MGMT436: In April 2011, Nicholas Psychoses, general manager at Rey Holdings Corp a leading group in Panama’s supermarket industry: Strategic Management Assignment, SUSS

THE DECISION

In April 2011, Nicholas Psychoses, general manager at Rey Holdings Corp. (henceforth, Rey Group), a leading group in Panama’s supermarket industry, sat in his office, thinking about Rey Group’s future after receiving a visit from a group of investment bankers who came with a pro-position to acquire Farmacias Metro, the second largest drugstore chain in Panama.

Always keen on spotting and accessing new opportunities, Psychoses considered Rey Group’s future and prepared to discuss this proposal with the board. Panama’s economy was thriving but small. He specifically wondered about Rey Group’s best consolidation and growth options.

Would it be best to follow the Group’s strategic plan, increasing the number and size of stores? Or should Rey Group acquire Farmakis Metro, rising to the challenge and taking the risks this option entailed? Wouldn’t it be better to focus the Group’s efforts on the rather competitive supermarket business?

REY HOLDINGS CORP. AND PANAMA’S SUPER-MARKET INDUSTRY

Rey Holdings Corporation’s Background

Rey Group had grown steadily ever since its founder, Mr. Antonio Tagaropulos nicknamed “The King” (in Spanish, “Rey”)— opened a small grocery store in Colon City in 1911 (see Figure 1).

According to market estimates, by April 2011, Rey Holdings Corp. held the second largest mar-ket share -over 30%- in Panama’s supermarket industry (estimate based on data from Dichter and Neira and public information). Rey’s brand created value over the years, becoming increa-singly well-known in Panama. Rey supermarket chain’s regional expansion started in 1958, when in addition to its store in Colon, the company opened its first Rey store in Panama City’s down-town district.

In 2003, the Group created the Mr. Precio supermarket chain, with a new format of neighborhood supermarkets located in Panama City, relying on the same quality and servi-ce standards to compete with “chinitoe -small grocery stores managed by Chinese community members- and to cater to middle- and low-income segments.

Thus, by 2011, the Group owned ten stores. In May 2007, it paid USD15.9 million to acquire Romero, the leading regional super-market chain founded in 1921 and owning nine stores in Chiriqui and Bocas Del Toro. By April 2011, the Group operated ten supermarkets with this brand.

Mission. Satisfying customers by consistently offering fresh, top quality products in or-der to contribute to Panamanian families wellbeing.

Vision. Participating positively and actively in customers’ and associates’ daily lives. Making every individual having a relationship with Rey, Romero and Mr. Precio feel it, enjoy it, and value it.

The Group regarded its relationships with customers as close and long-lasting more of a way of life than a simple transaction-based interaction. Its organizational culture reflected in a set of va-lues and behaviors that included a passion for customer service, integrity, ongoing improvement, innovating ideas, result orientation, openness to change, team work, and focusing on people.

Mr. Nicholas Psychoyos, general manager at Rey Holdings Corp., was a third-generation relative of the Group% founder, Mr. Antonio Tagaropulos.

Pondering the Group’s future, its current president remembered what his grandfather used to say, “What is not shared is lost, and success must be shared.

This summarized the philosophy and values that served as a basis for Rey Group’s culture, showing how important relationships with stakeholders were for the Group and its commitment to in-ternal and external integration, which led the Group to embark on corporate social res-ponsibility projects.

The strategic priorities set by the Group hinged on profitability, efficiency, customer service, innovation, continued improvement, ethics and values, associates and a single culture. Its stra-tegic goals focused on the following issues:

Panama’s Supermarket Industry

Panama in 2011

In the first decade of the new millennium, Panama was one of Latin America’s fastest growing economies, with a GDP growth rate of 7.,5% in 2010 and expectations to reach 10.6% and 10.3% in 2011 and 2012, respectively (see Exhibit 2).

Its privileged geographic position (an active business and financial hub for Latin America), world-class communication and infrastructure, worldwide logistics center (Colon Free Zone), a solid international financial center, developing tourism, the Panama Canal’s ongoing expansion, an ambitious public infrastructure investment plan, and a US-pegged currency all contributed to this growth.

The country boasted legal and judiciary sta-bility, security, and moderate fiscal deficits. There were periodical negotiations to review the do-mestic wage, and an increase of nearly 30% was expected for 2012. Panama’s retail sector was legally protected by the requirement that retailers be Panamanian and anti-trust laws.

Panama’s economy was highly open to international markets, with several free trade agreements in place, incentives for local and multinational companies, attractive laws to set up branches of multinatio-nal companies, mainly from Latin America, Europe, the United States, and Canada, as well from Asia (Taiwan, China, India), whose employees found in Panama a place to live, work or retire

The Supermarket Industry

Around so of Panama’s supermarket industry was informal, consisting of small grocery stores, usually belonging to the Chinese community and therefore locally known as “chinitoe, but, in recent years, supermarket chains had grown at a rapid pace. In the formal market, five domestic groups, owned by Panamanian families, dominated more than 90% of the market.

Super 99. This chain owned a Mega Depot hypermarket in Panama City and 33 super-market stores, with 24 of them located in Panama Province’s largest cities in-David, Chi-tre, Santiago, Colon, and Penonome. Super 99 belonged to the family of Panama’s acting President, Ricardo Martinelli, who, in 1981, joined the chain founded by the Wong Chang family in the late 19th century. In 2010, this chain grossed USD 520 million in sales (Es-trategia & Negocios, May 2012) and held the largest market share, estimated at 34%.

It offered a wide range of product lines, including hardware and toys, in addition to foods-tuffs, beverages and home supplies. Some of its stores opened 24 hours a day. It prima-rily targeted the middle-income segment, but, depending on its supermarket locations, it also served other segments in middle-high and high income areas like Punta Pacifica, Albrook, and Costa del Este.

The company expected to open a new store at Sabanitas, Co-lon, in 2011, with more to follow in 2012 at Vacamonte, Arraijan, Western Panama (mi-ddle-, low-income and emerging segments). It also planned to gradually invest in store maintenance. This chain was also characterized by its substantial efforts to reduce costs.

Riba Smith. Created in 1920, this chain that owned four supermarkets in Panama City focused mainly on higher A and B segments, with stores at premium locations, such as Bellavista, Multiplaza, Costa del Este, and Avenida Transistmica.

At its aspirational sto-res, renowned for their meat and bread quality as well as for their assortment of imported goods, people liked to shop for specific products, even if they did not do their stock-up shopping there.

The chain also owned a manufacturing company, created in the 197os to produce its private-label (ltimith) bakery, confectionary, charcuterie and prepared meal products for its own supermarkets and other outlets, like restaurants and cafe-terias.

Reba Smith planned to potentially expand to locations where Rey supermarkets operated, as it was a strong competitor for Rey Group’s target segment and positioning.

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