Latin America's a region of great and diverse natural beauty, vibrant cultures and larger than life personalities - the late Hugo Chavez of Venezuela to name but one. But there's more to it than carnivals and salsa. Here are three reasons why consumer goods companies should keep an eye on the region...
1. Expanding urban populations
Ever heard of a megalopolis? It's a city home to more than five million people and there are eight in Latin America [i] . The vast majority of the Latin American population - almost 85% - will live in cities by 2025 and the 198 large cities, those housing 200,000 or more people, will generate 65% of the region's growth over the next 15 years [ii].
It's not just that the population is growing and moving; there are changes in its make-up too. The World Bank says Latin America's middle class expanded by 50% between 2003 and 2009. Despite this, it's important to remember that inequality is still a feature of daily life in the region. The Bank defines only 2% of Latin Americans as rich (an income of over $50 per day). To give an example, in Chile and Mexico the top 20% of the population earn around 13 times as much as the bottom 20% [iii].
Consumer goods companies will need to take these population changes into account. The growing middle classes will have increased spending power, bringing with it opportunities for companies to target them with more 'aspirational' products. However it will also be important to remember lower income groups, and offer value with competitively priced products and entry price private label ranges.
2. Growth in many Latin American economies is cause for optimism
In IGD's new market attractiveness scoreboard, seven Latin American countries are among the top 30 most promising emerging grocery markets in the world. We've identified four common features across the most attractive markets, and one of these is a positive economic outlook, which helps create upbeat shoppers.
According to IMF figures, the Peruvian economy is expected to grow by 6.3% in 2013, the highest rate of the Latin American markets featured in our scoreboard. Chile is expected to grow 4.9%, Colombia 4.1%, Mexico 3.4%, Brazil 3.0% and Argentina 2.8%. Countries' membership of trading blocs Mercosur and Pacific Alliance, supported by momentum created by the World Cup and Olympic Games coming to Brazil in 2014 and 2016, will boost competitiveness and trade, and make Latin America more attractive in the longer term.
Unfortunately, it's not all good news. Economic growth, although strong, is slowing in Chile, while the Colombian government has cut its economic growth target for 2013.
And inflation is a constant challenge in many markets. For example, in Argentina, press reports say real inflation is around 25%, more than double the figure given by official sources. According to a survey at the end of July, consumers expect an inflation rate of 30% this year. Retailers in the country agreed to freeze prices this year for a period (later extended) from February to April, to help combat inflation.
New Venezuelan president Nicolas Maduro also faces a tough task, with price rises in April 2013 of +4.3%, the worst since August 2010. High prices are leading to shortages of groceries and consumer goods in Venezuela, with one state introducing restrictions on purchases of some price-controlled products.
3. Retailers and suppliers are investing and innovating
With tough conditions in Europe and the US, international consumer goods companies are increasingly looking towards emerging markets for growth.
Portugal's Jerónimo Martins has taken its first steps in Colombia, and there are still opportunities for acquisitions - Cencosud's purchase of Carrefour's Colombian stores has probably been one of the biggest deals in the last year - showing the potential for growth. Other retailers are looking at new channels - GPA for instance has launched an e-commerce site in Brazil and has ambitions to lead the online retail market.
Domestic retailers like Chile's Cencosud and Brazil's RaiaDrogasil are opening new stores too, while Mexico's Oxxo is powering ahead, opening a convenience store on average every eight hours.
Supplier investment levels are also high. Manufacturers are increasing production capacity - for instance Nestlé, AB InBev and Unilever are all investing in facilities in Argentina. They are raising cash to fund projects; Coca-Cola bottler Embotelladora Andina is selling bonds. And they are driving innovation. The Colombian food producer Grupo Nutresa has created a fund open to its employees, to encourage and finance radical innovation projects that enhance its competitiveness.
Conclusion - why it's a region to watch
The conditions aren't perfect - but they are encouraging for consumer goods companies operating in Latin America. There are problems with inflation, poverty, and inequality, and not all markets are stable, but there are plenty of reasons why it's a region to watch.
It has a growing population, with improving levels of affluence. Many Latin American economies have a positive outlook and investment is already happening, sending a signal about the potential for growth. With international and home-grown retailers and suppliers investing cash, time and resources into making the most of their businesses, we're certainly going to be watching their development and keeping a close eye on Latin America for the long term.
For more on Latin America
Our Latin America profile brings together all the latest from the region. More examples and updates from Argentina, Brazil, Chile, Colombia and Mexico can be found in our latest In Focus presentation, available for subscribers to Retail Analysis.
[i] Source: The Guardian, 11/09/12 - http://www.guardian.co.uk/world/2012/sep/11/latin-america-urbanisation-city-growth
[ii] Source: McKinsey
[iii] Source: OECD Better Life Index
This article first appeared on www.igd.com