Retail expands in Colombia as disposible incomes rise and poverty rates decrease

 

Growth of the economy has translated into an expansion of disposable income for some segments of the Colombian population. Consequently, the retail sector has been developing at an unprecedented speed. This has led to an expansion of the fast-moving consumer goods (FMCGs) segment and a vast increase in modern retail space across the country. Not only has the retail sector been buoyed by new shopping malls and the rising number of international branded stores, but the drive to increase IT usage among Colombians has also transformed the country into one of the region’s fastest-growing online retail markets. Despite the favourable conditions, the impact of a value-added tax increase on most products from 16% to 19% has the potential to cool consumption levels in the near future.

Efforts to reduce poverty have been largely successful, and although segments of the population still live on low incomes, the size of the middle class has expanded and its income levels have risen. The poverty rate fell from 52% in 2000 to 27.8% in 2015, according to the World Bank. However, Colombia’s 49m population and location have attracted companies that have set up production operations in the country to serve the domestic market and export into the region.

Food Expansion

Thanks to higher spending power – GDP per capita by purchasing power parity reached $14,130 in 2016 – Colombia’s processed foods sector has seen an increase in sales. With annual per capita consumption of processed foods estimated at $336.60, according to the National Association of Colombian Business (Asociación Nacional de Empresarios de Colombia, ANDI), there is still more room for growth. The level of annual per capita processed food consumption now stands at $505.40 in the Latin American region, according to ANDI. The sector is expected to expand by 51.5% between 2014 and 2019, which has made it a top priority for ProColombia, the governmental agency tasked with promoting exports and foreign direct investment in the country. According to government figures, between 2010 and 2015 investors from 14 countries channelled a total of $570m into food production units in Colombia. In late 2014 US-based processed food firm Dole opened a new $28m canned vegetable plant near Bogotá. Although initially planned to serve the local market, the unit will eventually be used to export goods to the region.

Increased formalisation of the sector is likely to bear fruit in the coming years, potentially increasing sales beyond expectations. According to a report by research firm Atradius, around half of all food sales in Colombia were made in the informal market in 2015. However, the fast-food retail sector has also experienced growth. Per capita consumption in fast food outlets in Colombia reached COP646,000 ($194) in 2015, and total sales rose by 15% to reach COP30trn ($9bn), according to local media reports. The Colombian Chamber of Commerce found that there were 32,000 restaurants registered in Bogotá in 2016, the majority of which were fast-food outlets. International brands such as Subway, Burger King and McDonald’s have been facing off with local heavyweights such as El Corral for years.

Beverages

The market for alcoholic and non-alcoholic beverages has also benefitted from growing disposable incomes. The beer segment in particular has seen a surge in sales, which totalled 22m hectolitres in 2016, up 17.6% compared to 2015, according to consumer research firm Nielsen. Bavaria, owned by SABM iller, remains the undisputed market leader, distributing well-known Colombian brands such as Águila and Póker. In early 2016 the firm accounted for 98% of beer sales. The market is also likely to be impacted by international consolidation, after the 2015 merger between SABM iller and AB Inbev, a process that led regulators in several countries to force the newly formed beer giant to sell some of its brands.

Furthermore, Colombian group Organización Ardila Lülle joined forces with Chilean firm Compañia Cervecerías Unidas to set up Central Cervecera de Colombia (CCC). The group signed a deal with Molson Coors for the distribution of its beer brands, allowing it to compete in the Colombian market with brands such as Heineken, Tecate, Sol and Coors Light.

CCC is currently constructing a $400m facility in Sesquilé that will be able to produce 3m hectolitres per year when it comes on-line in 2018. The firm has applied for special economic zone status for its factory, which would allow it to benefit from competitive tax rates and relaxed regulations to import inputs.

Shopping Malls

The expansion of FMCGs and restaurant chains has certainly found new space in modern retail outlets, which are a key component of the sector’s growth. A large number of projects have recently opened, increasing the retail offer for consumers and prompting established players to renovate and expand existing facilities. A total of 22 shopping malls are expected to open in 2017, according to projections by the Colombian Association of Shopping Malls.

According to second-half 2016 figures by Colliers International, the capital now has 1.3m sq metres of leasable retail space in 45 shopping malls. This represents a 6% increase year-on-year (y-o-y), and according to the firm was prompted by the opening of the 75,000-sq-metre, 340-store Plaza Central shopping mall as well as the expansion of the Diver Plaza shopping mall. In December 2016 Chilean company Parque Arauco inaugurated the 64,000-sq-metre Parque La Colina Mall, with 250 stores. Sales across the country’s shopping malls totalled more than COP21.9trn ($6.6bn) during the first eight months of 2016, according to local media reports. “The rapid expansion of shopping centres in recent years illustrates the growth the country has experienced, particularly in the middle class,” Horacio Lince, general manager at Unicentro Shopping Centre, told OBG. “The challenge is to continue that trend, and to sustain the open and competitive market that exists today in Colombia.”

The growing number of modern shopping options has attracted a host of international brands. Spain-based fashion accessory brand Sfera opened an online retail presence in Colombia in 2015, and French sports retailer Decathlon invested $10m in its first Colombian store in Bogotá. Swedish brand H&M opened its first Colombian store in Bogotá’s Parque La Colina shopping mall in May 2017, while Privilege, a Chilean women’s fashion brand, is investing $5m to open its first franchise stores in Colombia in the same year. “Colombia has something that only Mexico and Brazil also have in Latin America, which is many cities. We have around 25 cities with more than 100,000 inhabitants, and eight with more than 600,000 inhabitants. So retailers have a lot of room in which to grow across the different regions,” Rafael España González, economic director at the National Traders Federation, told OBG.

Cosmetics

New retail outlets are also supporting the growth of the cosmetics segment. According to ProColombia, Colombians spend an average of $79.80 per year on beauty products, a third of spending in more mature markets such as France and the US. Sales of cosmetics and beauty products in Colombia have progressed steadily, rising from $2.79bn in 2009 to $3.95bn in 2015, according to Euromonitor International. Sector sales are projected to reach $4.74bn by 2019. The market is also characterised by a relatively high use of cosmetics by Colombian men, which accounted for 22% of the market in 2016. Exports of cosmetics and hygiene projects reached $548m in 2015. Authorities are hoping to boost exports in the region.

A host of international brands are present in the market. Kimberly-Clark has one of its three global innovation centres in Medellín. Unilever, meanwhile, has set up regional offices and a detergent manufacturing plant near Cali. In addition, Peruvian group Belcorp has a research centre and a plant for the Andean region in Colombia, and another Peruvian firm, Yanbal, has a plant servicing its line of male-oriented cosmetics products.

A plethora of new shopping malls bode well for the expansion of retail sales. However, much will depend on disposable income, with tax hikes set to affect consumer confidence. With the country’s GDP forecast to expand, the sector is likely to continue its rapid growth.

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The Report: Colombia 2017

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