Publish in Perspectives - Wednesday, April 8, 2020
The urgent need to fast-track medical and pharma imports, as well as lower tariffs, provide a unique opportunity to logistics players to lobby for the modernization and professionalization of national customs operations. (Illustration by Americas Market Intelligence)
COVID-19 may in fact kick-start e-commerce in Latin America.
BY DIEGO RODRIGUEZ
Those of us who travel extensively all have our own COVID travel anxiety story. I was fortunate to catch one of the last flights from Lima to Miami on March 15th, hours before Peru shut down all international flights. I then self-isolated for two weeks, quickly adapting to life under quarantine. That experience prompted me to ponder the effects that COVID-19 will impact the industry I study each day, Latin American logistics.
All industries will suffer, particularly in Q2 when US, European and Latin American markets will suffer a forecast 15-30 percent downturn. However, amongst the widespread economic carnage there are bright spots, particularly in logistics.
Quarantining forces change in consumer behavior, beginning with the need to buy non-essential products through online channels. While “essential” goods retailers like grocery stories, pharmacies and hardware may remain open, most other types of retailers will be shut for at least two weeks in Latin America, possibly four to six weeks. In the short term, customers will have to buy online, many for the first time. COVID-19 may in fact kick-start e-commerce in Latin America the way that SARS did the same in China in 2003. What is more, specialty retailers, already suffering from online competitors like Amazon, Alibaba and MercadoLibre, may simply not recover from coronavirus, obliging customers to keep buying online.
LAST MILE DELIVERY SURGE
The more significant change, for the logistics sector, is the sudden uptick in online purchase and home delivery of groceries, medicines, personal care and cleaning products, as well as restaurant orders. In China, JD.com, the country’s largest online retailer, experienced fourfold growth in the sale and delivery of rice and flour products in February 2020. Given the relative immaturity of Latin American e-commerce, the comparative jump in Q2 could be even stronger. From March 1-15th, online sales of vitamins, supplements, hand sanitizers, gloves, face masks, and personal care products in Mexico expanded 100 percent as consumers stocked up on tools to defend the health of their households.
Matias Laks, the country manager for Rappi in Colombia, stated in an interview for the newspaper Portafolio that the delivery app experienced a jump of 40 percent in the number of transactions on its platform during the week of March 13th, which includes mostly purchases of prepared foods and groceries. Another supermarket executive from a large retail chain in Latin America (who declined to be named) estimated a hike of 25 percent in its online sales between March 1st and 15th.
The likelihood of sustaining these growth rates over the long run will depend on the degree of restrictions put in place by governments to limit the movement of people. In Latin America, the most stringent restrictions are being enforced in Peru, Ecuador, Argentina, Chile and Colombia with Brazil and Mexico as much as two weeks behind in their policy reaction time.
Last mile logistics can and should make the case to regulators that their service is essential. Rappi, the Colombian leader in this category, has led the lobbying efforts in Bogota. To help minimize contact between delivery personnel and customers, Rappi and others are adopting measures like online pre-payment and dropping off deliveries in front of the door to avoid any physical contact.
As quarantine measures were imposed, product hoarding became the norm in several LatAm countries. That phenomena may delay the kick-start in on-line sales of basic staples as customers wait to whittle down their food inventories before buying again. Such was the case in China, where customers binge shopped in January but after mid-February, physical home delivery ecommerce grew 22 percent. With online remaining the only channel for many products, coronavirus will create in the next four weeks more new e-commerce customers in Latin America than would otherwise have come on board over the course of a year or more.
The surge in last mile delivery will also boost demand for the types of modern warehousing that supports Latin America’s burgeoning e-commerce sector. While the big four — Amazon, Alibaba, MercadoLibre and Walmart — are best-poised to capture the gains of online purchases, traditional retailers with only nascent online fulfillment operations will scramble quickly to promote and service online sales. Providing a turn-key solution to said retailers becomes an opportunity to 3PLs.
OVERCOMING BOTTLENECKS = OPPORTUNITY
Resolving outstanding obstacles with last mile fulfillment of e-commerce, which the COVID quarantines are bound to do, leaves one acute problem: customs and cross-border movements. Poorly equipped and trained and often corrupt, Latin American customs unions have proven to be a bottleneck to the promising potential growth of cross-border logistics. A large number of e-commerce SKUs are simply not manufactured domestically and must be imported, including medical equipment and devices.
The urgent need to fast-track medical and pharma imports, as well as lower tariffs, provide a unique opportunity to logistics players to lobby for the modernization and professionalization of national customs operations. More effective than recommendations would, in fact, be volunteer efforts by logistics players to provide training and even finance the necessary equipment investments to speed up and make more transparent customs operations.
One last area of revenue opportunity for the logistics industry will be the optimization of inventories and the implementation of JIT (Just in time) processes, not just for manufacturers but also for retailers and e-commerce merchants. Supply chain shortages, initially in China but now also from Europe and US suppliers is the driver of demand for more precise inventory management.
On the cost side of P&Ls, the plunge in oil and fuel costs will bring relief to all logistics and transportation companies, offsetting some of their revenue losses.
Diego Rodríguez is a Senior Director at Americas Market Intelligence, handling dozens of market analysis and competitive intelligence studies throughout Latin America and serving as a consultant to more than 20 multinational companies.
Republished with permission from AMI Perspectiva.