Focus on increased domestic supply for consumer goods in Colombia

Fast-moving consumer goods (FMCGs) are often considered a recession-proof segment. Although margins are relatively thin, demand for basic items such as processed food, cosmetics and alcoholic drinks tends to rise steadily, especially in emerging markets with growing middle classes. According to a September 2015 report by the National Statistics Agency (Departamento Administrativo Nacional de Estadística, DANE) for the first time the Colombian middle class has exceeded those classified as poor. Some 30.5% of the population – around 14.7m people – are considered middle class, compared to 28.2% poor. This growth has translated into rising consumer spending in all areas except vehicle sales, where a declining peso has made imports more expensive. In the first 10 months of 2015 sales in Colombia’s supermarkets and department stores increased 11.7% year-on-year (y-o-y) to $10.8bn.

Food & Drink

The Colombian processed food and drink market was valued at around $12bn in 2014, with 42% of sales occurring in Bogotá and the surrounding region. In the first 10 months of 2015 sales of processed foods and non-alcoholic beverages grew 5.2%. Colombians spend just $337 a year on processed foods, well below the Latin American average of $505. With obvious room for growth, the national investment promotion agency ProColombia backed 25 new projects with a total foreign investment of $570m between 2010 and 2015.

A number of international food players have a presence in Colombia and are fighting for market share. PepsiCo registered double-digit growth in 2014 to hit COP930bn ($342.2m) in sales. The weak peso has led to a drop in imported food and drink products, which fell 17% y-o-y in the first 10 months of 2015. It has also spurred the sale of own-brand products, according to consumer research firm Nielsen. Among the most popular own-brand products are oils and milk, which account for 57% and 24% of total sales, respectively.

Firms continue to build their domestic supply chain. In September 2014 US fruit firm Dole completed a $28m investment programme in the country which included the construction of a plant close to Bogotá.

Drink Up

In 2014 some 20m hectolitres of non-alcoholic beverages were sold in Colombia for total revenues of around $1.3bn, a 9% increase on the previous year. That year Colombians spent an average of $170 on drinks, compared to $125 in 2009. Carbonated drinks accounted for nearly two-thirds of volumes, with juices making up 17% of sales and bottled water 9%. However, the juice segment is growing at a much faster rate (20%) than carbonated drinks (5%), and there is a wider trend of diversification of beverage consumption, with teas, energy drinks and low-calorie products increasing their market share.

Medellín-based Postobón has followed this trend and signed an agreement in 2015 with PepsiCo to produce Ocean Spray juices and acquired a 65% stake in local tea producer Triple Corona.

Alcohol & Cigarettes

Sales of alcoholic drinks and tobacco grew 11.6% y-o-y in the first 10 months of 2015. Colombians drink an average of 45 litres of beer per year, some way behind Brazil (68 litres) and barely half that of the Venezuelans (86 litres).

The local beer market is dominated by Bavaria, a local brewery owned by the Santo Domingo Group, but sold in 2005 to SABM iller in exchange for 14% equity in the British beverage giant. In the first quarter of 2015 the company sold 11.2m hectolitres of beer in the country, a 4.2% increase y-o-y. However, the firm faces challenges from new entrants. First, beer imports have increased dramatically. In the first nine months of 2015 Colombia imported 326,991 hectolitres of beer, up 79% on the corresponding figure in 2014. Second, foreign beers are establishing alliances in Colombia. In November 2014 Postobón entered a joint venture with Chile’s Cervecerías Unidas to create Central Cevecera de Colombia. That firm has since sealed deals to produce and sell Heineken and Coors Light in the country. Finally, the big players are looking to snap up artisanal brewers. In May 2015 local brewer Bogotá Beer Company, which owns a chain of pubs, was sold to Ambev, the Brazilian unit of Anheuser-Busch InBev, the world’s largest brewer.

Cosmetics

The cosmetics and personal care segment shows particular promise among FMCG products. Between 2007 and 2014 the market grew at an annual rate of 7% reaching $6.9bn in 2013, according to data from Business Monitor International, which forecasts a total market size of $9.9bn by 2018. In the first 10 months of 2015 spending on cosmetics and personal cleaning products grew 8.1% y-o-y.

The increased spending power of Colombia’s growing female workforce has been one driver behind the trend, but men are getting in on the action too. Men are expected to make up 25% of personal care spending in 2015, and in December a study by e-commerce firm Groupon found that 27% of Colombian males enjoy a manicure and pedicure, compared to 14% of Brazilians and just 5% of Chileans.

Compared to Brazil, where annual per capita spending on beauty products is around $260, Colombians spent, on average, just over $62 on personal care in 2014. But according to Candean Consumer, a commercial intelligence company, the country has the brightest growth prospects in the region, with a forecast annual compound growth rate of 8.3% to 2019 compared to 3.3% in Mexico and 3.6% in Brazil. Given the potential of the market, a number of multinationals, including Avon and L’Oréal, have established a footprint in Colombia, and in March 2015 direct cosmetics sales firm Mary Kay said it would invest $8m to bring 150 products to market.

Natural Exports

While the domestic market remains strong, the long-term goal is to boost domestic cosmetic production to become a major regional exporter. The sector is the focus of the Productive Transformation Programme (Programa de Transformación Productiva, PTP), a public-private partnership aimed at promoting the industry. “For the cosmetics sector the goal is that by 2032 we have to be recognised as a producer and exporter of cosmetics made from natural ingredients,” César Peñaloza, general manager of the cosmetics PTP, told industry news portal Cosmetic Design. Between 1996 and 2014 cosmetic exports surged from $66m to $870m, with Ecuador and Venezuela the primary destinations.

The second-most-biodiverse country in the world, several of Colombia’s native species have reached miracle-product status in the global cosmetic industry. Oil from cacay nuts is used in high-end anti-ageing creams, while wax from the myrica fruit is used in hair treatments. With 50,000 plant species, 36% of which are endemic to Colombia, and tax incentives for research and development spending, the country has the potential to become a focus of cosmetics innovation. International brands Belcorp and Kimberly-Clark have already set up innovation centres in Colombia.

Challenges

Although consumer spending has remained strong in a slowing wider economy, the FMCG sector faces challenges in 2016. The continued weakness of the peso will keep imports expensive and a major tax reform is expected to increase sales tax from 16% to 18%, reducing consumer spending power. The Ministry of Health and Social Protection has also proposed that a tax be levied on soft drinks to counter the country’s growing obesity problem.

While companies may be able to adjust to new fiscal burdens, Colombia’s poor transport network will remain a serious challenge until infrastructure projects are developed. “Distribution channels will continue to be an issue in the medium to long term,” Helio Duenha, general manager of Bosch Colombia told OBG. “Although the country is investing in roads and logistics infrastructure, local and foreign companies face enormous costs when distributing their products. Bogotá, Medellín, Cali and the Atlantic coast are markets where a distribution presence is needed; however, other cities will remain too costly until transport infrastructure improves,” Duenha said.