By Ari Kertesz, Tracy Francis, Bruno Furtado and Rogério Cafruni
Brazil is on a roll.
The country is on course to grow five to six percent for the next four years, after an excellent 7.5% performance in 2010. The middle class is getting bigger; inflation is moderate; confidence is high; and wages are rising. It is not surprising, then, that Brazilians are spending more: Retail sales, which were $266 billion in 2007, topped $400 billion in 2010.
But Brazil has broken the hearts of business before. The question, then, is whether this time is different. Should consumer-goods companies be going into Brazil? Or expanding there? Or waiting-and-seeing?
As companies evaluate those questions, here are five things they need to know about what McKinsey considers one of the world’s most promising economies. In fact, we like to call it “the country of the moment.”
1. Private consumption is growing strongly. Even in the third quarter of 2009, when the economy as a whole slipped a little (down 1.2%) in the aftermath of the financial crisis, private consumption kept growing (2.6%). That figure has since hit 5% in every quarter since.
2. Growth is broad-based. The northeast region, which is Brazil’s poorest, grew faster than any other region from 2003-08 (5.7%). And we believe it will continue to outpace the country through 2020.
3. Households are getting smaller. This is a long-term trend, but unmistakable. The average household today has 3.4 people, compared to 3.9 in 1995. Part of this is due to the growth of single-person households. There were 3.2 million of these in 1995 a figure that will likely triple by 2012. This demographic trend both feeds and reflects an economic one – toward individualized, rather than mass, consumption.
4. The demographic profile is promising. One of the big issues many industrial countries are facing is how to maintain growth while paying for an older population. Brazil doesn’t have nearly as much to worry about. It has a higher economically active population (56%) than Europe (45%) and a sharply lower ratio of retirees (8%) compared to (22%).
5. Consumers shop differently, depending on income. Lower-income consumers tend to use smaller stores; they comprise half the consumers of traditional mom-and-pops. Richer consumers do the lion’s share of their shopping at super- and hypermarkets (see Exhibit 1 in the attached PDF). The implication, then, is that to reach Brazilians up and down the income distribution means being adept in a range of retail environments.
These trends illustrate the need to think strategically about how to serve customers in terms of both geography and income. Missing out on poorer Brazilians in less prosperous areas now could mean a lost opportunity down the line as the middle class broadens and trades up to higher value-added products. "We want partners for the top and bottom end,” one consumer-goods executive told us. “We want to penetrate the slums ... small retail still has a lot to offer."
Exhibit 2 (see PDF) shows why it is so important to ensure that companies invest in an extensive point-of-sale network. (McKinsey borrowed the nomenclature from a previous report, “How Half the World Shops” .) The term “global” in the exhibit refers to consumers who participate in the global market. Typically wealthy, they travel abroad and own high-end electronic devices. The “consuming” segment dominates the mass market and includes the “aspiring” segment – people who are just beginning to shop for more than basics and are new to consumer choice. The “struggling” segment is focused on getting by and barely consumes at all.
With the belly of the market growing so fast, the appetite for consumption – and therefore the opportunities -- is huge. But the difficulties are also substantial. For a start, it’s important to remember that for all its promise and performance, Brazil is not a fully developed country. Only 10% of the roads are paved; violence is rife; and the level of corruption is troubling.
The business environment is no samba in the park, either. All the evidence is that the sector is getting more sophisticated and the competition more intense. The number of SKUs (stock-keeping units) is proliferating and spending on marketing is rising. Media spending on health and beauty, for example, rose by almost 30% a year between 2002-07. Meanwhile, large consumer companies are broadening their reach by venturing into adjacent categories.
To sum up, the opportunities in Brazil are massive, but companies need to be deliberate and reflective in order to overcome structural difficulties and thrive in the increasingly competitive business environment. And time is of the essence.
Ari Kertesz and Tracy Francis are principals in the Sao Paulo office, where Bruno Furtado is an associate principal and Rogerio Cafruni is an engagement manager.