Brazil: Financial stamina needed
Elsevier Food International, Vol.9, Number 2, May 2006Pascal Kuipers
Brazil, a market of 182 million people whose economy is recovering and average disposable income is on the rise, is attracting the interest of foreign retailers. Brazil’s top three retailers are leading multinational retailers who are investing huge sums in this increasingly competitive market.
Since its market entry in 1994, Wal-Mart has had a steep learning curve in Brazil. In the early years it was ridiculed for selling golf kits in superstores located in low-income areas. Its management did not speak Portuguese and the store layout was a full copy of Wal-Mart’s US stores. In the past three years, however, it has rapidly become Brazil’s third largest retailer. This success can be attributed to Wal Mart’s deep pockets (large acquisitions and funds for new store development) but also to the fact that the company has adapted to local customs and shopper preferences. Now, Wal-Mart’s managers in Brazil speak Portuguese and the store’s sales areas for food have been doubled in size in relation to the non-food areas.
Retail giant Wal-Mart is unmistakably a catalyst in retail consolidation in Brazil. Figures from PlanetRetail point out that in 1999 the Americans ranked tenth in Brazil with US$377 million sales and a 0.64 per cent market share. Early 2006, Wal-Mart is Brazil’s number three retailer, operating 296 stores in 17 of Brazil’s 26 states. PlanetRetail calculates its total sales at US$3,382 representing a share of 4.1 per cent of Brazil’s modern grocery distribution market. Two major acquisitions contributed to Wal-Mart quickly moving up the retail ranks in Brazil. In early 2004 it acquired the Bompreço chain from Ahold and in December 2005 Wal-Mart announced the acquisition of Sonae, the Brazil operation from Portuguese retailer Modelo Continente.
Bompreço was a US$500 million deal which added 118 units (hypermarkets, supermarkets and mini markets) in northeastern Brazil to Wal-Mart’s store base. Sonae was a US$757 million deal, adding to Wal-Mart Brazil 140 hypermarkets, supermarkets and wholesale units in the São Paulo region and Brazil’s southeastern regions. It is there where most Brazilians live and average income is relatively higher.
Huge investments
Despite Wal-Mart’s rapid growth, it is still way behind Brazil’s market leader Companhia Brasileira de Distribuição (CBD – also known as Grupo Pão de Açúcar). CBD – in which the French retailer Casino holds a controlling share – represents 9.2 per cent of Brazil’s 2006 modern grocery distribution, which Planet Retail values at US$82.4 billion in total. The retailer operates 85 extra hypermarkets and 460 supermarkets under the Pão de Açúcar, CompreBem and Sendas banners.
Wal-Mart is rapidly closing the gap with Brazil’s second largest retailer Carrefour, which represents a 5.96 per cent share of the market. It has 260 Dia discount stores and 147 Carrefour hypermarkets and superstores (including 35 former Champion supermarkets which it converted into a new concept: Carrefour Bairro superstores).
Wal-Mart’s acquisitions and investments do not go unnoticed by other retailers, who are investing huge sums of money in retaining or expanding their market position. Market leader CBD/Casino announced in January 2006 to be investing BRL1.5 billion (US$658 million) in 2006 and 2007 for the opening of 16 to 20 hypermarkets and 40 to 60 supermarkets.
Carrefour is also putting money on the table to enforce its operations in Brazil, which is its second important market after its home base France. Carrefour intends to build 15 hypermarkets this year for which it reserves a budget of BRL600 million (US$329million).
Last February, Wal-Mart announced its intention to spend BRL750 million (US$346million) in order to expand operations in Brazil this year. The majority of this – some US$275million – will be spent on the construction of 15 hypermarkets, supermarkets and wholesale stores in Brazil’s southeastern regions.
Large investments are also made on a local level. An example is São Paulo-based retailer Sonda who in March announced its plans to invest BRL100 million reais (US$47million) in the construction of three supermarkets, a shopping centre and a distribution centre in the São Paulo region.
Small retail remains strong
Obviously, leading retailers are confident that with a population of 182 million people, Brazil is a promising market, especially if the economic recovery (see Brazil fact sheet) proves to be structural. After the record year 2004, economic growth in 2005 remained below expectations. For 2006 ACNielsen Brazil recorded a decreasing optimism among Brazil’s consumers with regard to the country’s economic situation as well as the perception of his/her own purchasing power (see Figure 1). On the other hand, however, the majority of consumers is still optimistic.
In recent years different formats in Brazil’s grocery sector have had more or less stable shares. Figures from ACNielsen point out that small retail formats are most important and that these have sustained their growing trend in recent years (see Figure 2). In 2005, traditional mom & pop stores and small supermarkets with up to four checkouts accounted for 40 per cent of total revenues. Most of these small supermarkets belong to small, family-owned businesses. This also applies to small supermarkets with five to nine checkouts who maintained their position and even regained some lost territory in 2005.
This growth of smaller formats in Brazil is a worldwide unique phenomenon as in all other markets globally small formats and mom & pop stores are losing business to modern and usually larger-sized retail formats. This remarkable growth of smallest retail formats happens to the detriment of the medium- and large-sized supermarkets with ten to 49 checkouts, while hypermarkets remained stable with a six per cent share of revenues in recent years.
An explanation is that consumers are changing their shopping behaviour. According to ACNielsen, Brazil’s ageing population increasingly looks for proximity and time saving when it comes to shopping. The group aged 50 years and older, which currently represents 16 per cent of the 182 million Brazilians, is expected to represent 23 per cent of the projected 237 million people living in Brazil by 2020. And it is this group, whose disposable income is likely to increase further, which mainly shops at small retail stores.
Another explanation ACNielsen suggests is the fact that wholesalers acknowledge this trend and provide a better service to small companies, who consequently can offer lower prices to their customers.
Finally one should also take into account the strong imbalance in income in Brazil. The traditional small retail units cater to the majority of Brazil’s low-income customers. ACNielsen states that Brazil’s top socio-economic classes A (2.6 per cent of the population) and B (16 per cent of Brazilians) respectively account for 29.4 per cent and 34.4 per cent of purchasing power (also see Brazil fact sheet).
Increasing competitiveness
The huge sums that are invested indicate that retailers in Brazil are fiercely fighting each other to buy market share. Figure 3 shows the development of store numbers in the last decade which further fuels competitiveness as store density increases and each store caters to a lower number of customers. Between 1995 and 2005 store numbers soared by 45 per cent, while the average number of Brazilians per store declined by 18 per cent.
Due to the increasing competitiveness, retailers in Brazil are keen on reducing operational costs to improve operational margins and consequently profitability. Market leader CBD will work with a variable remuneration model for all levels in the company, which alerts people to limit expenses and reduce shrinkage wherever possible. Last March, PlanetRetail quoted CBD’s head of investor relations Fernando Tracanella. He said that CBD’s 2005 figures were affected by deflation in food prices, lower disposable income for consumers and higher consumer debt levels due to previous purchases of durable goods on credit. CBD was able to offset this by better negotiations with suppliers and higher pricing points in stores. Also improvements in merchandising and category management contributed to a slightly improved gross margin. CBD intends to focus more on selling non-food items which do not suffer from deflation. Part of this programme is selling financial services (credit products) in-store in collaboration with the local bank Itau.
According to Tracanella, CBD will invest all cost savings in lower consumer prices to increase traffic. A procedure which is second nature to Wal-Mart who is also testing its Bodega Aurrera discount hypermarket in Brazil. Wal-Mart is also actively expanding its Sam’s Club warehouse stores, especially in Brazil’s northeast.
Carrefour decided to focus on its hypermarkets and superstores, thereby divesting its underperforming Champion supermarket operation. Thirty-five of these were converted into a new neighbourhood format, Carrefour Bairro. This format – which was already tested in Spain under the Carrefour Express banner – sells basic foods and non-foods like consumer electronics. Since May 2001, Carrefour also operates hard discount stores in Brazil under the Dia banner. This was also imported from Spain and is currently operated both as a chain store operation and (since 2003) as a franchise.
Discount is expected to benefit from the pressure on Brazilian consumer’s disposable income. Dia is Brazil’s second largest discounter, after CompreBem (formerly known as Barateiro and owned by CBD) and before the rapidly expanding local discount chain Econ. This 61-store discount chain is owned by the São Paulo-based food retail and food service group CBA.
Local heroes
Given the huge sums being invested in new store development as mentioned before, leading retailers in Brazil will now focus on organic growth. This, however, does not rule out mergers and acquisitions as a future growth option. Brazil is still a fragmented market with a strong representation of small, local heroes with strong positions regionally. These could well be interesting acquisition targets for the large retailers.
Examples are the already mentioned São Paulo retailers Sonda and CBA. Other examples are Zaffari (eight Bourbon hypermarkets and 22 Zaffari superstores in Rio Grande do Sul), Epa (45 Epa stores and nine Mart Plus stores in Minas Gerais and Espirito Santo), Bretas (44 Bretas supermarkets in Minas Gerais and Goiás), Coop (27 supermarkets in São Paulo) and Angeloni (19 supermarkets and 27 pharmacies in Santa Catarina and Paraná).
The peculiarity of the Brazil market with a continued strong position of traditional and small retail businesses and the economic recovery which is still in an early stage will, however, influence leading retailers’ m&a appetite. Acquisitions will further increase levels of invested capital and therefore put additional pressure on the performance of retail operations. Given the increasing competitiveness of Brazil’s food retail sector, the retail fight will continue, affecting retailers’ short term bottom line results. In recent years, Modelo Continente and Ahold experienced that playing in Brazil’s top retail league is something for companies with enough financial stamina.
Sources:
ACNielsen Brazil (courtesy Mr. Olegário Araujo), PlanetRetail
Brazil fact sheet
Poverty and inequality
• Brazil has a population of 182 million.
• About 40 million people live on less than US$2 a day and 14.6 million people live on less than US$1 a day.
• Brazil is second only to South Africa in a world ranking of income inequality.
• The country’s poorest 20 per cent earn 2.4 per cent of Brazil’s income, while the richest 20 per cent earn 63.2 per cent.
Growth
• GDP grew a strong 4.9 per cent in 2004, the highest growth rate in ten years.
• Brazil’s GDP reached US$604.9 billion in 2004.
• In 2004, Brazil exported US$96.5 billion and imported US$62.8 billion in goods and services.
• The average income per capita in 2004 was US$3,090.
Economic development
Brazil’s economic programme, which gets the support from the IMF, seems to be paying off. After difficult years (e.g. sharp currency depreciations in 2001 and 2002) things now look better and 2004 was a turnaround year for the economy in Brazil. It recorded robust growth and both employment and real wages increased. Gross domestic product grew by 4.9 per cent, the highest growth rate in ten years, reaching a level of US$604.9 billion in 2004. Brazil ran record trade surpluses and productivity gains – especially in agriculture – contributed to record export levels for 2004 and 2005. A good sign is that not only export levels but also increasing internal demand supports the economic growth in Brazil. Inflation decreased sharply from 14.8 per cent in 2003 to 6.6 per cent in 2004 and it is set to decrease further. The main challenge for the government is now to use the proceeds of the economic recovery to reduce debt. Government domestic debt levels increased steadily from 1994 to 2003 which put a strain on government finances. Moreover, Brazil’s foreign debt is still large in relation to its small but growing export base.
Sources: CIA World Factbook; Worldbank; Roland Berger Strategy Consultants
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