As the countdown to the Rio Olympics begins, Rebecca Thomson looks at the country’s retail industry and asks why few UK retailers have ventured into one of the world’s largest economies.
The long-term economic effect of London 2012 will continue to become clear over the coming months, but one thing is certain – the event focused the world’s attention on the UK.
In four years it will be Brazil’s turn, and with the countdown to the Rio Olympics now under way the country’s retail industry will get its share of the attention.
So what state is Brazil’s retail industry in? The country has long been upheld as one of the world’s most exciting developing economies, but does this commonly held view tally with what’s happening there at the moment, and have UK retailers made the most of it?
Alongside China, India and Russia – which together form the BRIC countries – Brazil has developed an image as one of the worthwhile places in the world to invest and international retailers have flocked to the country.
The world’s biggest retailer, Walmart, entered the market in the 1990s and French grocery giant Carrefour was also an early mover, opening stores in the 1970s. Casino, another big French grocer, has recently gone down the acquisition route. This year it began the process to take full control of the biggest supermarket chain in Brazil, Companhia Brasileira de Distribuição SA (CBD). Walmart, Casino and Carrefour now account for about a third of grocery sales in Brazil.
On the apparel side, Mango and Zara have a presence in the country. Zara entered the market in 1999, and former British high street stalwart C&A – which is still big in Europe – has opened stores. Amazon also revealed plans to launch its Kindle in the country.
UK retailers, meanwhile, haven’t invested in Brazil with the same level of enthusiasm as their European counterparts. Accessories chain Accessorize is the only big mid-market UK name to have embraced Brazil and has so far opened 28 stores. Luxury fashion retailer Burberry opened a flagship store on August 23 in the JK Iguatemi mall, a new luxury shopping mall in São Paulo. The launch brings its total number of stores in the country to four – three in São Paulo and one in Brasilia.
Arcadia owner Sir Philip Green has spoken in the past of plans to expand into the South American country with Topshop stores, but no announcement has been made yet. Lingerie retailer Boux Avenue is mulling a launch there, but again, hasn’t yet made a move.
No British food retailers have tried trading in Brazil. By the time the UK’s biggest grocer, Tesco, was large enough to consider investment in the country, the Brazilian grocery market was already fairly sophisticated compared with other fast-growing economies such as China, where Tesco went on to open stores.
“I don’t know why the British didn’t make a bigger play for Brazil when the French and Americans did,” says Deloitte research director of consumer business Ira Kalish. But, he adds, it may just have been that UK retailers were slower to make a move than others.
“The globalisation of British retailing has been a little bit late compared with continental Europe retailers. When UK retailers did decide to go global they focused on areas they were more familiar with, such as Southeast Asia.”
Planet Retail chief economist Boris Planer agrees, pointing out there is often an easier option for UK retailers wanting to expand internationally. “Most retailers do have limited investment budgets, and they do what’s most profitable and most promising,” he says.
Nowadays, the grocery market would be difficult to enter – home-grown Brazilian retailers such as Companhia Zaffari Comércio e Indústria have a sophisticated offer and Walmart, Casino and Carrefour have mopped up trade. Planer says: “It would be hard to conquer space and differentiate yourself in the food market.”
Most of the big acquisition opportunities are gone because other major retailers have snapped up Brazil’s strongest domestic players, although Kalish says that there may be some potential in the less well developed Northeast region.
But there are opportunities elsewhere in the Brazilian retail industry, says Kalish. The general merchandise and fashion sectors, for instance, tend to be less sophisticated. Home category retailers that are normally keen on international expansion such as US giant Home Depot and Swedish chain Ikea haven’t made a move, and UK leader Kingfisher doesn’t have a presence after exiting the country in 2003, although it is reported to be considering trying again.
In fashion there are several strong domestic players such as mid-market retailer Hering, and Riachuelo, a clothing department store group. Some Brazilian names such as shoe brand Havaianas have become global brands but there’s room for further modernisation. Planer says: “I think there’s enough space for fashion brands, even now. The clothing sector is dominated by domestic independents, and they’re not all as exciting as they could be. From what I’ve seen, I would say there’s a massive space for new players in the fashion segment.”
Planet Retail analyst Isabel Cavill says Brazilian consumers are a style-conscious bunch, and would respond well to the UK’s fashion-forward high street players. Spanish retailer Zara, owned by Inditex, has performed well in the country – but Cavill warns import taxes are so high that Zara and its ilk must be positioned as premium players, because the high cost of imports means prices nearly double compared with their home markets.
These high import costs could help to explain British retailers’ reluctance to invest in Brazil. The two major taxes on imports – import duty and the tax on the distribution of goods and services called ICMS – can make foreign goods about a third more expensive than domestically manufactured products. Import duties are generally between 10% and 35% of the cost of the products, compared with the UK’s customs duty for goods produced outside the EU which is on average 6% to 9%. The ICMS rate varies across the country but can reach 18%. “The government has shown a predisposition to using protectionist measures to try to boost domestic industry,” says Kalish. “That’s a negative for retailers.”
These prohibitively high costs might also help explain the dearth of franchise companies in Brazil – a franchise network will fail to materialise if there’s not much money to be made on imported goods. Franchising is a popular method for UK retailers moving abroad, especially in areas such as the Middle East where cultural norms are so different.
But Tristan Rogers, chief executive of international expansion software company ConcretePlatform, says: “The Brazilian economy has been pretty strong for nearly 10 years now, and the fact that there aren’t franchise partners out there is surprising,” he says. “That would probably be a tipping point for brands, because the market is there but it’s a challenging one.”
High taxes are not the only hurdle for retailers entering the market – as with most developing economies, Brazil needs better infrastructure in some areas. President Dilma Rousseff has just announced a $66bn (£42bn) package to stimulate the economy through investments in infrastructure projects such as roads, airports, railways and ports, but this could take five to 10 years to produce its full effect, Kalish says.
The current slowdown in economic growth – it fell from 7.5% in 2010 to 2.7% in 2011 and was just 0.8% in the first quarter of 2012 – is partly to be blamed on a lack of investment in infrastructure. Planer says: “There wasn’t enough infrastructure investment and that’s choking off growth. The economy will probably grow 2.5% this year, which is low for a BRIC market. The government has some catching up to do in terms of infrastructure work.”
The other major barrier in Brazil is its latitude. Its position in the Southern hemisphere means it has a different annual cycle from its Northern counterparts – consumers want summer products in December and winter goods in July. This is a tough logistical challenge for fashion retailers in particular, and one that only Zara has so far started to address after it opened its first Australian store last year. This could be why Accessorize has had some success in the country, Cavill says – accessories don’t follow the same seasonal changes as other products, making the supply chain easier to adapt.
Another potential problem for the longer term, Kalish says, is the growing level of consumer debt. Retail sales are performing well – Planet Retail says they increased 8.5% last year and will rise 6.9% this year – but it’s worth keeping an eye on what’s fuelling this. Keeping control of consumer debt might be another point on the government’s to-do list.
High import charges, gaps in the infrastructure and seasonal differences might sound problematic, but retailers will face hurdles in every foreign market. And it’s important not to forget the positives. In the longer term, Brazil will continue to grow – it has already overtaken the UK as the sixth biggest economy in the world and is expected to be the fourth biggest by 2050.
There are positive social trends too, as the middle classes grow and income equality improves. “One of the really positive developments in Brazil has been the improvement in income distribution in recent years, which goes against the trends we are seeing everywhere else,” says Kalish. “A little over half the population is now considered middle class.”
Planer says this is partly down to clever policy-making – families will not receive social welfare payments unless they can prove their children are in school, for instance.
The Olympics might not be the economic magic wand businesses want it to be, but as the UK has just experienced, the event can make a country’s self-confidence soar.
As long-term growth rates climb and the middle classes swell, Brazil is already a good place to be for many.
UK retailers might want to consider following the Olympic flame across the Atlantic.
Poised to grow - Brazil’s economy
Brazil was an original member of the BRIC countries (Brazil, Russia, India and China) when the term was coined in 2001 by Goldman Sachs economist Jim O’Neill. Identified by their fast growth and potential, the BRICs were highlighted as likely to be the worlds’s four most dominant economies by 2050. Brazil’s economic growth has since been strong but inconsistent.
It reached the heady heights of 7.5% in 2010, and its efforts produced results when it overtook the UK as the world’s sixth biggest economy in early 2012.
But Brazil’s journey has not been without difficulties. GDP growth in 2011 fell to 2.7%, and analysts’ predictions for growth in 2012 have since fallen as low as 1.5%, although there are signs of second-quarter recovery.
In the longer term, Brazil’s overall direction will undoubtedly be upward. Growth is expected to top 4% in 2013, according to the International Monetary Fund. By 2050, it is expected to be the fourth biggest economy in the world.
Planet Retail forecasts consumer spending will reach BRL4.8tn (£1.5tn) in 2020, up from BRL2.6tn (£809bn) in 2012. Within this, retail sales will grow from BRL1.9tn (£591bn) this year to BRL3.3tn (£1tn) in 2020.