Modern trade in Latin America stagnates for consumer product companies

25 July 2018 Authored by Consultancy.lat

For the better half of a decade, modern trade penetration in Latin America has been situated between 48-50%, shattering expectations of increasing consumerisation of the region. 

Throughout the past twenty years, Latin America has seen a gradual rise in the penetration of consumer goods and modern trade. Barely shifting since 2011 however, consumer product companies have failed to break through traditional trade barriers and gain market dominance.  

Envisioning a marketplace which would resemble the maturity of Europe or the United States, MNEs and consumer companies entered Latin America enthusiastically. Attempting to woo consumers with a larger range and lower prices, these companies failed to predict the Latin economic downturn which has put a pause on purchasing power.

A recent report by EY Parthenon exemplifies the theory at the beginning of the century vs. the reality today. “In this intended marketplace, an increasingly affluent and growing middle class would have access to the financial services needed to afford the higher cart values that result from less frequent shopping trips.”

“In reality, consumer products companies that wagered on high growth in modern trade have struggled with ill-fitting routes to market in a challenging economic environment. In the fallout of the global financial crisis, mom-and-pop stores proliferated because they were better suited to address the needs of economically stressed local populations.”

Modern trade vs traditional trade in Latin America according to EY Parthenon

This misjudgement is an important factor in understanding why companies entering Latin America have struggled. However, it is not the only factor. Cash wages – representing a still largely unbanked population in some areas – have taken their toll on consumer purchasing power. 

There are approximately 400 million citizens who are locked out of the traditional banking system across Latin America. This demographic is neither rich nor poor, rural nor urban, but can be defined by their inability to access traditional banking methods.

The report suggests that there is a correlation between these factors and accessing modern consumer products. Wages have not grown, creating a disequilibrium between formal, banked, modern consumers and informal, unbanked, traditional consumers. “Many consumers, still paid in daily cash wages, were unable to access the financial services needed to enable consolidated shopping trips with higher cart values in modern stores.”

Modern trade and traditional trade split in terms of food and beverage in Latin America according to EY Parthenon

The last issue which EY Parthenon highlights is that many modern stores were not large enough to be sustainably profitable. This drove up prices across the board with brands attempting to reach the ‘economics of scale’. “The fragmented logistics networks required to serve this unanticipated volume of modern stores demanded the exact type of distribution and logistics investment consumer product companies had hoped to avoid.” 

These three factors combined create a divergence between what companies expected and the reality which occurred. As a result, international brands which once thought they could leapfrog into the Latin markets creating their own valuable trade routes and distribution networks, today understand that it is no longer a viable strategy. 

Instead of trying to create a new shopping experience – i.e., one-stop shopping malls, mega-retail chains, fast-fashion, etc. – or trying to buy/create a distribution network, it is prudent to engage a third-party provider who will navigate the challenges endemic to each Latin America country.

“This type of arrangement empowers companies to shift their focus to more value-adding activities such as account development, sales and merchandising. In addition, consumer products companies with large-owned distribution networks are increasingly open to distribution partnerships with other companies that effectively subsidize the fixed cost base that these networks demand,” states the report.

“Despite modern trade’s formidable presence in Latin America, traditional trade has continued to endure as a reliable cornerstone of the consumer products market, with ample opportunity across categories and countries,” the report concludes. 

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