The Colon Free Trade Zone (CFZ) offers a remarkable opportunity to U.S. companies in the consumer retail sector. It is currently the world’s second largest free trade zone – trailing Hong Kong – but is much more accessible for merchants from throughout Latin America. In the CFZ, a U.S. exporter can sell to one merchant, duty free, and then expect to see his products distributed and retailed throughout Central America, the Caribbean, and the Andean region of South America as a result.
The ideal U.S. company for this sort of model is one that is making a consumer retail item in the U.S. that already enjoys strong domestic sales to such mass merchants as Walgreen’s, Target, or Wal-Mart. However, the CFZ also enjoys strong sales in all areas of consumer retail, such as sporting goods, jewelry, perfumes, electronics, and clothing at all price points. So if you were to imagine any consumer good, from a lower end item at a Wal-Mart to a higher end luxury item at a Neiman Marcus, you would probably be able to find it for sale in the CFZ.
U.S. consumer retail companies using this method of export to Latin America could:
- Save Time. Instead of traveling to every Latin American country where there might be export prospects, talking with merchants, agents, representatives, and distributors, you would only need to go to one location – Panama, which is highly accessible given its prominence as a regional air hub.
- Grow Sales. Because the CFZ is the world’s second largest free trade zone, with exports of $10 billion and growing, retailers from many countries in Latin America simply schedule regular shopping trips to CFZ merchants. When they order, they order in wholesale quantities – the target retailer buying in the CFZ is frequently a department store owner with 10-15 stores in his country of origin.
- Reduce Complexity. You sell in dollars to a CFZ merchant. The entry is duty free. And you are only selling to one entity – therefore you only have one relationship to manage. Finally, the CFZ is co-located with some of the world’s largest transshipment ports, meaning that it is easy for merchants to pick and pack customized shipments to any one of a number of otherwise small Latin American ports of entry.
- Reduce Financial Risk/Make More Money. You are selling to established CFZ merchants. They in turn make their money by showcasing your products. They know their customers and are able to offer financial terms based on creditworthiness. These terms in turn allow you to sell more product instead of having to bear the risk of offering terms or losing the sale. In addition, you do not have any duties to pay – those end up being the responsibility of the final buyer once your goods enter that country. And finally, you are outsourcing the regional distribution to an expert. It is if you had, in a good CFZ merchant, a representative, financier, and third party distributor all rolled up into one, not only for Panama but for Latin America.
- Consumer Retail Only. No perishables and very little large capital equipment is sold through the CFZ. There is increasing activity for wholly owned regional distribution activity, as well as specialized third party logistics, handling products ranging from inexpensive shoes to high value pharmaceuticals. But for the most part, the products are basically what you would see in a U.S. shopping mall, from anchor stores through boutiques and specialty chains.
- Some CFZ Merchants Should be Avoided. Traditionally the CFZ, with its tradition of moving large amounts of merchandise and conducting some $18 billion annually of business, largely in cash, has had a bit of a frontier atmosphere. However, most of the business being conducted in the CFZ is entirely legitimate and the area inside the CFZ is very safe. The Commercial Service in Panama works closely with other sections of the U.S. Embassy to screen out merchants that should be avoided. We know the best merchants, and those merchants have every incentive to maintain their reputation. So please contact us before agreeing to conduct business with any merchant.
- The Best CFZ Merchants Know Their Value. If you think about the value that a solid merchant is offering you – a strong retail customer base, ability to offer terms, effective third party logistics co-located with significant transshipment operations – then you may need to be prepared to bargain hard for a margin that works for your business as well as the merchant’s. You are in a strong position if you can show solid sales in the U.S. already, but without an established history of top-line revenues, you would find negotiating with a good CFZ merchant to be a real challenge.
- We Can’t Assist You With non-U.S. Content. Given the product range, it should come as no surprise that most of what is distributed through Colon is made in Asia these days. U.S. content participation ranges from 6-8%, even while U.S. branded content is much higher (think of Nike shoes, Columbia Sportswear, or General Electric electronics). If you have a product that is largely made outside of the U.S., we may not be able to assist you.
- Brazil and Mexico Are Separate. Brazil and Mexico both have large populations and an internal buying structure. You are better off pursuing a direct strategy there.
Panama has long been known for being a transit point for goods, most recently through the Panama Canal. Although the percentage of world trade that passes through the Panama Canal has diminished to 5% in recent years, the Canal continues to play a key role in regional trade. We believe that the CFZ will grow dramatically with the successful expansion of the Panama Canal in 2014.
Here is why – in the next couple of years, the majority of container capacity will be on vessels that are too large to transit the Canal currently – so-called Post-Panamax ships. But with the expansion of the Canal, vessels up to 12,000 TEUs – all but a very small percentage of super-Post Panamax ships – will suddenly have a new option for all-water transit through the Canal from Asia to markets in North America, Latin America, and Europe. As a result, ports in the region are investing heavily in deep water capacity and transshipment capabilities.
For this reason, we believe that the increased traffic through the Canal, primarily from the Pacific to the Atlantic, will result in greater transshipment activity. Why? Because most ports in Central America, South America, and the Caribbean will not be able to accommodate vessels that are 6,000 + TEUs. So once their cargo transits the Canal, there is an opportunity to break the containers down and redistribute them via smaller vessels throughout the region. And the CFZ is collocated with the premier transshipment ports in the region.
Contact us. We can help you work through whether or not the CFZ represents a good opportunity to explore. If we think you do, we’ll encourage you to fly down to Panama and we’ll take you to Colon (about 50 miles away from Panama City) to look at the CFZ, meet with key merchants, and make a pitch if you’re inclined to. We’ll assist with a driver, interpreter, car, and of course the qualified meetings with the best merchants in CFZ.