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Shopping Centers Today -> May 2001
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U.S. BANK DEVELOPS SOUTH AMERICAN DISCOUNTER
By Susan Thorne
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The first Econ store opened in September 2000, and 11 others have been opened since. Five to six more will be built starting in June. |
Bank of America isn’t a name usually associated with retail, so it may come as a surprise to hear that it is developing a new chain of grocery stores in South America.
Econ, a budget supermarket concept, has been piloted in the city of São Paulo, Brazil, supported by Nexus, Bank of America’s private investment arm.
The stores follow a no-frills, hard-discount format, selling bargain-priced, mainly private-label food products from small (under 3,700 square feet) Main Street premises that are within easy walking distance of customers’ homes.
“It’s like a 7-Eleven with low prices,” said Marco A. Viola, Bank of America’s managing director and chairman of the board of Econ.
Hard-discount is a popular retail formula with price-sensitive customers in many parts of the world, although it has never caught on to any great degree in North America. German’s Aldi Group pioneered the concept in Europe, where a number of discount chains control a significant proportion of food products sales.
In Latin America, the concept has particularly good potential because of the large low-income segment of the population, Viola said, explaining that Econ is first in the Brazilian market with this particular type of operation. Using a combination of low prices, convenience and good locations, the company plans to exploit this niche.
The first Econ store opened in September 2000, and 11 others have been opened since. Following this pilot endeavor, five or six units per month will be built starting in June, increasing the total to 350 in three years.
Bank of America is hoping to repeat its earlier success in Argentina with a similar discount concept called EKI Descuonto, which grew from seven stores in 1996 to 130 in under three years; plans call for an eventual total of 394 in 2003.
Sales there rose rapidly from $500,000 in the first year of operations to more than $130 million in 2000. The Bank also operates discount groceries under the “BIM” trademark in Turkey.
São Paulo, where Econ is starting out in Brazil, is Latin America’s biggest city, with a population of 10 million and annual total grocery/household product expenditures of $5 billion, according to Bank of America data. The biggest customer market in South America, with a population of more than 160 million, Brazil has already attracted several other foreign-based food store companies. Carrefour, which entered the country in 1974, is its biggest food retailer; France’s CBD and Holland’s Royal Ahold (second and fourth respectively in sales) participate through joint ventures with Brazilian companies; and Portugal’s Sonae Distribucao is third in sales volume. Wal-Mart Brazil, which went into the market in 1995, stands in sixth place with nine stores.
But this activity by big-name retailers does not threaten Econ, Viola said, because the discounter is not in direct competition with supermarkets or hypermarkets. The Econ concept is positioned to offer slightly lower prices than those in larger stores, and greater convenience for shoppers’ daily purchases, since it locates within or beside residential neighborhoods; supermarkets serve larger market areas and might require a car or at least some travel time to visit.
Viola said Econ’s real competition is the traditional small grocers with four or fewer checkouts, accounting for 43% of grocery and household product sales in Brazil, according to the U.S. Department of Agriculture’s Brazil Food Retail Sector Report 1999. Econ’s strategy is to compete on price and operating efficiency with these mom-and-pops, which Viola says are vulnerable because their stores are often old-fashioned, poorly managed, “and offer a less than desirable shopping experience.”
Econ’s clean, well-organized stores, which carry a limited inventory of value-priced merchandise (800 to 1,200 SKUs), could attract customers away from the small groceries, Bank of America figures. Viola anticipates that hard-discount could eventually take 10% to 15% of Brazil’s grocery market.
But it is not an easy concept to execute, he pointed out.
“You need a very standardized process, and you must be very disciplined with your offerings,” he said. “It is always tempting to try to add services or new products, but you cannot do that because the margins are very low.”
dense urban population is needed to support a discount store, and São Paulo is ideal in this respect: Econ’s target districts there have a population density more than twice as high as that of Buenos Aires, company statistics show.
The stores, which are performing above expectations, are doing so without benefit of splashy promotions or ads.
“Not one dollar has been spent on marketing in Brazil,” Viola reported.
Instead, Econ works to foster community goodwill through its policy of employing within the stores’ neighborhoods. The company offers training and a career plan for employees, who average 22 years old, and Viola said staff are highly motivated and committed.
One possible future direction is a strategic alliance among McDonald’s, Blockbuster and Econ, which are exploring the idea of locating stores together in certain sites in Latin America.
It’s a good time to be pursuing the price-conscious customer in Brazil, said Robert Ford, first vice president with Merrill Lynch financial analysts, New York City. The hyperinflation that started in 1994 is now under control, making the prospects of success stronger for a value-oriented concept like Econ. “It’s difficult for people to perceive value when there’s inflation,” he explained.
Yet hard-discount has definite limitations as a retail format, Ford said.
“There are not many markets where you can have hard-discount. It’s an urban concept, and it’s small scale; it really only works where there’s high foot traffic. You need 10 or 20 hard-discount stores to equal one hypermarket, and 200 to make the business meaningful for distribution purposes.”
As for the competition, Ford said mom-and-pop stores may enjoy certain advantages not available to Econ, such as nonunion wages. These smaller grocers also benefited from the inflation period, because they could buy products at lower cost and then keep selling them at higher prices.
Competition could come from bigger players, too. Ford said Bank of America’s launch of Econ has drawn a lot of attention to the hard-discount market and will probably stimulate new entries to the sector. CBD is widely expected to start a similar line of stores, he reported, and other larger grocers like Carrefour could become involved.
“I think they’re [Econ] going to run into competition,” he said. “They’ve made a lot of folks nervous by coming into the market.”
Nevertheless, Bank of America is pushing ahead, and is analyzing other potential markets for the hard-discount store, identifying opportunities in Mexico, Colombia, Peru, Venezuela and Chile.
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