Brazil’s retailers start offering credit to a big new market: The poor
Monday, November 14, 2005
M?rcia Regina da Cruz, a 40-year-old janitor and mother of three, decided to splurge.
Da Cruz, who lives in S?o Vicente, a coastal town an hour’s bus ride from S?o Paulo, made a purchase in September equal to one-fifth of her monthly salary. She bought three irons – one for herself and two as gifts for her mother and sister – for 72 reals, or $33.
“It was a big purchase,” she said. “I normally couldn’t pay for it.”
She could, though, because of a new policy at CompreBem, a supermarket chain owned by Grupo P?o de A??car, Brazil’s biggest retailer. The plan allows her to pay for the purchase in 10 interest-free monthly installments of 7.20 reals a month.
Big retailers in Brazil are lowering the bar for what they will sell on credit. Though the country’s shops and department stores have long sold big-ticket items on installment plans, Brazilian and multinational retailers, like Wal-Mart Stores of the United States and Carrefour of France, have begun offering purchase plans for things whose monthly payments come to no more than 1 or 2 reals.
The shift is an effort by retailers here to squeeze more spending from the big but cash-strapped bottom of the consumer base in Brazil, South America’s biggest economy. Amid a tepid recovery that has yet to blossom into strong, sustained growth in retail demand, vendors are going to new lengths to help low-income Brazilians pay for everything from their weekly rice and beans to inexpensive things like clothes, radios, blenders and other items. The installments are interest-free until a payment is missed, and then interest of 3 percent to 5 percent a month is charged.
“Retailers are trying to wring the very last bit of disposable income from consumers who would like to buy more but often can’t,” said Paulo Francini, an economist at the Federation of Industries of the State of S?o Paulo, an influential business organization.
Low-income consumers – defined roughly as those earning less than 1,000 reals a month – make up nearly half of Brazil’s population, according to government figures. A recent study by Target Marketing, a consultant group based in S?o Paulo, found that those Brazilians accounted for only 11 percent of all consumer spending, though that still represents an annual purchasing power of nearly $54 billion.
Manufacturers in recent years developed a host of new products to better tap that market, introducing low-cost versions of coffees, shampoos, even washing machines. When the Swiss food giant Nestl? learned recently that some Brazilians gave condensed milk as a present – a can retails for 2.30 reals – the company developed a gift-wrapped version of the product.
“It’s not about reaching a new part of the market,” said Ivan Zurita, chief executive of Nestl?’s Brazilian operations. “It is the market.”
Brazil’s erratic economic history has made it difficult for retailers to reach this market. Expensive credit – Brazil has about the highest interest rates in the world, adjusted for inflation – kept most low-income consumers from seeking loans. And years of runaway inflation meant stores were able to offer few affordable payment plans.
But economic changes in the past decade helped curb inflation and laid the groundwork for what many economists believe is a nascent period of prolonged, if modest, growth. After years of stagnation, Brazil’s gross domestic product in 2004 grew 4.9 percent, the fastest pace in a decade, and it is expected to grow more than 3 percent this year.
Yet a big portion of the consumer base still struggles for bare necessities. That is why vendors recently began applying their credit plans to low-cost items, too.
“You want to make it easy for even basic purchases,” said Jo?o Carlos de Oliveira, president of the Brazilian Association of Supermarkets in S?o Paulo.
The approach was evident one recent Saturday evening at a Wal-Mart in southern Rio. Price tags offer telephones in 12 monthly installments of 3.57 reals. A plug-in electric grill sold for 12 monthly payments of 1.87 reals. Wines, domestic or imported, were offered for three interest-free monthly installments.
Wal-Mart and other big retailers use one key tool for such promotions: in-house credit cards.
Because many low-income Brazilians do not have bank accounts, retailers offer these cards to customers unable to meet the credit conditions of traditional banks. With no annual fees and low salary requirements – stores compute card limits using monthly pay stubs – the cards offer many consumers their first experience with credit. They also give stores a platform to offer special card-only promotions, aimed at fostering customer loyalty.
At Carrefour, the second-biggest retailer in Brazil, the store card is now used in nearly 40 percent of sales, outpacing cash, checks and bank cards as the most frequent form of payment. Customers with a monthly salary of at least 150 reals – half of Brazil’s minimum wage – qualify for the card and can use it for purchases as small as 5 reals. Purchases of more than 30 reals can be paid, interest-free, in installments of 5 reals each.
M?rcio Caldeira, a street vendor, said he rarely used banks at all. Sitting at the credit desk of a Sendas supermarket in Nova Igua?u, a bustling working-class suburb north of Rio, he said he wanted a Sendas card to complement three other retail cards he uses to buy things like sodas that he later sells on the sidewalk.
“Sometimes the little costs add up,” he adds, “but they make it easier to finance my work.”