International Journal of Retail & Distribution Management

Why small retailers endure in Latin America

Guillermo D'Andrea Belen Lopez-Aleman Alejandro Stengel
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Guillermo D'Andrea Belen Lopez-Aleman Alejandro Stengel, (2006),"Why small retailers endure in Latin
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Why small
Why small retailers endure in retailers endure
Latin America in Latin America
Guillermo D’Andrea and Belen Lopez-Aleman
IAE Business School, Universidad Austral, Buenos Aires, Argentina, and 661
Alejandro Stengel
Booz-Allen and Hamilton, Argentina

Abstract
Purpose – To understand the drivers behind small-scale retailers’ collective success, even after a
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decade of sustained growth of the “modern” retail sector in Latin America.

Design/methodology/approach – The study described in this paper was sponsored by the
Coca-Cola Retailing Research Council – Latin America. Consumer research for this study was based
both on primary and secondary sources. To understand the drivers behind small-scale retailers’
collective success, standard frameworks were adapted for evaluating their value proposition and
business model. Customer-facing value drivers were examined along with selected ratios from the
strategic resource model.
Findings – In spite of being “poor,” emerging consumers have a substantial purchasing power as a
group. They work with a very specific set of products, categories and store format needs that
distinguish them from other consumers. These distinct needs imply that it is not “just a matter of
money and time” for them to change their purchasing patterns over to the “modern trade”. In fact, the
evidence shows that smaller scale retailers fit the needs of emerging consumers quite well. Despite
perceptions that the small retail sector draws its resilience from informality, we conclude that that the
sector can be surprisingly efficient. Furthermore, the retailers exhibit a sustainable business model.
Originality/value – Although a wide variety of studies have been developed around small-scale
retailers, less effort has been devoted to learn about local storekeepers that are actually conducting
successful business, especially in reference to less developed countries.
Keywords Small enterprises, Retailers, Fast moving consumer goods, Low pay, Developing countries,
South America
Paper type Research paper

Introduction
After a decade of sustained growth of the “modern” retail sector in Latin America,
smaller scale retailers still supply a significant portion of fast-moving consumer goods
to the “emerging” consumer base or low income segments. Is this the natural order for
retailing in this region? Is the continued success of small-scale retail in Latin America
attributable to market inefficiencies? Can large chain retailers create value for
emerging consumers?
Our research found that many elements of the conventional wisdom about lower
income consumers are unfounded. In spite of being “poor,” emerging consumers have
substantial purchasing power as a group. They work with a very specific set of
products, categories and store format needs that distinguish them from the middle and International Journal of Retail &
higher income consumers. These distinct needs imply that it is not “just a matter of Distribution Management
Vol. 34 No. 9, 2006
money and time” for them to change their purchasing patterns over to the “modern pp. 661-673
trade”. In fact, the evidence shows that smaller scale retailers fit the needs of emerging q Emerald Group Publishing Limited
0959-0552
consumers quite well. DOI 10.1108/09590550610683184
 IJRDM One should be careful about losing sight of these consumers’ needs, and how they are
34,9 addressed by small retailers. Despite perceptions that the small retail sector draws its
resilience from informality, we conclude that there is much more to the small-scale
retailers’ value proposition and business model – and that the sector can be surprisingly
efficient. Furthermore, small retailers exhibit a sustainable business model.
A review of the paper “Breaking the Myths on Emerging Consumers to Create
662 Value in Retailing in Latin America” (D’Andrea et al., 2006) could be especially
productive to become more familiar to emerging consumers’ needs.

Methodology of this study

The study that is described in this paper was sponsored by the Coca-Cola Retailing
Research Council – Latin America. The Council commissioned Booz-Allen Hamilton to
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research across Latin American markets. The field work covered Argentina, Brazil,
Chile, Colombia, Costa Rica and Mexico. Consumer research for this study was based
both on primary and secondary sources. The methodology employed for primary
research was qualitative, using the technique of focus groups. Four focus groups were
conducted in each country for a total of 208 participants.
Fieldwork carried out in each country included 217 store checks and 190 in-depth
interviews with small retailers to complete the value proposition/business model
assessment. Note that given the sample size, results in some cases are directionally
correct but not statistically significant. “Best efforts” were made to check the accuracy
of the responses – for example, by double-checking the prices retailers stated they paid
for products against wholesale prices collected from distributors or public wholesale
markets, or by collecting tickets and receipts discarded in the store.
Comparisons with the large-scale trade are based on selected players in each country,
from which financial information is publicly available. The selection of these players is
intended only as a point of comparison, and is not meant to imply that these retailers are
necessarily “representative” of the supermarket retail sector in each country.
Finally, this study draws upon a wealth of general secondary research and data
sources: syndicated data sources such as A.C. Nielsen; local retail-oriented associations
such as ABRAS in Brazil and ANTAD in Mexico; journal and popular press articles,
and the like.

Previous research
The marked expansion of modern and large retailing formats from 1920 woke up many
discussions amongst academics. Initially, the problem made necessary to define what
would be considered a small-scale retailer (Doody and Davidson, 1964; Dawson and
Kirby, 1979; Smith and Sparks, 1997; Sim, 1999). According to Doody and Davidson
(1964, p. 69):
A small retailer is defined broadly as comprising any organization of one or more stores that
is owned and operate by an individual or individuals whose scawle of operation allows for
close and continuous personal involvement in day-to-day operations at the retail level.
This working definition has been adopted to guide the present paper.
Besides the debate over definition, a significant amount of literature was developed.
To gain a better comprehension of it, we classified the data into two perspectives:
macro and micro. The first involves contextual variables raising opportunities and
 threats to the small business, but are out of their control. The latter brings together Why small
issues that are more likely to be under the small retailer control. retailers endure
The macro perspective
in Latin America
.
Impact of newer forms of retailing (big boxes, hypermarkets and supermarkets) on
small-scale retailing (Smith and Sparks, 1997; Cady, 1976). The fact that the
number of small stores has been declining in most industrial societies, led 663
researchers to speak of independent retailing becoming a marginal economic
enterprise in post industrial. On the other hand, modern retailers have
consequences on consumers. In Ward’s (1987, p. 276) terms, the implementation
of competitive strategies by retail giants, has led to higher shopping cost for the
low-income, less-mobile consumer that is disproportionately concentrated in
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inner-city areas.
.
Governments and local authorities reacted to the dilemmas sketched above by
defining public policies and development programs. Since, the 1970s scholars have
studied programs put into operation by governments in different countries
(Kirby, 1981; Tsuchiya and Riethmuller, 1997; Davies, 1976). Several researchers
had focused on the effects of the large-scale retail regulations. Additionally,
governments’ agenda for planning the use of land and new store openings have
been studied (Davies, 1976); while others concentrated on government actions
and policies to protect low-income consumers (Ward, 1987).
.
Social contribution of small stores. The social role of small retailers has been
widely recognized (Dawson and Kirby, 1979; Ward, 1987; Smith and Sparks,
2000). According to Ward (1987), Asian (small) retailers have been making an
important contribution to public policy goals of protecting disadvantaged
residents from the impact of competitive strategies among the largest retail
multiples. Other studies conducted on the social values of small stores showed
how the decline in the retail and service functions of small towns has resulted in
a poor shopping environment for the less mobile, aged consumer and in general
to the low income household (Sim, 1999, p. 84). Finally, researchers have
highlighted how governments perceive local retailing as fundamental to
resolving issues of social inclusion.
.
Customers’ needs, reasons and motives to buy at independents and small stores.
Emerging consumers have been identified as major customers of small retailers.
Main points of study were the motivations and barriers in food purchasing of
those groups as well as their consumption habits (D’Andrea et al., 2004). As
Boone and Bonno (1971) mentioned, the poor in choosing their primary stores
forwarded three major reasons: convenience, friendship and availability of credit.
The small stores usually better satisfied those reasons.

The micro perspective:

.
Operational characteristics and business performance of small-scale retailers.
Business practices applied by small-scale retailers in their operations could be
identified across the literature. It is widely recognized that ownership and
management are typically tied together (Doody and Davidson, 1964). This
alignment leads to a high incentive to recognising problems as they find
 IJRDM workable solutions. Another group of studies highlighted the poor performance
34,9 of small retailers (Sim, 1999). Problems suffered by small stores were classified
into two kinds of inadequacies: in the retail operation and in management
(Smiths and Sparks, 1997). Against the latter, small retailers have proven to be as
effective and efficient as possible. Although the problems facing small retailers
are well documented, many local shopkeepers are actually doing quite well
664 (McGee and Peterson, 2000).
.
Types and roles of small independent retailers. The most frequent classification
has to do with the location of small-scale retailers, distinguishing among urban
and rural stores. Apart from this categorization, neither taxonomy nor
classification could be found among the available literature. However, it is
possible to identify a considerable number of roles for the small stores (Dawson
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and Kirby, 1979; Davies and Harris, 1990) through their contribution to their
social environment (e.g. supplier of products and services, bringing dynamism
and local adaptation to the retail situation, sources of new ideas).
.
Recommended actions, strategies and suggestions toward new competitive
challenges. During the early 1960s scholars had pointed coalitions among small
retailers as an efficient alternative to compete in the land of mass-merchandisers
(Doody and Davidson, 1964). Besides, the influence that membership in a strategic
alliance has on the strategic behavior of small retailers was observed (Reijnders
and Verhallen, 1996). Results indicate that membership in a strategic alliance had
a positive effect on the operational and financial performance of member retailers.
Also, the capabilities of small merchants to achieve sustainable competitive
advantages were studied. Finally, the application of information technology
(IT) has been identified as a decisive source of competitive advantage
(Treadgold, 1990).

Although a wide variety of literature has been developed around small-scale retailers,
the majority of studies have discussed problems they faced arising from their own
inefficiency. Additionally, most of the literature has been related to developed countries
such as UK, Scotland, Japan, USA and Norway. Little has been found in reference to
less developed countries where this scale of retailers captures a big portion of the
family spending in fast moving consumers’ goods. Also, little effort has been devoted
to learn about local storekeepers that are actually conducting successful business. Our
research tried to cover this gap in the literature, considering the importance of this kind
of trade in less development countries.

Lessons learned
Small retailers make Latin America’s retail landscape unique in its composition. Given
the range and diversity of formats, we focused our research on a subset of small
retailers that operate in relatively similar fashion across all six countries: “Traditional
stores” – that tend to be quite small (25-50 m2) and offer mostly behind the counter
service, “small self-service” – a subset of “small supermarkets” that are self-service
businesses with few cash registers, manned by the sole proprietor-; and “open-air street
fairs” – formats characterized by semi-permanent or mobile infrastructure.
To understand the drivers behind these small-scale retailers’ collective success in
the market, we developed and adapted standard frameworks for evaluating their value
 proposition and business model. Customer-facing value drivers such as place, product Why small
assortment, price/value, people, and services were examined along with selected ratios retailers endure
from the strategic resource model (Figure 1) (Ring et al., 2002).
The results provided a few “lessons learned” for those who seek to attract emerging in Latin America
consumers as customers, or who view small players as inherently inefficient.

Lesson number 1: small retailers fit the needs of emerging consumers 665
quite well
The store. Location is a compelling proposition of small retailers to emerging
consumers, many of who overwhelmingly make small daily purchases. The physical
proximity of stores to where they live and/or work, translates into significantly lower
“total purchasing cost.” To an eye trained on the consistent layout of chain stores,
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small retailers show a cluttered and less tidy physical appearance. Naturally, physical
appearance varies a great deal between small-scale stores; but as a whole, emerging
consumers’ find the infrastructure of small stores perfectly acceptable. Hygiene is what
matters and most sole proprietors are careful to provide it. In fact, many emerging
consumers equate modern infrastructure with “cost” pointing out that it is the
customer who ultimately bears the final bill for such luxuries.
Product. Small-scale retailers offer the “right” assortment. Assortment at traditional
and small self-service stores concentrates on fresh food, drinks, and basic dry goods,
along with a limited selection of cleaning products, personal care items, and luxury
food items (canned fish, cookies). In most countries, leading brands dominate the
assortment – especially in traditional stores, where approximately 85 percent of
the stocked SKUs are first tier brands. Additionally, small-scale retailers effectively
serve daily purchase needs by “fractioning” products. For example, in many countries
the smallest available size of powdered laundry detergent in large chain supermarkets
is 500 gram. Small retailers, on the other hand, commonly carry sizes as small as 150
or 250 gram. Storeowners will even fraction products on the smallest standard sizes.

Sales Gross Margin Employees Inventory

x Net sales Gross margin

= GMROI
Inventory Inventory
x
Inventory
Selling feet
=
Gross margin Net sales Gross margin
x = GMROS
Net sales Selling feet Selling feet
x
Selling feet
Employees Figure 1.
= Key financial ratios from
x Net sales Gross profit the strategic resource
= GMROL model
Employees Employees
 IJRDM Open air markets which typically carry only fresh produce provide customers with
34,9 exactly the desired quantity, no matter how small the amount. In comparison,
consumers express feeling ashamed when asking for very small quantities in large
chain supermarkets.
Price. Our survey of selected products found that shelf prices for exact substitutes
(i.e. same SKUs) were anywhere from 5-20 percent more expensive at traditional and
666 small self-service stores (as compared to large supermarkets). This is not surprising,
given that small retailers by definition lack the scale to earn the significant volume
discounts or trade allowances granted to large chains. Interestingly, emerging
consumers perceive a poor price/value tradeoff at large chain supermarkets, since they
think in terms of total purchasing cost and not only price. Street and open fairs do have
a clear price advantage in fresh produce. Besides lower prices overall, their service
model better matches the consumer demand curve. While chain supermarkets usually
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offer only first grade products, street and open-air formats offer several grades of
quality and prices from which to choose.
People. Small-scale retailers benefit from the presence of the local owner-operator
who can tailor their business model to local needs and provide a “personal touch.”
Storekeepers claim to know the majority of their customers by the name. Local owners
observed during store surveys made product recommendations or simply made a point
to engage and greet close to every customer who entered the shop. The end result is an
emotional proximity that makes emerging consumers to feel comfortable.
Service small-scale retailers offer limited services when compared to large chain
supermarkets. A few of them accept credit cards, offer home delivery, state that they
offer “extended operating hours,” or run promotions. Although merchandising activities
are less prevalent, small-scale retailers’ techniques are simple yet appropriate. For
example, many make use of POS materials like banners and shelf-talkers to decorate the
store and to communicate prices.
Small retailers do offer credit, in one of two forms – “informal credit” where the
operator writes the name of the debtor in a small notebook, or the “virtual wallet,” when
the customer is short of small amounts of cash at the register and is allowed to pay “the
next time.” Informal credit is more prevalent at traditional stores, although most small
retailers mentioned extending the “virtual wallet” for their known customers. Informal
credit acts as a sort of loyalty program. Besides, the social costs of bad debt are high for
consumers, since they are made public knowledge in the neighborhood.
In summary, despite higher shelf prices and limited “perks” and services, small
retailers’ have several advantages that make them highly attractive to emerging
consumers.

Lesson number 2: small retailers have a sustainable business model – even

before any benefits from tax informality
It is difficult to speak of the “small retailer business model” without first
acknowledging that these businesses operate under a different perspective from
large chain stores. Small retailers care almost exclusively about cash flow. They
typically do not manage their businesses to metrics like return on invested capital,
sales per employee, or inventory turnover.
Looking at sales productivity, sales per store can be quite low – in the region of
US$2,000-4,000 per month[1]. Small independent supermarkets may reach US$6-14,000
 per month, and this is still a fraction of what is sold in larger chain stores. Adjusting for Why small
scale, small retailers have substantially lower sales per square meter. While most small retailers endure
retailers’ revenues are essentially based on low ticket sizes and high store
traffic/frequency, the differences in net sales per selling area are striking. For the in Latin America
traditional stores, sales per square meter were only about 10 percent the amount for the
large-scale trade (Figure 2).
Small also retailers face procurement disadvantages. However, most small retailers 667
price by adding a markup in the range of 20-30 percent, with actual markups higher for
slower moving items. The higher retail shelf prices observed are consistent with a
higher supplied cost of sales; furthermore, storekeepers’ pricing practices preserve an
average gross margin in the area of 20-25 percent, similar to or lower than gross
margins for chain supermarkets, which for a small sample of chain retailers ranged
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from 20 to 32 percent[2]. Hence, similar or lower gross margins combined with lower
sales per square meter yield relatively lower gross margin return on sales (GMROS) for
small-scale retailers.
Regarding employee productivity, small retailers tend to work with no more than
1-5 employees in the store. Often, staff is family members and may not work full time
in the shop. Owner/operators take on numerous roles that in large chain stores could
formally be described as store management, purchasing, human resources, security,
cashiering, merchandising, and general administration. Some of the small-scale retail
stores surveyed show monthly sales per full-time employees – FTE – of as little as
US$1,000-2,000[3]. Similarly, gross margin return on labor (GMROL) for these stores
was low.
But where the business model of small retailers excels is at inventory turnover,
which is more than two times higher than that of large chain supermarkets. They
stock significantly fewer SKUs compared to a typical chain supermarket, and their

(Small-scale vs. Large Chain Retailers)

Average Ticket Size for Organized Trade Monthly Sales / m2-U$S

vs. Small Retailers Organized vs. Small Retailers
(In US Dollars)
Brazil
14 ... and results in
12.6 681 lower monthly
A value proposition sales / m2
12 based on high
frequency purchases
implies lower ticket 10.0
10 sizes than organized 330
trade...

8 7.6
6.8
60
6.1
6 5.5 Avg. Organized Traditional Small
Trade Supermarket
4 3.5 3.7 Argentina Mexico
2.5 2.6 262
2.1
2.0 203
2 1.6 1.6
1.4
0.8 1.0 1.0

89 120
0
Brazil Mexico Argentina Colombia Chile

Avg. Organized Traditional Organized Traditional

Figure 2.
O
Organized Trade1 1 Traditionals Small Super Street Trade Trade Average ticket size
and monthly sales
(1) Brazil organized trade ticket size based on CBD, Chile on DYS, Mexico, Argentina and Colombia based on average large players per square meter
Source: Field interviews (small retailers); INDEC, AntadMexico, and AC Nielsen (organized trade)
 IJRDM product assortment consists of relatively less general merchandise categories. The
34,9 cash nature of the business introduces rigorous discipline into inventory
management-the implications of ordering mistakes are large for the sole proprietor.
Therefore, while small retailers have low GMROS and GMROL, their business
model is quite efficient in converting inventory into cash – high GMROI – gross
margin return on inventory. Their return on inventory (GMROI) doubles and even
668 triples the figure of large chain retailers (Figure 3).
A look at net operating profit holds some additional valuable lessons. Going beyond
gross margin, small retailers have reduced operating costs that can be quite significant
to a large chain supermarket retailer. Labor costs are generally lower and more
variable than for the organized trade – most employees are family members who may
receive lower pay since “non-cash” compensation may be the bulk or all of
remuneration.
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Small retailers also save on many general expenses items (e.g. security and cleaning
services, marketing expenditures) that can account from anywhere between 3.5 and 10
percent of sales for the large chain retailer. Energy costs are kept low since there are
usually no air conditioners and freezers, and illumination is low.
In rent expense, many small retailers own the site where they operate as either a
freestanding business, or as a store co-located with their residence. For owners,
non-cash depreciation or return on invested capital is not viewed as an operating cost;
in these cases, depreciation is often not even a good proxy for the minimal capital
expenditures made to maintain properties. For those who rent, rates are in the “lower
income” zones where shops are located.
In total, small retailers show lower or similar operating expenses as a percentage of
sales than their chain supermarket counterparts. Admittedly, the comparison is
somewhat artificial for reasons discussed earlier about rent and depreciation expense,
and because “labor expenses” for the small retail sector usually do not include a salary
for the owner/operator. To complicate the comparison further, most small-scale
Gross margin
Net sales
x x x
Net sales Net sales Net sales
Inventory Selling feet Employees
= = =
GM ROI GM ROS GM ROL
Monthly Gross Margin / Inventory Monthly Gross Margin /M2 Monthly Gross Margin /FTEs
79% 79%
59% 57% 1,980
50% 64% 1,841

1,078
29%
22%
17% 24.0 21.0
16.0 336
242 281

Brazil Mexico Argentina Brazil Mexico Argentina Brazil Mexico Argentina

Figure 3.
Strategic resource model Organized Trade) (1) Traditionals
ratios (small-scale vs
large-scale retailers) (1) Organized Trade is CBD in Brazil, WalMex in Mexico and Disco in Argentina
Source: 2002 Annual Reports, field interviews, Booz Allen analysis
 retailers qualify for small business tax regimes, which typically simplify a plethora of Why small
sales, social, business income and VAT taxes into one flat tax with revenues as a retailers endure
calculation basis[4]. So, small-scale retailers enjoy a perfectly legal, structural cost
advantage – as long as they stay small. in Latin America
Taking all into account, the average net income after tax for the small retailers
surveyed ranged from 4 to 11 percent of sales. While this is an enviable figure for the
large chain supermarket retailer, scale must be considered. In fact, this higher 669
percentage translates into a rather small absolute amount (Figure 4).

Lesson number 3: let’s not be mistaken – informality matters – but there is

much more to small retailers’ value proposition and business model
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In the Latin American retail sector informality takes two main forms – evasion of part
or all of the taxes and labor contributions required by law, or the sale of stolen or
forged merchandise. The former is far more relevant than the latter.
Merchandise forgery is present in the region. “Road pirates” and robbers may sell
stolen product at 50-70 percent below-market price to retailers, who could take higher
profits or artificially lower shelf prices[5]. But they still represent a minor fraction of
the total consumer packaged goods sector. And assuming a small-scale retailer chose
to source 10 percent stolen merchandise at 60 percent of market price, the net impact
would provide roughly a 3 percent discount on shelf prices. Hence, theft and forgery
cannot be said to significantly explain the dynamics of small-scale retailing.
Regarding evasion, there are many creative means by which “informal” players
reduce the VAT, sales, and business income tax burden. Informal players may
understate revenues to take advantage of small business tax regimes. With labor taxes,
employers can neglect to register all or some employees in an attempt to avoid paying
social contributions and labor benefits like the “13th salary”. (It is a standard practice
in Latin American countries, consisting on the payment of a compulsory annual bonus
to employees, commonly named as the thirteenth-month bonus.) Registering
employees but with artificially low salaries also generates less taxes, since official
salary is usually the base for tax calculation. Besides, the economic benefits of tax
evasion can be significantly increased when “informal” practices are present along the
whole value chain. Informality is probably more characteristic of categories like fresh
Average Monthly Profits
For Traditionals as Multiple of
Monthly P&L for Traditional Player the Minimum Wage
Index Gross Sales = 100
3.3x
Brazil Mexico Argentina
Sales 100 100 100
COGS 73 80 77
Gross Margin 27 20 23
2.x
Operating Expenses
Labor 5 4 55 1.6x
General Expenses 10 12 99
Total Op. Expenses 15 15 14
EBIT 13 5 10
Interest 0.7 0.1 –
Taxes
Figure 4.
1.1 0.7 2.0
Monthly profits for
Net Income 11 4 8 Brazil Mexico Argentina
small-scale retailers
Source: Field Interviews, Booz Allen Analysis
 IJRDM produce and for “value brands”. Potential tax evasion could reach upwards of
34,9 20 percent of sales for completely informal value chains by one estimate[6].
Yet, complete evasion of these taxes is unlikely even in countries with higher
prevalence of “informality.” For one, large companies and multi-national
manufacturers – who sell formally – still supply the majority of consumer products
in Latin America. When these companies sell through intermediaries, tax compliance
670 tends to “travel” along the value chain since middlemen have strong incentives to also
sell formally and recover VAT credits. Moreover, many of these companies are trying
to sell direct to small retailers introducing tax formality to a large portion of small
retailers’ sales. Secondly, in some countries, government agencies are improving
capabilities and small retailers perceive a higher probability of being caught.
We looked at the stated tax payments of the small-scale retailers’ surveyed and
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made two adjustments – simulating increased labor costs to include higher

contributions and benefits, and applying the statutory rate under small business tax
regimes. This presumes some degree of informality – not necessarily a correct
assumption, given that effective and statutory tax rates may differ for perfectly legal
reasons. If the difference between stated and statutory tax payments were evasion and
full taxes were paid instead, then the retailers surveyed would need to increase prices
by anywhere from 2 to 8 percent above existing levels to recover the increased labor
and tax expenses[7]. For those “informal players” unable to raise prices, lower margins
or business failure could be the result. Yet even with these “full taxes” simulated net
income was still close to or slightly above one minimum salary – so informal players
would not necessarily be forced to exit the retail business.
Therefore, “informality” in Latin America is not the main driver of small-scale
retailers’ continued presence. The real strength of the small-scale retail trade rests in a
strong value proposition to emerging consumers and a business model that centers on
quick conversion of inventory into cash.

Summary and perspectives

Despite significant barriers, emerging consumers are still drawn to large
supermarkets, creating a potential opportunity for large-scale retailers to better
serve these groups as customers. However, the needs of this group are largely served –
and quite effectively – by small-scale retailers.
Supermarkets and hypermarkets are often perceived of as “stocking” places and the
product assortment is increasingly at odds with consumers’ economic situation.
Relatively longer distances are required to travel to them, which requires investing
time and money into transportation. Further, emerging consumers report “cold”
treatment by staff while shopping in large chain stores – when in fact they value
personal relationships and emotional proximity when shopping.
While the opportunity is large, the shopping habits of emerging consumers imply
challenging economics for retailers. This group’s shopping behavior is characterized
by small ticket sizes, comprised of lower-margin items; exercise of self-restraint and
low purchase conversion; and strongly focus on traffic building promotions (D’Andrea
et al., 2006). Therefore, simply extending the current value proposition and formats of
large chains to address physical proximity issues is likely to affect financial
performance negatively.
 Retailers who do not want to wait for the theoretical and long term “trickle down” Why small
effects of rising overall incomes have several business options to consider; such us retailers endure
selecting sub-segments of emerging consumers, and developing a distinct value
proposition supported by a sustainable business model that can be replicated at a in Latin America
larger scale into an extended network of stores. Finally, although there are several
important issues to resolve, retailers may find it worthwhile to think through their
potential response to the emerging consumer opportunity – in advance of channel 671
necessities to do so.
In summary, research across six Latin American countries shows several reasons
why small-scale retailers keep attracting the broad range of emerging consumers, and
conduct a healthy business. Several venues for further research were identified. Small
stores will certainly evolve through the application of modern trade techniques,
implying an evolution of formats into one that will combine an improved offer with the
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convenience sought by emerging consumers. The definition of this new emerging

format will require researching along the different components of the retail format.
Among these, understanding brand preferences among emerging consumers would
help for a better assortment definition. Price perception posted another challenge. In
spite of carrying higher price levels, small retailers were perceived to be cheaper than
the modern trade. How this perception is built would shed light over this complex
issue, key to the definition of value.

Notes
1. Figures in local currency converted to US$ with February 2003 exchange rates.
2. Gross margins for large supermarkets vary considerably by individual retailer, geographic
location, and format (e.g. hard discount, supercenter/hypermarket). For a small sample of
chain retailers, we observed gross margins for large chain retailers of 20-32 percent of net
sales (per financial statements available during 1Q’03).
3. Monthly sales per FTE for the large players ranged from approximately US$4,000-9,000.
4. All of the countries in this study levy VAT taxes, and large-scale retailers’ reported figures
naturally exclude this tax as an income statement expense since it is ultimately passed on to
consumers. VAT debits and credits do appear in balance sheet accounts – e.g. as tax related
receivables and payables. Care must therefore be taken when comparing tax expenses in the
published income statements of chain retailers (exclude VAT) with small-scale retailers’ tax
expenses (a flat tax which in many cases “includes” VAT). Adjusting for this, the total tax
pie (with VAT) is higher under the “standard” tax regime that large retailers face, when
compared to small business tax regimes.
5. Estimate based on interviews with small distributors.
6. Assumes 18 percent VAT tax and 3 percent sales tax; actual numbers vary by country.
7. Recall that tax informality is likely to differ by value chain – for example, with little to no
informality for leading brands sold direct from manufacturers.

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Further reading
Byrom, J., Medway, D. and Warnaby, G. (2003), “Strategic alternatives for small retail businesses
in rural areas”, Management Research News, Vol. 26 No. 7, pp. 33-49.
Dyer, L.M. and Ross, C.A. (2000), “Ethnic enterprises and their clientele”, Journal of Small
Business Management, Vol. 38 No. 2, p. 48.
 Litz, R. and Stewart, A.C. (2000), “The late show: the effects of after-hours accessibility on the Why small
performance of small retailers”, Journal of Small Business Management, Vol. 38 No. 1,
pp. 1-26. retailers endure
Smith, A.P. and Sparks, L. (2001), “Planning for small-scale retailing: evidence from Scotland”, in Latin America
Planning Theory & Practice, Vol. 2 No. 3, pp. 277-92.
Watkin, D.G. (1986), “Toward a competitive advantage: a focus strategy for small retailers”,
Journal of Small Business Management, Vol. 24 No. 1, pp. 9-15. 673
Corresponding author
Guillermo D’Andrea can be contacted at: gdandrea@iae.edu.ar
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