Latin America will see the highest e-commerce growth worldwide through 2015.
BY DANIEL LATEV
In 2010, Latin America topped Internet retailing growth globally, achieving a 24 percent increase together with Asia Pacific, while over the next five years it is expected to remain the fastest growing region, registering a 17 percent compound annual growth rate (CAGR) in constant value terms.
Internet retailing in Latin America almost tripled in size over the last five years to generate sales of almost US$12 billion in 2010. However, the channel is still almost three times smaller than direct sales, which remains the preferred non-store distribution channel among Latin American consumers.
Brazil is by far the biggest Internet retail market, accounting for 70 percent of all regional sales. The country also enjoys the highest per capita spend online in the region – at $42, followed by Chile and Argentina at $36 and $23, respectively. Mexico, the second most populous country in Latin America, is lagging behind with an Internet retail spend of just $9 per capita, overall Internet retail sales reached just over $900 million in Mexico in 2010.
MORE REGIONS, MORE CONSUMERS
In the biggest Latin American market of Brazil, Internet retailing is beginning to shift from the economic hub located between São Paulo and Rio de Janeiro to the Northeast region. The number of Internet users has risen the most in the North and Northeast regions. According to the IBGE (Instituto Brasileiro de Geografia e Estatística), the number of Internet users rose by 214 percent in the Northeast and 171 percent in the North in 2010. According to MoIP, a company which specialises in online payments, payments from transactions with Internet retailers from the Northeast accounted for 27 percent of the company’s revenues in 2009, compared to 12 percent in 2008.
With a vast geographical market to cover, Brazil is experiencing some of the problems typical of large emerging markets. Delivery companies have struggled to transport products sold via the Internet. As a result of e-commerce growth, delivery companies have witnessed problems in terms of lack of appropriate road and airport infrastructure as well as difficulty in hiring specialist workers. Additionally, deliveries to the growing numbers of lower and middle-income consumers who shop online are those presenting the greatest challenges and require a certain level of creativity from delivery companies. According to the delivery company Direct Express, in 2008 80 percent of deliveries were destined for affluent neighbourhoods, while in 2010 affluent areas accounted for a 60 percent share of deliveries and poor neighbourhoods, including “favelas”, a 40 percent share. Limited urbanisation in “favelas”, with few actual streets, calls for deliveries to be made by bicycle, motorcycle or even on foot. Additionally, robberies are not uncommon. To reach consumers in the “favela” located in Vila Cruzeiro in Rio de Janeiro, Direct Express established a partnership with the social inclusion project “Atitude Social” (Social Attitude), with some of the couriers being former drug dealers from the area. According to Direct Express, robberies diminished significantly following this partnership.
Latin American consumers are the biggest supporters of the direct selling model globally. In 2010, direct sales were worth US$32 billion in Latin America – almost three times the level of sales generated through the Internet. While both Internet and direct selling are non-store, distance selling models, direct selling offers an advantage in that it reaches lower-income consumers or consumers who are not connected to the Internet. However, one aspect which has been key to the high adoption of the direct selling channel in Latin America could also be starting to benefit Internet sales. Latin Americans are very social consumers who enjoy the interaction provided by direct sales, the personal recommendation and the experience. In this respect, it is not surprising that 86 percent of all web users are also users of social networks.
2010 saw the introduction of several collective buying sites in the Brazilian market. The newcomers include, among others, US company Groupon, SaveMe from Buscapé and Peixe Urbano and Click On, both owned by Grupo Abril. These new initiatives rely on young audiences and Brazilians’ wide adoption of social media channels on the Internet as indicators of collective buying potential.
The new launches of collective buying websites and clubs, such as BrandsClub, indicate that Brazilian consumers are becoming accustomed to purchasing online to the extent of trying new purchase formats. The new players hope to benefit from Brazilians’ extensive use of social media to expand their businesses. BrandsClub, for example, expects to reach R$200 million in revenue by the end of 2011.
ARGENTINA LEADS GROWTH
Argentina and Venezuela were the markets which achieved the strongest Internet retailing growth in 2010, reaching almost 40 percent in current terms. Argentina was also the fastest growing market historically, posting over a 57 percent CAGR between 2005 and 2010.
Rapid growth of Internet usage is one of the reasons behind the sustained growth in Argentina, another reason being that consumers are using the Internet to shop for better prices. According to Gonzalo Tomas Benitez from Le Shop, the current economic situation is helping as “people are turning to shopping online because it is a 'rational buy' which avoids temptation. Shopping on the web saves time and controls what you purchase, avoiding impulse buying.” Online supermarket clients typically purchase packaged food, drinks, beauty and personal care and home care products, with fresh food having a much smaller percentage than in actual stores as consumers still have some doubts about the cold chain being properly maintained.
However, despite the growth in online sales of supermarkets, Argentinean Internet users are still using Internet retail sites primarily to compare prices. This explains why many retailers like Carrefour and Wal-Mart do not have online stores but do have an extensive product catalogue with prices for people to compare. Consumers used to look for advice when searching for a television but now they prefer to do their research online and pick up the product directly at the store. This is helping hypermarket sales of electronics and domestic appliances as these retailers offer competitive prices, while the more specific advice offered by specialists is no longer as important to consumers.
The most successful Internet sites are those of store-based retailers which already benefit from consumer confidence. Pure e-commerce companies are few and far between, have not yet found a successful way to reach consumers and depend mainly on word of mouth. Retailers need to look at how they can use online communities like Facebook and Twitter, which are increasing their number of users significantly in Argentina.
YOUNG, EDUCATED, AFFLUENT
In Mexico, as in other emerging markets, Internet access and e-commerce remain the preserve of more affluent sections of society. While the number of Internet users continues to rise, a large proportion of these belong to income groups A, B and C+, which account for around 20 percent of the total population, compared to around 40 percent of all Internet users. Meanwhile, one of the lower-income groups (D) which represents around 37 percent of the total population did not register any increase in the number of Internet users in 2008/2009. The economic crisis of 2009 further worsened this situation. Indeed, the share of households with a home computer among lower-income groups (D and E) fell by three percentage points in 2008/2009 to 12 percent.
This concentration of Internet access and usage is not simply due to economic factors. Overall, 35-year-old-and-under consumers account for a 77 percent share of Internet users in Mexico. Another factor that signals the close relationship between higher Internet penetration and higher-income consumers is education: three quarters of all Internet surfers have at least a bachelor’s degree or college education, while only 10 percent of people with basic education access the Internet.
Tourism-related products and services (air tickets, hotel nights, holiday plans etc, which are not captured in the quoted data in this article) account for a huge portion of Internet sales - at least three times higher than retail Internet sales. Despite the boom in Internet retailing, it accounted for less than a 1 percent share of overall retailing value sales. This concentration of Internet access and usage suggests that the boom has been a response to a relatively new retail format that quickly became popular among a small part of the population but will encounter major difficulties in terms of reaching the bulk of the population.
The most successful Internet retailers in the country are regular brick-and-mortar retailers that have adopted the Internet to promote retail sales and offer a holistic retailing experience. While there are a few pure Internet retailers such as the music player Tarabu, it is mostly “bricks and clicks” companies such as El Puerto de Liverpool and Grupo Palacio de Hierro that profit in this retailing channel.
Latin America will be the region to register the strongest e-commerce growth globally, posting a 17 percent constant value CAGR over 2010-2015. In 2015, sales will reach just over US$25 billion, although this will represent just 4 percent of global e-commerce sales.
Growth will be driven by an increase in online users and improvements in infrastructure, such as faster broadband services, higher household PC and laptop penetration and improvements in payment and delivery services.
Given the platform on which Internet retailing operates, the best performing companies are likely to be those that fulfil two main criteria. The first is the use and promotion, or even the creation of, flexible payment methods. Credit/debit card ownership in Latin America is still relatively low and is unlikely to rise significantly in the short term, so retailers may have to create their own payment methods (for example, a pre-paid card accepted among a circuit of retailers) or promote existing methods such as PayPal, payment on delivery or select online and pick-up and pay in store. Secondly, companies will attract more consumers if they are able to offer safe transactions. This is an issue of paramount importance as consumers are still concerned about online fraud such as credit card cloning and sales of personal information contained in databases.
Daniel Latev is head of non-store retailing research at Euromonitor International. This article was written for Latin Business Chronicle.
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