Small retailers in Latin America have proved they are formidable competitors. Our study shows that they have a good business model — one based on efficient inventory management, low operating costs, and attention to the daily purchasing needs of emerging consumers and their personal preferences. Learning how to adapt some of these practices to their business models is critical to the large retailers’ growth, but such adaptation will be hard. Emerging consumers’ predilection for buying small-ticket and thin- or lower-margin items, their self-restraint as shoppers, and their tendency to browse rather than buy could mean low returns on promotional spending. Retailers that try to open new supermarkets closer to target neighborhoods but use modern retail formats are likely to have lower gross margins and
Existing supermarkets could change their approach to selling fresh fruits, vegetables, and meats so they’re more culturally appealing to everyone. Supermarkets can also address the concerns of low-income consumers who feel intimidated when they shop in those stores. The value proposition of the small stores is to make products accessible, and to offer friendly, helpful service. Large stores can do this better than they do. Respectful and supportive treatment of low-income customers goes a long way to getting them to return regularly.
Just as in the case of large retailers, consumer-goods companies face significant challenges to profit from serving emerging consumers. However, the magnitude of the opportunity has already moved multinational players like Unilever, Cadbury, Coca-Cola, and McDonald’s to target emerging-market consumers in countries such as Brazil and India. Typically, manufacturers have reacted to this opportunity by adjusting their value propositions and reconfiguring their business models along three dimensions, each representing increasing business transformation.
The transformation can be company centered and product centered, affecting important variables like price, package size and design, and branding. This involves repositioning of products and brands as well as adjustments to promotions and distribution. Or a specific consumer segment can be targeted, which requires a redesign of product attributes, production, and distribution. Significant business process change is introduced through changes in business objectives, performance metrics, and channels. In some cases, this could lead to acquisitions. A third route is redefining the entire industry value chain. Supply chain relationships may change or be eliminated. Major production and technology changes may be introduced. This can lead to strategic business transformation.
Whether the company is a retailer or a manufacturer, these initiatives represent an important shift in the paradigm for serving low-income consumers. Companies that successfully make this shift not only are likely to profit from their new business models, but also will be making an important contribution to the economic growth and social welfare of emerging nations in Latin America, and around the world.
Booz Allen Hamilton conducted this study for the Coca-Cola Retailing Research Council–Latin America. The council, which includes a group of major retail leaders in Latin America, devotes itself to studying issues of relevance to the retail industry in the region.
The research covered Argentina, Brazil, Chile, Colombia, Costa Rica, and Mexico. The study classifies consumers according to five socioeconomic strata (SES): “Upper-class” and “upper- to middle-class”; “lower-class” and “lower- to middle-class” (the emerging consumers); and “subsistence.” SES ratings are typically based on a number of variables including asset ownership, occupation, and education. Although annual per capita income level is not considered in the SES classification because this information is so difficult to verify, in this article, we use “low-income” and “lower-middle-income” interchangeably with “lower-class” and “lower- to middle-class.” SES ratings are relative; the purchasing power and characteristics of an “affluent” household in one country can be quite different from those of an “affluent” household in another country.
The primary qualitative research used four focus groups conducted in each country for a total of 208 participants. Target participants were emerging consumers and women who typically make the bulk of household purchases in the food, beverage, personal care, and cleaning products categories and shop regularly in at least one type of small-scale retail outlet. Secondary sources consulted included SES profiles from local marketing research associations and previously published, relevant consumer studies.
Fieldwork in each country included 217 store checks and 190 in-depth interviews with small retailers. Comparisons with the large-scale retail trade are based on selected players in each country for which financial information is publicly available. Country fieldwork also included interviews with distributors and tax practitioners. Other secondary research and data sources consulted were syndicated data sources such as ACNielsen, local retail-oriented associations such as ABRAS in Brazil and ANTAD in Mexico, and journal and popular press articles.