Analysis of the Effect of the Recession on Hypermarket Retailing Industry in Brazil - Essay Example

?Analysis of the Effect of the Recession on Hypermarket Retailing Industry in Brazil In the analysis of recession effect of hypermarket retailing industry in Brazil it has to be understood that “Brazil has emerged as one of the leading markets in the world. There is huge growth of sales in the retail sector. It is expected to grow continuously over the next few years because of a constantly declining inflation rate, which allows continuous expansion of credit conditions ease; i.e., substantial demand for durable goods and real incomes and growing demand for non-durable consumer goods” (Retail Market Industry Brazil 2009). The economic reviews of Brazil’s retail industry out that the Gross Domestic Product (GDP) rates are cumulatively increasing year by year. The practice of consolidation of the hypermarket retail industry has been continuing but in general, the hypermarket remains comparatively fragmented, representing substantial span for the big players to develop their market strength in future. The leading 3 market players are controlling the hypermarket retail industry in Brazil; they are Pao de Acucar, Carrefour, and Wal-Mart. Other players are leading through acquisition. The recession affects the revenue of sales and the decline of the profit in the retail industry, Recession is defined as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real gross domestic product (GDP), real income, employment, industrial production and wholesale-retail sales" (What causes a recession? 2012). In this study, the recession affects the business of hypermarket retailing industry. Recession affects various aspects of business such as the purchasing power of consumers, buying behavior, and the income disposable level of people has increased significantly. There are many other factors that contribute to the fall in economy's into a recession, but inflation is the major reason for recession. “Inflation is defined as a sustained increase in the general level of prices for goods and services” (All about Inflation 2012). Inflation indicates the general increase in the price of products and services over time period. The rate of inflation is higher; the consumers purchase lower percentage goods and services with the same price. The time of recession affects the hypermarket industry in Brazil; the major players of hypermarket industry in Brazil are Pao de Acucar, Carrefour and Wal-Mart. Recession mainly affects these companies because they are retail stores. “The economic crisis makes low-price concepts particularly adapted, and all three international retailers can potentially benefit from this trend. Expansion in Brazil is still ongoing and a strategic focus for all three groups” (Carrefour, Casino and Wal-Mart’s Expansion Strategies in Latin America 2012). Hypermarkets provide durable and non-durable goods. The retail industry of Brazil is segmented in three parts, they are Grocery Retail Non-Grocery Retail Non-Store retail These three categories are the main drivers of Brazil’s retail industry. The retailing of grocery is at a constant growth, and has gained its sustainability to the growing people who belong to low income group. The hypermarkets and large retailers are focusing on grocery, and also investing on the non-grocery items such as foot wears, fashion clothing, and sundries. The retailer’s Wallmart and Carrefour focus on developing personal labels for their own clothing brands and footwear. The Recession Impact of Retail Industry: “A recession normally takes place when consumers lose confidence in the growth of the economy and spend less, this leads to a decreased demand for goods and services, which in turn leads to a decrease in production, lay-offs and a sharp rise in unemployment” (Malik & Pandit 2012). The impact of recession in retail industry will decrease the proper demand and also enforces stress on the prices, and leads to the absence of price-war in the retail market. To keep the consumers, the price-wars can lead to turn down in rates and it might result in lower rate of inflation. Due to lesser spending ability, the lower prices may not be able to generate new demands, but in detail, recession leads to aggressive competition, and that at times it affects the product quality. The financial crisis in world economy has already shaken the retail industry globally. As many countries, Brazil is also not exempted from the affect of recession in the hypermarket retail industry. The reason is, the hypermarket retail industry is controlled by the international retailers. These companies restructure their business plans at the time of recession. The fluctuations in retail industry are not new for the global retail market. In the case of Wallmart, during recession, the company makes strategies for defending the world recession in the hypermarket retail stores. “Wal-Mart’s trademark is its focus on low prices, and it has remained true to this through thick and thin. As the economy bottomed out over the last few years, consumers looked to save money and Wal-Mart became the replacement destination to the higher priced competitors” (Burchett 2010). During recession, the competitions increase with hypermarkets. Wallmart uses an appropriate strategy for defending the economic recession. Wallmart retail stores offer consumer products by charging lower prices, for giving maximum value to consumers’ money. Wall mart usually charges for their products 20% lower than the competitors. Recession affects the wallmart hypermarket stores, during recession time other companies uses the aggressive pricing strategy of Wallmart. The company speaks about the pricing strategy in the following manner. “By cutting your price, you can boost your sales to a point where you earn far more at the cheaper retail price than you would have by selling the item at the higher price. In retailer language, you can lower your markup but earn more because of the increased volume" (Wal-Mart's Cost Leadership Strategy 2004). Wall mart is a global leader in retail industry, promises of Wal-Mart with a wide range of high quality, branded products at reasonable price, and also offers superior value for costumers’ money. This leads to increase in the demand for their products. Considering the impact of recession in retail industry, WAllmart is planning to acquire other retail companies in Brazil. Brazil is highly striking as a target for new retail chains, since has is a huge market, and new customers may walk in. The victorious record of global retail chains previously established in this country, and the easy trade regulations and laws do not restrict the international retailers from investing in Brazil. Wallmart also uses another strategy for restructuring the business at recession time. The company emphasises on information technology and logistics. These strategies cover the effects of global recession in their retail business. “Wal-Mart's entry into the grocery retail sector helped fuel its internationalization process. Global markets offered the attraction of potentially rapid economic development, increased consumer spending, and the ability for multinational retailers to leverage their superior distribution/logistics and information technology systems” (Sociology 2011). The company is successful in its own pricing strategies. The company uses successfully its pricing strategy by providing products everyday at low prices. This strategy increases the business of the retail stores of Wallmart. “Carrefour, the biggest network of hypermarkets in a Romania, adapts their strategy to the economic context marked by reduced purchasing power and introduces in its range of products1200 private-label items under the Carrefour name, having an average price” (Nistorescu & Puiu n.d., p. 4). This results in new phase in the strategy for supporting competition. It provides a wide range of products in their retail stores. Carrefour in Brazil was established in 1975. Now it is one of the major hypermarket retail stores in Brazil. It is world’s second biggest retailer after wallmart. These companies mainly concentrate on grocery, non-grocery and non-store retail business. During recession the market slows down; it widely affectsthe business of the company, and also increases competitions. “Modernisation of the retail landscape, driven by the rise of an urban middle class drove growth, especially for hypermarkets and discounter operators, will continue to favour the three global retailers. The economic crisis makes low-price concepts particularly adapted and all three international retailers can potentially benefit from this trend” (Carrefour, Casino and Wal-Mart’s Expansion Strategies in Latin America 2012). At the time of recession, the Carrefour uses aggressive pricing strategy for own products. The Carrefour may be in a stronger situation to battle overturns to makeup of its market share in Brazil. So, the company takes into consideration acquisitions in order to achieve the long term goal of the company. The company reduces the prices to make huge promotional activities, and successfully balances the negative effect of sales. A number of challenges that Carrefour has faced in the hypermarket retail business in Brazil, the company look forward to its expansion of business in the country. “Carrefour also faced several challenges at that time due to the unstable Brazilian economy, which faced problems like high inflation, fluctuating domestic currency, etc” (Carrefour’s Foray in Brazil 2008). There is a common decline during recession. The buying behaviors of the peoples come down due to insufficient income and low salaries. It results in fall in market with the goods and services are not available for the people. Production slows down and the prices going up. In fact, during recession, several retailers are required to sell products at lower rates. In the hypermarket retail business, recession has to be dreaded by consumers as well as producers. Both suffer during the hard recession time. These are equally needed to each other. In this case, the decline in the purchasing power of consumers, affects the manufacturer very badly. Recession is absolutely bad for the development and growth of the economy. At present, in the hypermarket sector, “the investors hesitate to invest, and producers are unable to churn out products. Consumer lack the necessary money due to unemployment and cannot therefore buy goods available in the market” (Shukla 2009). Brazilian Consumer Spending On Groceries: (Heller 2012). Even though the Brazil has faced the worst situation of recession, they managed to resume the growth rate in 2010, about $400 billion on grocery items. The total consumer spending on groceries are about $850 billion. The economic crisis has made a great impact on the consumer’s mindset. Brazilian consumers have become savvier shoppers and more quality conscious. For seventy percent of Brazilian consumers, total quality of retail products sold has a large amount of influence over the shop, where they do their grocery shopping. The Brazilian consumers used to spend more than 30% of their total income on purchasing grocery items. In 2011, the consumption rate of groceries has increased to $441 billion. Price and value perception influences a lot on where and how the Brazilian consumers will do their grocery shopping, but the qualities of products remain a matter of consideration. “A process of consolidation of the retail industry has been underway but overall, the market remains relatively fragmented, indicating substantial scope for the larger players to grow their market share in future. The top five supermarket chains account for approximately 40% of total sales. Three players — Brazil's Pao de Acucar, France's Carrefour and US's Wal-Mart —currently dominate the market, with the rest accounted for by much smaller — typically local — chains, each of which accounts for little more than 1% of the national market” (Opportunities in Brazil Retail Sector (2007-2011) 2007). As per the study of Euro-monitor International, due to the consequences of global economic crisis, the retail sales of grocery has been declined in 2009. The expected growth rate rise was about 3% in 2009. “Coffee is the favorite hot drink of Brazilian consumers and it also accounts for significant sales share in the Brazilian beverage industry. Besides, cosmetics & personal care industry in Brazil has shown an impressive performance and is expected to reach BRL 44.6 Billion by 2014 end. At the distribution channel front, retails formats, such as hypermarkets and supermarkets have gradually acquired market share from the traditional stores during the past few years and the country’s retail market has become home to several of the world's largest grocery retailers” (Brazil Retail Industry Analysis 2011). Change In Consumer Behavior And Its Impact On The Retail Industry: In Brazil, the effects of the economic meltdown became more obvious particularly among Brazilian consumers. In 2009, these adverse effects became clearer and this has brought a strong effect on Brazilian consumers. This made them to go in for a modest life style. “When surveyed by Data monitor in April 2009, more than a quarter of Brazilian respondents disagreed that they were giving up some of their favorite brands in light of the economic downturn” (The Global Economic Crisis: The Impact on Consumer Attitudes & Behaviors in Brazil 2009). The transformation in consumer habits, has been affected by the hypermarket sector as it is facing tough competition from international companies and hence it require to increase their productivity by concentrating more on the sector and diversified consumer behavior. “Customers are unwilling to make those hefty purchases. The value consciousness increases and the customer starts avoiding things that he or she might not use in near future. As customers become more value conscious and sales starts falling, the immediate reaction is to drop prices, thus squeezing the profit margins” (Singh 2012). Recession and Consumer Credit in Brazil: The signs of global financial crisis in Brazil are even clearly visible, the consumers trying to maintain their lifestyle in the best possible way. They continue their credit purchasing. Therefore, the effect of crisis on consumer demand that generated subsequently is not felt by the retailers immediately. “In 2008, many large appliance and electronics retailers continued with their plans of expanding in the country, opening new stores and experiencing growth throughout.  Some chains even pushed more aggressive expansion strategies that included opening new stores in lower SES markets to gain clients by offering them accessible credit.  While these strategies might have seemed like a sound way to grow in the past, under the current worldwide financial situation the risk exceeds the potential benefits” (Rubio 2009). In order to stimulate their quench for new products, a consumer requires more access to credit.  Successful retailers’ stimulate consumer’s demand and restructure their distribution as well as supply chains and all aspects of their operations.  Effect of Recession on Internet Retailing: In 2008, Wal-mart launched Internet retailing operations in Brazil with an investment of 14million dollar. This has benefitted the company with the growth of double digit of its rapidly growing channel which challenged its rivals. Carrefour has adopted a strategy of multi-format for the development of internet retailing operation in Brazil. “Brazil is by far the most developed Latin American market in this channel, accounting for around 55 percent of Latin America's sales” (Carrefour, Casino and Wal-Mart's expansion strategies in Latin America 2012). According to the study of Global Retail Development Index, Brazil holds the internet retailing power by a shift from the fifth position to first position. Among the top global food retailers, Wal-Mart and Carrefour have been developing a strong presence in Brazil for years. Carrefour is in a tight war with Casino, French retail organization for capturing the control of Pao de Acucar, which is the largest retail group in Brazil. It gives an idea about the rising importance of strategy in the retail market world. Brazil has fared well during the recession posting an impressive 7.5% percent growth in 2010. “The GDP per capita has increased by 30% over the past eight years. Brazil is a particularly attractive target expansion market given expected GDP growth of 5% per year over the next five years, a large and highly urban population, and surging retail sales” (Briggs 2011). Findings: 1. The Brazilian consumers became more conscious about the value and quality of grocery products during recession and their life style has been changed during the period, 2007-2011. 2. Grocery retailing is growing consistently and it has earned its sustainability because the number of people in the lower income group keeps increasing. 3. Growing trend of non-grocery retailers (like electronic appliances retailers, clothes and apparels retailers and footwear retailers) to gain from the disposable income level of Brazil, has paved way to tight competition from domestic as well as from new and internet retailers. 4. There is an increased demand for the fashion products, as the disposable income levels of the consumers are increased. This has resulted in the increased concentration towards private labels by the hypermarket retailers. 5. Brazilians’ buying preferences for household care are greatly shaped by price consciousness even in the times of economic downturn. 6. The consumer’s perceived quality differentials and loyalty towards brand acts as barriers to growth of private label. 7. The retailers like Wal-Mart and Carrefour continue their expansion strategy even in the times of recession. 8. The practice of discount offerings is more among the retailers, during the economic meltdown in 2007-2011. Recommendations: 1. Internet retailing development is slower in Brazil. Government should take necessary steps to improve the internet retailing in Brazil 2. Develop strategy to build and maintain flexibility in order to make the retail sector to deal properly with recession situation and such other events 3. Take the advantage of lower cost; competitors withdrawal from the markets, in the perspective of long term strategy 4. As demand for private label goods are increasing, retailers should concentrate more on private label goods which will bring a substantial development of the retail sector. 5. Communicate properly with the customers with attractive messages and promote business with more offers and free discounts. 6. Brazil Government should take steps to loosen the consumer credit, so that more and more demand will be created. Conclusion: The hypermarket is well spread in the Brazil, which is ranked top in the sales rate. The sales rate is very high in big cities. Non-grocery segments like footwear and clothing gave grown with increased sales and profitability. The retail segment of Brazil is growing due to factors like increase in wages, higher levels of formal employment and availability of consumer credit. Women are the decision makers in household expense related matters. The increased participation of women in labor market has also contributed a lot to the expansion of Brazilian retail industry. Out of the total retail sales more than half of the portion consists of retail food sales. The matured Brazilian retail (hyper) market is constituted by top 3 players, namely, Carrefour, Wal-Mart and Grupo Pao de Acucar. Consumer preferences in Brazil are changing quickly. The preference is shifting from household to personal consumption. The main reason for this shift is the discount offers provided by the retailers in hypermarket during recession as a strategy to gain competitive advantage. The retail industry in Brazil is an innovative one like any other retail sector in this developed world. During the crisis period also, the retail giants in Brazil like Wal-Mart and Carrefour, are looking ahead of adopting expansion strategies. The retail market is growing more and more internationally due to the global chains that rouse opportunities in the country. This development is an outcome of the economic challenges. Despite of the shortcomings caused by the economic crisis, Brazil has proved itself as an oasis for the world retail players. Reference List All about Inflation. 2012. Investopedia ULC. [Online] Available at [Accessed on 31 March 2012] Brazil Retail Industry Analysis. 2011. RNCOS. 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