May 7, 2014

German retailers won't kick in Brazil

Brazil in football fever (photo: Jose Roitberg_Flickr.com)
Everyone wants to go there: But not quite
As international football fans wait at fever pitch for the World Cup to start on June 12, German retailers aren't keen on going to Brazil any time soon. They seem quite content to reap the extra business generated by special offers and promos in their stores.

Don't they like samba, sun and beautiful girls? It can't be the distance, otherwise Aldi wouldn't be in Australia; nor the language, else Lidl and Aldi wouldn't be in Portugal. Too small a market or lack of business potential? With a young population of 200m aspiring consumers and a growth curve which could make this vast country the world's fifth-largest economy next year, Brazil is Latin America’s powerhouse.

So what's stopping this bunch of otherwise very cosmopolitan retailers playing an away game there when it has long been home ground for their suppliers?

An enquiry by our newspaper produced a very tepid response. Edeka, Germany’s leading grocer, took only 90 minutes to state that they wish to focus on their local market. Rewe emphasised the huge distance between Brazil and its European businesses, while discounters Aldi, and Kaufland didn't want to make a statement.


Markus Trojansky, head of expansion at Müller, replied that the drugstore operator currently doesn't intend to enter any new countries. Arch-rival Rossmann even tried to be witty: "You might just as well ask us why we are not interested in expanding to Australia, Burma, India or Madagascar."

While Obi and Hornbach preferred to remain silent, Austrian DIY retailer Bauhaus confirmed that it is limiting all expansion to Europe.

Even C&C giant Metro who, despite some recent withdrawals, is still active in some 30-odd countries wants to concentrate on existing operations for the time being.

If nothing else, German reluctance to enter Brazil has given international competitors a head start to the Copacabana. Pioneer Carrefour (1975) was followed a generation later by Walmart (1995) and Casino (1999). They now rank as the nation's three largest food retailers. 

Delightful demographics

The trio were primarily drawn to Brazil by its attractive demographics. 15 per cent of the rapidly growing population are located in São Paulo and Rio de Janeiro, and one in four inhabitants live in the northeast of the country. Age structures are also favourable: 85 per cent of the population are younger than 54.

Consumer spending has increased by a whopping 60 per cent over the last decade. Since the social welfare programme bolsa família and the salário mínimo of the Lula and Dilma years, 20 to 30m households have become "middle class" with average monthly incomes in excess of €400. Market researchers PlanetRetail estimate that national food retail revenues totalled €250bn last year. 

Sugarloaf Mountain casts shadows

For all this potential, however, South America’s largest playing field is fraught with difficulties. Even Walmart with its Every Day Low Price strategy has found this to its cost. In fact, the world's largest retailer has not stopped losing money since its entry two decades ago.

Strict labour laws make it expensive to hire and fire workers, and wage disputes are costly. Import taxes range from 10 to 35 per cent, and the tax code and bureaucracy are excessively complicated, putting Brazil 130th in the 185-country Ease of Doing Business Ranking. Graft is also a problem with Brazil no. 69 in the Corruption Perception Index.

Commercial real estate, rentals and construction costs are relatively high. Until President Dilma Rousseff's $66bn investment programme takes effect, road and rail infrastructure in the world’s fifth-largest country remains woefully inadequate. This has created regional bottlenecks leading to temporary power outages and petrol station closures as well as to cooking gas scarcities.

Meanwhile, the downside of the private consumption boom is an alarming increase in household indebtedness. This has occurred as Brazilian society has polarised between a growing middle-class and an increasingly disenchanted underclass in the favelas. Civil unrest has focussed around the hosting of the World Cup and 2016 Olympics with protesters demanding that the billions being invested in sports stadia should be spent on social projects such as housing.

Retailers have also been affected by the conflict. Once, the 500 shopping centres that span the country were a haven of security. Recently, however, malls have been targeted by flash mobs. Coordinated by social networks, thousands of young people, who often have nowhere else to go, descend from the favelas for a rolezinho where they dance loudly to ostentação funk. These mass rallies have led to days of clashes with the police and considerable disruption of normal business.

Cultural differences

The main challenge, however, is far more mundane for Brazilian eating habits and consumer culture differ from most of Western Europe or the US. The national dish is feijão and arroz (black beans and rice with chicken, meat or an omelette). Brazilians love refreshing drinks, but will leave bottled juice untouched on shop shelves because they prefer to press their own fresh oranges and lemons for their sucos.

Due to the fertile climate locals are very demanding when it comes to fresh produce, which is sold on virtually every street corner. Even breakfast cereals have difficulty finding a market because Brazilians go to bed late and usually just drink cafezinho (filtered coffee with an awful lot of sugar whether you want it or not) in the morning.

Western packaging has also had to adapt to local spending power. When one fmcg company tried to market 60-nappy jumbo packs in the poor Northeast of the country, they failed miserably, but fresh attempts with 4- and 6-packs have been crowned with success.

Similarly, European standard-sized (3.36kg) washing powder failed to find a large market. It took western manufacturers quite a while to understand that the high air humidity in Brazil makes cardboard boxes unpractical. The real hit have been lavender-scented 200g plastic bags that are far more practical for washing clothes at the riverside in the northeast and Amazonas area.

Logically, you can forget trying to sell ice cream on a stick because it melts before customers get it home. The solution is to sell fruit-flavoured water-ice (sherbet) in plastic bags. Brazilians keep these in the freezer compartment of their fridges to be thawed and enjoyed at a later date.

Although the days of mega-inflation are now long past, payment by instalment has long become the norm for even everyday household goods — regardless of whether one is rich or poor. The more than 600,000 international football fans visiting Brazil for the World Cup will doubtless be puzzled by the price signs they see in the shops. For instance, an item that would be only €30 in Europe might be labelled "12 x 10 R$" meaning twelve instalments of ten reals (reais). At the very least, this requires a different approach to marketing.

Still chances out there

Given this catalogue of difficulties, German retailers look wise for not having entered the market. But should they really be patting themselves on the back so quickly? Some international experts think they are missing a trick. "There are still chances out there, if you select your region carefully," says Insead Professor Marcel Corstjens.

Potential entrants won’t face high national concentration as the top five players still account for less than 11 per cent of the total market. In a country 15 times larger than France there is still plenty of scope for the regional player. If one takes, for instance, a town like Montes Claros with a population of around 250,000, the nearest foreign retailers are 500km away in Belo Horizonte, the state capital of Minas Gerais.

In view of the construction boom it is also surprising that there are hardly any big DIY chains. The same applies for the entertainment electronics segment with the exception of a few local heroes such as Casa Bahia or Ricardo Elétricos.

Many localities in the "interior" are therefore ripe for the taking by modern self-service mass retailers. The country is still dominated by more than 44,000 Mom & Pop stores as well as countless kiosks and garage shops. At most, some local clan will run a handful of small supermarkets reminiscent of those in Poland and Russia over 20 years ago. Several times a week, side roads close for street markets in every bairro (town quarter) where fresh produce, including meat, is sold without refrigeration under the blazing sun.

Retail consultant Boris Planer of PlanetRetail warns potential western retail investors, however, about timing. Although Planer estimates that it could be another decade before the first German grocers arrive, "this will also give local players the time to grow aggressively and to improve operational efficiency".

El Dorado for fmcg companies

Despite a number of ups and downs, Brazil, however, has always been a strong market for the likes of P&G, Unilever, Nestlé or Coca-Cola. Consumer goods giants have brilliantly exploited local demand for low prices and small packages. They have also used the country as a test bed for the marketing of their brands in threshold economies.

When, for instance, Nestlé found that it wasn't even possible to sell packs of four or six yoghurts in the favelas, it equipped an army of sales people with refrigerated handcarts who sell even single pots on credit. The Nestlé até você project is hugely successful. Trade legend has it that the Swiss company has never had to write down one centavo for non-payment even in the poorest areas. This is because the sales reps are recruited locally and know where their customers live and when they can pay.

There is further big potential in a number of niches. The cosmetics segment may serve here as an example. "As the sensational success of Nivea & Co. proves, Brazilian women and increasingly men spend a far larger part of their disposable income on cosmetics and health & wellness products than the Germans," says Hans-Joachim Stickel, a Bad Homburg-based management consultant, who, in tandem with his Brazilian wife Aurilia, advises medium-sized manufacturers on the choice of sales channels and the best route to market.

Stickel paints an interesting picture of the realities that need to be faced by those wanting to export their products to Brazil or market their brands there. "You've got to have someone who speaks Portuguese because Brazilians seldom know English, and communication is everything in Brazil. You also need someone who will hold introductory talks with the buyers and a local distribution partner whom you trust and who has local contacts."

He warns exporters about the necessary staying power. "You have to accept that the authorities can make entry difficult, and it is essential to do your sums properly. The real art is to pitch the end consumer price of your brand to make it a winning proposition but with enough gross margin to compensate high import duties etc."

For those prepared to accept the rules of the game and the conditions of the market the good news is that "most Brazilians are excited about all things European and are often willing to pay more for European products than for local ones".

Given such business chances, the World Cup and 2016 Olympics are as good a reason as any to reassess Brazil as a potential investment destination. Surely, this vibrant country with its wonderful people offers German retailers and suppliers more than Ipanema Beach and the jogo bonito (beautiful game) this summer?

 

Related article in German: By Mike Dawson in Lebensmittel Zeitung, no. 10, 07.03.2014


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