Ethan Arpi

Consumer Credit Hits Brazil

CreditFor someone like Marcia Regina da Cruz, a Brazilian janitor who earns just over $150 per month, grocery shopping is a painfully difficult task.? What this mother of three can buy to feed her children is almost always determined by the amount of spare change she can muster on a given day.? So when she bought three irons as presents for $32 she had done the impossible.? Thanks to a new set of policies at Brazil’s largest grocery and retail stores, Marcia and other low-income Brazilian consumers can now make purchases in monthly installments with almost no interest.? According to the New York Times, the new policies, which provide ?low-cost credit for low cost-items,? are an attempt by retailers to ?squeeze more spending from the big, but cash-short, bottom of the consumer base in Brazil, South America’s biggest economy.?

In data released last month by the Inter-American Development Bank, approximately 115 million Brazilians are like Marcia, earning less than $3,260 a year.? But because they number in the hundreds of millions, their combined incomes total a staggering $172 billion.? According to the IDB’s data, low income Brazilians, contrary to the prevailing opinion, spend just 50% of their earnings on basic living expenses.? What this means is that Brazil’s BOP has about $85 billion of spending money.? These whopping stacks of cash have raised the eyebrows of business executives at retailers like CompreBem and Magazine Luiza, which now market their goods and services exclusively to Brazil’s BOP.

By selling even the cheapest items in installments and providing customers with affordable credit, Magazine Luiza has taken a considerable risk in an attempt to tap Latin America’s biggest underserved market.? And so far the risk has paid off; Magazine Luiza has become Brazil’s third largest retailer, making 80% of its sales on credit.? Remarkably, its clients? default rate is 50% lower than that of other retailers. ?How has Magazine Luiza been so successful?? The retailer has a policy requiring customers to return to the store to make their monthly payments, a strategy which encourages customer loyalty and continued spending.? This might be a smart business practice, but I?m not entirely convinced that impulse buys are good news for low-income consumers, especially as they pay off credit. ?

This brings us to the darker side of BOP consumerism.? Is Marcia really better off now that she has gone into debt to buy three irons?? And more generally, does selling items in installments only provide the illusion of affordability while keeping low-income consumers mired in poverty?? These are the questions that the Argentinean sociologist Nestor Canclini takes up in his seminal work, Consumers and Citizens: Globalization and Multicultural Conflicts, a must read for anyone interested in the challenges of consumerism.? In broad strokes, Canclini argues that consumerism in Latin America, especially among the poorest sectors of society, has transformed active citizens into passive consumers.? Consumerism, Canclini argues, provides the false hope of social and economic mobility and masks Latin America’s rigid social and economic inequalities.

Canclini’s argument might be right.? But there is also a case to be made that consumer debt is actually a good thing, especially in a place like Brazil.? First, increased consumer spending among the BOP opens new markets, which generate economic activity and link the BOP to the formal economy.? And second, the long-term benefits of making a sound purchase often outweigh the short-term costs of buying on credit.? Take a small business owner who purchases a Pay-As-You-Go computer from Magazine Luiza.? By having a computer, which optimizes business practices, a store owner can save time, cut costs, and increase profits.? Few would argue that this type of consumerism is a bad thing.

At the end of the day, however, arguing about the costs and benefits of consumer credit is purely academic.? With credit becoming a fixture of Brazilian retail, it is now up to the BOP to decide how to spend its money.? Will low-income consumers become just another group of frivolous spenders?? Or will they make smart purchases that pay off further down the road? ?

Any predictions?

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Base of the Pyramid, consumer products, microcredit, World Resources Institute