Beating scale

barriers in
fragmented trade
An exploration of the traditional
trade opportunity for consumer
goods companies in Latin America
Introduction
In the early 2000s, consumer products companies
envisioned a new marketplace taking shape across
Latin America, one that relied on modern convenience
and self-service stores instead of a fragmented network
of mom-and-pop shops. They developed their distribution
strategies accordingly and plotted for a future with new
store formats, organized channels and a more affluent
and financially empowered consumer base.

In the early 2000s, consumer products Consumer products companies that

companies envisioned a new marketplace want to succeed in Latin America cannot
taking shape across Latin America, afford to neglect the traditional trade
one that relied on modern convenience opportunity. They also cannot afford the
and self-service stores instead of a exorbitant cost and 5–10 year timeline
fragmented network of mom-and-pop required to build distribution networks
shops. They developed their distribution capable of serving consumers throughout
strategies accordingly and plotted for a the region. While this conundrum persists,
future with new store formats, organized it does not prevail: consumer products
channels and a more affluent and companies can and should pursue routes
financially empowered consumer base. to market in Latin America, and they are
now able to do so with modest exposure
Fifteen years later, this future has not
and capital expenditure.
fully materialized. Traditional trade
has endured, and consumer products
companies that wagered on modern trade
are now missing out on a large segment
of the market. Other companies, with
either no presence in Latin America or
low-performing distribution capabilities,
are struggling to compete in a landscape
with potentially hundreds of thousands of
points of sale.

An exploration of the traditional trade opportunity for consumer goods companies in Latin America | 1

Theory vs. reality
Multinational consumer products companies with aspirations
of growth in Latin America envisioned a future marketplace
driven by loyalty to modern trade. This vision, inspired by
North America and Europe, was based on an assumption that
consumers would discover modern stores and be delighted by
their lower price points, curated assortments, on-shelf execution
and “one-stop-shopping,” therefore causing a fundamental shift
in consumer preference toward a more contemporary shopping
experience. In this intended marketplace, an increasingly
affluent and growing middle class would have access to the
financial services needed to afford the higher cart values that
result from less frequent shopping trips. In addition, there was
an assumption that modern trade would scale quickly due to
their own access to capital, therefore expanding store footprints
to acquire consumers in remote areas historically dominated by
traditional trade. Consumer product companies with no presence
in traditional trade thought this scenario would present an
attractive “shortcut” in which they could capture market share in
a critical emerging market, leverage distribution networks owned
by modern trade and circumvent the cost of building their own
distribution networks.
In reality, consumer products companies that wagered on
high growth in modern trade have struggled with ill-fitting
routes to market in a challenging economic environment. In
the fallout of the global financial crisis, mom-and-pop stores
proliferated because they were better suited to address the
needs of economically stressed local populations. In addition,
many consumers, still paid in daily cash wages, were unable
to access the financial services needed to enable consolidated
shopping trips with higher cart values in modern stores.
Lastly, many modern stores were too small to be profitable,
therefore requiring more stores to attain economies of scale.
The fragmented logistics networks required to serve this
unanticipated volume of modern stores demanded the exact
type of distribution and logistics investment consumer product
companies had hoped to avoid.

Figure 1: Modern trade had been demonstrating a healthy growth rate historically reaching penetration over 50% by 2010
and was expected to continue at a robust rate
56% Period depicting growth of modern trade Modern trade stagnation

54%

52%

50%

48%

44%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Modern trade (ex. convenience) Traditional trade

2 | Beating scale barriers in fragmented trade

An opportunity that has persevered
Despite modern trade’s formidable presence in Latin America, Home care
traditional trade has continued to endure as a reliable
Traditional trade has maintained a healthy 30% share in
cornerstone of the consumer products market, with ample
home care since 2003. As macroeconomic factors such as
opportunity across categories and countries.
urbanization and increasing female workforce participation
Category and market dynamics come into play, modern trade is expected to maintain its majority
share moving forward.
Food and beverage
Figure 3: Split of traditional vs. modern trade in the home
The food and beverage categories have proven especially care category in Latin America
resilient in traditional stores. Over the past decade, traditional
trade has maintained a majority share in these categories across 1% 2% 2% 2%

the region despite assumptions that modern trade would quickly

31% 29% 29% 30%
capture share. While the share of modern trade in recent years
has shown a 1% to 2% increase, traditional trade is expected to Modern trade
remain an important determinant of total food and beverage Traditional trade
retail in Latin America. 68% 70% 69% 68% Convenience stores

Figure 2A: Food — Split of traditional vs. modern trade

in the food category in Latin America
2004 2008 2012 2016
2% 2% 2% 2%
Beauty and personal care
52% 51% 51%
Personal care and beauty continues to be dominated by modern
54%
Modern trade trade, with supermarkets and hypermarkets being the primary
Traditional trade point of sale. Promotional offers, convenience and a differential
Convenience stores experience are key sales drivers for these categories in the
44% 46% 47% 48% modern channel. While this is not expected to change, traditional
trade has maintained 11% market share for nearly a decade,
2004 2008 2012 2016 suggesting it will continue to be a core channel for consumers
lacking access to modern trade.
Figure 2B: Beverage — Split of traditional vs. modern trade
in the beverage category in Latin America Figure 4: Split of traditional vs. modern trade in the beauty
and personal care category in Latin America
3% 4% 4% 4%
1% 1% 1% 1%
13% 11% 11% 11%
53% 52% 50% 50%
Modern trade
Traditional trade Modern trade

Convenience stores Traditional trade

86% 88% 88% 89%
46% Convenience stores
45% 45% 46%

2004 2008 2012 2016

2004 2008 2012 2016

An exploration of the traditional trade opportunity for consumer goods companies in Latin America | 3


Channel dynamics
There is a high degree of variance in channel dynamics across
Latin American markets, so consumer products companies
can expect varying degrees of opportunity across the region.
Traditional trade exceeds 30% share in markets such as Mexico,
Argentina, Colombia and Peru; Chile, by contrast, lags at 14%.
Also, individual markets reflect varying growth dynamics,
with Colombia and Peru expecting modern trade to grow at a
compound annual growth rate of 6.1% and 3.5%, respectively,
through 2022.
Convenience
Proximity and convenience give traditional trade a critical
advantage. Latinos work longer hours than Americans and
Europeans: an average of 42 hours per week vs. 38 and 37
hours, respectively, resulting in less time to shop. Among Latin
American consumers, 44% consider location to be the most
influential reason behind choosing one store over another,
and for consumers who lack access to transportation, “one-
stop shopping” — a hallmark of modern stores — is logistically
prohibitive. It’s also interesting to note that 60% of Latino
consumers interact with their local shopkeeper, presumably
allowing him or her to influence their path to purchase with
helpful, time-saving recommendations.
4 | Beating scale barriers in fragmented trade
New strategies
for competing
Until very recently, the only way to penetrate the traditional
channel was to build or buy a distribution network, which
carried a high upfront cost, not to mention several years of
unprofitable operations and the challenge of managing hundreds
of thousands of new points of sale.
Now, several independent distributors offer a reliable network
of regional third-party providers that give consumer products
companies the access they need without the costly investment
in assets and infrastructure. This type of arrangement empowers
companies to shift their focus to more value-adding activities
such as account development, sales and merchandising. In
addition, consumer products companies with large-owned
distribution networks are increasingly open to distribution
partnerships with other companies that effectively subsidize
the fixed cost base that these networks demand. In many
cases, these “invited guests” must invest only in the particular
infrastructure required to handle their specific products (e.g.,
refrigerated trucks for frozen food).
Additionally, consumer products companies such as Procter &
Gamble (P&G) are starting to use targeted direct marketing
campaigns to drive traffic to traditional stores in which
consumers can discover localized product innovations and
assortments. Latin America is the world’s fourth-largest mobile
market, with social media adoption surpassing that of the US,
and P&G has been shifting its media strategy and spend away
from television in order to focus more on digital and radio. P&G
has seen its sales in the region grow 8% in the last fiscal year with
about 50% of its volume sold through traditional stores, and it
will be interesting to see how its media and advertising strategy
continues to impact the traditional channel moving forward.
Executing a distribution
partnership
While a reliable distribution partnership can reduce time
to market and capex requirements, the complexities of
the arrangement structure and integration should not be
neglected. For example, a company may need to contract
multiple distributors or wholesalers in various regions, sales
channels or client categories, and they must closely manage
in-store execution, including inventory, pricing, assortment
strategy and merchandising — no easy task across such a
fragmented landscape. The amount of oversight needed
to properly serve traditional stores, in combination with
logistical complexities, can be daunting. Meanwhile, talent
is not widely available in the region, so companies must
be creative to attract, incentivize and retain qualified and
experienced professionals.
Perhaps the most important hurdle is how a company
handles distribution, whether through agreements with third
parties, an acquisition or a separate path. In many cases,
these network arrangements are set up through complex and
customized service-level agreements. They may include exit
and breakout mechanisms and be structured more like a joint
venture than a commercial agreement. Some networks become
co-owned, requiring clear governance models and periodic
capital expenditures to upgrade infrastructure.
Consumer products companies that choose to explore
innovative and adaptive distribution partnerships can monetize
the traditional trade opportunity and achieve their full potential
in Latin America.
How EY-Parthenon
can help
EY-Parthenon Consumer Products and Retail teams can
help you navigate your options and answer your key
questions about a new route to market, such as:
• Which companies are open to forming a distribution
partnership that will expand my access to traditional
trade?
• Which partners have the capabilities and reach that
align with my portfolio and business objectives?
• How can I limit redundancies and optimize operations
while expanding access to new markets?
EY-Parthenon has developed a broad approach for
strategic route to market (RTM) transactions, centered
on four stages:
1  valuate the commercial and operational capabilities
E
and compare them to the opportunities, gaps and
priorities in your business
2  ssess the strategic options against a clear set of
A
commercial, financial and risk parameters
3  elp design your future operating model by
H
determining key processes, systems and third-party
relationships
4  upport the implementation of focused governance
S
and plans for cutover, stabilization and synergy
attainment
Figure 5: EY-Parthenon RTM circle

4 1

Implement Evaluate
Rou
Route
to market
approach

Design Assess

3 2

An exploration of the traditional trade opportunity for consumer goods companies in Latin America | 5

Authors EY | Assurance | Tax | Strategy and Transactions | Consulting

About EY
Omar Troncoso
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Managing Director
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