South America is the next retail frontier as Brazil, Uruguay and Chile top China and India for new expansion opportunities.
The region made the biggest gains in an annual ranking of the top 30 emerging countries for retail development, according to a report by management consulting firm A.T. Kearney. That improvement puts four South American countries in the top 10 for the first time, said Hana Ben-Shabat, a New York-based partner at A.T. Kearney who started the ranking 10 years ago.
South American markets are increasingly attractive to foreign companies because of their “very healthy” retail spending and large urban populations with rising disposable incomes, Ben-Shabat said. Latin American markets are showing strength coming out of the recession, which helps keep sales accelerating, she said.
“The region is ready for that next wave of modern retail growth,” Ben-Shabat said. “It makes sense to invest in brands in those markets because you’re going to have some large percentage of consumers who are young today and who are going to grow with the brand into the long-term.” Uruguay ranked second on the Global Retail Development Index, moving up six spots from last year, while Chile came in third after placing sixth in 2010. These countries trail Brazil, “now one of the developing world’s most attractive markets for retailers,” according to the report. Chile’s economy grew 9.8 percent at an annual rate for the three months ended March 31, compared with 6.8 percent for Uruguay and Brazil’s 4.2 percent.
Companies ranging from Wal-Mart Stores Inc., the world’s largest retailer, to LVMH Moet Hennessy Louis Vuitton SA, the world’s largest maker of luxury goods, are flocking to the continent even amid concerns about a credit bubble.
Brazil’s Bovespa stock index has fallen 20 percent from a November high on investor concern about rising inflation. In December, the central bank increased reserve and capital requirements to slow consumer lending. Chile and Uruguay have raised their benchmark rates within the past two months.
South American economies have embraced domestic demand-led growth, while their governments generally take a “hands-off” approach by, for example, resisting price controls, according to Pedro Tuesta, a Washington-based economist for Latin America at 4Cast Inc., a global market analysis firm. They are “very, very receptive to foreign capital investments,” he said.
India and China placed in the index’s top three for several years before dropping to fourth and sixth, respectively, this year. The lower rankings are indicative of the faster pace of growth in South American economies and not a sign of falling retail potential in India and China, Ben-Shabat said. Because their markets are already “mature,” companies are considering second- and third-tier cities for expansion, she said.
‘Masters of Globalisation’
The index, now in its 10th year, is developed using 25 macroeconomic and retail-specific variables to help companies prioritize their global expansion strategies.
Wal-Mart and France’s Carrefour SA, the world’s second- largest retailer, are “masters of globalization,” having made developing-market expansion a priority, according to the report. Bentonville, Arkansas-based Wal-Mart entered Brazil in 1995 and Chile in 2009 and now operates 484 and 290 stores, respectively, in these countries, the company said in June.
Chile, along with Mexico and China, had the best comparable-store sales growth and also “the highest percentage sales increase for the quarter compared to last year,” Chief Executive Officer Mike Duke said on a May 17 conference call.
Carrefour, meanwhile, has more than 650 retail locations in Brazil, according to its 2010 annual report. The retailer, based near Paris, will continue to pursue growth opportunities in Brazil even after a proposal to merge with Cia. Brasileira de Distribuicao Grupo Pao de Acucar failed this month, Chief Financial Officer Pierre Bouchut said last month.
Another French competitor, Saint-Etienne-based Casino Guichard-Perrachon SA, set up franchises with grocers in Uruguay in the 1990s. The company’s 53 Uruguayan stores made up 3 percent of total international revenue as of Dec. 31, according to its 2010 annual report. In Brazil, Casino has more than 1,600 stores; they make up 42 percent of global sales.
Uruguay has “very attractive economic and retail fundamentals,” including high consumption per capita, an export-oriented economy, a tourism-centered service sector and a favorable environment for foreign investment, said Almacenes Exito SA, which is planning to buy a stake in Uruguayan supermarkets from majority shareholder Casino.
Exito used the A.T. Kearney report as part of its analysis for the purchase, it said in a statement.
Uruguay is “riding Brazil’s coattails” as it approaches the peak of its window of opportunity for investment, according to A.T. Kearney. Almost 95 percent of the population has easy access to urban areas where modern retailing prospers. The country’s physical size — among the smallest in South America – – is appealing to retailers that want to test concepts before entering other regional markets, Ben-Shabat said.
For Uruguay, a strengthening middle class with healthy disposable income and a population concentrated in the capital of Montevideo are appealing for retail investment, Tuesta said. Still, foreign companies may find it difficult to open a large operation in this country of about 3.3 million people unless they’re interested in a regional strategy, he said.
It’s common for grocery stores and other food-related companies to be the first to enter developing markets, according to Ben-Shabat. They pave the way for other types of retailers, she said. Paris-based LVMH, which sells leather bags for more than $2,700, has stores in the capitals of Uruguay and Chile.
Match for Gap
San Francisco-based Gap Inc. plans to open its first South American franchise store in Santiago in October, followed by one in Concepcion, Chile in November, according to Stefan Laban, senior vice president of strategic alliances. The market is a “great match” for Gap’s target customer, he said.
The company, the largest U.S. apparel chain, operates about 3,100 stores in eight countries and more than 180 franchise locations in 25 countries.
“Chile has a strong retail market with a large, city- centered customer base that appreciates casual American style,” Laban said. “Substantial opportunity exists for us in South America and we are exploring other markets in the region.”
With a population of almost 16.9 million, Chile has become one of the region’s promising retail markets, driven by government incentives to stimulate consumption, increased middle-class disposable income and an urban population, according to the A.T. Kearney report. Retailing in Chile, which places consistently among the index’s Top 10, is projected to grow 10 percent in 2011, the authors said.
Still, foreign companies may encounter hurdles in developing markets, where high levels of growth may be offset by consumer credit volatility. In addition, outside of the largest cities, the population of these countries is largely rural, which limits expansion opportunities.
Inflation is also a concern, even for the region’s biggest economy. Brazilian prices rose 6.71 percent in June, marking a six-year high and the 10th straight month of increases. It was the longest streak of annual quickening since 1993-1994, when the country replaced the cruzeiro with the real amid hyperinflation of as much as 4,923 percent.
Brazil also has raised its overnight interest rate five times this year and doubled a tax on consumer credit, to 3 percent a year.
The pace of price increases rose to the highest levels in more than a year in both Uruguay and Chile. Uruguayan household debt via the banking system, including mortgages, grew in 2010 to 21.4 percent as of the end of 2010, according to a financial stability report from the Central Bank. The report compared total credit with household disposable income.
At the same time, Chilean retail sales have slowed. After averaging 16.4 percent annual growth in the first quarter, they fell to an average 8.6 percent in April and May and sales are projected to rise to 10 percent in June, according to the median forecast of nine economists surveyed by Bloomberg.
Retailers may underestimate the level of competition in these developing markets, where they must vie with both local and other foreign companies, Ben-Shabat said. In China, Mattel Inc., the world’s largest toymaker, closed its only Barbie store in March, less than two years after opening, while Best Buy has closed stores in Turkey and China.
“Just because we invented modern retailing, some people think we know it best,” Ben-Shabat said.
Once retailers establish a presence in Brazil, Uruguay and Chile, a regional approach to other burgeoning markets in the region may make sense, Ben-Shabat said. Peru, eighth in this year’s index, could attract some of the same foreign retailers, particularly as its infrastructure — including shopping centers and supply chain routes — expands, she said.
Several Chilean retailers have already opened stores in neighboring Peru. Cencosud SA operates 64 supermarkets and hypermarkets under the brands Wong and Metro, and Ripley Corp. has 15 stores in Peru. The country’s “constant economic growth” led to 21 percent revenue growth for SACI Falabella’s 57 supermarkets and stores for the quarter ended March 31, the company said May 13.
With a comparably younger population — the median age is 26.2 years old — and potential for more urbanization, Peru will grow even faster than Chile and Uruguay, Tuesta said. He projects that GDP growth will stabilize at about 6.5 percent in the next five years after fluctuating between 0.2 percent and 9.8 percent in the past decade.
The government has historically “gone out of its way” to grant benefits to foreign investment, though investors have been concerned that President-elect Ollanta Humala, who assumes office today, may not be as business-friendly as his predecessor, Tuesta said.
“The risk, as always, is how long these countries can drive growth without the global economy rebounding,” he said.
By Anna-Louise Jackson and Anthony Feld