Despite the crisis, Brazil faces growth opportunities finds BCG

18 November 2016 Consultancy.uk

Brazil has seen a number of years of recession across its economy, as well as ensuing political turmoil. While the country wide picture is one of contraction, a new report highlights that there are regional areas of growth – the country remains a diverse market of more than 200 million people.

Brazil has been making headlines recently, following mass corruption, protests and political wrangling. The political implosion was preceded by a sharp recession that has seen the Brazilian economy shrink by 3.8%, with projections highlighting that the recession may continue before growth picks up in 2018 to average 3% to 2022.

The recession has brought with it considerable hardship, yet, as a new report reveals, the country of more than 200 million people is relatively heterogeneous, with different parts of the country, and different income levels, affected differently by the crisis. The report by The Boston Consulting Group (BCG), titled ‘Finding Islands of Consumer Spending Opportunity in Brazil’s Crisis’, was developed jointly with Cielo, to provide insight into the diverse economic landscape of Brazil.

Spending changes pre- and post-crisis

Crisis growth

Following the financial crisis, Brazil saw a number of years of relatively robust growth. In 2014, however, stagnation occurred, before a sharp 3.8% contraction the following year. This year is again projected to see a sharp growth slide in the country’s economy, at similar levels to last year.

In the years prior to the crisis, a number of segments of the economy saw considerable growth. Pharmaceuticals, supermarkets, gas stations, and furniture and home décor stores all saw expansion of more than 5% CAGR between 2010 and 2013, while bars and restaurants, apparel, jewellery and optics shops too saw growth, if somewhat less modestly.

In the years following the crisis, however, consumption behaviour saw considerable decreases among many Brazilians, resulting in a significant contraction in the retail sector, with consumer electronics losing 5%, apparel down almost 5%, while department stores and furniture and home décor also faced reductions in spending. Some major retail segments saw growth, with particularly pharmaceuticals and supermarkets able to buck the wider economic trend.

Six city clusters

Regional categories

The analysts sought to better understand the distribution of changes across the retail landscape in relation to geographical, and regional economic, conditions. The firm developed six categories, through which a more granular snapshot was created about regional city demand in line with prevailing trends between the cities.

The Amazon Belt region cities (1% of retail spending), for instance, has a relatively low GDP per capita, at R$16,000, with average monthly income of R$375 and agricultural share of GDP at 9.6%. The region was also one of the hardest hit by lower global commodity prices. In comparison, the country’s National metropolitan cities (Sao Paulo, Rio de Janeiro, Brasilia, and their surroundings), accounting for 39% of retail spending, have a GDP per capita of R$43,000, with an average monthly income of R$1,233.

Other regions include South-Southeast Interior (22% of retail spending), with strong GDP levels and relatively robust growth; Northeast Interior (3% of retail spending), with low levels of GDP and hard hit by the recession; Other Metropolitan Cities (30% of retail spending), facing a mixed bag of growth and stagnation on the back of regional differences; and the Agro-Export Zone (5% of retail spending), which has a strong growth basis on the back of commodity exports, with further considerable regional differences in terms of its continued growth during the downturn.

Sector and cluster lenses

Spending breakdown

The research in addition explored the growth of various retail segments across the six different categories of cities and Brazil as a whole for the period 2015. Big-ticket items, such as electronics, furniture and department stores, have been hit the hardest, particularly in the Amazon Belt, Agro-Export and Other Metro Cities regions, at -13.1%, -10.6% and -11.9% respectively. Apparel too has been impacted across the board at -6% in Agro-Export and -7.6% in National Metropolises. Beauty and personal care too saw negative growth in all regions, and -1.6% nationally.

Some types of retail saw growth, and some considerable growth. Supermarkets, for instance, saw considerable growth in outlying areas, such as Agro-Export, at 5.2%, South-Southeast Interior, at 2.4%, and the Amazon belt, also at 2.4%. Other Metro Cities saw slight 0.6% growth, while National Metropolises saw a slight contraction of -0.6%. Pharmacies saw growth in every region, with particularly the Northeast Interior booking robust 9.6% growth and Other Metro Cities seeing 9% growth. Gas stations remain staples for consumers, seeing 2.3% growth nationally, while tourism had to deal with mixed fortunes.

Daniel Azevedo, a BCG partner and co-author of the report, reflects, “The impact of the crisis is far from evenly – or similarly – distributed. Smart retailers and consumer goods companies can use spending data from real people and places to adjust their strategies to make the most of the islands of opportunity.”

Another recent study by BCG's Brazilian arm – the management consulting firm has an office in São Paulo – found that Brazilian employees are increasingly seeking soft values in their engagement with employers.

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