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Brazil- the new consumption map


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Why Brazil will become the 5th largest consumer in the world by 2020...

Why Brazil will become the 5th largest consumer in the world by 2020...

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  • 1. 04/09/12 Exame Reprint - The New Consumption Map Mais sites Abril Grupo Abril Abril Mídia Distribuição Gráfica Abril Educação Assine Loja SAC Home Negócios Mercados SPECIAL REPRINT OF THREE RECENT EXAME COVERS STORIES ON THE BRAZILIAN ECONOMY | | THE NEW CONSUMPTION MAP The recent slowdown in the Brazilian economy cast doubts on the strength of consumption in the country. But dont be fooled. By 2020, Brazilians will spend 1.3 trillion Reals more — turning the Brazilian market into the worlds fifth largest FABIANE STEFANO, FROM JUAZEIRO DO NORTE (CE), AND PATRICK CRUZ, FROM APARECIDA DE GOIÂNIA (GO) #1022 The 1960s, M orris Asimow, a professor of engineering at the University of California, in Los Angeles, believed industry could bring development to the most remote areas in the world. Based on this belief, in 1961, Asimow led an expedition to the Brazilian hinterland. The Cold War was in full swing, Fidel Castro had just aligned himself with the Soviet bloc and the Americans, under the leadership of President John F. Kennedy, wanted to promote democracy and entrepreneurship on the American continent. Together with a group of American and Brazilian students, Asimow arrived in Juazeiro do Norte, in the interior of the state of Ceará, planning to sow the seeds for the construction of small corn and cassava flour mills and cement plants. In but a few years, the region actually got an example of each of these industries. Even a radio and an engine factory were deployed in the city, then with 68,000 inhabitants. The projects only survived, however, as long as American money was flowing in. When the cash dwindled in the late 1960s, the factories slowly fizzled out, one by one. It was a practical lesson that proved development is not created in a lab - and that there is no amount LAST EDITIONS of government aid that is capable of inducing the economy if the minimum conditions for it to flourish are lacking. Interestingly, Juazeiro is currently the stage of an even more radical transformation than professor Asimow, who died in 1981, ever dreamed of. With a population of 250,000 inhabitants and almost 300,000 other people living in the cities surrounding it, Juazeiro has become a major retail hub and is boiling. Evidence of this new era has a connection with the experiments carried out in the 1960s. Last year, one of the buildings that was home to an old factory under Asimows project, was turned into a unit of Hiper Bompreço, a supermarket chain belonging to U.S. group Wal-M art. The store #1021 #1020 BB ED. was put together to target the city’s consumption IN 2020, BRAZILIANS WILL CONSUME AS MUCH PASTA AS ITALIANS AND THREE TIMES MORE BEER THAN GERMANS potential, currently at 570 million Reals per year. This amount is expected to quadruple by the end of the decade. Based on an exclusive survey conducted by American think tank M cKinsey, supplemented by data from the Escopo geomarketing outfit, EXAM E drew the map of consumption in Brazil in 2020 - and it is clear that the Juazeiro example is anything but an isolated case. It will be replicated across the country. Within a decade, the Brazilian consumer market will almost double in size: from 2.2 trillion to 3.5 trillion Reals. This figure includes all household spending, ranging from housing and school expenses to the supermarket cart. Of this total, M cKinsey analyzed the behavior of the 45 main product categories consumed in Brazil, which include cosmetics, frozen food and clothing and is expected to move 1.3 trillion Reals by the end of the decade (see the chart). Escopo, meanwhile, has projected consumption of items such as cars, appliances and airline tickets. Together, the 55 categories will represent a market worth nearly 1.8 trillion Reals in 2020, up from the current 800 1/11
  • 2. 04/09/12 Exame Reprint - The New Consumption Map market worth nearly 1.8 trillion Reals in 2020, up from the current 800 billion. Some projections paint a picture of the move forward. By the end of the decade, Brazilians are likely to consume as much pasta as Italians. We are expected to have the third largest car market in the world. Beer consumption, which was half of the German one in 2005, will be three times greater. Over the next eight years, hair product sales in São Paulo alone will grow twice as fast as in France. Consumption in Brazil will shift to a new dimension, adding up to 65 percent of the 5-trillion-dollar GDP. “From the economic viewpoint, durable goods consumption may end up working as an investment in Brazil," says 2004 Nobel Prize winning economist Edward Prescott. Prescott says that acquiring goods such as computers and appliances can make a family more productive and able to generate more wealth. In recent years, consumption has already been the driving force of the economy. Fueled with more credit and more income, Brazilians have achieved the unlikely: they have kept the economic activity heated, even during the 2008 crisis, when the world dove into one of the most severe recessions of the past 100 years. The formula, however, begins to show signs of exhaustion. Debt now accounts for 45 percent of the Brazilians annual 2/11
  • 3. 04/09/12 Exame Reprint - The New Consumption 3/11
  • 4. 04/09/12 Exame Reprint - The New Consumption Map Nearly a quarter of the workers wages is locked up with the payment of interest and amortization. Default is up and the consumers moods have cooled down. Is this a sign that Brazilian consumption has hit the roof? Yes and no. The yes is for part of retail that depends on credit. An analysis made by the LCA think tank, headquartered in São Paulo, shows that these sectors sales shrunk in the quarter - despite the soaring car sales in July, a response to the M ay tax reduction the government granted. Income-related segments, meanwhile, such as supermarket sales, continue faring well. And this is an effect that is likely to endure. According to Trends, a São Paulo-based consultancy firm, income is expected to continue on the rise over the next five years, surging at a rate close to 4 per cent per year. If this trend is maintained consumption in Brazil is on the verge of a qualitative change. Scholars say that when a nations per capita GDP ranges from 12,000 to 17,000 dollars (Brazils is currently nearing 11,000 dollars), there is a surge in consumption. "Buying truly skyrockets, with many new categories of goods being incorporated into the household budget," says Fernando Fernandez, CEO of consumer goods company Unilever in Brazil. This happened in Spain and in Portugal, countries where the populations buying power doubled between 1990 and 2000. This is good news for the major retailer groups installed in Brazil. The least enjoyable part is that these very companies will be forced out of their comfort zones. If they want to come out on top, they will be forced into exploring markets outside the of capital cities and of the South and Southeast. The reason for this is that the dynamics of consumption is undergoing a major transformation. By crossing data on income, population and information on 45 product categories, M cKinsey identified the consumption behavior of Brazilian cities with over 100,000 inhabitants. Escopo, meanwhile, analyzed the household budget in 27 Brazilian metropolitan 4/11
  • 5. 04/09/12 Exame Reprint - The New Consumption 5/11
  • 6. 04/09/12 Exame Reprint - The New Consumption Map and projected the performance of another ten product categories. Together, the two studies show that the weight of the Northern and Northeastern regions is growing and should continue at this pace - it is estimated that the two regions’ share of domestic consumption will reach 28 percent in the end of the decade, up from the current 24 percent. "Understanding the potential of different parts of the country is essential to prepare production, distribution and even customer service," says Geraldo Ferreira, a director at Escopo. The six northeastern states with the highest growth potential by 2020 are in the Northeast - Pernambuco, Alagoas, Piauí, Paraíba, Ceará, and M aranhão. TOWARD THE INTERIOR The surveys underpin the idea that consumption is moving toward the metropolitan regions and the interior. Today, 36 percent is concentrated in capital cities, which have established themselves as consumption centers par excellence. Based on M cKinseys projections, this percentage is likely to drop to 32 percent. Among the 26 Brazilian states, 13 are expected to grow more in the interior than in their respective capital cities. In places such as Pernambuco, Bahia and Ceará, in 2020 the interior will account for at least half of consumption. M oreover, a few cities in the interior will stand out with record domestic sales growths. Juazeiro do Norte, for example, is expected to become a leader in pasta sales. M eanwhile, by 2020, Caruaru, in Pernambuco, is likely to have per capita beer consumption above the current German average. This sales decentralization, which is already in course, has put millions of Brazilians on the retail map - something expected of a growing emerging nation and desirable for its inclusiveness. "In the upcoming decade, winning enterprises will be those that are able to identify, city to city, where growth will come from," says Fabio Stul, a director at M cKinsey. What makes the current decade delicate for large retailers is the most experts certainty that is a period in which the major brands will consolidate themselves - or lag behind. Historically, those who have ventured into a poorly explored market is more likely to be rewarded in the future. In England, the Tesco supermarket chain has lead the market for almost three decades, thanks to a strong expansion of the brand in the 1950s and 1960s. This is what Wal-M art has tried to do in China, opening stores in cities that, for the Chinese standard, are considered midsize, such as Wuhu and Loudi (both with almost 4 million inhabitants). "Companies that become Brazilian market leaders by 2020 are likely to perpetuate themselves in such position for decades to come," says Aldo M ussachio, a professor at Harvard 6/11
  • 7. 04/09/12 Exame Reprint - The New Consumption Map themselves in such position for decades to come," says Aldo M ussachio, a professor at Harvard Business School. There is a demographic justification for the race for leadership. It is estimated that, in 2020, WHAT MAKES THE DECADE SO DELICATE IS THE CERTAINTY THAT THIS IS THE PERIOD IN WHICH RETAILERS WILL CONSOLIDATE - OR BE LEFT BEHIND Brazil will reach the peak of the so-called demographic bonus, when of each ten persons, six will be in the labor market. From there, the ratio between those economically active and inactive (basically, children and the elderly) tends to narrow. "After that, only with real increases in productivity will it be possible to boost income and keep high levels of consumption in the Brazilian economy," says Rogério Hirose, who coordinated the M cKinsey study. In other words, in the upcoming years, consumption in Brazil is favored by unique factors that do not repeat themselves. "Just as in rich nations, income in Brazil will keep pace with economic growth, "says former Central Bank CEO Gustavo Loyola, now at Trends. Some retailers have already realized this. "Until recently, only cities with at least 500,000 inhabitants were in our focus. Now, we analyze the potential of municipalities with at least 150,000 inhabitants,” says Hugo Bethlem, vice-president of the Pão de Açúcar Group. Some executives at the major retail networks have become pilgrims of the interior of Brasil. "There are 400 cities where we do not have stores, but we are keeping a close eye on them to identify the right time to jump in," says Ricardo Ribeiro, director for network expansion at the M arisa clothing network, whose analysis horizon ranges through 2017. The growth rate in the interior has been such that cities that are under the limelight today were barely noticeable three years ago. "In 2009, we analyzed the feasibility of Parauapebas, in Pará, and concluded it was not yet time to open a store there," recalls Ribeiro. The situation shifted rapidly. Thanks to the wealth generated by mining, Parauapebas got on M arisas map in 2011, when they inaugurated their store in the citys first shopping mall. A direct hit: clothing and accessories sales in Parauapebas are expected to grow 20% annually through 2020. M etropolitan region cities are already those where most growth is taking place, and this translates 7/11
  • 8. 04/09/12 Exame Reprint - The New Consumption Map M etropolitan region cities are already those where most growth is taking place, and this translates into consumption potential. "Steeper real estate prices and worsening traffic have caused many families to leave the capital cities," says researcher M ichael M atteo, a director at the Institute of Applied Economics Research. Among those who opt out of the central regions of the major agglomerations, there are consumers of all social classes. In states such as São Paulo, M inas Gerais and Goiás, consumption will grow faster than in the municipalities surrounding the capital cities. Take the example of Aparecida de Goiânia, located in the metropolitan Region of the Goiás capital. The huge surge in its population, which increased from 336,000 to 455,000 people over the past ten years, helps explain why big companies of the likes of Pepsico and Hypermarcas, are increasingly interested in having stronger presences in the M idwest in general - and Aparecida de Goiânia in particular. The ascension that took place there in recent years has given rise to a question: Is Aparecida de Goiânia growing this fast because it has so many companies, or does it have these businesses because it is growing so fast? Nobody there seems concerned with finding an answer to this. The municipality 8/11
  • 9. 04/09/12 Exame Reprint - The New Consumption Map attracting both - businesses and workers. Since 2000, Aparecida de Goiânia has gained two new industrial districts - there are now four centers of this kind, all next to the BR-153 highway, which runs north to south in Goiás. Its logistical advantage is the citys trump card. "The Aparecida unit allows us to supply the M idwest and the northern and western areas of the State of São Paulo," says Gilson Rigotto, the city director for Rio Grande do Sul furniture manufacturer Bertolini. "And sales here have grown strongly." 9/11
  • 10. 04/09/12 Exame Reprint - The New Consumption Map With so many opportunities spread throughout Brazil, the question is: Can the industry and retail handle so much growth in consumption? After all, sectors such as food or hygiene and cleanliness, which are expected to expand on average 8% per year, would require 13 companies the size of Brazil Foods or seven of the size of Unilever. Today, the mismatch between supply and consumer demand has been solved by imports. In July, the Brazilian Institute of Geography and Statistics reported that retailers had a cumulative growth of 7% in the past 12 months - while industrial production shrank by nearly 2%. In other words, there would be room for the domestic industry to take on most of the consumption. This opportunity, however, poses enormous challenges for businesses. Given the state of the Brazilian infrastructure, is not credible (or desirable from the sustainability viewpoint) to have three times more trucks running in the country. Based on this, a few companies are reviewing their product lines and logistic structures. At Unilever, one of the bets is the popularization of concentrated liquid soap. A 315-milliliter bottle of liquid Omo yields the equivalent to 1 kilo of the same detergent in the powder version. If all of the brands consumers migrated to the liquid version, there would be a reduction equivalent to 43,000 trucks on the road per year. No reputable economist considers consumption as an end in and of itself. Without investments, without progress in education and without innovation in most important sectors of the economy, the increase does not sustain itself - and in periods of heated consumption, expansion is like chicken flights. Some see, in the current moment the Brazilian economy is going through, similarities with the explosion that took place in the American consumer market from the 1950s. At that time, the per capita GDP in the U.S. was around 13,000 dollars in todays values. In recent years in Brazil, millions of people have had access, for the first time, to goods that had previously been unreachable - whether a university degree or a 40-inch TV set. All of this has created a sense of prosperity in the country, despite the recent downturn of the economy that threw a bucket of cold water on the Brazilian peoples momentum of taking-on more debt to spend more. American consumption ended up lasting several decades due to increased investments and productivity - based on the high level of education of its population and on its power to innovate. In the Brazilian case, how long the current expansion in trade will carry on is still an open question. The country has huge challenges ahead. One of them is the low savings rate - a key factor for a nations long-term growth. Today, Brazilian private savings add up to about 5 percent of the GDP, very little compared to the Chinese, which is equivalent to 20 percent. Another obstacle is the Brazilian workers low productivity rates, equivalent to about a fifth of the Americans. SIGNS OF A MORE MODERN COUNTRY Although the path to keep retail expanding is long, there are several signs that a more modern Brazil begins to emerge. For decades, the main economic activity in Juazeiro was religious tourism, fueled by some 2 million pilgrims who visit the land of Padre Cícero annually. Previously a center for popular commerce, the city now has 17 car dealerships (half of them didnt even exist there in 2007) and one of the largest shopping centers in Northeastern Brazil. According toSantiago is one of them. He was attracted to Juazeiro do Norte to coordinate the materials engineering course. Although they only moved there recently, Santiago, his wife, Rita, and their two children, M ateus and Raíssa, have noticed the pace of the changes taking place in the city. "A new store or a new restaurant is opened every day," says Santiago. The family’s situation isn’t perfect only because property prices in Juazeiro do Norte have skyrocketed in recent times, a fact that ended up delaying their homeownership dream for a 10/11
  • 11. 04/09/12 Exame Reprint - The New Consumption Map The Santiagos’ case, and indeed that of the city itself, is not unique in Brazil. Far from the spotlights, hundreds of Brazilian municipalities are silently experiencing a new cycle of prosperity that is fueled by a blend of investments, jobs, education and – yes – an unusual increase in consumption. The transition that is underway in Brazil is noticeable with IBGE, in 2000, 44% of the economically active population had no income in Juazeiro do Norte. In 2010, this rate had already dropped to 34%. In 2011, the city was the second that created the most jobs in the Northeast - most of them came in construction. In recent years, Juazeiro also witnessed a growing amount of high-income jobs. Inaugurated in 2010, a regional hospital brought hundreds of health professionals to the city. Several colleges, both public and private, were installed there in recent years to meet demand in the region. Among them was the campus of the Federal University of Ceará, with 11 courses and teachers getting wages in the range of 7,000 Reals. A native of Fortaleza, M arcelo IN 2020, THE CONSUMER MARKET IN BRAZIL IS EXPECTED TO BECOME THE FIFTH LARGEST IN THE WORLD, SURPASSING FRANCE, ENGLAND AND ITALY in night satellite imagery. Today, these images show a nearly continuous band of light on the coastline, with more or less isolated points outside of it. In the near future, hundreds of new sources of light will be added throughout the interior of the country - with more emphasis on the Northeastern Region. Skeptics on call should keep one thing in mind: Ten years ago, many companies were slow to realize that the country was beginning to grow faster and allowed the local competitors to grow and tons of imported products to meet the regions demand. Today, Brazil is the eighth largest consumer market in the world. The forecast now is that by 2020, Brazil will see surpass France, England and Italy and reach the fifth. Does anyone doubt it? Exame Home 05/09/2012 Negócios Últimas Notícias Mobile Facebook Fale conosco Mercados Blogs Meu site EXAME Tw itter Expediente Economia Vídeos App Chrome LinkedIn Assine EXAME Brasil Galerias Só em Exame Tumblr Anuncie Tecnologia Infográficos New sletters Pinterest Parceiros Meio Ambiente e Energia Quizzes Tópicos RebelMouse Termos de Uso Marketing Ferramentas RSS YouTube Política de Privacidade Carreira Widgets Dailymotion Sobre EXAME Seu Dinheiro About EXAME Sumário PME Revista EXAME Arquivos Estilo de Vida Revista PME Mapa do site Rede EXAME PME Copyright © Editora Abril S.A. - Todos os direitos 11/11