Brazil- the new consumption map

04/09/12 Exame Reprint - The New Consumption Map

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THE NEW CONSUMPTION MAP

The recent slowdown in the Brazilian economy cast doubts on the strength of consumption in the
country. But don't be fooled. By 2020, Brazilians will spend 1.3 trillion Reals more — turning the Brazilian
market into the world's fifth largest
FABIANE STEFANO, FROM JUAZEIRO DO NORTE (CE),
AND PATRICK CRUZ, FROM APARECIDA DE GOIÂNIA (GO)

#1022 The 1960s, M orris Asimow, a professor of engineering at the University of California, in Los Angeles,
believed industry could bring development to the most remote areas in the world. Based on this belief,
in 1961, Asimow led an expedition to the Brazilian hinterland. The Cold War was in full swing, Fidel
Castro had just aligned himself with the Soviet bloc and the Americans, under the leadership of
President John F. Kennedy, wanted to promote democracy and entrepreneurship on the American
continent. Together with a group of American and Brazilian students, Asimow arrived in Juazeiro do
Norte, in the interior of the state of Ceará, planning to sow the seeds for the construction of small
corn and cassava flour mills and cement plants. In but a few years, the region actually got an example
of each of these industries. Even a radio and an engine factory were deployed in the city, then with
68,000 inhabitants. The projects only survived, however, as long as American money was flowing in.
When the cash dwindled in the late 1960s, the factories slowly fizzled out, one by one.

It was a practical lesson that proved development is not created in a lab - and that there is no amount
LAST EDITIONS
of government aid that is capable of inducing the economy if the minimum conditions for it to flourish
are lacking. Interestingly, Juazeiro is currently the stage of an even more radical transformation than
professor Asimow, who died in 1981, ever dreamed of. With a population of 250,000 inhabitants and
almost 300,000 other people living in the cities surrounding it, Juazeiro has become a major retail hub
and is boiling. Evidence of this new era has a connection with the experiments carried out in the
1960s. Last year, one of the buildings that was home to an old factory under Asimow's project, was
turned into a unit of Hiper Bompreço, a supermarket chain belonging to U.S. group Wal-M art. The store
#1021 #1020 BB ED. was put together to target the city’s consumption

IN 2020, BRAZILIANS WILL CONSUME AS MUCH PASTA AS
ITALIANS AND THREE TIMES MORE BEER THAN GERMANS
potential, currently at 570 million Reals per year. This amount is expected to quadruple by the end of
the decade. Based on an exclusive survey conducted by American think tank M cKinsey, supplemented
by data from the Escopo geomarketing outfit, EXAM E drew the map of consumption in Brazil in 2020 -
and it is clear that the Juazeiro example is anything but an isolated case. It will be replicated across
the country.

Within a decade, the Brazilian consumer market will almost double in size: from 2.2 trillion to 3.5 trillion
Reals. This figure includes all household spending, ranging from housing and school expenses to the
supermarket cart. Of this total, M cKinsey analyzed the behavior of the 45 main product categories
consumed in Brazil, which include cosmetics, frozen food and clothing and is expected to move 1.3
trillion Reals by the end of the decade (see the chart). Escopo, meanwhile, has projected consumption
of items such as cars, appliances and airline tickets. Together, the 55 categories will represent a
market worth nearly 1.8 trillion Reals in 2020, up from the current 800 billion.
thebrazilianeconomy.com/edition-1022/the-new-consumption-map.php 1/11

market worth nearly 1.8 trillion Reals in 2020, up from the current 800 billion.

Some projections paint a picture of the move forward. By the end of the decade, Brazilians are likely
to consume as much pasta as Italians. We are expected to have the third largest car market in the
world. Beer consumption, which was half of the German one in 2005, will be three times greater. Over
the next eight years, hair product sales in São Paulo alone will grow twice as fast as in France.
Consumption in Brazil will shift to a new dimension, adding up to 65 percent of the 5-trillion-dollar GDP.

“From the economic viewpoint, durable goods consumption may end up working as an investment in
Brazil," says 2004 Nobel Prize winning economist Edward Prescott. Prescott says that acquiring goods
such as computers and appliances can make a family more productive and able to generate more
wealth.

In recent years, consumption has already been the driving force of the economy. Fueled with more
credit and more income, Brazilians have achieved the unlikely: they have kept the economic activity
heated, even during the 2008 crisis, when the world dove into one of the most severe recessions of the
past 100 years. The formula, however, begins to show signs of exhaustion. Debt now accounts for 45
percent of the Brazilians' annual income.



Nearly a quarter of the workers' wages is locked up with the payment of interest and amortization.
Default is up and the consumers' moods have cooled down. Is this a sign that Brazilian consumption has
hit the roof? Yes and no. The yes is for part of retail that depends on credit. An analysis made by the
LCA think tank, headquartered in São Paulo, shows that these sectors' sales shrunk in the quarter -
despite the soaring car sales in July, a response to the M ay tax reduction the government granted.
Income-related segments, meanwhile, such as supermarket sales, continue faring well. And this is an
effect that is likely to endure. According to Trends, a São Paulo-based consultancy firm, income is
expected to continue on the rise over the next five years, surging at a rate close to 4 per cent per
year. If this trend is maintained consumption in Brazil is on the verge of a qualitative change. Scholars
say that when a nation's per capita GDP ranges from 12,000 to 17,000 dollars (Brazil's is currently nearing
11,000 dollars), there is a surge in consumption.

"Buying truly skyrockets, with many new categories of goods being incorporated into the household
budget," says Fernando Fernandez, CEO of consumer goods company Unilever in Brazil. This happened
in Spain and in Portugal, countries where the population's buying power doubled between 1990 and
2000. This is good news for the major retailer groups installed in Brazil. The least enjoyable part is that
these very companies will be forced out of their comfort zones. If they want to come out on top, they
will be forced into exploring markets outside the of capital cities and of the South and Southeast. The

reason for this is that the dynamics of consumption is undergoing a major transformation. By crossing
data on income, population and information on 45 product categories, M cKinsey identified the
consumption behavior of Brazilian cities with over 100,000 inhabitants. Escopo, meanwhile, analyzed the
household budget in 27 Brazilian metropolitan areas



and projected the performance of another ten product categories. Together, the two studies show
that the weight of the Northern and Northeastern regions is growing and should continue at this pace
- it is estimated that the two regions’ share of domestic consumption will reach 28 percent in the end
of the decade, up from the current 24 percent. "Understanding the potential of different parts of the
country is essential to prepare production, distribution and even customer service," says Geraldo
Ferreira, a director at Escopo. The six northeastern states with the highest growth potential by 2020
are in the Northeast - Pernambuco, Alagoas, Piauí, Paraíba, Ceará, and M aranhão.

TOWARD THE INTERIOR
The surveys underpin the idea that consumption is moving toward the metropolitan regions and the
interior. Today, 36 percent is concentrated in capital cities, which have established themselves as
consumption centers par excellence. Based on M cKinsey's projections, this percentage is likely to drop
to 32 percent. Among the 26 Brazilian states, 13 are expected to grow more in the interior than in
their respective capital cities. In places such as Pernambuco, Bahia and Ceará, in 2020 the interior will
account for at least half of consumption. M oreover, a few cities in the interior will stand out with
record domestic sales growths. Juazeiro do Norte, for example, is expected to become a leader in
pasta sales. M eanwhile, by 2020, Caruaru, in Pernambuco, is likely to have per capita beer consumption
above the current German average. This sales decentralization, which is already in course, has put
millions of Brazilians on the retail map - something expected of a growing emerging nation and desirable

for its inclusiveness. "In the upcoming decade, winning enterprises will be those that are able to
identify, city to city, where growth will come from," says Fabio Stul, a director at M cKinsey.

What makes the current decade delicate for large retailers is the most experts' certainty that is a
period in which the major brands will consolidate themselves - or lag behind. Historically, those who
have ventured into a poorly explored market is more likely to be rewarded in the future. In England,
the Tesco supermarket chain has lead the market for almost three decades, thanks to a strong
expansion of the brand in the

1950s and 1960s. This is what Wal-M art has tried to do in China, opening stores in cities that, for the
Chinese standard, are considered midsize, such as Wuhu and Loudi (both with almost 4 million
inhabitants). "Companies that become Brazilian market leaders by 2020 are likely to perpetuate
themselves in such position for decades to come," says Aldo M ussachio, a professor at Harvard Business

themselves in such position for decades to come," says Aldo M ussachio, a professor at Harvard Business
School. There is a demographic justification for the race for leadership. It is estimated that, in 2020,

WHAT MAKES THE DECADE SO DELICATE IS THE CERTAINTY
THAT THIS IS THE PERIOD IN WHICH RETAILERS WILL
CONSOLIDATE - OR BE LEFT BEHIND
Brazil will reach the peak of the so-called demographic bonus, when of each ten persons, six will be in
the labor market. From there, the ratio between those economically active and inactive (basically,
children and the elderly) tends to narrow. "After that, only with real increases in productivity will it be
possible to boost income and keep high levels of consumption in the Brazilian economy," says Rogério
Hirose, who coordinated the M cKinsey study. In other words, in the upcoming years, consumption in
Brazil is favored by unique factors that do not repeat themselves. "Just as in rich nations, income in
Brazil will keep pace with economic growth, "says former Central Bank CEO Gustavo Loyola, now at
Trends.

Some retailers have already realized this. "Until recently, only cities with at least 500,000 inhabitants
were in our focus. Now, we analyze the potential of municipalities with at least 150,000 inhabitants,”
says Hugo Bethlem, vice-president of the Pão de Açúcar Group. Some executives at the major retail
networks have become pilgrims of the interior of Brasil. "There are 400 cities where we do not have
stores, but we are keeping a close eye on them to identify the right time to jump in," says Ricardo
Ribeiro, director for network expansion at the M arisa clothing network, whose analysis horizon ranges

through 2017. The growth rate in the interior has been such that cities that are under the limelight
today were barely noticeable three years ago. "In 2009, we analyzed the feasibility of Parauapebas, in
Pará, and concluded it was not yet time to open a store there," recalls Ribeiro. The situation shifted
rapidly. Thanks to the wealth generated by mining, Parauapebas got on M arisa's map in 2011, when they
inaugurated their store in the city's first shopping mall. A direct hit: clothing and accessories sales in
Parauapebas are expected to grow 20% annually through 2020.

M etropolitan region cities are already those where most growth is taking place, and this translates into

M etropolitan region cities are already those where most growth is taking place, and this translates into
consumption potential. "Steeper real estate prices and worsening traffic have caused many families to
leave the capital cities," says researcher M ichael M atteo, a director at the Institute of Applied
Economics Research. Among those who opt out of the central regions of the major agglomerations,
there are consumers of all social classes. In states such as São Paulo, M inas Gerais and Goiás,
consumption will grow faster than in the municipalities surrounding the capital cities. Take the example
of Aparecida de Goiânia, located in the metropolitan Region of the Goiás capital. The huge surge in its
population, which increased from 336,000 to 455,000 people over the past ten years, helps explain why
big companies of the likes of Pepsico and Hypermarcas, are increasingly interested in having stronger
presences in the M idwest in general - and Aparecida de Goiânia in particular. The ascension that took
place there in recent years has given rise to a question: Is Aparecida de Goiânia growing this fast
because it has so many companies, or does it have these businesses because it is growing so fast?
Nobody there seems concerned with finding an answer to this. The municipality continues



attracting both - businesses and workers. Since 2000, Aparecida de Goiânia has gained two new
industrial districts - there are now four centers of this kind, all next to the BR-153 highway, which runs
north to south in Goiás. Its logistical advantage is the city's trump card. "The Aparecida unit allows us
to supply the M idwest and the northern and western areas of the State of São Paulo," says Gilson
Rigotto, the city director for Rio Grande do Sul furniture manufacturer Bertolini. "And sales here have
grown strongly."


With so many opportunities spread throughout Brazil, the question is: Can the industry and retail
handle so much growth in consumption? After all, sectors such as food or hygiene and cleanliness,
which are expected to expand on average 8% per year, would require 13 companies the size of Brazil
Foods or seven of the size of Unilever. Today, the mismatch between supply and consumer demand has
been solved by imports. In July, the Brazilian Institute of Geography and Statistics reported that
retailers had a cumulative growth of 7% in the past 12 months - while industrial production shrank by
nearly 2%. In other words, there would be room for the domestic industry to take on most of the
consumption. This opportunity, however, poses enormous challenges for businesses. Given the state of
the Brazilian infrastructure, is not credible (or desirable from the sustainability viewpoint) to have
three times more trucks running in the country. Based on this, a few companies are reviewing their
product lines and logistic structures. At Unilever, one of the bets is the popularization of concentrated
liquid soap. A 315-milliliter bottle of liquid Omo yields the equivalent to 1 kilo of the same detergent in
the powder version. If all of the brand's consumers migrated to the liquid version, there would be a
reduction equivalent to 43,000 trucks on the road per year. No reputable economist considers
consumption as an end in and of itself. Without investments, without progress in education and without
innovation in

most important sectors of the economy, the increase does not sustain itself - and in periods of heated
consumption, expansion is like chicken flights. Some see, in the current moment the Brazilian economy
is going through, similarities with the explosion that took place in the American consumer market from
the 1950s. At that time, the per capita GDP in the U.S. was around 13,000 dollars in today's values. In
recent years in Brazil, millions of people have had access, for the first time, to goods that had
previously been unreachable - whether a university degree or a 40-inch TV set. All of this has created a
sense of prosperity in the country, despite the recent downturn of the economy that threw a bucket
of cold water on the Brazilian people's momentum of taking-on more debt to spend more. American
consumption ended up lasting several decades due to increased investments and productivity - based
on the high level of education of its population and on its power to innovate. In the Brazilian case, how
long the current expansion in trade will carry on is still an open question. The country has huge
challenges ahead. One of them is the low savings rate - a key factor for a nation's long-term growth.

Today, Brazilian private savings add up to about 5 percent of the GDP, very little compared to the
Chinese, which is equivalent to 20 percent. Another obstacle is the Brazilian workers' low productivity
rates, equivalent to about a fifth of the Americans'.

SIGNS OF A MORE MODERN COUNTRY
Although the path to keep retail expanding is long, there are several signs that a more modern Brazil
begins to emerge. For decades, the main economic activity in Juazeiro was religious tourism, fueled by
some 2 million pilgrims who visit the land of Padre Cícero annually. Previously a center for popular
commerce, the city now has 17 car dealerships (half of them didn't even exist there in 2007) and one of
the largest shopping centers in Northeastern Brazil. According toSantiago is one of them. He was
attracted to Juazeiro do Norte to coordinate the materials engineering course. Although they only
moved there recently, Santiago, his wife, Rita, and their two children, M ateus and Raíssa, have noticed
the pace of the changes taking place in the city. "A new store or a new restaurant is opened every
day," says Santiago. The family’s situation isn’t perfect only because property prices in Juazeiro do
Norte have skyrocketed in recent times, a fact that ended up delaying their homeownership dream for
a while.



The Santiagos’ case, and indeed that of the city itself, is not unique in Brazil. Far from the spotlights,
hundreds of Brazilian municipalities are silently experiencing a new cycle of prosperity that is fueled by
a blend of investments, jobs, education and – yes – an unusual increase in consumption. The transition
that is underway in Brazil is noticeable with IBGE, in 2000, 44% of the economically active population

had no income in Juazeiro do Norte. In 2010, this rate had already dropped to 34%. In 2011, the city
was the second that created the most jobs in the Northeast - most of them came in construction. In
recent years, Juazeiro also witnessed a growing amount of high-income jobs. Inaugurated in 2010, a
regional hospital brought hundreds of health professionals to the city. Several colleges, both public and
private, were installed there in recent years to meet demand in the region. Among them was the
campus of the Federal University of Ceará, with 11 courses and teachers getting wages in the range of
7,000 Reals. A native of Fortaleza, M arcelo

IN 2020, THE CONSUMER MARKET IN BRAZIL IS EXPECTED TO
BECOME THE FIFTH LARGEST IN THE WORLD, SURPASSING
FRANCE, ENGLAND AND ITALY
in night satellite imagery. Today, these images show a nearly continuous band of light on the coastline,
with more or less isolated points outside of it. In the near future, hundreds of new sources of light will
be added throughout the interior of the country - with more emphasis on the Northeastern Region.
Skeptics on call should keep one thing in mind: Ten years ago, many companies were slow to realize
that the country was beginning to grow faster and allowed the local competitors to grow and tons of
imported products to meet the region's demand. Today, Brazil is the eighth largest consumer market in
the world. The forecast now is that by 2020, Brazil will see surpass France, England and Italy and reach
the fifth. Does anyone doubt it?

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