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Brazil’s New C-Class

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The number of C-class consumers in Brazil is growing, but challenges ahead include rising inflation.

BY NATAN RODEGUERO


In 2004, Tendencias forecast the continuous decrease in Brazilian interest rates, progressive economic stability, strong reduction in unemployment rates, and an increase in available credit.

“With such stability, SES C (and to some extent SES D) consumers are now targets…  Although market penetration remains lower than in SES A and B, the entry of the lower segments can significantly affect market size. As the Brazilian economy picks up momentum, latent demand for mid-to-high value products will be translated into accelerated consumption.”

Four years later, this has come to pass – at least so far.  The ongoing transformations in Brazilian SES levels and consumption profiles, resulting from the upward migration of millions of people into the middle class, are leveraging opportunities in a number of segments.  However, inflation and interest rates threaten to spoil a happy ending.

The main positive consequence of the country’s recent development is the growth of its middle class, which for the first time in history includes the majority of Brazil’s population.  The addition of more than 20 million people – 11 percent of the population – from SES level D into SES C officially transitioned them from “non-consumers” to “consumers.” If the band keeps playing the same tune, another 10 million are expected to join the party in the next three to five years.  This migration is creating a gigantic consumption class, avid for mid-level and even high-ticket items to which they rarely had access in the last decade.

DEMOGRAPHICS

Demographics are also changing the profile of Brazilian consumers. The population growth rate now stands at a record low of nearly 1.8 percent annually, and life expectancy has risen to more than 70 years.  As a result, Brazil is now a ‘country of adults,’ where two-thirds of the population are of working age, generating and spending wealth, and at the same time sustaining the third of Brazilians who are too old or too young to work.  If these demographics continue, in one or two decades this productive class will retire with time and money to spend on products and services launched specifically for them – a trend that many companies have already noticed.  The Brazilian Institute of Geography and Statistics (IBGE) estimates that the revenues of currently retired Brazilians reached $10 billion in 2006.

Another notable trend is the growing number of people living alone and married couples without children, as Brazilians delay both marriage and the birth of their first child. IBGE estimates that “one-person households” will grow from 8 million to 12 million in the next four years, and that the number of couples without kids will grow at 7 percent annually, reaching 14 million households in 2014.

As these changes occur, industries see opportunities in a number of segments, from credit cards and electronics to cosmetics, tourism, food & beverage, and entertainment.

INFLATION THREAT

In spite of the opportunities arising from the consolidation of the middle class, the country is facing challenges from inflation and the level of investment as a percentage of GDP.

In its last meeting in July, the Brazilian Central Bank (Bacen) raised the country’s interest rate (SELIC) to 13 percent, up from 12.25 percent. Considering the inflation forecasts for the year – above the government’s target ceiling of 6.5 percent - interest rates will likely be raised 0.75 percent twice more this year, finishing at 14.50 percent, with a possible 1 percent further increase in the first semester of 2009. Such interest rate hikes, if confirmed, may slow Brazil’s GDP growth to 4.8 percent in 2008 and 4 percent in 2009.

Brazilian inflation for 2008 is forecast to be 6.8 percent, above the government’s ceiling of 6.5 percent. Internal demand – fueled by an increase in salaries, credit, and employment rates – and the rise in prices of international commodities such as oil are considered the main villains of inflation.  However, Bacen must not overlook the fact that government expenses increased 7 percent above inflation this year, a factor that must be tackled sooner or later by fiscal authorities. Another issue is that investments in Brazil correspond to roughly 18% of GDP, a number considered low for emerging markets, where ideally at least 25 percent should be invested. To make matters worse, 42 percent of existing investments are derived from civil construction, not exactly leading to an increase in production capacity. And last but hardly least, the tax burden faced by companies is painfully high — 39 percent in the first quarter of 2008, severely impacting the competitiveness of Brazilian products.

To help Brazil’s economy face the challenges ahead and ease pressures on interest rates, the government would be advised to reign in public spending and – once and for all – make much-needed pension, labor, regulatory and tax reforms. With presidential elections approaching, however, a major policy overhaul is unlikely soon, meaning that growth will likely depend much more on market opportunities and industry’s creativity. With Brazil’s growing consumer class eager for new products, the door is open.

This article is republished with permission from Tendencias, the magazine of Kroll InfoAmericas.  


 

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