For subsectors: Lojas Brasileiras, Lojas Cem, Lojas Colombo, Magazine Luíza, Casas Pernambucanas, Casas Bahia Carrefour, Bompreço, Casas Sendas

The Brazilian retail trade employs 11% of the working population, accounts for around 17% of GDP and is responsible for close to 47% of commercial sales.

Of the 1.4 million retail establishments, only 2% can be classified as medium or large-sized.

Competition is intense and implies heavy expenditure on special offers, sales and marketing. Stock turnover and financial gains during the period between selling a particular item and paying suppliers are also extremely important in determining profits, especially in periods of galloping inflation. The sector is thus particularly sensitive to changes in the overall economic situation.

Shopping malls (or shopping centers), which first arose in the 60’s, have also gained increasing importance. They expanded rapidly during the so-called economic miracle of the 70’s, thanks to burgeoning demand, particularly for durables, which was followed by another boom after the Plano Real in mid-1994. In 1997, this segment took in US$ 13 billion.

Brazil is ranked 5th in the global shopping-mall rankings, behind France, the UK, Canada and the USA (the leader). In the latter country, where the market is already consolidated, the 41,200 malls generate 58% of total retail revenue, or US$ 914 billion p.a.

Punishing interest rates and the recent tax increases mean that the recession will continue for some time.

Given the new increase in interest and the brutal fiscal measures, the recession is likely to become even more pronounced in 1999. The raising of the rates to stratospheric levels forced retailers to obtain money at the higher interest practiced by the financial system, a tragedy for those establishments undergoing Chapter 11 proceedings. Consumer financing will remain extremely expensive, discouraging long-term debt, the most common method of acquiring consumer durables. Given the market uncertainties, storekeepers are likely to cut back on the use of pre-fixed rates (where purchasers know in advance exactly how much they will pay per installment) and opt for the post-fixed system, with the rates varying in line with the financial market or the price of the dollar. Thus shopkeepers are likely to become considerably more cautious over granting credit.

Domestic utility stores should suffer most, followed by clothing and footwear outlets, department stores, supermarkets and wholesalers

We believe first-quarter sales will be a good deal lower than in the same three months period in 1998, since this period should bear most of the brunt from the brutal interest, soaring unemployment and the repercussions of the fiscal squeeze.

In addition, the expected gradual decline in interest will offer little relief for consumers since retailers are likely to keep their own financing rates high as a shield against rampant default.

We therefore believe overall sales volume will continue to slide, in turn discouraging big orders from industry. Thus manufacturers also appear to be facing a particularly bleak period in the opening months.

In fact, we see no little or no chance of a recovery in the immediate future. The bulk of wages should continue to fall, hitting purchasing power and, consequently, consumption. With demand on wane, unemployment should also move up, preventing new consumers from entering the market, and we estimate an annual sales-volume drop of 14%.

On the structural front, we believe the consolidation process, chiefly involving the supermarkets, department stores and wholesalers, will continue to move ahead.