Brazil Retail: Drivers and Opportunities

Matt Bruck

McDuff Advisors

January 2012

Retail and the Economy

3

After an astonishing climb since 2004…

Source: World Bank

4

…GDP growth has slowed

Source: IBGE

5

This is still impressive; Brazil has outperformed all but China.

0.0

1 000.0

2 000.0

3 000.0

4 000.0

5 000.0

6 000.0

7 000.0

8 000.0

9 000.0

2005 2006 2007 2008 2009 2010 2011 2012

China

India

Russia

Brazil

Nominal GDP, US$ Billion

Source: IMF World Economic Outlook Database

6

02468

1012141618

Feb-1

0

Apr-1

0

Jun-

10

Aug-1

0

Oct-10

Dec-10

Feb-1

1

Apr-1

1

Jun-

11

Aug-1

1

Oct-11

Retail Sales have slowed too…

Source: IBGE

Annual Retail Sales: % Change Year over Year

April 2010: +15.7%October 2010: +

8.7% September 2011: +

5.3% October 2011:

+4.3%

7

…but sales are still growing.

2012 Projections:Continue decelerating

trend through H1 Stabilize and possibly

pick up late in 2012.

Longer Term ProjectionsTotal Retail 2011: $792BTotal Retail 2015:

$1,162BGrowth: 47% in 4 years

Sources: Roubini Global, IBGE, Moody’s Analytics, BMI Brazil Retail Report

8

Inflation – and the Central Bank response - remain an issue for retail. 5 rate hikes in early

2011 to restrain domestic demand

Sales fall 3 cuts in August to

counter Europe malaise Strong sales rebound in

November (+6.8% vs 2010)

4.93

2.05

4.60

6.07

3.95

6.24 6.36

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

2005 2006 2007 2008 2009 2010 2011

Annual % Change in Consumer Prices

Sources: IBGE, FGV

9

Business optimism has fallen this year – but still remains high for the future.

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

Jan

Mar

May Ju

lSep Nov

Jan

Mar

May Ju

lSep Nov

Current Conditions

The Future

Note: Scale of 0 to 100; above 50 indicates confidence among entrepreneurs.Source: Banco Central do Brasil, 12/11

BCI

10

Consumer confidence has fallen from its peak – but remains even higher.

144.00146.00148.00150.00152.00154.00156.00158.00160.00162.00164.00166.00

Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov

Note: Index is weighted average of current and future expectations; 200 is most optimistic.

Sources: Fecomercio SP, CNI

2010 2011

CCI

11

Brazilians continue to get richer.

Source: World Bank

12

The wealth is not uniform: the majority still earns less than $1,000 per month…

66

57

50

39

0

10

20

30

40

50

60

70

India Brazil China Russia

Source: Credit Suisse

% of population earning less than US$1,000 per month, 2010

13

…but the population and GDP per capita are growing in parallel.

0

5 000

10 000

15 000

20 000

25 000

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

GDP per capita in 2010 R$

Population (x10,000)

Source: IBGE

14

Compared to peers, Brazilians spend…

Source: Credit Suisse

Savings as % of income, 2010

17

10

31

13

0

5

10

15

20

25

30

35

India Brazil China Russia

15

…and use credit cards.

20.619.3

16.214.6 13.6

9.47.2

0

5

10

15

20

25

SaudiArabia

Brazil Egypt China Russia Indonesia India

Source: Credit Suisse

% of purchases by credit card, 2010

16

A demographic shift – toward a middle class - favors retailers.

1. Older and more affluent:

2. Better educated; increased access to information:

3. Smaller, more urban households:

More sophisticated products, health-oriented products

More discerning consumers

Consumption as a topic; need for small packages and more convenience

Sources: Euromonitor, IBGE, CIA, Ernst & Young

17

The broader environment also appears favorable. Substantial investment

in infrastructure enhances convenience.

Foreign capital inflows, encourage foreign vendors.

Tax reductions and bureaucratic improvements ease business burden.

Source: A.T. Kearney

Country 2011 Rank 2010 RankBrazil 1 5Uruguay 2 8Chile 3 6India 4 3Kuwait 5 2China 6 1Saudi Arabia 7 4Peru 8 9U.A.E. 9 7Turkey 10 18

A.T. Kearney Global Retail Development Index, 2011

18

Risks to sales growth exist – but appear manageable.

Global Factors: Global slowdown

infects Brazil’s economy.

Exchange rate makes shopping vacations irresistible.

Brazil Factors: Inflation/interest

volatility Credit bubble Slowing job creation Social unrest Corruption scandals

Retail Segments

20

Brazilian consumption by category

Source: IBGE 2007

21

Some booming products:

Cars2.2 million new

purchases in 2009. Domestic airline tickets

From 80 million in 2005 to 100 million in 2009

Cell phones 200 million by 2012 – in a

country with a population of 190 million

TVs9 million imported in 2009

Sources: Vivo, Credit Suisse

Brazilian passenger car sales p.a. (millions)

22

Brazilians have embraced appliances, but room for growth remains.

Sources: IBGE, Euromonitor

9591

78

3227

0

10

2030

40

50

60

7080

90

100

television refrigerator telephone microwave computer

% of households 2007

23

Supermarkets – owned by global firms - have boomed. Companhia Brasileira de

Distribuicao (CBD) largest chain Diniz family and Casino

(French) Q4’11 revenues + 8.7% vs

2010. Annual sales to $25B Operated in traditional Brazilian

style: replacing typical yo-yoing discounts and mark-ups

Walmart Brazil Established 1994; active since

2004 Invested $1.2B to open more

than 100 shops in 2010; plans 80 for H1 2012

2009 revenues $11B Introduced its trademark

“everyday low prices” in early 2011

Focus on middle class needs: organic products produce, generic drugs, cut-price computers.

Expects Brazil business to grow at 1.4x its international average over next 5 years

Sources: The Economist, NASDAQ, Dow Jones, FT

24

A large, under-served lower economic class promises 64 million more market customers. Class D sees growing

buying power: Rising minimum wageGovernment subsidiesLower inflationAccess to credit

To reach this segment: Local AffordableLess expensive Smaller packages Family appealQuality emphasisBenefits educationTrust branding

Sources: Boston Consulting Group, Euromonitor

Foreign Retailers

26

Global retailers have found Brazil challenging. Taxes

exorbitant import duty (eg 30% on foreign cars)

25 % luxury goods tax

Bureaucratic red tape Currency controls and

exchange rates Stringent local content

requirements Turbulent history

40.4452.95

62.6476.7

84.26

107.5 103.42118.68

134.92

155.5

0

20

40

60

80

100

120

140

160

180

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Sources: Ernst & Young, Banco Central do Brasil

Unit Labor Cost Index, US$

27

A strong Real also hurts foreign retailers.

Source: OTC Interbank

28

Some globalists are in Brazil – but many have hesitated.IN BRAZIL: Zara

$282M sales in 2010 held liable for “slave-like”

conditions at its local subcontractors; paid $1.8M fine

Starbucks In Brazil since 2006, by

acquisition. Approaching 100 stores. Targeting 1,000; struggling

with locations.

NOT IN BRAZIL: Topshop

Opening first store Q1 ’12 H&M, Gap

Not in Brazil Apple

Launched itunes Brazil in December 2010.

31 "premium" resellers (19 Herval stores), closely controlled by Apple

Still considering a flagship store

29

Brazilians expect high prices – and in return demand quality and service… Carlos Jereissati –

CEO of Iguatemi “Service has become a

crucial factor… Brazil is very different from the Middle East and Asia… Things are very expensive and that creates a difficult market. In order to sell, you need amazing service...”

Richard Barczinski, general director in Brazil for Hermès: “The consumer here is

highly sophisticated and informed. People here appreciate not just the value of something expensive, but the value and pleasure of good design and materials.”

30

…so luxury brands work particularly well. 30 billionaires 137,000 millionaires (more

than Russia or India) Over 1 million families with

income above $80,000

Doubled 2006 to 2010 Grew 22% in 2011 Will grow from 1% of the

global luxury market to 6% ($63.5B) by 2025

Louis Vuitton grew Brazil sales 50% in 2009.

Tiffany and Gucci count Brazil among their top performing markets worldwide in 2010

Sources: Forbes, Goldman Sachs, MCF Consultoria, World Wealth Report

31

Foreign luxury brands are now opening their own stores. 2008

20 foreign luxury brands had established a store in Brazil

2013 an additional 50 brands will

enter the market

Chanel Chanel closed franchise

store in Daslu; opened boutique in Cidade Jardim in 2011

Removal of middleman allowed 30% price cut.

Diane von Furstenberg São Paulo store is her most

successful outside US Louis Vuitton

The 4 Louis Vuitton stores in Brazil grew 4 times faster than their average store in 2011

Sources: Bain & Company, Forbes

Appendix

33

Interest Rate

34

Business Confidence

35

Inflation

36

Online retail? Farfetch.com

In Brazil since late 2010 Amalgamator - online sales for 80 luxury

stores (25 Brazilian) 2,000 global labels, 50 Brazilian labels Local payment systems and split payments Assisted, fast customs clearance All taxes prepaid by vendor Easy returns Native language customer-service team

37

Age trends the majority of the population will still be concentrated in the age

group of 15 - 44 through 2050 – but aging quickly average age in Brazil is 28.6 67% between the ages of 15 and 64 27% younger than 14 population over 40 growing (+4.2% 2003-7) Birth rate is decreasing. Population under 14 fell by 0.7% (2003-7) Percentage of elderly has doubled since 1960; by 2020 Brazil will

rank 6th in the world in percentage of elderly life expectancy has increased (now 73, likely to reach 80) due mainly to improvement in quality of life and advances in

health care. Aging and more affluent population tends to favor more

sophisticated and health-oriented products

Sources: Euromonitor, IBGE, CIA,

38

Consumption drives GDP growth. (GDP= C + I + G + X – M)

Source: Credit Suisse