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Retail channels
BY: ROBERTO PALACIOS, SAMIR BHOJWANI Y ALEJANDRA OVALLE, SINTEC
INTRODUCTION
Colombia is a country where retail is heavily concentrated along Tradition channels. Both economic as well as demographic aspects, such as the personal preferences of consumers, have contributed to making the famous cornerstores (or tiendas de barrio as they are commonly known) the largest holders of market share in sales of fast moving consumer goods across the country. This factor, along with rapid and aggressive changes in modern retail, have brought great challenges upon manufacturers who often struggle to increase market share and improve pro tability in a growing and competitive environment, as is the case with the Colombian market. Despite the differences in the mix between Traditional and Modern channels that can be found within the region, one unequivocal trend that can be seen in the past few years sweeping the continent would seem to be the growing penetration of Modern Retail. This phenomenon can be observed in the majority of Latin American countries, but for a handful of exceptions, among which we nd Colombia. In Colombia the distribution of sales between Modern and Traditional retail outlets has remained steady for the past six years, unlike what we observe other countries where consumers have swayed towards major chains. Economic growth (which is generally a precursor to Modern Retail growth) has not managed to shift a great deal of Colombian consumers from their traditional points of purchase, and a growth rate of 3.6% in GDP has not shaken the traditional cultural preferences and customs inherent within the population.
These cultural preferences, which show no signs of abating in the coming years, bring with them important implications for both manufacturers and distributors of consumer goods. It is imperative that they reevaluate their strategies in light of the idiosyncrasies of the Colombian mindset, and that they fully comprehend the demands of the often underestimated Traditional sales channel that continues to dominate the retail environment despite the setbacks it has faced from major multinational chains.
between 2 and 3 times a week and 14% buy on a weekly basis. They tend not to buy large volumes due to the fact that they lack immediate liquidity to do so and also tend to buy products that serve their prime necessities. Thus, cornerstores offer products in small sizes that are congenial to the purchasing power of the average Colombian. 4. Proximity: Finally, cornerstores, by de nition, are conveniently located close to the homes of consumers. Trips to the supermarket, especially in big cities, imply a major investment in time, money and an ordeal that most Colombians are not willing to undergo when they can count on a more convenient outlet closer to home. These factors have been essential in impeding the major chains that operate in the Colombian market from gaining greater market penetration despite the fact that they have gone to great lengths in the last few years to arrive at a larger percentage of the population. While these same efforts have been highly effective in other parts of the Continent, they have simply not borne the same results in Colombia.
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In addition, having a handful of key competitors in the market leads to price wars with the sole aim of attracting greater traf c to their establishments. What is more, giant chains are now offering private brands, more economic alternatives to everyday products. All these factors have made Modern Retail outlets extremely competitive in their pricing for those who use these channels to purchase larger volumes of goods. Nevertheless, the constant efforts to keep prices at rock-bottom levels, while they do serve to displace customers from one point of purchase to another within the Modern Retail Chain, have not managed to make customers migrate from other Channels towards them. It is for this reason that the major chains have now started to experiment with new formats that will allow them to expand to a new client base.
MODERN VS. TRADITIONAL: THE FIGHT TO CAPTURE THE BOTTOM OF THE PYRAMID
Colombia is still a country with an astonishingly high level of inequality with regards to income distribution. It is precisely for this reason that Traditional retail will continue to hold such a large share of sales for a long time to come. Low income households will continue to depend on Traditional channels for reasons before mentioned, and it is for these reasons that major chains will be forced to migrate to the lower income populations if they wish to capture a part of the fortune to be found at the bottom of the Colombian Pyramid. The aggressive growth of Surtimax and the acquisition of an array of neighborhood supermarkets all around the country by the retail giant Olmpica are clear indications as to the intentions of Modern retailers to encroach upon territory historically dominated by Traditional retailers. Yet it is worth noting that the global giants will come up against a competition that is becoming increasingly powerful, organized and sophisticated in handling their business. Through initiatives such as Fenaltiendas and
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explicit backing from the Government, Traditional outlets have been able to improve their negotiating positions, band together into formal cooperative communities and adopt the best technologies and practices thanks to the help of the National Federation of Commerce (FENALCO). In addition to an increasingly formal Traditional retail channel, it is worth noting that even the very dynamics of buying from traditional outlets is evolving. Studies of shoppers undertaken by market researchers Kantar have shown that clients of cornerstores and neighborhood supermarkets do not only seek price and convenience when they shop; They also frequent these channels with the aim of trying out new products and take the time to analyze prices. The latter indicates that neighborhood supermarkets, much like the major chains, are being perceived as places to stimulate trial of novel products and to analyze promotions, which holds serious implications for both producers and distributors. In fact, neighborhood supermarkets are already recognized by Colombian industry as an important location to win over the loyalty of Colombian consumers. These two trends, on the one hand the push by big chains and the increasing formalization of neighborhood supermarkets and on the other the evolution in the mindset of the clients of neighborhood supermarket highlight the fact that the struggle between the big chains and neighborhood supermarkets to capture the bottom of the pyramid will be the key battleground between Traditional and Modern Retail in Colombia.
Additionally, it goes without saying that for whichever product that enters or wishes to survive in a market, the key to succeeding in retail is based on having the product available at points of sale. Producers need to develop an ef cient distribution network to assure that products are delivered properly and on time, not only in order to cater to demand from repeat users but also to stimulate impulsive buying of those who encounter the products in cornerstores for the rst time and opt to try them in what would be their Moment of Truth. If the nal decision is to enter or strengthen a given channel, producers must assure that the way in which they are attending clients is the most effective way possible. It is imperative that producers understand that new formats of retail are being created in Colombia as we speak, that the markets are evolving and for that reason their formulas for success need to be evolving for the channels they wish to participate in. Producers must be constantly reevaluating their strategies, with a focus on guaranteeing ef ciency in logistical processes, and moreover they must look to train and specialize their sales force. All distribution and sales initiatives will need to be guided and organized with a careful segmentation of clients and channels. One mustnt merely quantify all potential clients but rather, in addition to the former, estimate the possibilities of growth and potential pro tability from each one. Once this is determined, it is key to de ne the value proposition, identifying all commercial elements that truly generate a greater impact for both Traditional and Modern retail clients, since the latter will keep experimenting with new formats and opening more points of sale, which will create the need for newer and better strategy. Although Colombia remains a market with a highly potent Traditional sector, one cannot and must not underestimate its Modern counterpart, whose players are evolving into fewer but more powerful members and are showing themselves willing to enter in several new segments simultaneously. The key to triumph with these big commercial chains will be found in optimizing the Level of Service, not only to avoid incurring penalties, but also to become the supplier of choice for these clients. Finally, as mentioned before, there is a constant downward pressure to offer cheaper products. The implication is that pro tability for producers and distributors will not be derived from the margin imposed upon the price as we have seen in years past: Price wars, perpetual discounts and increasingly demanding consumers will not allow it. Pro tability today must be earned through minimizing costs, reducing logistical expenses and lowering inventory levels that can represent important savings and subsequently, greater margin.
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CONCLUSIONS
Colombia is a market unlike any other. That being the case, strategies to dominate retail sales must take into account all these unique characteristics that, if addressed correctly, can translate into important pro ts in one of the most dynamic economies in the region with a population that is nally showing its appetite for consumption. The focus must be on the Traditional channels and the key to success is to develop distributors and intermediary channels with the aim of consolidating ones presence in the points of sale where the bulk of consumption occurs in Colombia.
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