Thomas White Global Investing
Brazil
Brazil Stamp
June 17, 2011
A Postcard from the Americas
Brazil: A Nation of Discerning Shoppers

img-brazil-shopping

The growing middle class with high disposable incomes has been driving Brazil’s retail sector growth.

Brazilians seem to be moving in rhythmic lockstep with their thriving domestic retail sector, much like their spirited national dance, the Samba. The AT Kearney Global Retail Development Index has judged the Latin American powerhouse as the most attractive retail market among the world’s 30 emerging economies, ahead of China, according to a report published by FT. Though Brazil has been growing at a fast pace over the past few years, the ranking offers the country’s fun-loving populace an excuse to uncork the bubbly, considering the fact that this BRIC country could not even make it to the global management consultant’s list in 2004.

AT Kearney has rightly cited Brazil’s amazing 40% growth in GDP per capita in the past eight years and the purchasing power of an affluent middle class. To put it simply, the country’s economic boom since 2002 has elevated about 20 million Brazilians into the middle class. The stable market and a government which encourages foreign investment attracted the likes of Wal-Mart and French retailer Carrefour to pitch tents in the country. Apart from the behemoths, local players such as drugstore Droga Raia, footwear chain Arrezo, and home appliances retailer Magazine Luiza are also enjoying the limelight and have all gone public in the last six months.

Demographics also seem to favor the growth of the consumer-oriented sectors of the economy. About 80% of the country’s population of 181.4 million lives in urban areas. A PwC report shows out that 42% of the population is under 20 years of age, with less than 7% above 65. Moreover, for urban-dwellers of Brazil, shopping also doubles up as a leisurely activity, something that Brazilians consider both necessary and entertaining in their everyday lives. And compared to other emerging markets, Brazil’s large urban population tilts the balance in its favor.

Still, not all retailers emerge as victors in this environment. Although Brazilians may be compulsive shoppers, they are very much brand-conscious and brand-loyal, which hampers the development of the retail sector in the country. Moreover, a closer scrutiny of the behavioral patterns of Brazilian shoppers would show that many of the country’s demographic advantages don’t translate into actual revenues for retailers eager to taste a slice of the lucrative market.

That’s because the consumption habits of Brazilians could not be more diverse. Due to inequality in income distribution, as PwC points out, there is a clear distinction between the shopping pattern of lower income classes who spend more on food and beverages and the well-heeled who tend to splurge on consumer durables and leisure activities. Nowhere is this difference more evident than in the corporate results of Carrefour for the year 2010. True, the rosy numbers from Brazil clearly outperformed the company’s disappointing sales figures from its European markets. Yet, an analysis of the earnings release tells us that while the retailer’s cash and carry business contributed the bulk of its revenues, its hypermarket sales were weak in Brazil. However, Carrefour’s woes extend well beyond this numbers story. The firm’s Brazilian operations have been plagued by years of mismanagement and accounting irregularities, which forced it to take a $250 million loss last year.

The highly competitive Brazilian market, which offers lots of potential for growth, makes it difficult for new entrants to gain a toehold. The top 10 retailers account for 60% of the highly fragmented sector. The country’s underdeveloped infrastructure also stands in the way of retail sector development. Yet the realization that there is money to be made in the market has prompted the beleaguered Carrefour to initiate merger talks with Brazil’s biggest retailer Grupo Pao de Acucar. The merger, if it goes through, is estimated to give the combined entity a 28% share in the domestic market. U.S. giant Wal-Mart and Chilean retailer Cencosud have also expressed their interest in buying Carrefour’s Brazilian assets if they are put up for sale. Understandably, the stakes are high in the $230 billion Brazilian retail market, with Carrefour’s French rival Casino, a major shareholder in Pao de Acucar, challenging the proposal in court.

Ambitious multinational corporations and local players alike have set their sights on the aisles of Brazilian supermarkets, yet challenges lurk around the corner. Despite low unemployment rates, inflation has been rising, driven by higher food and fuel costs. High taxes on imports and complex labor laws make doing business in Brazil a tough proposition for retailers. With this, retailers would do well to realize that navigating the byzantine ways of Brazil’s bureaucracy and a nation of discerning shoppers may very well be a different ball game than shaking a leg at a Rio de Janerio carnival.

 

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