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August 30, 2013

Navigating Brazil’s slowdown: International retailers battle it out in Brazil

As the fifth-largest country in the world, Brazil is simply too big a market for food retailers to ignore. And with a population of around 190m, the potential for growth and expansion in a market of this size is tremendous. However, for international retailers in the country, it has proved a tough nut to crack.

As the fifth largest country in the world, Brazil is simply too big a market for food retailers to ignore. And with a population of around 190m, the potential for growth and expansion in a market of this size is tremendous. 

Domestic and international players certainly see the potential offered by Brazil and, despite a slight slowdown in recent years, investment continues apace. Indeed, Brazil has one of the world’s most rapidly developing economies and a GDP per head that is greater than either India or China.

IGD figures show the Brazilian grocery market is currently worth US$329bn and is set to become the fourth largest in the world by 2016, valued at $468bn. With its large population and growing middle class, Brazil is an enticing market for foreign and local investors.

But, for all its potential, the Brazilian retail food industry is a tough nut to crack.

The sector is highly fragmented with the top five grocery retailers all non-domestic, according to research analysts IGD. French retail giant Carrefour is the market leader, with Latin America as a whole driving a strong international performance for the group. Brazil is one of its best-performing markets and in its recent first quarter results, posted growth across all formats.

According to IGD, Brazil is also a high growth country for the second placed grocery retailer, Casino-owned Grupo Pão de Açúcar (GPA), which is increasing its pace of expansion. Walmart takes the bronze position, while Chilean retailer Cencosud and Spain’s Dia make up the rest of the top five, with domestic Brazilian retailers completing the top ten.

Brazil research manager for Euromonitor, Meika Nakamura, tells just-food the top ten players hold just 18% market share in value, making competition in the country “quite intense”.

“The main reason for this is because we have a lot of regional players and this is one of the main issues the multinationals have.”

IGD business analyst Catherine Ellwood concurs that the grocery market in Brazil is “highly fragmented” and adds that while difficult to measure accurately, it is estimated that the ‘informal’ sector accounts for around 40% of grocery spend. This typically includes trade going through street markets and small businesses.

“Small, independent retailers and specialist grocers are highly resilient and compete effectively by staying close to shoppers and providing a high level of service,” Ellwood says. “They are also able to optimise their cost structures compared to international retailers, who face the infrastructure and legislative complexities of trading across states.”

According to Ellwood, understanding the national and regional differences will remain “critical to driving growth for operators in Brazil”.

In addition to understanding where to invest, however, the key for anyone wanting to invest in the Brazilian food retail scene will be in understanding which format to invest in.

According to Ellwood, among the top ten grocery retailers, supermarkets are the dominant format. The typically large modern-day self-service grocery stores, tend to dominate the segment, accounting for around 80% of purchases made. Leading players such as GrupoPao de Acucar, Wal-Mart, and Carrefour all follow this format.

However, large retailers have been quick to realize that a ‘one-size fits all’ model can not necessarily be applied to the Brazilian market and so the concept of the convenience store has been on the rise. It is now the fastest growing channel in Brazil.

Nearly all convenience stores in Brazil are associated with fuel distribution locations. The fuel distribution network in Brazil is far more extensive and developed than the stand-alone convenience stores network.

The majority of stores are run by the largest and second largest oil companies in the Brazil, Petrobras and Ipiranga, respectively. Other large players include Shell Brasil, and Esso Brasiliera de Petroleo, with the remaining c-stores being unbranded independent operators.

The hypermarket format is also very well entrenched in the Brazilian retail market, Ellwood says. “Carrefour, for instance, makes three quarters of its sales from its hypermarkets, in addition to its other store formats such as supermarkets, cash and carry, and convenience stores.”

However, it is the emergence of “warehouse clubs” – also known as Atacarejo – that are winning favour with lower-income customers.

Nakamura suggests the warehouse store are experiencing healthy growth.

“Atacarejo – a mix of warehouse clubs and grocery retailers – attract many families from lower income brackets that purchase their groceries in bulk as it is cheaper. This type of channel has grown in popularity. They’re cheaper as they’re are not situated close to the city.”

The one channel that may have been expected to show attractive growth prospects for grocery retailers is e-commerce. While internet retailing in Brazil is the fastest growing channel within retailing, online grocery is lagging behind general merchandise e-commerce.

MercadoLibre, the Latin American equivalent of eBay, is one of the largest players and reported a 38% revenue increase for the three months ended 30 June. But according to A.T. Kearney principal, Pietro Gandolfi, the growth in online retailing in Brazil is centred around non-food.

“Brazil is very advanced in terms of e-commerce compared to other countries, the projection and trend in e-commerce is very impressive but the top categories are electronics, home appliances, apparel and health and beauty. There is not really a demand for e-commerce with food.”

The focus for the majority of players currently operating, or looking to invest in the Brazilian grocery retail market, will be in the development of the convenience and discount format.

Gandolfi predicts store numbers will grow by around 11-12% by 2016. This compares to 7% for the hypermarket format. And the focus, he suggests, will be on choosing the right location.

“There was once a huge investment in large store formats and still hypermarkets and supermarkets both account for almost 80% of sales country-wide. But hypermarket growth has slowed down in the last seven years. The projection and trends for convenience and discount stores is set to increase in number and in market share.

“Why? Because in the past there was a huge investment in the big cities with big formats. Now there is a kind of separation, particularly in the south-east where players are now looking at Tier 2 and Tier 3 cities with below 500,000 inhabitants. In this kind of city the more attractive format is a convenience store. Even in the big cities where CBD operate, there is a separation and no need for hypermarkets but more demand and attractiveness for the small convenience store. There is real shift in the mindset of the consumer wanting a convenience store nearer to their homes. Bigger companies like Wal-Mart, Carrefour are really shifting for the convenience store format as a more attractive one.”

Gandolfi says there has also been a shift from players investing in the “saturated” south of the country, which accounts for more than 50% of sales, to the growing importance of other regions like the centre-west and northeast of Brazil.

“There are some white spaces in Brazil, it’s a huge country, there is still a lot of space to create new stores.

He somewhat dismisses talk of a slowdown in Brazil’s food retail sector, which he says is related more to non-food categories.

“I don’t see this as a long term concern for the players here. To cope with this slowdown players are looking at strategy, location and formats, as well as their commercial offer.”

With consumption increasing, despite the slowdown, Brazil is certainly an attractive proposition and ripe for investment.

Thanks to the aggressive growth strategy adopted by players operating in the market, both foreign and domestic, its continued economic stability, and the country’s growing middle-class, means Brazil has emerged as a retail juggernaut and the world’s third-biggest grocery market, next only to the US and China. Any talk of a slowdown is unlikely to deter the deep-pocketed foreign players looking to invest in this high growth market.

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