Further industry growth in Peru lies in store expansions, a larger formal market and the adoption of e-commerce

Driven by the expansion of shopping malls, low prices at supermarkets and pharmacies, and a growing middle class, the retail industry grew by 4.3% in 2017 and is projected by the Lima Chamber of Commerce and the Retail Labour Union to grow by up to 6% in 2018.

Furthermore, the 2017 Global Retail Development Index claimed that Peru’s retail industry recorded the largest growth in Latin America, despite an economic slowdown. Peru ranked 9th out of 30 countries based on market attractiveness, country and business risk, market saturation and time pressure.

Sales Growth & Businesses

In 2017 the retail industry reached PEN36bn ($11.1bn) to represent 4.1% of GDP. The Ministry of Production (Ministerio de la Producción, PRODUCE) announced that this uptick was due to the profit margins of supermarkets and department stores, which increased by 3.8%.

The total number of retail units in operation – including hypermarkets, supermarkets and discount stores – amounted to 386 in 2017, of which 293 were in Lima and 93 in other provinces around the country, according to Canadian multinational Scotiabank.

In 2017, 71 new stores were established nationwide, with 68 of them in the format of discount stores, of which two were located outside Lima. Three of the new stores were supermarkets, with two in Lima and one in Ica. The three main operators included Cencosud Perú, which is owned by Chilean multinational Cencosud; Supermercados Peruanos, which is linked to Intercorp; and Tottus, which is owned by Chilean Falabella.

According to Scotiabank, Peru has great growth potential in the retail industry given that it has 386 supermarkets for its population of 32m inhabitants, whereas Colombia had over 1000 stores with a population close to 48m, while Chile had 1370 stores for around 18m inhabitants. The Colliers 2017 commercial report highlighted that there is further growth potential considering the low penetration of modern retail, however, the opportunity has not been fully exploited.

Carlos Asmat, analyst at the Economic Studies Department of Scotiabank, told local press that the low level of penetration has encouraged the opening of more stores in the country. This generated a higher level of competition in the market, which has resulted in promotional sales and recurring low prices. Increasingly, stores are promoting their own brand of products in order to broaden offerings and increase market participation, especially in discount stores.

Convenience and discount stores accounted for 11% of the sector in 2017, 24 percentage points away from being considered a mature subsector. According to international consultant Kantar Worldpanel, the figure will reach 15% by the end of 2018.

Informal Market & Employment

According to credit ratings agency Fitch Ratings, the informal market represented between 75% and 80% of retail sales in Peru in 2013. Diego Macera, manager of the Peruvian Economy Institute, told local press one factor that would improve retail growth in the region would be the creation of more jobs in the formal sector. Moreover, it could have a double effect since it strongly stimulates demand and allows small and medium-sized companies to hire qualified personnel. Another factor that would enhance growth in retail is a larger middle class.

Data from PRODUCE indicated that the proportion of the population employed by the retail sector increased by 4% in February 2018, compared to the same month the previous year. The subsectors that saw an uptick in the number of personnel were hardwares and appliance stores with 12.5%, books, newspapers and stationery shops with 6.4%, and pharmacies with 1.7%.

Major Conglomerates

The 2017 Global Retail Development Index measured the performances of supermarkets within the Peruvian market and found that sales totalled approximately PEN15bn ($4.6bn) to represent a growth rate of 7%, the highest since 2014.

Intercorp, a national conglomerate with businesses in financial services, education and retail, has invested in more than 100 supermarkets, over 1000 pharmacies and expressed interest in expanding to shopping malls.

Another Peruvian company investing heavily in the retail sector is the Lindcorp. Although its original business was in the production and distribution of beverages, it is now targeting convenience stores under the branding of Tambo, and expects 500 Tambo stores to open by 2023. Convenience stores have modernised the food sector, and between 2014 and 2018 the segment has seen double-digit growth, accounting for almost one-third of modern retail sales in the food subsector.

The cosmetics and personal hygiene market was estimated to grow between 6% and 8% during 2018, which would be an increase of PEN7.8m ($2.4n), according to the Personal Hygiene Cosmetics Association. The highest growth within the market in 2017 was the cosmetics subsector, which was up by 12%.

Foreign Investment

Government policies are attracting new international brands, especially in the garment and the specialist retail sectors. Oxxo, a Mexican chain of convenience stores, is scheduled to enter the Peruvian market in 2018. It will be in direct competition with Tambo, which has set the tone for the development of convenience stores in Peru, having been in operation with 200 locations in Lima since 2015.

Regarding the furniture and home appliance segment, in May 2018 Falabella signed an agreement with IKEA for the expansion of the franchise in South America. The agreement includes the opening of nine stores in Chile, Colombia and Peru by 2028, and the development of an online shopping platform. Falabella reported that the estimated total for the anticipated arrival of IKEA to these three countries will be $600m.

A study by rating agency ICR Chile revealed that some Chilean shopping mall developers are beginning to diversify their operations beyond their borders. Real estate rental industry players – such as Falabella, Cencosud and Parque Arauco, among others – are expanding their operations to cities in Peru and Colombia. It is projected that companies will continue to expand across various formats, in line with their diversification plans.

Pharmacies

Similar to the industry sector, retail did not observe noteworthy mergers and acquisitions. However, attention to this area was brought back into focus after the coming together of pharmacies Mifarma and Inkafarma. Controversy over whether this acquisition should be considered a monopoly remains, as the two companies now make up 95% of pharmacy chain stores, yet only cover 18% of the total market due to independently run local pharmacies.

In Peru there is still no law against monopolies. The anti-monopoly policies proposed in 2011 and then again in 2016 have not yet been addressed by Congress.

E-commerce

In 2017 Peru’s e-commerce sector registered one of the most highest rates of growth in Latin America, with online purchases rising 27.1%. E-commerce is growing five times the rate of in-store retail as consumers become more accustomed to making purchases online, according to the latest “Latin America e-Readiness Report 2014” commissioned by Visa. International consulting firm Ipsos found that in 2017 the priorities of online shoppers were discounts and promotions, ease of delivery and prices, meaning the Peruvian market could expand even further as competition improves.

A global study by data analytics firm Nielsen stated that “to adapt to this tendency, retailers are implementing digital mediums to promote their offers and themselves”. E-commerce’s biggest challenge, however, is tapping emerging neighbourhoods in Lima and country provinces where store-based retailing is prominent, partly because of a lack of digital infrastructure.

Outlook

The growth observed in retail sales in Peru is based on the market’s capability to adjust to consumer demands, whether that is through increasing store-based retailing or e-commerce. One of the challenges regarding the development of digitalisation and e-commerce is Peru’s ability to innovate and adapt business and sales models across the entire country. E-commerce could result in growth of up to 64%, according to Nielsen, although the emerging segment would need to improve its capacities significantly in the coming years.

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The Report: Peru 2018

Industry & Retail chapter from The Report: Peru 2018

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