LatAm Consumer & Retail: The Good, Bad and Ugly for 2018

Latin America has enjoyed a slow but steady recovery since 2016, characterized by strengthening currencies and consumption and the rapid growth of e-commerce. In 2018-2019 the LatAm economy will continue its positive momentum, with Brazil and Argentina holding the reins. But this upcycle is different, challenged by the disruptive force of m-commerce, strong Chinese competition in many product categories and an unpredictable political backdrop thanks to elections in Brazil, Mexico and Colombia.

The Good

In 2018, projected real GDP growth in Latin America will reach 2.4%. Importantly, growth this year will improve in every major market in the region versus 2017. If currencies continue appreciating as expected, LatAm imports could grow at 6%. The mix of foreign direct investment will include more consumer facing businesses such as e-commerce, banking, insurance, food services, etc. A more stable economy will enable central banks to lower interest rates, helping accelerate demand for durables (cars, computers, white goods, etc.) which in Latin America is increasingly tied to credit.

Beyond this positive macro-economic picture, consumer facing companies need to focus in on three positive trends:

#1 Incremental cash into the economy

In 2018, the Russia World Cup will take place as well as the election of five LatAm presidents. These events will prompt both short-term fiscal expansion and boost advertising spending, putting more cash on the street. In Brazil, Mexico and Colombia, (all World Cup qualifying countries) wide-open, hotly contested elections will exacerbate this positive demand boost. Advertising costs will not be cheap but with the entire nation glued to their TVs, laptops and cellphones, 2018 presents a superb opportunity to launch new products and bolster brands.

#2 Universal connectivity

Internet penetration in LatAm is around 61% (reaching 400 million people). Consumers are constantly connected and exposed to breaking news. Latin Americans keenly research facts, brands and price comparisons online. According to research published by Nielsen in its 2017 report, 41% of consumers check or compare prices before visiting a store, with 33% searching online for deals or promotions. The new Latin consumer seeks objective product reviews, a rapid and easy e-commerce experience and a secure transaction. Few retailers are prepared to shift their offering as quickly as consumers demand. As a result, a gap has opened for new online and omnichannel retailers to fill.

#3 E-commerce/Omnichannel

E-commerce in LatAm ($60bn) represents around 3% of formal retail sales (2% of all – formal and informal retail) and is projected to continue growing at double digit rates (15% to 20%). Comparatively, e-commerce represents closer to 10% of U.S. retail and 20% of Chinese retail. As an emerging market with an underwhelming brick and mortar retail footprint, e-commerce penetration in Latin America should eventually reach Chinese levels if payment, logistics and security barriers can be overcome.

The barrier busting era may commence in 2018 as three big players ramp up their LatAm expansion: Alibaba, Amazon and Walmart (omni). The scale of their investments and commitment to low prices and excellent customer service are not viable with today’s structural barriers in place so these companies have no choice but to overcome Latin America’s perennial e-commerce challenges. There will be plenty of opportunities for local solutions providers and complementary e-commerce players to partner with these and other game-changing digital commerce players (Netflix, Uber, Airbnb, etc.)

The Bad

On December 11th, 2017, a 15-year probationary period of China’s entry into the WTO was concluded. Now, several Latin American countries can opt to rescind their recognition of China as a market economy. The distinction is an important one for such recognition by a 2nd country obliges them to work through the bureaucratic machinery of the WTO to counter any dumping by the other market economy, i.e. China. Ever since Premier Hu Jintao charmed the market economy recognition out of LatAm leaders in 2006 in exchange for increases in FDI and trade, many in Latin America have regretted the decision. Each year, Chinese products flood Latin America, displacing local brands and other international brands that manufacture in the region. In Mexico, savvy entrepreneurs import products from Chinese factories using Alibaba and then resell on Mercado Libre at double the price. Despite hefty tariffs and terrible logistical delays, Latin Americans go out of their way to save money by purchasing Chinese products. Today, Chinese brands command anywhere from 7-20% share of Andean car markets. Chinese transition from maquiladora to ownership of global brands is driving the need to penetrate middle income markets starting with Latin America.

While elections tend to inject additional resources to the economy, political campaign battles create a lot of noise and a negative sentiment among consumers. A good practice is to monitor consumer sentiment and brand affinity with consumers to adapt messaging if necessary and to build bonding and empathy.

Latin Americans are the most obese people on the planet, with Mexico ranked the most obese nation on earth. This startling fact has prompted a political backlash against soft drink producers who have traditionally enjoyed above global average penetration of the LatAm beverage market. Mexico introduced a Sugar or Obesity tax in 2014, increasing consumer product pricing by 12% and changing labelling rules. A new report from Euromonitor International shows that 19 countries have introduced what it called “sin taxes” on food and drinks and more will follow suit the near future, with the aim of reducing sugar consumption by 20% in line with guidance from the World Health Organization. Beverage producers have little choice but to play along, but are not thrilled by the new challenge in LatAm, their most prized world market outside the U.S.

The Ugly

Latin America has evolved rapidly in no small way due to trade agreements signed with partners all over the world. But today, the specter of protectionism has resurfaced in the US, parts of Europe as well as important emerging markets. The law firm Gowling published a study in November 2017 that ranked countries that have passed more anti-trade regulatory measures versus pro-trade measures since the financial crisis in 2009. The top 10 list (led by the US) included India, Argentina, Russia and Japan.

Latin America has been positively contrasted to the U.S. and Europe as a safely pro-trade region. However, globalization has proven more displacing of manufacturers and farmers in Latin America than it ever was in the USA. The technocrats in power may be free trade enthusiasts but Latin voters are less sanguine about globalization. AMLO is the leading candidate in Mexico’s July 2018 Presidential election and has cleverly positioned himself as the anti-Trump candidate. An ugly NAFTA divorce could launch AMLO to power and an era of creeping protectionism in Mexico. Brazil’s election campaign also casts doubts about the country’s trade policy future. Lula may now be out of the race but some of the country’s strongest contenders: Marina Silva (left) and Bolsonaro (right) are both of protectionist bent. The election of populists in either Mexico or Brazil will shake investor and consumer confidence, just as the region is regaining some positive traction.

Contact us to find out more how the right market intelligence can help you strategize to maximize the opportunities, minimize the risk and avoid the threats in the LatAm consumer and retail sector during 2018.
Mauricio Cárdenas

Leave a reply