Brick-and-mortar retail faces major challenges in pandemic - roundtable

Brick-and-mortar retail faces major challenges in pandemic - roundtable

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The great COVID-19 lockdown is posing difficult challenges for the brick and mortar retail sector in Latin America that will likely result in a faster and steadier improvement for e-commerce sales in a region where online purchases still have a low level of penetration, executives and analysts said in a discussion moderated by LatinFinance.

“I don’t think we were prepared to see the level of level of growth and online penetration that happened over the last two or three months,” said Federico Sandler, head of investor relations at the e-commerce company, MercadoLibre.

Speaking during the first of LatinFinance's Pandemic Crisis Response round table series, Sandler said that social distancing measures have given a strong impulse to e-commerce in the region. In Chile and Colombia, the growth that the company expected in two to five years occurred in a matter of just months, he said.

The extent of the transformation towards e-commerce in the aftermath of the crisis could be modest due to low initial penetration, however it is important in relative terms.

“We estimate we can gain maybe two percentage points,” said Sandler, highlighting that as still being significant for the region where e-commerce penetration today is just 6%.

This is a cautiously optimistic scenario that takes into account the possibility that some penetration gains of e-commerce will flow back to physical retail, Sandler said.

For the brick and mortar sector, the lockdown has instead meant a collapse in consumer demand, prospects of slow recovery, and increased tensions between tenants and developers.

“The drop in demand that this pandemic has created is something unlike I’ve ever seen before,” said Robert Wagstaff Managing Director of the turnaround and restructuring firm, Conway Mackenzie.

Depending on the sector, Wagstaff projects a fall in demand ranging from 25% to 50% year over year and a recovery that could last two to three years. Pharmacies, food, and liquor have been the least affected.

A rebound in consumer spending, as the one seen in the past month in the United States, is unlikely in Latin America said one executive.

The US government has invested more than two trillion to keep the economy afloat, distributing checks to people who qualify, said Jose Larroque, chair of North America Real Estate at Baker McKenzie. “That gives a lot of liquidity to the market for people to come back in. We’ve not seen that in Latin America,” he said.

Except for Chile and Peru, government efforts in Latin America have been in containing the virus and less on the economy, Larroque said. The economies of Latin America have also been more hard-hit that the American economy where there has been a continuance of manufacturing.

The relationship between retail developers and their tenants has also been disrupted during the lockdown months.

“There are scenarios where tenants have said, ‘hey during the months that we’re going to be shut down I’m just going to stop paying you,’” said Juan Carlos Mier y Teran, head of real estate Mexico & Latin America at HSBC, referring to tenants with strong bargaining power that have forced developers to turn to banks to renegotiate their loan payments.

Liquidity is at the heart of the problem for both tenants and landlords, and this will require both sides to sit down and work out their differences with creative solutions, said Larroque.

“At the end of the day, we’re in it together,” he said.