Brazil’s convenience market: ready to fly

January 1, 2010

Like its overall economy, the convenience store industry in Brazil appears poised for a break-out, according to Don Longo, editor-in-chief, Convenience Store News.

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% to 5,500 stores, said Alisio Vaz, vice president of Sindicom, Brazil’s confederation of petroleum wholesalers and convenience stores.

Sindicom, along with a local fuel and lubricants distributor and convenience store operator called Mime Group, sponsored Longo’s recent trip to Brazil, where he 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 Postos & Conveniencia, the country’s equivalent to the NACS Show in the US.

During his five-day trip to Brazil Longo heard petroleum and convenience store executives, while undeniably proud of their country’s resurgence, outline 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 polarisation 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
• 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.

Ethanol made from sugar is the fastest growing fuel in Brazil, growing from 4% of the country’s fuel consumption to 14% over the past five years, according to Sindicom.

More than 90% 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% ethanol), ethanol, diesel or natural gas. In Brazil many motorists pay approximately $1,500 (US) 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. 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% 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% per year.

Longo contrasted the development of convenience retailing in Brazil with the US.

In the US 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, he reports. 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 leading experts on convenience retailing, said only 15% 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% 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% 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% over the past five years,” Franceschetti told Longo.

In addition, average gross margin at the stores was up 1.2% in 2008 on a 15% sales gain, he noted. That gain compares favorably to a 9.1% sales gain achieved by the total Brazilian retail market.

Franceschetti said the slow convenience store development in Brazil was due 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 told Longo.

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 operators 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, 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 US ampm convenience stores, many aspects of the programme were tweaked for the Brazilian market, according to Mauricio do Rosario Jr, of Ipiranga.

The stores’ new fresh food programme 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%, 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, discovered Longo.

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.

To read Don Longo’s full report and view photographic footage of his Brazilian convenience store tour visit csnews.com article