L.E.K. Consulting
CONSUMER SPOTLIGHT
LEK.COM
Spotlight on Brazil
Understanding the Brazilian Consumer
L.E.K. Consulting / ...
LEK.COM
Another important factor changing Brazilian retailing is technology. Brazilian Internet penetration is reasonably ...
LEK.COM
CONSUMER SPOTLIGHT
L.E.K. Consulting / Consumer Spotlight
checkouts) experienced 1.2% of sales volume growth in 20...
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Spotlight on Brazil: Understanding the Brazilian Consumer

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Once the darling of the BRIC group, Brazil has recently fallen out of favor. GDP growth over the past four years has halved since the heady years of 5% growth between 2004 and 2008, and the market expects a similarly weak performance of around 2% GDP growth in 2014. The reasons for the decline are well understood: a closed and protected economy, low productivity, heavy government intervention and bureaucracy, and famously weak infrastructure.

If the hype is over, however, Brazil still remains a large and attractive consumer market. The country has the sixth largest GDP in the world and a population of around 200 million, half of which can be safely categorized as middle class. On the whole, Brazilian consumers remain undeserved in many retail categories, presenting plenty of opportunities for retailers able to understand where and how to place their bets.

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Transcript of "Spotlight on Brazil: Understanding the Brazilian Consumer"

  1. 1. L.E.K. Consulting CONSUMER SPOTLIGHT LEK.COM Spotlight on Brazil Understanding the Brazilian Consumer L.E.K. Consulting / Consumer Spotlight Once the darling of the BRIC group, Brazil has recently fallen out of favor. GDP growth over the past four years has halved since the heady years of 5% growth between 2004 and 2008, and the market expects a similarly weak performance of around 2% GDP growth in 2014. The reasons for the decline are well understood: a closed and protected economy, low productivity, heavy government intervention and bureaucracy, and famously weak infrastructure. If the hype is over, how- ever, Brazil still remains a large and attractive consumer market. The country has the sixth largest GDP in the world and a population of around 200 million, half of which can be safely categorized as middle class. On the whole, Brazilian consumers remain underserved in many retail categories, presenting plenty of opportunities for retailers able to understand where and how to place their bets. Retail sales in Brazil were weak in 2013, growing at 4.5% from 2012, accord- ing to CNDL, a national confederation of shopkeepers; a similar performance is expected for 2014. In a recent survey undertaken by Provar/FIA, a business school, consumers seem to be particu- larly interested in electronics, large appli- ances and travel/tourism for 2014. On the other hand, purchase intention on computing equipment and construction material are substantially down com- pared with 2013. (See Figure 1) Looking toward the long term, demo- graphic change will affect Brazilian consumption patterns significantly. If the growth of the lower middle class has been the defining characteristic of the previous decade’s demographic shifts, the growth of the middle and upper-middle classes will be the main factor for change over the next 10 to 20 years. By 2030, the richest Brazilians will increase from 1% to 5% of the population, and the middle and upper-middle classes will increase from 36% to 56% of the population. Both demographic changes will drive consumption changes, in particular an increased interest in luxury and aspirational goods. Today’s typical Brazilian luxury consumer is usually between 35 and 55 years old and lives in either São Paulo or Rio de Ja- neiro. The Brazilian luxury consumer is not price sensitive, as luxury goods are more expensive in Brazil than elsewhere in the world. Taxes are the main reason for this price premium – some items are taxed up to 300%. Luxury consumers also expect exceptional service, so they tend to prefer high-end malls. Some of them, such as JK Iguatemi in São Paulo and Village Mall in Rio de Janeiro, have helped launch several international brands in Brazil. Apparel and Footwear 17.8 Travel and Tourism 13 Large Appliances 10.6 Electronics 9 Furniture 7.4 Construction materials 7.4 Automotive and Motorcycles 7.2 Cellphones 6 Computers 5.4 Camera, Photo & Video 3.6 Small Appliances 3 Home textiles 1.8 Figure 1 Consumer purchase intention in São Paulo for the first quarter of 2014 22.6 51.4 0 0 16.1 7.1 5.9 0 -5.3 -27.5 -50.9 36.4 % of respondents 1st quarter of 2014 % change compared with 1st quarter of 2013 Source: Provar/FIA
  2. 2. LEK.COM Another important factor changing Brazilian retailing is technology. Brazilian Internet penetration is reasonably high at around 50% (versus 75% for the U.S.) and eight out of 10 Brazilians visited a social networking site during the last six months. The Wall Street Journal recently reported that Brazil has 65 million Facebook users, second only to the U.S. This high level of Internet usage signals promising opportunities for e-commerce. E-commerce sales in 2013 reached R$28 billion ($11bn), according to e-bit, an Internet data provider—a 25% increase over 2012 and 3.6% of total retail sales in Brazil (compared to 5.2% in the U.S.). Brazil is expected to become the fourth largest e-commerce market by 2016. The main established e-commerce categories in Brazil include travel, electronics, books, appliances, clothing and footwear. Up and com- ing categories include home items as well as beauty and health products. While the e-commerce market in Brazil is growing, profitability remains a distant objective and most players are still focused on capturing market share at any cost; companies considering e-commerce should be prepared to play a long game in Brazil. They also have to face many logistics challenges that increase shipping costs while decreasing customer satisfaction. The next frontier in Brazilian e-commerce is smartphone usage. Smartphone penetration is rapidly increasing, especially among the young. Brazil is the fifth largest global market for smartphone sales with 26% of the population owning a smartphone in 2013. Among 18 to 24-year-olds the penetration rate is 46%. Many Brazil- ians, however, have yet to use their smartphones to shop. Forty-two percent of Brazilians say they do not use their smartphones for shopping, while 33% use their phones to look for ideas and to comparison shop but not to make purchases. While overall retail growth is expected to be muted dur- ing the next few years, smaller metropolises are expected to deliver above-average growth. We expect cities between 20,000 and 500,000 inhabitants to grow 1-2% more than larger cities until 2020, and the population of Brazil’s north and northeast are expected to grow 3% more quickly than the country’s southeast during the same period. Finally, the rise of female consumers is changing the demographic mix of Brazil’s shoppers. More women in the workforce means households have more discretionary income. Women have gained increased financial independence and as a result have developed unique purchasing tastes. The health and beauty category, for instance, is expected to grow by about 12% annually from 2012 to 2017. Retailers have responded to these demographic changes in different ways. Some players are expanding aggressively to take advantage of opportunities outside the big, urban centers. They are also experimenting with new retail models and store formats. Neighborhood markets, for instance, are competing more aggressively with supermarkets. Smaller outlets (1-4 CONSUMER SPOTLIGHT L.E.K. Consulting / Consumer Spotlight Figure 2 E-commerce in Brazil 2001 02 E13E12111009080706050403 2,000 0 4,000 6,000 8,000 10,000 12,000 14,000 16,000 Source: Interbrand, Euromonitor International, Canadean, Consultoria e-Bit, E-commerce Brasil, PR Newswire, L.E.K. analysis 23%+ Brazilians have already made a purchase on the internet 226.8 11,195.3 15,958.1 357 735 1,050 1,848 2,646 3,444 4,452 6,216 7,854 23% 495.6 E-commerce purchases in Brazil (2001-2013E) USD in millions
  3. 3. LEK.COM CONSUMER SPOTLIGHT L.E.K. Consulting / Consumer Spotlight checkouts) experienced 1.2% of sales volume growth in 2012, while larger outlets experienced a sales decrease. Some larger retailers have been experimenting with stores that open late as well as 24-hour shopping. Retailers have also experimented with product mix. Consumers with more discretionary spending power are now searching for broader product variety and new products to try. For instance, consumer electronics sales in hypermarkets have grown rapidly in recent years. Private labels, particularly in the food and house cleaning categories, are also gaining share and expanding beyond grocery retail. In short, the sheen may have rubbed off Brazil’s economy, but this large country still provides an enticing opportunity to inter- national retailers, particularly those that can identify pockets where consumers are spending more, are underserved, or both. Meet Our Experts Please contact us at retail@lek.com for additional information. L.E.K. Consulting is a registered trademark of L.E.K. Consulting LLC.All other products and brands mentioned in this document are properties of their respective owners. © 2014 L.E.K. Consulting LLC Meet Our Experts Mauricio Franca São Paulo Jon Weber Boston -2 -1 0 1 2 3 4 5 6 7 8 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 1.6 2.9 4.4 5.7 5.7 5.2 4.1 3.2 3.2 6.6 5.2 2.9 0.7 -1.4 -0.3 2.5 5.4 7.6 7.5 6.3 4.9 3.7 2.7 1.9 1.2 0.9 0.9 1.2 1.92.6 3.3 4.0 4.2 5.3 5.6 6.1 6.4 6.4 Figure 3 Brazil’s growth rate - percentage change in GDP Source: IBGE, Adaptação NE&PE/GS&MD

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