A Food Fight for Hugo Chavez With his popularity sagging, Venezuela's fiery President is seizing supermarkets from owners. But can he keep stores stoc

By Geri Smith

An Exito supermarket: Sales are off since the government takeover in January Isaac Urrutia/Reuters

Caracas - It's 10 a.m., and tempers are already flaring at the Cada supermarket in Caracas' San Bernardino neighborhood. The store has just taken delivery of two pallets of 4- and 11-pound sacks of sugar. With dozens of shoppers swarming around him, Rigoberto Fernández tries to pass out the bags one by one. The clerk hands a smaller one to a gray-haired woman, but she flings it back. "How dare you tell me I can't have one of the larger bags?" she screams. The sack splits open, spilling sugar everywhere.

Within 10 minutes, the shipment has vanished. "I am so fed up with these food shortages," Fernández mutters as he sweeps up the mess. "People get desperate and start behaving like animals."

Venezuelan President Hugo Chávez's response to the food shortages: find a scapegoat, in this case supermarket owners. On Jan. 17, the mercurial leader expropriated six Exito stores, controlled by France's Groupe Casino. A month later he seized Cada, another Casino chain, with 35 supermarkets and eight distribution centers.

El Presidente's efforts to transform his country into a Cuban-style socialist state are sputtering. With its vast oil wealth, Venezuela shouldn't suffer from shortages, yet inefficient farms, government takeovers of supermarkets, and a 50% currency devaluation in January have thrown the food supply into disarray. That's bad news for Chávez, whose anti-capitalist message and ceaseless drive to undermine U.S. influence in Latin America have made him Washington's biggest headache in the region. Chávez's approval rating among Venezuelans has dropped to about 45% from 70% three years ago.

Supplying low-cost food to the poor has been a centerpiece of Chávez's presidency. He has expropriated food processors, stores, and more than 6 million acres of farms and ranches, convinced that the government can feed Venezuela better than the private sector does. Under state ownership, though, production has suffered. From 1999 to 2008, per capita, sugar cane was off by 8%, fruit declined by 25%, and beef production dropped by 38%, according to Carlos Machado, an expert in agriculture at the Institute of Higher Administrative Studies, a business school in Caracas. "The cooperatives have failed and our cattle ranching has been decimated," Machado says.

While Chávez was flush with oil profits, it was easy to take up the slack with purchases of chicken from Brazil, beef from Argentina, and powdered milk from New Zealand. Food imports jumped from $1.3 billion in 1999, when Chávez took office, to $7.5 billion in 2008—about 70% of what Venezuelans eat. But falling crude oil prices and last year's 3.3% contraction of the economy left Chávez with less money to buy food abroad, or to prop up poorly run state farms and food processors. Government officials "think they know how to run businesses, but they just run them into the ground, just like they're running the country into the ground," says 47-year-old homemaker Antonia Rangel, one of the shoppers who managed to get a bag of sugar at the Cada store.
"SOCIALIST MEGASTORES"

A new consumer protection law, which went into effect on Feb. 1, allows Chávez to expropriate virtually any company if he deems it to be in the national interest. Exito's alleged misdeed: raising food prices following the January devaluation (though two months later, on Mar. 9, the government authorized stores to boost prices on some basic goods by as much as 35%). Chávez wants to transform the chain's outlets into what he calls "socialist megastores" that sell food, appliances, and clothing with virtually no markup. "The measure is one further step in the Venezuelan state's policy of transforming capitalism into socialism," Chávez declared on his weekly Hello President TV show. Exito's parent and the government haven't disclosed any details on compensation.

The supermarket seizures have alarmed grocers, but few are willing to speak publicly for fear of more harassment. "This is one of the worst times we've ever lived through," says the CEO of a major supermarket chain. "We live in constant fear that we could be shut down or taken over by the government."

Chávez has been skirmishing with supermarkets for years. In 2002, big food producers and distributors participated in a two-month nationwide work stoppage that nearly brought the economy to its knees. In response, Chávez opened a rival network of government-run grocery stores, where more than a quarter of Venezuelans now shop.

The biggest state-owned chain, Mercal, has 16,600 outlets, ranging from street-corner shops to huge warehouse stores. They employ 85,000 workers selling basic products such as rice, sugar, and beans at prices as much as 40% below those the government sets for private stores. Mercal also has a fleet of trucks that serve street markets, and it offers free lunches and afternoon snacks at 6,000 soup kitchens. "Mercal is a very noble mission that contributes to a higher quality of life for Venezuelan families," says Carlos Alonzo Sánchez, manager of a busy Mercal store near El Junquito, a vast hillside shantytown on the outskirts of Caracas.

Joelis Muñoz recently carted 9 pounds of sugar, 7 pounds of rice, and 4 1/2 pounds of corn flour home from Sánchez's Mercal outlet. Her bill was $4.88, half what it would have been at a private supermarket. "Since the government opened these stores, my family hardly ever goes to regular supermarkets anymore," says the 21-year-old single mother.
CHEAP CHICKEN

The state-run stores serve as a platform for Chávez's revolutionary message. In the middle-class California Norte neighborhood of Caracas, an outlet of a second government-controlled chain called PDVAL (owned by state oil company Petróleos de Venezuela, or PDVSA) offers frequent reminders about the source of the bounty. At the entrance, a banner proclaims: "Food Sovereignty! All power to the people!" A few feet down the first aisle, a placard reminds shoppers that the "government is fighting for your food security." Says Luis Pedro España, a sociologist at Andrés Bello Catholic University in Caracas: "It's quite clear to anyone who shops at state-run stores that they owe it all to the President, who brought cheap chicken to the people."

Sometimes, however, there aren't any cheap chickens to sell. The PDVAL store offers tomato sauce from Spain, nutritional drink mixes, and cans of tuna at regulated—but not subsidized—prices. On a recent Friday, though, there's no chicken, beef, or sugar. To fill empty shelves, the store has stocked an entire aisle with nearly 1,000 bottles of cooking oil made by a company the government took over two years ago. Another aisle is filled with hundreds of bags of corn flour. A third is jammed with industrial quantities of dried oregano and curry powder.

When scarce products do arrive, word spreads fast and long lines form. "I can only let one or two people in at a time so things don't get out of control," says Omar Gálvez, manager of a small Mercal outlet in Petare, a rough Caracas slum.

Supplying Venezuelans with cheap chicken isn't cheap. Félix Osorio, Chávez's Food Minister, oversees Mercal from a spacious office filled with paintings, handicrafts, and other gifts from constituents. Osorio, a 40-year-old Army lieutenant colonel, says the government will spend $605 million this year on food subsidies, plus $1.8 billion to run the Mercal system. "Food is a basic necessity, and not mere merchandise," Osorio says, munching on a midnight snack of white cheese and fried beef empanadas after a long day in the field. "The capitalists," he says, "don't see it that way."

Even so, the government knows it can learn something from the people it frequently calls "squalid capitalists." Taking control of the Exito and Cada supermarkets makes sense, Osorio says, because the government needs more expertise in large-scale retailing. The authorities are negotiating with Groupe Casino and may allow the French company to stay on as a minority partner to help keep the chain running smoothly. Casino declined to comment.

SUDDEN SHUTDOWNS

The capitalists, though, face constant oversight. Members of Cuba-inspired "community councils," or neighborhood watch groups, can make unannounced inspections to look for signs of hoarding. One executive from a nationwide chain grouses about constant visits from tax authorities, the consumer protection agency (to check prices), workplace safety inspectors, and even the National Guard, which monitors store hours to make sure they don't stay open too long and use too much electricity at a time of widespread blackouts. Even when no infractions are found, the executive sighs, "The inspector can say, 'It doesn't matter, I have orders to shut you down for 24 hours,' and he does it—just like that."

Supermarket managers estimate that the government regulates prices on about 20% of the items they sell, but these products account for up to 40% of volume. "We make zero profit on most of the regulated foods, so we have to make up for it by charging more for other goods," says Carlos Hernández, manager of Los Campitos, a small grocery in Caracas' upscale El Rosal neighborhood. And at Exito and Coda stores, says one executive, the government seems intent on eliminating any possibility of turning a profit. "How are they going to replace freezers and forklifts as they wear out?" he asks.

Supermarket owners are watching how the government manages Exito, renamed Bicentenario in honor of this year's 200th anniversary of Venezuela's independence from Spain. Since the takeover, sales have sagged, according to Sintesis Financiera, an economics consultancy. Now suppliers concerned over delays in payment appear to be slowing deliveries, prompting Chávez to warn 60 companies that they may be expropriated if they fail to double deliveries to the chain.

With legislative elections scheduled for September, the fiery President is likely to continue cracking down on food retailers. Although he doesn't face another presidential vote until 2012, he's determined to hold onto his party's majority in the National Assembly. Chávez has won the loyalty of poor Venezuelans with his food subsidies, but as inflation erodes spending power, that support is flagging. After climbing by more than 15% annually from 2004 to 2009, consumption has started to fall, Central Bank data show.

As supermarket owners fret about further expropriations, Venezuelans increasingly say socialism isn't the right path. In a poll by researcher DATOS taken two weeks after the Exito seizure, 58% of respondents said they disapprove of Chávez's takeover of stores. Another DATOS survey found that 86% don't think Cuba is an appropriate model for Venezuela. Chávez "is moving in the opposite direction from what people say they want for their country," says DATOS director Joseph Saade. "People look at everything the government has taken over and they're seeing that the companies have become dysfunctional."

Smith is Bloomberg BusinessWeek's Latin American correspondent, in Mexico City.