Brazil: Deals & Splurges Driving Growth in Retail

I recently had the pleasure of visiting São Paulo, Brazil, for a market tour, customer immersion, and team meetings. I returned with fresh insights about the consumer & retail landscape in this vibrant country – the world’s 8th largest consumer market.

The Context:

Between 2009 and 2013, Brazil was a hot growth market with a booming economy. The retail real estate environment was almost speculative and grocery retailers raced to expand their presence. Growth has been more modest in recent years as the country faces a deepening recession marked by high inflation, rising unemployment, and falling wages. However, Brazil is still a market with a lot of potential. It is a populous nation of 203 million, where young people under age 34 account for over half of the population. It is the third largest grocery retail market in the world, with spending of close to $70 billion USD in 2014.

The Insight: Growth at the Low & High End

Brazil has a high level of income bifurcation and this was apparent when traveling through São Paulo. I learned that the country has the #1 Ferrari dealership in the world. And, it is #1 in private helicopter ownership – a necessity for those with the means to avoid the challenging traffic. Conversely, Brazil is a very poor nation, where the average GDP per capita is $12,100 (vs. $51,000 in the U.S.) and 21% of the population lives below the Brazilian poverty line.

Not surprisingly, I learned that the retail grocery landscape mirrors this split. Discounters and luxury grocery retailers have been rare growth spots in recent years, while formats in the ‘middle’ have languished.

“The Discounters”

Brazil is home to a unique format called the atacarejo, and it has been the country’s fastest-growing grocery segment over the past 3 years. The word itself is a neologism, a mix of atacado (wholesale) and varejo (retail). Atacarejos offer bulk sales of food and other items that can be paid for in cash. They are no-frills outlets that keep prices low in large part through low operating costs. Most employ a tiered pricing strategy, offering the best deals for those who want to buy volume. Traditionally this model attracted wholesale customers but in recent years it has appealed to everyday Brazilians with shrinking disposable incomes.

According to Supermercado Moderno magazine, the number of atacarejos grew from 299 in 2013 to 436 stores in 2014. In March, Nielsen reported that sales in atacarejos grew 12.1% in 2015 over the previous year – more than double sales in the industry as a whole. These outlets have been a boon for large retailers, who are investing heavily in the format. For example, Carrefour bucked the trend of sluggish grocery sales in 2015 posting 8.5% growth in sales at existing stores driven largely by growth at Atacadão, the country’s biggest cash-and-carry chain. More recently, Grupo Pão de Açúcar’s atacarejo format – Assaí –reported 37.6% sales growth year-on-year for Q2 2016. Based on the success of the atacarejo in Brazil, retailers are opening similar formats in other countries throughout Latin America including, for example, Columbia.

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The atacarejo model undoubtedly appeals to price sensitive consumers dealing with the implications of recession. However, it also resonates culturally because consumers enjoy the shopping style. Credit-shy shoppers feel comfortable dealing in cash. Brazilian families, which tend to be larger, are able to pool together to buy in bulk and share the cost savings. The largest shopping day is Sunday and shoppers appreciate the bazaar-like atmosphere, where there is space and variety for the whole family to explore.

This format seems poised to retain a presence and relevance even after the country begins to recover from the recession.

The Luxury Purveyors

A second arena of growth has been at the high end. The Italian retailer Eataly opened its first Brazilian (and also first South American) location in 2015 amidst the deepening recession. Fast Company aptly described Eataly as an “Italian grocery market-cum-restaurant emporium-cum-enoteca slash bakery slash cheese shop.” Eataly’s New York outpost opened in 2010 to the delight of consumers and food journalists alike and there are locations in Italy, Tokyo and Munich.

The São Paulo store is located in the Itaim neighborhood, an upscale area near several business districts. It is a two-story luxury emporium that offers fresh and local fare not to mention a Nutella bar, a roast meat counter, and a place to purchase handmade pasta.

Upscale offerings in Brazil are not limited to large multinational retailers. Brazilian retailer Super Muffato opened its first gourmet store in Londrina, Paraná earlier this year. Industry group ABRAS describes the outlet as a “gastronomic paradise” complete with a 700 bottle wine cellar and sommelier, sushi bar, imported cheese shop, and a global cuisine section. This is the third opening under this concept, highlighting the room in the market to provide a more premium retail offering in Brazil, despite its continuing economic challenges.

These outlets capitalize on the “food as hobby” and “food as entertainment” trends. For affluent consumers looking to economize, Brazil’s growing gourmet options offer the ability to procure ingredients for cooking at home rather than spending the money to dine out. Further, they show that Brazilian consumers are willing to spend on categories that engage them even during tough economic times.

My Takeaway:

The Brazilian grocery landscape is one of juxtapositions, like city of São Paulo itself. Growth at the bargain and luxury ends of the spectrum shows no signs of slowing anytime soon.

For retailers, particularly those without plans to grow through these formats, it will be important to find ways to infuse elements of both the atacarejo and the gourmet grocery into everyday shopping experience across formats.

Further, retailers who continue to struggle in the middle will need to find new ways to create value for customers. This is not unlike the situation of U.S. fashion retailers who are looking to loyalty programs, unique shopping experiences, technology and even product scarcity to lure buyers back to the middle. 

Brazil: Exploring Favela Culture

I’m in São Paulo this week, where more than 2 million people, about 11% of the population, live in working-class settlements called favelas. Global media coverage of the estimated 1,643 favela neighborhoods usually focuses on the negatives: gang violence, drug culture, and lack of infrastructure. These are real and pressing issues that residents and community organizers work daily to address.

There is another narrative that needs to be written about the favelas. They are Brazil’s cultural incubators – vibrant spaces that influence the larger city and with growing influence in their own rights.

The favelas are “alive with sound and movement.” They are unique, walkable spaces with a blend of retail and residential property use; something urban planners strive to create in other cities. Gatherings tend to happen outdoors and create a lively street culture. Living in close proximity to neighbors encourages the exchange of ideas, and “incubates” novel blends of culture and commerce. For example, I saw in my visit many an ad hoc musical performance outside a grocery store, where an enterprising entrepreneur was leveraging that to sell drinks and snacks to curious on-lookers.

Not unlike the far-reaching influence of U.S. hip-hop culture, the expressions and ideas that develop in the favelas trickle out to influence tastes in the broader Brazilian culture. They shape music, fashion, food, and language. Samba, Carnival, and more recently funk carioca all emerged from these spaces.

Brands and Retailers looking to connect with the country’s large, relatively young population would do well to take notice. This is especially true for foreign companies that seek to expand into the Brazilian market and need to tailor their offerings to local tastes.

In addition to sending cultural influences out, recent years have seen new occupants flowing in. Students, artists, expatriates, and middle-class Brazilians are taking up residence in favela neighborhoods – seeking affordable housing and cultural diversity. They bring higher expectations about the rights and services they deserve, and favela dwellers are increasingly finding ways to make their voices heard. In the last few years, they have been empowered by the ability to use social media for connecting, organizing, and problem-solving. Taking notice, Google recently launched a mapping project with the goal of giving Rio’s favela communities visibility and, therefore, louder voices in the complicated politics of the country. By the way, one interesting observation on my trip was the very high frequency of use of waze app by Brazilians to navigate their challenging traffic situation.

Amidst this change and growth, new business models are developing in many favela communities, including tour operators, hostels for young foreigners, and community art projects.

One start-up, Friendly Mailman, is taking on the problem of unreliable mail delivery. Because residences and businesses lack street names, much less physical addresses, it is almost impossible for government carriers to reliably deliver mail within the favelas. The company’s founders used algorithms to create a proprietary digital “map,” which their private carriers use to deliver parcels to customers who pay a modest monthly fee. This is surely the tip of the iceberg when it comes to innovative tech platforms that could serve favela residents in meaningful ways.

I do not wish to detract from the complex history that created Brazil’s favela neighborhoods or the often-difficult conditions of daily life within them.

However, I am enthused to think about how they also embody the power of human creativity and ingenuity. Forward-thinking companies have an unprecedented opportunity to consider new ways to meet the needs of Brazil’s growing working- and middle-classes. I’m particularly fascinated about the potential to use technology platforms to cater to emerging consumer needs and aspirations. For example, could a retailer use a click-and-collect model to improve food access within a larger favela neighborhood?

True, there may be missteps and there is no one-size-fits-all model. However, success in this arena represents the dual opportunity to simultaneously create company value while also bringing value to a currently underserved market.