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Multinationals vs. Multilatinas: Latin America’s Great Race

Low-Income Opportunities
Developing new products and business models for low-income and middle-class segments, which comprise about 245 million people or roughly 50 percent of the total population, is a major growth opportunity for MNCs and multilatinas alike. But serving this market profitably is hard, especially for non-Latin companies. A mass consumer in Latin America earns a fraction of the income of the average consumer in developed markets. He or she does not have a car, typically can’t afford to make impulse purchases of small items (even a whole candy bar), and would not, in a developed country, qualify to open a bank account or have a credit card. Yet as a group, these consumers have massive purchasing power and a strong desire to buy basic goods and services.

To sell and distribute profitably to this mass market requires capabilities that MNCs often lack. We have seen many MNCs, particularly consumer goods companies that have tried to import their upscale global brands and distribution models from retail markets in developed countries, struggle in Latin America. For example, Unilever’s acquisition of Varela SA, a Colombian home and personal care company, and Best Food’s acquisition of the Brazilian food company Arisco faced a similar difficulty: the integration of local companies that made popular low-priced brands into firms accustomed to producing and selling more expensive products. In both cases, the result was that these companies lost a considerable portion of their market share, or divested parts of the acquired businesses.

Global MNCs frequently face trouble managing distribution channels in Latin America. Most of the region’s distribution channels are small stores, especially in categories such as food, packaged goods, and construction materials, and they differ markedly from the concentrated distribution environments in Europe and the United States.

Large Latin locals have also done better than foreign competitors in selling to low-income consumers, because they tend to create products and services suited for them. Locals also have distribution channels in place to make these products broadly accessible and business models that allow them to do so profitably. Whereas the U.S. chocolate companies Mars Inc. and the Hershey Foods Corporation have established only a marginal presence in Latin America by selling their larger chocolate bars, Arcor and Nacional de Chocolates have developed sizable businesses selling bite-sized chocolates that are affordable to low-income consumers, cater to their tastes, and can be bought in remote rural stores.

Banks such as Bradesco in Brazil and Banco Caja Social in Colombia are able to offer services to low-income households many other banks would not serve; they’re also among the most profitable banks in their countries. Grupo Maseca SA in Mexico and Polar in Venezuela have grown to be among the largest and most successful food companies in Latin America by producing tortillas and flour for “arepas,” which is a basic food staple, and by making them available in the small retail stores where low-income consumers typically shop.

How Multilatinas Will Multiply
Expanding internationally is clearly the other critical growth strategy for Latin American companies, especially the rising Brazilian and Mexican multilatinas that have been able to prosper in their large single-country markets. Although locals are under pressure to become at least panregional in scope, they must carefully examine many issues as they develop their strategy. They should:

  • Recognize when multicountry scale is appropriate, and understand how it will affect the business.
  • Define the minimum scale and coverage necessary to compete in their sector (e.g., subregional, pan-Latin, or even global).
  • Achieve scale through a combination of domestic consolidation and regional acquisitions and alliances.

Locals can derive multicountry scale and management networks in several ways, and through a combination of strategies: They can build on language and cultural similarities to develop pan-Latin brands; concentrate on easily transportable products with high economies of scale in production; use fewer and larger plants sourcing in more countries; and establish service centers in low-cost countries or develop services through the Internet.

 
 
 
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Resources

  1. ResourcesJorge H. Forteza, “Competing in Emerging Countries: The Case of Latin America,” s+b, Second Quarter 1997; Click here.
  2. James A. Gingrich, “Five Rules for Winning Emerging Market Consumers,” s+b, Second Quarter 1999; Click here.
  3. C.K. Prahalad and Stuart L. Hart, “The Fortune at the Bottom of the Pyramid,” s+b, First Quarter 2002; Click here.
  4. “The Changing Face of Strategic Alliances in Latin America,” strategy+business and Knowledge@Wharton white paper, September 11, 2002; Click here.
  5. Geri Smith, “War of the Superstores,” Business Week, September 23, 2002
  6. Christopher C. Williams, “La Vida Loca: Latin American Markets Are Surging — and Money Is Still Pouring in,” Barron’s, June 17, 2003
  7. John Williamson and Pedro-Pablo Kuczynski, “After the Washington Consensus: Restarting Growth and Reform in Latin America,” Institute for International Economics, 2003
  8. “Wanted: A New Regional Agenda for Economic Growth,” The Economist, April 26, 2003
 
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