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Latin America said to hold rich promise

By Edmund Mander

3 There are 268.8 million active consumers in Latin America, compared with 178.8 million in the United States. Source: Marketing Developments

Economic stabilization and favorable demographic trends are just two of the factors pointing to rich opportunities in Latin America for retailers and shopping center developers.

That was the message economists and business executives delivered to close to 400 people attending ICSC’s 2nd Conference of the Americas in Miami in October. The region is emerging from its economic crisis, led by improving economies in Argentina and Brazil, and it offers huge, untapped long-term prospects, industry insiders said.

In particular, the wage-earning segment of the population is growing, and people are moving to urban areas where they are enjoying higher standards of living, said Paulo Rabello de Castro, an economist, professor and consultant with RC Consultants, Rio de Janeiro, Brazil.

“That presents not only a challenge, but an immense opportunity for the shopping center industry,” he said.

Stanley Eichelbaum, SCMD, president of Marketing Developments, a Cincinnati-based retail consulting firm, said Latin America deserves more attention than it has been receiving from the U.S. retail industry.

“It’s surprising that more of the major U.S. chains aren’t looking there,” he said.

Others have made similar observations, arguing that Latin America offers a logical and lucrative expansion opportunity for retailers who have nowhere else to build in the U.S. market.

Much of Latin America’s lack of foreign investment can be blamed on its history of political and economic turmoil. While democracies have replaced dictatorships in the region, it has taken longer for many countries — with the notable exception of Chile — to adopt the free-market institutions necessary to allow their economies to flourish.

The failure to undertake such reforms has made the region’s economies particularly vulnerable to economic turmoil elsewhere in the world, as witnessed recently by the impact on Brazil and Argentina of the crises in Asia and Russia, economists say.

As a result, it has taken Latin America a long time to deliver on its promise. Three years ago everyone was predicting a flood of investment in Latin America, noted Neil Duncan, a former executive in J.P. Morgan’s real estate investment banking group, and now a vice president with Rockwood Realty Associates, New York.

“It hasn’t happened,” he said. “Although there’s been a lot of foreign companies down there looking, they haven’t done much, as you know.”

The reason for this lack of action is quite clear, he said. Up to now other parts of the world — places such as Poland and Japan — have offered more lucrative returns on investment. While foreign investors are looking for returns of 20% to 25% on their investments, Latin Americans are not willing to pay such dividends, Duncan said. Locals and foreigners also have different perceptions of risk, both political and economic, he added.

Commentators offer a variety of other reasons for foreign investors’ hesitation, including cultural differences, but “it’s all been pricing and yield,” Duncan said. “It’s as simple as that.”

But the institutional changes necessary to unfetter Latin American economies are within the grasp of governments in Brazil, Argentina and elsewhere, economists say. During the past decade many countries have undertaken what the World Bank calls “first-generation” reforms by reducing tariffs and implementing fiscal policies that have defeated inflation and expanded their economies.

Now much depends on how quickly they adopt “second-generation” reforms, including the strengthening of independent fiscal supervision, decentralization of power, the reinforcement of property rights and improved education, according to World Bank officials.

“The next 10 years in Brazil will be decisive in terms of an economic turnaround,” said Rabello de Castro, adding that much depends on whether fiscal reforms are enacted in the coming two years.

The potential for economic growth in Brazil is considerable, he said. Birth rates will drop and so will saving, thanks to the spending habits of older people, who will make up a larger part of the population.

“The next 10 years in Brazil will be decisive in terms of an economic turnaround.” — Paulo Rabello de Castro, consultant, RC Consultants

Brazil, long dubbed a “sleeping giant” for its massive potential, has one of the world’s largest populations (more than 165 million people), several large cities and a developed industrial base. Yet, as of August, it only had 159 shopping centers, according to the Brazilian Association of Shopping Centers (ABRASCE), accounting for $14 billion in sales last year. (In contrast, U.S. shoppers spent $1.1 trillion in the country’s more than 43,600 shopping centers last year.)

Rabello de Castro, a past president of the International Academy of Law and Economic Science and the author of several books on economics and development, dubbed 1985 to 1994 the “missed decade,” due to Brazil’s failure to adopt the fiscal reforms that brought prosperity to Chile. But he calls the 1995 to 2004 period the “global test” decade, in which the country will become increasingly urbanized, the population will grow to 177 million, and industrial productivity will rise. All of this will contribute to an annual gross domestic product growth of 3.2%, he predicted.

Consequently, Rabello de Castro said he is optimistic about the future, so long as governments remain disciplined about sticking to sound, if sometimes unpopular, fiscal policies. Mercosur, the free-trade common market formed by Brazil, Argentina, Paraguay and Uruguay, will help member states do that, he said.

“Mercosur is like an insurance policy against stupidity,” he said, adding that it will promote more free trade in the region. “I think we are going to have practically no borders in five years.”

Enrique Szewach, an economist and consultant, and president of Central de Riesgo Crediticio S.A., Buenos Aires, was equally sanguine during a presentation on Argentina’s growth prospects.

Argentina was hit hard by Brazil’s decision in January to devalue its currency, making Argentine exports prohibitively expensive there. But Szewach, who also is president of Evaluadora Latinoamericana S.A. rating agency and an advisor to the Cámara Argentina de Comercio (the Argentine shopping center association), said he expects recovery and growth to return during the next two years, opening up opportunities for retailers and developers.

“We love brands, we love consumption,” he said. Argentina has 41 centers, which sold $1.8 billion of goods in 1998, and 10 more are in various stages of development.

Other speakers also took up the call for foreign retail investment, especially from the United States.

The region deserves more attention from business leaders in the United States and elsewhere, said Jorge Agustin Justo, general director of the shopping center division of Cencosud S.A., Buenos Aires, who served as conference co-chairman. “We must be taken seriously.”