Middle-classes on the up: why Brazil is growing

Date : 13 September 2011
Middle-classes on the up: why Brazil is growing

Brazil is a market full of promise and now one of the world’s top ten economies, but it comes with inherent challenges for international retailers and FMCG manufacturers.

We review some of the success stories we have witnessed in São Paulo and Salvador (Bahia) and highlight the key components you need to take into account if you are considering entering this market.

Slower or more manageable growth?

Thanks to its resilient performance  through economic turmoil so far, Brazil is emerged as one of the market winners. Its successful bids to host the 2014 Football World Cup and the 2016 Olympics, in Rio de Janeiro, have proved a magnet for investment – providing opportunities for much needed infrastructure improvements.

Brazil is a market on the riseBut in June 2011, the IMF revised down its GDP forecast for Brazil from 4.5% to 4.1% for 2011 and from 4.1% to 3.6% for 2012. The reasons for this downgrade are mostly external to Brazil’s economy and reflect a more sluggish global economic outlook. Brazil is one of the top 20 largest exporters globally so lower growth worldwide is likely to negatively impact its export of commodities.

However, this is not necessarily a bad thing for the retailers and FMCG manufacturers who operate in the market as it could bring a welcome respite from the recent upward inflationary trend. Inflation has been running relatively high creating more challenges for the business community, which is already juggling both rising input costs and wage inflation.

Will it dampen Brazilian consumers’ optimism?

From the bustle of São Paulo, where modern skyscrapers spring up everywhere, to the vast farmlands in the south and central-western regions, Brazilian optimism is on the rise and so is its growing consumer class. Brazilians are consuming everything from luxury imported goods and mobiles to Coca-Cola.

One of the reasons for such buoyant consumption is the shifting population; almost 40m people have risen to the ranks of the so-called ‘new middle classes’ over the past five years. Within the middle classes a greater degree of divergence is emerging, with aspirational desires feeding a small but growing credit bubble as consumers switch into higher value, branded products.

The appetite for brands has not slowed. At the same time, those in the more ‘traditional’ middle classes are battling rising prices, and an increasingly clogged infrastructure. The growth of the wealthier AB classes cannot be ignored either, with rising stock markets, booming exports and increased consumption generating significant wealth for a smaller segment of the population.

A swelling, aspiring but diverse 'C' middle class

A swelling, aspiring but diverse 'C' middle class

Regional complexities create challenges for suppliers and retailers

The federal system of government means there is a high degree of regional complexity; economic growth is not uniform, with São Paulo experiencing single digit growth compared to runaway expansion in the less developed north east region, where government incentives underpin development. Between 2000 and 2010, half of the 50 fastest growing cities with a population up to 100,000, in terms of rising incomes, were in the north east.

Despite considerable progress in the past ten years, understanding the regions, not only in terms of their legislative systems, but also in terms of ethnicity and unique cultures is still essential for retailers and manufacturers alike to operate successfully.

Brazil's regions

Brazil's regions

Strength of the independent trade shows no sign of slowing

Having established the complexities of the Brazilian consumer and outlined the regional growth story, it is easier to understand how independent and small chain stores are a strong competitive force in the retail market; close to the shopper and able to work the legislative environment effectively, they are highly effective operators.

This is demonstrated by the fact that out of the top 500 retailers in Brazil, the top ten have increased their share by only ten percent over the past five years. While the consumer may seem difficult to court in some respects, local players are adept at catering for their needs; effective promotions, critical for driving traffic, and high service levels are two features that often deliver competitive advantage.

The role of wholesalers is central in ensuring effective supply to the independent trade. With detailed knowledge and experience of trading across states they are key partners and helpful in establishing efficient cost structures.

Significant opportunities for bigger players who can unlock pockets of growth

Although independent retail is a potent force, deep pockets of growth exist for larger players who can tailor their models to meet shopper needs and develop more collaborative ways of working with their supplier base. Format innovation is a good example of how the major national and international retailers are targeting both the burgeoning middle class, which many view as the largest prize, small businesses, and also wealthier shoppers who are buying premium and international goods more and more.

Carrefour’s Atacadao wholesale modelCarrefour’s Atacadão wholesale model is a market leader, and having visited the concept it is easy to understand why. Mass appeal to small businesses such as bars and restaurants, families and individuals is delivered in a warm store environment, with enticing promotions that are highly relevant and competitive pricing. The high stock environment gives consumers who can recall the days of hyperinflation and economic bust greater confidence, which drives loyalty.

Another leading multi-format player, WalMart, is developing its TodoDia concept to unlock middle class growth; the low price supermarket has adapted its assortment, both in terms of brands and private label and introduced in-store bakeries and counter services to entice local shoppers. The only top three retailer with operations in the north east, it has early exposure to this high growth environment.

A notable player focusing on the more affluent end of the market is Pão de Açúcar, concentrated in São Paulo and the south east of Brazil. Its premium supermarkets are capitalising on strong fresh produce to appeal to health-conscious shoppers as well as using its relationship with Casino to offer imported products at reasonable prices.

There is no winning formula, but these examples highlight that there is plenty of growth for the major players to unlock. With retailers citing ambitious plans, and getting more attuned to the complexities of the consumer, expect expansion to remain a dominant theme in the market.

Pace of change will not slow

Looking ahead, challenges will persist, the high inventory levels referred to earlier are a consistent feature of the market and coupled with short payment terms, they can cause problems for major retailers. Alongside this, staff costs are likely to create strain as wage inflation creeps up and adds pressure to margins.

However, expansion is set to continue at pace, be that via select acquisition, organic growth or, in some instances, franchise, infrastructure capacity challenges will have to be overcome. Finally, consolidation on both the retail and supply side has the potential to drive efficiencies; the acquisition of Sadia by Brazil foods and the merger of pharmacy chains Droga Raia and Drogasil demonstrate the desire to expand – a desire shared by aspirational consumers, retailers and suppliers alike.