Latin America Edition

Cash & Carry: The New Hypermarket in Latin America? For the last 15 years the largest retailers in Latin America Walmart, Carrefour, Soriana, Po de Acar, Cencosud relied heavily on hypermarkets as their primary growth engines to establish a dominant presence across key markets. As we look out at key drivers of change saturation/concentration levels as industry drivers and urbanization and middle class growth as societal drivers we see growth in the next 3 to 5 years coming from new store types & formats that are fundamentally different than what we are accustomed to. One of them is a segment belonging to the Warehouse Club channel Cash & Carry a key format that was historically used to introduce modern retail to developing markets but in the future will be used as a key vehicle for growth in emerging markets like Brazil. Read on for our thoughts on this important segment and the implications for branded manufacturers. Aaron Chio aaron@retailnetgroup.com www.retailnetgroup.com

2010 RetailNet Group LLC www.RetailNetGroup.com

Latin America Edition

Cash & Carry in Latin America There are two major segments that comprise the Warehouse Club channel - one requiring shoppers to purchase a membership fee (Membership Clubs) and another one that does not (Cash & Carry). Major warehouse club players in Latin America include Makro, Price Smart, Costco, SAMs Club, and City Club (Soriana). Cash & Carry operators are led primarily by Atacadao (Carrefour), Assai (Po de Acar), and Maxxi (Walmart). When we look at the projected share of volume for these two segments as a percentage of the total Warehouse Club channel in Latin America, we find something extremely compelling: By 2014E Brazils Cash & Carry segment will be almost 1.5x larger than Mexicos, despite the fact that they are similar in size in 2010E. In addition, Brazils Cash & Carry segment alone will account for almost 50% of all the volume in the Warehouse Club channel in Latin America. Put in a different way, Brazils Cash & Carry segment will be larger than Mexicos and Central Americas warehouse club channel volume combined.
Zone Brazil Segment Sales '10E Share of Latin America '10E Share of Latin America '14E Sales '14E Warehouse Club Channel Warehouse Club Channel 13,571,096 42% 47% 4% 1,163,588 4% 6% 2,015,810 7% 0% 73,040 0% 0% 64,943 0% 41% 9,888,676 34% 7% 2,200,295 8% 100% 28,977,449 100%

Cash & Carry 8,165,584 Membership Club 856,304 Membership Club 1,177,891 Central 52,079 America/Caribbean Cash & Carry Cash & Carry 61,856 Mexico Membership Club 8,017,875 Cash & Carry 1,314,601 South America TOTAL 19,646,190

Source: RetailNet Group; sales in constant 2009 USD

Unlike Mexico, where Membership Club has been the leading growth segment for the Warehouse Club channel, Brazils leading segment will be Cash & Carry a small difference on paper but of extreme significance in terms of the implications for strategic alignment and customer segmentation for branded manufacturers. Why will Brazil have such a different growth profile than elsewhere in Latin America? Carrefour, a key player driving the Cash & Carry charge in Brazil, understands that a multi-format strategy is needed to succeed in Brazil and Atacadao is one of the key answers here. The Cash & Carry format has some of the lowest distribution cost ratios in retail, making it very attractive for retailers to operate these stores and creating immediate value for shoppers in the trading areas. These large boxes can address upwards of 70% of Brazilian households in lower income catchment areas, particularly in the peripheries of major metropolitan areas. The same way hypermarkets captured higher income and aspirational shoppers Cash & Carry will capture lower income shoppers and traders (i.e., mom & pops)
2010 RetailNet Group LLC www.RetailNetGroup.com

Latin America Edition

Brazil has one of the most promising growth curves for lower income shoppers & consumers the C, D, and E brackets and Cash & Carry stores are one of the most efficient ways of capturing their spend. Critical Success Factors for Cash & Carry A great example for understanding the critical success factors for the Cash & Carry format is European retailer METRO. As the worlds 3rd largest retailer, METRO evolved its business over the last 14 years from being extremely concentrated in Germany to becoming a major international player with operations in 30+ markets today. RNG forecasts that 50% of their revenues will be concentrated in their Cash & Carry format by 2014E. This is a great parallel to some of the major Latin American retailers who are becoming increasingly vested in multi-continental growth.

Source: RetailNet Group; METRO presentation

METRO attributes part of their success to their ability to replicate and optimize their stores for multiple markets but also to several critical success factors that are relevant across the spectrum of Cash & Carry operators. These include: First mover advantage. Cash & Carry models tend to appear early on in market development and they can give operators an early start on key competitors. Real estate. With a first mover advantage comes first pick on real estate, allowing retailers to find less expensive land than followers. Focus on driving value for shoppers. The no frills environment of Cash & Carry stores are all about driving efficiencies through labor and supply chain management, driving high levels of value on a limited number of fast moving SKUs. Focus on an under-served shopper segment in emerging markets. METRO uses a defined development cycle management concept to target individual shopper segments,
2010 RetailNet Group LLC www.RetailNetGroup.com

Latin America Edition

beginning with small retail (traders) and later on HoReCa (hotels, restaurants, caterers) as the market, shoppers, and stores mature. Capital efficient model. In the case of METRO, return on capital employed (RoCE) is very high at over 35% while other retailers are typically in the 20% to 30% range. Product mix. In developed markets, 80% of the store is typically dedicated to food and consumables while in developing markets this jumps to +90%. The focus on fast moving goods while limiting inventory on higher ticket items can be an advantage. This also shows that retailers understand the informal/traditional trade in a market like Colombia, for example, there are over 150,000 mom & pops alone, a key shopper segment for cash & carry stores. In addition these stores have a clearly defined shopping experience which is consistent on a market by market basis: Practical, not experiential shopping environment. Stores are targeted to the needs of professionals who place significant value on a fast, efficient, flexible and convenient experience. Clearly defined shopper groups. In the case of METRO, these are small retail (traders), HoReCa (Hotels, Restaurants, Catering), and lastly SCOs (Service Companies, Offices). This narrow focus allows them to concentrate on what matters the most to these crucial buying groups.

Source: METRO presentation

Merchandisability. Clearly arranged merchandise with wide aisles and a no-frills environment for ease of navigation and shoppability. In RNGs experience, stores in developing markets will typically index higher on merchandisability vs. developed markets. Shopper first mentality. Some stores will feature large, partly roof-covered parking to allow shoppers to load the merchandise into their cars/trucks without worrying about the weather.
2010 RetailNet Group LLC www.RetailNetGroup.com

Latin America Edition

Source: RetailNet Group store visit; Carrefours Atacadao in Sao Paulo, Brazil

2015 and Beyond: Whats Next for Cash & Carry in Latin America? As we look out to 2015 our analysis of market dynamics tells us the landscape will fundamentally transform as the Warehouse Club channel, and in particular the Cash & Carry segment, is repositioned. Large retailers like Carrefour (Atacadao), Po de Acar (Assai), and even Walmart (Maxxi) will dedicate a greater share of their capital expenditures to growing these formats across key markets like Brazil. As markets continue to urbanize throughout Latin America, these Cash & Carry stores will be a good fit for lower income shoppers who typically settle in the peripheries of major metropolitan areas. Those retailers and brands that address this growing opportunity will find new pockets of growth that today are not clearly evident. Looking at METRO in Europe today it is clear the retailer is already undergoing a fundamental transformation in how it targets and clusters its store base by geography, affecting both the size of the store and its assortment which inevitably creates new complexities, challenges and opportunities for all parties involved.

Source: METRO presentation

The implications for Latin American retailers are clear: the markets/regions where the modern trade is more developed will see smaller, more targeted stores that very carefully mimic the
2010 RetailNet Group LLC www.RetailNetGroup.com

Latin America Edition

socio-economic needs of the region. In more developed markets, urban variations are likely to prevail but will inevitably follow the principles weve outlined to be successful. Brand Implications Based on our expectations for the Cash & Carry format, there are a few key questions and considerations for brands. Invest ahead of scale. Retailers like Carrefour Atacadao are entering new markets with Cash & Carry formats in Latin America. These stores do not have massive scale yet but they could be a great investment for the future. Lack of scale means no dedicated resources. Since some of these new formats might be too small to have fully dedicated teams, how will your organization work with these customers when they are small to ensure you are a key partner when they gain appropriate scale? Customer tiring. Are customers in the Cash & Carry space more/less profitable than other retailers across different channels? Having the ability to analyze customers and channels in this regard will allow your organization to realign resources as needed and invest in this growing segment. Merchandisability. How brand friendly or hostile are these new store formats? Do they promote manufacturer brands or are they focused mostly on building private label? These are two different scenarios that will require different actions. Differentiation requirements will escalate. As retailers continue to diversify their store portfolios, they will seek differentiated approaches from FMCGs. The most important question FMCGs can ask themselves here is not how to do this (i.e., supply chain requirements) but rather deciding what areas need to be customized/differentiated (i.e., products, services, back offices, etc), for who (i.e., adequate retail partners), and the implications (i.e., managing internally organization expectations and other customers) As the Cash & Carry segment grows its share of the Warehouse Club channel over the next 5 years, it will be crucial for brands to understand the key success factors that will enable these stores to succeed. Brands that place bets early on in this process and align their strategies with their retailers stand to gain from this fundamental transition.

For more RNG research on Latin America please visit www.retailnetgroup.com/Curriculum

2010 RetailNet Group LLC www.RetailNetGroup.com