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Food Giants Refocus in LatAm

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Latin America provides better growth than Asia for food giants like Carrefour and Casino. Meanwhile, Wal-Mart gets help from CAFTA.

BY EVETTE TREEWATER
InfoAmericas

Global retailers like Wal-Mart, Carrefour and Casino established footprints in Latin America during the 1990s, but the economic downturn following 2001 shifted their strategic focus to other emerging markets.  While they were preoccupied with Asian entries, Latin America became economically stable, experienced a rise in disposable incomes and discovered credit. 

Consumer demand has responded emphatically with some of the fastest sales growth worldwide. Over the first three quarters of 2007, Carrefour registered comparable (same-store) sales growth of 9.7 percent in its Latin American stores, compared to only 2.8 percent in Asia.  Casino reports an even greater disparity this year, with 13.1 percent same-store growth in Latin America and only 2 percent in Asia.  

This recent rise in consumer demand is not concentrated in the usual places.  Middle and upper low-income consumers, comprising about 55 percent of Latin America’s population, are flexing their consumer power for the first time.  Second-tier markets like Colombia and Peru are experiencing a release of pent-up demand that is reshaping their retail sectors.

RETAIL WAVE

The 1990s saw major foreign retail investment in tier-one Latin American countries.  American giant Wal-Mart and France’s Carrefour and Casino all entered Mexico between 1991 and 1994.  Wal-Mart started operations in Brazil and Argentina in 1995, competing against Carrefour stores already present. Having established themselves in all three tier-one retail markets in Latin America, Wal-Mart and Carrefour set out to conquer Asia.  Casino made up for lost time by entering Argentina and Brazil back-to-back in 1998 and 1999, followed by Thailand and Taiwan

A surge of East Asian entries for global food retailers began in 1995, as they vied for early positions in the world’s fastest-growing economies.  The economic downturn in Latin America followed the Asian retail surge, and caused several divestments in the region.  Among them was Carrefour’s sale of its Chilean operations to leading supermarket chain D&S.  Aside from Casino’s minority shares in Venezuelan and Colombian retail chains and Carrefour’s five-year stint in Chile, the most promising second-tier markets remained largely untouched. 

In 2005, ten years after entering Brazil and Argentina, Wal-Mart announced its next Latin American move: Central America.  Wal-Mart simultaneously entered Guatemala, Honduras, Nicaragua, El Salvador and Costa Rica by purchasing a third of CARCHO (Central American Retail Holding Co.) from Dutch retailer Royal Ahold, proving that the giant is not shy to enter smaller markets under the right conditions.

CAFTA
 
After success in countries with the largest market potential, why Central America? One deciding factor was the Central America-Dominican Republic-United States Free Trade Agreement (CAFTA-DR). Wal-Mart announced its purchase CARHCO shares from Ahold in September 2005, two months after the treaty was ratified by the U.S. Congress.  It purchased the additional shares necessary to become majority shareholder as the treaty began to take effect the following March.  Seizing the opportunity for easy access and rapid dominance paid off. Wal-Mart Central America now stands as Central America’s largest retailer with over 420 outlets and counting.

Free trade agreements mean more to food retailers than lower prices for imported goods.  Wal-Mart is a leading business lobbyist for speedy approval of the pending Latin American free trade agreements before Congress.  Its representatives explain that barriers to store entry and tariffs on expansion inputs are also eliminated with the agreements.  This allows for rapid expansion as in the case of Wal-Mart Central America.

Global retailers have generally exhausted greenfield entry options in the region’s largest markets, which have been rapidly consolidating in recent years.  Wal-Mart, Carrefour and Casino are comfortably situated in tier-one and some tier-two cities where buying power is the most concentrated.  All operate supermarkets, hypermarkets, clubs stores and hard discount store formats.  In the last five years, there has been increased segmenting of consumers by launching high-end supermarkets and various discount stores.

MEXICO

With the very large exception of Walmex, the Mexican grocery scene is dominated by competitive domestic players that rank among the region’s largest retailers.  Local giants like Soriana and Chedraui successfully drove out European competitors Carrefour and Casino, who both sold their Mexican operations in 2005.  In Buenos Aires, global retailers that weathered the crisis are reaping the benefits as incomes catch up to economic recovery. Carrefour’s same-store sales growth in Argentina averaged 30 percent over the first three quarters of 2007. Of the top three retail markets, Argentina could hold the greatest opportunity for immediate expansion. 

Expansion efforts in these markets are now focused on penetrating medium-sized cities and targeting lower income segments.  All major retailers operate hard discount store formats like Wal-Mart’s Bodega Aurrera in Mexico and Carrefour’s Dia stores in Brazil and Argentina.  Wal-Mart announced this year that it will venture into Brazil’s most impoverished region, the Nordeste. 

Both local and foreign retailers are taking credit access for the masses into their own hands by partnering with banks to provide financial services in the stores.  Wal-Mart, Cencosud, Falabella and Carrefour are now some of the largest card issuers in the region.  Credit issues boost sales of large-ticket items like refrigerators, television sets and washing machines that low-income customers cannot afford up front.

NEW FRONTIERS

Chile’s competitive retail sector has proven deadly to global entrants.  Aggressive Chilean players Cencosud, Falabella and D&S have driven out European food retailers Carrefour and Ahold.  Although one of the developing world’s most attractive modern retail markets, it is also one of the most highly penetrated and consolidated. 

These same factors force Chilean-based regional players like Cencosud and Falabella to make expansion outside of Chile a top strategic priority.  Cencosud President Horst Paulmann commented after the 2007 shareholder meeting that Chile “is an extraordinary country as an investment platform and the company's expansion and future depend on internationalization."

Chile’s leading department store chain, Falabella, and largest food retailer, D&S, are joining forces to create Latin America’s second-largest retail entity.  The new, multi-format retail giant is valued over $15 billion and well-positioned for further regional expansion. 

COLOMBIA AND PERU

Colombia’s dynamic and expanding retail market has already attracted global retailers like Carrefour and Casino.  With modern retail penetration at only 40 percent and the possibility of a US-Colombian Free Trade Agreement on the horizon, opportunity remains for more players to get involved.   Wal-Mart began registering its brands and trademarks in Colombia in 2006, raising speculation of future entry plans.  Earlier in 2007, Cencosud and Casino vied over shares in the top supermarket chain Almacenes Exito, with Casino acquiring the additional shares to become majority shareholder.   Undaunted, Cencosud found an unlikely partner in Casino to open home improvement stores in Colombia, which could represent an opportunity for future expansion into food retail.

Peru is about to complete its sixth straight year of GDP growth averaging 5.6 percent annually.  This growth is due mainly to a rise in metal prices worldwide, but the increase in consumption that resulted is now a major driver of growth itself.  Domestic demand expanded 10.4 percent in the first half of 2007, with no signs of slowing (Credit Suisse).  Food retail sales have grown 52 percent since 2002 in Peru compared to 60 percent in Colombia; however, growth has accelerated faster in Peru over the last two years. 

Modern retail has been mostly confined to Peru’s capital city, where 80 percent of household purchasing power is concentrated.  Supermarkets and hypermarkets have a penetration of 30 percent in Lima and only 15 percent in the rest of Peru for a national average of 25 percent.  This number is expected to double to 50 percent in 2009 (EIU).  Peru represents an incredible opportunity for modern retail market chains if they act quickly.

Corporación Wong currently holds a 60 percent market share and Supermercados Peruanos comprises 26 percent.  Both operate several formats to target different income levels, with construction plans focusing on larger stores and the middle-income consumer. Falabella’s Tottus stands at 14 percent with only four hypermarkets.  The Chilean retailer announced plans to open 15 new grocery outlets in Peru over 2008.  Another indicator of Peru’s appeal to modern retailers is their response to Wong’s reported solicitation for acquisition bids. Though Wong repeatedly denied it was ever for sale, it was considered for acquisition by Cencosud, Ripley, Falabella and Wal-Mart earlier this year.

WAL-MART

Wal-Mart denied any immediate plans for entry into Colombia or Peru earlier this year but says “the opportunities are there.” The U.S.-Peru FTA was approved by the House of Representatives on November 8 and has been moved to the Senate.  Along with Wal-Mart, consumer product manufacturers have been eagerly awaiting its passage.  Procter & Gamble points to Peru and Colombia as particularly important commercial opportunities.  Peru’s imports from the U.S. increased 25 percent over 2006 to US$2.9 billion even without an FTA.  The pending trade agreements with Colombia and Panama face significant challenges that are likely to cause delays. 

Major global retailers have all voiced the same strategy in the last year:  lean heavily on operations in Latin America and Asia to increase profit margins and offset decreasing sales growth in the U.S. and Europe.  If they are to deepen their presence in Latin America’s fastest growing retail sectors, second-tier markets like Colombia and Peru, they must move quickly as local acquisition costs increase in step with Latin American incomes.  India and China might be the emerging retail markets of the future, but the time to be in Latin America is now.

This article is republished with permission from Tendencias, the magazine of the InfoAmericas.

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