An Industry and Nation on the Verge of a Breakthrough

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An Industry and Nation on the Verge of a Breakthrough

By Don Longo, Convenience Store News - 11/09/2009
The International Olympic Committee's recent announcement that Rio de Janeiro will host the 2016 Olympic Games was celebrated throughout Brazil, a nation that appears on the verge of cementing its status as one of the world's emerging economic powers.

Brazil's growing status as a world power -- with many experts predicting it will have the world's fifth largest economy by 2016 -- was boosted by the Olympic Committee's announcement last month. One of the four so-called BRIC countries (Brazil, Russia, India, China) for their potential economic growth, Brazil is second only to the United States in its number of gas stations, and trails only the U.S., Germany and England in number of convenience stores.

On a five-day trip to southeastern Brazil in September, I learned that the country:
-- Is one of the world's biggest producers of beef, chicken, pork, oranges, coffee, rice and textiles;
-- Has a 4,650-mile coastline that sports some of the world’s most beautiful beaches;
-- Is the largest country in South America, just slightly smaller than the U.S., and shares borders with 10 countries; and,
-- Contains 20 percent of the world’s surface water.

Of all the BRIC countries, Brazil is the most similar to the Western nations in its origins, culture and people. Its diverse population is composed of immigrants from the world over. In recent years, the country's hyperinflation has been brought under control and the discovery of a new offshore oil deposit could make Brazil one of the most oil-rich nations of the world.

Yet for all its accomplishments, Brazil -- in the words of British columnist and travel writer A.A. Gill -- is "either one of the great might-have-beens or yet-to-bes."

On my trip to Brazil, local petroleum and convenience store executives, while undeniably proud of their country's resurgence, outlined a host of problems that plague the nation and hold it back, including:

-- Rampant corruption by the government, where good-intentioned spending never seems to reach the country’s teeming poor;
-- Shady business operators that cause distrust among consumers because they do things such as diluting fuel they sell by mixing it with water or solvents;
-- Huge polarization between the population’s haves and have-nots;
-- One of the highest crime and murder rates in the world, especially in the big city centers of Rio and Sao Paolo;
-- Oppressive taxation that raises the cost of all consumer goods from automobiles to baby diapers; and,
-- An astonishing lack of concern about the environment, which manifests in continued destruction of the Amazon rainforest and the transformation of once blue rivers into brown sludge.

Like its overall economy, the convenience store industry in Brazil also appears poised for a break-out. For an industry that only started 22 years ago when the first convenience store opened in Sao Paolo in 1987, the Brazilian c-store industry is amazingly robust, more modern than you'd expect and growing rapidly. In the last two years, the segment has grown 40 percent to 5,500 stores, said Alisio Vaz, vice president of Sindicom, Brazil's confederation of petroleum wholesalers and convenience stores.

Sindicom invited me to Brazil to give the keynote address in September at the Expo Postos & Conveniencia, the country's equivalent to the NACS Show in the U.S., although on a much smaller scale. The show attracted approximately 20,000 attendees to Sao Paolo's Expocenter Norte pavilion, which was filled with approximately 140 exhibitor companies, including both product and service suppliers. With a large number of equipment vendors, the show floor resembled the PEI (Petroleum Equipment Industry) wing at the NACS Show.

Sindicom, along with a local fuel and lubricants distributor and convenience store operator called Mime Group, sponsored my trip to Brazil, where I was given a tour of c-stores and gas stations throughout the southern state of Santa Catarina and in the huge business capital of Sao Paolo, before giving the keynote speech at the Expo.

Ethanol made from sugar is the fastest growing fuel in Brazil, growing from 4 percent of the country's fuel consumption to 14 percent over the past five years, according to Sindicom. More than 90 percent of new vehicles in Brazil are equipped with flex-fuel technology -- meaning they can run on both traditional gasoline and ethanol, which is usually less expensive than regular petroleum fuel because it is not taxed as heavily.

Motorists usually have four choices of fuel at most stations -- gasoline (which contains 25 percent ethanol), ethanol, diesel or natural gas. In Brazil many motorists pay approximately $1,500 (U.S.) to convert their automobile to run on natural gas, which burns much cleaner than petroleum and is dispensed at many gas stations in the country. I was told approximately 65,000 cars in the country can run on natural gas. According to Sindicom, the growth of Brazilian-produced ethanol cut into some of the growth of natural gas, whose sales declined 5 percent last year to 1.2 million cubic meters sold. The rise in the price of imported natural gas contributed to the increase in ethanol sales, according to the association. Until last year, natural gas was growing at the rate of 10 percent per year.

Ironically, here in the U.S. we are nowhere near as developed in our use of natural gas for motor vehicles even though this fuel is plentiful domestically and would do more for the environment than the cap-and-trade proposal currently being considered by Congress.

In the U.S., the convenience store industry began by selling milk, bread, eggs and other essential items, and then added fuel, which greatly accelerated the development of the channel. In Brazil, the convenience store has become the add-on to an already highly developed retail fuel distribution industry. Indeed, many operators view the c-store as a way to increase their fuel sales.

Flavio Franceschetti, a consultant for Sindicom and one of the country's premier experts on convenience retailing, said only 15 percent of the country's 36,000 gas stations have convenience stores. "Despite the ongoing difficulties from tight margins, defrauders and tax evaders, the c-store market has grown about 75 percent in the past four years," said Franceschetti, who noted Exxon opened the second Brazilian c-store in 1989 in Rio de Janeiro. Petrobras, the huge state-owned oil company, opened its first store in Sao Paolo in 1994.

Franceschetti points to research from international consulting firm Gouvea de Souza & MD that highlights the benefits of adding a convenience store to a gas station operation in Brazil. Gas stations with convenience stores sell 30 percent more fuel than those without, according to the research. "Research also shows the number of transactions at c-stores are up to almost 500 million per year, and spending by each customer is up roughly 40 percent over the past five years," said Franceschetti. In addition, average gross margin at the stores was up 1.2 percent in 2008 on a 15-percent sales gain, he noted. That gain compares favorably to a 9.1-percent sales gain achieved by the total Brazilian retail market.

So why aren't there more convenience stores in Brazil? Franceschetti attributes the slow convenience store development to the reluctance of many gas station operators to deal with the complexities of running a retail store. "It's outside their comfort zone," he noted. Other factors include competing demands for spending on equipment for new fuels and meeting environmental requirements, and continuing intense fuel price competition, which drains the operator's focus away from anything not associated with the fueling lanes.

Ipiranga, the second largest oil company in Brazil and a major operator of the ampm franchise there, has the most convenience stores with a projected total of 992 by the end of this year, according to Sindicom research. While the Brazilian ampm concept borrows much of what is standard at U.S. ampm convenience stores, many aspects of the program were tweaked for the Brazilian market, according to Mauricio do Rosario Jr., of Ipiranga. The stores' new fresh food program is supplied by twice-a-week deliveries. Franchisees can order over the Internet through a secure Web site and receive their delivery within two to three days, said Rosario, who added the company's plan is to open an average of 100 new convenience stores per year.

Ipiranga is followed by the country largest oil company, state-owned Petrobras, which is projected to operate 780 BR Mania convenience stores by the end of the year. Haroldo Andrade, a convenience and franchise manager for Petrobras, said the company recently completed a store planogramming test with the help of The Nielsen Co.'s Brazilian office (Note: Convenience Store News is also part of The Nielsen Co.) that increased profits in test stores by a medium average of 32 percent, without any additional investment in inventory or fixturing.

Shell (330 stores), Esso (245 stores) and Ale (160 stores) round out the top five major companies. Esso Brasiliera de Petroleo, a subsidiary of American ExxonMobil, was sold last year to the biggest sugar cane and ethanol company of Brazil called The Corzan Group, but retained the Esso branding.

By far, though, the largest number of stores (2,401) are what the Brazilians call "white flag" or unbranded operators.

Sindicom projects the total number of convenience stores to increase to 8,755 by 2013, with Ipiranga, Petrobras and Shell all operating more than 1,000 stores.

Dishonest Dealers
Supermarkets, hypermarkets and wholesale clubs (big players include Walmart and Carrefour) are also in the fuel business, pumping about 15 percent of the nation's gas and ethanol. These big-box retailers are successful in the fuel business not just because of low prices, but also because customers trust them to sell unadulterated product.

The Brazilian petroleum and convenience store industry's concern over this kind of fraud came to the forefront during the Expo when the governor of Santa Catarina, Jose Serra, arrived for a signing ceremony for a new law to tighten enforcement and penalties for fraud by convenience and petroleum dealers, including increased fines and confiscation of inventory. The members of Sindicom applauded the governor's efforts to crack down on shady operators.

With the depressed values of companies in the U.S., there was some talk at the show of a Brazilian company, most likely Petrobras, entering the U.S. convenience and petroleum market in the near future. One Petrobras executive I spoke with at the show acknowledged the company was looking at the U.S. market. However, he noted the company would probably need to acquire refining operations in the U.S. first before making a play for any convenience store chain.

Observations From Store Visits
I visited more than a dozen convenience stores from Florianopolis and Blumenau to Pomerode and Jaragua do Sul to Joinville, and then all around Sao Paolo. Some of my observations:

-- It’s clear c-stores in Brazil make more money on fuel than those in the U.S. The retail store is seen as a draw to increase fuel volumes.
-- There’s no self-service at the pumps.
-- The auto repair business is huge and most c-stores also have extensive oil, lube and repair service bays. This is because cars are so expensive people have to keep them running longer than in the U.S. This is also evidenced by the large number of used auto parts shacks along the roadways (we used to call them junk yards when I was much younger and trying to keep my ’69 Camaro running). Car theft is also a big problem.
-- Like in the U.S., the big push for Brazilian c-stores is growing their foodservice business, particularly in the areas of fresh baked goods and new coffee/espresso/cappuccino offerings. Most stores have either in-store seating areas or a lunch counter for in-store dining.
-- In general, Brazilian convenience stores are not as aggressive on price promotions as their U.S. convenience store counterparts, with less deal signage. The exceptions seem to be Ipiranga’s ampm stores and the Mime shops.
-- Stores have much narrower product assortments. For example, where a U.S. convenience store might have a whole refrigerated door full of energy drinks with myriad different brands, a typical Brazilian convenience store would have one shelf with perhaps three brands.
-- The OTP (other tobacco product) category, which is so strong in the U.S., is practically non-existent in Brazil.