Brazil’s biggest retailer is a bargain. Why hasn’t anyone bought it yet?

. Apr 23, 2019
via varejo retailer

The Brazilian retail sector has shown some life in 2018, growing by 2.3 percent—its best result in five years. Even so, the country’s biggest retailer, Via Varejo, posted a net loss of BRL 267 million.

As a matter of fact, Via Varejo has been in trouble for a while now. In 2015, the company saw its profits shrink by 99 percent—followed by a BRL 95 million net loss in 2016. The company appeared to bounce back in the following year, but 2018 results show that the problems run deep.

For many, including its controlling shareholders, there is only way out of this hole: selling the company to a foreign player. However, bidders are nowhere to be found. According to analysts, Via Varejo’s frailties and problems go some way toward explaining the scarcity of offers. But the case also reveals a lot about foreign companies’ unwillingness to enter the Brazilian market—after many giants have failed to thrive in Latin America’s largest economy.

</span></p> <p><span style="font-weight: 400;">Via Varejo is an umbrella company which controls Casas Bahia and Ponto Frio (two of Brazil&#8217;s main household retailers), furniture store Bartira, e-commerce website </span><a href=""><span style="font-weight: 400;"></span></a><span style="font-weight: 400;"> (a marketplace for supermarket chain Extra, which is in turn owned by GPA), and e-commerce portal Barateiro, which sells discounted goods which have small defects and damages.</span></p> <p><span style="font-weight: 400;">The saga to </span><a href=""><span style="font-weight: 400;">sell off Via Varejo</span></a><span style="font-weight: 400;"> started back in 2016, when GPA (a Brazilian company controlled by French group Casino) announced its intention to focus on the more profitable food sector. Not only was Via Varejo recording steep losses, but the recession had lowered consumption, the government was withdrawing tax exemptions on home appliances, and interest rates and inflation were peaking.</span></p> <p><span style="font-weight: 400;">Last year, GPA established the end of 2019 as its deadline to sell Via Varejo—already getting rid of a 6-percent share in the stock market. The rest would preferably be sold to a &#8220;</span><a href=""><span style="font-weight: 400;">strategic investor</span></a><span style="font-weight: 400;">.&#8221;</span></p> <p><span style="font-weight: 400;">It seemed a feasible plan. The economy was showing signs of a steady (albeit slow) recovery, expectations around the newly-elected government were high, and the company&#8217;s potential was there: despite the net losses, Via Varejo posted BRL 30 billion in gross revenue. Magazine Luiza, one of Via Varejo&#8217;s main competitors, gathered BRL 18.9 billion in gross revenue over the same period.</span></p> <p><span style="font-weight: 400;">Still, Via Varejo stocks lost 45 percent in 2018—while Magazine Luiza&#8217;s gained 125 percent.</span></p> <p><span style="font-weight: 400;">In simple terms, whoever buys Via Varejo would acquire a market leader at a bargain price. So why has the sale stalled?</span></p> <hr /> <p><img loading="lazy" class="alignnone size-large wp-image-16073" src="" alt="via varejo retailer" width="1024" height="683" srcset=" 1024w, 300w, 768w, 610w, 1200w" sizes="(max-width: 1024px) 100vw, 1024px" /></p> <hr /> <h2>The struggle to adapt</h2> <p><span style="font-weight: 400;">Management issues are the very core of Via Varejo’s problems. The company started its digital transformation just two years ago, while competitor Magazine Luiza has been investing in technology for at least a decade.</span></p> <p><span style="font-weight: 400;">Over the past few months, Via Varejo has tried to clean out the cobwebs, replacing legacy systems used for over 30 years for more modern alternatives. The company has signed an agreement with American startup CarrierEQ AirFox to create new financial services for mobile payments, allowing consumers to choose installment payments, and offering cashback through a mobile app. They are also betting on smaller store formats, trying to better integrate digital and physical shopping experiences. </span></p> <p><span style="font-weight: 400;">These efforts, however, did not have an immediate impact. The company gross revenue shrank in 2018 and Via Varejo ended the year with a net loss of BRL 267 million. </span></p> <p><span style="font-weight: 400;">An investor, who asked to remain anonymous, explained to </span><b>The Brazilian Report</b><span style="font-weight: 400;"> why last year’s results caused so much frustration: “They are shrinking and losing a lot of market share, while Magazine Luiza is making a lot of money. But I think that that’s because they are lost and lacking strategy,” the investor said. </span></p> <p><span style="font-weight: 400;">“From every perspective, Via Varejo seems like an absolute bargain,&#8221; the investor continued. &#8220;Maybe something is that cheap because it is really not worth more. In the investment world, is what we call a value trap.&#8221;</span></p> <hr /> <p><img loading="lazy" class="alignnone size-large wp-image-16076" src="" alt="via varejo retailer" width="1024" height="620" srcset=" 1024w, 300w, 768w, 610w, 1200w" sizes="(max-width: 1024px) 100vw, 1024px" /></p> <hr /> <h2>Not everyone gets Brazil</h2> <p><span style="font-weight: 400;">In a country of 207 million people, where the economy is mainly driven by private consumption, investing in retail would appear to be a slam dunk. However, Via Varejo is by no means the only giant to struggle in Brazil. </span></p> <p><span style="font-weight: 400;">Last year, </span><a href=""><span style="font-weight: 400;">Walmart</span></a><span style="font-weight: 400;"> announced the sale of 80 percent of its shares to private equity fund Advent International. America&#8217;s </span><a href=""><span style="font-weight: 400;">CVS Health Corp</span></a><span style="font-weight: 400;"> recently sold drugstore chain Onofre after only six years in Brazil. And around 25 percent of </span><a href=""><span style="font-weight: 400;">luxury brands have fled the country</span></a><span style="font-weight: 400;"> over the past three years.</span></p> <p><span style="font-weight: 400;">Many analysts accused these companies of not knowing how to deal with Brazilian consumers. </span></p> <p><span style="font-weight: 400;">Brazil is an insular economy, imposing hefty taxes on imported goods. For instance, it is more expensive to buy Zara products in Brazil than it is anywhere else in the world. Due to high local prices, fast-fashion companies are often perceived as upscale brands, which require different market placement strategies.</span></p> <p><span style="font-weight: 400;">Though Brazil has dropped its </span><a href=""><span style="font-weight: 400;">benchmark interest rates</span></a><span style="font-weight: 400;"> to the lowest level on record, the country remains in sixth place among the highest interest rates in the world, according to a ranking by Infinity Asset Management. </span><a href=""><span style="font-weight: 400;">Expensive credit takes its toll </span></a><span style="font-weight: 400;">on retailers with high average selling prices, such as electronics or car dealers. For companies, it also means a higher cost to finance corporate debts. </span></p> <p><span style="font-weight: 400;">“Every company has debts and this higher long-term rates curve—created by negative expectations—make companies pay more, reducing room for investments,” explains Ilan Arbetman, an analyst at brokerage Ativa Investimentos.</span></p> <p><span style="font-weight: 400;">Another major roadblock is Brazil&#8217;s convoluted and Kafkaesque tax structure. In 2017, the local tax burden reached 32.4 percent of GDP, earning Brazil the second spot on the list of Latin American highest tax burdens—behind only Cuba. Moreover, there is no unified tax system; cities, states, and the federal administration require different taxes for different services and collect them through different methods. They also compete among themselves to attract companies by offering tax breaks.</span></p> <p><span style="font-weight: 400;">But, for Mr. Arbetman, the worst part of betting on Brazil is its lack of stability, which scares off local and foreign investors.</span></p> <p><span style="font-weight: 400;">“Brazil has an environment of political and economic uncertainties. If the national market does not have the necessary conditions to make even local businessman invest, foreigners will think twice, or three times, before they do.” </span></p> <h2>Amazon is coming</h2> <p><span style="font-weight: 400;">The largest retailer in the world has adopted a slow and steady approach to Brazil. It first arrived at the end of 2012 with ebooks, then with printed books two years later. In 2017, the news Amazon would open an online marketplace made local retailers&#8217; stock crash, only to recover soon after when the market realized the launch was “</span><a href=""><span style="font-weight: 400;">no big deal</span></a><span style="font-weight: 400;">.” </span></p> <p><span style="font-weight: 400;">This year, the giant has made more steps, beginning to </span><a href=""><span style="font-weight: 400;">sell products from 11 categories directly to Brazilians</span></a><span style="font-weight: 400;">, creating its first distribution center in Latin America—a 47,000-square-meter structure near São Paulo—and offering free postage for purchases over BRL 149.</span></p> <p><span style="font-weight: 400;">Despite this careful strategy, Amazon has already disrupted the </span><a href=""><span style="font-weight: 400;">Brazilian publishing market</span></a><span style="font-weight: 400;">. In fact, last year, two of the largest Brazilian bookstore chains, Saraiva and Livraria Cultura, were forced to file for court-supervised reorganization due to poor management and their inability to keep up with Amazon’s discounts. It’s no wonder every decision Amazon makes is closely watched by local players.</span></p> <p><span style="font-weight: 400;">For many, its next step could be buying Via Varejo.</span></p> <p><span style="font-weight: 400;">“Investors speculate Magazine Luiza and Amazon would be the most interested companies in buying Via Varejo. I believe they would be a perfect match for Amazon, due to their almost 1,000 stores,” said Mr. Arbetman.</span></p> <p><span style="font-weight: 400;">Amazon is indeed a major online player, but in recent years it has forayed into brick and mortar retail—as seen by its purchase of the Whole Foods chain. In Brazil, e-commerce is set to grow 15 percent, to BRL 61.2 billion in 2019, according to consultancy Ebit. However, it still only represents 5 percent of Brazil’s retail, per studies by McKinsey, another consultancy.</span></p> <p><span style="font-weight: 400;">“Amazon is trying to implement the omnichannel culture, integrating both online and offline experiences. But before that, they need a tool called click and collect, which is an earlier integration between digital and brick and mortar stores. If they don’t have stores, they can’t apply it.”</span></p> <p><span style="font-weight: 400;">For the analyst, the uncertain economic scenario in Brazil is preventing major players from making bolder moves—but approving the pension reform would be a game-changer.</span></p> <p><span style="font-weight: 400;">Others doubt that this strategy would be wise for Amazon. One investor, who requested to remain anonymous, raised a question: “I believe that if Amazon wanted to buy Via Varejo, they would’ve done it already. Why do they need it? Why would they take on the challenge to change the entire mindset of a company when they could just train new people in their own culture?”</span></p> <p><span style="font-weight: 400;">Alone, or with major partners, it is certain that Amazon has found competition in the country. Brazilian e-commerce leader B2W, owner of the brands Submarino and Lojas, has invested in creating a large marketplace. Magazine Luiza has its own digital innovation center, LuizaLabs, and is investing heavily in logistics. </span></p> <p><span style="font-weight: 400;">“In Brazil, no one knows Amazon and everybody knows Magazine Luiza and Lojas Americanas,” said Betina Roxo, an XP Research analyst, in an interview with InfoMoney. “Despite constant progress, our market still has a traditional bias,” says Mr. Arbetman.

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Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Before joining The Brazilian Report, she worked as an editor for Trading News, the information division from the TradersClub investor community.

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