Brazil and its unorganized retail sector's success story!

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Brazilian retailing was protected from foreign competition during the 1980s because of the high environmental turbulence in Brazil resulting from hyperinflation, recession and government policies. To survive in such an environment, companies were forced to adapt their strategies and practices to specific local conditions.

During the 1990s, however, the Brazilian retailing environment changed substantially. Economic stabilization and the lowering of tariffs reduced entry barriers stimulating foreign competitors to enter. Such changes happened at the same time the world retailing industry was moving towards concentration and internationalization.

A market of 182 million people whose economy is recovering and average disposable income is on the rise, is attracting the interest of foreign retailers.

Since its market entry in 1994, Wal-Mart has had a steep learning curve in Brazil. In the early years it was ridiculed for selling golf kits in superstores located in low-income areas. In the past three years, however, it has rapidly become Brazil’s third largest retailer.

In recent years different formats in Brazil’s grocery sector have had more or less stable shares. Figures from AC-Nielsen point out that small retail formats are most important and that these have sustained their growing trend in recent years. In 2005, traditional mom & pop stores and small supermarkets with up to four checkouts accounted for 40 per cent of total revenues. Most of these small supermarkets belong to small, family-owned businesses.

This growth of smaller formats in Brazil is a worldwide unique phenomenon as in all other markets globally small formats and mom & pop stores are losing business to modern and usually larger-sized retail formats.

Some possible reasons

1. Small retailers fit the needs of emerging consumers quite well.(The store with its location proximity and familiar appearance, The right product assortment like having the smaller sachets etc, Price in terms of cost of purchase, Having the ‘personal touch’ and the informal credit etc.)

2. Small retailers have a sustainable business model– even before any benefits from tax informality (despite lower sales and average GMROS, they enjoy high inventory turns and ]good cash velocity).

3. Informality matters –(Like tax evasions, selling fake/pirated/outdated products)

4. Right demography - According to ACNielsen, Brazil’s ageing population increasingly looks for proximity and time saving when it comes to shopping.

Small retailers have been successful in forming horizontal buying alliances to negate the extent of price advantage enjoyed by big retailers.

Brazil does not have national policies regulating the spread of supermarkets, or protecting or supporting traditional retailers. Retail regulation is decentralized to the municipal level, at which foreign and national chains “bargain” with local governments about the terms and conditions of entry. Sometimes the terms and conditions are difficult, sometimes quite easy.

the Federal Competition Commission regulates competition among formal sector firms but not between formal and small, informal firms. In that sense, no “protection”

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