Today, I'll be talking again about business in Latin America. More specifically, I'll be discussing whether it's better to open a physical store or an online store.
We'll go over the pros and cons of each, along with ways you can set up shop south of the border as a foreigner.
Let's jump into it.
Things Are A Bit Different Down Here...
If you were debating between opening an online store or a physical store in the United States and asked my opinion, I would recommend an online store.
Start up costs are lower, you can reach a larger consumer base, implement changes faster and have your store open 24/7. People are comfortable with shopping online (and often prefer it) and there are a number of reliable payment processors you can use for your website.
But things in Latin America are slightly different.
For instance, less people shop online. Fewer people know how to do it and fewer people are comfortable with it.
Also, there are a myriad of challenges to conducting an online business in Latin America. Low credit card penetration, a lack of suitable payment processors and poor logistics in particular are huge barriers to overcome.
Some of the aforementioned advantages will still apply down here, but the obstacles are much larger than they would be in the United States.
Opening A Physical Business in Latin America
- Exposure - If you want to sell, it's good to be seen. Having a physical store allows your customers to come visit, see what your brand is all about and decide if they like it. If they do, they'll tell their friends about the cool new shop in town. It also allows bloggers or journalists to stop by, take some pictures or video and write a feature. Having a store that people can actually see and visit is a big advantage in a place where shopping online is still viewed with suspicion.
- Branding - A physical store will give you an opportunity to create the image you want to project for your brand. It will allow you to create an experience for your customer that can't be digitally replicated. The smell, aesthetic, music and arrangement of your store are a few of many of the things that can keep customers coming back. With an online store, you have less options to create the ambiance you truly want.
- Connection With The Client - Before buying a product, most people want to see it. Whether it's a dress they'd like to try on, a camera they'd like to test out or a couch they'd like to sit on, people want to see if what they're buying is worth their hard-earned cash. In a physical store, they can do this. In an online store, they can't. Sure, you can provide all the physical details of the item, but nothing comes close to seeing something three-dimensionally, and asking someone in person about how it works.
- Cost - A physical store costs more money. You have to pay for the space, lights, and everything to make it look pretty. Probably employees, too. For an online store, all you need is a place to store your product and a camera to take pictures.
- Security - If you have an online shop, you don't have to worry as much about theft (well, perhaps credit card theft). With a physical store, you do. There's not much stopping a couple gangsters from coming in with masks and cleaning your till. Not to mention shoplifters. If you have a physical store, you'll have to invest in a security guard or some kind of system to reduce/discourage theft.
- Tax Authorities/Building codes and regulations - With a physical presence, you're more likely to be on the radar of the local tax authorities. They may try to make your life difficult if they think you're not paying your fair share of taxes (particularly, if you're a foreigner). You'll need to keep meticulous track of your sales and inventory if you have a physical store. Also, you'll have to comply with any building codes or regulations set by the city/district/neighbourhood. Even more sinister, if you're working in a town with a high presence of organized crime, you'll have to pay the piso, an unofficial tax enforced by local goons.
- Petty Local Competition - If you're operating in a neighbourhood or city in Latin America, and you aren't from that city, the local competition will do everything they can to try to shut your business down. They'll claim it isn't registered, claim you're selling drugs or running a brothel, file noise complaints. Whatever they can think of. Folks are petty like that down here. Instead of putting in any effort into improving their own business, they'll direct all that energy into trying to ruin yours.
Opening An Online Store in Latin America
- Low Cost - It costs practically nothing to open an online store. You'll save huge money not having to pay all the costs associated with a physical location.
- Adaptability - Want to make changes to your store? It's as simple as a couple clicks. No need for construction projects or interior designers (although you may want to hire a web designer). New marketing project or sale? No need to manually send out fliers in the mail. Just drop a message to your email list. Adding a new product is as easy as clicking "Add new product" on your Shopify dashboard - no major changes to your inventory system are required.
- Low Profile - If you prefer to keep a low profile, an online store is a better way to do so in Latin America. You can more effectively shield yourself from theft, jealous locals, the local tax authority, criminals and corrupt police.
- Larger Potential Customer Base - With an online store, you can target any customer in Latin America through Internet marketing. With a physical store, your client base will be limited to the city you're located in.
- Low Credit Card Penetration - Not everyone in Latin America has a credit card. In fact, most folks don't. Some people don't even have a bank account! You'll find that the inability to accept in-person, cash payments will reduce your base of potential local customers.
- Unfamiliarity With Online Shopping - People in Latin America simply don't shop online that much. With the exception of Brazil, Mexico and Chile, online shopping is far from normal for most down here. They either don't trust it, or don't know how to do it. Many prefer to pay in store, and in cash.
- Unreliable Logistics Services - Shipping is entirely unreliable in nearly all Latin American countries. Oftentimes, a package you order will never arrive. Most probably, it was stolen or lost along the way. Private domestic services are slightly better than the government-run post, but even they manage to cock things up more than they should. Shipping is an incredibly frustrating aspect of doing business in Latin America, and one that is more or less out of your control. The best you can do is send the package and pray that it arrives.
- Poor Payment Gateways - PayPal isn't used much down here. Stripe can't be used down here. In terms of payment gateways in Latin America, you basically have 2Checkout as an option (who takes a big cut of commission) or PayU (who takes a big cut of commission and has terrible customer service). There are others, but these will be your main options. Neither are ideal. PayU has can't handle cross-border payments, so if you're based in Chile and want to sell into Peru, you're out of luck.
Is It Legal?
The big question.
If you're reading this, I assume you're an English-speaker foreigner who's interested in doing business in Latin America.
I'm also going to assume that you're not a citizen of the country you plan on doing business in.
Is this all legal?
Well, it can be. It's up to you!
In many, if not most, Latin American countries, a foreigner can register a business without being a citizen or even a resident. There's some paperwork, but it's generally straightforward and low-cost. This route is certainly an option.
However, if you want to actually work at your own business, you'll need to procure a work visa. You can do this by "hiring" yourself as an employee and paying yourself a salary, but you'll get dinged come tax time, since you'll have to pay both as a business and an employee.
Or, you can be a bit naughty.
If you're not sure your business is going to work (who is, at first), you can put off registering it. You'll have to sort out how to get a local bank account to accept bank transfer payments (difficult without residency, but not impossible) and you won't be able to use PayU, but you will be able to set up a store...well an online store, at least.
If you want to open a physical store, you WILL need a registered business.
No way around that.
Keep in mind, if you are caught conducting business down here without the proper documentation, you risk deportation and/or a serious fine.
Proceed with caution.
So, Which Is Better?
A few months back, I would have said an online business in Latin America is preferable to a physical one.
But now I'm not so sure...
Over half the profits that my business partner and I enjoy currently come from physical stores (i.e. consignment). Only about 30% come from our online store...even though the prices for the same products are much cheaper.
To truly succeed in business in Latin America, you'll eventually need both a physical presence and an online one, at least until online shopping catches on a bit more.
Since I've never personally opened a physical store in Latin America, I can only advise based on what I've heard from friends who have.
So, what's my suggestion for someone who's new to all this?
Well, I'd do what we're doing!
If you're a foreigner looking to do business in Latin America, start small. Fire up an online store, make sure your marketing is good and try to get as many stores as you can to buy your products in bulk through consignment. It's the lowest cost, lowest risk option. Of course, if it gets big enough, you'll want to legitimize it by getting a tax ID and all that fun stuff, but there's no need to do that before you know if you have a hit or not.
Final Answer: Online Store (+ consignment)
Without a doubt, there are struggles to doing business in Latin America.
That said, if you can get past these not-so-minor hurdles, you'll be in a incredible position a few years down the road, when online shopping really starts to catch on.
If you're looking for a "new frontier" in our increasingly saturated world, an e commerce business in Latin America might be something to look into.
P.S. There were a lot of things I didn't cover in this article. If you have any questions or comments, please leave them below! I'll do my best to answer.
And, as always, until next time.
Interested in starting your own online business in Latin America? Check out this post.