Finding Islands of Consumer Spending Opportunity in Brazil’s Crisis

Finding Islands of Consumer Spending Opportunity in Brazil’s Crisis

          
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Finding Islands of Consumer Spending Opportunity in Brazil’s Crisis

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    The economic turmoil in Brazil is a big story of a country in crisis. The national economy contracted by almost 4% in 2015, and estimates for 2016 are not much better. Consumption—once an engine of growth—declined by 1.3% last year and shows no clear signs of improvement. Consumers are more pessimistic today than at any time in years.

    Headline numbers such as these make it easy to write off Brazil—a member of the once-heralded BRICS nations (Brazil, Russia, India, China, and South Africa)—­as one more boom-to-bust tale. But like many other generalized judgments, such an assessment is both simplistic and misleading. Brazil is a nation of more than 200 million people and is the fifth-largest country by land mass in the world. Its continental dimensions, geographic variety, and economic and sociodemographic diversity define heterogeneity. Although it is one country, it comprises many local, regional, and sector-specific economies, each with its own defining characteristics, drivers, and trends.

    The economic crisis that brought Brazil’s accelerated growth trajectory to a sudden halt is a clear reminder that volatility is as common in emerging markets as growth is. Playing successfully in a country such as Brazil requires not only the ability to grow a business fast but also a deep understanding of the many realities that define a dynamic and heterogeneous market, and the ability to adapt to these conditions. For example, retail spending in 2015 grew faster (by 1.8 percentage points) in interior cities than in major metropolitan areas; and in many cities (mostly in agricultural areas), spending growth remains strong. Despite overall decimation in the retail sector, pharmacy retail sales are growing at almost 9% per year, supermarkets at more than 3.5%, and bars and restaurants at more than 2%. (See Exhibit 1.)

    exhibit

    Recently, BCG and Cielo, Brazil’s largest credit- and debit-card payments processing company, undertook a major study of trends in Brazilian consumption based on a database of between 5 billion and 6 billion transactions per year from 2011 through 2015, involving 160 million credit and debit cards. We also analyzed dozens of eco­nomic and sociodemographic variables related to consumption in more than 5,000 cities and 137 mesorregiões (regions, as defined by the Brazilian government’s statis­tical institute, IBGE). We then applied statistical techniques to identify clusters of cities whose inhabitants reacted to the crisis with similar behaviors. The results show conclusively that traditional approaches to analyzing demand planning—approaches that rely on historic consumption data and municipal GDP trends—have significant limitations and therefore are unlikely to provide a complete or specific picture of where the real opportunities lie. Our analysis addresses this shortcoming.

    The crisis has hit hard, but its impact varies; Brazil is diverse. Smart companies—whether Brazilian or multinational—can employ a sophisticated approach based on real spending data from real people and places. These companies can adjust their strategies so that they make the most of the islands of opportunity that exist in the current downturn while positioning themselves to take maximum advantage of the eventual recovery.


    Unless otherwise indicated, all figures in this report are based on the ICVA (Cielo Broad Retail Index, a consumption index published by Cielo) and other Cielo data. The ICVA tracks the monthly performance of Brazil’s broad retail sector based on actual sales transactions from more than 1.8 million active merchants. Cielo’s Intelligence area has developed mathematical models to eliminate the effects of such factors as variations in Cielo’s market share, as well as the effects of use of checks and cash in place of cards. Thus, the index reflects the retail sector as a whole and is in no way related to Cielo’s financial performance. Growth rates and consumption data cited in this report are deflated, based on IPCA (Extended National Consumer Price Index), an inflation index issued by the IBGE (Brazilian Institute of Geography and Statistics) and adjusted to the “expanded retail” sector mix present in the ICVA (including car rental and retail consumption, among other segments).
    To ensure adequate sample size, we focused on card data from cities with more than 10,000 inhabitants and more than 100 stores that accept electronic payments. Collectively, these cities represent more than 90% of Brazil’s GDP and 80% of the country’s population.
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