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Cover Story

Purchasing power

Access to credit and government actions foster national consumption, arousing the interest of Canadian groups such as the Sobeys supermarket chain and local companies of different industries

Unlike what is happening in other countries, Brazilian supermarkets apparently are not faced with the international financial crisis. This advantage called the attention of the Sobeys chain, the second largest in food items, with 1,300 stores throughout Canada, which in September participated in the 3rd International Business Round of the Brazilian Supermarket Association (Abras), with the objective of exchanging information and knowledge. “We believe Brazil might offer a variety of opportunities for the direct import of food products for our own brands”, states Martin Hall, vice-president of Global Purchasing Services.

The interest in local production focuses on three main product categories: coffee, seafood and confectionery products. “The main objective of this visit was to survey the local market, the supplier base, the infrastructure and the overall trade scenario”, adds Hall. The executive admits there is a lack of knowledge about the Brazilian economy, but expresses interest in obtaining as much information as possible in the short-term. According to Abras, the domestic chains grew revenues by about 5% in the first semester compared with the same period in 2008, and expect to close 2009 with a 4.5% increase. The increase in sales volume was a determinant factor for the result, according to Sussumu Honda, the entity’s president, given that prices remained practically stable.

For other Canadian companies, advancements such as this are a synonym for opportunity. Air Miles, the world’s largest client rewards and fidelity program company, decided to invest US$ 5.5 million in Dotz, the industry leader in Brazil. “Growth of the middle class and the market’s increased competitiveness have created a favorable environment for expanding such programs”, assesses Jay Malowney, Air-Miles’ vice-president. Roberto Chade, president of Dotz, goes on to say that “there is a significant group of consumers providing the domestic market broader coverage”. This group mostly comprises the C class (average monthly family income between R$ 1,064 and R$ 4,591, according to the Getúlio Vargas Foundation), whose social ascension has benefited several industries. Its willingness to go shopping is even transforming online transactions – this social class accounted for 42% of combined sales in July -, fostering investments by retail companies such as Casas Bahia and Magazine Luiza.

One of the first countries to signal resistance to the current crisis, Brazil is back on the growth track due to the expansion of consumption: the dynamic domestic market has offset the reduction in exports, diminishing the dependency on developed countries. In a meeting of the Economic Committee of the Brazil-Canada Chamber of Commerce (CCBC), held in September, Fernando Sampaio, a partner in LCA Consultores, a well-known consultancy firm in Brazil, pointed out that there are increasingly clearer signs that the worldwide recession is being overcome, even at a faster pace in emerging countries. According to Sampaio, apart from production rising at more robust rates in the country, with inflation under control, retail sales are recovering strongly, reflecting in the creation of new jobs at the beginning of the 3rd quarter of 2009. Sampaio believes this scenario makes Brazil even more attractive for foreign investments.

“Monetary policy measures, including programs to increase liquidity and bring down interest rates, proved effective”, states Sergio Vale, chief economist of MB Associados. According to him, such initiatives brought about an increase of approximately 60% in the population’s income. “We project a reduction in industrial output of about 8.5% in 2009, considering that industry and exports were hard hit, but project an increase of almost 2% in family consumption”, says Vale.

Capacity expansion – Following initial caution due to the crisis, Brazilians have gone back to shopping, motivated by Federal Government incentives and credit availability. For 2009, the outlook is that national consumption will reach R$ 1.86 trillion, a 1.6% increase over 2008, according to the Target Marketing research institute. “Industry has low inventory levels and with Christmas time nearing, there should be a good recovery, reflecting in retail sales”, points out Vale.

However, no economic sector in the country has brighter prospects than the auto industry, which has benefitted mainly from IPI (Industrial Product Tax) rate reductions for new vehicle purchases. In June, car dealerships reached the historic level of 289,792 units sold, an increase of 22% in comparison with the previous month, according to the National Federation of Automotive Vehicle Distributorships (Fenabrave).

This achievement accelerated investments. General Motors do Brasil, for example, intends to launch a new compact model still this year - the Agile.  With the intention of manufacturing products destined for emerging markets at plants in Argentina and Brazil, the carmaker will allocate US$ 400 million to the project. In July, the company also announced investments of R$ 2 billion for the launch, in 2012, of a new car family, in addition to the capacity expansion of the Gravataí (State of Rio Grande do Sul - RS) plant to 380,000 vehicles/year. “Of this amount, R$ 1.4 billion will flow to that city and the rest to all other industrial units in the country”, informs vice-president José Carlos Pinheiro Neto.

At Volkswagen, the target is to produce one million units per year by 2012, expanding its capacity by 39% in comparison with 2008. With this increase, the company will market one third of the cars sold in Brazil, impelling the entire production chain. In 2009, this carmaker will be spending R$ 11 billion in purchasing, 10% more than in the previous year. From January to June, the company posted an 81% decline in worldwide profits, which were only not higher due to sustained sales in emerging countries.

In the housing industry, programs such as the Federal Government’s “My Home, My Life” initiative and the stability of the economy provided relief to the civil construction industry. The opportunity to more intensively cater to class C demand made the Canadian company Royal do Brasil Technologies expand its activities. “We are looking for alternatives to, in the short-term, increase our production capacity, including the production of some PVC profiles in Brazil”, states Carlos Eduardo Torres, the company’s general director.

In turn, Luiz Rogelio Tolosa, director of Institutional and Investor Relations of Brookfield Incorporações, predicts growth for the industry of two to three times the Gross Domestic Product (GDP) growth rate, in less than ten years, considering that about 50% of Brazilians are under the age of 25 years and in search of opportunities in the labor market. “In the first semester we launched 2% more projects than in the same period of 2008 and reached a 56% increase in contract sales”, says Tolosa, emphasizing that higher prices and longer loan terms, along with the reduction in mortgage loan interest rates made many young C class couples purchase a home.

“If in 2006 a family needed 14 minimal wages to purchase a home priced at R$ 80,000, it now only needs six”, compares Tolosa. He points out that 70% of the company’s projects are intended for the middle class, with homes sold at under R$ 500,000, whereas 9% comply with the rules set for the “My Home, My Life” program, which limits the sales price to R$ 130,000. He goes on to say that “launches in 2009 will total between R$ 2.5 billion and R$ 3.1 billion”.

In recent years, domestic consumption attracted Canadian investors to the shopping center industry – with such centers standing out as symbols of the population’s higher purchasing power. Ancar Ivanhoe and Cadillac Fairview (in partnership with Brazilian Multiplan) are among the ten largest operators in Brazil. Their investments are spread across the country, to a large extent due to Canadian experience in this line of business. Brookfield Brasil Shopping Centers, for instance, ranks among the most important companies in the country to invest in this segment.

Like the civil construction industry – other industries such as tourism – are showing signs of recovery. Trip Linhas Aéreas, an airline, is one of the companies that took advantage of domestic consumption picking up to invest in its fleet and flight destination network. “We serve 73 destinations with 27 aircraft and by the end of the year intend to grow this figure to 30 aircraft and 80 destinations”, says José Mário Caprioli, the company’s president. With a 175% gross revenues increase in 2008, compared with the previous year, Caprioli projects 70% higher sales this year. In 2010, the company intends to invest R$ 200 million in purchasing eight additional aircraft.

At Air Canada Brasil, the 91% occupancy rate in July exceeded the company’s global rate, which at the end of that month was at 83.6% when including the consolidated regional base of Jazz (its regional carrier). “Albeit the fragility of the world economy, this result reflects our disciplined capacity management”, states Calin Rovinescu, Air Canada’s president and CEO.

The luxury item segment is also recovering. The Canadian company Butterfield & Robinson, specialized in offering outings on foot and bicycle, was faced with a slight retraction in the first months of the year, with a 10% reduction in tourist package sales in comparison with the same period in 2008. “Given that our clients have begun travelling on shorter notice, I believe we will recover this difference by the end of 2009”, says Marcia Lucas, the company’s representative in the country. The executive points out that increased concern about the cost of bespoke (private) travel makes people choose leaner packages. Therefore, the company plans on diversifying its travel options. “We are, however, tuned to who seeks adventure with sophistication and lots of comfort”, assures Lucas, who hopes to achieve a 12% higher positive result compared with the previous year.

With stores also in Canada, the Patachou griffe intends to create collections for who is looking for lower prices, without losing its original characteristic, i.e., offering differentiated articles. “We are making a new brand feasible for people who, in certain cases, give up quality features due to price”, states José Antônio Mendes Cabral, of the Operations department. Notwithstanding an average reduction of 10% in wholesale sales in 2008 – and stable retail figures –, the bet is on expanding the physical structure. “We aim at opening five new own retail sales outlets between 2009 and 2010, in addition to franchises. “We also intend to activate exports”, says Cabral.

One of the factors behind the movement in the domestic market, access to credit – which had retracted following the announcement of the crisis – was again fostering consumption in Brazil. Studies conducted by the National Association of Finance, Administration and Accounting Executives (Anefac), published in July, showed that for the sixth consecutive month rates of loan operations were reduced, which can be explained by the reduction in the basic interest rate (the “Selic” rate) and the improved economic scenario. Between December 2008 and July 2009, the average interest rate for natural persons declined by 7.33 percentage points, or 5.3%, decreasing from 137.9% to 130.6% per year.

At Santander, for instance, in the natural persons’ business area, transactions reached R$ 330 billion in 2008. “Overall, this market grew 20%. The expansion was bigger for some products, such as housing loans (40%), credit cards (27%) and personal loans (25%)”, states Eduardo Francisco de Castro, product executive superintendent at the Santander Group in Brazil. However, slight de-acceleration in durable goods’ consumption and everyday expenditures in the initial months of 2009 resulted in more modest performance, with operations totaling R$ 25 billion from January to May. “We noticed an increase in consumption. Therefore, this market of products for natural persons is expected to grow 15% this year”, says Castro.

At Itaú Unibanco, the credit card segment corresponds to 17 million clients, account holders and non account holders, resulting in that the group in 2008 had a portfolio of R$ 15.8 billion and revenues of R$ 63.2 billion. The challenge for 2009 is to strengthen the chip-equipped credit card base. In the direct consumer finance area, the institution has catered to more than 5.2 million clients with financial products and services offered under the Taií and Fininvest brands. These two channels are also aimed at consigned loan transactions, a segment which, at the end of 2008, represented R$ 79 billion, or 55% of total personal loans made by the financial system.

The Brazilian Association of Credit Card and Services Companies (Abecs) calculated a financial volume transacted in all the segment’s modalities – debit and credit transactions, in stores and store chains – of R$ 388.7 billion in 2008, a level 24% higher than in 2007. The largest portion of this volume was transacted by consumers who used their credit cards in transactions totaling R$ 223.5 billion during the period. Debit cards were equally put to use, totaling R$ 112.3 billion in purchases. Such figures, of before the worst moment of the financial crisis, highlight what today one perceives as a sustaining force of Brazil’s domestic market: the increased availability of credit to expand access to consumption.

Translation to English: BeKom Comunicação Internacional

Canadian reaction

In Canada, recent data shows that the economy is de-accelerating more than expected, even though the domestic market is beginning to react to the effects of the international financial crisis. In the second semester of 2009, the country’s Gross Domestic Product (GDP) decreased 3.4% in comparison with the same period of 2008, according to Statistics Canada. Analyst projections showed a 3% retraction, whereas the Bank of Canada predicted a 3.5% reduction in the same period. Albeit the negative result, some indicators suggest that the first Canadian recession since 1991 might be coming to an end, also as the result of domestic demand. In the second semester of 2009, the economy grew 0.4% in comparison with the same period of last year, fostered by consumer (+1.8%) and the country’s governments’ spending (+3.2%).

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