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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Increasing connectivity looms as a threat to consumer trust in Latin America

11 September 2018 Consultancy.lat

In a consumer trust survey covering six key sectors and conducted by Llorente y Cuenca in nine Latin American markets, the food & drinks sector has come out on top ahead of pharmaceuticals and retail, with consumers in the north of the continent generally more trusting than those in the south. Connectivity, however, may be having an impact.

Taking in the views of nearly 4,000 consumers across Brazil, Chile, Colombia, Ecuador, Mexico, Panama, Peru and the Dominican Republic, and exploring the consumer trust relationship with the key sectors of food & drink, automotive, pharmaceutical, financial services, retail and telecommunications, the survey by communication and public affairs consultancy Llorente y Cuenca has found that food & drinks businesses are on average the most trusted in Latin America.

Overall, the pharmaceutical and retail sectors were considered the equal second-most trustworthy (with a tally of 7.2 out of ten) following the food & drinks sector (7.5), while the telecommunications (6.8) and financial services (6.6) sectors received the lowest trust ratings in the region. The automotive sector meanwhile earned a trust grade of 7.1, which along with retail was above average when compared to other regions.

Average consumer trust per sector in Latin America

The results, however, highlighted some distinct divides between the countries surveyed per sector, with the more northern consumers in Mexico, Panama and the Dominican Republic expressing overall greater faith in big business than their more cynical southern counterparts in Argentina, Peru and Chile – the latter of which registered the lowest levels of trust across the region despite being considered the best location for business.

Chilean consumers, for example, assessed the food & drinks sector as a 6.6 for trustworthiness, compared to a 7.9 rating in Mexico, while consumers in Panama felt that financial service providers were worth a 7.3 on the trust scale against a 5.7 score in Argentina although this may not be surprising given the contribution of financial services to Panama’s GDP and the dire state of an Argentinian economy riddled by foreign debt and fiscal mismanagement, which continues to hamper the country’s overall business climate.

Consumer trust in Latin America by country

Still, despite the variances, consumers in Latin America are on the whole more trusting than those in Spain (the home market of Llorente y Cuenca), and by a fair margin – with the corresponding survey in Spain producing an average result of 5.8 and none of the sectors earning a score higher than 6.3, compared to the consolidated score of 7.1 across sectors in Latin America and a lowest score of 6.6 (although financial services wasn’t assessed in the Spanish survey).

In contemplating the differences between regions, the consulting firm forwards the idea that the internet may be playing a part; “when contact intensity (connectivity, e-commerce, transactions) is greater, there are more ‘moments of truth’ when more frustrating and also more satisfactory situations are or may be generated.” While the Latin American region as a whole has reached an internet penetration rate of 61 percent, some sources give the figure in Spain as having pushed above 90 percent, with the country one of absolute world leaders for mobile connectivity.

Interestingly, Chile, which is the least trusting of those surveyed, also leads Latin America for internet connectivity – last year ranked 25th worldwide in an index compiled by Chinese telecommunications giant Huawei. Chilean consumers also consistently ranked higher across each sector in the Llorente y Cuenca survey for the value they placed on communications (transparency) in assessing business trustworthiness, privileging this criterion as a ratio above business practices (integrity) and product/service (credibility) as compared to other countries.

According to Llorente y Cuenca, the growing online engagement trends in Latin America are granting consumers more power in their relations with businesses, and presenting greater potential for the erosion of trust; “Inevitably, the increased connectivity and boom of social networks have converted the relationship between brands and consumers into a glass box, which requires a more direct, transparent approach. The challenge of meeting expectations in an era of Fake News is not to be infallible, but to be honest when one makes a mistake.”