Brazil Retail: Drivers and Opportunities Matt Bruck McDuff Advisors January 2012
Dec 22, 2015
Brazil Retail: Drivers and Opportunities
Matt Bruck
McDuff Advisors
January 2012
Retail and the Economy
3
After an astonishing climb since 2004…
Source: World Bank
4
…GDP growth has slowed
Source: IBGE
5
This is still impressive; Brazil has outperformed all but China.
0.0
1 000.0
2 000.0
3 000.0
4 000.0
5 000.0
6 000.0
7 000.0
8 000.0
9 000.0
2005 2006 2007 2008 2009 2010 2011 2012
China
India
Russia
Brazil
Nominal GDP, US$ Billion
Source: IMF World Economic Outlook Database
6
02468
1012141618
Feb-1
0
Apr-1
0
Jun-
10
Aug-1
0
Oct-10
Dec-10
Feb-1
1
Apr-1
1
Jun-
11
Aug-1
1
Oct-11
Retail Sales have slowed too…
Source: IBGE
Annual Retail Sales: % Change Year over Year
April 2010: +15.7%October 2010: +
8.7% September 2011: +
5.3% October 2011:
+4.3%
7
…but sales are still growing.
2012 Projections:Continue decelerating
trend through H1 Stabilize and possibly
pick up late in 2012.
Longer Term ProjectionsTotal Retail 2011: $792BTotal Retail 2015:
$1,162BGrowth: 47% in 4 years
Sources: Roubini Global, IBGE, Moody’s Analytics, BMI Brazil Retail Report
8
Inflation – and the Central Bank response - remain an issue for retail. 5 rate hikes in early
2011 to restrain domestic demand
Sales fall 3 cuts in August to
counter Europe malaise Strong sales rebound in
November (+6.8% vs 2010)
4.93
2.05
4.60
6.07
3.95
6.24 6.36
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
2005 2006 2007 2008 2009 2010 2011
Annual % Change in Consumer Prices
Sources: IBGE, FGV
9
Business optimism has fallen this year – but still remains high for the future.
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
Jan
Mar
May Ju
lSep Nov
Jan
Mar
May Ju
lSep Nov
Current Conditions
The Future
Note: Scale of 0 to 100; above 50 indicates confidence among entrepreneurs.Source: Banco Central do Brasil, 12/11
BCI
10
Consumer confidence has fallen from its peak – but remains even higher.
144.00146.00148.00150.00152.00154.00156.00158.00160.00162.00164.00166.00
Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov
Note: Index is weighted average of current and future expectations; 200 is most optimistic.
Sources: Fecomercio SP, CNI
2010 2011
CCI
11
Brazilians continue to get richer.
Source: World Bank
12
The wealth is not uniform: the majority still earns less than $1,000 per month…
66
57
50
39
0
10
20
30
40
50
60
70
India Brazil China Russia
Source: Credit Suisse
% of population earning less than US$1,000 per month, 2010
13
…but the population and GDP per capita are growing in parallel.
0
5 000
10 000
15 000
20 000
25 000
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
GDP per capita in 2010 R$
Population (x10,000)
Source: IBGE
14
Compared to peers, Brazilians spend…
Source: Credit Suisse
Savings as % of income, 2010
17
10
31
13
0
5
10
15
20
25
30
35
India Brazil China Russia
15
…and use credit cards.
20.619.3
16.214.6 13.6
9.47.2
0
5
10
15
20
25
SaudiArabia
Brazil Egypt China Russia Indonesia India
Source: Credit Suisse
% of purchases by credit card, 2010
16
A demographic shift – toward a middle class - favors retailers.
1. Older and more affluent:
2. Better educated; increased access to information:
3. Smaller, more urban households:
More sophisticated products, health-oriented products
More discerning consumers
Consumption as a topic; need for small packages and more convenience
Sources: Euromonitor, IBGE, CIA, Ernst & Young
17
The broader environment also appears favorable. Substantial investment
in infrastructure enhances convenience.
Foreign capital inflows, encourage foreign vendors.
Tax reductions and bureaucratic improvements ease business burden.
Source: A.T. Kearney
Country 2011 Rank 2010 RankBrazil 1 5Uruguay 2 8Chile 3 6India 4 3Kuwait 5 2China 6 1Saudi Arabia 7 4Peru 8 9U.A.E. 9 7Turkey 10 18
A.T. Kearney Global Retail Development Index, 2011
18
Risks to sales growth exist – but appear manageable.
Global Factors: Global slowdown
infects Brazil’s economy.
Exchange rate makes shopping vacations irresistible.
Brazil Factors: Inflation/interest
volatility Credit bubble Slowing job creation Social unrest Corruption scandals
Retail Segments
20
Brazilian consumption by category
Source: IBGE 2007
21
Some booming products:
Cars2.2 million new
purchases in 2009. Domestic airline tickets
From 80 million in 2005 to 100 million in 2009
Cell phones 200 million by 2012 – in a
country with a population of 190 million
TVs9 million imported in 2009
Sources: Vivo, Credit Suisse
Brazilian passenger car sales p.a. (millions)
22
Brazilians have embraced appliances, but room for growth remains.
Sources: IBGE, Euromonitor
9591
78
3227
0
10
2030
40
50
60
7080
90
100
television refrigerator telephone microwave computer
% of households 2007
23
Supermarkets – owned by global firms - have boomed. Companhia Brasileira de
Distribuicao (CBD) largest chain Diniz family and Casino
(French) Q4’11 revenues + 8.7% vs
2010. Annual sales to $25B Operated in traditional Brazilian
style: replacing typical yo-yoing discounts and mark-ups
Walmart Brazil Established 1994; active since
2004 Invested $1.2B to open more
than 100 shops in 2010; plans 80 for H1 2012
2009 revenues $11B Introduced its trademark
“everyday low prices” in early 2011
Focus on middle class needs: organic products produce, generic drugs, cut-price computers.
Expects Brazil business to grow at 1.4x its international average over next 5 years
Sources: The Economist, NASDAQ, Dow Jones, FT
24
A large, under-served lower economic class promises 64 million more market customers. Class D sees growing
buying power: Rising minimum wageGovernment subsidiesLower inflationAccess to credit
To reach this segment: Local AffordableLess expensive Smaller packages Family appealQuality emphasisBenefits educationTrust branding
Sources: Boston Consulting Group, Euromonitor
Foreign Retailers
26
Global retailers have found Brazil challenging. Taxes
exorbitant import duty (eg 30% on foreign cars)
25 % luxury goods tax
Bureaucratic red tape Currency controls and
exchange rates Stringent local content
requirements Turbulent history
40.4452.95
62.6476.7
84.26
107.5 103.42118.68
134.92
155.5
0
20
40
60
80
100
120
140
160
180
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Sources: Ernst & Young, Banco Central do Brasil
Unit Labor Cost Index, US$
27
A strong Real also hurts foreign retailers.
Source: OTC Interbank
28
Some globalists are in Brazil – but many have hesitated.IN BRAZIL: Zara
$282M sales in 2010 held liable for “slave-like”
conditions at its local subcontractors; paid $1.8M fine
Starbucks In Brazil since 2006, by
acquisition. Approaching 100 stores. Targeting 1,000; struggling
with locations.
NOT IN BRAZIL: Topshop
Opening first store Q1 ’12 H&M, Gap
Not in Brazil Apple
Launched itunes Brazil in December 2010.
31 "premium" resellers (19 Herval stores), closely controlled by Apple
Still considering a flagship store
29
Brazilians expect high prices – and in return demand quality and service… Carlos Jereissati –
CEO of Iguatemi “Service has become a
crucial factor… Brazil is very different from the Middle East and Asia… Things are very expensive and that creates a difficult market. In order to sell, you need amazing service...”
Richard Barczinski, general director in Brazil for Hermès: “The consumer here is
highly sophisticated and informed. People here appreciate not just the value of something expensive, but the value and pleasure of good design and materials.”
30
…so luxury brands work particularly well. 30 billionaires 137,000 millionaires (more
than Russia or India) Over 1 million families with
income above $80,000
Doubled 2006 to 2010 Grew 22% in 2011 Will grow from 1% of the
global luxury market to 6% ($63.5B) by 2025
Louis Vuitton grew Brazil sales 50% in 2009.
Tiffany and Gucci count Brazil among their top performing markets worldwide in 2010
Sources: Forbes, Goldman Sachs, MCF Consultoria, World Wealth Report
31
Foreign luxury brands are now opening their own stores. 2008
20 foreign luxury brands had established a store in Brazil
2013 an additional 50 brands will
enter the market
Chanel Chanel closed franchise
store in Daslu; opened boutique in Cidade Jardim in 2011
Removal of middleman allowed 30% price cut.
Diane von Furstenberg São Paulo store is her most
successful outside US Louis Vuitton
The 4 Louis Vuitton stores in Brazil grew 4 times faster than their average store in 2011
Sources: Bain & Company, Forbes
Appendix
33
Interest Rate
34
Business Confidence
35
Inflation
36
Online retail? Farfetch.com
In Brazil since late 2010 Amalgamator - online sales for 80 luxury
stores (25 Brazilian) 2,000 global labels, 50 Brazilian labels Local payment systems and split payments Assisted, fast customs clearance All taxes prepaid by vendor Easy returns Native language customer-service team
37
Age trends the majority of the population will still be concentrated in the age
group of 15 - 44 through 2050 – but aging quickly average age in Brazil is 28.6 67% between the ages of 15 and 64 27% younger than 14 population over 40 growing (+4.2% 2003-7) Birth rate is decreasing. Population under 14 fell by 0.7% (2003-7) Percentage of elderly has doubled since 1960; by 2020 Brazil will
rank 6th in the world in percentage of elderly life expectancy has increased (now 73, likely to reach 80) due mainly to improvement in quality of life and advances in
health care. Aging and more affluent population tends to favor more
sophisticated and health-oriented products
Sources: Euromonitor, IBGE, CIA,
38
Consumption drives GDP growth. (GDP= C + I + G + X – M)
Source: Credit Suisse