Retail prospects look bright as demographics drive Peru's consumer spending

The retail sector in Peru has been the second-fastest-growing sector of the economy over the past decade, after construction, driven by rising consumer spending. Retail sales peaked at $64bn in 2013-14, before falling back to an average of $61bn in 2015-16, in line with the slightly cooler economy. Peru’s total private consumption has more doubled in nominal terms since 2007 to peak at $132bn in 2014, easing a little in 2014-16 to around $126bn, and the country ranks seventh in the region for this indicator, meaning that there is tremendous room for growth. In consulting firm AT Kearney’s 2016 edition of its Global Retail Development Index, which ranks developing countries’ attractiveness for retail investment, Peru was ranked first in the region, above Colombia and Brazil, and ninth overall out of 30 economies measured.

Demographic Trends

The positive outlook can be attributed in part to the country’s expanding and increasingly urbanised middle class, which is estimated at 10.4m people, making the country a very attractive prospect indeed for the retail segment.

Nor is the expanding middle class limited to Lima. According to César Peñaranda, executive director of the Institute for the Economy and Business Development (Instituto de Economía y Desarrollo Empresarial, IEDEP), a unit of Lima’s Chamber of Commerce (Cámara de Comercio de Lima, CCL), while a total of 53% of the middle class is concentrated in Lima, which is home to one in every four Peruvians, in the period between 2011 and 2015 Lambayeque in northern Peru was the region with the fastest growth in the middle class at 101.1%. This was followed by Puno (80.2%), Arequipa (57.9%) and Cusco (55.8%). José Cabanillas, president of the CCL’s Retail and Distribution Guild, remains confident that retail sales will continue to increase by at least 10% in 2017.

High-End Demand

The luxury retail sector has taken off in Peru in recent years, establishing a strong presence in both Lima and Cusco. Indeed, the country is seen as one of the most exciting prospects in Latin America for luxury retailers. The high-end jewellers Tiffany’s is among the latest arrivals to Lima. About 40 international luxury brands are present in the capital, with 30 others looking to enter Peru.

Convenience Foods

Within retailing the food industry remains dominant, accounting for about two-thirds of total sales, or roughly $40bn in annual sales terms. Supermarkets have expanded to account for over a fifth of food sales, led by Cencosud of Chile, the Tottus chain of supermarkets owned by Falabella, another Chilean company, and Supermercados Peruanos, a local firm. With the opening of a new store in Villa El Salvador in late December 2016, Tottus now has a total of 60 stores in the country.

Supermarket sales in Peru remain low in comparison to other countries (in Chile, for example, 80% of food sales are through supermarkets), pointing to considerable market growth potential. Even as the supermarket sector continues to expand, small convenience stores and mini-markets like Tambo, Jet Market and Viva, to name the dominant brands, are currently enjoying strong growth in Lima, according to market research firm CCR Perú, threatening the traditional bodegas (corner shops). Market GESA, owned by the Spanish Group Espinoza, plans to open 10-14 convenience stores this year, according to its general manager, Francisco Ponte.

Home improvement stores are also enjoying a rise in popularity, led by Sodimac, which is owned by Cencosud, and Maestro Home Centre, a local franchise of the US-based Ace Hardware, which now has over 16 stores in Lima and 30 nationwide.

Shopping Centres

Peruvians enjoy the mall experience, and mall development continues to grow strongly, including outside Lima, with notable expansion witnessed in a number of other provinces in recent years. According to the IEDEP, investment in shopping centres in the country has totalled some $2.3bn in the past 15 years, with a further investment of $1.2bn in mergers and acquisitions activity.

According to the association of commercial and entertainment centres, there are now 77 malls nationwide, and it expects this to rise to over 130 by the end of the decade. International fast-fashion retailers, including H&M from Sweden and Forever 21 from the US, are now established in Peru, along with Spain’s Zara and the US brand GAP. The prevalent MegaPlaza, owned by Inmuebles Panamericana, is the dominant mall in North Lima and the most-visited mall in areas outside of the capital. It intends to invest $115m in the next two years.

Meanwhile, the Real Plaza chain owned by InRetail, which has 19 malls across Peru, reported a 3.5% rise in earnings and a 3.1% increase in same-store sales in the first quarter of 2017, defying predictions of weakness because of El Niño in zones like Trujillo, Piura and Chiclayo. Indeed, H&M opened a mega store in Trujillo in May 2015, creating 81 jobs. H&M is also now present in Arequipa and Piura, with further stores planned for Cajamarca, Cuzco and Huancayo. New H&M outlets are also in the pipeline for Lima’s emblematic Larcomar shopping centre and the planned new 245,00-sq-metre Real Plaza Este in Ate, for which a local construction firm won the $74m build contract in late April. Speaking to local press, Macu Alfaro, H&M’s country manager in Peru, said the chain will soon have 12 stores across the country.

E-Commerce

Increasing credit access coupled with the large variety of store cards offered by supermarkets and the majority of other big chain stores, including the leading department store Ripley, owned by Falabella, have encouraged more consumer spending, notably on big ticket items, such as cars.

The prospects for e-commerce in Peru are significant. Of the main supermarkets, Tottus and Cencosud’s E Wong have online stores, while Falabella and Ripley have also established an online retail offer. Juntoz.com, the country’s first online mall, launched in 2016 and in its first six months had 1m visits a month and 1000 orders a day, according to its founder and CEO, Fernando D’Alessio.

Fast Food Niche

In line with the growth of malls and fast fashion, food services sales have also risen, approaching the $8bn mark, with upwards of 40,000 fast-food outlets accounting for about a quarter of total food service sales, according to the Lima office of the US Foreign Agricultural Service (FAS). Many of the big US chains – McDonald’s, Burger King, KFC, Domino’s Pizza and Papa John’s – have expanded their outlets in recent years, both in Lima and also the main provincial cities, including Trujillo, Chiclayo and Cusco. The FAS identifies the local chain Bembos Burger Grill as the biggest competitor for foreign entrants in the fast-food sector.

Peru’s world-famous local gastronomy sector provides fierce competition, however, with the country’s prestigious chefs and restaurants continuing to expand nationally, regionally and internationally, in some cases via franchising.

Car Sales On The Rise

Continuing the positive performance of vehicle sales towards the end of 2016, 2017 has also been a successful one for the automotive sector. According to the Automobile Importers Association of Peru, approximately 45,861 new vehicles were sold during the first quarter of 2017, representing a 9.4% increase in comparison to the same period the previous year. A study conducted by Scotiabank points out that sales during the first quarter have mainly been driven by an increase in sales of light vehicles of 10.4% compared to the same period the previous year. Although the figures for heavy vehicle sales are more conservative due to a slowdown in the development of large infrastructure and mining projects, sales of this type of vehicle still experienced a 1.4% increase during the first quarter.

Overall, an increasingly competitive market caused by the entrance of new brands, mainly from China, drove the increase in sales, forcing the main brands to lower their prices. Jorge Maldonado, general manager of Indumotora, a local car dealership, told OBG, “The growth in demand for Chinese brands can also be explained by a decrease of the value of the dollar.” Additionally, the decision to ban imports of vehicles that fail to comply with Euro IV emissions regulations – the implementation of which were postponed to January 2017 – is also contributing to an increasingly promotion-driven market. “The highly competitive environment in Peru has led dealers to offer promotions that would be unthinkable in other markets, sometimes offering up to 5% discounts on the final price of the vehicle,” Maldonado told OBG. As a result, luxury vehicles have become more accessible, making it one of the most stable segments in terms of sales.

Importance Of Expansion

Looking forward, one of the keys to growth for dealers and brands will be determined by their ability to look beyond Lima. “Around 70% of sales take place in Lima versus 30% in other regions of the country,” Carlos Chiappori, general manager of auto distribution firm Nissan Maquinarias, told OBG. “As the country develops and the middle class in the provinces grows, 40% to 45% of sales will take place in those areas.” Furthermore, success will also be determined by the ability to respond to the changing needs of the customer. Toshiro Hayashi, executive president and CEO of Toyota Peru, told OBG, “Clients need to perceive there is added value, which forces sales channels to adapt to the new reality by incorporating more innovation.”

As players adapt to a changing environment and the ban on imports of Euro III-compliant vehicles becomes effective in 2018, sales will inevitably be linked to economic performance. While some in the industry worry that the ban will have a negative impact on the sector, others feel differently. “Environmental regulations in Peru are much less strict than in other countries, and it was only a matter of time that Peru followed the global trend towards the use of more environmentally friendly vehicles,” Hayashi told OBG.

Outlook

According to the latest Pulso Perú survey published by Datum Internacional and released in early May 2017, confidence is finally returning to consumers in Peru after a sustained period of low spending. Sentiment is still subdued in the north of the country, the worst area affected by the recent floods, but is strengthening in Lima and Callao. Consumers are on the whole more confident that the economy is no longer stagnant and are more willing to spend. Spending is also buoyed by the government’s public investment plans, which are aimed at stimulating activity. There is also sense that private investment is slowly picking up.

As consumers continue to regain confidence in the market in 2017, consumption levels are expected to bounce back significantly towards the second half of the year. The country’s economic stability and the current pipeline of projects – which is expected to boost job creation – will act as catalysts for development, therefore stimulating consumption levels.