Research: In inflation times, hard discount chains enter big into Latin America
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Research: In inflation times, hard discount chains enter big into Latin America

Updated: Aug 31, 2022

It was March 2009 and in the traditional neighborhood of San Pío, in the municipality of Itagüí in the city of Medellín, the first hard discount store was born in Colombia. With a low profile and in an area where the population of the medium and low income predominates, according to the classification of the National Planning Department of that country, the D1 discount retail brand made its debut.


“The discount format was not known in Colombia. At first people did not believe in it, nor the suppliers of conventional national brands. We had to go to small suppliers who started with D1 and today are very large and important as a result,” says Ignacio Gómez, consultant and retail expert and hard discount, who was an external consultant of D1 in his first years of operation.


More than 13 years have passed since that opening and today D1 has been talking in the Colombian retail industry. D1 currently not only has just over 2,000 stores in 451 municipalities from 28 departments, but also this year it made news after becoming the main retailer, dethroning the historic leader Almacenes (owned by the Grupo Éxito) according to the Map of Retail 2022 made by Mall & Retail.


Thus, while D1 the store chain of the Santo Domingo Group, one of the most powerful conglomerates of Colombia culminated 2021 an operational income of 9.91 billion Colombian pesos (US $ 2,650 million) and recorded a growth of 32% versus 2020, Éxito stores revenues were 8.58 billion pesos (US $ 2,290 million), registering a growth of 6.6%.


And it is in the first months of the pandemic the e-commerce became a rising star and a temporary lifeguard for retail trade in times of confinement, today, back to the face-to-face, hard discount stores are now the stars in the retail industry for more than a year. This discount retail format, originated in Germany with important discount retail brands such as Aldi and Lidl, has been entering in Colombia, Latin American market where D1 is not alone in this segment, but competes with other discount retail brands such as Ara (from the Portuguese group Jerónimo Martins) and Justo & Bueno (from Panama).


These stores are characterized by their low prices, a maximum of 700 sku portfolios and that are deployed in areas of between 200 and 300 square meters, and have been gaining ground in the middle of a post-pandemic economic crisis that has put diverse impact on the food retail markets, including Latin American, experiencing inflation, food shortage, loss of reduced jobs and reducing budgets for the basic grocery basket.


“The increase in inflation and the consequent effect on the prices of basic consumption products have reaffirmed the role that discounts have in the Colombian grocery basket, supporting consumers with convenient prices and growing variety of products. The strong presence of own private label branded products in its stores means that companies can respond faster not only to changes in consumer preferences, but also to stock difficulties and breakdown of raw materials, increasing the production of products similar or launching new varieties leveraged in the ingredients of easier access,” says Paula Goñi, consultant at Euromonitor International.


Indeed, their own private label brands have played an important role in the consolidation of the discount stores. However, the consistency in quality to gain the confidence of buyers has been key and also a gradual process.


“Before the discount retail formats were not very successful because there was a distrust of the general public when thinking that if something was very cheap the quality was not necessarily good. Another point is that the penetration of neighborhood stores is very strong in Colombia, between 50% and 52%. However, before the Pandemia, three Hard Discount store formats began to be opened: Ara, Justo & Bueno and D1. People began to see them different, because quality was good and consistent. From there, consumers began to see it as an intelligent purchase, says Juan Pablo Soto Zuluaga, Vice Dean of Corporate Relations of the University of the Andes.


For Luis Raúl Domínguez, professor of the International Marketing and Business Program at the Autonomous University of the West (UAO), the ascent of Hard Discount took place much earlier, specifically in 2016, the year that was a break point for this format.


“In 2016, a truck drivers in Colombia blocked roads, entries and exits of large cities and collection centers. At the same time, the government took new measures to reduce the cultivation of the coca leaf and the cocaleros producers joined the strike that took a lot of strength, generating an atmosphere of instability. On the other hand, VAT rose three points and 2016 was also the year with the highest inflation, of 5.75%, in the last 16 years. All these factors made the products more expensive. This tested our pockets and boosted the growth of Hard Discounters in Colombia,” says Domínguez.


Neighborhood stores in Jaque

Another factor of the upward success of these stores is their proximity. According to the recent dynamic report of the Hard Discount in Colombia, prepared by the Bancolombia Group, this format has ventured in a disruptive way the retail sector, in some cases to the point of exceeding at the level of sales to traditional companies in the sector Supermarkets "Thanks to its expansion strategy, the main referents of this business model have managed to have high national coverage, with more than 3,700 stores operating today," says the report.


Juan Pablo Espinosa, director of Economic, Sector and Market Research of Bancolombia, adds: “The great reception in Colombia is mainly due to the proximity of their stores to consumers, as well as a diversified offer of products, positioning their own private label brands as protagonists. In this way, people have the possibility of accessing essential goods with a quality/price ratio perceived by the consumer as highly competitive ”.


On the other hand, despite the fact that neighborhood stores remain the main competitor of the hard discount, they are giving land year after year. “Something that has impacted rents is the strong increase in the square meter of the properties throughout Colombia and especially in popular neighborhoods, where the rental of the houses located in the corners is more expensive. The shopkeeper does not own this strategic point and renting becomes very expensive. To do this, he has to marginalize more strongly to hold his business, that is, raise his prices, ”says Luis Raúl Domínguez.


According to Juan Pablo Soto, neighborhood stores have currently backed away in Market Share and hold a 48% participation, which is still high but that moves more away from their historical 50%. “The Hard Discount formats such as Ara, Justo Bueno and D1 began to be located in areas of less favored strata or lower economic income and has allowed them to take part of the market they did not have. In addition, the reality is that in neighborhood stores not necessarily the price is the best. It is always a little higher, but they offer closeness to people who cannot move far away and other things such as the fractionation of the products because they did not have to buy the great product, but per unit or less amount,” says Juan Pablo Soto.


Colombia is leading the hard Discount in Latin America. According to Bancolombia, as of March 2022, the hard discount in Colombia has a 21% market share and it is projected that this year reaches 30%. In April 2021, one of the highest months of the pandemic for Colombia, the Hard Discount Share reached 38%, demonstrating the penetration potential of this format.


Pure and hard discount in the rest of Latin America

Either in a corner of a residential area, on a busy avenue, in a popular district or in an exclusive one, it is increasingly frequent to find Hard Discount stores also in Lima and Callao in Peru.


According to the market study firm Lock & Asociados, there are more than 600 points of sale with the discount model in Peru, most in the capital, which represent 11% of sales for the modern channel.


The brands that have started this path are Mass (from the Intercorp Peruvian group), Hyperbodega Price One (of the Chilean Holding Falabella) and Vega stores, from VEGA Corporation that has mainly focused on the North Lima area.


Mass is the most ambitious discounter in the country. This year the chain plans to open 120 stores with an average sales area of ​​200 m2 per place. This plan goes in line with the openings made in 2021, the year in which they opened 130. At the end of 2021 they had 557 stores, according to the financial report of the fourth quarter of 2021 of Inretail, the Retail Division of Intercorp.


“In Peru, the growth of Hard Discount is sustained, although it has a small participation. However, its growth rate is auspicious, since it resembles the traditional consumption patterns that still continue in Peru, as well as in the incessant search for the best prices by consumers. While it is risky to differentiate itself only by the price, this type of formats achieve more and more attention because consumers have become more rational due to economic limitations product of inflation, pandemic and the little availability of some products,” says José Ruidías Rojas, Professor of Pacific Business School.


For the professor, the challenge to ensure the sustained and profitability growth of this type of formats is to achieve a great purchase experience of consumers, without generating cost overruns that end up eroding the main differential of value proposal, which in this case is the price.


Although Peru is far from matching Colombia's current status in the field of discount stores, the format has already felt solid bases to begin its expansion in the interior of the country, not only in large cities, but also in intermediates, where In other Latin American markets they enjoy great acceptance. "It is possible that in the future Peru has the open space to reach the market level of Colombia," says Juan Pablo Soto.


In addition to Peru, several countries in the region are added to the Hard Discount's trend, with advances and levels of maturation of different markets.


“In Peru, Mass stores have been growing well, but in other countries this trend is also taking place. In Ecuador is Tuti that grows rapid in Guayaquil and is a clone of D1, because those who opened the company were D1 employees. In Argentina and Brazil DIA, which is a chain of Spanish origin that carries most stores,” says Ignacio Gómez.


In that sense, the Ecuadorian chain Tuti, of the El Rosado Corporation, opened its first store in Guayaquil in April 2019. Today it already has more than 150 stores, venturing into the provinces of the coast and now also in the mountains of the Andean country. On the other hand, the DIA chain, which today is controlled by the industrial group based in Luxembourg Letterone, already has 900 stores strategically located in cities, neighborhoods and towns of Argentina. In Brazil, day has more than 600 stores.


Precisely these two markets, DIA also operates in Spain and Portugal, were it registered the greatest increase in sales in the first quarter of 2022. The main rebound occurred in Argentina, with net sales of € 286.2 million (US $ 290,5 million), 45% more than the same period of 2021, while in Brazil the increase was 9.8% and sales amounted to € 197.4 million (US $ 200.4 million).


Mexico, on the other hand, is a much more mature market than the South American and has thousands of discount stores. And the complex economic situation of recent months has served as great impulse for expansion.


“The last quarter of 2021 was impacted by the price increase and it is better observed how these channels accelerated, especially in countries with the less favorable economic scenario such as Argentina, Brazil, Central America and Mexico. Precisely in this country you can see a clear sign of how the discount formats bet on the transformation. Bodega Aurrerá (owned by Walmart), for example, not only will invest this year in expansion through new points of sale, but also to technological and logistics improvements, but the most interesting thing is that the highest percentage of investment. This chain will invest in remodeling the points of sale, without a doubt, to go more in line with the needs of New Latin Shopper,” says Lenita Vargas, Shopper & Retail Director Latin America Kantar.


Indeed, in March 2022, during the Walmex Day corporate event, the Walmart retailer of Mexico and Central America (Walmex) announced an investment of 27.6 billion pesos (just over US $ 13,440 million), a growth of 34.9% with respect to At 2021. The retailer explained that 40% of the capital will be used for remodeling, 28% to the expansion of new branches, 17% to logistics and the remaining 15% to technology. In physical stores its main commitment will continue to be Bodega Aurrerá, which in Mexico represents 80% of the total stores and at the end of 2021 it had 2,756 stores.


On the other hand, Tiendas 3B of the Lebanse businessman, Anthony Hatoum, has deployed more than 1,300 points of sale and, after the pandemic, has done some tests with the e-commerce through the Marketplace Mercado Libre. Net stores is another hard discount chain. Hugo Salinas Sada, son of the owner of Elektra, Ricardo Salinas Pliego, is the founder and president of the company that last week he turned 13 and currently adds more than 1,500 stores.


Large backs for small formats

Although the supply of the hard discount format has multiplied and these are small, basic stores and with a limited stock of products, their expansion and their profitability demand millions of investments to generate economies of scale.


“These are formats that require a high financial muscle to start because they are very high expansion formats. For example, D1, which began in 2009, began to be profitable in 2018. All that time was investment and investment. Now they are in the time of recovering and growing. On the other hand, they are not small investments or capitals, with US $ 1 million, everything will be done. We are talking about US $ 70 million or US $ 100 million that can be considered as a risk capital that can go well,” says Ignacio Gómez.


"This is a format where you have economies of scale you have to make a "oil spot" growth in which you cover areas because you can make the fastest distribution in small areas. If you have the stores very decentralized or scattered, it is very expensive. This is a format that is very dependent on costs and all the operational efficiency transfers to the price to the consumer, that is the gain here,” complements Juan Pablo Soto, of the University of Los Andes.


But not everyone gets good about the play. This is the case of Justo & Bueno, one of the main discount retailers of Colombia that today is going through a delicate financial situation. The accelerated expansion was not at the same rate as its income which led it to a debt of 135,000 million pesos (more than US $ 30 million). As a consequence of this, Justo & Bueno received a liquidation order last May from the Superintendence of Societies, which is in force.


Since then, they have paraded potential investors from various nationalities to rescue the discounter, although no proposal has progressed so far.


“Just & Bueno is the second discount retailer in number of stores, it has 1,350. What happened? As I did not have the capital to make that expansion, it began to be leveraged in suppliers, delayed payments and has generated that debt that can no longer handle well. More than format, it is a company management problem. They have grown a lot, but they were less successful as budgeted,” says Ignacio Gómez.


The most recent novelty about Justo & Bueno is that Lobbing & Consulting, an investor interested in rescuing and sell as the best option to advance recovery.


Thus, despite the great impact that Justo & Bueno's financial crisis has had, the interest of investors to refloat the company, given that the hard discount formula works in the Colombian market, remains intact.


For Paula Goñi, in the rest of Latin America the development of this format will not be uniform. “The expansion of the format at Colombia is something that we only see in Mexico, where discounters have also had a rapid opening of premises. However, in the rest of Latin America this strong development has not been appreciated, since the phenomenon depends mainly on the opening thrust of premises and the destruction of the traditional channel, something that supermarkets and hypermarkets have carried out much more efficiently in other countries of the countries of the region,” he says.


However, the specialist does highlight the potential of Latin America. “The region remains positioned as a fertile terrain for discount format growth, since consumers' income and economic growth prospects will continue to be reduced during the coming years as a result of the economic attacks of pandemic and the consequent world economic rearrangement. Old consumer habit refrain, finding good products at good prices will be increasingly willing to explore the benefits of the discount format and complement their purchases if the products are not available on promotions,” says Goñi.





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