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Brazil's retail families: Striving to keep firms in family hands

Brazil's largest family-owned retail businesses have become acquisition targets for multinational players. Rodrigo Amaral spoke exclusively to three key families to find out how they plan to keep their companies in family hands. 

Brazil has emerged from the global economic downturn with a flourish and is resuming its path of strong economic growth. The country's performance has impressed global investors, who have poured money into the country with gusto. But the real beneficiaries are Brazilian consumers, who have profited from an increase in wealth and access to credit. This consumption boom has been a gift for many of Brazil's family-owned retail chains, which have been working hard for decades to carve out a niche in the market. However, the new economic prospects have also brought new threats to their survival.

Such challenges were dramatically highlighted in December 2009 when the Klein family-owned Casas Bahia, world famous purveyors of household articles and electronics for low income clients, was acquired by the Diniz family-controlled entity Pão-de-Açúcar, a group renowned as a supermarket chain that targets the upper middle classes. The transaction between the families created a giant retailer with estimated sales of 18.5 billion reais ($9.5 billion), and has fuelled speculation that Brazil's retail industry is ripe for consolidation.

Multinational groups including Wal-Mart and Carrefour, who also have family connections, already have a strong presence in the Brazilian market, and there is constant talk that other large foreign players are seeking opportunities to set up shop too.

The usual targets of the rumour mill are family-owned companies with a strong presence in regional markets but which are believed to need more firepower to carry on growing in a business environment that gets more competitive by the day.

That is the case with family-owned Berlanda, a chain of stores based in Santa Catarina, a wealthy state in southern Brazil. "Many groups from both Brazil and abroad have approached us via intermediaries, but I've created a rule that none of these calls are put through me," says Nilson Berlanda, the chairman and founder of the company. "We don't want to sell out."

Potential buyers appear to be too worried about achieving great deals for themselves. "If you have a car that's worth 10,000 reais, and someone offers you 20,000 reais, wouldn't you sell it?" Nilson asks rhetorically. "But that's not what's happening today. A Mexican company made us a proposal five years ago, but it was very unsatisfactory as they didn't want to pay for the brand, only for the physical assets. I told them to go away."

Berlanda is one of several firms that claim they will be able to keep their independence and even achieve healthy rates of growth in the future despite the changes taking place in the market. The most important development has been the hike of income that poorer Brazilians have achieved in recent years. According to business school Fundação Getúlio Vargas, about 31 million Brazilians went up the socio-economic ladder from 2003 to 2008, most of them going from being wretchedly poor to becoming members of the lower middle classes.

Almost as relevant has been the gradual reduction of interest rates that has taken place in Brazil after they reached more than 40% a year in the 1990s. The central bank's current reference rate, 8.75% a year, may sound high for consumers of developed countries, but for Brazilians they've been a blessing that has enabled them to borrow from banks more often and to boost their consumption levels.

As a result of this, Brazil only had a short-lived stumble during the most recent economic downturn. The economy is estimated to have contracted by 0.3% in 2009, and is expected to grow by around 5% in 2010. Retailers are doing particularly well, and sales went up by 8.7% in the 12 months to November 2009 – a period during which the country suffered a mild recession. "We posted the best quarterly performance of our history in the last quarter of 2009," Berlanda says. "We've never worked with interest rates that were so low as they are today. It's a unique moment for retailers in Brazil."

The Berlanda brand is present in 119 stores spread around the state and neighbouring Rio Grande do Sul. The strength of the company is that it doesn't ignore any market, no matter how small it is. "Purchase power has increased considerably in the past decade. The segments of the population that didn't consume some time ago now have money to buy consumer goods," says the founder.

Berlanda plans to open up stores in all of Santa Catarina's 293 towns and cities, even in those 158 that are home to less than 10,000 souls, by 2015. "Even the very smallest towns have the potential to host one of our shops," he says, pointing out that mammoth retail groups aiming at the Brazilian market are unable to provide such places with the personalised service that their inhabitants want. "We know our clients more closely than other groups. Big corporations evaluate credit applications in a purely technical way. But our managers know who is who in their communities and use this information to make more thorough decisions."

Berlanda, 48, remains fully involved with the day-to-day operations, while his wife heads the financial department, a daughter takes care of advertising via her own firm and a son, who graduated in international trade, is exploring supply routes into the Chinese market.

One of Berlanda's main rivals is another Santa Catarina-based family company, Lojas Koerich, a chain of stores that employs more than 1,300 people and posted revenues of 340 million reais ($174.5 million) in 2008.

The company is also often mentioned as potential prey for ambitious newcomers, but Antonio Koerich, the 73-year-old chairman, doesn't even want to talk about the subject. His goal is for the business to grow on its own. "We have a very well planned, daring growth project," he says.

The focus remains on the regional market, as Antonio believes there's still potential to expand in Santa Catarina. But he stresses the family must remain grounded. For him, family-owned firms that have not been able to carry on by themselves in Brazil's retail market were too reliant on the money of banks or other business partners in their quest for excessive rates of growth. "We don't think of expanding using money from third parties. Koerich only works with its own resources," he says.

Koerich was founded by Antonio's father in 1955, having grown from a grocery shop established 20 years before in the surroundings of Florianópolis, Santa Carina's capital. The company grew quickly and diversified in other sectors, so the family owned one retailer and three distinct construction companies. In 1993, however, Antonio and his three brothers decided to go their separate ways.

"We divided up the company at a time when it was in its best financial health," he recalls. "We did it by splitting the group's equity in four parts." Antonio kept the store that sells household appliances and furniture, while each one of his brothers kept a construction company.

"At that time, there were some 60 cousins between the various family branches, so succession was becoming an issue. We decided that dividing the company up was the best solution," he explains.

Antonio notes that, as poor Brazilians become consumers in their own right, all kinds of retailers have set their sights on them. "Big corporations are trying to grow in the high street," he says. "They are not restricting themselves to the big commercial centres anymore."

He believes middle-sized companies could struggle to survive in this more aggressive commercial environment, but says there is no reason why those that are family-owned should be the losers. More important than being big or publicly owned, he claims, is being agile and creative and meeting the particular demands of consumers. This does not just mean their demands according to income, but also respecting the variety of cultural habits and customs that can be found in Brazil. That's where family firms can have an advantage. "Some time ago, people thought that family companies were on their way to extinction," he reflects. "Times have shown that it is not the case."

Lojas Koerich is set to remain in the hands of the family as Antonio's two sons, Ronaldo, 51, and Sergio, 47, are directors, and his grandsons are beginning to get involved in the business too. For him, this is a development that makes a lot of sense from a business point of view. "Our first principle is a simple one: work, work and more work," he says. "The second concerns responsibility. The best executive of a company is the one that has amassed capital through some personal sacrifice."

Brazil's southern states, heavily populated by the descendants of European immigrants from countries such as Italy, Germany and Poland, as well as the former colonial power Portugal, are a hotbed of family-owned business. Since their founding, some of these businesses have long outgrown their origins.

Lojas Colombo began in the retail business 50 years ago in Rio Grande do Sul, Brazil's southernmost state, and has rapidly been increasing its national footprint since. In 2008 it achieved a turnover of 1.3 billion reais ($667 million) and is now also an important player in São Paulo and Minas Gerais, the two most populous and wealthy states, with plans to enter three other markets.

Adelino Colombo (pictured), the 79-year-old founder and chairman of Lojas Colombo, began by selling TV sets and other appliances in the small town of Farroupilha. He has seen Brazil live through at least two periods of increasing prosperity, in the 1950s and 1970s, but also long periods of economic crisis, especially in the 1980s. He says the fact that the economy is looking healthier than ever today doesn't mean that things will get easier for firms like his.

"Competition is much bigger than in the past and we need to continue working well in order to carry on growing," he points out. Growth, in his view, has become difficult to achieve because margins have narrowed a lot, which makes new markets still harder to crack.

For instance, Brazil's most endearing story in the past few years has been the emergence of consumers in its north-eastern states, the country's poorest region. Although still far from being rich, states like Pernambuco, Bahia and Ceará have been untapped markets for consumer goods, but now many companies have been disclosing plans to take advantage of the boom.

Colombo prefers to remain careful. "I've been to the north-east recently and it is really thrilling what is happening there," he says. "But competition in the retail market is already very tough. It is not the time to do anything crazy." Expansion plans, although still alive, are unlikely to include markets that are geographically and culturally too distant from the south.

A considerable part of the expected growth of sales should be achieved by making gains in the more than 340 stores that already operate around the country, many of which have been added to the network by the acquisition of smaller family-owned companies. Colombo is certainly a careful manager of the company's money. He reminisces that he and his family lived in a rented flat until his 25th wedding anniversary. "I didn't want to take any money out of the company," he recalls. When he finally became a proprietor, the flat was located on top of a Lojas Colombo store. The philosophy has helped Lojas Colombo to guard its independence fiercely.

Colombo's succession plan has been the subject of much debate in his home state, but he says his family will hold the reigns of the group for the time being. "At the moment, Lojas Colombo will continue being a family company," he says. "We don't have cash flow problems as we own our own financial company, so we don't need either partners or investors."

But he doesn't discard the possibility that things could change. "The dynamics of the Brazilian market are changing and things can be different in the future," he concedes. "But right now we are not even listening to propositions."

It seems that Brazil's hardened family owned retailers will certainly put up a good fight to retain their place in the market.

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