October 26, 2018 / 5:30 PM / 10 months ago

CORRECTED-UPDATE 1-Brazil's GPA shakes up formats, bets on wholesale and regional divisions

(Corrects fourth paragraph to say the firm is considering converting just Extra Super stores into Compre Bem and Mercado Extra stores; Hiper stores not part of process)

By Gabriela Mello and Gram Slattery

SAO PAULO, Oct 26 (Reuters) - Brazilian food retailer GPA plans to shake up formats, betting big on its wholesale Assai stores and regionally focused Compre Bem markets while cutting other brands, executives said on Friday.

In a call with analysts and an interview with Reuters following announcement of its third-quarter results, executives laid out an expansive plan to thin out some mid-sized formats that have dragged on results in recent years.

The firm plans to open 12 new Compre Bem stores, 23 Mercado Extra supermarkets and 11 Assai stores by year-end, they said. GPA also plans to complete renovations at three of its flagship, upscale Pao de Acucar stores.

As part of that process, GPA sees potential to convert up to 50 percent of its Extra Super stores into Compre Bem stores and 50 percent into Mercado Extra stores, Chief Executive Peter Estermann said.

The firm, owned by France’s Casino Guichard Perrachon SA , said the capital expenditure needed for the openings would pressure margins in the short-term. But it added that the resulting margin pressure was already built into its 2018 guidance.

The aggressive re-jig of store formats at Brazil’s second- largest food retailer reflects the evolving tastes of local consumers. A years-long recession helped popularize so-called “cash-and-carry” stores like GPA’s Assai, which offers a no-frills, wholesale format to customers.

Regional supermarket chains have also outperformed multinational retailers here, as they are often more attuned to the needs of different regions’ customers in this continent-sized country. Compre Bem, which allocates significant sourcing and management decisions to individual stores, is seen as a way to counter that trend.

In quarterly results released late on Thursday, GPA reported a significant boost in margins and profit, as expected, thanks in part to increased food inflation. While the Multivarejo division, which groups GPA’s traditional supermarket formats, swung to profit, the firm’s Assai division again stole the show, with earnings before interest, taxes, depreciation, and amortization jumping some 49 percent.

Preferred shares in GPA gained about 1.5 percent at the opening bell, but lost steam as executives detailed the capital heavy plans. Shares were down 1.2 percent in afternoon trade, while Brazil’s benchmark Bovespa index was up 1.3 percent.

Executives reiterated that electronics unit Via Varejo SA continues to be for sale, adding that they expected the process to evolve after Brazil’s presidential election on Sunday. (Reporting by Gabriela Mello Writing by Gram Slattery Editing by Dan Grebler and Frances Kerry)

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