Innovators from France drive market changes

Home Channel News, Nov 9, 1998

One can't go far in Brazil's biggest city without bumping into the latest sign, literally, of the times. On Sao Paulo's streets, dozens of billboards, banners and bus backs tout the arrival of French home improvement retailer Leroy Merlin. While home centers are nothing new to Brazilians -- indigenous chain Uemura has been in business for 30 years -- true one-stop shopping at warehouse home centers certainly is, and the arrival of Leroy Merlin and its ubiquitous advertising efforts are emblematic of greater changes taking place here.

Even before Leroy Merlin opened its first -- and, to date, only -- Brazilian store in midsummer 1998, another French firm, Castorama, became the first international home improvement dealer to set up shop. In October 1997 that dealer opened a massive 17,000-square-meter (183,000-square-foot) store in the Aricanduva section of Sao Paulo and filled it with 60,000 skus. Naturally, the French and their immense new stores set off a round of remodeling and re-engineering among Brazil's existing dealers. But those developments pale in comparison with the financial storm threatening to swamp Brazil's resurgent economy as well as those retailers' best-laid plans.

Until midsummer 1998, Brazil was enjoying an economic resurgence that made it the darling of international investors. In 1997, its stock market posted an earnings gain of 89 percent, and unemployment, while still high by first-world standards, shrank to a promising 12 percent. Annual inflation, which five years earlier was running at greater than 2,000 percent, leveled off below 6 percent, and the much-touted Real Plan of recently re-elected president Fernando Cardoso allowed a 32 million-strong "underclass" to participate in the official economy, many for the first time.

But when another emerging market, Russia, devalued its currency in mid-August, the aftershocks sent Brazil reeling. In a span of two months, investors pulled more than US$30 billion in foreign currency from the country's coffers, threatening to make Brazil the next piece to fall in a global economic domino effect.

Even before the recent turmoil, Brazil's economic resurgence came with its dark clouds. While the country remains a huge and rapidly developing market -- its economy is the world's ninth largest -- it retains many characteristics of the third world. The huge metropolis of Sao Paulo represents 60 percent of Brazil's gross national product, and an immense gap exists between the country's few rich and its teeming poor.

"The lives of the poor are getting better," notes Everaldo Beni, president of retailer Peg & Faca. "But they're not moving into the middle class, and some of the middle is slipping."

For this reason alone, what DIY activity there is here is, as a rule, borne of necessity. "In Brazil, we don't have the DIY culture yet," Beni adds. "But because of the economy, it is less expensive for people to do it themselves particularly smaller projects like painting and basic electrical things," Indeed, for such an immense nation with a long history of home center retailing, Brazil remains an incredibly immature and fragmented market. Informality marks the bulk of the market's sales, with many independent dealers operating in a twilight arena where taxes, receipts and other accepted business practices don't exist. A half dozen chains vie for market share here, but none has a national presence, and according to the trade association ANAMACO, only 5 percent of an estimated US$24 billion in home improvement sales goes through the biggest dealers' cash registers.

Because of its status as Brazil's largest city and its economic capital, Sao, Paulo is the focus of home improvement retail activity, with the four largest chains --eight-unit Madeirense, Uemura, five-store Conibra and eight-store TendTudo --all based nearby.

The city boasts a population of 10 million, and if one adds in the satellite cities and towns that form an urban ring 100 kilometers (62 miles) across, the number of potential consumers doubles. As Alain Ryckeboer, the purchasing director for Leroy Merlin's Brazilian operations, puts it, "Any store in the city has 500,000 potential consumers within 20 minutes."

As a result, Sao Paulo and the surrounding state of the same name are home to some 14,000 home improvement stores, according to ANAMACO, which represents 32,000 dealers operating 100,000 stores. Many of those Sao Paulo stores are little more than category-specific or even product-specific stalls lining designated streets. Paulistas (as Sao Paulo's residents are called) in search of tools, for instance, are likely to head to Rua Florencio De Abreu, a twisting street whose storefronts all sport well-known international and local brand names.

In the city's sprawling suburbs, homeowners have their pick of neighborhood hardware stores, which are more economical and convenient than a one- or two-hour (depending on traffic) trip downtown.

Outside of Sao Paulo, the market is more "rarefied," in the words of Marcio Kohiro, marketing director for Uemura, and is served by networks of small stores and the occasional one- or two-unit home center.