Thomas White Global Investing
Peru Stamp
December 31, 2010
A Postcard from the Americas
Peru: Retail Sector Picks up along with Economic Growth

Checkout point in a store

Business Monitor International expects the Peruvian mass grocery retail sector to expand by a staggering 80% over the next five years.

Retail giant Wal-Mart was recently quoted as saying that it was not looking to expand operations into Peru. For a company that rode the recession relatively well, one wonders if the world’s largest low-cost retailer may have missed the mark here. Truth be told- Peru’s retail market is booming, spurred on by a rapidly growing economy and rising consumer confidence.

The latest government estimates expect the Peruvian economy to grow 8% this year before slowing to 6% in 2011. The economy is the fastest growing in Latin America and indeed one of the most rapidly expanding in the world. Third quarter gross domestic product (GDP) rose 9.5% year-on-year, pushing growth for the first nine months of the year to 8.6%. Driving GDP ahead was the retail sector – expanding 9.6% in the third quarter.

When asked to give reasons for its absence in Peru, Wal-Mart said that it was looking to focus more on its operations in Chile, another growing giant. But others are not complaining. Supermarket and cloth retailers have had reason to rejoice in Peru this year. Supermercados Peruanos, which is the second largest supermarket chain in Peru, launched 10 new stores in 2010 already. And it’s not just the capital of Lima which is interesting retail investors. Retailers are also looking to diversify reach outside Lima, and shopping centers have mushroomed in cities such as Arequipa, Huancayo, Trujillo and Cajamarca. While Wal-Mart declined, other retailers have checked in. The Chilean retail group, Cencosud, announced earlier this year that it would invest $230 million to open 10 new supermarkets in the Peru. Another Chilean company, Falabella, also announced expansion plans.

It is not just economic success that is cushioning the retail boom in Peru. Retail sales have also been spurred by the easy access consumers have had to credit. From just 210,000 credit cards in 1996, there were more than six million credit cards in circulation in 2009. Around 80% of Peru’s households are expected to have at least one credit card by 2016. Easy money need not always lead to easy spending, but in Peru’s case – the growth of a strong middle class has formed the backbone of domestic consumption. Inflationary pressures have remained relatively benign, allowing the Peruvian central bank the freedom to hold its interest rate steady in November.

Will there be a cloud to damper such a rosy horizon in Peru? Risks do come into play. The country’s infrastructure needs to be upgraded. The Presidential elections in April 2011 will obviously be crucial for Peru’s future. These elections will determine the successor to Alan Garcia Perez, but none of the candidates in the fray including former President Alberto Fujimori’s daughter, Keiko Fujimori, have indicated a dramatic shift in market-friendly policies. Moreover, the country has strong fundamentals – its public finances remain sound and it has a stable banking sector. These are factors that should drive retailing ahead – the market is still young and growth is sustainable. Shopping never sounded so good.

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