INTRODUCTION
Colombia is a country where retail is heavily concentrated along Tradition channels. Both economic as well as demographic aspects, such as the personal preferences of consumers, have contributed to making the famous cornerstores (or tiendas de barrio as they are commonly known) the largest holders of market share in sales of fast moving consumer goods across the country. This factor, along with rapid and aggressive changes in modern retail, have brought great challenges upon manufacturers who often struggle to increase market share and improve profitability in a growing and competitive environment, as is the case with the Colombian market.
OVERVIEW OF LATIN AMERICA
It should go without saying that the retail market in Latin America has been heavily concentrated towards traditional channels. However, in the last few years, the region has witnessed a significant migration towards more modern retail channels, largely due to the arrival of major multinational chains. In addition, a mix of economic and demographic factors, coupled with the sudden growth of a young and more modern middle class along with high rates of urbanization have further fueled this trend and are drawing an increasing number of consumers in the region towards the more Modern retail channels.
Yet it is important to highlight that each country in the region can be found at a distinct phase in their evolution towards Modern retail. Within Latin America we find countries with both a high penetration of Modern channels as well as countries still heavily reliant on Traditional retail outlets. Examples of the former, where the Modern Channel is highly developed (with a market share of above 50% of total retail sales) can be seen in Brasil, Chile and Mexico. On the other end of the spectrum we find countries with strong traditional tendencies such as Bolivia, Peru and -in third place- Colombia, which for the close of the year 2011 showed a 74% share of its sales concentrated within this channel.
Despite the differences in the mix between Traditional and Modern channels that can be found within the region, one unequivocal trend that can be seen in the past few years sweeping the continent would seem to be the growing penetration of Modern Retail. This phenomenon can be observed in the majority of Latin American countries, but for a handful of exceptions, among which we find Colombia.
In Colombia the distribution of sales between Modern and Traditional retail outlets has remained steady for the past six years, unlike what we observe other countries where consumers have swayed towards major chains. Economic growth (which is generally a precursor to Modern Retail growth) has not managed to shift a great deal of Colombian consumers from their traditional points of purchase, and a growth rate of 3.6% in GDP has not shaken the traditional cultural preferences and customs inherent within the population.
These cultural preferences, which show no signs of abating in the coming years, bring with them important implications for both manufacturers and distributors of consumer goods. It is imperative that they reevaluate their strategies in light of the idiosyncrasies of the Colombian mindset, and that they fully comprehend the demands of the often underestimated Traditional sales channel that continues to dominate the retail environment despite the setbacks it has faced from major multinational chains.
HOW HAS TRADITIONAL RETAIL BEEN ABLE TO HOLD ITS GROUND?
In comparing the Colombian case with the rest of Latin America, the question arises as to why Colombia has not followed the trend prevalent in the rest of the region. The root causes lay in both the economic factors of the population as well as the personal preferences of consumers.
Despite rapid economic growth in previous years, Colombia is still a highly unequal country with regards to income distribution, where the top 20% of the population controls over 60% of the national income. Neighboring countries that have shown similar growth levels have managed to improve their indices of inequality, yet Colombia remains stuck at the levels it was prior to its growth. The economic factor subsequently plays a key role in consumption habits; Studies undertaken by the BBVA Bank show that 74% of Colombians that live with an income of less than USD $370 a month do their shopping exclusively in cornerstores (Tiendas de Barrio). On the other extreme, merely 6% of the population frequent only modern grocery retail outlets, and the rest of the Colombian population uses a mixture of both sales channels.
Looking beyond merely economic factors, the purchasing habits of Colombians have also been shaped by cultural aspects as well as their personal preferences. Colombian consumers find immense value-add in specific characteristics of the cornerstore which Modern Retail cannot offer them. Four key factors stand out as the key motives that drive Colombians to shop in cornerstores.
1) Comfort and Service: Cornerstore goers are often attracted to the personalized service that these store owners have developed with their customers. The familiarity factor and other benefits that are offered in these outlets are elements that one does not find in supermarket chains. In addition, the store owners are revered as important members of the community that look out for the welfare of their customers and on many occasions, play the role of neighborhood watchmen. Finally, the inherent informality of the business allows store goers to do their shopping without having to deal with the hassles and restrictions of packaging, volumes and hours that are imposed upon by big supermarkets.
2) Availability of Credit: One of the most important factors for cornerstore goers is the possibility of purchasing by means of credit. These micro-loans or “fiados” as they are termed, allows for a large part of the Colombian population to buy products in the moment that they most need them. Store owners, who know their clients on a personal basis, are willing to offer these credits which would be impossible to obtain in large chains.
3) Small Volumes: In addition, a large proportion of the Colombian population carries out their shopping solely on the basis of their daily needs. 42% of Traditional Retail shoppers buy on a daily basis, 19% between 2 and 3 times a week and 14% buy on a weekly basis. They tend not to buy large volumes due to the fact that they lack immediate liquidity to do so and also tend to buy products that serve their prime necessities. Thus, cornerstores offer products in small sizes that are congenial to the purchasing power of the average Colombian.
4) Proximity: Finally, cornerstores, by definition, are conveniently located close to the homes of consumers. Trips to the supermarket, especially in big cities, imply a major investment in time, money and an ordeal that most Colombians are not willing to undergo when they can count on a more convenient outlet closer to home.
These factors have been essential in impeding the major chains that operate in the Colombian market from gaining greater market penetration despite the fact that they have gone to great lengths in the last few years to arrive at a larger percentage of the population. While these same efforts have been highly effective in other parts of the Continent, they have simply not borne the same results in Colombia.
THE EVOLUTION OF MODERN RETAIL CHANNELS
MERGERS & ACQUISITIONS
One phenomenon that can be seen to a great extent in the past years has been the flow of acquisitions of national chains by major foreign retail groups. Today, the key competitors of the Modern Channel, Grupo Exito and Carrefour, belong to the international companies Groupe Casino and Carrefour (Cencosud since 2012) respectively. We also see mergers and alliances between different players within the country. For example, Grupo Exito is an amalgamation of Exito, Carulla and Surtimax while chains such as Ley, Pomona and Mercadefam have disappeared, victims of the wave of consolidation in the last few years brought on by their competitors.
As a consequence, there has been a marked reduction of options and greater uniformity among the big chains. This situation has brought with it further consequences, particularly with respect to the prices offered to the public.
The remaining chains, which are becoming ever more so concentrated along a handful of fewer and more powerful members, have gained greater leverage in negotiations with suppliers given that they now represent a larger part of retail sales. This has allowed them to increase their buying power and investments from suppliers which often translate into promotions and lower prices for the public as they aspire to be the chain with the lowest prices.
In addition, having a handful of key competitors in the market leads to price wars with the sole aim of attracting greater traffic to their establishments. What is more, giant chains are now offering private brands, more economic alternatives to everyday products. All these factors have made Modern Retail outlets extremely competitive in their pricing for those who use these channels to purchase larger volumes of goods.
Nevertheless, the constant efforts to keep prices at rock-bottom levels, while they do serve to displace customers from one point of purchase to another within the Modern Retail Chain, have not managed to make customers migrate from other Channels towards them. It is for this reason that the major chains have now started to experiment with new formats that will allow them to expand to a new client base.
THE EXPRESS STORE BOOM
Around two years ago, the major chains started moving rapidly towards the convenience store format, opening up a large number of these outlets that they called Express Stores (Tiendas Express). As a result, by the end of 2011 there were 48 Exito Express outlets, 22 of Carrefour Express outlets, and 10 Carulla Express outlets. In addition, 2009 was the year the global convenience store chain OXXO entered the market and today numbers 17 outlets around the country.
The sudden growth of such a large network of establishments of this kind (which were almost inexistent a few years ago) has rendered this format the fastest growing of any kind of retail outlet in sales volumes (24% in 2010 and 53% in 2011), although they still represent a small portion of total sales within the retail sector of the country.
The opening of Express stores in the big cities of Colombia looks to cater to a new segment of the population that has started to appear only within the last few years. The so called Generation Y, the cohort of young adults that were born in the 80s, show distinct behaviors in their attitudes, their consumption habits as well as their diets. The sudden proliferation of Express stores in the big cities of Colombia is in large part attributable to this segment: young, single, and flush with disposable income, this segment demands convenient locations in order to make quicker purchases. Major chains have recognized the importance of this group and taken the initiative to develop Express Stores in accordance to their life style.
THE DISCOUNT STORES
The expansion of Express Stores has primarily taken place in the higher strata zones 4, 5 and 6 of Colombian cities, while the cornerstores still dominate the lower strata areas of zones 2, 3 and 4 along with neighborhood supermarkets (“Minimercados” as they are locally known). These neighborhood supermarkets are formats focused on residential zones of lower strata districts, and are larger than cornerstores yet significantly smaller than supermarkets. It is highly unlikely that the big chains would want to compete directly with cornerstores through Express formats which are oriented to higher end segments. But in order to be able cater to this lower end segment, the major chains have opted for a different model, namely through Discount Stores, as is the case with Surtimax (which belongs to Grupo Exito), which offers cheaper products with greater variety.
Initiatives such as Surtimax aim to attack socioeconomic segments that the big chains have not been able to reach. Till now, this format has shown a significant growth in sales (33% in 2011 compared to last year) and though they do not have a large share of total retail sales in the country, show promising growth in the years to come.
GREATER GEOGRAPHIC COVERAGE
Lastly, the major chains- whom until now have concentrated on big cities- have started to spot important opportunities for sales in intermediary cities that up until now had not formed part of their expansion plans. The potential to draw traffic from this new base of consumers has incited these chains to open new points all around the country, increasing their number of establishments as well as their geographic coverage.
To give one example, Grupo Exito, the leader in retail sales in Colombia, opened 65 Exito outlets in the first 9 months of 2012 (split between supermarkets, hypermarkets and express stores), 39 Surtimax stores and 2 Carulla outlets, adding up to a total of 395 points of sale for the group in 72 cities around Colombia and more than 790,000m2 in sales area.
MODERN VS. TRADITIONAL: THE FIGHT TO CAPTURE THE BOTTOM OF THE PYRAMID
Colombia is still a country with an astonishingly high level of inequality with regards to income distribution. It is precisely for this reason that Traditional retail will continue to hold such a large share of sales for a long time to come. Low income households will continue to depend on Traditional channels for reasons before mentioned, and it is for these reasons that major chains will be forced to migrate to the lower income populations if they wish to capture a part of the fortune to be found at the bottom of the Colombian Pyramid. The aggressive growth of Surtimax and the acquisition of an array of neighborhood supermarkets all around the country by the retail giant Olímpica are clear indications as to the intentions of Modern retailers to encroach upon territory historically dominated by Traditional retailers.
Yet it is worth noting that the global giants will come up against a competition that is becoming increasingly powerful, organized and sophisticated in handling their business. Through initiatives such as Fenaltiendas and explicit backing from the Government, Traditional outlets have been able to improve their negotiating positions, band together into formal cooperative communities and adopt the best technologies and practices thanks to the help of the National Federation of Commerce (FENALCO).
In addition to an increasingly formal Traditional retail channel, it is worth noting that even the very dynamics of buying from traditional outlets is evolving. Studies of shoppers undertaken by market researchers Kantar have shown that clients of cornerstores and neighborhood supermarkets do not only seek price and convenience when they shop; They also frequent these channels with the aim of trying out new products and take the time to analyze prices. The latter indicates that neighborhood supermarkets, much like the major chains, are being perceived as places to stimulate trial of novel products and to analyze promotions, which holds serious implications for both producers and distributors. In fact, neighborhood supermarkets are already recognized by Colombian industry as an important location to win over the loyalty of Colombian consumers.
These two trends, on the one hand the push by big chains and the increasing formalization of neighborhood supermarkets and on the other the evolution in the mindset of the clients of neighborhood supermarket highlight the fact that the struggle between the big chains and neighborhood supermarkets to capture the bottom of the pyramid will be the key battleground between Traditional and Modern Retail in Colombia.
WHAT ARE THE IMPLICATIONS FOR MANUFACTURERS AND DISTRIBUTORS?
Despite all the efforts by big chains, there is no doubt that Traditional channels remain an important figure in the Colombian retail environment. The reality is that cornerstores are here to stay and that they deserve the attention that they are receiving given that they account for more than 50% of retail sales in the country.
Consumer Goods producers firstly need to have a clear idea that the bulk of the demand for their products is concentrated in small units and volumes. They need to be able to arrive with an offering of products that satisfies the daily necessities of buyers and that attracts consumers that seek an image of lower priced items.
Changing the portfolio to meet these needs would imply expending a great deal of effort on several fronts in order to be able to forecast demand and distribute these items to the hundreds of thousands of cornerstores that operate around the country. Firstly, an accurate estimation of demand would allow for efficiencies in production and a reduction of lost sales which could represent an important part of revenue. With regards to distribution, producers will need to better gauge the scope of their logistics and study the best way to reach out to such a mass market, whether it is with direct distribution or through distributors. Producers need to be able to weigh the costs and benefits of both models with the aim of optimizing revenue. Their methods of distributing merchandise will be crucial if they wish to win over a larger number of consumers, particularly when they are products and brands that have not yet been positioned in the market as leaders.
Additionally, it goes without saying that for whichever product that enters or wishes to survive in a market, the key to succeeding in retail is based on having the product available at points of sale. Producers need to develop an efficient distribution network to assure that products are delivered properly and on time, not only in order to cater to demand from repeat users but also to stimulate impulsive buying of those who encounter the products in cornerstores for the first time and opt to try them in what would be their Moment of Truth.
If the final decision is to enter or strengthen a given channel, producers must assure that the way in which they are attending clients is the most effective way possible. It is imperative that producers understand that new formats of retail are being created in Colombia as we speak, that the markets are evolving and for that reason their formulas for success need to be evolving for the channels they wish to participate in. Producers must be constantly reevaluating their strategies, with a focus on guaranteeing efficiency in logistical processes, and moreover they must look to train and specialize their sales force.
All distribution and sales initiatives will need to be guided and organized with a careful segmentation of clients and channels. One mustn’t merely quantify all potential clients but rather, in addition to the former, estimate the possibilities of growth and potential profitability from each one. Once this is determined, it is key to define the value proposition, identifying all commercial elements that truly generate a greater impact for both Traditional and Modern retail clients, since the latter will keep experimenting with new formats and opening more points of sale, which will create the need for newer and better strategy.
Although Colombia remains a market with a highly potent Traditional sector, one cannot and must not underestimate its Modern counterpart, whose players are evolving into fewer but more powerful members and are showing themselves willing to enter in several new segments simultaneously. The key to triumph with these big commercial chains will be found in optimizing the Level of Service, not only to avoid incurring penalties, but also to become the supplier of choice for these clients.
Finally, as mentioned before, there is a constant downward pressure to offer cheaper products. The implication is that profitability for producers and distributors will not be derived from the margin imposed upon the price as we have seen in years past: Price wars, perpetual discounts and increasingly demanding consumers will not allow it. Profitability today must be earned through minimizing costs, reducing logistical expenses and lowering inventory levels that can represent important savings and subsequently, greater margin.
CONCLUSION
Colombia is a market unlike any other. That being the case, strategies to dominate retail sales must take into account all these unique characteristics that, if addressed correctly, can translate into important profits in one of the most dynamic economies in the region with a population that is finally showing its appetite for consumption. The focus must be on the Traditional channels and the key to success is to develop distributors and intermediary channels with the aim of consolidating ones presence in the points of sale where the bulk of consumption occurs in Colombia.
Roberto Palacios, Sintec roberto.palacios@sicweb.wpengine.com Samir Bhojwani, Sintec samir.bhojwani@sicweb.wpengine.com Alejandra Ovalle alejandra.ovalle@sicweb.wpengine.comAbout Sintec
Sintec is the leading consulting firm focused on generating profitable growth and developing competitive advantages through the design and execution of holistic and innovative Customer and Operations Strategies. Sintec provides a thorough and unique methodology for the development of organizational competencies, based on three key elements: Organization, Processes and IT. Furthermore, Sintec has successfully carried out more than 300 projects on Commercial Strategies, Operations and IT issues with more than 100 companies in 14 countries throughout Latin America. Our track record of more than 25 years makes Sintec the most experienced consulting firm in this area of expertise in the region.
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