The coronavirus has claimed an unexpected victim — the independent international distributor in Latin American and Caribbean markets.
Small and mid-sized manufacturers and brand owners of consumer-packaged goods are seeking to quickly regain the levels of performance they experienced pre-Covid. But retail consumer markets across the globe are in the throes of an economic downturn caused by the coronavirus pandemic. Recovery could take years. Our clients cannot wait for markets to recover fully. They are seeking solutions for near-term revenue growth. We advise that a viable solution for small and mid-sized companies in the Association of Southeast Asian Nations, China, the European Union and the United States is accessing new customers in Latin America and the Caribbean (LAC). Also, we advise our clients not to repeat the same old mistake of entering the LAC region by the traditional method of appointing an independent local distributor.
The seminal study performed on the relationship between the local international distributor and foreign manufacturers/brand owners by Harvard Business School Professor David Arnold concluded that these relationships are almost always doomed to fail because of the fundamental misalignment of goals between the parties. However, there is hope for the small and mid-sized corporation that endeavors to enter LAC but is deterred by risky joint ventures and distribution agreements with local partners.
The coronavirus pandemic, for all its negative effects, has reshaped consumer habits in Latin America and the Caribbean in favor of online shopping. Consequently, the LAC region is experiencing a significant acceleration in the growth of e-commerce penetration of retail sales. Also, the readiness of the logistics sector in the LAC region to serve e-commerce is at an all-time high, especially in the Republic of Panama, which has served as the logistics hub for the Americas for decades.
This confluence of logistics and market factors has opened a window of opportunity for manufacturers and brand owners to disintermediate their quest for new customers in Latin America and the Caribbean, control their marketing in the LAC region at a strategic level, and thereby minimize the costs and risks of entering LAC. Although Professor David Arnold may have been premature in writing the epitaph for the independent distributor in the LAC region in 2000, the current rendering of the obit, which is precipitated by the increase in retail e-commerce distribution rates post-Covid, may prove to be dead on (pardon the pun).
From which city in LAC can a foreign business best execute a regional, direct-to-consumer, e-commerce business model that does not involve an independent international distributor?
In 2019, DHL and the Panama Ministry of Commerce & Industry (collaborating as the Global Center of Excellence) published a white paper, E-commerce in Latin America. It benchmarks the strengths of Panama and other cities in the Americas that have traditionally served as logistics hubs in the region, regarding readiness to serve as the preferred hub for the growth of e-commerce in Latin America. Other than Panama, the hub cities studied were Houston, Los Angeles, Mexico City, Miami, Montevideo, Santiago de Chile and São Paulo.
The Benchmark Study found that Panama is the preferred hub for growth of e-commerce in Latin America, with an overall benchmark score of 90 percent. Miami came in second, with an overall benchmark score of 80 percent.
The 90 percent score reflects the fact that Panama brings to bear a comprehensive set of capabilities and geopolitical advantages (i.e., dollar-based currency, stable constitutional democratic politics, the Panama Canal) rather than any one attribute.
The empirical evidence indicates that Panama is ready today to serve as the preferred logistics hub for e-commerce in Latin America and the Caribbean. Foreign companies can sell direct to consumers and avoid the dysfunctionalities of the relationship with local distributors by consolidating cross-border manufacturing and logistics in Panama. Using Panama as the regional logistics hub, e-commerce businesses will be able to provide faster fulfillment times, enable the provision of end-to-end services (i.e., returns and replacements), and provide higher quality customer service.
Additionally, the Panamanian government passed legislation in August 2020 for a new investment regime for the Establishment and Operation of Multinational Companies for the Provision of Services Related to Manufacturing (EMMA).
EMMA exemplifies the diverse and integrated investment regimes that Panama offers foreign investors. Foreign companies operating in Panama with an EMMA license enjoy significant tax, labor and immigration incentives, which include a reduced income tax rate, a fixed capital gains tax at 2 percent, an exemption from import tax on all types of merchandise and immigration benefits.
The EMMA investment regime is designed to tip the risk-return scale such that the decision to use Panama as a hub for a regional e-commerce strategy is clearly net positive. The combination of the superior e-commerce readiness of Panama’s logistics sector and the tax, labor and immigration incentives enjoyed by the EMMA license holders makes the execution of a direct-to-consumer model in the LAC region less risky than it has ever been and removes the need for an independent local distributor.
In sum, an unexpected victim of the coronavirus is the independent distributor in the LAC region. Covid has permanently raised e-commerce penetration rates in the region at a time when e-commerce logistics readiness in Panama is outperforming other traditional logistics hub cities in the Americas as the preferred hub for cross-border e-commerce.
Anthony Robinson is Head of the Latin America and Caribbean Practice at YK Law. He advises clients on the regulatory requirements and strategic corporate considerations that affect the import, export, and distribution of consumer-packaged goods, including advice regarding the laws and regulations that govern advertising materials and related efforts to generate sales in Latin America and the United States.