Peru's emerging consumer: Whoppers, alpacas at 10,000 ft

HUANCAYO, Peru Thu Aug 30, 2012 6:11am EDT

1 of 5. An Andean woman stands at the counter of a foreign fast food restaurant at a shopping mall in Huancayo city, in Peru's central Andes, August 17, 2012.

Credit: Reuters/Janine Costa

HUANCAYO, Peru (Reuters) - Between babies in blankets tied onto women's backs and boys in chullos, the traditional Andean stocking hat with earflaps, Joel Reyna and his girlfriend strode up to the glowing orange sign of one of the world's highest Burger Kings and did what was once unthinkable in Huancayo: they ordered a Whopper Jr.

That, in a nutshell, captures the transformation underway in Peru's economy - the fastest-growing of the larger Latin America countries. Peru's provinces, long ignored as unprofitable backwaters by elites in Lima, are booming as foreign and domestic companies target an emerging class of consumers.

Two decades ago, Huancayo - a city of 400,000 that sits in a farming valley 10,731 feet (3,271 meters) above sea level - was overrun with leftist rebels. Now, it has a shiny new shopping center with all the trappings of a typical mall in the United States, right down to the elevator music, prickly Rent-A-Cops, and an arcade called Happyland.

"Things have gotten better compared to years past. Now we are more like Lima in terms of conveniences," said Joel Reyna, 20. While his girlfriend ate a burger, he opted for fried chicken at KFC in the food court.

Helped by growing access to consumer loans and a government that is in its best fiscal shape ever, Peru is on track to grow 6 percent this year even as exports of minerals, the traditional foundation of its economy, slump on a slowing China and feeble Europe.

Lofty prices for Peru's gold, silver and copper supercharged its economy for much of the past decade, when in some years it grew as much as 9 percent. But domestic demand has largely led expansion since Peru emerged from the 2009 global slump as well-capitalized banks lend out money for everything from car purchases to housing construction.

Several Peruvian provinces have grown faster than the capital in recent quarters thanks to two crucial sectors: retail and construction, which expanded respectively 7.2 percent and 14.7 percent nationwide in the first half of this year.

Construction growth in 15 of Peru's 24 provinces outpaced a 15 percent expansion in Lima in 2010, when the overall economy grew 8.8 percent. Three Peruvian regions also had retail sales growth that beat the 10.2 percent pace of Lima and all were close to the broader retail average of 9.7 percent.

Though more recent regional data isn't available, anecdotal evidence suggests the trend continues.

"The provinces have shown a certain dynamism and demand for malls of international size over the past two years. Because of this we don't doubt that explosive demand will come from them," said Mauricio Mendoza, general manager of the Mall Aventura Plaza group, which is building shopping centers nationwide.

Its owners include the Chilean retailers Falabella FAL.SN and Ripley RIP.SN. Foot traffic at its mall built a little over a year ago in the Andean city of Arequipa grew 34 percent in the first half of this year.

"We feel there is a lot of space for growth. In Peru there are 1.5 malls for every million people. In Latin America, the average is 2.5 malls for every million people."

Its competitors include, among others, Chile's Parque Arauco and the Real Plaza group, which owns the mall in Huancayo and belongs to Intercorp, the financial holding company of No. 4 Peruvian lender Interbank.

Though a treacherous world economy makes it dangerous to bet on the sustainability of growth in Peru, dozens of private-sector economists think it will expand 6 percent again in 2013, according to a monthly survey by the central bank. That contrasts sharply with Brazil, where the region's largest economy is lurching toward 1.7 percent growth this year and is expected to recover to 4 percent next year.

To ride out potential turbulence, President Ollanta Humala has ramped up public investments planned for this year by some 120 percent as the difficult global economy makes some firms tepid about investing.

The government's biggest problem, and it is an enormous one, is that it often lacks the administrative machinery to spend quickly. So far this year it has spent only a third of its capital budget and Finance Minister Luis Miguel Castilla has cut red tape to speed approvals for infrastructure projects.

Peru sidestepped economic shrinkage that hurt many of its peers during the global troubles of 2009 and grew nearly 1 percent, though conventional wisdom says it would have expanded more if the state had spent its fiscal cushion faster.

That cushion is now larger than ever . Peru's international reserves have doubled to a record of nearly $60 billion since 2009 (nearly a third of total GDP), its net public sector debt load is 6 percent of GDP, and its public sector surplus in the first half of the year was a 7 percent of GDP. Take into account other resources it has and that swells to 14 percent.

BROADENING THE DEFINITION OF RETAIL

Ordinary Peruvians sound increasingly confident.

"The U.S.? The U.S. is screwed! - because of the crisis," Ana Avila, 42, a grinning potato farmer who lives near Huancayo, said in rhyming Spanish at the Chupaca outdoor animal market and slaughterhouse.

Chatting in Quechua with her elderly mother, she had come to the Chupaca market to buy a bucket of sheep's blood, which she said has curative powers. She swathed it on her sick baby before wrapping him in a blanket.

Like many Peruvian consumers, she has one foot in the formal economy where taxes and labor benefits are paid and another in the free-for-all of the informal economy. Sometimes she goes to Plaza Vea, the modern supermarket in Huancayo's mall.

"The good thing about Plaza Vea is they don't trick you when you weigh items. They charge you a fair price, but they also charge sales tax, so it's not always affordable for me. In normal markets, you don't pay tax but you can get tricked by people who charge you 50 grams extra."

Huancayo and the surrounding Junin region have also benefitted from growth in so-called non-traditional exports, which have continued to rise even as metals exports sink.

Junin produces Quinoa, the nutrient-rich grain that NASA once identified as a potential crop to raise on long space missions, and the pricey wool of alpacas, the cameloids that graze on stubby Andean grasses.

Quinoa exports have risen exponentially to 7,600 tonnes last year, up from 148 tonnes a decade ago, according to the agriculture ministry. And though they dipped early this year, alpaca and llama fiber exports rose 20 percent last year, according to the trade ministry.

"People with lots of acreage are forming cooperatives and exporting quinoa," said Flor Lazo, 25, who was selling the grain from sacks at a market in Chupaca. She said her family's income has risen in recent years because they have improved the quality of seeds they plant.

The geographic changes in consumption are also occurring within Lima. Many of the new malls in the capital are popping up in peripheral neighborhoods that only 20 years ago were poor but are now populated by an expanding middle-class that demands better services and higher-quality goods, according to Arellano Marketing, a research firm.

Mall Aventura Plaza is currently spending $80 million to expand two of its malls and build another, in Santa Anita, on Lima's eastern periphery.

Efforts to capture this new middle-class have, in many respects, been led by Interbank, which has sought to broaden the definition of retail, former executives say. It has bought a chain of affordable private schools and a university, along with a chain of pharmacies, Chinese fast-food, and hamburger stands.

Innova, the name of the schools, has introduced a new concept between horrendous public schools and traditional private schools for the rich that can cost a pupil's family $1,000 a month.

It charges between $95 and $150 a month for what it calls a cutting-edge curriculum. It has 11 schools and nearly 5,000 students. It plans to open 70 schools nationwide over the next 10 years, which would make it the biggest chain of its kind in Latin America.

Peru's poverty rate has fallen in half over the past decade to 27 percent, with most of the benefits accruing in Lima and provincial cities. That has swollen the ranks of families who can pay for private school.

"This apparent growth bonanza we have won't be sustained unless the middle classes have access to quality education. This is what motivated me and Interbank to go into education," said Innova's director, Jorge Yzusqui.

(Additional reporting by Patricia Velez; Editing by Martin Howell and Leslie Gevirtz)

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