Beating scale barriers in fragmented trade An exploration of the traditional trade opportunity for consumer goods companies in Latin America

Transcription

1 Beating scale barriers in fragmented An exploration of the traditional opportunity for consumer goods companies in Latin America E Y -P arthenon C onsumer products and retail sector

2 Beating scale barriers in fragmented Introduction In the early 2000s, consumer products companies envisioned a new marketplace taking shape across Latin America, one that relied on modern convenience and self-service instead of a fragmented network of mom-and-pop shops. They developed their distribution strategies accordingly and plotted for a future with new store formats, organized channels and a more affluent and financially empowered consumer base. Fifteen years later, this future has not fully materialized. has endured, and consumer products companies that wagered on modern are now missing out on a large segment of the market. Other companies, with either no presence in Latin America or lowperforming distribution capabilities, are struggling to compete in a landscape with potentially hundreds of thousands of points of sale. Consumer products companies that want to succeed in Latin America cannot afford to neglect the traditional opportunity. They also cannot afford the exorbitant cost and 5 10 year timeline required to build distribution networks capable of serving consumers throughout the region. While this conundrum persists, it does not prevail: consumer products companies can and should pursue routes to market in Latin America, and they are now able to do so with modest exposure and capital expenditure. 1

3 Theory vs. reality Multinational consumer products companies with aspirations of growth in Latin America envisioned a future marketplace driven by loyalty to modern. This vision, inspired by North America and Europe, was based on an assumption that consumers would discover modern 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. In this intended marketplace, an increasingly affluent and growing middle class would have access to the financial services needed to afford the higher cart values that result from less frequent shopping trips. In addition, there was an assumption that modern would scale quickly due to their own access to capital, therefore expanding store footprints to acquire consumers in remote areas historically dominated by traditional. Consumer product companies with no presence in traditional thought this scenario would present an attractive shortcut in which they could capture market share in a critical emerging market, leverage distribution networks owned by modern and circumvent the cost of building their own distribution networks. In reality, consumer products companies that wagered on high growth in modern have struggled with ill-fitting routes to market in a challenging economic environment. In the fallout of the global financial crisis, mom-and-pop proliferated because they were better suited to address the needs of economically stressed local populations. In addition, many consumers, still paid in daily cash wages, were unable to access the financial services needed to enable consolidated shopping trips with higher cart values in modern. Lastly, many modern were too small to be profitable, therefore requiring more to attain economies of scale. The fragmented logistics networks required to serve this unanticipated volume of modern demanded the exact type of distribution and logistics investment consumer product companies had hoped to avoid. Figure 1: had been demonstrating a healthy growth rate historically reaching penetration over ~50% by 2010 and was expected to continue at a robust rate 56% 54% Period depicting growth of modern stagnation 5 50% 48% 46% 44% (ex. convenience) 2

4 Beating scale barriers in fragmented An opportunity that has persevered Despite modern s formidable presence in Latin America, traditional has continued to endure as a reliable cornerstone of the consumer products market, with ample opportunity across categories and countries. Category and market dynamics Food and beverage The food and beverage categories have proven especially resilient in traditional. Over the past decade, traditional has maintained a majority share in these categories across the region despite assumptions that modern would quickly capture share. While the share of modern in recent years has shown a 1% to increase, traditional is expected to remain an important determinant of total food and beverage retail in Latin America. Home care has maintained a healthy 30% share in home care since As macroeconomic factors such as urbanization and increasing female workforce participation come into play, modern is expected to maintain its majority share moving forward. Figure 3: Split of traditional vs. modern in the home care category in Latin America 1% 31% 29% 29% 30% 68% 70% 69% 68% Figure 2A: Food Split of traditional vs. modern in the food category in Latin America 54% 44% 5 46% 51% 47% 51% 48% Figure 2B: Beverage Split of traditional vs. modern in the beverage category in Latin America 3% 4% 4% 53% 5 50% 4% 50% Beauty and personal care Personal care and beauty continues to be dominated by modern, with supermarkets and hypermarkets being the primary point of sale. Promotional offers, convenience and a differential experience are key sales drivers for these categories in the modern channel. While this is not expected to change, traditional has maintained 11% market share for nearly a decade, suggesting it will continue to be a core channel for consumers lacking access to modern. Figure 4: Split of traditional vs. modern in the beauty and personal care category in Latin America 1% 1% 1% 1% 13% 11% 11% 11% 86% 88% 88% 89% 45% 45% 46% 46% 3

5 Channel dynamics There is a high degree of variance in channel dynamics across Latin American markets, so consumer products companies can expect varying degrees of opportunity across the region. exceeds 30% share in markets such as Mexico, Argentina, Colombia and Peru while in Chile it s 14%. Also, individual markets reflect varying growth dynamics, with Colombia and Peru expecting modern to grow at a compound annual growth rate of 6.1% and 3.5%, respectively, through Proximity and convenience give traditional a critical advantage. Latinos work longer hours than Americans and Europeans: an average of 42 hours per week vs. 38 and 37 hours, respectively, resulting in less time to shop. Among Latin American consumers, 44% consider location to be the most influential reason behind choosing one store over another, and for consumers who lack access to transportation, one-stop shopping a hallmark of modern is logistically prohibitive. It s also interesting to note that 60% of Latino consumers interact with their local shopkeeper, presumably allowing him or her to influence their path to purchase with helpful, time-saving recommendations. New strategies for competing Until very recently, the only way to penetrate the traditional channel was to build or buy a distribution network, which carried a high upfront cost, not to mention several years of unprofitable operations and the challenge of managing hundreds of thousands of new points of sale. Now, several independent distributors offer a reliable network of regional third-party providers that give consumer products companies the access they need without the costly investment in assets and infrastructure. This type of arrangement empowers companies to shift their focus to more value-adding activities such as account development, sales and merchandising. In addition, consumer products companies with large-owned distribution networks are increasingly open to distribution partnerships with other companies that effectively subsidize the fixed cost base that these networks demand. In many cases, these invited guests must invest only in the particular infrastructure required to handle their specific products (e.g., refrigerated trucks for frozen food). Additionally, consumer products companies such as Proctor & Gamble (P&G) are starting to use targeted direct marketing campaigns to drive traffic to traditional in which consumers can discover localized product innovations and assortments. Latin America is the world s fourth-largest mobile market, with social media adoption surpassing that of the US, and P&G has been shifting its media strategy and spend away from television in order to focus more on digital and radio. P&G has seen its sales in the region grew 8% in the last fiscal year with about 50% of its volume sold through traditional, and it will be interesting to see how their media and advertising strategy continues to impact the traditional channel moving forward. Executing a distribution partnership While a reliable distribution partnership can reduce time to market and capex requirements, the complexities of the arrangement structure and integration should not be neglected. For example, a company may need to contract multiple distributors or wholesalers in various regions, sales channels or client categories, and they must closely manage in-store execution, including inventory, pricing, assortment strategy and merchandising no easy task across such a fragmented landscape. The amount of oversight needed to properly serve traditional, in combination with logistical complexities, can be daunting. Meanwhile, talent is not widely available in the region, so companies must be creative to attract, incentivize and retain qualified and experienced professionals. Perhaps the most important hurdle is how a company handles distribution, whether through agreements with third parties, an acquisition or a separate path. In many cases, these network arrangements are set up through complex and customized service-level agreements. They may include exit and breakout mechanisms and be structured more like a joint venture than a commercial agreement. Some networks become co-owned, requiring clear governance models and periodic capital expenditures to upgrade infrastructure. Consumer products companies that choose to explore innovative and adaptive distribution partnerships can monetize the traditional opportunity and achieve their full potential in Latin America. 4

6 How can help Consumer products and retail teams can help you navigate your options and answer your key questions about a new route to market, such as: Which companies are open to forming a distribution partnership that will expand my access to traditional? Which partners have the capabilities and reach that align with my portfolio and business objectives? How can I limit redundancies and optimize operations while expanding access to new markets? has developed a broad approach for strategic route to market (RTM) transactions, centered on four stages: 1 Evaluate the commercial and operational capabilities and compare them to the opportunities, gaps and priorities in your business 2 Assess the strategic options against a clear set of commercial, financial and risk parameters Figure 5: RTM circle 4 1 Implement Route to market approach Evaluate 3 Help design your future operating model by determining key processes, systems and third-party relationships 3 Design Assess 2 4 Support the implementation of focused governance and plans for cutover, stabilization and synergy attainment 5

7 Authors Omar Troncoso Managing Director Mancera, S.C Jeff Wray Managing Director Ernst & Young LLP New York For more information on and the Consumer products and retail teams, please visit parthenon.ey.com. About professionals are global leaders in strategy consulting. teams are committed to bringing unconventional yet pragmatic thinking together with clients smarts to deliver actionable strategies for real impact in today s complex business landscape. Innovation has become a necessary ingredient for sustained success. Critical to unlocking opportunities is the balance of strengths specialized experience with broad executional capabilities to help you optimize your portfolio of business, uncover industry insights to make investment decisions, find effective paths for strategic growth opportunities and make acquisitions more rewarding. Proven methodologies, along with a progressive spirit, can deliver intelligent services for our clients, amplify the impact of our strategies and make consultants the global advisors of choice for business leaders. EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. is a brand under which a number of EY member firms across the globe provide strategy consulting services Ernst & Young LLP All Rights Reserved. EYG no GBL ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com