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  1. Analysis
March 2, 2010

Carrefour, Wal-Mart battle for supremacy in Brazil

Brazil is shaping up to be a key battleground for Wal-Mart and Carrefour, the world's two largest retailers. Both have outlined separate expansion plans for Brazil in recent weeks but, as Michelle Russell reports, both face a fight from CBD, the country's leading domestic player.

Brazil is shaping up to be a key battleground for Wal-Mart and Carrefour, the world’s two largest retailers. Both have outlined separate expansion plans for Brazil in recent weeks but, as Michelle Russell reports, both face a fight from CBD, the country’s leading domestic player.

Brazil is on course to become the sixth-largest grocery market in the world, so no wonder that Wal-Mart and Carrefour are vying for a larger piece of the action.

As one of the high-growth BRIC markets, Brazil has become the ninth-largest economy in the world and the second-largest in the Americas, after the US.

Although the growth of the Brazilian retail sector slowed during the downturn, it has not stopped domestic or foreign retailers from setting out expansion plans in a market that, according to the IGD, will be worth EUR284bn (US$384.7bn) by 2014.

The major players – Brazil’s Pão de Açúcar (CBD), Wal-Mart and France’s Carrefour – dominate the market, with the rest accounted for by much smaller, typically local chains.

All three retailers are competing strongly for market share and have clear strategies in place that they believe will help them expand.

Carrefour, while holding second place to CBD in terms of market share, earlier this year announced its intent to spend BRL2.5bn to expand its presence in the north and north-east of the country.

The French retail giant and the world’s second-largest retailer is looking at opening more stores and a new distribution centre in northern Brazil. The firm currently has almost 600 outlets in the country. Carrefour’s plans also include a proposed move into Internet retailing in a bid to compete head on with CBD.

Allied to this, Carrefour’s director for Latin America, Laurent Bendavid has previously said that the company had not ruled out making an acquisition in the market. The long-term potential that Brazil embodies for Carrefour underlines the firm’s belief that it could eventually overtake Spain and become the company’s second-largest market behind France.

Jonathan Gunz, senior business analyst for IGD, says: “Carrefour is unlocking future growth potential through expansion into services such as petrol stations and financial services, and of course, through the Atacadao acquisition, which has bolstered the group’s presence in the wholesale sector.”

However, Carrefour is unlikely to have everything its own way. Marcel Motta, Brazil research manager at Euromonitor International, believes Carrefour held a “first-mover advantage” in Brazil, being the first international retailer to hit the country with a big store-format.

“Back in the 1980s when Carrefour came into Brazil, Wal-Mart wasn’t even thinking about it, so Carrefour was first,” Motta explains. “Then the [Carrefour] stores were always located far from the consumer, right on the roads, big hypermarket-type business models. And that worked very well at a time when inflation in Brazil was in the thousands a year.”

However, Motta believes the Brazil of today, in which inflation rates are declining and consumers are becoming more demanding, means Carrefour is “struggling” due to its slow reaction to change.

“What’s going on in Brazil is that there’s been a trend towards bringing the store closer to the consumer. Carrefour was very slow in reacting to that at the same time when CBD moved faster,” Motta says.

Motta believes that CBD, even though the company had larger supermarkets, benefited from having a core business based on smaller formats.

“What we’re seeing now is Carrefour struggling. They now have a smaller neighbourhood format, which they are opening within in the city and closer to the consumer. But there is good fire from what CBD has been doing,” Motta says.

In December last year, CBD announced a joint venture with Casa Bahia Comercial, the country’s largest retailer of durable goods, for the sale of food and non-food products.

Once completed, the deal will mean CBD will become Brazil’s largest private employer, with 68,000 employees and gross revenues of around BRL40bn.

French retail giant Groupe Casino, which holds a majority stake in CBD, welcomed the strategic tie-up that it says “confirms the priority” given to expanding in Brazil.

Meanwhile, CBD, which operates just under 600 stores throughout Brazil, has insisted it will use “the best brand image” in the country to fight off the competition from Carrefour and Wal-Mart.

It posted a 28.8% increase in full-year sales earlier this year, boosted by marketing campaigns at its Extra chain.

Motta believes there is likely to be further consolidation in Brazil’s retail sector in the wake of the deal between CBD and Bahia.

“It’s the natural flow of things and incomes have been improving here in Brazil. There’s this new middle class being formed. Even though it’s a large country with lots of small chains, it’s going to continue to consolidate and bring smaller stores closer to consumers as opposed to what we’ve seen in the past with stores being so far away,” Motta says. “What all of [the retailers] are looking for is to acquire the smaller chains. The smaller, but with great potential, chains in the country.”

Some industry watchers see Wal-Mart as key to any consolidation that could take place in Brazil.

The IGD believes international operations continue to be one of the key growth drivers for Wal-Mart, with sales in the last financial year breaking the GBP100bn barrier.

“Over recent years the retailer has started to build strong momentum in markets such as China and Brazil, while it believes that India offers a substantial opportunity following its first store opening in the country,” Gunz says. “In 2009, Wal-Mart opened over 90 new stores in Brazil as it pursues a multi-format strategy, with its cash-and-carry format, Maxxi, and its TodoDia soft discount format stores, delivering some of the strongest performances.”

No surprise then, that mirroring the steps of Carrefour, Wal-Mart has also laid bare its warchest for Brazil, announcing an investment of between BRL2bn and BRL2.2bn to fuel growth in the country in the coming year.

The projected capex spending includes investments in new stores, distribution and technology, and it is expected that between 100 and 110 new stores will be opened during 2010.

The US retailer, which re-entered the country in 2003 after an initial failed attempt, has been gaining ground ever since.

In previous downturns, it would have been easier for many retailers to turn their backs on their investments in Latin America.

However, those that have stuck with their strategies and investments have clearly benefited as the region’s economies, notably Brazil, emerged from the downturn and consumers look to start spending once more.

With this in mind, the region’s leading grocers are unlikely to shrink from their expansion strategies. The companies that invest now are likely to reap rewards.

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