Spending more freely: A young population is ready to consume

Over the past decade, retail has become one of the biggest contributors to economic growth, consistently surpassing high-value industries such as oil, gas and mining. According to Fenalco, the national trade federation, the sector’s contribution to GDP reached 8.1% in 2011, placing it just after financial services (19.1%), services (15.3%) and industry (13.1%).

As a parameter of macroeconomic performance, retail – which constitutes 78% of total domestic trade – has benefitted from the rising size and wealth of the middle class, greater access to financing and an inflow of foreign retailers. As a result, it has grown consistently since the turn of the millennium, with the exception of 2009 when the global economic crisis stemmed consumer demand worldwide. Since 2010, consumer spending has been back on the rise.

GLOBAL DESTINATION: The sector’s growth fundamentals have not gone unnoticed by foreign investors. According to Fenalco, foreign capital inflows rose from $10m in 2000 to $2.3bn in 2011, largely driven by the increase in shopping malls. Investment appetite has been further stirred by positive rankings from groups such as AT Kearney, a management consulting firm, which included Colombia in its annual selection of the world’s 30 most attractive retail investment destinations, citing its high GDP growth and moderate inflation. Besides sound growth fundamentals, the sector’s development is positively influenced by changing demographics. Whereas in the 1960s almost 50% of the population was under 14 years old, today their share ranks at half of that while “spending-age groups” have increased proportionately. According to Fenalco’s calculations, 6% of household spending went to durable goods in 2011, a significant increase from the 2% registered in 2001. This is in line with figures from the National Administrative Department of Statistics (Departamento Administrativo Nacional de Estadística, DANE), which show that country-wide, the proportion of households in the bottom three economic strata – Colombia has six – has fallen from 50% in 2002 to 34% in 2011. This reduction has been most notable in cities such as Bogotá and Medellín, where poverty fell from 32% to 13% and 37% to 19%, respectively. The rise in consumer spending has been both facilitated by and resulted in a higher number of modern retail outlets, particularly super- and hypermarkets, department stores and modern shopping malls. The latter is attracting particularly significant levels of domestic and foreign investment.

While there is room for expansion in Colombia’s biggest cities, growth has extended to mid-sized cities as well, where growth fundamentals have boosted consumers’ appetite to spend. Retail growth has also raised employment. According to Fenalco, every percentage point of retail growth translates into an average rise of 0.4% in employment. This was exceeded in 2012 when the sector grew 3% compared to a rise in employment of 5.7%, according to DANE figures.

EMPLOYMENT: At the end of 2011, more than 25% of the active population was employed by the sector (including restaurants and hotels), while 900,000 new jobs had been created in the preceding decade, more than any other industry. As sector growth progressively shifts to less-urbanised and lower-income areas, so does its demand for labour, helping to reduce the large gap between the rich and the poor. Moreover, as savvy marketing increasingly defines retailers’ success, employment has shifted from predominantly informal and low-skilled jobs to more permanent contracts for higher-skilled labour. Job growth has been strongest in large retail formats, including hypermarkets, department stores and shopping malls. While these facilities employed around 68,000 people in 2001, that figure had increased to just under 100,000 by the end of 2011, according to Fenalco.

SECTOR GROWTH: The country-wide retail offering has diversified significantly in the past decade. According to Fenalco, in 1997 large retail formats offered four main product categories: food and beverages, textiles, pharmaceuticals products, and domestic furniture and appliances. Today these items compete for market share with other categories such as household cleaning and personal care products, while the share of domestic furniture and appliances has tripled to 17.7% in 2011. The same source put average annual sector growth, excluding vehicles, between 2001 and 2011 as 4.45%, having recorded a drop of 2.8% in 2009. Both 2006 and 2010 were particularly strong years as growth was reported at 14.6% and 13.5%, respectively. There was growth in 2012 too, but at a slower pace: retail sales went up by 4.2% (3% when vehicles are included) compared to 10.4% in 2011.

With a share of 18%, household electronics was the main contributor in 2012, followed by hardware, paints and glass, which represented 8% of all sales, and footwear and leatherwear, which accounted for 7%. This was different from the preceding decade when the highest growth was reported in computers and office equipment – an annual average of 36.1%. This was followed by cars and motorcycles (18.9%), household furniture and appliances (15.2%), and footwear and other leatherwear (11.1%). The strong growth in computer and related sales can be primarily attributed to global technological advances, liberalisation of trade and more accessible consumer credit. As such, 2010 and 2011 registered year-onyear (y-o-y) growth of 42.2% and 31.5%, respectively, compared to sector growth of 13.5% and 10.3%. Sales of clothing and footwear posted a y-o-y rise of 15% in 2011. This was encouraged by the expanding supply offered at competitive prices as well as the increasing influence of fashion trends on local middle-class buying behaviour.

Pharmacies performed much more modestly as a result of increasing competition, emerging consumer habits and a structural changes in the segment’s role.

The increase in public health coverage – up from 62% of the population in 2003 to 91% in 2011 – has reduced overall sales of independent pharmacies to the benefit of subsidised products offered through the public medical system. As such, y-o-y performance fell from 9.8% in 2006 to -3.5% in 2010. Recovery came the year after when growth of 3% was recorded. As a result of the slowdown, pharmacies have started to adopt more aggressive marketing techniques such as extending product lines, improving customer service and promoting online sales CAR SALES: Registering average annual growth of 18.9%, sales of cars and motorbikes exceeded sector growth between 2001 and 2011, with the exception of 2008 and 2009 when the impact of the global recession resulted in weaker demand. Sales recovered substantially in 2010 and 2011 thanks to strong household confidence, increased competition and low interest rates. As such, in 2010 the segment posted y-o-y growth of 48.8%, while in 2011 sales grew by 28%, pushing total sales to an unprecedented 327,000 vehicles. Cars accounted for more than half of all sales, followed by campervans and pick-up trucks, which represented 19% and 9% respectively. As a result, the contribution of cars to sector sales has been significant in recent years, totalling 14.11% in 2011.

With up to 60% of vehicles imported entirely or in part – compared to 54% in 2010 – the appreciation of the peso has played to the sector’s advantage. Other notable drivers of growth include free trade agreements with supplier nations such as Mexico, the US and South Korea, and increased competition among car dealerships contributing to below-inflation price increases. Growth slowed in 2012. According to figures from BBVA, a multinational bank, combined car sales fell to 316,000 units, representing a 3% drop from the year before, which was particularly evident in sales of vehicles for personal use. Despite below-inflation price increases, this can be attributed to a drop in consumer confidence – on the back of a slowdown in macro-economic growth – fiscal reform and restrictions on cars in urban areas. Bank financing for vehicle sales developed in line with market trends and grew by 15% compared to 27% in 2011. Despite these developments, the share of financed purchases maintained its 2011 level at just under 60%.

BIG BRANDS: In 2012, the market included around 70 brands, with Chevrolet and Renault leading in terms of market share, mostly assembled in-country. Chinese brands have increased their share from less than 1% in 2001 to a current 6.6%. BBVA forecasts this trend to continue over the next few years given the competitive positions of these brands in specific, pricesensitive segments such as small vans.

For 2013, BBVA forecasts a stabilisation of sales around the 315,000 mark with a rise in personal vehicles and a slight reduction in the commercial segment due to the high level of installed capacity reached in recent years. It also predicts a gradual recovery through 2014 towards 325,000 units, driven by continued low interest rates and a restoration of household confidence. Other factors that can affect growth include the impact of trade agreements on price levels as well as the pace of development of mass transit systems and nation-wide road infrastructure.

The share of imported cars is set to grow, particularly in the high-value segment, as trade agreements with South Korea and the European Union materialise. Moreover, the rise in contribution of mid-sized cities like Bucaramanga, Barranquilla and Villavicencio to country-wide sales, which climbed from 8% to 14% over the past six years, is set to continue. In 2012, Bogotá, Medellín and Cali contributed about 68% to total sales. Car ownership and vehicle stock figures display significant room for growth. Ownership currently stands at about 80 cars per 1000 inhabitants compared to 131 for Chile, 201 for Argentina and an average of 500 for the G7 countries. Moreover, vehicle stock is an average of 15.2 years old, indicating high renewal potential. BBVA forecasts annual growth of 7.9% in automotive stock over the next 10 years.

PLAYERS: Demand for formal retail has increased as a result of higher purchasing power, helped in turn by a rise in female employment and rapid urbanisation across numerous large and mid-sized cities. In addition, higher levels of car ownership have changed shopping habits to fewer visits and higher volumes, for which formal retail chains are more optimal than traditional markets or neighbourhood stores.

Consequently, domestic players have faced rapidly increasing competition from foreign players. Chile takes a particularly prominent role as indicated by the variety of brands operating in the Colombian market, including established home improvement and department store names such as Sodimac, Falabella, Ripley and La Polar. Many of these, faced with market maturity at home, entered Colombia after 2009 when a bilateral free trade agreement came into effect. Their expansion plans are ambitious. Ripley has allocated $272m to open 10 stores by the end of 2013, while Falabella plans to invest around $3.34bn in constructing 204 stores and 16 shopping malls. In addition, La Polar opened its fifth local shop in 2012 and has plans to open another 18 in cities such as Bogotá, Cali, Barranquilla, Cartagena and Pereira.

Besides increased competition, international retailers have introduced technological know-how that has allowed for shorter supply chains and more efficient market access. Examples include digitalised inventories that send out automated orders to suppliers, communication systems allowing for direct access to producers, as well as online sales, SMS marketing and social media. Profitability levels have risen as a result. According to Fenalco, retailers’ gross margins rose from 21.1% in 2001 to 24.9% in 2010. Meanwhile, sales leakage – due to theft, expiration or damage – dropped 13.2% from 2009 to 2010, when it totalled COP364bn ($218.4m). In addition to geographic expansion, formal retail has expanded its focus, shifting from the wealthiest segments to a broader offering.

Among the top five retailers by turnover, Grupo Exito ranks first by a significant margin over its competitors. The firm, which is owned by France’s Casino Group and oversees more than 400 locations and eight retail brands country-wide, generated a turnover of COP8.8trn ($5.3bn) in 2011, more than twice that of number two Carrefour. According to Fenalco’s figures, the French retail conglomerate grossed COP3.9trn ($2.3bn) in the same year. Runner-ups were domestic players Olimpica and Alkosto, posting COP3.2trn ($1.9bn) and COP2.5trn ($1.5bn), respectively, followed by Chilean home improvement chain Sodimac, with COP2trn ($1.2bn). Further down the ranking were Cali-based La 14, with COP1.2trn ($720m); Chile’s Falabella, with COP864bn ($518.4m); the Dutch group Makro, with COP861bn ($516.6m); and Superinter, another domestic player, with COP571bn ($342.6m).

ACQUIRED TASTE: The year’s most notable event was the acquisition of Carrefour’s Colombian operations by Chilean retail conglomerate Cencosud for $2.5bn following an ongoing global restructuration of the French retail chain. According to Cencosud the deal marks a “strategic entry into the supermarket segment in Colombia”, where it already participates through its Easy stores, focused on home improvement. The Carrefour name will be gradually changed to Cencosud’s own Jumbo brand. The deal was significant, not just because of Carrefour’s country-wide presence – 72 hypermarkets, 16 convenience stores and four cash-and-carry stores – but also because the transaction value was an estimated 20 times the historical enterprise value per earnings before interest, tax, depreciation and amortisation, according to independent analysts.

While the transaction shows signs of a maturing large-surface retail segment, with expansion marked by acquisition rather than organic growth, newcomers continue to be attracted by sound fundamentals, particularly in smaller formats. Jeronimo Martins, a retail chain from Portugal, opened its first Ara supermarket in the city of Pereira in March 2013. The supermarket is characterised by its proximity to residential neighbourhoods and a surface area of up to 600 sq metres with a maximum of 15 employees. The company plans to operate 40 Ara stores by the end of 2013, with a total investment value of approximately $100m.

Jeronimo Martins’ investment follows the operation of the neighbourhood-based express stores by incumbents like Exito and Carrefour over the past few years. As a result, the number of new express stores has been on the rise from 45 openings in Bogotá in 2011 to an average of one per week in 2012, according to Fenalco. Other cities like Cali, Medellín and Cartagena are experiencing similar growth rates.

CONVENIENCE: “Neighbourhood stores are among the few remaining areas of growth open to retailers,” Carlos Giraldo, COO of Exito, told OBG. The reason for this lies in the large share of traditional, family owned shops – so-called bodegas – that continue to hold the largest market share in the convenience segment. According to Fenalco, in 2011 46% of the market share was held by these shops, while large and smallsized supermarkets, most of which are tied to a retail chain, had shares of 38% and 15%, respectively. Despite strong growth in the latter two segments, neighbourhood stores maintain an advantage as land prices and urban congestion make large surfaces at an accessible distance from people’s homes less attractive.

ONLINE: Online retail is also a growth area. Most established country-wide retailers already have an ecommerce portal and are increasingly promoting it as a viable alternative to physical shopping. The biggest hurdle to overcome for e-commerce to take off seems to be consumer trust. As Giraldo told OBG, “If e-commerce manages to win over the minds of consumers, the country can overtake regional leaders Argentina and Brazil in the next five years.”

MALLS: Another area of interest for retailers is shopping centres. As indicated by growth in mall sales of 13% in 2012, following 23% in 2011, this retail format offers significant prospects for investors (see analysis). According to Fenalco, Colombia counted some 450 malls by the end of 2012, including the country’s smaller-sized units that deviate from the standard international definition, up from 200 at the start of the millennium. The current project line-up consists of 47 units at a value of $1.9bn. In addition, 15 projects are undergoing expansion or modernisation at a value of some $310m. As with supermarkets, mall developers are diversifying in layout and location in order to cater to a universal clientele.

OUTLOOK: Rapid expansion in various segments of the retail sector over the past few years has significantly altered the landscape for both operators and consumers. Domestic players have had to come to terms with the high levels of funding, innovation and efficiency brought along by foreign competitors, while trying to attract and maintain a clientele that is increasingly persuaded by international brands and marketing practices. Still, Colombian and foreign retailers are progressively matching each others’ strengths as shown by a gradual stabilisation of the market shares among the top-10 players. Expansion is steadily shifting to retail niches catering to specific geographic or economic criteria. This is less visible in the high-value shopping mall segment, which is expanding. As foreign funding increases, malls’ features like size, quality of design and sophistication of management structures are also improving. Colombia’s large population, spread over numerous cities, is a key factor supporting this growth.

There are some challenges to bear in mind as well. The nation’s deficient national road network continues to put a burden on retailers, especially as development activity is increasingly focused on a large number of smaller cities. Besides the state of the network, security issues on and around roads also drive up retailers’ costs. With the announcement of the fourth generation road concessions, hopes are high that the biggest infrastructure bottlenecks will be addressed, even though this will take some time.

Another challenge the country and the sector face is the rapid rise of consumer credit, which in December 2012 was up by 20% y-o-y, according to figures from the central bank. Coupled with lower overall economic growth levels for the same year, the IMF has voiced concern recently and called for monetary intervention, but in light of low interest rates, forecasts like that from BBVA predict a rise, rather than a decline.


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The Report: Colombia 2013

Retail chapter from The Report: Colombia 2013

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