TrendWatch - expert columns

Housewares boom in Latin America attracts interest from international retailers

By Euromonitor

With 75% of its population living in cities, Latin America has an urban/rural ratio similar to that of highly industrialized countries. Moreover, rapidly expanding urban agglomerations such as Buenos Aires, São Paulo, Rio de Janeiro, Mexico City and Lima are already among the largest in the world and, despite high levels of poverty, growth in the housing stock in those markets drive demand for housewares.

Over the next five years, sales growth of specialist housewares retailing across Latin America is expected to reach 18%, with Argentina and Chile expected to be the strongest performers with growth of almost 40%.

Source: Euromonitor International

Penetrating lower-income consumer groups One of the most successful strategies implemented by local retailers in Latin America is offering affordable furniture and home furnishings to lower-income consumers. This approach has been adopted by Grupo Elektra and Famsa – Fabricantes Muebleros. Their stores are located in densely populated urban areas with convenient transportation links, encouraging visits from noncar owners.

This is a rational approach in Latin America, given that consumer spending is primarily devoted to fulfilling basic needs and non-grocery retailing is relatively underdeveloped. Based on this, retailers such as IKEA, offering good value products, would have a great chance to succeed in countries such as Mexico or Brazil.

With a large proportion of consumers that do not have access to banking services, as well as strong competition from informal retail trade, retailers across all Latin American countries have been prompted to introduce credit programs. Since retailers are more flexible in terms of formal credit requirements than financial institutions, this strategy helps attract consumers that would not quality for a bank loan to cover larger ticket items.

However, in this area, housewares retailers face increasing competition from major department store chains, which also offer affordable financing and credit plans rivaling those offered by major hardware chains such as Grupo Elektra.

Housewares retailers in Brazil to benefit from construction boom

Falling interest rates and improving affordability of mortgages are resulting in increased demand for housing among middle and lower-income consumers. Developers are already addressing this trend and new building sites are mushrooming, especially in the largest Brazilian cities of São Paulo and Rio de Janeiro.

Both local and foreign housewares retailers have spotted the opportunities and are opening new stores. With the expansion of its megastore concept, Tok&Stok is one of the fastest growing chains in Brazil. The company is also investing in advertising by attaching leaflets promoting its products to popular Brazilian mass magazines.

However, specialist housewares retailers in Brazil will need to deal with competition from the high number of small and medium independent stores as well as durable goods retailers, which also offer furniture targeted at lower-income consumers.

Within home improvement retailing, local C&C Casa e Construção and the French chain Leroy Merlin lead in terms of sales revenues. The sector is, however, very fragmented with the largest players accounting for only 7% of total value sales in 2006.

Source: Euromonitor International

Mortgage boom drives growth in Colombia

Colombia, the second largest market for housewares retailing after Brazil, is growing on the strength of an increasing number of mortgages and favorable demographic factors. Euromonitor International forecasts that by 2011 the country should have 14 million households, up from 12.4 million in 2006. The dynamic growth in number of households is also fuelled by the fact that

Colombian household sizes are getting smaller and more houses need to be built as the population grows.

Currently there are only two chained specialist housewares retailers in Colombia - Home Center, owned by Chilean SACI Falabella, and Home Sentry owned by local retailer Mecaneletro SA. In May 2007 Casino Group, which is already present in Colombia with hypermarkets, supermarkets and discounters, announced plans to launch a new brand within the home improvement sector. The new chain, called Easy Colombia, will be a joint venture with Chilean retailer Cencosud.

Casino's plans may be indicative of the significant potential of the Colombian market. Other home improvement retailers present in the region such as Leroy Merlin and Home Depot are also likely to establish operations in Colombia over the next few years.

Local players in the lead

Although foreign retailers are increasing their investment in Latin American markets, local players lead home furniture and hardware sectors in terms of sales and number of outlets. Thanks to almost a 20% market share in the Mexican homewares sector, Grupo Elektra managed to secure a leading position across the whole region, followed by the Sodimac chain, which has strong positions in Chile and Colombia.

After being acquired by SACI Falabella in 2003, Sodimac benefits from the synergy between other Falabella businesses - hypermarkets, supermarkets, department stores as well as banking and financial services. Among others, Falabella's expertise enabled Sodimac to provide easy access to credit by using popular store cards, to facilitate installment payments and encourage additional purchases.

Although local players currently seem to benefit most from the favorable demographics and increasing interest in improving homes in Latin America, the region has great potential to become a profitable market for foreign investors such as IKEA or Kingfisher.

Lowe's to go head to head with Home Depot in Mexico

The tendency among Mexicans to hire workers to carry out minor construction work is slowly shifting towards the "do-it-yourself"concept. Home Depot, currently the only foreign chain with a significant presence in Mexico, plays an important role in promoting DIY to consumers. For example, the company uses special workshops as a way to show customers how to fix plumbing or how to paint walls properly. Currently Home Depot has a total of 60 outlets across the country, with ambitious expansion plans for the next three years.

In 2006 Home Depot was joined by another US-based home improvement retailer, Lowe's, which plans to operate 3-5 stores in Monterrey by the end of 2009. After establishing a strong presence in the Monterrey area, the company is expected to expand further and is likely to gain a significant market share in the Mexican home improvement sector.

* In Columbia, the Easy brand will be developed as a result of a joint venture between Cencosud SA and Casino Group.