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24 Issue
February 2009
Format Innovation: Bodega Stores
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Retailers all over the world are increasingly focusing on in-fill strategies as some
retail segments & markets show signs of maturity. In This Issue
Key Characteristics
Last week Wal-Mart de Mexico announced that 2/3 of all its openings during 2009 RNG Topic Survey
would be in the form of a relatively new small-box Bodega-style store that will Store Photos
help them in-fill markets in key regions across Mexico.
Differences vs. Discounters
We believe the expansion of this Bodega format has far reaching implications The Broader Landscape
outside of Mexico and for a wide range of demographic & ethnographic segments, What's Next?
both for North and Latin America.

Read on to learn more about the key characteristics of this store & why we New at RetailNetGroup.
believe this is an important development. com
Aaron Chio,
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Bodega Aurrera Express: Key Characteristics
Not a subscriber? Request a
Wal-Mart de Mexico has experimented with different Bodega-style store concepts, demo here.
from the larger sized Bodega Aurrera (41,000 sq.ft) to mid-size stores Mi Bodega
(16,000 sq. ft) to the smallest of all Bodega Aurrera Express (4,000 sq. ft). All of
the Bodega stores target primarily the +60% Mexican population that belongs to Wal-Mart's Other
the E to D+ socio economic segment (SES).
In Mexico, each store serves a slightly different purpose, with Mi Bodega aimed at
rural areas as a destination store while Express is intended to be an in-fill store Wal-Mart runs a variety of
targeting convenience & closer-to-home consumption. formats in Central and Latin
America that fill similar wide
This is not a fresh store and features an edited assortment with a focus on food variety of needs (RNG
essentials. It resembles a soft discounter, given its assortment focus on branded subscribers can see photo
vs private labeled items. galleries of some of these
stores, including Despensa
We can infer some interesting things about Bodega Aurrera Express' store Familiar, Pali, Maxi Bodega, Mas
economics based on their highly-urbanized (high shopper density) real estate
x Menos, Hiper Paiz)

● Smaller ticket but more transactions. This type of store calls for Prior Strategy Alerts
shoppers to visit it a few times a week while spending a short amount of RetailNet Group has published over
money on each visit. In a sense, this is very similar to how the Bodegas'
20 Strategy Alerts with the most
core shopper behaves in the formal trade.
important themes that retailers &
suppliers should be aware of today to
● Lower margins? A higher mix of consumables vs. discretionary/general be ready for the future.
merchandise items compared to a hypermarket could mean lower
margins. Private label helps offset this, but so far Bodega Express' Here is a sample of our latest reports,
private label selection seems to be limited (see section below). Due to for a full list, visit
informal & open markets competition in Mexico perishables can be lower
margin than center store foods or GM - in the US this is just the opposite. - Get Real on Pricing

- Perishables Private Label 2009
● Lower operating costs. The store runs with less than 15 people. This
has one key implication for suppliers: retailers typically will try to shift
- Latin America Outlook Pt. 1:
labor as a way of reducing costs & improving efficiency.

● Less capital intensive. Lastly, as mentioned before, investment on - How consumers are managing
smaller stores is lower compared to big boxes, making it easier for a through the crisis
retailer to expand rapidly.

These four characteristics tend to be true for most small-box discounters.
Outside of the economic model, Bodega Express lacks some unique features
typically associated with discounters/small boxes.
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Store Branding & Positioning
No frills & convenient: No sign fixture on the façade of the store, which also has Dan W. O'Connor is the President
a pharmacy for shopping convenience. & CEO of the RetailNet Group.
He also is the Founder of
Management Ventures, Inc.
(MVI), a WPP Group company.
Dan is a widely known industry
speaker and thought leader.
Email | LinkedIn

(click images to enlarge)

The store offers a dignified, well lit, & organized shopping experience that does
not feel like a E/D+ store. Aisles are short and fixtures not high, improving Aaron Chio is a Senior Analyst
visibility. The store consolidates all the products that can be found at a typical leading RNG's development of
traditional trade store (i.e. mom & pops). new research, insights and
growth strategies in Latin
Email | LinkedIn | Twitter

Tim O'Connor is Vice President
Not a lot of proliferation of private label, which is mostly at the OPP level. Below
at RNG, currently responsible for
photos of Great Value & Aurrera.
RNG's Growth Strategies
Curriculum and European market
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Keith Anderson is a Senior
Analyst and responsible for
Expertise clearly shown - stores offer baked breads on an open setting, similar to
RNG's North American research
options shoppers could find in the informal trade. Perishables are limited as they
practice and transformational
are not the easiest to figure out from a supply-chain point of view.
Email | LinkedIn | Twitter |
Windows Live Messenger

Symantha Chow is a Research
Analyst and supports RNG's North
Very basic endcaps with a minimalistic approach to pricing, promotion & visual American and Latin American
impact. Signage (besides the price) is hard to read from far away, calling the research, including its database
need for products to be recognizable from afar. Big opportunity for improving of chain retailers.
messaging & visual impact. Email | LinkedIn
Packaging is in line with labor model where a lot of products remain inside their
cardboard boxes. Again, no callouts/impactful pricing messaging.

Service offering is limited in line with labor model. Service deli is limited to pre-
packaged foods & only a few front-end checkouts available.

Differences vs. Traditional Discounters
The store varies in some aspects vs. traditional discounters or even limited
assortment grocers. Key differences include:

● Not as focused on private label. The majority of sales for a discounter
or LAG are typically derived from private label; Bodega Express does not
currently rely heavily on private label. The thinking behind Latin
American's retailers lag on private label development vs. the rest of the
world tends to be that lower income shoppers cannot afford to risk trying
a private label item and have it fail -shoppers can't afford having to re-
buy branded item if the latter was true. Though this might not be the
case it is enough to defer purchases.

● Pricing positioning & messaging. The store does not appear to be
trying hard to convey value outside of no-frills store experience (i.e., no
heavy signage, branding, or messaging)

● Very limited perishable selection. Either a function of supply chain
complexities or the fact that people can find better assortments in the
informal trade, but for the most part the perishable selection is extremely

● Location. A proportion of LAGs and discounters are found both in highly
urbanized but also more suburban areas. Bodega Aurrera Express is likely
to focus only in highly dense areas, leaving the rest of the country to any
of the other Wal-Mex formats.

The Broader Landscape
There are more than a few reasons why people whose responsibilities are not
directly tied to this geography, retailer, or segment, should still be aware of this
important development.

● Store lifecycles are extremely important. Retailers are rapidly
changing their food selling stores to adapt to a demanding economic
cycle, making some of the assumptions that were previously successful
less effective today.

● Stores are becoming more targeted. Retailers are specializing and
targeting a narrower selection of shoppers and shopping occasions,
highlighting the need for supplier organizations to segment their
customers less by channel/format and more by trip positioning.

● Opportunity to leverage best practices. We have seen pricing
communication, award winning private labels, labor models & practices,
impulse merchandising & marketing strategies, among others, coming
from small-box retailers & being incorporated into large boxes.

● Discounters are growing rapidly. We have seen discounters grow
rapidly in Europe and we are starting to see this box & business model
move swiftly into the US and parts of Latin America.

● Small boxes can be disruptive to the market. Talk to anyone familiar
with Mercadona in Spain, where the company decided to cut 800 SKUs
and up to 1,200 more in a matter of weeks while reducing its prices
across the board by 10%. Or arguably Tesco's Fresh & Easy (not a pure
discounter but similar concept) regional impact in the US, or the generic
pharmacies in Mexico which have gone from a few hundred to more than
4,000 stores in less than a decade, or even the impact Aldi has had in the
UK/Europe. These are all examples of disruptive moves from small-box
retailers that have transformed the retail landscape.

● Private label is growing everywhere. Most discounters' sales come
from private label, with some retailers' mix upwards of 90-10 on private
label vs. branded items. These small-box retailers are a great place to
look at to understand shelf dynamics.

● New reference price points being established as a consequence.
See our last newsletter for examples, but as more and more retailers
expand their private label offerings many categories are getting more
than an OPP price reference, with mid, mid-high, and premium price
comparisons within and outside the store.

● Lower capex investments = ability to scale quickly. Zoning laws &
permits are easier to obtain, and many stores can be dropped rapidly into
a marketplace with a less intensive capex requirement. Think of what
Fresh & Easy did in the US, or the rapid store growth of Oxxo in Mexico
who has consistently opened on average 700 stores/year over the last 4-
5 years.

● Lastly, as Perry Caicco's small box analysis from CIBC has indicated,
scale economics are difficult and need to be managed carefully,
which supports more private label and limited assortment vs. variety.

These are a few of the reasons why tracking the development of the Bodegas in
Mexico is of importance - things that can always lead to new thinking for both
supplier & retailer organizations.
Final Thoughts
The real question is whether this format is just a formalization of the informal
trade in Mexico and Latin America or if certain elements would work in the US.

Without a doubt, the expansion & growth of small stores creates new
opportunities for retailers to take share from the formal/informal trade. We have
referred to this kind of outlet as a cross-over segment - one that is aimed at
converting shoppers from the traditional to the modern trade.

If Bodega Express succeeds, we would expect other retailers in Mexico to be fast
followers - something we have seen in the past - which would bring a totally new
dynamic to the marketplace with the proliferation of these types of stores.

We won't see a discounter market as developed as the UK/Europe in just a few
years, but 2009 could well be the beginning of a changing retail environment in
Mexico and potentially the inclusion of its winning elements back into the US.

RetailNet Group is the leading insight and advisory firm focused on retail
growth strategies and consumer-facing transformational capabilities. We
are deeply experienced retail/consumer analysts and strategists working
exclusively to help brand-led businesses and large-scale retailers grow.


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