In 1997, Citibank unveiled a bold, 30-year growth strategy. By 2025, they planned to serve 1 billion customers worldwide, 50 million of which would come from Latin America. To many, Citibank’s plan appeared more naïve than visionary. Mexico was still reeling from the peso crisis and its banking sector was theoretically insolvent. Brazil was pilfering away $40bn of privatization proceeds to defend its overvalued currency. The region was entering what has since become known as the lost half decade (1997-2002), when voters rejected the Washington Consensus brand of liberalism and Chávez came to power, sparking a wave of new left-wing leaders. Certainly the middle class was expanding in Asia but it was shrinking in Latin America and had been since the early 1980s.
Moreover, Citibank seemed an unlikely candidate for any mass market strategy. In 1997, they epitomized an elite approach to retail banking with a handful of well-placed branches in Latin America’s wealthiest neighborhoods, serving Latin millionaires and professional ex-pats. Regardless, Citibank forged ahead. They bought Banco Confia (Mexico), Grupo Financiero Atlas (Chile), Grupo Siembra (Argentina), GFU and Cuscatlán (Central America) and others, but the crown jewel was Banamex of Mexico, the largest bank in the country. Citibank paid $20bn for Banamex in 2001, just as the region fell into a recession.
Prescient Planning, Strong Results
By 2008, when disaster struck the global financial system, Citibank was already generating 40% of their revenues from both Asia and Latin America. That was just enough to save the bank from financial ruin. In 2009, the retail banking divisions of traditional markets (US, EMEA) generated a combined $145 million in profit while emerging markets (Asia and LatAm) retail divisions earned over $1.7bn in profit. Today’s trimmed-down Citibank is even more weighted to emerging markets, an important reason why its stock price grew steadily since the financial crisis.
Sizing the Opportunity
The expansion of Latin America’s middle class stalled from mid- 2014 to mid-2016 as leading currencies tumbled in the aftermath of a commodity price collapse. But recent data shows the middle class is on the march again. By the end of 2017, Latin America will support more than 42 million of middle class homes, a a historical high.
Marketers have traditionally focused their efforts on the top 20% of Latin Americans whose households earn more than $15,000 per year. That has begun to change. Instead of limiting themselves to only 1/5th of the region’s 600 million consumers, many companies are setting their sights on the next 200 million customers in Latin America, the upper tier of the 480 million consumers that demographers like to call the base of the pyramid (BOP).
Tricky to Research
Of course, reaching that base is not easy. Though 75% of Latin America’s emerging middle class live in cities, many are spread among hundreds of second- and third-tier cities. Those living in large cities often live in the outer urban reaches, cut off from modern retail networks, let alone public transport. Cellphone penetration is high among the emerging middle class and they have begun to adopt smart phones in earnest but are wary of using data when away from WiFi coverage. Household computer penetration in this segment remains below 10%, though more can access the internet at work.
Another issue with reaching this emerging middle class: more than half of those who are employed, actually work in the informal economy, i.e. are not registered in the social security system. Even fewer have bank accounts—through some access credit through unconventional yet legitimate lenders.
Despite the Challenges, a Viable Target
Though marketers can’t reach this emerging middle class of LatAm with the precision they can reach the so-called “tip” of the economic pyramid, this middle class still represents a major market, consuming close to $500 billion per year. For certain product categories like food, beverages, cellphones, home appliances and others, conquering this segment promises to double the addressable market size in Latin America from its traditional upper tier.
As much as governments and NGOs are stumbling over one another to research the base of the pyramid and publish their advice on how to penetrate the market, it is the few successful private sector players already thriving in the market who shed the most insightful light on both the opportunities and challenges of selling to the emerging middle class. Here’s a look at some examples of how these players managed to reach this market.
#1 Switch Delivery Tactics
Like almost every bank in Latin America, Banco BCI of Chile limits its branch network to 1st and 2nd tier cities, unable to reach a large portion of the emerging middle class. Across Chile’s smaller communities, thousands of small business owners are viable banking customers, presiding over debt free assets (their businesses) but unable to grow because of a lack of working capital that they struggle to rotate. Banco BCI had developed the right products for this segment: lines of credit and micro-finance products, but lacked the physical network to reach an underserved market. The answer was to team up with CPG companies like Coca-Cola, PepsiCo, Unilever and Arcor, all of whom deliver through their own distribution network product on a weekly basis to every small town in Chile. These companies understand very well the credit worthiness of their small store customers and are keen to cooperate with Banco BCI to help extend working capital loans to their customers.
#2 Use Microcredits
Banco BCI notwithstanding, retail banks in Latin America have proven to be unable and unwilling to serve the emerging middle class. Instead, it is other businesses that make the effort and take the risk to bank the poor. In Colombia, Empresas Públicas de Medellin (EPM), the nation’s largest distributor of electricity, brings power to remote communities across a challenging geography. They know who pays their power bills and how much they pay. Their customer database is a functioning credit bureau. That is why Colombia’s largest retailer, Almacenes Éxito, partnered with EPM to provide more than 10,000 low-income clients micro-credits to buy energy efficient appliances, internet services and laptops. Not only did Éxito reach a sizeable new client base, they provided tools to people that lift them out of poverty. When a woman goes from washing clothes by hand to using a washing machine and dryer, she frees up 3-4 hours a day of time, providing her the opportunity to earn an income and her independence.
So many of the productivity tools that we take for granted in our lives: the computer, motor bike or car, appliances, cellphones, and others normally require credit to purchase or can be bought much faster with credit. Too much credit can be dangerous but too little credit keeps the consumer, the entrepreneur, the homemaker from achieving their potential.
#3 Simplify to Fit Needs
A hard lesson learned by marketers is the need to strip down and simplify their product for what is a highly pragmatic consumer at the base of the pyramid. When Maytag entered the Mexican market in the early 1990s, they introduced their best-selling US models and placed them in department stores across Mexico. Almost no washing machines were sold in the first two quarters. In disbelief, Maytag turned to their Mexican partner, Vitro for an answer. Vitro explained that the upper and middle classes do not do their own laundry but instead hire a servant to do the work. Many Mexican household servants are not sufficiently literate to read the complex instruction manuals designed to operate multiple speed, temperature and agitation levels of a modern washer. Vitro encouraged Maytag to “dumb-down” their product line so Maytag executives rummaged through corporate archives and found an old blueprint from the 1930s – and built a dead-simple washer with one speed and two temperature levels. The price tag of the “new” washer was $60 versus the $300 price tag commanded by the best-selling US model. The washer with the 70 year-old design sold like hotcakes in Mexico.
Most successful suppliers to the base of the pyramid know they must return to the drawing board and design a product stripped of non-essentials and durable enough to withstand the harsher conditions of rural or small town living. Techo-para-mi-pais, the Chilean charity that builds safe and economical housing for the poor across Latin America is also the founder of a laboratory in Colombia that partners with the private sector to invent, pilot and test new product concepts especially designed for the base of the pyramid.
Why Latin America Matters
Latin America is abuzz with BOP product development. Unlike Asia and Africa, Latin America is a middle income region. Ideas can be developed with Latin America’s geography, demography, and education challenges in mind and later rolled out with few changes across Asia. With greater purchasing power, Latin America’s working poor can afford the higher price points of the first phases of the product life cycle before volumes are ramped up and prices pushed downwards for the big push into gigantic markets like China, India and Indonesia. It is little wonder then, that Chinese manufacturers have set their sights on Latin America, one of their highest growth markets for their emerging brands and mass market goods.
Contact Americas Market Intelligence to obtain strategic insights into the political, economic and cultural landscape in Latin America that will drive your business decisions successfully in areas such as healthcare, logistics, payment, consumer initiatives, natural resources, industrial, automotive and more.