THE BRAZILIAN CONSUMER : OPPORTUNITIES AND CHALLENGES / WHARTON KNOWLEDGE ( RECOMMENDED READING )

The Brazilian Consumer: Opportunities and Challenges

For 15 years, Brazil has ridden an unprecedented wave of consumption growth throughout its socioeconomic pyramid. This period has been marked by the emergence of a new middle class and of companies finding ways to address this market.


At the same time, a number of consumer goods companies have flourished, employing successful, relatively basic entry strategies. These strategies offer important lessons for other companies seeking to meet the increasing demands of a new group of consumers. Since the turn of the millennium, Brazil has been widely regarded as ready to realize its promise as the “country of tomorrow,” and the relatively well-known success stories to date have only added to Brazil’s reputation as an attractive growth market.


Despite its rapid growth, the Brazilian consumer market is a complex landscape that could challenge companies as competition increases in the future and the behaviors of Brazilian consumers become more relevant (and, consequently, more important in defining strategy). As the Brazilian middle class continues to emerge, companies will have to define their target consumers more accurately, refine their strategies and make organizational adjustments adequate to meet unique segment-specific demands.


As Julian Gadano, CEO of Region 4, a Latin American research firm, notes, “The emerging consumer market in Brazil has become so large that brand managers can no longer sleep if they are not confident in their approach to this specific segment.”


Several vital questions emerge in attempting to understand these trends and issues: What developments are behind the rise of the new Brazilian middle class? How have companies been involved in this development? And what strategies and tactics should companies consider when
addressing this segment?

Defining the Opportunity

The first challenge for companies doing business in Brazil arises as soon as one tries to define the consumers. Despite the undeniable growth of this new middle class, there seems to be a significant discrepancy in defining the group in question. The Brazilian Statistics Agency (IBGE) recently redefined the country’s economic classes, based on average monthly income per capita, as: Class A1: above R$9,734 or US$4,874 (R$14,400 or US$7,211 on average, 1% of the population); Class A2: R$6,564-R$9,734 or US$3,287 to $4,874 (R$8,100 or US$4,056 on average, 4% of the population) Class B1: R$3,480-R$6,564 (R$4,600 on average, 9% of the population); Class B2: R$2,012-R$3,480
(R$2,300 on average, 15% of the population); Class C1: R$1,194-R$2,012 (R$1,400 on average, 21% of the population); Class C2: R$726-R$1,194 (R$950 on average, 22% of the population); Class
D: R$484-R$726 (R$620 on average, 25% of the population); and Class E: R$276-R$484 (R$440 on average, 3% of the population).

Even after this official redefinition, which introduced sub-classes (namely, the subdivision of Class C), various entities continue to define the socio-economic pyramid in different ways. For example, the Brazilian Central Bank considers Class C households as those with a monthly income between R$726 and R$1,195, and states that they account for 46% of total Brazilian households.

Another differing perspective is given by the Getúlio Vargas Foundation, which considers “middle-class households” as those whose monthly income is between R$3,800 and R$7,600 and notes that they represent up to 54% of total households. Apart from the fact that these definitions are based on household rather than population figures, both clearly contradict the official IBGE figures, which define Classes C1 and C2 as those that account for only 43% of the total population and have a
monthly income between R$726 and R$2,012.

The lack of a clear and homogeneous segmentation of the Brazilian consumer base is problematic for companies trying to address the emerging consumers. Not only does it increase the companies’ level of uncertainty when assessing market attractiveness, but it also makes it harder for them to define precisely the main characteristics of their target segments and leverage company data to create more complex and insightful customer segmentations. As Wladimir Gomes, a senior partner from Bain, notes, “Splitting social classes solely on income ignores highly important factors. More significant are consuming patterns and habits, which are driven by what the household already possesses, and which help explain consumers’ next needs and moves.” To truly understand the needs that should drive corporate strategy, it is important to understand the evolution of this consumer class to date.

A Middle Class in 15 Years

The dynamic evolution of socio-economic classes, as a result of a plethora of political and economic developments, is one of the primary constraints on establishing a consensus on defining the tiers. In the past two years alone, more than 23 million people rose into Class C, and their economic activity ballooned: 10 million people gained Internet access between 2005 and 2007, car sales soared 28% in 2008 and mortgage lending rose 26.5%.

These developments were made possible by the political and economic reforms implemented by the Collor de Mello, Cardoso and Lula administrations, which brought Brazilian consumers and companies
a formerly unknown degree of stability. Previously, particularly during the 1980s, rampant inflation and high import tariffs constrained buying power.

Consequently, consumption remained concentrated in basic goods. National retail and consumer goods companies were equally constrained, and the import activity of international firms was essentially nonexistent. National firms focused on providing basic and medium-grade goods to Classes A and B – and at relatively high prices due to both their inability to invest in efficiency and a lack of competition. Most companies were regional or even local, and the majority focused entirely on the southern and southeastern regions of the country.

The 1994 Plano Real, a currency stabilization plan, was a pivotal factor in establishing Brazil’s modern middle class. The plan was highly successful in its goals of eliminating price indexation and controlling inflation. Complementary institutional reforms, such as the passage of legislation setting the institutional framework necessary for creating mortgage lending and securitization, demonstrated a commitment to predictability that allowed consumers to plan their spending.

Consequently, corporate planners could build and refine business plans like never before, and the lowering of import tariffs provided additional incentivization (at the risk of losing out to international entrants).

Nowhere was this more apparent than in consumer goods/retail companies where, in 1995 alone, sales ballooned 17%.

According to Jose Carlos Reis Magalhães, CEO of Tarpon, a Brazilian hedge fund with significant investments in retail, the lifting of import
regulations and increased internal competition allowed international entrants to bring improvements in operational efficiency that drove
profound transformations among the majority of national companies.

From technology to distribution to internal restructuring and efficiency, retail companies in the late 1990s focused on lowering costs to survive in a more competitive market. Although the companies were merely reacting to short-term forces, these very changes set the stage for addressing the emerging middle class more significantly in the future. Equally important was the boom in credit over the last 15 years.

Consumers needed to finance their growing purchases, and companies sought ways to further penetrate the market. In 1995, easing credit restrictions stimulated the first loans for white-goods purchases, which grew by some 34% in 1996. Companies, thus, were not only able to offer financing options to their consumers, but also to finance their own growth and restructuring, facilitating even further growth. Subsequent structural reforms led to an explosion in consumer lending during the Lula administration: Between 2002 and 2006, the number of credit cards in Brazil rose 91% to 79 million, or about 1 for every 2.3 people.

New forms of financing emerged, such as payroll lending, which grew 150% in three years. Overall, credit assets grew 27% per annum from 2004 to 2008.

Such economic changes created a consumption focused class. With the confluence of these developments, companies began to cater to the
burgeoning consumer segment. The speed at which this segment grew meant that innovation was not paramount to initial success. Going forward, as the segment attracts further competition, a rudimentary entry strategy must soon be replaced by a refined and sustainable strategy. First, however, companies must attain a true understanding of this giant segment.

However, according to consultants, understanding the economic profiles of these consumers is merely an initial step. Companies must then analyze consumer habits and winning strategies to develop more effective competitive advantages and attain a sustainable foothold in their newest target segments.

A New Approach

Two of the most pronounced approaches by successful first movers in the new Brazilian consumer market have been the very consumer centricity mentioned previously (e.g., incorporation of consumer habits, lifestyles, etc.) and a more diversified distribution strategy.

As a Booz & Co. market study suggests, companies targeting the new Brazilian middle-class consumers often think of them as a poorer version of those who fall under Classes A and B, which could not be further from the truth. Emerging middle-class consumers differ from those in the upper tiers of the socio-economic pyramid in ways far more significant than mere income.

The products that have succeeded in this segment are those that address the particular needs stemming from the target customers’ day-to-day
realities. For example, Unilever recognized that washing was a major social event for women in rural areas and adjusted its market positioning accordingly.

Recognizing that powdered soap –
typically used in machine washing – was not used in this community, the company quickly made a widespread adjustment to promote its bar soap product and saw a rapid increase in sales. Another important observation is that consumers in this class are significantly more brand-loyal and care more about quality than typically thought (rather than being solely price-driven).

Quality matters because these consumers do not have enough disposable income to try out different products (running the risk of buying a product that does not solve their specific needs the first time around).

According to Ismael Gilio, sector specialist of the Inter-American Development Bank in Brazil, consumers often buy the higher priced of a set of comparable products or even products that have a status component, such as energy drinks or colognes. Based on these insights, major consumer goods companies have launched smaller and adapted versions of successful products to meet their lower-end consumers’ needs. These new products, however, typically have been launched under new brand names and with different packaging to protect the positioning of the companies’ mid-to-high-end brands.

The key for creating a successful pricing strategy is the ability to offer products with price points that match the middle class consumers’ limited out of- pocket possibilities, rather than simply cutting prices.

This class often associates cheaper products with bad quality.

Furthermore, products that reduce per-unit costs by offering larger quantities frequently do not meet the needs of these consumers, who often opt for smaller-sized but more expensive per-unit products that offer a lower absolute cost (their key spending constraint).

Successful companies adapt to these conditions by either reducing the size of their products or splitting the price in multiple monthly installments. For example, the Brazilian retailer Fast Shop offers the Brastemp 419L refrigerator for R$3,594 (US$1,800) as a one-time payment or in 12 monthly installments of R$339 ($170), which yields an all-in price of R$4,076 or $2,041 (suggesting a 27% annual interest rate). The latter strategy makes sense for many companies as it allows them to reach more consumers and extract more profit per consumer. Delinquency typically remains low.

Reaching the Consumer

Amid a changing retail environment, consumer goods companies are employing two main approaches to reach the new middle-class retail
market in Brazil: selling through smaller-sized stores and creating exclusive distribution networks.

A distinct bipolarization of the Brazilian retail store format is taking place. Larger players are growing organically and consolidating, while smaller local stores are increasingly relied upon to meet more of local shoppers’ daily needs. For example, Wal-Mart has acquired many medium-sized regional retailers such as Bompreço and Sonae, while Pão de Açúcar, one of Brazil’s largest retail chains, has bought other specialist retailers such as Ponto Frio.

The emerging consumers in Brazil are likely to continue buying in small neighborhood stores in addition to (or in place of) hypermarkets.

Previously, hypermarkets enabled consumers to make large purchases in one location to guard against inflation. However, as inflation has been controlled, high transport costs have reduced this trend. According to “How to Create Value for Emerging Consumers,” published by Guillermo D’Andrea in the Latin American edition of Harvard Business Review, the discount offered by hypermarkets relative to local stores should be around 25%. The benefits hypermarkets offer consumers not living in close proximity have been reduced, making shopping at the small local stores more attractive.

Even multinational retailers are changing their store formats to meet these trends. Carrefour has established Bairro, a low-cost neighborhood alternative; and Wal-Mart has rolled out its Todo Dia stores, a smaller specialized version of its Supercenters where “everyday low prices” continue to be the imperative.

Consumer goods companies recognize these trends and are increasingly focusing their sales efforts on these smaller stores. In addition, they are moving toward using exclusive distributors to reach these smaller and more dispersed stores and to increase their bargaining power over the larger retail chains.

Carlos Trostli, former CEO of Reckitt Benckiser in South America, notes, “Although having exclusive distributors may bear higher costs, they are more than offset by the margin gains resulting from
increased bargaining power. Negotiating with exclusive distributors is more valuable to companies than negotiating with multi-product wholesalers or large retailers.” Furthermore, according to Trostli, “exclusive distributors are more open to initial stage tests and trials, allowing them to better manage and innovate their product portfolios.”

The emerging consumers in Brazil represent a significant opportunity for both international and domestic companies seeking to expand their
consumer base. As Trostli states, “Five years ago, Class C was considered a niche market, and Classes A and B the market. Now, Classes A and B have become the niche, and Class C the market [with 43% of the population].” More companies are competing for the emerging consumer’s wallet. As Gílio points out, “As of today, all major companies operating in the Brazilian market are preparing or have already prepared a set of products and services to address the specific needs of the Brazilian emerging consumers.”

Nonetheless, it is clear to experts that for retail companies to take advantage of this shift, merely utilizing strategies initially used to target higher-end segments will be insufficient. Detailed consumer segmentations, followed by specifically tailored products, innovative pricing formulas, and complex distribution systems, they say, are necessary to appeal to the emerging consumers. Addressing the
Brazilian emerging consumer brings significant promise. Holistic solutions and products must be tailored to the unique needs of the Brazilian Class C consumers for companies to be successful.

This article was written by Federico Chester, Zachary Fox, Julien Gervaz, Nicholas Reise and Alex