Increased purchasing power and consumer confidence are supporting a shift in shopping habits

As a new Colombian middle class emerges, retail is beginning to modernise to meet the needs of a wealthier consumer base. Big Latin American retailers, sometimes called multilatinas, are introducing their brands to the country, and malls have been opening frequently, at a rate of one every 23 days in 2013, according to the National Retail Federation (Federación Nacional de Comerciantes, Fenalco). However, there still remains a great deal of opportunity for retail brands to convert customers who are accustomed to shopping at small, informal stores. The potential for e-commerce, which is in its infancy in Colombia, is growing but remains open to new entrants since giants such as Amazon and Walmart have no presence in the country.

Purchasing Power

After a decade of economic growth which led to a tripling of GDP per capita in nominal terms, Colombia’s socio-economic demographics have undergone significant change.

“In 2002 the middle class was miniscule and about 50% of the population lived in poverty. Today that percentage is 30%,” Rafael España, economic director of Fenalco, told OBG. “This expands the opportunity for modern commerce.” The trends of the past decade have continued in recent years. In 2011 and 2012, 1.7m Colombians, of a population of 47m, rose out of poverty, according to government statistics, as reported by Financial Times, and the middle class grew to account for 30% of the population by 2013.

Consumer confidence has been stable and optimistic for several years. The most commonly cited Colombian index is the consumer confidence index published by Fedesarrollo, a think tank in Bogotá. On the index, zero is the threshold between optimistic and pessimistic outlooks. In the past three years the index peaked in early 2012 when it surpassed 30. Since mid-2012 it has averaged about 20, and in mid-June 2014 it was 23.

Increasing buying power has changed the tastes of Colombian consumers. Mid-range and high-end international brands have begun tapping the Colombian market. Such stores do not only cater to the rich. Regarding the emerging middle class, España told OBG, “People think about brands now, not just price. This facilitates the arrival of shopping malls.”

The Number Of Shopping Malls

In 2013 shopping malls grew at the fastest rate of the past 10 years. According to Colombia’s Association of Shopping Centres, 382,000 sq metres of new shopping mall area was added in 2013, including 20 malls larger than 5000 sq metres. Naturally, combined sales at shopping malls have also grown, increasing by 22% in December 2013 compared to the same month a year earlier.

While the growth of shopping malls, both in terms of area and sales, remains robust, there have been some signs that pockets of the market may be reaching saturation, even if the country as a whole can accommodate more malls. The country’s two biggest cities, Bogotá and Medellín, were the first to see malls constructed and now have extensive coverage.

In the capital Bogotá, this may mean that mall developers branch out from the centre towards the city’s sprawling working-class neighbourhoods.

There is recent precedent suggesting that such a strategy can work. In recent years, three large upscale malls – Centro Mayor, Calima and Tintal Plaza – opened outside Bogotá’s traditionally wealthy neighbourhoods. The investments in these locations were seen as risky but all three of them have high occupancy rates and foot traffic today. In the wake of their success, other developers may follow them out of the city centre with large projects of their own. The business model of Colombian malls tends to differ from that of other countries. Colombian developers usually build malls and then sell the retail space, rather than renting it and remaining involved with the project in a management role. Some malls have retail space available only for rent, but these remain outliers in the market.

Chilean Brands

Retail brands have followed malls into Colombia. Many of these are Chilean companies, such as Falabella, Ripley and Cencosud, which have emerged as some of the biggest retail players in Latin America, competing with Carrefour and the Mexican spinoff of Walmart in many markets.

Cencosud has made an aggressive play for the Colombian market, introducing several of its brands and acquiring Carrefour Colombia in 2012 for $2.5bn. The company has introduced its big box chain, Jumbo, in every major market in the country and has rolled out its home goods and hardware chain, called Easy, in and around Bogotá and Medellín. It has also begun establishing its Metro brand, a chain of supermarkets with a more budget-minded customer in mind.

Falabella, a chain of department stores, has a presence in malls in most of Colombia’s major markets, with a concentration of seven locations in Bogotá. Ripley, another department store, has locations in Neiva, Bucaramanga and Bogotá and has plans to expand to three more markets including Medellín. A local competitor is Éxito. A big box store based in Medellín and 50% owned by the French Groupe Casino, Éxito has dozens of locations throughout the country.

Obstacles To Growth

The typical Latin American issues of low credit penetration and informality are two of the obstacles to the growth of the formal retail sector in Colombia. Even as shopping malls and large retailers gain more secure footholds, informal shops, or neighbourhood stores, still command as much as half of the retail market by some estimates. Transactions at these businesses are almost exclusively carried out in cash, which has contributed to a culture of paying in hard currency and a general mistrust of credit and electronic payment in certain parts of the population.

Credit and debit card transactions are further held back by burdensome regulations and a tax of 4/1000 on card payments paid by the cardholder. The tax adds a disincentive to the adoption of credit cards, which has contributed to keeping credit card use low despite According to an Ernst & Young report, more than 15% of the Colombian population entered the banking system in the six years to 2013, and 40% of Colombians have savings accounts. Nevertheless, banks have tended to be conservative in extending credit to retail customers. As of 2013 only 49% of customers held a personal loan from the bank that provided their savings account and only 52% had a credit card with this provider, Stores themselves have stepped in to fill the void, with most of the major chains offering credit cards to their customers on a much more liberal basis than the customers’ own banks. These stores may benefit from banks’ reticence, as retail credit in Colombia has become Financial Times report, “Ten years ago past due credit stood at 11% of total loans. Now they are 2.9%.” Ripley, for its part, announced in 2012 that it would offer a wider range of financial services by opening a bank in Colombia.

E-Commerce

E-commerce depends on credit expansion for its success. Despite relatively low levels of credit card use, demand exists for online shopping platforms, driven by the young and the wealthy. In 2013 Colombian online sales increased 40% compared to 2012, reaching $3bn, according to the Colombian Chamber of Electronic Commerce. This growth has occurred despite the fact that e-commerce in Colombia is immature, presenting a significant opportunity for a new entrant to serve pent-up demand. In Mexico, by contrast, Amazon and Walmart Mexico are battling to control e-commerce. In Colombia, neither of these behemoths has a presence despite the fact that demand for such a service clearly exists. According to a report El Universal, citing data from Visa, Colombian consumers spend $500m a year on Amazon, meaning that they are willing to go as far as paying international shipping fees or dealing with courier services in order to shop online. A viable local alternative should be able Even if progress toward greater credit penetration has been relatively slow, it appears to be inexorable. As Colombian consumers and banks become more comfortable with credit, and as the economy continues growing, opportunities will continue to present for growth in the country’s formalising retail sector.

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The Report: Colombia 2014

Industry & Retail chapter from The Report: Colombia 2014

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