"Setting up a company in a Latin American country and ensuring it is compliant with local regulations requires a certain amount of advanced planning. It is important to research and understand local compliance regimes."
Head of Accounting and Outsourcing Services
1. Regional Backdrop
Latin America is a group of countries and dependencies in the Western Hemisphere, encompassing a diverse linguistic landscape of Spanish, French and Portuguese. The name originates from the 1856 initiative to create a confederation of various republics that work towards common defence and prosperity goals; this later came into picture in the mid-19th century to include French-speaking territories in America, along with the larger set of Spanish and Portuguese. It has now culminated into a vibrant regional base made up of 20 sovereign states, as well as several other territories and dependencies, which span from the northern border of Mexico to the southern tip of South America. There are over ~623.3 mn people, spread over a combined area of 19,197,000 sq. km.
On a timescale, Latin America has had a rich historical journey, amassed by cultural nuances and political/ socioeconomic volatility. However, its an untapped market potential of great interest to investors as they try to shape its development ahead.
Rising People and Population
Demographically, the LATAM (Latin America) population continues to climb, growing at a CAGR of 1.2% from 2013-17; it is forecast to reach ~629.5 mn people this year. Within this, Brazil and Mexico top the charts, hosting a population of over 209 mn and 129 mn respectively. Majority (~83.2%) of the people are below 55 years of age, with ~41.5% of the lot concentrated within 25-54. This dominant young mix represents a promising demographic dividend, in terms of bringing in contemporary markets and trends at the forefront for economic development. At the same time, having a healthy and skilled supply of “working hands” can provide the requisite support to build upon a variety emerging industries.
Numerically, the region’s combined nominal GDP stood at USD 5,573,397 mn in 2014, with a GDP PPP of USD 7,531,585 mn. This figure is made of up of a multitude of countries, including those in Central America, which experienced a steady GDP rise at a CAGR of 3-5% from 2000-15. While this modest growth has largely been attributed to periods of high volatility and socioeconomic uncertainty in the past, stronger commodity prices coupled with an upswing in trade are expected to bring momentum.
Laying the Infrastructural Groundwork
In terms of infrastructure performance, LATAM countries significantly vary in their placement on the Logistical Performance Index (LPI), which reflects perceptions of a country’s customs clearance process efficiency, trade & transport-related infrastructure quality, as well as the ease of logistical services. Meanwhile the Internet Inclusivity Index, which outlines the current state of internet inclusion on parameters such as availability, affordability, relevance and readiness, stands fair for most countries at a score of 60 – 80. Amidst this, Chile leads the sphere in terms of both logistical and internet performance, standing at 34 and 85.1 on the LPI rankscale and Internet Inclusivity Index respectively. Ease of doing business is somewhat stagnant – ranging from moderate to fairly difficult for most countries. Mexico is the highest LATAM performer here at a rank of 49, representing a satisfactory business environment that takes care of legal issues such as property rights, IP etc. Hence, a greater scope for improvement lies here in terms of streamlining the regulatory ambit that eradicates mismatches/ambiguity, developing a friendly route for small/emerging players. Nevertheless, Uruguay stands very high with its E-GDI score in comparison to other countries (ranking at 34), which signals a greater emphasis put upon website development with regards to infrastructural and educational enhancement, using information technology to increase access and inclusion. This stands quite in line with the digitization buzz, where many people are looking to adopt e-platforms in every part of daily life. The drive also includes retail, where purchasing goods/services on electronic platforms has paved the way for a growing ecommerce market.
2. A GROWING DIGI-MARKET SPHERE
The primary gateway to the digital world lies in the Internet, with a wide variety of users joining the e-bandwagon. Holistically, internet usage has gradually increased from being 55% in 2015 to 59% in 2017, with Argentina taking the lead at a rate of 71%. In fact, Argentinians are making use of this access to buy the most online, with the country estimated to have 39% active paying customers (or accounts) by 2018. This is closely followed by Brazil and Chile, where 38% and 35% products/ services were bought online last year respectively. Meanwhile, Mexico also stands next in line, with an expected 31% active paying customers (or accounts) this year. This strong interrelation between internet access and e-shopping is expected to significantly refine online shopping in the LATAM sphere, attracting a host of consumers from all age groups and countries.
Online Shopping On The-Go
Opening up of new Avenues and Channels
Buying online is not merely a “young” phenomenon. Surveys reveal that amongst the various age groups, Generation X consumers actually made the most online purchases in 2016-17, which is 20% higher than the tech-savvy millennials. At the same time, young shoppers largely have the most distinct preferences when it comes to e-shopping in countries such as Peru, with a strong uptake towards buying a range of products such as accessories & applications (38%), technology (30%), as well as clothing & footwear (30%). The increased ease and convenience is driving consumer behavior towards this new avenue, with users in Venezuela willing to buy online despite the absence of a sophisticated payment mechanism or connection bandwidth. This demand has led to an upswing of online marketplaces, with various retail websites recording an e-footfall of over 154.8 mn visitors in May 2018. Within this, Mercado Libre/Livre is viewed as “LATAM’s Amazon. com” capturing over 47.4% of the activity in February 2018, as well as getting over 56.3 mn visitors in May 2018. All countries, with the exception of Chile, rank Mercado Libre/Livre as the No. 1 marketplace used by consumers.
This e-shop holds greater prospects ahead with its payment platform Mercado Pago, as well as its dispersed consumer activity across the region.
The growth in e-tail activity is also driven by the emergence of various proactive platforms, offering consumers further options to browse, select, buy and discuss online. This includes the development of mobile commerce (m-commerce), which has reached almost 25% of the aggregate e-shopping activity in Brazil in 2017. More than 55% of online store visitors there come from mobile devices. This mobile movement is largely led by key LATAM marketplaces such as Mercado Libre/Livre, Americanas, AliExpress and Amazon. At the same time, the upcoming arrival of 5G connections, as well as smartphone usage facilitating multi-purpose apps/ wallets, are further aligning to consumer liking and becoming a critical gateway for e-shopping.
However, these avenues are not limited to merely making searches and purchases. The boom in social media platforms such as Facebook, Instagram, Twitter etc. have become a significant part of shopper networking, allowing a variety of consumers to ask, discuss, and review their own buying experiences. This discussion sheds a lot of transparency into the market, allowing people to become aware of any snags/defects before investing money on a particular product. Firms are therefore stepping in to turn social media in a marketing hub by creating brand pages and deploying instantaneous support systems to solve consumer feedback/ concerns in a timely manner.
The choice of a particular social media platform depends on its network and audience behavior. For example in the LATAM arena, countries such as Uruguay, Chile and Argentina are home to most of the active social media population, standing at 72%, 71% and 70% respectively. Facebook is the most popular avenue here, comprising of ~52.8% of the activity mix, which is then followed by Twitter at ~22.8%. However, users have different behaviors when it comes to accessing a particular platform. For example, Instagram would be more apt when a seller needs to do a branding campaign to increase its organic engagement. However, Facebook is a better pick when it comes to creating a new campaign focused on conversion and quick response rates. Paying attention to these characteristics can help players turn this driver into a strong competitive advantage.
The Rise of the Omnichannel Experience
Today’s consumer no longer demands a singular journey through purely an online/offline channel, but one that strategically makes use of both realms to offer a unique, omnichannel experience. This is in line with the emergence of the B2Me market that places the customer at the focal, as opposed to B2B/B2C/conventional strategies. Given the nature of purchase, users want to utilize the timely benefits of e-shopping, along with the sensory advantages offered by inspecting a product in-store. Hence, firms must act upon this opportunity and provide all such options, integrating front-end and back-end offices that streamlines the entire process from lead-to-fulfill. Various points of contact should be dispersed over the chain, ranging from web-shops, m-stores, call centers, physical branches, self-management totems etc., which provide comfort, convenience and personalized attention. Absence of such can be detrimental to the overall purchasing journey, which can hinder loyalty as consumers shift to & fro a multitude of players. Switching costs in most cases are negligible.
Promising B2C Market
Financially, all these developments play well for the Latin American B2C ecommerce market, with turnover growing rapidly at a CAGR of 16% from 2015 to 2017. It is expected to reach USD 71.2 bn this year. Within this, Mexico makes up the largest ecommerce market with a turnover of USD 21 bn, which is closely followed by Brazil at USD 19 bn. On the macro level, the Dominican Republic has the highest E-GDP, standing at 2.78% as of 2017. Nevertheless, there remains scope for these numbers to further increase as e-tail gains greater economic significance by touching base with more consumers and countries.
3. What are the Impediments?
While the ecommerce landscape is gradually making greater presence in the emerging LATAM economy, it is not free from challenges. Firms will need to iron out various bottlenecks when it comes to areas such as operation, compliance, governance and more, facilitating smooth awareness, acceptance and adoption of e-tail. Having a good understanding of the market will further help countries refine their institutional and infrastructural framework, filling in current gaps and loopholes.
Opening up the E-Transactions Arena
It is difficult for a market to reach its potential unless it is embedded in a variety of sectors/areas. One of the critical pain points for LATAM consumers, specifically in the Dominican Republic, involve businesses being slow to integrate ecommerce into operations, with only a few B2C sectors having such capability. Meanwhile the e-business model in Guatemala is largely B2C, while in Chile the package delivery industry to date has been inherently focused on B2B. It is not an either or scenario
when it comes to embedding ecommerce; both B2B and B2C markets can benefit from integrating technology into operations that creates greater value for all stakeholders involved. Ideally, the scope should also increase in relation to the medium(s) of offering, for not just B2B or B2C but also B2Me shoppers. For example, omnichannel platforms should be used both as part of the business model as
well as a marketing gimmick, to connect with existing/ potential consumers in a cost-effective manner. Providers would need to play around with the complexities of matching high logistical costs through adequate storage/ pickup points. Meanwhile, having a robust communication platform would allow firms to understand the consumer first for designing appropriate offerings as opposed to the other way around, helping curb short-sighted strategic pitfalls.
Staying abreast with Heterogeneous Complexity
One of crucial factor underpinned to the ease of doing business in Latin America consists of operational heterogeneity on a country-specific level. For example, the entire region hosts many different and sophisticated tax regimes, with countries such as Chile rolling out a multinational ecommerce tax, Brazil varying with its customs and payment restriction etc. Hence, carrying out thorough advanced planning becomes the need of the hour, so as to understand the regime of a specific market/markets in question. Knowing certain favorable payment conditions, border controls and tax status can help players develop a framework that is suitable for both consumers and the organization as a whole, opening up possible strategic alliances with key stakeholders across the value chain. However, the homework here is not simply limited to regulation. It also involves getting to know local consumer tastes and preferences and taking care of their linguistic priority, given that the region encapsulates a variety of languages. For example, selling in Brazil requires websites to be in Brazilian Portuguese, as opposed to other states. Not being communicatively in line here can hinder sales.
Establishing Trust & Confidence across the Ecosystem
Old habits die hard; getting anyone to change practices is not an easy process. In ecommerce this translates into both consumers and merchants demonstrating acceptability and confidence in the system, which can only come with sound trust. Currently, despite the attractiveness of e-tail, Guatemalan consumers and small businesses are reluctant to purchase goods/ services online due to a lack of trust in the system. This is largely attributed to sensory factors, such as buyers in Chile who want to touch and feel what they are purchasing to be sure of its quality. Meanwhile, customers in Spain appreciate the convenience brought upon by online shopping (i.e. 24/7 availability, home delivery etc.), yet distrust online payment transactions. Firms can build trust by rooting business operations in an ethical framework that creates a strong corporate repute amongst the entire e-retail community. Proper investment in information security technology for reliable online platforms is absolutely paramount to cut back the catastrophic risk of electronic fraud, given that these transactions involve a plethora of data from banks and other financial institutions. This protection ideally requires a proactive risk management and governance structure, supported by requisite policies, procedures, internal controls and best practices. Hence, firms need to consolidate this structure by properly investing in both infrastructural and human capital. Building an ethical culture amongst employees cannot be overlooked as they are ultimately the ones carrying out quality checks and utilizing the platforms to create a connection of trust with consumers. Overseeing these externalities will eventually add back to the bottom line.
3. Way Forward
On the whole, while Latin America has faced tumultuous years of great market and socioeconomic uncertainty, it is changing gears towards greater economic development ahead. Prospects are high for investors and firms to capitalize upon the emergence of a multitude of industries, which includes the digital retail arena. Ecommerce has steadily picked up pace in a range of industries, given its suitability with today’s SMART consumer. Consumers are increasingly getting on and about to make purchases “on-the-go,” with the e-network set to increase further ahead. However, this surge in demand calls in for a more sophisticated infrastructural base, which is governed by an unambiguous
regulatory framework. Sound awareness and understanding is needed throughout the ecosystem. Classic myths pertaining to how e-demand is “not ready” for a certain category due to lack of maturity, security, quality of internet connection etc. need to be withdrawn. Stepping forward to fill the gaps is the success mantra for this current digi-volution.