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Brazil Consumer Outlook

Non-branded, low cost and even illegally imported products will gain in the Brazilian market as the economy slows down.

BY MARIO RUBIO


The worldwide financial crisis has taken the world by surprise.  Certainly Latin American leaders and most companies in the region had little or no time to prepare for such an event, and are having difficulties adjusting plans in the wake of the changes the crisis has brought.  However, there is still much to be done as the effects of the crisis that began in the United States and Europe slowly ease into the everyday lives of Latin American consumers. (...)

NEW LIFESTYLES 

Brazil has been among the fastest growing Latin American economies over the past five years.  Its US$ GDP has increased at an outstanding Compound Annual Growth Rate (CAGR) of 19 percent from 2003 to 2008, compared to that of Mexico (7 percent), Argentina (16 percent), Chile (18 percent) or Colombia (16 percent).  Macroeconomic growth enabled the government to pursue ambitious development projects that have benefited a large percentage of the population with better infrastructure and access to health and education.

Furthermore, local and international companies operating in the region have profited from a decade of macroeconomic stability and surging growth.  Multinationals such as Sony, Philips and Apple took advantage of this period to establish their stronghold in the Brazilian market. Local consumer goods companies like Perdigão, Britânia, and Cyrella positioned themselves as world-class competitors in their industries.

The case has been no different for appliances and electronics companies. In 2007 alone, the kitchen appliance industry experienced double- digit growth above 20 percent, which should decrease to a very healthy 15 percent growth in 2008.  Such high growth rates are possible due to Brazil’s enormous population -- with 190 million, it accounts for 34 percent of Latin America’s population -- and also because the long macroeconomic bonanza translated into companies expanding in the region and exponentially increasing their consumer credit offering.  

CREDIT CARD SURGE

For nearly a decade, consumers in Brazil of all socioeconomic status (SES) have had increasing access to more expensive electronics and appliances.  The number and value of bank-issued credit cards in Brazil grew at a CAGR of 22 percent from 2000 to 2007, while store-issued credit cards increased at a compound rate of 26 percent during the same period. 

This has been the case not only for lower SES, but also for higher ones that now have access to ultra-premium products and brands otherwise unaffordable. This created important changes in consumer lifestyles and preferences, which will be difficult to change, even in the face of an economic crisis.

The effects of the financial crisis are becoming more apparent in Brazil, especially among Brazilian consumers.  The country relies heavily on its local industry, which in part has helped contradict negative economic conditions.  However, 2009 will make these adverse effects more apparent and will bring a palpable effect on consumers in Brazil, which at present are resilient to becoming accustomed to more modest lifestyles.  As multinationals and local companies face economic hardships through rising prices of supplies and less access to credit, their final sales prices will take a toll.  This will initially affect consumption and, if companies continue to face difficulties, they could be forced to shrink their operations in Brazil, thereby reducing their labor force and further hurting consumer demand.

NOT IMMEDIATE

It is true that some signs of the economic crisis are visible in Brazil, but consumers will try to maintain their lifestyles in as much as they can. They will continue to purchase using credit, even if not with such willingness as before.  Therefore, the effects on consumer demand that the crisis will generate will not be felt immediately by players in the region, but rather as a result of a more full-scale crisis in Brazil. 

In 2008, many large appliance and electronic retailers continued with their plans of expanding in the country, opening new stores and experiencing growth throughout.  Some chains even pushed more aggressive expansion strategies that included opening new stores in lower SES markets to gain clients by offering them accessible credit.  While these strategies might have seemed like a sound way to grow in the past, under the current worldwide financial situation the risk exceeds the potential benefits.

2009 CHALLENGES

While these are valuable expansion strategies, retailers and manufacturers should anticipate the changes in distribution channels that 2009 will bring.  As prices begin to increase, eager customers who were accustomed to a certain lifestyle will look toward unauthorized sales channels to satisfy their electronics and appliances needs.  Non-branded products, low-cost and illegal imports, and stolen or illegal merchandise will gain a greater importance in the Brazilian market.  At times like these, retailers in the region should consider strengthening their portfolios in 2009, before the effects of the crisis take a full effect in Brazil.

Much can still be done in Brazil as well as in the rest of Latin America and the Caribbean to minimize the impacts the crisis will have on demand in the region.  By strengthening the ties with local players (manufacturers, distributors, and retailers), foreign companies can strengthen their supply chain.  Furthermore, it will be essential for international and local players to ensure they are dealing with economically sound partners who will not default on their obligations if faced with economic downturn.  As consumer electronic prices begin to rise in Brazil and demand slows, these players will have to ensure their ability to cope with the crisis and remain leaders in the market.

Consumers will need more than access to credit to stimulate their thirst for new products.  Successful market players must stimulate demand as well as streamline all aspects of their operations and their supply and distribution chains.  They will also benefit from minimizing risk of theft of product or intellectual property in order to survive through the crisis and use these times as an opportunity to strengthen their position in the market and grow by filling the gap left by those in retreat.

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

 

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