Private Labels Will Wrap Up Success in Uruguay

By Kenneth Joseph

Heads up on a new market possibility! Uruguay, the South American nation nestled between Brazil and Argentina on the South Atlantic, is taking the fast track toward liberalizing its market. Although U.S. food exports to this market haven’t taken off yet, the evolving supermarket sector in Uruguay beckons to the U.S. entrepreneur. Consumer-oriented food products are just beginning to make headway, and the use of private label is probably just a year or so away.

The time is ripe now for U.S. exporters to work on relationships with importers and retail grocers, preparing a foundation for future business and ensuring the positive perception of customer service.

MERCOSUR Made the Difference

Its MERCOSUR¹ membership that began in January 1995 formalized Uruguay’s commitment to getting its economic act together. Government downsizing, along with cutting deficit spending and controlling inflation, became top priorities.

And the numbers reflect how successful the new tactics have been. Uruguay’s gross domestic product (GDP) grew over 5 percent in 1996 and 1997, with continued growth expected for the near future. At 15 percent in 1997, inflation was at its lowest rate in 28 years, with single digit inflation expected for 1998.

Market Liberalized in Early 90s

When the Uruguayan government officially opened its borders for business in the 1970s, it socked imports with tariffs averaging 200 percent. The 1990s began a move toward liberalization with significantly reduced tariffs–now averaging 35 percent–with more cuts to come.

Uruguay’s MERCOSUR membership brought home the benefits of tariff elimination. Trade liberalization among the partners brought increased trade for all parties.

Meat, wool and leather lead Uruguay’s healthy $2.7 billion worth of global exports (most go to MERCOSUR countries). What Uruguay has been importing–mostly capital goods–is indicative of the country’s focus on infrastructure development.

Though Uruguay’s trade is highly concentrated with other MERCOSUR partners, the United States places third in the trade line-up with exports of $430 million to the country, so far mostly machinery, equipment and industrial supplies.

Liberalization Shakes Out Food Sector

Opening up Uruguayan trade doors has spelled the end of many local food industries and has forced efficiencies on marginal firms. Sectors doing well in the market-driven economy include: dairy products (except ice cream), beef, cold cuts, fish products, fruits and vegetables, rice and bakery products.

Brazilian and Argentine food industries haven’t wasted any time taking advantage of their preferred MERCOSUR membership--and of gaps in the Uruguayan domestic food industry. Along with Chile, they’re top suppliers for the mass consumption market.

Imports from Europe and the United States are aimed at the middle and higher income sectors and tend to be more upscale.

Supermarkets Gaining Market Share

With yearly sales of $1 billion, supermarkets now account for only 35-50 percent of the country’s total food sales, with traditional stores taking up the remainder. In neighboring countries, supermarkets generally control 70 percent of market sales.

This is expected to change soon with the advent of hypermarkets (9,000 square meters or more) and the arrival of a few strong foreign supermarket chains. The current breakdown on where imported food is sold:

Add-ons Hit Non-Member Imports U.S. food exports to Uruguay pay between 13 and 23 percent duty. MERCOSUR products have the advantage of mostly duty-free status and proximity.

Other add-ons affecting all products include distributor markups of 30-70 percent, retail markups of 30-50 percent and a value-added tax of 23 percent. (MERCOSUR doesn’t eliminate these costs for members.)

Despite the average markup to a stiff 3-1/2 times over product cost, the main problem facing U.S. exporters in this market is volume limitations.

Once the supermarket sector gets more competitive and increases its market share, the increased volume will encourage direct importation. This will be a critical development for U.S. producers. Before supermarkets develop store brands, producers should woo importers--with customer service and products in hand.

¹ Argentina, Brazil, Paraguay and Uruguay claim full membership in this southern common market that promotes trade between members by reducing duties. Chile and Bolivia are associate members.

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The author is an agricultural specialist with the Office of Agricultural Affairs at the U.S. Embassy in Buenos Aires, Argentina. Tel. (541) 777-8054; Fax: (541) 777-3623; E-mail: agbuenosaires@fas.usda.gov

Last modified: Thursday, October 14, 2004 PM