Brazil Country Overview for Retail Business
January 2013
Retail Opportunity Assessment Overview Brazil is one of the fastest-growing global destinations, and hosts one of the world's largest retail markets. The country’s economy has been growing over the years, helping create a positive business environment for the retail sector. Rising purchasing power fueled by high urbanization and the strengthening of the middle class has helped fire the growth of Brazil’s retail sector in the past and will continue to do so in future. Brazil has been ranked number one among top developing countries for global retail expansion two years in a row, ahead of other developing nations like Uruguay, Chile and India, clearly depicting the country’s optimism in general, and for retail in particular. Brazil offers a wide range of investor-friendly regulatory reforms too, be it to invest in retail equity or to buy or lease property, further making it a friendly destination for foreign retailers. This research paper documents in brief some of the macroeconomic, regulatory and business aspects of ‘Retailing in Brazil’.
Macroeconomic Environment
GDP 7.5% 6.6%
6.1% 5.7% 5.2%
4.9%
5.2%
5.0%
3.6%
2.7%
4.9%
4.0%
4.8%
4.5%
4.5%
4.2%
4.2%
4.1%
4.1%
4.5%
1.5% -0.3% 1.37
1.65
1.62
2.14
2.49
2.43
2.50
2.69
2.86
3.05
3.25
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
GDP ($ Trillion)
GDP Growth rate (%)
Inflation (%)
Source: IMF
Brazilian economy is characterized by a substantial contribution from the Services sector (c. 67%), followed by Industry (c. 27.5%) and Agriculture (c. 5.5%). Currently, the Brazilian economy outweighs all the other South American countries and is one of the leading developing economies across the globe. Brazil is estimated to have a GDP of USD 2.4 Tn as of 2012, which is forecast to reach USD 3.3 Tn by 2017 – an average growth of c. 6.6% (at current prices). At Real prices, the Brazilian economy has been registering positive growth too, except in 2009 when the GDP shrank by c. 2%. Per Capita GDP in 2012 is USD 12,340 and is projected to grow at a CAGR of 5.2% to reach USD 15,919 by 2017. At current prices, Inflation has been moderate for the past five years, and the same
trend is projected to continue in the near future, with the convergence towards the target of 4.5% expected to start as early as in the second half of 2013.
Population 1.1% 1.1% 1.0%
188
2007
190
2008
191
2009
0.9%
193
2010
0.9% 195
197 0.8%
2011
2012
0.8%
204
203
0.8%
0.8%
0.8%
2015
2016
2017
0.7%
2013
Population (Million)
Source: IMF
199
198
201
2014
Population Growth (%)
Brazil is the fifth most populous nation on earth and the largest in the South America, with an estimated population base of over 196.5 Mn as of 2012. Approximately 87% of the population resides in the urban areas as of 2012, which is projected to increase at an average annual rate of 1.1% till 2015 (source: CIA). Brazil is a comparatively young country, with a median age of 29.6 years. As per the 2012 estimates, 24.7% of the population falls in the age range of 0-14 years, while 68.2% falls in the range of 15-64 years. Only 7.1% people make the older generation of 65 years and above (Source: CIA). Overall increase in population till 2017 is projected to be relatively stable at an average annual rate of 0.7-0.8%. About 21% of Brazilian population was considered poor as of 2009, a decrease of almost 10% over 2005 (source: World Bank).
Unemployment 9.3% 7.9%
6.0%
8.1% 6.7%
6.0%
2007
2008
2009
2010
2011
2012
6.5%
2013
7.0%
7.0%
7.0%
7.0%
2014
2015
2016
2017
Unemployment rate (%)
Source: IMF
Brazil has a labor pool of over 100 Mn people, of which about 90 Mn are literate as of 2012. Brazil’s labor participation rate among persons aged 15 years and above is as high as 81% for men and c. 59% for women. The
unemployment rate in Brazil decreased to 6% in 2012 from 9.3% in 2007. Overall, the unemployment rate is projected to stagnate at this level over the next five years (source: World Bank). A lower unemployment rate and sizeable per capita income are often quoted as the key reasons for overall optimism in the Brazilian customers. Business Environment
Market 31.6%
30.3%
1,200
18.2%
17.5%
418 266
314
491
318
518
542
5.3%
4.7%
576 6.3%
1.1%
2007
2008
2009
619
7.5% 2010
2011
2012
2013
Retail Sales (USD Bn)
2014
2015
2022
Growth Rate(%)
Brazil is one of the world's largest retail markets. The country was ranked number one in 2011 as well as 2012 among the top developing countries for global retail expansion, ahead of other developing nations like Uruguay, Chile and India. Despite the global slowdown, the country’s retail industry has been witnessing positive growth in sales during the last five years, although the impact of world recession was registered by the industry and the growth was a mere 1.1% in 2009. Brazilian retail industry is estimated at USD 518 Bn in 2012, and is forecast to grow at an average of c. 6% annually during 2011-15. Over the next decade, the industry is forecast to reach USD 1.2 Tn. This growth is fueled by the rising purchasing power, positive macroeconomic factors and population base of 40 Mn being brought out of poverty between 2003 and 11, which now forms part of the burgeoning middle class of Brazil. According to the Industry group IDV’s estimates, its members – Brazil's 40 biggest retailers – will open 720 new stores in 2013, expanding sales area by 14%. It is also estimated that sales volume will increase by c. 11.5%, with about 5% growth coming from stores open for a year or more. The expansion plans of Brazilian retailers are no surprise given that they have a reason to be optimistic about the outlook – the country will be hosting the Football World Cup in 2014 and the Olympic Games in 2016!
“ … We developed a very aggressive expansion plan for all our formats and we plan to open 500 stores in the next three years, creating approximately 30,000 jobs and entering new markets. In 2013, we will be focusing on expanding our wholesale formats, by strengthening the Assaí brand, and on proximity, via the Mini Mercado Extra stores, speeding up inaugurations under these formats, and also working on the organic expansion of all formats …” >> Enéas Pestana, CEO, Grupo Pão de Açúcar”
“ … Brazil is a critical next step in our global expansion strategy and we are excited to introduce our store experience to customers … given that Brazil is the fifth largest country in the world and the largest Latin American economy, we feel that this market provides us with an incredible growth opportunity … ” >> Stefan Laban, Managing Director, Strategic Alliances, Gap, Inc.
Consumers 122
106 Jan 2008
Jan 2009
Jan 2010
Jan 2011
Jan 2012
Jan 2013
The country’s consumer confidence index has been consistently above 100 over the last five years, suggesting an overall optimism on the part of consumers. There has been a consistent decline or stagnation over the last two years, but as compared to the world average of 94, the confidence is still on the higher side. Over the last five to seven years, low unemployment and unprecedented access to credit had led to the change in the shopping habits of an average Brazilian, leading to increase in the household spending thereby. Increased spending has, in turn, been the key to increased retail demand post 2002 and robust economic growth in general. New-age consumer seems wary of debt however, and austerity measures or curtailment in discretionary spend is evident in the recent decline in the confidence levels as well as in holiday spending.
“ … In spite of economic difficulties in Western economies, confidence is high. On an individual basis, consumers have not been affected by the global economic downturn and they see the future as positive. This makes them willing to take on additional debts, consume and make purchases … ” >> Alberto Serrentino, Retail specialists, GS&MD
“ … On average, Brazilians spend about 31% of their income on groceries, compared with the 15% spent on groceries by U.S. consumers … ” >> Boris Planer, Research Director, Planet Retail
" … There is great potential for global apparel retailers to succeed in Brazil … Brazil is the most attractive apparel market for reasons of demographics and demand … ” >> Hana Ben-Shabat, Partner, A.T. Kearney. "
Regulatory Environment FDI Brazil opened the retail sector in 1994 for foreign investors. Post that, the government has been encouraging the expansion of foreign companies within the country, rather than setting up any barriers. FDI in multi-brand or single-brand retail is permitted to the extent of 100%, and there is no limit on the foreign equity participation.
"Brazil is much more advanced than those other three markets (China, India and Russia). It's been an open market for foreign companies and influenced by international retailers for a longer period of time."
Large international players like Carrefour S. A. and Wal-Mart entered the Brazilian market in 1975 and 1995, respectively, and both currently appear in the>> Neil Stern, Partner, LLP Top 10 Retail firms in Brazil. French Retailer Groupe Casino acquired CompanhiaMcMillanDoolittle Brasileira de Distribuição SA in 2012, making its presence felt in the grocery and food retail. On the apparel side, Mango and Zara have forayed into the country, and UK accessories chain Accessorize as well as Luxury brand Burberry have also opened shops as of 2012. Many other large chains too have talked about their plans to enter the Brazilian Retail market in near future.
Real Estate Brazilian real-estate market is attractive for foreign investors, as very few restrictions are imposed on the ownership; non-allowance of ownership in the areas of defense and communication being one such. Similarly, limitations are imposed on the acquisition of rural real estate or acquisition of real estate near national borders. A property transfer tax of 6% is levied on sale of property and a tax of 0.2-5% of assessed value of property is levied annually. Non-resident individuals or companies need to enroll with the General or Corporate Taxpayer Registry and obtain a Federal Taxpayer identification number (CNPJ) prior to the acquisition of any real estate assets. Most areas of Sao Paulo and Rio de Janeiro are already fairly populous however, and the real estate vacancy rate in both these places is estimated to be as low as 7%.
Labor Consolidated Labor Laws (CLT), enacted in 1943 and amended several times post that, along with numerous other complementary laws and regulations govern the labor environment in Brazil. The Brazilian government requires that at least two-thirds of the employees in any Brazilian company are Brazilian citizens, and that two-thirds of the total remuneration is received by Brazilians. It is mandatory to prepare an annual report depicting the proportion of ‘national: foreign’ employees for the Ministry of Labor. A foreigner who has lived in Brazil for more than 10 years is deemed to be a Brazilian citizen. The Brazilian Federal constitution stipulates a minimum wage of c. USD 274, paid at least monthly. Labor cost in Brazil is higher than other comparable nations like China and India (despite the minimum wage being low), due to strict imposition of labor laws and requirement of paid benefits under them.