Latin America: Lifestyle changes driving fastfood expansion
The lifestyle of Latin American households has been transformed in recent years by a number of factors. One factor that directly comes to bear on food preferences is the entry of women into the work force. The impact can clearly be seen in Peru, where the percentage of women in the work force increased from 29% to over 55% during the past decade. Even though the nation experienced a prolonged economic slowdown in recent years, fastfood sales surged upward.
Focusing on major urban markets
Urbanization and overall population expansion bode well for fastfood expansion in Latin America and other regions of the developing world. At present 78% of South America's population lives in urban areas. In nations like Argentina, Chile, Mexico, Peru, and Venezuela more than 20% of the nation's population is concentrated in the capital city. This concentration of population allows major fastfood franchises to carve out a strong market share while focusing on only one or a handful of urban markets per nation.
International fastfood chains entered Latin America by positioning their units in the vicinity of households in the top two socio-economic strata. Such neighbourhoods are highly concentrated in the leading metropolitan areas. Only recently have the major chains begun to target middle-income areas and secondary urban markets, although that is where the most dynamic growth is likely to occur over the next few years.
At first, McDonald's and other international franchises experienced a cost competitive disadvantage due to a need to import the majority of their raw materials. Recently McDonald's has turned to local sourcing of its bread, chicken, ice cream, milk, onions, and tomatoes. Patented products like sauces, cheese, and potatoes still come from the United States, as is the case with recycled paper and non-toxic packaging.
McDonalds expands in Peru and Colombia
Both local and international fastfood chains have fared well in Peru in recent years. During 2000 McDonald's invested more than US$4m in expanding the number of units in Lima to 14. McDonalds anticipates an earnings increase of 72% this year.
The first restaurants were concentrated in affluent districts of the capital, but by the end of this year six will located in middle class areas. At present all units are located in the capital of Lima, which accounts for 30% of the nation's population. By the end of this year, the number of McDonald's restaurants in Lima will reach 17.
McDonalds is preparing to expand into secondary urban markets within the next year. The first restaurants outside the capital are likely to be located in Cusco and Arequipa in the southern part of the country and Chiclayo and Trujillo to the north.
In Colombia McDonald's plans to invest US$75m over the next three years to open a total of 50 new restaurants nationwide. Management's goals for Colombia include generating direct employment and laying the groundwork for long-term profits from 2005 through 2010. Profit margins have held steady there in spite of the difficult economic climate.
Tricon leads in the Mexican market
Two franchises of Tricon - KFC and Pizza Hut - were pioneers in Latin America and other parts of the developing world. KFC has been present in the Mexican market for 38 years. Unfavourable market and cultural factors limited growth in the early years, but a much more positive market atmosphere prevails today. The percentage of Mexican women in the workforce rose from 34% in 1990 to over 40% today, increasing household income as well as the demand for quick meals.
Tricon, which operates KFC and Pizza Hut restaurants in Mexico, has experienced double-digit expansion every year since 1996. During 2000, Mexican sales amounted to US$250m. Strong expansion should continue through this year, with KFC projected to sell 25 million chickens. About 95% of Tricon's suppliers are based in Mexico.
For Tricon, Mexico is its second most dynamic market after China. The company has 350 restaurants nationwide and is the undisputed fastfood leader with a 30% market share. KFC is the strongest single franchise with a 21% share. Management expects to be operating more than 400 units in Mexico by the end of this year and reach a thousand units no later than 2008.
The two main players that have emerged in the region are McDonald's and the Tricon restaurants (KFC and Pizza Hut). International franchises have established a strong presence in most nations of the region, yet there is still room for local chains to thrive in metropolitan areas.
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