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Market Structure, Growth and Competition in the Supermarket sector in Latin America

 |  October 27, 2015

Oct 26, 2015

Market structure, Growth and Competition in the Supermarket Sector in Latin AmericaJuan Delgado (Global Economics Group)

Supermarkets have become the primary point of sale for food and household products throughout the world. This process of drastic transformation in the food retail sector was facilitated by several intersecting elements of supply and demand: On the demand side, we see changes in the habits of consumers who, due to time constraints and a greater available wealth, tend to do all their shopping in a single stop. On the supply side we find innovations in logistics and distribution, as well as economies of scale and scope made possible by the sheer size of supermarket chains. These have brought important reductions to distribution costs and improvements in stock-handling and variety.

The growing role of supermarkets as points of entry into the market has resulted in better stocks of available foodstuffs and lower distribution costs. At the same time, supermarket chains have accrued greater bargaining power against both providers and consumers, which could give rise to anti-competitive practices.

The speed and scope of this transformation varies across different countries throughout Latin America. Here we find countries with a high degree of supermarket penetration, such as Brazil, Mexico and Chile (where supermarkets account for over 50% of food sales) alongside countries with low penetration, such as Colombia, Venezuela and Argentina (where supermarket sales account for less than 40% of food sales). In any case, the development of supermarkets in Latin America is still lower than that of more developed countries (where supermarket sales account for over 80% of food sales) and their growth has been strongly tied to increasing trade liberalization and openness to foreign investment.

Variations in the stage of development within the sector can be explained by supply and demand. On the demand side, relevant factors include income levels (the advantages of supermarkets are associated to large sale volumes, not available to lower income levels), the country’s rate of urbanization (urban concentration allows supermarkets to take advantage of their economies of scale), the size of the middle classes (supermarkets’ natural market) and women’s participation in the workforce. On the supply side, a relevant role is played by the development of transport infrastructure, the modernization of distribution channels or the establishment of a regulatory framework favorable to starting and running supermarkets (such as removing administrative hurdles or eliminating restrictions on trade hours and prices).

Despite the different levels of development and heterogeneity in Latin America’s supermarket sector, there are a series of common characteristics shared by the countries in the region:

First, although the penetration of supermarket chains is relatively low, the sector is found to be highly concentrated. So, in most countries (such as Chile, Mexico, Brazil or Peru) the top three supermarket chains together will account for more than 80% of the market. There is also a small number of supermarket chains which operate across several countries, such as Chile’s Cencosud and its stores in Argentina, Brazil, Chile, Perú and Colombia; America’s Wal-Mart in Argentina, Brazil, Chile, Honduras and Mexico, and French Carrefour in Argentina and Brazil.

On the other hand we find a high degree of socio-economic segmentation among consumers. In Mexico, for example, those at the lower quartile of income will do their shopping mostly in traditional shops (59% of their income goes towards food), while the upper quartile will almost exclusively shop at supermarkets (46% of income.)

Supermarket chains often integrate their logistics and distribution networks. However, outside of the main distribution centers, the sector is characterized by the underdevelopment of modern, independent wholesale venues that will allow small stores and minor supermarket chains to access the benefits of modern logistics. Small stores and chains fill their stock mostly from the old-fashioned markets or through small local wholesalers, with costs considerably higher than those of modern distribution chains. On the other hand, even when dealing with larger supermarket chains, one can frequently find that the stocking of fresh produce (fruit, vegetables, meat and fish) is often carried out through local or regional supply chains.

This idiosyncrasy of Latin America’s supermarket sector means that the typical issues with competition and the abuse of market dominance may not be identical to those found in countries with more developed sectors. This can be confirmed by looking at a short list of the anti-competitive practices under investigation by the various competition authorities:

  1. The smaller channels of trade limit the abuse of purchasing power by supermarkets as a whole. However, the high concentration in the sector allows for high Individual purchasing power within the modern sector. The aggregate effect on consumers is still uncertain. Several competition authorities have carried out probes into the agro-food market and distribution hoping to analyze the structure of the sector, detecting possible competition problems (as in Chile, Colombia, Jamaica, Barbados, and a currently ongoing probe by Mexico’s COFECE). Several countries have developed codes of conduct to avoid anticompetitive practices in the food market (México, Colombia and Costa Rica).
  2. The highly concentrated market increases the possibility of coordination between supermarket chains. Recently, Uruguay’’s Competition Promotion and Defense Commission fined a cartel of frozen product manufacturers in which the country’s main supermarket chain was involved. Chile’s economic prosecutors (Fiscalía Nacional Económica, FNE) are currently investigating an alleged price-fixing deal between some of the top Chilean supermarket chains.
  3. However, a majority of these anticompetitive practices still take place at the manufacture and production stages, which could mean that he transfer of market power from manufacturers to supermarkets, seen in most developed countries, is still not fully realized here in Latin America.  There are several tell-tale signs of this fact, such as the lack of domestic supermarket chains (which speak to their market power) or the high concentration of some markets at the manufacturing level. Some examples of Competition cases dealing with a manufacturer’s market include Unilever’s sanction by Chilean authorities for abusing their power over the market, a probe into Brazil’s AmBev brewery over exclusivity contracts, or the cartels that run Chile’s chicken and Mexico’s egg and tortillas market.
  4. The socioeconomic segmentation of the market could be favorable to the establishment of discriminatory prices, resulting in higher prices for consumers at a higher income bracket and thus limiting the possibility that consumers would benefit from economies of scale and scope.

Lastly, the lack of any wholesale distribution enterprises and the lack of integration between fresh products and the modern distribution channels could be interpreted as prejudice against the consumer. This is because independent and small supermarket chains, as well as grocery stores and fresh produce growers, would not see many improvements to efficiency from these modern channels.

Supermarkets are gaining importance in Latin America. This importance has undoubtedly translated into greater efficiency, benefitting consumers. However, it also increases the risk of anticompetitive practices. The challenge for competition authorities will be to push for the development of modern distribution networks, eliminating barriers to competition while also guaranteeing the proper workings of competition, making consumers the main beneficiaries of this modernization process.

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This column is based on the article “Market Structure, Growth and Competition in the Supermarket Sector in Latin America”, prepared by Juan Delgado for the Latin American Competition Forum, held by the OECD and IDB.