Branching out: As the economy grows, retailers are looking to expand outside of Lima

As more Peruvians continue to work their way into the country’s burgeoning middle class, an increase in disposable income has led to strong growth in the retail sector. According to UN data, GDP per capita increased by 19% between 2009 and 2010, and is expected to rise in the coming years as the economy continues to expand.

While the retail sector grew by only 3.3% in 2009, slowed by the global economic crisis, it quickly rebounded in 2010 with retail sales reaching $51.6bn, a year-on-year (y-o-y) increase of 18.3%. Now with more cash in hand, Peruvian consumers are also becoming more demanding. They want access to a greater variety of products sold at more affordable prices in retail venues located closer to home. International and domestic retailers are now working hard to meet this ever-growing demand, investing in expanding their presence with new retail venues both within and outside of Lima.

MALL DEVELOPMENT: According to a report by the Peruvian Association of Shopping Malls and Entertainment (ACCEP), as of 2011 there were 40 shopping malls in the country. Additionally, there are plans to construct approximately 40 more retail centres between 2011 and 2014. In 2011 investors devoted $326m to the construction and expansion of malls. With slightly slower growth predicted for the overall economy in 2012, international consulting firm AT Kearney estimates that $260m will be invested in constructing new malls in Peru this year.

Among the larger mall developments on the agenda for the coming years are several projects in Lima. Immobiliaria Riscal, a Peruvian real estate firm, is participating in the development of a new specialised shopping mall in the capital city’s downtown area. The mall, Plazatech, will include 172 stores focused on offering technological products and services.

The Corpem real estate company is working on a new mixed residential and retail development on the coast just south of Lima. The new mall, Sunset Boulevard, will house around 40 retail outlets and is scheduled for completion in 2013.

Experts in the industry agree, however, that the more important story in shopping mall retail is taking place outside Lima in regions of the country that were historically ignored by commercial developers. Around half of the mall projects currently in the works are planned for regions outside the capital. In particular, strong growth in the following 11 regions has caught the attention of investors in the retail sector: Arequipa, La Libertad, Piura, Ancash, Cuzco, Ica, Cajamarca, Junín, Lambayeque, Puno and Tacna.

This surge in mall development both within and outside Lima is primarily the result of a sharp increase in shopping mall sales figures over the past couple of years. According to ACCEP, gross mall sales reached $3.4bn in 2010, and while the 2011 figures were unavailable at the time of writing, they were expected to ring in at $4.2bn. The country’s malls receive approximately 26.7m monthly visitors.

Malls, however, are not the primary destination for Peruvian shoppers. Open air markets and small corner stores, known as bodegas, are where most Peruvians continue to do the bulk of their shopping. According to Carlos Casabonne Stoessel, the managing director of URBI, a real estate developer, “People going to the malls still represent a small fraction of the population.” Casabonne argues that this is partly due to the fact that there are not enough malls; a problem likely to be resolved soon, given the country’s rapid mall development. But even with a mall close to home, many Peruvians still carry the perception that malls are expensive places to shop.

UPGRADING BODEGAS: While modern retail outlets, such as shopping malls, are clearly becoming an increasingly popular choice among consumers, at least for the moment, local markets and bodegas are still important retail venues for the average Peruvian. The large contingent of consumers that receive their wages on a daily and weekly basis still find it more convenient to do their shopping at the corner store or market closest to home, as opposed to driving to the nearest modern retail centre. In addition to the convenience of shopping close to home, cultural factors also affect consumers’ decisions on where to buy food. The majority of Peruvians still believe that food purchased at the local market, as opposed to the supermarket, is fresher.

Nonetheless, a growing middle class is slowly shifting away from these traditional retail outlets to malls and supermarkets. In response, bodega owners are making a concerted effort to remain competitive by offering consumers a wider array of products and services. For example, many bodegas now coordinate with banks to offer bill payment services within stores. Almost all carry pre-paid mobile cards.

There is only so much the bodegas can do to keep pace, however. As Rafael Dasso, the general manager of Real Plaza, a mall developer, points out, “The Peruvian customer inside and outside Lima has become a lot more demanding. Formal retail has an advantage in that respect, as it usually offers more products and activities under one roof.”

SUPERMARKET SURGE: While traditional grocery outlets continue to account for the majority of grocery sales in the country, modern supermarkets – many of which are now situated in malls – are also gaining ground among Peru’s middle class.

Cencosud Peru, a subsidiary of the Chilean retail giant, Cencosud, is the largest supermarket retailer in the country. The firm owns and operates the Metro supermarket chain, as well as the more upscale Wong supermarkets, which were acquired by the company in 2007. Cencosud Peru currently accounts for approximately 46% of supermarket sales.

The next largest supermarket retailer is Supermercados Peruanos, which is part of Grupo Interbank, one of the largest business conglomerates in the country, as well as the owner of one of Peru’s largest banks – Interbank. The firm currently operates 69 stores under the brand names of Plaza Vea, Vivanda and Mass. Since 2007, Supermercados Peruanos has followed an aggressive agenda of expanding outside the capital, opening stores in Chiclayo, Arequipa, Lambayeque and Cajamarca. The firm has further plans to move into Huancayo and Cuzco. According to the Class & Asociados rating agency, the chain’s sales have increased by an average of 19.5% annually over the past five years.

While Cencosud Peru and Supermercados Peruanos account for some 74% of supermarket sales collectively, the hypermarket chain Tottus is also an important player, holding the remaining quarter of market share. Tottus, a subsidiary of Chilean retailer Saga Falabella, operates 19 stores throughout Peru, as well as additional retail outlets across Chile.

As all of these supermarket retailers continue to expand their presence outside Lima, and Peruvian consumers continue to see an increase in disposable income, this segment of the retail sector is expected to grow further. According to a report by research firm Euromonitor, grocery sales are anticipated to hit around PEN50.1bn ($18.4bn) by 2016.

COMPETITIVE BEVERAGE MARKET: While malls and supermarkets continue to try and find their place in the Peruvian market, beverage retailers are already well-placed, participating in what is considered to be a very competitive domestic beverage market.

According to Mauricio Leyva Arboleda, the chairman of Backus & Johnston, a local beer manufacturer and subsidiary of the SAB Miller Group, “Peru is highly competitive in the beverage industry as a whole, and within both segments – alcoholic and non-alcoholic.” The country’s largest beverage manufacturers include Destilerías Unidas and Backus & Johnston, Anheuser-Busch InBev, and the locally owned and operated AJEGROUP (AJE).

SABM iller, the country’s largest beer manufacturer, accounts for more than 92% of beer sales in Peru. The beverage company has profited from a substantial increase in beer consumption in recent years, up to 45 litres per capita from 28 litres per capita in 2006. The firm recently announced a $300m investment in upgrading its brewing operations in Peru.

While accounting for only 6.36% of beer sales, Anheuser-Busch InBev is currently the second-largest shareholder in both beer and soft drinks in Peru’s bustling beverage market. The company began operations in the country in 2003 when AmBev, the Brazilian subsidiary of the parent company, acquired local PepsiCo bottler, Embotelladora Rivera.

As in many areas of the country’s economy, the informal sector produces a significant amount of alcohol. Leyva told OBG, “A challenge will be to reduce the amount of illicit alcohol consumption, which still accounts for approximately 30%, and shift into formal consumption. Illicit alcohol consumption in Peru is one of the highest in Latin America and tax losses account for PEN1bn ($366.4m).”

At present, one of the most rapidly expanding companies in the non-alcoholic beverage market is the privately owned Peruvian firm, AJE. The company’s primary products include Kola Real and Big Cola. In recent years, the company’s growth both within Peru and internationally has largely been due to its efforts to undercut American soft drink giants Coca-Cola and PepsiCo on price.

Within Latin America, AJE operates in Venezuela, Mexico and Brazil. The firm has also taken aggressive measures to establish a presence in Asia, which has thus far proven successful. AJE gained an 8% market share in Vietnam only nine months after entering the country. The group is currently looking to support further global expansion through a potential $200m bond issue and/or initial public offering.

According to Leyva, as disposable income levels in Peru continue to rise, growth in the beverage sector is widely expected to follow suit. In particular, Leyva points out that healthier, non-alcoholic beverages are showing much potential for future growth.

DEPARTMENT STORES: Outside the grocery and beverage segments, department stores and home improvement retailers are also working to expand their presence throughout the country.

The country’s largest department store chains are both Chilean-owned – Saga Falabella and Ripley Corporation. Ripley recently announced a plan to invest approximately $80m in Peru over the next three years. The firm hopes to open 13 new stores between 2012 and 2015. In the first half of 2012 the company opened a new store in Chimbote, a northern coastal city. It has plans to open new retail venues in Huancayo, San Borja and Lima before the end of the year.

Home improvement retailers are now also expanding operations, largely in response to the increase in disposable income. As a result, more consumers are beginning to invest home renovations and upgrades. Maestro Home Centre, an American franchise of Ace Hardware, has plans to open 12 new stores in the near term. Meanwhile, Sodimac, a home improvement retail chain and subsidiary of the Chilean Cencosud, also has ambitious plans to open 15 new stores in the country in the coming years.

CLOTHING: According to a report by ACCEP, approximately 47% of all mall visitors enter a clothing store while in the mall, making clothing stores the most popular retail venues in Peruvian shopping malls. High footfall, coupled with strong economic performance, have led to a number of international clothing retailers becoming increasingly attracted to the country’s burgeoning clothing segment.

In January 2012, Spanish clothing retailer, Zara, opened its first store in the country – an 1870-sq-metre retail space in Lima’s largest shopping mall, Jockey Plaza. Within the first week of opening, the store handled $1m in sales. Inditex, Zara’s parent company, is also considering opening a Zara Home, the company’s interior decorating chain store.

US clothing retailer Gap is also looking to set up retail operations in Peru. The company made the announcement in February 2012, shortly after opening its first store in Panama. Gap will be working with a subsidiary of Komax, a Chilean clothing distributor, on the project. While the location of the new venue was not available at the time of writing, the store is scheduled to open in 2013.

Entrants like Zara and Gap will also play an important in forcing larger department stores, such as Ripley and Falabella, to compete on price and selection.

OUTLOOK: As disposable income continues to increase, retail should remain an important growth segment of the economy in the years to come. Retail sales are expected to continue their upward trend by an annual average of 6% in real terms and 8.5% in nominal terms over the next five years. Clothing, grocery, technology and home improvement are just some of the sub-segments of the retail sector that are most likely to experience growth.

Casabonne told OBG that while Chilean companies have played an important role in the sector over the past decade, he expects to see a more diverse mix of players in the coming years. New entrants, coupled with the rapid expansion of the sector as a whole will increase the level of competition going forward, much to the benefit of Peruvian shoppers.

Local consumers will continue to demand more from both domestic and international retailers operating in the country. According to Carlos Bragagnini, the CEO of Peruplast, a Peruvian-based flexible packaging company, “The Peruvian consumer is now becoming more demanding and companies will have little choice but to adapt to remain competitive.”