RNG STRATEGY ALERT

March 2010
Latin America 2010 & Beyond: Five Crucial Themes
Greetings!

Without a doubt 2009 proved to be a difficult year for retail globally and Latin America was no exception.

RNG's Latin America chain retail database showed an average year-over-year growth of 12% from 2005-2008
but growth slowed down considerably to 6% from 2008-2009 (constant currency, see data here). If we
take currency exchange fluctuations into consideration, this makes for an even more challenging comparison: 16%
avg. growth for '05-'08 vs. -7% decline for '08-'09 (see data here)

As we look into 2010 & beyond there are a five big themes that will play out across Latin America that CPG
companies & retailers need to consider as they build their strategic & business plans for the future.

We share our view with you below - please share yours back.

Regards,

Aaron Chio
Senior Analyst
aaron@retailnetgroup.com | 781-522-6788 |
twitter.com/aaronchio

I. Consolidation & concentration will continue

The Latin American market experienced significant consolidation over the last 5 years (see Figure 3 of RNG's 2009
Latin America update) and there are no indications this should be different going forward. See below for major
highlights worth noting from the last several years.

As retailers look to expand their share of the modern trade as well as the traditional trade (including informal/mom
& pops) across Latin America, this consolidation will continue. A market like Brazil, for example, which is largely
fragmented & dominated by thousands of regionals/independents, will likely see a lot of movement in the upcoming
years.
Key questions for CPGs to consider:

● Where will your organization be placing their bets for future growth?
● Is your segmentation the right one (not only on growth, but also based on customer capabilities?
● How do you staff/prepare the organization to stay ahead of the curve for potential acquisitions/growth
spurts?

II. Expect major market expansions / developments

Retailers across Latin America will continue to push for new market expansions (from one country to another) as
well as within geographies (from large cities to suburban/rural areas). This is driven by two things:

● Retailers leveraging successful formats. The same way that the supercenter/hypermarket model has
largely been replicated & optimized throughout the region, we can expect other formats - cash & carry,
bodegas, discounters, smaller in-fills, etc - to be leveraged across geographies. Carrefour's Atacadao
format & the introduction of Oxxo's convenience stores entrance in Colombia are a good example of this.
Arguably, the entrance of Best Buy & Lowes Mexico could also fit here.

Carrefour exporting Atacadao stores from Brazil to Colombia

● Big box saturation forcing retailers to go smaller & into different geographies. As the vast
majority of major urban centers are penetrated with big boxes, real estate will become increasingly harder
& more expensive to find. Retailers will look to smaller boxes as a way of in-filling urban markets while
also expanding into smaller cities outside of major urban areas. Format experimentation will be key -
something we are already witnessing as retailers replicate successful formats globally (i.e., Walmart's
Smart Choice in China based off of Bodega Express in Mexico).

Carrefour Express - Carrefour experimenting with convenience store format in Brazil

Key questions for CPGs to consider:

● Global/multi-market customers are clearly exploiting best practices & information about the formats that
work. Is your organization taking full advantage of knowledge & better practices across regions & markets
as well?
● What are the implications of some formats growing disproportionately relative to others?
● How does the above impact your supply chain efficiencies, planogramming, shopper marketing, product
assortment, merchandising, communication, etc inside the store?
● Lastly, as retailers continue to experiment they will focus on fine-tuning their new formats, creating big
opportunities for CPG organizations to help.

III. Retailers betting on growth at "belly of the market"

Many retailers across Latin America are making big bets on being able to convert shoppers from the traditional/
informal trade into the modern trade. In Mexico, for example, a big portion of the population has moved from the
lowest socio-economic segments (D/E) to a higher-income bracket (D+ and above)

Mexico example: Some retailers banking on reaching the D+ & lower Socio Economic Segment.

Source: AMAI

The challenge for both retailers & CPGs is that this is a different consumer & shopper - one that has
different needs & aspirations, and one for which the store's assortment, shopping experience, brand &
communication messaging are very different.

In addition, disposable income on this lower end of the pyramid remains constrained & much more volatile despite
their movement to a slightly higher income bracket. As such, shoppers carry a higher risk of reverting back to the
traditional/informal trade.

Key questions for CPGs to consider:

● The traditional/informal trade is well understood by many CPGs. How can we help our key customers
better understand, target, & communicate with shoppers as they migrate to the formal trade?
 ● How do you work within your organization to exploit best practices on traditional/informal trade to help
grow with your modern trade customers?
● How do you manage the relationship internally between stakeholders focusing on the traditional/informal
trade & the modern trade?
● If retailers are expanding into new formats that target a lower income shopper...Do we believe some
formats/channels are over capacity?

IV. Re-engineering the store

Close to 80% of modern retail stores in Latin America are over 3 years old today. For some formats (specially big
boxes, traditional supermarkets), store re-generation will be key to gain share of mind & of wallet in shopper's
minds' as smaller, in-fill stores develop across markets. CPGs need to be aware of key re-generation principles
retailers will pursue in this environment:

● Rationalizing - Replacing, re-locating, expanding, or re-merchandising of key departments inside the store
that are most relevant to shoppers.
● Focus on brand clarity - This includes managing the brand experience all the way from the parking lot
down to the items in the store, including having a clear brand stand & architecture.
● Ensuring the feel & store experience is consistent and puts attention to the in-store tension, noise
levels, visibility, sight lines, shop-ability, and familiarity to the assortment/ambiance of the store.
● In-store communication - Reinforcing the value & promise of the brand. Visibility, relevance, and
impact of signage and communication are extremely important, as well as dynamic and engaging in-store
experiences (through in-store digital media, experiential categories/products, etc)
● Shop-ability - Improving the flow of the store, the in-store navigation (including sight lines, signage,
adjacencies) and also reducing the shopper barriers to purchase. Merchandiseability plays a big role here.

In some markets like Mexico we are already seeing changes across the store that shows us how a key retailer like
Walmart is bringing this thinking into this marketplace.

Focus on pricing communication at WMT Supercenter (left); Wider, cleaner aisles at Bodega Aurrera (right)

Key questions for CPGs to consider:

● Which stores in your customer's portfolio are more likely to undergo this transformation?
● Can you help your customer through this transition by initiating the discussion?
● If this transition is already happening, what's the impact on your product portfolio, assortment, & the way
you are able to merchandise (i.e., merchandiseability) your products within the store?
● Can you handle the changes if this move were to happen across a wider range of customers in the modern
trade?
V. Consolidation + Market expansion = New capability requirements
A large number of the largest, most important retailers in Latin America have multi-format, multi-market
operations. These global/multi-market operators will continue to increase their share of the market (most have
over the last 5-10 years), and almost by definition, they will have an evolving set of requirements & build new
capabilities to meet market demands.

As such, CPGs will need to take a holistic approach to building new capabilities across their organizations. RNG has
identified several key areas of retailer innovation that CPGs will need to adapt to. Here are the most relevant as it
relates to Latin America (in no particular order):

● Optimization. Retailer response to the economic cycle & anticipated shopper behavior by deliberately and
cyclically balancing costs/margins and growth by cutting SG&A (selling, general & administrative costs),
adjusting capital expenditures, reducing inventory (vendor & SKU rationalization) and establishing greater
discipline on category life cycle management.
● Branding & marketing. Retailers focusing primarily on three things: the store level experience, private
label, and in a few cases on corporate social responsibility.
● Market development models. Retailers leveraging & blending global capabilities with local realities to
accelerate market development along RNG's Level 1-5 continuum. We have talked about this in the past.
● Store re-generation & innovation. Communication, price clarity, store experience, shoppability (see
photo examples above). Retailers re-thinking what & how the store looks like for today's & tomorrow's
shoppers.
● Merchandising innovation. Category life cycle management is key - what is the role of my product
within the broader view of the store? Does my product/category/department have both current & future
growth potential, or is this a commoditized & easily substitutable space? Different actions need to be taken
depending on where you fit within this thinking.
● Organizational structure. Retailers have evolved their organizations considerably, adding greater
specialization & taking responsibility away from historical key touch points for CPGs (i.e.,. buyers). For
those capabilities/skills that are centralized retailers are in-sourcing/near-sourcing/out-sourcing for the
advantage of systematic centralization, a lower cost structure, or simply to facilitate knowledge transfer
throughout the organization. In this environment, CPGs need to innovate their organization to match the
movement happening within their key customers.
● Supply chain. Retailers increasingly paying attention & focus to SKU rationalization & inventory
reductions, particularly for those deleveraging with lower sales growth. Hyper-competition will put pressure
on pricing going forward and will bring new thinking around sourcing, pricing strategies, and ultimately the
requirements of added value services that CPGs bring to their customers.

Key questions for CPGs to consider:

● What are we doing to build capabilities around these areas?

● Is your organization meeting/exceeding market and customer demands? In other words, are you investing
for today or for the future?
● Are you investing with the right customers, based more on capabilities than on pure scale or growth?

Connect with An Analyst

RNG Clients are reminded of our Analyst Support and Access. If you have questions, challenges, or would like help
making the RNG tools and data work for you please contact us by email, phone or through the chat function on our
site. We look forward to hearing from you.

Aaron Chio
aaron@retailnetgroup.com
860-539-8161