off-White and Versace in the men’s department. Two Dolce & Gabanna in-stores also bowed open.

Under chief executive officer Juan Carlos Escribano, El Palacio also added 31 in-store shops including seven from Mango and nine from Samsung. The North Face and Desigual also saw openings, the report said.\[po

El Palacio has said it is working to cut operating expenses as part of a plan to stave off the crisis. In the first quarter, the company took an $84.5 million credit line with several undisclosed banks to cushion itself against a prolonged crisis. As part of the plan, it will cut non-priority investments, rein in operating expenses, cut merchandise purchasing rates and protect its cash flow.

El Palacio’s suppliers are feeling the pain from management’s efforts to shore up the business.

The owner of an El Palacio apparel supplier, requesting anonymity, said Escribano has established a much higher, 40 percent recovery margin for discounted merchandise that doesn’t sell, squeezing purveyors who may have to swallow a loss to maintain their products in the network.

“I know many international brands that are not making money by selling in El Palacio, but it’s a good window display for their brand [to sell in the overall Mexican market] so they continue to send merchandise,” the executive said.

He added Escribano has been mandated to lift the chain’s EBITDA margin to 23 percent from 18 percent now, before his contract expires in 2023. He noted the margin was 10 to 11 percent before Escribano joined El Palacio from Spain’s Cortefiel in 2015.

El Palacio did not immediately respond to requests for comment on its relationship with suppliers.

Source: WWD



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