Changing economies shift consumer habits in Latin America.
BY DAVID MACKINSON
Latin America has seen brighter days. The commodity boom that was so instrumental in reducing poverty over the first decade of this century has turned to bust due to weak demand out of China as well as domestic economic malpractice. According to the World Bank, the regional economy will contract for a second year, weighed down by recessions in Brazil, Argentina and Venezuela, and decelerations in Colombia, Peru, Chile, Uruguay, Ecuador and Bolivia. The tide (and popular sentiment) has quickly turned against politicians in nearly every country, so it’s therefore no surprise that consumer retail habits are a reflection of what’s going on in the country. The last few years have been characterized by economic uncertainty, with GDP projections suffering consequent downgrades.
However, GDP growth has never actually been a reliable indicator of growth in retail sales, and 2016 only further illustrates that the situation is far from simple. For example, factors as diverse as unemployment, consumer confidence, rates of banking services penetration or financial inclusion, infrastructure development, households with internet and or smart phones, and the growth of women in the labour force are all relevant indicators in terms of what we can expect of the retail industry. Additionally, the migration of consumers from traditional channels to modern ones is actually being accelerated by the economic environment. Although the traditional channel of independent so-called mom-and-pop stores and local markets is alive and well, global giants like Wal-Mart continue to expand within the region, capitalizing on several of the aforementioned factors.
The continuing economic crisis and increasing, 30 percent-plus inflation in Argentina are forcing consumers to not only trade down, but to reduce what is spent on non-essential goods. Apparel is an example, with consumers shifting to non-top-tier brands and waiting for end-of-season sales.
In Brazil, the recession and political scandal taking place since late 2013 have encouraged Brazilians to do something similar, as consumers are trying to cope with more constrained disposable income levels. Unemployment and stagnating incomes are also culprits. Necessities such as packaged food and home care products were most impacted as consumers traded down to cheaper alternatives or private label brands.
In Mexico and Peru home care has been affected, with consumers preferring multi-purpose products within surface care and bleach, therefore reducing what is spent on specialized products. Consumers in these countries as well as in Venezuela have also sought to prolong the life of their products by watering them down or by reducing the dosage.
Trading down in Chile is part of a broader retailer strategy. First of all, consumers in Chile tend to be loyal to brands, and, when trading down, will start with the non-essentials like napkins or paper towels. However, not all private label brands are associated with trading down. In apparel, for example, prices are often similar to brand names. Leading department stores such as Paris and Falabella are actively encouraging consumer awareness of these brands and they see today’s fast-moving consumer goods shoppers as an opportunity. Private label lines in apparel allow retailers to have new products on the floor each month and to respond quickly to that which has enjoyed a good response, in turn driving sales.
The Chilean economy continues to grow (albeit at half the rate of previous years). Coupled with a stable employment rate, retailers are positioning their offerings at middle-class consumers. For example, the Wal-Mart private label Great Value is positioned as a premium product (thanks to its foreign origin) within its Lider supermarkets. Wal-Mart’s aCuenta brand, however, offers the company an opportunity to capture those consumers who are looking to save a few pesos.
In countries such as Ecuador and Bolivia, traditional retailers have positioned themselves to take advantage of economic uncertainty via price wars with their competitors in the modern channel. These independent retailers have stocked their shelves with illegal imports (due to porous borders), such as tobacco and alcohol, and are able to price them below modern retailers.
In Argentina, modern channel grocery retailers are relying more on credit card discounts, offering significant discounts through card payments that often include a tax kickback to the consumer. With regard to the traditional channel, in mid-2016 legislation was passed that allows small merchants to accept mobile payment processors like Square and Visa through Prisma, which offer credit and debit payments at a reduced cost compared to a point-of-sale terminal. If the inflation rate starts to drop in 2017, traditional retailers will have some room to grow if they remain competitive in 2016. Otherwise, modern channels will gain more negotiating power with suppliers, and, with access to better financial terms, they will continue to undermine the traditional independent retailers.
In Brazil, the acceptance of electronic methods of payment has been increasing significantly over the years, mostly due to the entrance of new point-of-sale machine companies such as PagSeguro and GetNet. As electronic methods of payment are expected to increase penetration in Brazil over the coming years, the strategy of adopting the usage of point-of-sale machines may continue gaining space and help boost sales. However, it is worth noting that this performance will not be as strong as it was over the review period, as economic crisis typically constrains consumers’ access to credit.
The traditional channel remains strong in most parts of Chile, especially those not serviced by the leading retailers, particularly rural areas and small cities. Chile has only three large metropolitan areas, and this greatly affects the speed with which the modern channel can expand. The traditional channel is best positioned in terms of grocery, as these small neighbourhood stores act as a meeting place and because consumers often establish a relationship with the owner based on an informal credit system (pay in instalments or at a later date). Some have begun to partner with Transbank to accept financial cards, but many remain cash-only as commissions are high and margins remain low.
This could be changed by the access of Multicaja, which will accept MasterCard, creating for the first time a competitor for Transbank, meaning that commissions will be lower. However, in more affluent neighbourhoods, these mom-and-pop stores have already lost ground to supermarkets and convenience stores, which offer more products and more payment options. Store cards and loyalty programmes are also crucial for promoting growth. The leader in the grocery channel in Chile is Wal-Mart, with more than a third of the market. Since 2011, more than 20 percent of its total sales have corresponded to its own Lider card.
In Peru, retailers such as Cencosud’s Wong and Metro are following in the footsteps of more developed Latin economies and are pushing their own private label lines by forging alliances with financial institutions, offering reduced prices when purchasing with a Cencosud credit card.
In Mexico, Grupo Bimbo, the leading brand of packaged bread within the traditional channel, signed an agreement in 2013 with the telecoms company Blue Label México in order to create the Red Qiubo network. This partnership was aimed at increasing the acceptance of electronic payments at independent small grocers. Other partners of the programme include the payment operators Visa and MasterCard, as well as the Banamex bank. It was estimated that in the first stage of the programme, 25 percent of Mexican small grocers were able to accept electronic payments. In 2014, there were already 120,000 point-of-sale terminals installed.
Card payments are directly related to the development of internet retailing. Young consumers are the ones driving the percentage of households with internet access in the region above 50 percent – and this will only continue to grow. This not only impacts the format where the purchase takes place, but all that it implies for the industry: negotiating with suppliers, the idea of relating directly with consumers, and the power of social networks and the need to rethink marketing. However, this channel remains marginal and, although one might think the sky is the limit in terms of market potential, it would be worth seeing the hard data first.
For example, Chile is the Latin American country with the highest rates of internet access and is one of the leaders in terms of per capita spending. However, with respect to the two leading internet retailers, Cencosud, with its virtual supermarket Jumbo.cl, and Wal-Mart with Lider.cl, their online sales barely reach 3 percent and 2 percent, respectively, of the total sales of their physical and online stores. It is true that there is strong growth potential in the channel, but this does not change the fact that the channel will struggle to exceed 5 percent in terms of the total market. We believe that internet retailing needs to be a long-term strategy – one focused on logistics, which takes into account the advantages of each country, along with all of its challenges.
Despite all the doom and gloom, however, we do expect positive growth in local currency terms in various channels of the retailing industry. Nevertheless, the challenges facing the region will be instrumental in the strategies that retailers, both modern and traditional, adopt. A more connected consumer base and the advent of internet retailing as well as higher rates of financial inclusion will also transform the sector. The new Latin American middle class, although it is under assault in 2016, can be expected to find the best path forward.
David Mackinson is a Research Manager at Euromonitor International. This article was written for Latinvex.
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