1. Brazil's Long Term Growth - Walmart's Perspective
Please see our interview with Jamey Barbour, Development Director for Walmart Brazil. As
the largest retail organisation in the US, the company needs very little introduction - we
discuss the company's 15 year history in the country, opportunities, risks, market
idiosyncrasies as well as future plans.
1) Most of our readers would know of the immense success that Wal-Mart has had in the US
- when did the company first arrive in Brazil and what were the initial reasons of choosing
here (as opposed to other large countries)?
Wal-Mart first arrived in Brazil in 1995 with the opening of our first Sam's Club in S??o
Caetano do Sul in the greater metropolitan area of S??o Paulo. To be honest, I wasn??t in
Brazil at the time and cannot give you the reasons behind our decision to enter the Brazilian
market. However, I believe Brazil had the 5th largest population in 1995 with a little over 161
million inhabitants and also a strong retail segment with a promise of growth.
2) Can you talk about your role in the organization and a bit about your experience?
Well, in my current capacity I am leading a group of Project Managers responsible to deliver
our expansion plan in Brazil. We have more than 103 projects we are actively managing. My
previous role was as the regional director of development responsible for the north east.
There, I fell in love with the real estate industry and passionately led a great team of real
estate managers, architects and construction managers to accelerate our expansion plans in
the region. We proudly managed more than US$600 Million in corporate real estate deals
during a two year period. Prior to moving to Brazil, I worked in China, South Korea, Germany,
Puerto Rico and in the US as a project manager.
3) What do you see as the main strengths and opportunities of a country like Brazil -
particularly from an investment perspective?
There are a lot. One is the expected increase in the middle class: between 2005 and 2009
the D/E income profile classes fell from 93 million to 67 million, whilst the C income profile
increased from 63 million to 93 million and the A/B income profile class increased from 26.5
million to just over 30 million. As an investor, the economic and political stability is just as
important as a growing middle class. There appears to be confidence that whenever the
political leadership changes hand, the economy will remain stable. The country is rich in
commodities which has been the catapult of nationwide growth for the last 7 years. Strict
banking regulations have served as a shield against the global financial crisis; Brazil was one
of the last countries to be impacted by the crises and one of the first to exit.
4) And, conversely, what are Brazil's weaknesses and threats?
2. Brazil, like any other country, has its problems and issues. Infrastructure, or the lack there of,
is a huge threat to the economy. A qualified work force, especially in the north east, is also a
weakness. From a real estate point of view, the licensing process is notoriously bureaucratic
and, if not planned correctly, developers and ultimately investors returns could be effected
significantly. With growth comes risk. Inflation seems to be popping up again. The cost of
construction materials, land appreciations and the cost of labor will impact prices. To combat
this, the government has raised the SELIC rate. This will lead to more expensive credit and
could keep some prospective buyers out of the market. Also, even though the government is
investing heavily to improve infrastructure, the country is still far below other leading
developing countries - such as China - in logistic costs. The high cost of logistics practically
ruins any competitive advantage Brazil has to offer and continues, in my opinion, to be a drag
on the GDP. Another red flag is on the level of corporate debt by leading real estate
developers. According to recent figures, corporate balance sheet debt has increase from
21% to 46%. As these developers focus on the low margin projects such as "Minha Casa,
Minha Vida", these high debt rates could come back to haunt them in a down turn. We are
already seeing companies such as JHSF & Helbor turn away from the government housing
programs. As with typical Brazilian culture, the government social programs that I mentioned
above (PAC 1 & 2) continue to be executed behind schedule. The world cup preparations,
which must have 8 stadiums ready by 2013 to hold the Confederation Cup, have not even
started. Overall, I believe anyone who wants to be a player in international real estate, must
have a position in Brazil. Confidence is high and so is the country's future. However, I
wouldn't put all my money in Brazil just yet. Keep some cash on hand, research, watch the
market and keep an eye out for genuine opportunities.
5) Has Wal-Mart's approach needed to be adapted to work in the Brazilian market - and, if
so, how?
Looking at our retail operations we have learned a lot over the past 15 years. One of our first
stores in the S??o Paulo metro market was designed to have a roof capacity to withstand 2
feet of snow! Needless to say this was quickly corrected. As for real estate, we had to adapt
to several methods which are not normal business practices in other countries. It is a known
fact that Wal-Mart grew in the US by expanding in smaller rural cities such as Danville,
Virginia - which happens to be my home town. In Brazil, this is completely opposite. The
demographics do not support large investments in smaller marketplaces. This forces us to
focus on large metro markets such as S??o Paulo, Rio de Janeiro, Porto Alegre, etc. Also,
US customers do not use public transportation as much as Brazilian customers and are more
likely to drive 7 to 8 miles to shop. In Brazil, this is not the case as convenience is extremely
important to the success of a store. These types of habits leads us build even closer to the
customer. However, as you can imagine, it??s hard to build a 20,000m?? store with grade
parking in the middle of S??o Paulo; these types of properties either do not exist or are
expensive. We have therefore adapted by adjusting our product and building smaller
hypermarket stores. In some cases we have mezzanines, which is not a regular practice in
the US. We have also learned to offer different formats which we are not accustomed to
3. operate in the US - such as the 'Soft Discount'. Our Todo Dia Brand is a format that was built
based on the business model from one of our acquisitions. It is a brand we are extremely
excited about and has great promise. If there is a lesson in all of this is to be flexible and
learn from the market. Maybe you offer a great product in Europe or Asia but chances are it
may not work well in the Brazilian market; at least in its current form. To make it more
complicated, Brazil is a complex market with strong regional and cultural differences. Right
down to the finer details, companies must be regionally sensitive with the products it offers.
6) Can you give us a brief outline of Wal-Mart's future intentions in the country?
To grow in a way that is sustainable. Brazil is one of our most important markets - if not THE
most important. Brazil has been a good experience for the company and we continue to
believe in its potential to grow above international rates.
7) The north east has become an area where many overseas investors have focused. What
are your thoughts on this part of the country - are these areas where Wal-Mart envisage
great expansion?
As the previous regional director responsible for the north east, I got to know up close what
potential the region has to offer. Most of the foreign investment in the NE seems to be in the
area of tourism. With a yearly average temperature of 25?? who can blame them. This sector
doesn't necessarily drive our business, but we watch the non-retail segments closely if
nothing more than to take a measurement of land costs. Furthermore, there has been an
increase focus from national players in the NE, especially in segment of housing. Cyrela, the
country's largest developer, has several key joint ventures with local construction companies
such as Andrade Mendon??a in Salvador. We are paying extra attention to these
developments. After all, we must go where our customers are living and working. As for
Walmart, even though we are the market leader in the north east as a whole, we still have
lots of ground to cover in specific markets. We have plans to grow aggressively in the north
east over the next five years.
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