Over the past decade, large retailers have made only modest progress in penetrating low-income segments in Latin America. Part of the reason is that multinational corporations, especially from developed countries, have earned enough delivering products to, and developing retailing formats targeted at, higher-income customers to be able to take their eyes off the potential of consumers with limited incomes. Moreover, retailers have underestimated the collective economic clout of people of modest, or even subsistence, means.
As Latin America makes progress in solving its economic and social problems, companies seeking growth and profit in the region’s consumer-goods markets will have to refocus on this vast and growing group of lower-class and lower-to-middle-class consumers we call emerging consumers. Indeed, this was a definitive finding of a Booz Allen Hamilton study of consumer behavior and supermarket retail trade trends in six Latin American countries conducted in 2003 for the Coca-Cola Retailing Research Council–Latin America. (See “Research Methodology,” at the end of this article.)
Companies trying to export modern supermarket and hypermarket models from developed countries to Latin America face the toughest challenges, not the least of which is surprisingly strong competition from small-scale retailers — the shops, street markets, and small independent supermarkets that are an integral part of the Latin culture. Through the lens of the modern retailer, Latin America’s traditional retailers appear to be inferior; their small stores seem dirty and cluttered and possess limited stock. It is assumed their proprietors rely on informal, even illegal, operating practices, such as the evasion of taxes and labor laws, to prop up their otherwise unproductive business model. Their customers are seen as cash-strapped, unsophisticated shoppers.
Our study found these assumptions regarding low-income Latin consumers and the viability of Latin America’s small-scale retail models to be faulty. Although large supermarkets have made significant inroads in the region over the past decade, traditional retailers are holding their ground. Small retailers not only are meeting the needs of emerging consumers; in many ways, they are serving these consumers better than modern retailers do. Furthermore, informal business practices are not the main driver of the traditional stores’ competitive strength.
To reach these conclusions, we analyzed not only what and where emerging consumers are buying, but also why they make their choices. In the process, we discovered significant myths about the mind-set and behavior of emerging consumers, and lessons that large companies producing and distributing consumer goods for this region can learn from the success of the small-scale retail trade.
Selling to emerging consumers is no small challenge for major consumer-goods retailers and manufacturers, especially those unfamiliar with Latin America’s distinctive retail terrain. To accelerate their penetration of these markets, and to sustain profits over time, these companies must offer emerging consumers different value propositions, modify their distribution and marketing strategies, and achieve global scale and local focus. They must do all this without compromising the value and profitability of their offerings for traditional customers. And, when possible, they must seek to decrease their costs. Until companies better understand the needs of emerging consumers and adapt their business models to serve them more efficiently and effectively, their growth will be limited.
The 1990s global economic boom and the economic stabilization of many Latin American countries was the perfect springboard for modernizing the region’s retail sector. During this period, multinational consumer-goods companies and local supermarket chains invested aggressively in retail. This investment, combined with rising per capita incomes and a general improvement in the quality of consumer goods, helped fuel the expansion of large chain supermarkets through the mid-1990s. Today, depending on the country, approximately 45 to 60 percent of the retail sales of such packaged goods as food, beverages, personal care items, and cleaning products are concentrated in supermarkets.