Going modern with Latin American consumer practices

14 January 2019 Consultancy.lat

In Latin America, corner stores, bodegas, and mom-and-pop shops reign. In the early 2000s, this was not the future idealized by consumer product companies, which aimed to lay the foundation for a fluid network of modern convenience and self-service stores. Distribution channels were planned, and a consumer base targeted: the rising middle class, which was fast becoming more affluent and empowered.

But old habits die hard – and the global market crashed. Thus, the Latin American consumer product market remains fragmented – there are hundreds of thousands of shops scattered around the region – with no intuitive entry point for industry newcomers. Those established companies that had hoped for a more modern future are now struggling, as a large percentage of the market remains unmoved, and the middle class is not rising as quickly as companies had hoped.

This puts consumer product companies between a rock and a hard place. They cannot ignore the traditional habits of the current consumer. To do so would be assured financial loss. But they also cannot afford the potential decade, as well as resources, financial and otherwise, necessary to construct a network that would adequately service an entire region.

But all is not lost. An EY-Parthenon study shows that there are methods and strategies that can allow consumer product companies to infiltrate the Latin American market, with “modest exposure and capital expenditure.” First, however, it is necessary to look at the root causes of the trouble.

Split of traditional vs. modern trade in the food and beverage category in Latin America

Consumer culture shock

When looking toward the future, consumer product companies underestimated the allure of modern convenience stores. “This vision, inspired by North America and Europe, was based on an assumption that consumers would discover modern stores and be delighted by their lower price points, curated, assortments, on-shelf execution, and ‘one-stop-shopping,’ therefore causing a fundamental shift in consumer preference toward a more contemporary shopping experience.”

But societal differences, especially in consumer habits, between Latin America and the aforementioned regions are rather large. Rather than capturing the growing and increasingly affluent middle class, the more modern consumer product stores – the “one-stop-shops” – have faltered. Additionally, in a region where many are paid daily, in cash, the idea of consolidated shopping trips encouraged by modern stores, necessitating higher, if less frequent, lump payments, is undesirable. Modern stores, as well, were often too small to remain in the black, meaning more stores were needed, resulting in a 360-degree turn to the fragmented network that had initially been an obstacle.

Longer working hours among Latin Americans, compared to Americans and Europeans, also means there is less time to shop. Store location is a hugely important factor in a Latin American’s choice of where to shop, with 44% considering it to be the “most influential reason.” Also important is a cultural factor: 60% of Latino consumers have developed a personal relationship with their shopkeeper, “presumably allowing him or her to influence their path to purchase with helpful, time-saving recommendations.”

Markets matter

Modern trade, according to the report, has a “formidable presence” in Latin America, but its growth has stagnated. While modern trade dominates in the home care (68% in 2016) and beauty and personal care (89% in 2016 markets, where products are primarily purchased at large supermarkets or hypermarkets, traditional trade narrowly takes the edge in food (51%) and beverage (50%).

Split of traditional vs. modern trade in the home care & beauty and personal beauty category in Latin America

Different Latin American countries exhibit varying attitudes and openness toward accepting modern trade methods. In Mexico, Argentina, Colombia, and Peru, traditional trade takes a 30% share of all markets. In Chile, for example, this share plummets to 14%. Different national markets also forecast varying degrees of growth – Colombia expects modern trade to grow just over 6.0% annually, while Peru expects 3.5% growth. Consumer product companies would do well, then, to closely examine the country, rather than the Latin American region as a whole, when attempting market entrance.

Market penetration is also not as difficult as in the recent past, thanks to independent distributors that allow companies access to a “reliable network of third-party providers.” This means consumer products companies need not focus or invest in assets and infrastructure, freeing up time and resources to “more value-adding” activities, such as merchandising.

Go mobile

Latin America is the fourth-largest mobile market in the world. Adoption of social media has surpassed that of the Untied States, meaning advertising and marketing budgets can be adapted accordingly, by using “targeted direct marketing campaigns to drive traffic to traditional stores where consumers can discover localized product innovations and assortments.” Regional sales for Proctor & Gamble, for example, have grown 8% in the last fiscal year, with approximately half of its products sold in traditional stores.

Partner up

There are many hurdles to properly handling business with traditional stores, often involving the different distributors for different products in different regions, as well as a lack of talent. To reduce the juggling act, this means distribution partnerships are all but necessary. Consumer products companies must be adaptive and creative to maintain partnerships and retain qualified and experienced professionals.

EY-Parthenon RTM circle

In its study, and to aid those companies looking to dip into the Latin American market, EY-Parthenon developed a four-stage approach to “route to market” transactions.

  • Evaluate capabilities and compare them to opportunities. Essentially, companies should ask themselves, “Is it worth it?”
  • Assess strategic options against all potential risks.
  • Design with the future in mind. Companies must have a vision for how they will keep their operating model up and running in the weeks, months, and years ahead.
  • Implementation must be supported, in various forms – cutover, stabilization, synergy. There should be no surprises when it comes to enacting a plan.

Related: Growth of billionaires in Latin American stagnates.

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