Brazil's retail queen sees a Christmas recovery

SAO PAULO Wed Dec 12, 2012 12:28am IST

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SAO PAULO (Reuters) - For anyone wondering if Brazil's economy is broken, retailer Magazine Luiza (MGLU3.SA) has an answer - a three-story-tall Christmas tree made of flat-screen TVs.

The exuberant display in the company's flagship store reflects the outlook of its CEO Luiza Helena Trajano Rodrigues, who told Reuters that sales have seen a recovery since November, this Christmas should be a good one, and that recent concerns about the overall economy are overblown.

"Retail is always the first to perceive these things ... and we've seen the consumer recover his confidence and start buying again," said Rodrigues, one of the country's most influential executives and a frequent adviser to President Dilma Rousseff.

In an interview in her office just above the store, Rodrigues also outlined her expectations for upcoming trends in Brazilian retail and said her company has no plans for new acquisitions. Yet her main focus was a contrarian view to what many others are saying about Brazil's economy, which is expected to grow only 1 percent this year.

"What we're seeing since November is a change from the (slower) trend we had," she said. "I don't agree with those who say the economic model has problems ... the evidence says otherwise."

Magazine Luiza, Brazil's No. 3 consumer electronics retailer, specializes in selling to the country's lower-middle class, or "C Class" as it is known here -- families with a monthly income of roughly $550 to $2,300.

More than 30 million Brazilians have risen from poverty over the last decade, and their desire to buy TVs and cars for the first time has been one of the main drivers of the economy. However, the C Class has struggled with heavy debt in the last year or so, leading to concerns that consumers are tapped out and Brazil needs to find other sources of growth.

Slower spending and declining investment led to an overall economic expansion of just 0.6 percent in the third quarter, deflating President Rousseff's predictions of a strong recovery.

Rousseff has been criticized for trying to stimulate the economy by forcing down interest rates and offering more tax breaks for kitchen appliances and other goods that feature in Magazine Luiza's bright, modern showrooms. Economists have compared Rousseff's policies to trying to force-feed someone who is already full, and have urged her to focus instead on resolving bottlenecks in infrastructure and labor.

Rodrigues acknowledged that many C Class customers fell into a "mess" with debt in the past year, and offered a detailed theory as to why it was just a short-term issue.

POINTING THE FINGER AT CARS

She said the problems were focused in the auto sector, where many first-time buyers got into trouble with loans with no down payment and maturities of up to five years, as opposed to the shorter five- or six-month durations her store offers.

"I think with cars - it's everybody's desire to have one - but I think that was a problem that's now been balanced out," Rodrigues said. She called the issue "isolated," pointing to low default rates on working-class homes as further proof that other segments have seen fewer credit problems.

Families who saw their budgets torpedoed by the auto debt problems are now working their way out of trouble, she said. Meanwhile, Brazilian banks that were spooked by the high default rates, and cut off credit more broadly to the C Class, also began increasing lending around November, she said.

The recent plunge in Brazil's benchmark interest rate to a record low of 7.25 percent, down from 12.5 percent in August 2011, has also begun to pay dividends, she said.

Rodrigues declined to provide sales numbers, citing stock market disclosure rules, but she said the outlook was good.

"Consumer spending is heating up," she said. "With rates coming down, you'll naturally have greater chances of people making purchases."

Her optimism differs sharply from what other recent evidence has shown. Credit research company Serasa Experian says retail sales volumes fell 2 percent in November from October on a seasonally adjusted basis. Consumer default rates in the first 10 months of the year rose 15 percent compared with the same period a year before, Serasa said.

About half of Brazilians expect to spend less on Christmas presents this year, according to a November survey by Deloitte in which 64 percent of respondents said they planned to use the extra month's salary, traditionally paid in Brazil in December, to pay off debts or save money.

A RAGS-TO-RICHES STORY

On the other hand, Rodrigues' optimism is understandable, considering all that has happened since 1954, when her aunt - also named Luiza - founded a modest store in a small town in the interior of Sao Paulo state.

Rodrigues began working in the store when she was just 12, and eventually rose to take full command. By extending credit to the masses and focusing on the C Class long before it was fashionable, she built the company into an empire with 743 stores nationwide and sales of 6.4 billion reais ($3.1 billion) in the first three quarters of 2012.

Magazine Luiza's shares have fallen 30 percent since its $586 million stock offering in early 2011, when investor optimism over Brazil was at its zenith. But the rags-to-riches story remains compelling enough that Rodrigues is still a popular motivational speaker throughout Brazil and a well-known presence at retail fairs in the United States and Europe.

She is also a frequent visitor to Brasilia, where she forms part of a council of three dozen or so business leaders who regularly advise Rousseff on economic policy.

Rodrigues cited Brazil's still-low housing stock as proof that much consumer demand remains unmet. She said the country still needs 23 million housing units to "reach a balance, for people to have the dignity of having their own house."

For perspective, the much-lauded government-run public housing program "My House, My Life" just celebrated the construction of its 1 millionth unit earlier this year.

Rodrigues said Brazilian consumers have been moving beyond basic appliances and making other purchases such as tablet computers, which she said have room for very fast growth due to Brazil's high Internet penetration rates.

She said Magazine Luiza has been working with a renowned Brazilian designer to make a line of stylish, low-cost furniture for "casas populares" -- small, working-class housing units.

"We see that people are buying refrigerators and TVs, but they've still got a run-down couch," Rodrigues said. "The C Class still has room to grow."

(Additional reporting by Vivian Pereira, Editing by Todd Benson and Gunna Dickson)

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