Managing Director & Senior Partner
So far, much of the focus on the unfolding COVID-19 pandemic has been on China, Western Europe, and the United States. But this unprecedented human and economic crisis is posing unique challenges for Latin America as well. These countries are home to large numbers of economically vulnerable citizens, many of whom live in multigenerational households. According to one estimate, 20% of Latin Americans are highly vulnerable financially, with less than a week of financial reserves.
The measures being taken to slow the progress of the disease are unprecedented in the speed and severity with which they are slowing economies. Growth projections across the globe are being adjusted downward, indicating a growing consensus around a coming recession. A macroeconomic indicator from the UN Economic Commission for Latin America and the Caribbean projects that GDP in the entire region will decline from modest growth of around 0.1% in 2019 to −3% to −4% in 2020, a direct result of economic restrictions and exposure to lower oil prices.
Latin American countries are already experiencing increased volatility, with market declines and unstable exchange rates in Brazil, Mexico, and Argentina. Given the progression of COVID-19, we expect the economic environment to become even more challenging. As of April 8, Mexico and Brazil are experiencing approximately 15% growth in new cases daily and reported cases are doubling every five days. But testing is still limited, suggesting that the outbreak is relatively underreported and spreading faster than we realize.
The pandemic and associated restrictions will hurt companies of all sizes as revenues dry up. Even for companies offering essential goods, such as consumer staples and health care, the expected consequences are significant: more than 50% of the more than 200 companies worldwide that BCG surveyed are forecasting a negative impact on revenue and earnings in 2020. Moreover, another BCG survey revealed that nearly 80% of Spanish-speaking South American consumers plan to spend less in 2020.
Latin America’s small and medium-size business (SMB) sector will likewise be greatly affected by the economic restrictions and resulting recession, with significant long-term consequences as these businesses struggle to remain solvent. This is especially worrisome because SMBs play a vital role in people’s lives on the continent and are a large source of both formal and informal employment and income for millions.
Here we focus on two specific types of SMBs: on-premise food service (restaurants, bars, and cafes) and traditional-trade stores (corner stores, bodegas, and mom-and-pop shops). These businesses are an especially integral part of Latin American economies—traditional channels account for more than 95% of outlets and more than 50% of food and beverage sales—and they are an essential employer and part of the value chain. They also will be some of the businesses that are hardest hit by economic restrictions. (See Exhibit 1.) Restaurants and traditional-trade stores have an estimated two to three weeks of cash on hand, but many have much less than that and quickly become unprofitable when faced with declining demand. Their profits represent their owners’ take-home income; when that disappears, they have minimal personal reserves with which to weather a prolonged period without earnings.
According to one of our consumer-packaged goods clients, as of April 8, more than 90% of on-premise food service SMBs in Colombia, more than 70% in Brazil, and more than 30% in Mexico have closed. Delivery services and e-commerce are growing amid the economic restrictions, but these will mainly benefit larger businesses. In Peru, where a state of emergency was announced in mid-March, supermarket e-commerce is up 12%, with a 49% increase in ticket size. In Brazil, Mexico, and Colombia, Google searches for delivery services like Rappi, Uber Eats, and iFood were up 95% in the last two weeks of March. These services can provide some ongoing cash flow for restaurants, but they can charge up to 30% commission and require a formal contract, making them inaccessible to very small or informal SMBs.
Restrictions associated with COVID-19 will put the entire on-premise food service industry at risk. With a potential 60% to 80% decline in demand during a single month, approximately 75% to 80% of these outlets in Brazil, Mexico, Colombia, and Peru will be highly vulnerable to closure, putting 3.8 million to 4.2 million jobs at risk. Traditional-trade stores such as tienditas and mercearias, however, will likely see an initial increase in demand for staples, followed by a long-term decline in revenue as recession hits and disposable income shrinks. These small stores also often act as lenders to their customers, putting even greater pressure on their cash flow. Given the near-term demand shocks that are expected and assuming annual GDP growth of −1% to −6% (the projected range for individual countries in Latin America), 20% to 25% of traditional-trade stores will be highly vulnerable to closure, putting more than 800,000 jobs at risk in Brazil, Mexico, Colombia, and Peru. (See Exhibit 2.)
While SMBs without a permanent commercial location, such as street vendors and home-based businesses, may be more resilient, the impact on the broader sector will have a long-term detrimental effect on the economy. Broken credit, damaged supplier relationships, and lost customers will make it challenging to bounce back once the economy recovers. In the absence of interventions to support SMBs, a month of economic restrictions could, at a conservative estimate, result in the loss of 4 million to more than 5 million jobs in both the on-premise food service and traditional-trade sectors in Brazil, Mexico, Colombia, and Peru. The loss of these businesses would have downstream effects on customers, suppliers, distributors, and other stakeholders and inhibit the ability of Latin America’s economies to rebound once the recession ends.
The effects of the crisis on consumer sentiment and behavior are also likely to linger. In China, for example, even since the country emerged from lockdown in late March, 93% of consumers are still trying to avoid public spaces and 35% of consumers are concerned about eating at restaurants. Just as SARS at the beginning of the century jump-started China’s e-commerce sector, COVID-19 may presage secular changes to the way consumers behave—an effect that is likely to be felt globally. Moreover, subsequent waves of the disease and recurrent rounds of economic restrictions—we already see China closing its borders despite the end of domestic transmission—could cause the economic pain to persist even longer. Economies will gradually reopen for business, but normalcy will take time to reassert itself.
Governments around the world are providing economic stimulus and bailout packages in response to the crisis. In both the US and Europe, these packages exceed previous records set in the 2008 financial crisis, underscoring the severity and precarious state of the global economy. They may be only the first of a number of investments, however, with further support needed as recession materializes.
In Latin America, a large government-sponsored economic stimulus will be challenging owing to an already delicate financial environment and limited distribution mechanisms for reaching the informal sector, where over half of the population works. As of the second week of April, government actions are still in development and are evolving rapidly as the pandemic progresses.
The following examples from Latin America and around the world illustrate four broad categories of support that governments could consider in order to protect SMBs:
As important as the promise of aid is, how it is distributed will make all the difference. Challenges with distribution can limit the positive impact of a stimulus plan. SMBs are a highly informal, fragmented market, which complicates the distribution of relief funds. This is where the private sector has a role to play. As Ely Mizrahi, president of Instituto Foodservice Brazil, notes, “We need a solidarity network among public and private sectors to develop the solution." A coordinated effort by all stakeholders, including government, SMBs, larger private enterprises, distributors, and financial players, is critical.
One way the private sector can partner with governments is to distribute liquidity funding and help educate SMBs on how to access federal programs and grants. Mobile-based credit or money transfers, for example, can help subsidies reach recipients and provide microfinancing to SMBs at a faster rate. In Mexico, Credijusto provides asset-backed loans and equipment leases to SMBs, enabling business growth and financial upskilling. In Peru, Billetera Móvil, a mobile wallet company is working with local governments and the National Confederation of Private Business Institutions to distribute COVID-19 aid directly into the mobile wallets of 500 independent vendors—no bank account required—allowing them to withdraw funds at any ATM free of charge.
Other ways in which the private sector can lend support to help SMBs weather the COVID crisis and build resilience include the following: