the coca-cola retailing research council – latin america

Research launched for:The Coca-Cola Retailing Research Council Latin America by:McKinsey&Company

Inside the minds and pockets of Inside the minds and pockets of Latin American consumersLatin American consumersHow consumers build price perception and its How consumers build price perception and its impact on retailersimpact on retailers

Inside the minds and pockets of Inside the minds and pockets of Latin American consumersLatin American consumersHow consumers build price perception and its How consumers build price perception and its impact on retailersimpact on retailers

2

THE COCA-COLA RETAILING RESEARCH COUNCIL – LATIN AMERICA

The Coca-Cola Retailing Research Council – Latin America (CCRRC - LA) is dedicated to developing a better understanding of the food retailing and allied merchandise distribution business in Latin America. It concentrates in identifying and then studying selected relevant issues, presenting its findings to the manufacturing and retailing communities, in order to assist in the development and enhancement of the food retailing business.

Latin America Council MembersJonathan BergerCIES USA

Howard Butt IIIHEB Mexico

Guillermo D'AndreaCouncil Research Director

Ana Maria DinizGrupo Pao de Acucar Brazil

Paulo GoelzerIGA, Inc. Brazil

Antonio Coto GutierrezDia Internacional Argentina

Tim HammondsFMI USA

Nicolás IbáñezD&S Chile

Gonzalo RestrepoÉxito Colombia

Eduardo Castro WrightWal*Mart Mexico

3

REVIEWING THE STUDY GOALS AND OBJECTIVES

Understand the drivers of consumer price perception in Latin America

Overall goals and focus level Specific objectives

Understand the implications of pricing approaches on retailers and manufacturers

Understand high level implications for retailers in terms of organization, supply chain and vendor relations

Understand high level implications for manufacturers in terms of capabilities and requirements to deliver under different retailer price approaches**

Source: Team analysis

Match consumer price perception with reality to understand which are the most effective levers for retailers

Understand the relative importance of different drivers of consumer price perception, across major consumer segments, product categories, shopping occasions* and selected markets

Understand how price ranks among the key factors in the consumer preferred store selection process*

10% of study focus

90% of study focus

4

THE STUDY LEVERAGED THREE MAIN SOURCES OF INFORMATION

*AC Nielsen conducted the focus groups in São Paulo and the field research in all five marketsSource: Team analysis

•~15 in-depth interviews with executives of key retailers in the region

Methodology •Qualitative survey– Focus groups to test

initial hypothesis•Quantitative survey

– ~3,000, 30-minute interviews

•Correlate consumer research results with AC Nielsen scantrack information

•Understand retailer perspective on consumer price perception

Objective •Capture insights on consumer price perception

•Segment consumers

•Enrich findings with AC Nielsen proprietary databases

•Match price perception with actual prices

In-depth interviews Consumer survey* ACNielsen database

5

CONSUMER SURVEY DETAILS

Source:AC Nielsen, team analysis

Bogotá

• 673 consumer surveys• 6 retailers (90% market share)• 30 categories (~3,500 SKUs)

Santiago

• 600 consumer surveys • 11 retailers (95% market share)• 30 categories (~3,700 SKUs)

Buenos Aires


São Paulo

• 600 consumer surveys• 13 retailers (87% of the market)• 30 categories (~2,500 SKUs)

Mexico City


6

ONLY CONSUMERS WHO SHOP REGULARLY IN AT LEAST ONE MODERN FORMAT STORE ARE RELEVANT FOR OUR ANALYSIS

*Includes hypermarkets, supermarkets, mini-markets and suburban supermarketsSource:Team analysis

Considered for our analysis

Consumers who only shop in traditional format

Consumers who shop in it least one modern format* store regularly

• Typically low-end consumers

• Useful to gain insights on the low-end market, already studied by CCRRC

• Analysis more useful in a study to increase the penetration of modern format, what is not the scope of this project

• Primary population of interest for the CCRRC

• Only respondents able to provide answers and crossable data for:– Accuracy of price perception– Price perception drivers for modern format– Effectiveness of promotional activity in price

perception building

Our sample is representative

of modern format shoppers

7

21-34 years

35-49 years

50+ years

THE CONSUMER SURVEY IS REPRESENTATIVE OF THE MAIN SOCIO-ECONOMIC CLASSES AND AGE GROUPS

Age

*Based on AC Nielsen socio-economic classification for each marketSource:Consumer survey

%

Middle

Low

High

Socio-economic class*

Results take into account the behavior and attitudes of low income consumers

8Source:AC Nielsen, National Marketing Associations of each country

COUNTRY-LEVEL ACCEPTED STANDARDS GUIDED OUR INCOME LEVEL CLASSIFICATION

We adopted the principles suggested by the National Marketing Associations of each country

High income

Middle income

Low income

São Paulo Buenos Aires Mexico D.F. Santiago Bogotá

• A • AB• C1

• ABC+ • ABC1 • Clase alta • Clase média

alta

• B• C

• C2• C3

• C • C2• C3

• Clase média

• D• E

• D1• D2• E

• D/E • D • Clase baja

67% of modern format shoppers in São Paulo belong to classes B and C, classified as middle income

9

KEY TAKEAWAYS FROM STUDY

1. Latin America: diversity of consumers, and not just in the depth of their pockets

2. The few key levers that matter in building price perception – and the one that doesn’t

3. Consumers (mostly) getting it right in their search for value

4. Retailers have an opportunity to get it right more often in their search for a better price proposition

10

CONSUMERS IN LATIN AMERICA CAN BE SPLIT INTO FIVE MAIN SEGMENTS

Source:Consumer survey, team analysis

"Avid bargain hunters"

Invest a lot of time and are willing to visit multiple stores for the best deals

"Quality seekers and time savers"

Willing to pay a slight price premium to save time and have access to high quality products

“Indifferent shoppers on a budget"

Do not care about shopping, hence invest little time in it

"Range-seekers on a budget"

Want to bring home the best quality products, but limited by a tight budget

High income consumers who are willing to visit multiple stores to find the best deals

"High-income bargain hunters"

11

WE RAN A TWO-STAGE CLUSTER ANALYSIS COMBINING ATTITUDINAL AND SOCIO-DEMOGRAPHICS ELEMENTS…

*Note that none of the elements are unique, however, this methodology provides managers with unprecedented control over the process, by allowing maximum managerial input and the testing of early hypothesisSource:Team analysis

Sample of 3,084 consumers in 5 countries

Two main segmentation drivers

Attitudinal elements (most common method)

• Clean and intuitive attitudes across all segments

• Lacks actionability (difficult to find consumers)

• Selected 4 most robust scenarios

• Crossed with shopping behavior– Key buying factors – Average monthly

spend– Format of main

store

Socio-economic/ demographics

• Simple way to segment, facilitate identification

• Lacks insights and does not reflect attitudes

Two-stage cluster analysis

• Combines both methodologies to reach meaningful and actionable segments

• Process* developed and refined by McKinsey experts for segmentations with strategic objectives

Ran 20+ statistically relevant scenarios

Selected 1 scenario with 5 clusters

12

…ALLOWING THE IDENTIFICATION OF SOME CONSUMERS TO WHICH SEGMENT THEY BELONG

Source:Team analysis

• Low income level • Age 21-34 years old• Only one person on

the household

• Middle income level • Large household• Shops primarily on

hypermarkets

84% probability that this person is an Avid

Bargain Hunter

86% probability that this person is a Range seeker on a budget

EXAMPLE

13

INCLUDING A HANDFUL OF ATTITUDINAL STATEMENTS, ONE CAN IDENTIFY MOST CONSUMERS


Would you sacrifice service for lower prices?

Would you spend a lot of time looking for offers?

Probability of 64% to be an “Indifferent shopper on a budget”

Yes

No

21 - 34

35 - 49

50+

Age group

A handful of attitudinal statements allow us to identify over 50% of all

consumers

EXAMPLE

14

AVID BARGAIN HUNTERS

• Rely less on modern formats– When shopping on

modern formats, tend to prefer discounters

How do they behave?

• Lowest average expenditure when compared with other segments (~12% below market average)

• Less likely to do stock-up trips

• Always compare prices at different stores

• Tend to be the least loyal consumers

• Shopping around for the best deals• Purchasing only products they had

planned on• Willing to sacrifice services for lower

prices• Spending a lot of time looking for

promotions• Shopping in larger number of stores

recently

What do they not value?

• Paying more to shop close to home• Paying more to save time• Paying more for higher quality

What do they value?


Shopping behavior

Monthly spend

Format

• Typically low income • Disproportionate number of

males and older consumers (50+ years old)

15

AVID BARGAIN HUNTERS

16

HIGH INCOME BARGAIN HUNTERS • Typically high income consumer

• Average age and household size

• Tend to spend more (~16%) than the average spend on groceries

• Rely more on modern format stores– Tend to prefer

hypermarkets and avoid shopping on discounters

• Tend to have higher loyalty than average (São Paulo is the exception)

How do they behave?

Shopping behavior

Monthly spend

Format


• Shopping around for the best deals• Stocking-up when they find attractive

promotions• Going to a grocery store they hear is

offering good specials• Shopping in more stores recently


• Paying more for the convenience of shopping closer home

What do they value?

17

HIGH INCOME BARGAIN HUNTERS

18

RANGE SEEKERS ON A BUDGET

• Tend to shop more on hypermarkets

Format

• Highly price sensitive• Tend to make fewer trips

(São Paulo is the exception) and stock up once a month

• Normally below average loyalty

How do they behave?

• Tend to spend less (~6%) than the market average on groceries

Monthly spend

Shopping behavior


• Typically young, low income mothers

• Large household (6 or more people)

• Getting good quality products and a large assortment

• Stocking-up when they find attractive promotions

• Providing the best possible quality for their family, despite their tight budget


• Sacrificing services for lower prices• Shopping at upscale stores

What do they value?

19

RANGE SEEKERS ON A BUDGET

20

INDIFFERENT SHOPPERS ON A BUDGET

• Typically low/ middle income

• Tend to spend ~10% less than the market average on groceries

• Tend to rely less on modern format stores– When shopping on

modern formats, tend to choose hard discounters

How do they behave?

• Tend to shop less frequently

• Display relatively high loyalty to their main grocer store

Shopping behavior

Monthly spend

Format


• Sacrifice service for lower prices


• Spending time looking for deals• Stocking-up when they find good

promotions• Reading store pamphlets

What do they value?

21

INDIFFERENT SHOPPERS ON A BUDGET

22

QUALITY SEEKERS AND TIME SAVERS

How do they behave?

• Highest average basket, ~22% higher than market average spending on grocery shopping

• Rely primarily on modern format stores– Willing to shop more on

supermarkets

• Tend to shop less frequently

• Tend to be the most loyal segment in all markets

• Rarely compare prices

Shopping behavior

Monthly spend

Format


• Typically high income consumers

• Small families

• Saving time rather then money• The convenience of shopping closer to

home• Higher quality, even at higher prices


• Spending time looking for promotions• Shopping in many stores to pay less

What do they value?

23

QUALITY SEEKERS AND TIME SAVERS

24

22%

23%

19%

18%

18%

Avid Bargain Hunters

Indifferent shoppers on a budget

Quality seekers and time savers

High-income bargain hunters

RELATIVE SIZE OF THE SEGMENTS IN THE REGION

100% = 2,818

Number of respondents

Source:Consumer survey

Range-seekers on a budget

25

THE MARKETS SHOW SIGNIFICANT DIFFERENCES IN SEGMENT BREAKDOWN%, number of respondents


Range seekers on a budget


Avid bargain hunters

S. Paulo B. Aires Mexico Santiago Bogotá


Overall

5835685505515652,818

High income bargain hunters

100%

• São Paulo and Buenos Aires have a disproportional share of “Bargain hunters" segments

• “Quality seekers and time savers” are more relevant in Santiago and Bogotá

26

DETAILED SEGMENT DESCRIPTION – SÃO PAULONumber of respondents, R$ 000, %



$ spend



Quality and time

High income bargain hunter

Number of consumers

Range seekers on a budget• Average spend: R$ 500• Monthly visits to modern format: 16• Share of wallet of main retailer: 63%• Income level

– High: 0%– Medium: 70%– Low: 30%

Quality seekers and time savers• Average spend: R$ 543• Monthly visits to modern format: 10• Share of wallet of main retailer: 74%• Income level

– High: 20%– Medium: 75%– Low: 5%

Indifferent shoppers on a budget• Average spend: R$ 327• Monthly visits to modern format: 8• Share of wallet of main retailer: 71%• Income level

– High: 6%– Medium: 63%– Low: 32%

High income bargain hunters• Average spend: R$ 516• Monthly visits to modern format: 11• Share of wallet of main retailer: 55%• Income level

– High: 34%– Medium: 66%– Low: 0%

249565

• Store format– Hyper: 47%– Super: 19%– Disc.: 35%




Avid bargain hunters• Average spend: R$ 429• Monthly visits to modern format: 7• Share of wallet of main retailer: 55%• Income level

– High: 0%– Medium: 66%– Low: 33%


Significant deviations from average

Bold =

Market average• Average spend: R$ 441• Monthly visits to modern format: 9• Share of wallet of main retailer: 62%• Income level

– High: 10%– Medium: 67%– Low: 23%


27

ALTHOUGH OTHER FACTORS VARY IN RELEVANCE, LOCATION AND PRICE ARE THE TWO MOST IMPORTANT FACTORS FOR ALL SEGMENTS


Location

Promotions

Quality of perishable products

Assortment

Overall product quality


Range-seekers on a budget



Why did you choose to shop at that particular store?

Price

% of consumers that selected the factor as important

Brand variety

Service level

Private label quality


28

BUT SEGMENTS VARY WIDELY IN THE FREQUENCY OF PRICE COMPARISON%, number of respondents


Indifferent shopper on a budget

Range seeker on a budget

Quality seeker and time saver

100%



493655530 493636

Always

Occasionally

How often do you compare prices between stores?

Never

Very often

29

FROM RETAILERS’ STAND POINT, SOME SEGMENTS APPEAR TO BE MORE ATTRACTIVE THAN OTHERS

-6

-4

0

3

8Quality seekers and time savers






Loyalty compared to averageShare of wallet of main store

-14

-6

-7

16

18

Monthly spendCompared to market average

• “Quality seekers and time savers” and “High income bargain hunters” spend more than any other segment and tend to be more loyal customers

• “Avid Bargain hunters” and “Range seekers on a budget” are the least loyal segments and have small basket sizes

%

30

BUENOS AIRES AND BOGOTÁ HAVE THE LOWEST LOYALTY RATIO OF ALL MARKETS

São Paulo Santiago Mexico Bogota Buenos Aires

Average loyalty ratio*

*Share of wallet of main storeSource:Consumer survey

31

SHOPPING BEHAVIOR BY SEGMENT AND MARKET

300

450

600

25 50 75 100

Average basket size (vertical axis) vs. loyalty index* (horizontal axis)

*Share of wallet of main storeSource:Consumer survey

São Paulo (R$)

100

150

200

25 50 75 100

Santiago (CLP)

300

450

600

25 50 75 100

Bogotá (COP)

1.250

1.750

2.250

25 50 75 100

Mexico (MXN)

300

450

600

25 50 75 100

Buenos Aires (ARS)

QualityHIBH

Range

Avid BH

Indifferent

Quality

HIBH

Indifferent

Avid BH

Range

Quality

HIBH

Range

Indifferent

Avid BH

HIBH

Quality

Indifferent

Avid BHRange

Quality

HIBH

Indifferent

Avid BH

Range

• Quality seekers and High income bargain hunters spend more than any other segment across all markets and generally have the highest loyalty ratio

• Avid bargain hunters and range seekers on a budget tend to spend less than all other segments and are also less loyal customers

• On average, São Paulo, Santiago and Mexico have the highest loyalty ratio on all segments

32

WHERE THE DIFFERENT SEGMENTS SHOP

*Indicate store format that capture a disproportional share of the segment compared to the market average. H (Hyper), S (Super) and D (Discounters). Discounters include Bodegas in MexicoSource:Team analysis



Frustrated shoppers



%, across all metropolitan areas studied

Percentage spent on modern format

Higher income segments spend more on modern

format

Preferred format*



Frustrated shoppers



Super Hyper Discounter

Higher income segments prefer super & hyper; lower tend towards

discounters & hyper

33

SOME RETAILERS “ATTRACT” DISPROPORTIONATE SHARE OF CERTAIN SEGMENTS (1/3)

Overall A B C D

543 74 90 47 93




100%




Percentage of primary shoppers by segment, main retailers

São Paulo Buenos Aires

322 93 71 51

Overall A B C

34


Overall

410 59 114 51 37







A B C D

Bogotá Santiago

Overall A B

521 114 316


35


Average A B C D E

495 66 203 57 68 35




100%




Mexico


36

McKINSEY PROPRIETARY RESEARCH IDENTIFIED SEVEN SEGMENTS IN THE U.S. GROCERY RETAIL MARKET

Shop around at many different stores to hunt down the latest special

Want broad selection and national brands for a low price

Use coupons 100% of the time, usually at a store close to home

Pure Price

Willing to pay more and drive farther for quality and service

Want great service and ambience at any cost

Willing to pay more to get in and out quickly at a store close to home

Use every means available to get the lowest price – will not pay more for anything

Bargain Hunters Selection for Less Coupon Clippers

Quality Superior ExperienceConvenience

Source:McKinsey North American Retail Practice

37

LATIN AMERICA SEGMENTS ARE FAIRLY SIMILAR TO THOSE IN THE U.S.

Selection for Less (12%)

Coupon Clippers (10%)

Quality (14%)

Superior Experience (20%)

Convenience (22%)


Range-seekers on a budget (22%)

Quality seekers and time savers (21%)

United States Latin America

( ) Percentage of total spend

Bargain Hunters (10%)

High-income bargain hunters (20%)

Avid bargain hunters (20%)

• In Latin America, “more price oriented segments” are significantly larger than in the U.S., noticeably “Bargain Hunters” even adding the “Coupon Clippers” in the US

• Segments broadly similar in key characteristics

Pure Price (12%)

Indifferent shoppers on a budget (17%)

79%

44%

56%

21%

More price oriented

Less price oriented

• “Less price oriented” segments in the U.S. more defined and significantly larger share of total population than in Latin America

38






39

MAIN MESSAGES

• Reference price, range architecture and promotions are the three most important levers in determining consumer price perception in Latin America

• Reference price is the most important lever:– in all consumer segments, although other levers have disproportionate influence

depending on the segment, such as range architecture for “Quality seekers and time savers” and “Indifferent shoppers on a budget”.

– in all markets except Mexico City, where range architecture is slightly more important

• A limited number of KVIs appear to particularly important in driving consumers’ perception of reference price

• From matching price perception with price reality, it is clear that consumers are able to quite accurately identify retailers with low average prices in markets where promotional activity is relatively low. Promotions do not drive price perception in any market and in fact obscure price reality in Sao Paulo and Buenos Aires.

• There are indications however, both in low and high promotional markets that some retailers are able to get more credit more value than they “deserve”

1

2

3

4

5

40

HOW DO CONSUMERS DEVELOP THEIR PRICE PERCEPTION?


• What are the different elements that can help explain price perception?

• What are the elements that are most relevant to explain price perception?

• Are these different for the various markets?

• Are these different for various segments?

How do consumers perceive prices?

• Do Latin American consumers accurately perceive low price retailers?

• Are there differences in price perception accuracy when we look at the different regional markets and segments?

• What elements might explain regional differences in price perception?

How does price perception match with price reality?

41

THERE ARE SEVERAL POTENTIAL DRIVERS OF PRICE PERCEPTION


Referenceprice

Promotions

Rangearchitecture

Communications

In-storeenvironment

Drivers

• Low prices on items bought most often• Low prices on well-known items• Prices are usually low

• Frequent discounts • Frequent interesting promotions (e.g., 2x1, wow deals)

• Low priced alternatives for everyday basics (i.e., OPP)• Broad range of price and quality levels• Private label with good price/quality ratio

• Believable low price ads• Frequent promotion pamphlets• In-store signs that clearly point to sales

• Overall store environment• A lot of people shopping

42

PRICE PERCEPTION IN LATIN AMERICA IS DRIVEN MAINLY BY TWO ELEMENTS% total weight


• Reference price is the key lever of price perception, with KVIs as a very relevant component

• Range architecture – namely cheap alternative brands (OPPs) – are also very important

• Together they make up for 75% of the way a consumers builds price perception

Prices are usually low

Cheap alternative brands

Upscale store environment

Frequent discounts

Believable price ads

Prices on well-known items/bought most often

Broad range of quality & price levels

Reference price

Range architecture

Environment

Promotions

Communi-cations

43

DRIVERS OF PRICE PERCEPTION BY METROPOLITAN REGION% total weight

*Causes poorer price perceptionSource:Team analysis

São Paulo Buenos Aires Santiago Mexico D.F. Bogotá

Reference price

• Prices are usually low

• Low prices on items bought most often/well known

Promotions

• Good promotions

• Frequent discounts

Range architecture

• Cheap alternative brands

• Broad range

Environment• Upscale store

environment*

Communications• Believable

price ads

44

DRIVERS OF PRICE PERCEPTION BY SEGMENT% total weight

*Causes poorer price perceptionSource:Team analysis




Frustrated shoppers on a budget


Reference price

• Prices are usually low

• Low prices on items bought most often/well-known

Promotions

• Good promotions

• Frequent discounts

Range architecture

• Cheap alternative brands

• Broad range

Environment• Upscale store

environment*

Communications

• Pamphlets

• Believable price ads

47

A LIMITED NUMBER OF KVIs APPEAR TO BE ESPECIALLY IMPORTANT FOR BUILDING PRICE PERCEPTION

*Based on McKinsey previous experience Source:Consumer survey

Do you base your assessment of store prices on a few key products?

How many items do you normally memorize the price of to assess the price level of a store?

No

Yes

Overall Bogotá Buenos Aires

Mexico San-tiago

São Paulo

Average number of items consumers claim to memorize the price on to assess retailer prices

Different consumers have different KVIs, as a result

an individual store can have up to 100 KVIs*

49

OUR SURVEY HAS IDENTIFIED ABOUT 500 KVIs IN EACH METROPOLITAN REGION – ONLY ABOUT 150 ARE COMMON TO MULTIPLE SEGMENTS…Number of different KVIs mentioned – spontaneous responses

638

545

474474 461

Buenos Aires

Bogotá Santiago São Paulo Mexico D. F.


Mentioned by only 1 segment

Mentioned by at least 2 segments

50

… AND, OUT OF THESE, ONLY A DOZEN ARE ULTRA-KVIsNumber of different KVIs mentioned – spontaneous responses

154 150139

147

130

Buenos Aires

Bogotá Santiago São Paulo Mexico D. F.


Ultra KVIs

Only 2 segments

3 or 4 segments

All Segments

Mentioned by:

51

TOP TEN KVIs BY METROPOLITAN AREA% of unaided consumer responses


São Paulo

Sugar União 1 kg

Rice Camil 5 kg

Coffee Pilão 500 g

Rice Camil 1 kg

Rice Tio João 5 kg

Detergent Omo 1 kg

Rice Camil type 1 5 kg

Beans Camil 1 kg

Oil Lisa 900 ml

Detergent Omo Multiação 1kg

Buenos Aires

Sugar Ledesma 1 kg

Milk Sachet La Serenísima 1 liter

Sugar Domino 1 kg

Detergent Ala 800 g

Sugar – no brand 1 kg

Sugar Chango 1 kg

Milk Fortuna 1 liter

Oil Cocinero 1.5 liter

Oil Natura 1.5 liter

Coca-Cola 2.25 liter

Ultra-KVIs (mentioned by all segments)

52



Santiago

Sugar Iansa 1 kg

Rice Tucapel 1Kg

Beef 1 kg

Aceite A cuenta 1 l

Aceite Belmont 1 l

Azucar Iansa 5 kg

Aceite Miraflores 1 l

Azucar Dama Blanca 1 kg

Oil Chef 1 liter

Leche Soprole 1 l

Mexico D.F.

Aceite 1 2 3 1 l

Detergente Ariel 1 kg

Suavisante de telas Suavitel

Arroz Morellos 1 kg

Aceite Capullo 1 l

Café Nescafé 200 gr

Papel Higiênico Petalo 4 rollos

Detergente Salvo 1 kg

Detergente ACE 1 kg

Shampoo Caprice 1 l

Ultra-KVIs (mentioned by all segments)

53



Bogotá

Panela

Aceite Óleo Soya

Aceite (no recuerda marca)

Chocolate/Sol

Crema dental Colgate

Arroz Diana

Detergente en polvo Ariel

Arroz Flor Huila

Arroz Roa

Detergente en polvo FAB

54






55

DO CONSUMERS GET IT RIGHT? PRICE PERCEPTION ACCURACY BY METROPOLITAN AREA


Market average

Santiago Mexico D.F.

Bogotá Buenos Aires

São Paulo

Accuracy of price perception+ -

Universe of primary shoppers and respondents

that correctly identified retailers

with low prices (retailers that had the price reality

index at the bottom quartile of the

market)

56

RELATIONSHIP BETWEEN PRICE PERCEPTION AND PRICE REALITY

*T-Stat lower than 2,0**The assessment of the São Paulo market was made without a clear high price playerSource:Consumer survey, team analysis

90

95

100

105

110

0 20 40 60 80 100

90

95

100

105

110

0 20 40 60 80 100

90

95

100

105

110

0 20 40 60 80 100

Mexico D. F.Santiago Bogotá

0,75 0,82 0,72

‘‘

‘

90

95

100

105

110

0 20 40 60 80 100

90

95

100

105

110

0 20 40 60 80 100

São Paulo** Buenos Aires

0,23 0,21• Unlike the other markets,

price perception in São Paulo and Buenos Aires, cannot be explained using actual prices

• These results are in line the lower accuracy of price perception of these cities

Price reality (vertical axis) vs. Price perception index (horizontal axis)

Relevant Relevant Relevant

Not Relevant*Not Relevant*

R2

57

0

3

5

8

10

0 20 40 60 80 100

0

3

5

8

10

0 20 40 60 80 100

0

3

5

8

10

0 20 40 60 80 100

RELATIONSHIP BETWEEN PRICE PERCEPTION AND PROMOTIONAL ACTIVITY

0,06 0,19

‘

‘‘

Proact index (vertical axis) vs. Price perception index (horizontal axis)

0

3

5

8

10

0 20 40 60 80 100

0,16

• Promotional activity does not explain price perception in any of the Latin American cities analyzed

0

3

5

8

10

0 20 40 60 80 100

Not Relevant*

0,01

Not Relevant*

Not Relevant* Not Relevant* Not Relevant*

*T-Stat lower than 2,0**The assessment of the São Paulo market was made without a clear high price playerSource:Consumer survey, team analysis

R2

Mexico D. F.Santiago Bogotá

São Paulo** Buenos Aires

0,03

58

REGIONAL DIFFERENCES OF LATIN AMERICA RETAIL MARKET DYNAMICS

Santiago

*Does not consider high price playerSource:AC Nielsen, market research, team analysis

Mexico

Bogota

Buenos Aires

São Paulo

Promotional intensity Proact index

Price reality indexR2 of real vs. perceived prices

• Actual promotional activity does not drive price perception

• However, promotional activity seems to relate to a less accurate assessment of prices from consumers – promotion creates price opacity

*

Consumers’ perception is less

influenced by price reality

Consumers’ perception is influenced by price reality

59

IN MOST MARKETS, PRICE LEADERSHIP IS CONSISTENT OVER TIME

95

100

105

110

1 2 3 4 5 6 7 8

Price reality index over eight four-week periods


95

100

105

110

1 2 3 4 5 6 7 895

100

105

110

1 2 3 4 5 6 7 8

95

100

105

110

1 2 3 4 5 6 7 8

Bogotá

São Paulo Buenos Aires

Santiago

Number of periods of same leadership

8

7 8

8

60

HOWEVER, IN MEXICO, OTHER PLAYERS ASSUME THE PRICE LEADERSHIP POSITION FOR A SHORT PERIOD OF TIME Price reality index over eight four-week periods


95

100

105

110

1 2 3 4 5 6 7 8

Mexico D.F.

Number of periods of same leadership

5• Even though price

leadership is lost for three periods, consumers’ perception is not influenced by short-term price investments

• Rather a consistent long-term strategy seems to be more effective to build a sustainable price perception with consumers

61

DIFFERENT SEGMENTS CAN HAVE DIFFERENT PRICE RATINGS FOR THE SAME RETAILER

Price ratings can be uneven across segments

Retailer in Buenos Aires Retailer in São Paulo Retailer in Santiago





Frustrated shoppers on a budget



% of consumers who rated retailer as inexpensive or very inexpensive

62






63

MAPPING OUT THE COMPETITIVE CHARACTERISTICS OF EACH PLAYER

PromotionalactivityProact index

Pricereality


100

More expensive retailers

Less expensive retailers

Less promotional retailers (stable prices)

Highly promotional retailers (variable prices)

Marketaverage

Every daylowest price

EDLP (Every day low prices) working definition• EDLP retailers

are those that consistently have lower and more stable prices

69

THE MARKETS ARE AT DIFFERENT POSITIONS ALONG THE PROMOTIONAL ACTIVITY CONTINUUMPromotional activity index

Mexico BuenosAires

BogotáSantiago São Paulo

3.5x

Source:AC Nielsen, McKinsey analysis

70

Santiago

SÃO PAULO AND BUENOS AIRES HAVE HIGH LEVELS OF PROMOTIONAL ACTIVITY IN ALL PRODUCT CATEGORIESAverage promotional activity index by category quartile

TopAverage of ~8 categories with the highest promotional activity in each country

Second

Third

BottomAverage of ~8 categories with the lowest promotional activity in each country

Overall promotional activity index +

Bogotá B.Aires Mexico D.F. São Paulo Quartiles

–

Source:AC Nielsen, McKinsey analysis

71

90

95

100

105

110

0 1 2 3 4 5 6 7 8 9 10

THERE IS NO PURE EDLP PLAYER IN THE REGION, AND THE CONCEPT IS BEST THOUGHT OF A AS CONTINUUM


Buenos Aires

São Paulo

Santiago

Bogotá

Mexico D.F. Highest prices

Lowest prices

Rea

lity

pri

ce (

act

ua

l p

rice

in

dex

)

Promotional activity indexLow

promotional activity

High promotional

activity

72

90

95

100

105

110

0 2 4 6 8 10

THERE ARE MANY DIFFERENT PRICING STRATEGIES EVEN WITHIN THE SAME MARKET


Buenos Aires

90

95

100

105

110

0 2 4 6 8 10

90

95

100

105

110

0 2 4 6 8 1090

95

100

105

110

0 2 4 6 8 10

90

95

100

105

110

0 2 4 6 8 10

Price index vs. promotional activity index

São Paulo

Santiago Bogotá

Mexico D.F.

• In Mexico, promotional activity range from very low to very high

• Most retailers in São Paulo and Buenos Aires have high promotional activity

• Retailers in Santiago and Bogotá have low promotional activity

73

THE COMPETITIVE GAME AMONG RETAILERS VARIES ACROSS MARKETS


São Paulo

Bogotá

Mexico D.F.

Santiago

Buenos Aires

Correlation between promotional levels of each category

Mutual followershipPlayers have the same promotional intensity for the same categories

Independent behaviorPlayers have different levels of promotions for same categories

74

IN BOGOTÁ, A “MUTUAL FOLLOWERSHIP” PREVAILS, AS PROMOTIONAL INTENSITY IS SIMILAR FOR ALL PAYERS IN ANY GIVEN CATEGORY

Retailer A

Retailer B

Retailer D

Retailer C


Face cream

Cosmetics

Chocolate (candies)

Hair dyers

Beer

Dairy beverages

Cereals

Coffee

Edible oils

Margarine

Milk

Processed meat

Toilet paper

Cleaners

Toilet soap

Laundry detergent

Deodorants

Shampoo

Detergent

Tooth paste

Promotional activity index, ranked from highest to lowest market average

Categories

75

Cheese

Crackers

Pasta

Wine

Juices

Beer

Soft drinks

RTE desserts

Yoghurt

Breads

Edible oils

Fresh milk

Sugar

Toilet paper

Tooth paste

Personal hygiene

Toilet soap

Shampoo

Body deodorants

Laundry detergent

IN ALL OTHER MARKETS, LIKE BUENOS AIRES, RETAILERS HAVE DIFFERENT LEVELS OF PROMOTIONS FOR THE SAME CATEGORIES

Retailer A

Retailer B

Retailer C

Retailer E

Retailer D


Categories

Promotional activity index, ordered from highest to lowest market average

76Source:AC Nielsen, team analysis

Category promotional activity index

FEW CATEGORIES HAVE SIMILAR PROMOTIONAL ACTIVITYACROSS MARKETS

Soft drinks

Toilet paper

Diapers

Cookies

Coffee

Cereals

Beer

Toilet soap

Sugar

Snacks

Shampoo

Yoghurt

Deodorant

Edible oils

Industrialized Breads

RTD Juices

Laundry detergent

+

Av

era

ge

pro

mo

tio

na

l in

ten

sit

y a

cro

ss

ma

rke

tsBuenos Aires

São Paulo

Santiago

Bogotá

Mexico D.F.

77

Cheese

Crackers

Pasta

Wine

Juices

Beer

Soft drinks

RTE desserts

Yoghurt

Packaged bread

Edible oils

Fresh milk

Sugar

Toilet paper

Toothpaste

Sanitary protection

Toilet soap

Shampoo

Deodorants

Laundry detergent

Leve

l of e

xpan

dabi

lity*

+

Retailer A

Retailer B

Retailer C

Retailer E

Retailer D

*Expandable categories are those in which overall consumption increases when income increases (i.e., it is possible to increase per capita consumption)Source:AC Nielsen, team analysis

Promotional activity indexCategories

THERE IS NO CONSISTENT PATTERN AS TO WHICH CATEGORIES WILL BE SELECTED FOR PROMOTIONS ARGENTINA EXAMPLE

-

78

UNDERSTANDING DIFFERENCES IN PRICE PERCEPTION AT THE SAME LEVEL OF ACTUAL PRICES


Price reality (index of actual prices) vs. Price perception index

Significant differences in price perception in situations with very similar real prices index

Price perception

90

95

100

105

110

0 20 40 60 80 100

Price reality

B A

São Paulo

79Source:Team analysis

SOME RETAILERS GET MORE CREDIT THAN THEY DESERVEAverage % of consumers that selected top 2 box (agree/strongly agree)

ILLUSTRATIVE

Price perception

•Out of the three main drivers of price perception for São Paulo, retailer A has higher performance on Reference Price and Promotions, and similar performance on Range Architecture

•One possible explanation for a better perception on reference price despite similar price reality might be execution (i.e. better choice of KVIs and categories, etc)

Reference price

Range architecture

In-store environment

Promotions

Communications

Retailer with worse price perceptionRetailer B

Retailer with better price perceptionRetailer A

GAP

17

-12

10

-6

-2

72 48

80

AND THIS DIFFERENCE IS EVEN STRONGER WHEN ONLY THE MAIN CONSUMER SEGMENTS ARE CONSIDERED


ILLUSTRATIVE

Breakdown of main store shoppers by segment

%

Performance on key levers according to "bargain hunters"

% top 2 box (agree/strongly agree)

100%


Retailer with better price perception

Range seekers

Quality and time

Indifferent shoppers

Retailer with worse price perception)


Reference price

Commu-nications

Range architecture

In-store environment

Promotions

Retailer A Retailer B

80 36

Price perception

Retailer A delivers superior performance on Reference price and Promotions, which account for 60% of the drivers of price perception for "bargain hunters"

Gap

24

-11

-5

-10

16

Bargain hunters’price perception

100%

81

DIFFERENT SEGMENTS ARE ATTRACTED BY DIFFERENT PRICING STRATEGIES


Highest prices

Lowest prices

Rea

lity

pri

ce (

act

ua

l p

rice

in

dex

)

Promotional activity indexLow

promotional activity

High promotional

activity


High Income Bargain hunters




82

MARKETS WITH HIGH PROMOTIONAL ACTIVITY TEND TO HAVE A DISPROPORTIONAL SHARE OF THE BARGAIN HUNTERS SEGMENTS

2,2

2,2

3,0

7,0

7,6São Paulo

Buenos Aires

Bogotá

Santiago

Mexico D.F.

*Includes both “Avid bargain hunters” and “High-income bargain hunters”Source:Consumer survey, AC Nielsen, team analysis

39

31

30

44

58

Promotional activityProact index

Size of “Bargain hunters” segments*%

• Significant impact on retailers’ strategy as:– Avid Bargain

hunters tend to have the lowest basket size and the least loyalty among all consumers

– High-income bargain hunters tend to visit more stores and have low loyalty in some markets (e.g., São Paulo)

83

ISSUES TO CONSIDER FOR INDIVIDUAL RETAILERS

• Which segments of consumers are most attracted to you? Which do you want to be? Which format is most appropriate to each segment?

• What is driving your promotional activity? Your suppliers, your category managers or the consumer?

• Where are you at the EDLP-HiLo continuum versus your competitors? Where should you be?

• Are you getting credit for value? What are the drivers of price perception for your consumers?

• What would it take to change your pricing approach? What are the implications for you, your suppliers and your consumers?

84


1. Consumers are different - 5 distinct consumer segments in Latin America with different characteristics, attitudes, behaviors and preferences for retailers

2. Forget pure EDLP - No pure EDLP player exists and the concept is best thought of as a continuum, with retailers employing different price and promotional strategies

3. You get the consumer you deserve – Hi-lo retailers in São Paulo and Buenos Aires have significantly more promotional activity and attract disproportionately more bargain hunters

4. Reality equals perception – almost - Reference price is the key driver of consumer price perception, but with important variations by segment. Consumers generally figure out the low price players, but not in a highly promotional environment

5. Some of you get more credit for value than others – Some retailers have better price perception than reality through working different levers on different segments

the coca-cola retailing research council – latin america

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