BLENDING IN BRAZIL

MICHAEL KEPP

SAO PAULO, Brazil (FNS) -- The Brazilian supermarket sector is seeing a relatively new phenomenon that is already familiar to the U.S. market.

It's called consolidation.

That consolidation -- fueled by drastically lower inflation -- is being spearheaded mainly by big foreign chains taking over local ones. The large players are attempting to gain market share in an emerging market country with huge growth potential.

Already small- and medium-sized operators are merging to gain economies of scale. The region has a long way to go before consolidation leads to highly concentrated market shares. But already it has made the sector more efficient, although production cost reductions have not led to lower prices.

Sao Paulo state, Brazil's most industrialized and affluent, accounting for 40% of the country's Gross National Product, is where the country is most likely to take off economically. Accordingly, this region is predicted to be the main market share battleground in the near future. That's why operators including Pao de Acucar, Carrefour and Bompreco (the latter 50% owned by Ahold, Zaandam, Netherlands) have been making investments in other retailers.

Eduardo de la Pena, retail sector analyst for the Rio de Janeiro-based Bozano Simonsen bank, said, "The foreign supermarket chains that have recently come to Brazil, and the expanding local and foreign supermarket chains already in Brazil, see this country as a huge, undeveloped market on the verge of taking off economically, especially in the supermarket sector. Because the country is still developing, there's a very low rate of consumer penetration in, for example, the processed and frozen-food sector, and thus a huge amount of room for growth."

In 1997 and 1998, three of Brazil's Top Five supermarket chains -- the French-owned Carrefour, the locally owned Pao de Acucar group, and Bompreco -- made a number of major acquisitions. Among them:

In December of 1997, Carrefour, the largest chain (1997 net sales of $5 billion) bought a 50% stake in the Eldorado chain, the 14th largest, with 10 hypermarkets, seven in southern Sao Paulo state. Carrefour, which is running the Eldorado chain, in making the partial acquisition boosted its number of hypermarkets to 58, of which 33 are in Sao Paulo state.

In May of 1998, Pao de Acucar, the second-largest chain (1997 net sales of $3.3 billion), bought 100% of the Barateiro chain, the 10th largest chain (26 supermarkets and six hypermarkets, most of which are in Sao Paulo state). In the last two years, Pao de Acucar has bought six supermarket and two hypermarket chains (with total net sales of $1 billion in 1997), mostly in Sao Paulo state, and, in 1997 alone, pushed its number of stores from 238 to 270.

In June of 1997, Bompreco, the third-largest chain (1997 net sales of $1.85 billion), whose supermarkets are located in northeastern Brazil, bought the 50-supermarket Supermar chain in northeastern Bahia state for about $60 million. That purchase consolidated its leading market share in northeastern Brazil.

Other major supermarket chains also underwent consolidations in late 1997, all via takeovers/acquisitions by foreigners.

In December of 1997, Wal-Mart Brasil bought out the 40% stake of retail chain Lojas Americanas in a jointly owned Wal-Mart chain for $40.5 million, a buyout that gave Wal-Mart almost 100% ownership. Wal-Mart sold a small stake to one of the owners of Banco Garantia investment bank, which controls Lojas Americanas.

In December of 1997, Jeronimo Martins, Portugal's second-largest supermarket chain, bought the local 23-store Se supermarket chain, the 11th largest ($490 million net sales in 1997), located in southern Sao Paulo state. Jeronimo Martins is the second Portuguese firm to have recently entered the supermarket sector.

In June of 1997, Sonae, the largest Portuguese supermarket chain, bought the remaining 50% of Companhia Real de Distribuicao (commonly known as the Real chain), the ninth largest ($580 million in net sales in 1997), with 34 stores in the southern Brazilian states of Rio Grande do Sul, Santa Catarina and Parana. Sonae had bought a 26% stake in CRD in 1989 and had increased that to 50% in 1996. Sonae had also studied the possibility of buying the Eldorado chain, which would have put it in direct competition with the Jeronimo Martins-owned Se chain in Sao Paulo state.

Sonae and Jeronimo Martins, in buying major Brazilian supermarket chains, albeit in geographically distinct regions, continued a market-share dispute that they had also been waging in Portugal.

Paulo Feijo, president of Abras, Brazil's national association of supermarkets (comparable to the Food Marketing Institute), said that both chains came here because the European supermarket field was saturated and because federal laws in Portugal, as well as in Spain and France (where both Portuguese firms have chains), to protect smaller chains, prohibited the building of supermarkets bigger than about 2,000 to 2,500 square meters. A hypermarket can encompass from 10,000 to 13,000 square meters.

Both Sonae and Jeronimo Martins are also planning to expand their respective CRD and Se supermarket chains, according to analyst and market reports. J. Martins reportedly plans to open five more supermarkets in Sao Paulo state by year's end. Sonae, which has made Brazil its main base of expansion outside Europe, reportedly plans to open three new hypermarkets in southern Brazil this year.

Both Sonae and Jeronimo Martins refused to comment on their Brazilian acquisitions or strategic reasons that brought them here.

Carrefour plans to continue consolidating its market share in Sao Paulo so as not to cede additional market share to Pao de Acucar. As Jean Duboc, the president of Carrefour in Brazil, said in reference to the Eldorado chain purchase, "our plan is to maintain this rhythm of growth, without erring in growing more quickly than our capacity or the capacity of the market."

Carrefour and Pao de Acucar's Sao Paulo consolidation appear to have prompted Wal-Mart to do likewise. Now with five Supercenters and four Sam's Clubs in Sao Paulo state, Wal-Mart, in June, announced plans to open four new Supercenters, three of which will be in Sao Paulo state. Wal-Mart also announced plans to build eight to 12 Supercenters/Sam's Clubs each year in Brazil, beginning in 1999.

Though Wal-Mart, unlike most chains, has built its stores from scratch, the increasing lack of prime real estate in and around the city of Sao Paulo, South America's largest, and where most of the Carrefour and Pao de Acucar stores are located, may force it to enter the acquisition wave, said Bruno Zaremba, retail sector analyst for Banco Pactual, Rio de Janeiro. Zaremba added that the Dutch-owned Makro chain of 25 cash-and-carry wholesale stores, mainly in Sao Paulo, was a possible takeover target because its stores were large enough to convert into Supercenters.

This supermarket acquisition/consolidation movement has, in making small and medium-sized supermarket chains less competitive, also forced them to merge to gain economies of scale. The most recent example: In July, eight small and medium-sized supermarket chains merged to form Redeconomia, a locally owned Rio de Janeiro chain with 36 supermarkets, making it the second-largest supermarket chain in Rio de Janeiro (in terms of number of stores) behind Sendas, Brazil's fourth-largest chain ($1.57 billion in sales in 1997).

Even with its consolidation, the Brazil market is still quite segmented compared with other countries. Abras, the national association of supermarkets, said that the five biggest supermarket chains here in 1997 had a 27.8% stake of the market (up from a 25% stake in 1994-1996). This is a small market share compared to that held by the Top Five supermarket chains in other countries: France (70% market share), Argentina (60%), England (48%) and the United States (32.6%), according to Abras statistics.

Abras, however, estimated that, as consolidations increase in the near future, Brazil's five largest chains will, like those in the above countries, conquer greater market share -- an estimated 31% stake in 1998 and an estimated 40% to 45% stake in the next five years.

The entrance of foreign firms into the Brazilian supermarket picture has also brought the capital to achieve technology gains. Such was the case with Royal Ahold's 50% acquisition of Bompreco. While Bompreco was the first Brazilian supermarket chain to use bar coding (back in 1987), Royal Ahold also helped provide it with more sophisticated automation systems, like electronic data interchange. Nowadays, all of Brazil's biggest supermarkets have EDI systems, though not all their sales are linked to it.

About 20% of Pao de Acucar's purchases are EDI-linked, up from 2% to 3% several years ago.

"Royal Ahold's becoming a 50% shareholder in Bompreco helped us make the technological strides, like our EDI system, that has helped lower our costs and kept us competitive," said Raimundo Almeida, the assistant to the president of Bompreco. "This has, not, however, over the short-term, led to a perceptible level of price reductions."