Producers looking for competitive advantages need to study carefully the Central American market dynamics.
BY DANIELA RUBIO
The fast-changing market realities of Central America, spurred by the implementation of the DR-CAFTA free trade agreement with the United States, are providing a competitive advantage to new companies that can start planning their sales and distribution approaches from the beginning, and poses challenges to the established players that still need to re-organize their strategies to match the changing scenario.
The market consists of six countries with at least 30 million consumers. Thanks to economic and political stability, the middle class expansion in recent years is evident in the rise of credit access, remittances and GDP growth. Private consumption is at historic levels.
Since the DR-CAFTA was signed in 2004 by Guatemala, Honduras, El Salvador and Nicaragua, followed by Costa Rica in 2005, growth in the region has increased as a direct consequence. The United States is the top trading partner for each country individually, and therefore the largest commercial partner for Central America as a whole. The trade pact has brought higher foreign direct investment to the region, and has allowed countries to increase their exports. Furthermore, trade liberalization offers consumers a much wider product variety, making the purchasing decision more complex.
EFFECT ON DISTRIBUTION
These trends are pushing regional market leaders to re-think their strategies toward Central American consumers. The question in everyone’s mind now is, how will the changing market dynamics affect the sales and distribution systems?
Currently, the region does not have high-volume wholesale retailers or supermarkets that call for a single-channel model; rather, distribution is organized in sub-regions or even on a per-country basis. The implementation of DR-CAFTA is unlikely to change this in the medium term, with most companies dividing Central American into "northern" (Guatemala, Honduras and El Salvador) and "southern" (Nicaragua, Costa Rica and Panama) sub-regions, for distribution purposes. In the long term, Central America will operate and be considered as a single trading area. As the regional economy consolidates, distribution channels will follow as a direct result, and the region could then reach a distribution and sales model similar to second-tier single-country markets in Latin America.
Currently products are sold through different selling points depending on the country and city. Most countries in the region still use traditional distribution and sales channels, such as small, family-owned stores. Although large retailers are increasingly apparent in certain key cities, traditional trade will likely prevail in the upcoming years. The shift from traditional trade outlets to big box retailers will come gradually and have a larger impact over the next five to seven years.
CASE STUDY: HOME APPLIANCES
In Central American home appliance distribution, the retail sector is consolidating. Currently, three retailing models can be identified in the region. Traditional channels such as hardware stores, specialist shops and even kiosks and grocery stores are still the predominant channels for purchasing home appliances. On a second level, supermarkets are growing in sales share. Finally, traveling salesmen and informal trade still have a share of the market.
Traditional channels predominate in cities of all sizes, with an estimated trade volume of at least 60 percent. Consumers in smaller cities and towns or low income segments have a greater tendency to visit specialized shops, such as electronic stores. These points of sale still exist in larger cities, but see less business from middle class and upper class customers, who find big box retailers and supermarkets more convenient for their shopping, offering a "one-stop shop" solution.
Big box retailers are present mostly in larger cities. The expansion of large format retailers in these markets allows consumers to access high-quality and low-cost products.
Wal-Mart made a standard loan investment in 2005 and entered the market through former local chains: País in Guatemala, Los Pela in Nicaragua and Más por Menos in Costa Rica. Discount club stores like Costco and PriceSmart tailored their strategy similarly.
Consumers use this channel to purchase any type of home appliance, from a toaster or blender to a refrigerator or washing machine, simply because they believe supermarkets and big box retailers offer enough variety and a competitive price. Specialty shops are usually not available in all city areas and, combined with high traffic, consumers prefer to go to a "one-stop shop" where they can simultaneously do other shopping.
Logically, this channel should consolidate in the future. However, this will not happen in the short term, and other channels will dominate the market while the economies are still emerging. Consolidation of big box retailers will happen when the middle class expands to a broader share of the population. It would be a mistake to think of these channels as primary and ignore other channels, which are still crucial sales points.
Central American salesmen move across the region supplying a certain niche that still does not frequent commercial centers such as malls. Their operational costs are cheaper (similar to the grey market) and they never offer warranty or post-sale services. This distribution model is often used by low-cost manufacturers or manufacturers that are looking to clear excess inventories or previous-generation technologies.
When planning strategic distribution in Central America, foreign manufacturers should keep in mind that having their product located in a big-box retailer will not guarantee sales success. They might be missing the reality in the region, which is still dominated by traditional channels. Foreign home appliance manufacturers should consider the conditions of each region and ensure distribution of their products in all channels for deeper market penetration.
As the region’s economic and political consolidation process continues, companies should be paying special attention to how distribution of products is evolving. For the home appliances case specifically, the way the products are distributed is changing due to the emerging big-box retailers. Nevertheless, the distribution mapping for another product or service can vary. Therefore producers that wish to find competitive advantages need to study carefully the Central American market dynamics.
This article is republished with permission from Tendencias, the magazine of Kroll InfoAmericas.