Bloomberg News

Pao de Acucar Chases B2W With Amazon Strategy: Corporate Brazil

June 09, 2013

Cia. Brasileira de Distribuicao Grupo Pao de Acucar, Brazil’s biggest grocery chain, is accelerating efforts to overtake B2W Cia. Digital (BTOW3) as the country’s largest online retailer.

With a new Web platform echoing Amazon.com Inc. (AMZN:US)’s, Pao de Acucar expects a fivefold boost in online product offerings by the end of 2014, Chief Executive Officer Eneas Pestana said in an interview. The Sao Paulo-based company also seeks to triple revenue at its wholesale unit by 2016 through expansion into more states, he said.

Online sales and wholesale stores are growth opportunities for a company that Brazilian industry trade group Abras says already controls 37 percent of the supermarket and hypermarket segment. Those channels also would help diversify Pao de Acucar’s customer base as inflation and a slowing economy threaten to sap consumer spending.

“I have always been optimistic about Brazil,” Pestana said on June 6 at Bloomberg’s offices in Sao Paulo. “We are accelerating our market share in wholesale, and we plan to be the leader in the online retail market by a wide margin.”

Pao de Acucar shares rose 16 percent this year through June 7, trouncing the 15 percent decline in Brazil’s Ibovespa index. It’s also outpacing the second- and third-place food retailers in Brazil, with French supermarket operator Carrefour SA (CA) up 11 percent and Wal-Mart Stores Inc. up 12 percent.

Food, Electronics

Food accounted for 46 percent of Pao de Acucar’s 50.9 billion reais ($23.9 billion) in 2012 sales, based on data compiled by Bloomberg. Appliances and electronics retailing generated 38 percent of sales, followed by wholesale stores and e-commerce. Gross profit was even more heavily weighted to the two biggest units, with 92 percent between them.

“This company is very resilient,” said Julia Monteiro, a Rio de Janeiro-based analyst at CGD Securities who rates the shares as accumulate. “I don’t think in the short term there will be a huge cut in consumer spending.”

Pao de Acucar’s online retailing push will increase the number of products to 1 million in 2014 from 200,000 now. In March, the company unveiled Extra Marketplace, attempting to mimic the success of Amazon by offering a platform other retailers can use.

In February, with online sales showing almost no growth, the company changed its pricing strategy and reaped a 40 percent gain in March sales from a year earlier, said Pestana, who wouldn’t give details. The e-commerce business generated 6.7 percent of 2012 sales, data compiled by Bloomberg show.

B2W’s Struggles

Pao de Acucar is chasing Rio de Janeiro-based B2W, which is pouring 1 billion reais over three years into upgrading distribution and logistics after failing to provide on-time deliveries. Customer complaints about B2W spurred Sao Paulo’s consumer protection agency to temporarily suspend sales last year. B2W fell 47 percent this year through June 7.

“We put 28 million reais into our business in 2008, and that was the last time,” Pestana said of Pao de Acucar’s online operations. “We have revenue of 4 billion reais and have never had any complaints.”

A spokeswoman for B2W at publicist In Press Porter Novelli who wouldn’t give her name declined to comment about the company’s prospects. Fabio da Silva Abrate, B2W’s investor relations chief, told analysts in March that the company was “continually transforming its processes and investing in the necessary infrastructure” to compete.

Inflation Pressure

Pao de Acucar’s online foray comes as a pickup in inflation crimps its supermarket business. Same-store sales fell 0.2 percent in the first quarter after correction for inflation, according to a Pao de Acucar regulatory filing.

Industry sales on the same basis were down 3.8 percent in April from a year earlier, according to Abras, the trade group. In May, inflation accelerated to an annual rate of 6.5 percent, the upper limit of the central bank’s target. That’s important for retailers such as Pao de Acucar, because consumer spending made up 62.3 percent of Brazil’s gross domestic product in 2012, the most since 2001, government figures show.

“I’m not going to deny the existence of inflation, there is price pressure,” CEO Pestana said. “I don’t see any motive for panic.”

Pao de Acucar identified Brazil’s northeast, the region that has surpassed the south as the country’s second-largest consumer market, as a place to expand its wholesale business. Pestana said that division will expand into 14 states, twice as many as now.

‘Niche Market’

“The company saw a niche market and saw that competitors weren’t doing well, and with the logistics expertise it has, the company was able to get into the market quickly,” said CGD Securities’ Monteiro.

Pestana said Pao de Acucar is discounting products at its newest wholesale outlets to gain market share. In May, sales rose 39 percent for the wholesale division, according to a regulatory filing.

The company is entering an industry whose largest operator is closely held Makro, according to Brazil’s association of wholesalers, known as Abad.

Makro has 76 stores in Brazil and has been restructuring since 2010 to “prepare for sustainable long-term growth,” a spokeswoman for the company at FSB Comunicacoes said in response to a request for comment on the challenge from Pao de Acucar. “Our focus has been to increase market share and reinforce our wholesale operations by increasing the average amount spent by professional customers in our database.”

Luiz Carlos Cesta, an equity analyst at Banco Votorantim SA in Sao Paulo who rates the shares as market perform, said Pao de Acucar is positioned to weather a slower economy and higher consumer prices. He is among 10 analysts in a Bloomberg survey with a rating of hold or equivalent, compared with 12 buys.

“This is a relatively stable business with little volatility mainly because we are talking about basic necessities,” Cesta said in a telephone interview. “Even with inflation, people don’t stop buying these products.”

To contact the reporters on this story: Christiana Sciaudone in Sao Paulo at csciaudone@bloomberg.net; Fabiola Moura in Sao Paulo at fdemoura@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net


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