For hundreds of years, Brazil has symbolised the great escape into a tropical paradise, igniting the western imagination like no other country. But the pretty picture begins to blur when faced with some of the realities in the country, among them a disappearing rainforest, political corruption and widespread poverty.
Make no mistake, Brazil is still – and perhaps more so than ever – a land of opportunity. The political scene may look shady at present with its ongoing corruption scandal, but president Lula da Silva and his Worker’s Party administration have done much to restore consumer confidence since da Silva took office in 2003, after years of recession and the flotation of its currency – the real – in 1999.
Brazil’s economy has never scaled the dizzying heights of China in terms of GDP growth – 3.4 per cent in 2005 – but with its large and well-developed agricultural, mining, manufacturing and service sectors, it outweighs that of all other South American countries.
Export
It’s also expanding its presence in world markets and it is the export market that is particularly strong. Says Cláudio Fernando Felker Andreis, export manager of the stationery business unit of Brazilian manufacturer Mercur SA and a member of the Trade Council Committee at SHOPA: "With a strong industrial base, Brazil produces and exports cars, planes, trucks, buses, tractors – and also school and office products. For international companies, the export market is a good start. Of course, there will be competition in every product category and local products will always have an advantage. Leading players like Acrilex, Acrimet, Mercur and Helios Carbex have well known brands; they also frequently carry out merchandising activities; they have a network of sales reps established and they will fight to protect their domestic market."
For companies that are looking further than exports, Andreis’ advice is the following: "Establish a subsidiary or buy a local player. According to local vendors, among the most successful weapons for growth in the domestic market are communication with the resellers, a network of sales representatives and marketing material at the point of purchase."
Raquel Lobao from Brazilian OP magazine Papel & Arte agrees, saying that there are numerous international brands scattered all over Latin America that are completely unknown to the consumer. She adds: "Let’s also not forget that until 15 years ago, importing these products was virtually impossible in Brazil, with prohibitive import duties and tremendous bureaucracy involved as a way of protecting Brazilian products".
But things are changing and there’s much to play for. The estimated size of the stationery, school and office products market in Brazil is $2.2 billion in manfacturing terms, $5 billion in reselling terms. And the international OP community has clearly taken an interest and many of the firms that have – including Faber-Castell, Henkel, Hewlett-Packard, 3M, Bic and International Paper – have become very successful indeed and leaders in their product category. Several have also used their presence in Brazil as a gateway to the rest of South America, notably Argentina, Uruguay and Paraguay, where no import duties apply as a result of the Mercosur agreement.
Distribution
In reselling terms, it’s the wholesalers that rule the roost in Brazil. And its easy to see why. Brazil is divided into 27 states and five regions. The south-east is the most developed region, followed by the south. The major manufacturers, importers and wholesalers, as well as the largest customer base, are located in the São Paulo area (the south-east), but several large companies are based in other states and the capital city of Brasilia (in central Brazil).
The market is also hugely fragmented with 90 per cent of sales generated by approximately 50,000 so-called papelerias. As such, wholesalers and distributors, which are being supplied by locally-based manufacturers as well as large importers, play a key role in the distribution of products. All of them are Brazilian companies, some general line wholesalers, others specialist ones. They are regarded as agile and versatile players that offer a wide range of products to everyone in the market.
Andreis elaborates: "The largest Brazilian wholesalers – Arcom and Martins being the best known – are general wholesalers located in the state of Minas Gerais. They distribute everything from food to office products. Then there are the national specialist wholesalers such as Kalunga, Clovis, Jandaia, Rio Branco, Nagem Reval and DPM."
Some, he adds, adopt a multi-channel approach, boosting their sales through retail and catalogue businesses. Kalunga, for example, operates 42 retail stores in São Paulo, Rio de Janeiro and Minas Gerais and also has a contract stationery arm. It’s the country’s largest specialised wholesaler of stationery, school and office supplies, office furniture and computer-related products.
While the wholesale landscape is completely devoid of international companies, the retail sector isn’t. The biggest successes so far, however, have been in the mass market sector, with Makro, Metro and Carrefour present in full force. But, not surprisingly, it is the mighty Wal-Mart that is the Brazilian retail king with over 150 stores in the country.
Luckily for its OP competitors however, the only time of the year when Wal-Mart is full of office and related products and therefore a considerable threat, is during the hugely important back-to-school season. In fact, the mass market channel was responsible for 13 per cent of OP and school supplies sales during the last back-to-school season, compared to 31 per cent for the wholesalers and 26 per cent for traditional retailers.
Exit
Fellow US retail giant OfficeMax hasn’t been so fortunate. It took the plunge in Brazil in 1999 when it opened a store in São Paulo, with ambitious plans to launch a further 49. But after just one more opening, it left the country rather unceremoniously. Popular opinion has it that OfficeMax – unlike Wal-Mart, for example – did not look for a solid local partner. As a result, its weak knowledge of local consumer habits and the general business arena caused the whole experience to be a very traumatic one.
Staples meanwhile decided to tackle the market from a different angle – the contract stationery side. In the spring of this year, it acquired mail order and contract stationery firm Officenet, a company that calls Argentina home, but one that has enjoyed huge success in Brazil, virtually ever since it first set foot in the country in 2000, becoming profitable there in 2003.
Santiago Bilinkis is one of the founders of Officenet and has remained in the CEO position after the takeover. He says: "We knew we had to bring in international investors which we did [in 2001] with private equity funds. But we also realised that, to fulfil the potential of this business, at some point in time we would need to become part of Staples. It was in our heads from day one, and it now allows Officenet to fulfil its potential."
And Staples appears to leave well alone, letting Officenet get on with its tried and tested strategies. And that’s the secret, Bilinkis adds: "The key is, if you’re entering Brazil, or Argentina for that matter, you can’t expect to run your business the way that you would do in the US. There are many things that you have to adapt to. ‘Max failed to recognise this and it failed to find a good local partner with deep knowledge of the industry in Brazil."
Lobao agrees that being successful in the Brazilian market is not easy, particularly for international companies: "A lot of research, structural investment in logistics and marketing is required. There are some consulting companies in Brazil that are specialists in the area of office and school supplies. Just ask for help…"
This will cost, of course, but the opportunities can be too good to miss, as Lobao explains: "Recently, a large local company, a stapler manufacturer, which owns about 70 per cent of that product category in the country, had a large structural problem and simply didn’t have enough staplers to supply the market. A small local competitor didn’t have the set-up to take advantage of this opportunity and the importers of Chinese products had a field day. So, reserve a small part of your investment for your consultants and researchers. And then invest wisely."
The Green Green Land
In 2004, Brazil’s paper and pulp industry had a turnover of $8.5 billion. It involves 220 companies that directly employ 100,000 workers. Brazil is the world’s seventh largest producer of cellulose – or wood pulp – accounting for three per cent of global supplies, thanks to exports that have tripled in the past ten years.
Consider this: Brazil’s eucalyptus forests – its trees are most commonly used for wood pulp, then the manufacture of paper – have an average harvest cycle of 3.5 times faster than that of the average American forest; their annual yield per unit of land is five times greater. Add to that the country’s competitive labour and energy costs and it comes as no surprise that homegrown producers are doing rather well. According to Capital IQ, Aracruz Celulose and Votorantim Celulose e Papel churned out profit margins of 18 per cent and 28 per cent respectively over the past 12 months – superior performances by anyone’s standard.
And increasingly, the world’s most successful paper producers are also taking advantage of Brazil’s lush leafiness. The largest paper products company in the world, International Paper, already maintains 1.2 million acres of land in South America, by far its largest forestry base outside the US.
UPM-Kymmene has announced plans to expand into Brazil while fellow Finnish paper products giant Stora Enso announced in September that it plans to significantly expand its existing operations in South America, investing up to $100 million this year in Brazil and Uruguay. The company has started to purchase land in the southern part of Brazil (the state of Rio Grande do Sul) and in Uruguay with the intention of establishing fast-growing eucalyptus and pine plantations as early as next year. The target for 2005 is to complete the purchase of around 50,000 hectares of land in each country.
Stora Enso’s CEO Jukka Härmälä said at the time of the announcement: "We are now taking another important step in Latin America. These purchases are in line with our emerging markets strategy. This will be our second-largest investment in South America after the successful completion of Veracel Pulp Mill in the state of Bahia in Brazil, a joint venture with the leading local pulp producer Aracruz Celulose."
In establishing the new plantations, Stora Enso says it will follow its principles for sustainable plantations by adopting the best environmental and social management practices. The intention is to certify the plantations in Brazil with both CERFLOR and FSC forest certifications. It also expects a positive economic impact on the region.
But environmentalists are not convinced and complain of the ecological and social impacts of some pulp mills in the region, which are among the most profitable of the forestry sector activities. In some states in Brazil, they say, native forests have been cut down to make way for wood pulp trees. They also complain that the industry uses excessive mechanisation and technologies that reduce employment possibilities.
Luiz Ernesto Barrichelo from the University of Sao Paulo Institute of Forestry Research disputes some of the ecological claims made by environmentalists. He concedes, however, that the aforementioned Veracel, established in 1992, promised to generate 10,000 direct and indirect jobs, but instead has only hired 300 at the plant and another 1,000 on the tree plantations.
Brazil and the region at large clearly have much to offer to the paper producing sector. But any potential investors in the area should bear in mind that their business is a very hot topic these days from an ecological, economic as well as social point of view, and that all their movements will be monitored very closely indeed.
A Bit of Trivia
Brazilians might not have a royal family, but they do have a king – Pelé. Born as Edson Arantes Do Nascimento in 1940, Pelé is not just a legendary football player who’s won several ‘player of the 20th century’ awards, he’s a symbol of hope. He was Brazil’s first black government minister and has been knighted by the British queen.
In his 22-year football career, he played 1,363 games and scored 1,282 goals. The teams he played in won 53 titles, including three World Cups.
