Retail: Drugstore Pioneer

Deusmar de Queiros took an unconventional path when building Brazil’s first national network of pharmacies. Now he is going to the markets to keep his retail chain Pague Menos growing.

São Paulo — Francisco Deusmar de Queiros is in a hurry. His brother-in-law and business partner has just sent him an image of the new jet he is collecting in Fort Lauderdale, and the retail executive is already primed for takeoff. “This one can fly from Fortaleza to Lisbon, or from Fortaleza to Buenos Aires nonstop,” said Queiros, who would put a private jet to good use by keeping tabs on his fast-growing and far-flung drugstore chain.
From a base in Fortaleza, the capital city of 2.5 million in the northeastern state of Ceará, Queiros has over three decades built a national empire of more than 400 Pague Menos stores. He was the first retailer of any type to establish a presence in every one of Brazil’s 26 states as well as the federal district of Brasilia. A man of simple manners, who most people call Deusmar (which translates as “Seagod”), the hands-on executive insists on personally choosing locations before closing the deal.
The executive estimated that the company ended 2010 with sales of 2.2 billion reais ($1.3 billion), an increase of 20 percent over 2009. Queiros predicts revenue will again surge by more than 20 percent this year, to reach 2.7 billion reais by year-end 2011.
Queiros aims to open more than 40 stores during 2011. To finance future growth, Pague Menos is looking to the capital markets, as the company president sets his sights on a $600 million initial public offering on the São Paulo exchange by October.
Pague Menos is Brazil’s top pharmacy chain by revenues and second-largest by number of outlets, according to Brazilian Association of Pharmacies and Drugstores (Abrafarma).
Queiros has pursued a strategy that is unconventional by local standards yet has proved wildly successful. Most Brazilian entrepreneurs would start a business in large metropolitan markets, such as Rio de Janeiro or São Paulo, before seeking to expand across a nation of continental proportions. Queiros, a stockbroker who studied economics, opened his first pharmacy in his native state of Ceará 30 years ago.
In Bahia, the largest state in the northeast, Pague Menos first set up not in the capital of Salvador, but in Teixeira de Freitas, a smaller, regional agricultural hub.
“Wal-Mart did not come from big cities. It grew from small cities,” said Queiros, who is heavily influenced by U.S. retail culture.
And like the U.S. retail giant, Pague Menos has leveraged the scale of its network to offer customers competitive prices. The name — “Pay Less” — says it all.
The product lines are not necessarily inexpensive. Pague Menos carries cosmetics and personal-care products like face creams or higher-end shampoos that are typically not sold by traditional retailers in much of Brazil, giving shoppers another reason to patronize Pague Menos.
Further distinguishing Pague Menos is its selection. Queiros says his stores carry inventory of about 12,000 products versus 8,000 items at the typical, traditional pharmacy. Nearly one-third of Pague Menos’ sales come from non-drug items.
Pague Menos — and the rest of the industry — would like to generate even more sales from non-drug items. Queiros is keen on emulating the U.S. model, where drugstores sell snacks, candy, milk, magazines, greeting cards and more in addition to medicines and personal items like toothpaste.
Yet even as pharmacies in Brazil may increasingly resemble convenience stores, they are facing legislative and regulatory hurdles to expanding their product mix. The regulatory agency Anvisa has ruled that pharmacies can sell only prescription medical drugs, cosmetics and personal-care products, effectively banning treats like ice cream. In Congress, there are pressures for more restrictions.
“People want to move back towards Portuguese-style pharmacies that existed 20 years ago. While the whole world is talking about opening up, Brazil is considering closing down,” said Sergio Mena Barreto, president of Abrafarma, the association of Brazilian pharmacists.
The controversy has triggered a huge legal battle across the country. Through legal appeals and local ordinances, restrictions on the sale of mobile-phone cards for pre-paid devices, beverages and breakfast cereals, among other products, have been lifted.
Consumers have unquestionably welcomed the modern drugstore and Pague Menos, which has brought the concept to areas of Brazil that have been ignored by other retailers. “Ten years ago, [drug store chains] basically had a regional focus, mainly in Rio or in São Paulo,” Mena said.
That focus has worked to the advantage of Pague Menos, Mena said. In states where Pague Menos has a limited presence, the competition can be stiffer, he said. Nonetheless, “it is difficult to see another national network [to compete against them].”
The operation of other large drugstore chains, such as Droga Raia (the third-largest by number of outlets) and Drogasil (the second-largest by revenues) remain mostly concentrated in the cities of the southeast, the federal district of Brasilia and parts of the south. But Drogasil’s financial results point to the robustness of this segment of the national retail market: For the nine months ended September 30, 2010, it reported revenue of 1.47 billion reais, an increase of 18 percent over the same period a year earlier, and a 20 percent increase in net income to 67 million reais.
Meanwhile, Drogaria São Paulo (the third-largest by revenues) has expanded into the Northeast. It opened stores in Bahia, but it had to close others in Ceará, which is dominated by Pague Menos, Mena says.
Despite the competition in São Paulo, the state is Pague Menos’ fourth-largest market after the Northeastern states of Ceará (its home state), Rio Grande do Norte and Bahia.
Queiros attributes some of the chain’s success in the country’s biggest metro area to an existing connection with many residents. “São Paulo has a greater population who comes from the Northeast than of pure paulistas,” he said of those born in the city.
“Paulistas still think they are the kings of Brazil. …We are going to remain on top for a long while,” Queiros boldly predicted.
Pague Menos’ meteoric rise has not gone unnoticed. Queiros has confirmed that mega-retailers like Carrefour and Pão de Açúcar, seeking to expand their drugstore business, have come courting. “The problem is that they want a lot for little money,” Queiros complained.
Private-equity funds, which have invested in minority stakes in competitors like Droga Raia, were not well received, either. “I was not ready for that. People who only deal with money would start giving advice on my business — this is not good enough,” Queiros said. “But I would be pretty interested in doing business with someone who understands the pharmaceutical retailing business.”
The local industry has already undergone some consolidation, as when Drogaria São Paulo acquired the Drogão chain last June.
For now, Queiros is preparing to take the company public by October, if not sooner.
Pague Menos intends to raise 1 billion reais in order to finance an aggressive expansion and modernization strategy. Queiros wants to use the funds to launch another 300 stores, including 50 online/delivery centers; to modernize the existing ones; to set up a new distribution center in the south of the country; and to increase inventory to 15,000 items per store.
With a significantly bigger network, he would apply his “pay less” ethos to both sides of the retail equation. “I want to be able to pay cash in order to get greater discounts from suppliers,” Queiros said.
Future Pague Menos stores may be even more diverse: Queiros would like to introduce banking services in 2012.

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