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Retailers are more exposed to uncertainty in Brazil, Fitch says

Managing Director Ricardo Carvalho said that companies must present better results to avoid rating pressure, downgrade

09/29/2022

Guararapes and C&A are among companies that need to improve their results to bring their leverage ratios in line with the current rating, Fitch said — Foto: Matt Lloyd/Bloomberg

Guararapes and C&A are among companies that need to improve their results to bring their leverage ratios in line with the current rating, Fitch said — Foto: Matt Lloyd/Bloomberg

Retail companies are the most exposed ones to the effects of great uncertainty generated both by the general elections in Brazil and the risks of global recession, said Ricardo Carvalho, managing director of Fitch Ratings. “Companies need to present better results to avoid greater rating pressure and a downgrade,” he said. “The fourth quarter will be key. It is a big challenge, one of the biggest in Fitch’s portfolio.”

Guararapes and C&A are among companies that need to improve their results to bring their leverage ratios in line with the current rating, Fitch said. This year, 19% of the companies with an A rating have leverage slightly above what is reasonable for this grade, Mr. Carvalho said. There is an expectation that next year these companies will have a sufficient cash recovery for them to be re-rated. “With the business environment still weak, the exposure is much lower in terms of leverage,” he said. “But these companies have the important challenge of managing better in order to have lower pressure.”

According to Mr. Carvalho, the main threats right now are the evolution of inflation and interest rates. “If these rates remain for too long, it will be a big problem,” he said. The concern is that there will be a lower-than-expected cash generation. “If it is weaker than we are modeling, it changes leverage ratios and more companies can escape the parameters,” he said. “It is not our baseline scenario, but it is a concern.” Besides this, there is a lot of uncertainty about what the new administration’s posture will be.

Mr. Carvalho highlighted that the projection of GDP growth next year is at 0.8%, which he considers very low. “Inflation and interest rates are critical variables, in our view. They will give direction to companies’ demand, profitability, and cash generation,” he said. “Companies will have a hard time in passing on [costs to prices] in the first half of 2023.”

Fitch believes that companies, in general, are prepared to face this situation of external and internal uncertainty, Mr. Carvalho said. Both the presidential election in Brazil and the risk of a global recession are factors that require caution. But today, 90% of Fitch’s portfolio has a stable outlook, which means that the risk of downgrades is reduced.

Although the election is a source of uncertainty, the risks outlined today are not comparable to what was seen in 2015 and 2016, a period when the interest rate was at the current level and many companies were downgraded. The current business environment is less hostile than during the Car Wash anti-corruption task force, with the consequent political instability, he said. In addition, a good part of the companies took advantage of the period of abundant liquidity. “AAA companies are flush with cash,” he said. “The pandemic also taught companies a lot.”

As for the foreign exchange rate, volatility is expected to continue given the fiscal uncertainty and interest rate hikes abroad. But the exchange rate risk is not a big issue for companies since exporters, basically, are the ones with cash generation in dollars – and those that keep debt in foreign currency today.

By Lucinda Pinto — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Retailers go all-in on Black Friday, World Cup after sluggish sales in Q3

Companies likely to bring forward promotions; networks focused on home appliances and food will be helped by events

09/26/2022

Retailers reported sluggish sales in the third quarter as segments like food, fashion and home construction failed to improve their results compared with the April-June period. As a result, the companies face mounting pressure to perform better in the fourth quarter.

Commercial actions have been defined, and projections of orders sent to manufacturers suggest an increase of 5% to 25% in sales (in volume) over 2021, depending on the segment. Orders placed can still be revised until November. Figures include, however, the effect of a weak basis of comparison in certain segments, which favors stronger year-over-year growth.

Full-year results are now more dependent on the sales linked to the World Cup, Black Friday and year-end holidays. The companies will focus on this 45-day period to try and end the year on a high note. “This is a still complex backdrop. The third quarter remained complicated, which generates a higher expectation from companies for the next quarter, especially because the pandemic is not helping some sectors” like in previous years, said Marcelo Osanai, head of e-commerce at NielsenIQ|Ebit. Items for home and technology, office, and electronic products, which benefited from the higher demand during the health crisis, face a slowdown this year.

“The World Cup and Black Friday together will help a lot brown goods and food and beverages, but will not help white goods [refrigerators, washing machines], a segment that never does well during World Cup years. In our view, products with high turnover and lower values will gain ground in the coming months,” Mr. Osanai said.

This is an election year in Brazil, but they will be defined by late October at most, which may reduce political tension and improve consumer confidence, executives say. Deflation measured in recent months in some categories and lower unemployment weigh favorably on projections as well. Other positive factors are the expanded cash-transfer program Auxílio Brasil since August and the effect of the low basis of comparison – sales of durable goods, for instance, were very weak in November in the last years.

“Sales have increased somewhat in the third quarter compared with the previous one, depending on the region. But a better scenario is projected in the fourth quarter, no matter who wins the election, in an environment of greater confidence and more money circulating,” said Carlos Corrêa, managing director of Apas, the São Paulo supermarket trade group. The sector is directly benefited by higher cash transfers of R$600 a month.

Last week, Apas raised to 2% from 1.7% the projection of sales growth in São Paulo this year. In retail in general, considering all segments, IDV, the main commerce association, projects increases of 6.7% in September, 6.2% in October, and 6.9% in November over 2021.

Executives and specialists cite the expensive credit as a negative factor that still generates a fear of placing larger orders. In addition, they say, despite recent deflation and higher cash handouts, prices have stalled at high levels.

In this scenario, retailers will seek breathing room by bringing forward Black Friday actions to try and spread the positive effect of this shopping day as much as possible.

For the first time, commercial strategies closed with the manufacturers of technology and electronic items for Black Friday (November 25) will be launched gradually starting in October. For consumers to understand that these are Black Friday promotions, consultants who advised the companies say that the idea is to ensure that these will not be repeated.

The idea of limited-time promotions was used last year in campaigns of large retailers in November 2021. “In conversations with customers in retail, we see a strategy along these lines, to launch actions for Black Friday from October on, following a pre-defined schedule of target products. And they will avoid launching an avalanche of promotions in November,” said Fernando Baialuna, head of retail at GfK in Brazil, a consultancy specializing in durable goods.

According to GfK, there was a 1.1% drop in the volume sold of TVs from January to June over 2021, while smartphones fell 11% and portable devices rose 3%. “I don’t see a risk of World Cup and Black Friday hindering each other. I see one thing helping the other, in a more stable exchange rate scenario, which helps the commercial team to make plans,” he said. “We are likely to see cross-selling, with food and beverage sales, for example, to celebrate the games, linked with strategies to sell TVs or 5G cell phones [with faster video connection].”

Jose Guimaraes — Foto: Divulgação

Jose Guimaraes — Foto: Divulgação

José Guimarães, CEO of the electronics chain Novo Mundo, said that orders have been placed for the industry in talks aimed at the October-January period. The company expects a growth of 35% to 40% in sales value of brown goods in the fourth quarter – excluding the 12-month inflation, it means an increase by 20% to 25% in volume. The projection for white goods is lower – growth of 3% to 5% in value.

“There is a slightly stronger negotiation to meet Black Friday in October, especially in brown goods, to start taking advantage of sales linked to the World Cup before that. Then we will extend the actions until January,” said the CEO of the chain, with 147 stores.

Mr. Guimarães recalled that large chains such as Casas Bahia and Magazine Luiza strongly reduced stocks in 2022 after having started the year well stocked, and sales this year end up forcing them to buy more in the second half, despite sales are not expected to be strong at the end of the year. “There will be a search for more sales, but with rationality, to prepare for a stronger recovery in 2023,” he said.

Cybelar, a strong retailer in the São Paulo state, may be boosted in the fourth quarter by a recovery in store demand this year. “The third quarter was flat, and it changed little from the pace of the second quarter. For the period after October, there is some better expectation, in part because stores will be 100% ready for a normal foot traffic, which did not happen in 2021,” CEO Ubirajara Pasquotto said.

A third electronics chain heard, with a strong presence in Rio de Janeiro and Minas Gerais, placed orders 5% higher in white goods, by volume, and 20% higher in brown goods for October and November, compared to the previous year. “This has more to do with the fact that we were not as stocked in 2021, and not because we expected strong sales. [Sales in] Rio is likely to grow slower at the end of the year than in the North and Northeast regions,” the chain’s director said.

In the fashion and home retail segment, Grupo Avenida, with operations focused on lower-income classes in the North and Central-West regions, says that any comparison of third or fourth quarters with 2021 is unfair considering that the sector lost sales because of the pandemic. “But if we compare with 2019, we are growing twice as much as the IPCA [Brazil’s official inflation index], because even serving the lower income, we feel a migration of the middle-class to our stores,” said Martijn Winkel, the group’s chief operating and sales officer.

“We plan to hold this pace in the rest of the year, as we have attractive prices for different social classes. This can be affected, of course, by a lack of money, a smaller leftover of funds from mandatory consumer spending, and the chance that this deflation is only a one-off thing. Lack of money prevented us from posting a strong third quarter,” he said.

Tenda Atacado expects a less tense political backdrop, and believes that many companies will bring forward Black Friday sales to generate a positive environment. “What still favors performance – many people forget it – is that this segment posted weak same store sales at the end of 2021, and this [low] basis of comparison will help now,” CEO Marcos Samaha said. The chain increased by 20% to 25% year-over-year the volume of beverages acquired, including beer, in the fourth quarter.

*By Adriana Mattos — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Retailers bet again in brick-and-mortar stores

Pague Menos talks about opening 120 new stores, 50% above last year — Foto: Divulgação
Pague Menos talks about opening 120 new stores, 50% above last year — Foto: Divulgação

More than two years after the beginning of the pandemic, retailers have resumed investments in store openings and land purchases, at the same time they have been increasing disbursements in the digital arena — the business that has supported part of the retail results. This increases the need for the chains to expand their spending in the year, in a scenario where there are already new pressures on the cost of building the stores. There was an increase of up to 50% in the value of each new store this year compared to 2020 — in an environment of more expensive money in the market.

An analysis by Valor shows that the investments of 15 public retailers — considering those with data available between 2019 and 2022 — reached R$1.9 billion from January to March this year, 35% higher than in early 2019, the year before the health crisis, when the combined figure reached R$1.4 billion. The analysis considered the amounts reported by the companies in the quarterly financial statements. When taking into account the annual expansion rate of the decade, the projection was that this figure would be reached a year ago, but the pandemic held back investments. This delay increases the need for accelerating projects, despite the uncertain consumption environment and high interest rates making capital more expensive.

“What is happening again is a greater allocation of funds for organic expansion, because it is not possible to keep this part of the business in the ICU for a long time, as it was. And stores are key in the strategy of online sales today. It happens that the disbursements in logistics, distribution and systems have already grown in 2020 and 2021, and it is also an investment that needs to be accelerated,” said Alberto Serrentino, partner and founder of Varese Retail.

“Right now, this investment management is much more complex within the management teams. One thing is to invest under good conditions. Another one is with the CDI [interbank deposit rate] at the level it is. The return on capital analysis in the current environment has become more critical, but nobody doubts that companies must occupy new spaces again.”

Data from January to March compiled by Valor show, for example, that Via (owner of Casas Bahia and Ponto chains) opened 22 stores in this period — the highest number since 2019 — while Centauro opened four, a record in the period. In the building material chain Quero-Quero, there were 14 openings, an unprecedented number in this period. For the year, Renner projects 40 openings, versus 32 in 2021, and in food retail, Grupo Mateus estimates 45 to 50 openings, compared with 44 in 2021. Pague Menos talks about 120 new stores, 50% above last year. Raia Drogasil projects 260 stores, 20 above 2021.

Despite the strategic function of the new stores, an aspect raised by the companies themselves recently, in first-quarter conference calls, was the increase in the cost of construction of the units, and the storage centers. Even when leased, they saw an increase in rent. “The bill today is for a 40% to 50% increase in construction costs compared to before the pandemic. Steel, aluminum, copper, everything went up and was passed on,” said José Barral, a consultant and a board member in some retailers.

According to Luiz Novais, chief financial and investor relations officer at drugstore chain Pague Menos, there is strong inflationary pressure on investments. “We are suffering with this. Before, we imagined that the average investment cost for opening a store would be R$1.1 million, and this average value is closer to R$1.35 million now. So, there is a great pressure. But even with these two components we have a very good rate of return, above 18%, a level above the cost of capital, that is, we remain very optimistic with new stores,” he told analysts a few weeks ago.

For Mr. Barral, companies with the right geographic expansion strategy, in areas that prove to be more resilient or with already tested models, will come out ahead in this resumption of expansion. “But I am still a little skeptical about this, because we have to remember that investments in new stores affect the [operating profit] margin initially, and we have already entered the pandemic with certain chains opening too many stores.”

The management team of Assaí, which projects 50 openings in the year, 40 of them being conversions of Extra’s stores, states that the increases in materials occur mainly in steel and concrete because of the war in Europe. The plan is to renegotiate with suppliers. “There is an impact on the conversion costs, especially steel. But it’s not easy to negotiate because there’s not much to do,” CEO Bemiro Gomes said. Each new cash-and-carry store costs between R$70 million and R$85 million on average now. Two years ago, the cost ranged from R$50 million to R$60 million.

In the listed companies analyzed by Valor, the disbursements in structure for digital operations also advanced rapidly this year. The analysis shows that from January to March there was a growth in the value of intangible assets – such as software, licenses and brands – three to five times the value recorded in 2019.

In this line of fixed assets are real estate, renovations, land, machinery and equipment. But this is partly due to the effect of the base of comparison. The combined physical assets of companies is higher than that recorded as intangibles because this line had a greater expansion in recent years, after the 2020 pandemic.

In the first quarter of this year, companies such as Renner, Riachuelo, Centauro and Soma more than doubled the added value in their intangibles, which include, for example, license renewal and systems. In the specialists’ view, these are disbursements that cannot be interrupted, especially in projects that are still gaining traction.

“Technology products can run on their own for a while, but they can’t survive without updates. You can’t unplug them quickly. That’s why these investments are still at a high level, and this is likely to continue for a few years. But I don’t see this as an issue. The leading companies in the industry have access to resources in various channels and have been able to sell to the market the idea of their growth plans in digital and physical stores,” says a consultant specialized in online marketplaces.

Source: Valor International

https://valorinternational.globo.com

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Retailers see stronger sales of durable goods in April, May

Sales of durable goods in April and May may have been better than in the first quarter — Foto: Edilson Dantas/Agência O Globo
Sales of durable goods in April and May may have been better than in the first quarter — Foto: Edilson Dantas/Agência O Globo

Despite the difficult phase faced by retailers of durable and semidurable goods since last year, there are signs that April and May may have been better than the first quarter, which has made asset managers and executives more hopeful about a change in the consumer environment after the second half of the year.

This started to become clearer with the release of results from the companies this month. Although the sales data from January to March show what was already expected – sales volume in decline and costs on the rise – companies such as Via, Centauro, Carrefour and GPA say they saw better figures in April than in March, and May sees demand and foot traffic levels in line with April.

Via, the owner of Casas Bahia and Ponto chains, reported the best Mother’s Day since 2018. Americanas, which sells everything from food to laptops and linens, said that brick-and-mortar stores have been expanding foot traffic and show resilience.

The partial authorization to withdraw money from Workers’ Severance Fund (FGTS) accounts, the stabilization of unemployment rates (the quarter ended in February saw the lowest rate since 2016) and early payment of 13th salaries (a year-end bonus) of pensioners may have driven results, economists say.

The companies also cited the effect of Auxílio Brasil, a social program with larger monthly cash transfers than its predecessor Bolsa Família, as well as the higher number of consumers in the streets.

Another aspect that drew the market’s attention was the fashion retailers’ ability to pass on price adjustments to consumers in the first months of the year without any reduction in the volume sold.

In a way, according to analysts’ reports, this can also be understood as a sign of a greater possibility of improvement in the retailers’ margins.

Renner’s management team mentioned last week that it has been passing on higher costs to products without noting negative reactions from buyers. Centauro’s management team said it has partly passed on higher costs from input and freight without losing sales.

Despite being companies more focused on middle-class consumers, any recovery in consumer spending typically starts with this segment. As a result, consumer spending specialists expect that a little more consistent recovery may gain strength later among low-income consumers.

Despite the sharpest drop in foot traffic in January, Marisa, a fashion retailer focused on the middle class, cited an “expressive recovery” of same-store sales in February and March compared to the same months in 2019, a phenomenon noted in April and May as well.

Market analysts will monitor in the following months the higher portion of payments in arrears in point-of-sale loans. They see a slight pickup in demand in the second half as a possible outcome, despite the fact that many consumers are still paying for previous purchases.

In Marisa, Via and Carrefour first-quarter results, net losses in customer portfolios or payments in arrears (up to 90 days) drew the attention of analysts. They are already adjusting the release of POS loans, but say that the situation is under control.

Source: Valor International

https://valorinternational.globo.com

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Industry offers retailers more money to boost sales

Supermarkets are a battlefield for industries trying to sell — Foto: Maria Isabel Oliveira/Agência O Globo
Foto: Maria Isabel Oliveira/Agência O Globo

The current scenario of fiercer competition between brands, following the drop in consumer disposable income, has made the industry spend more to try to improve its sales. Amounts paid by companies to retail chains, or negotiations involving discounts on invoices, lost strength in the first year of the pandemic, but accelerated again at levels above those of the last five years.

According to a survey conducted by Valor based on the financial statements of eight major chains that publish these figures, over R$2 billion in commercial funds were paid by manufacturers to retailers in 2021, a rise of 11.6% over 2020. For comparison, this expansion rate is more than double the average annual growth of 5.7% seen since 2016.

According to calculations, there was a 3.4% drop in the total amount in 2020 compared to 2019. When the health crisis began two years ago, the payment of emergency aid by the government supported the accelerated demand in consumption, and without the need for companies to support much more aggressive actions, some payments lost strength – a different picture from today.

The information was collected from the footnotes and/or financial reports released by GPA, Assaí, Carrefour (including Atacadão), Americanas, Magazine Luiza, Raia Drogasil and Panvel. Among all the companies, in two there is practically stability (GPA and RD) and in only one, Americanas, there is a drop, of 9.5%, in the amount.

There are companies that do not inform these numbers in their reports, such as Via and Grupo Mateus – the publication is not mandatory, according to Brazilian accounting standards. The industry does not usually inform this data in their earnings reports (Whirlpool, Ambev and M.Dias Branco, for example, do not disclose the information), so the best barometer is the retail market. Adding up all the chains, the expansion in disbursements is in line with the increase in total gross revenue in 2021 (11%).

According to consultants who work with the networks, these negotiations accelerated as of 2021, in a movement that has been extended through 2022, with a focus on increasing sales by commercialized volume. In 2021, much of the increase in revenue came from rising inflation, and not from volume (which even shrank in certain products).

“In the good years, companies take their foot off the gas in terms of funds. That’s not to say that retailers won’t continue to negotiate this with industry, but the commercial stimulus drops. But everything indicates that 2022 will be a year of more bumps, and with retailers feeling more pressure on cash, the need for these agreements on the store side increases,” says Eugenio Foganholo, head of consulting firm Mixxer.

“What happened in 2020 was a disruption of products, with the crisis of the supply chains in the pandemic,” says the chairman of the board of a retailer in São Paulo. “There was a shortage of merchandise, from cell phones to furniture, and no one had to beat a drum to sell. Part of 2021 wasn’t bad either, and that made the funding for actions in TV disappear. But if you look now, there are even wholesalers advertising meat and beer offerings in prime time. And the industry is the one who pays for part of this, under the cooperative advertising agreement.”

These negotiations involve marketing funds (support for campaigns in newspapers, on TVs), or in shelf exposure (who pays more has better space). There are still bonuses associated with industry purchase and customer sales targets, and freight reimbursements. If the chain exceeds the goal, a bonus is paid. And the payment can be made through the reduction of invoices payable to the industry.

Store openings are still part of the negotiations, although they do not involve such significant amounts, through the free delivery of initial batches of products to new stores. Openings receive greater funds than refurbished stores – last year, openings and conversions grew more than in 2020. Between openings and closings, the balance was positive in 204,000 stores, and in 2020 there were 75,000 closings. For 2022, the projection is for a new positive balance.

Among the cases analyzed, Carrefour (whose largest business is Atacadão), Dimed (Panvel) and Assaí lead the increase in payments, with expansion of 32%, 22% and 18%, respectively, in 2021 versus 2020. Carrefour integrated at the time the Makro chain to its store base, absorbing new contracts. The chain and Assaí have resumed openings since 2021.

Consultants also point out two aspects in these negotiations: the pressure that the industry itself faces in its expenses and the effect of high inflation in these trade agreements. Manoel Araujo, head of Martinez de Araujo Consultoria de Varejo, remembers yet another aspect. “I have five brands of a certain product in the store, and I signal that I will look for other cheaper brands in the market. I can still use the store’s own brand, which fits like a glove in these times of crisis. This all ends up entering the daily negotiation of discounts,” he says.

Despite the fact that, strategically, these negotiations are fundamental in the sector. Brazilian accounting rules do not require the disclosure of those numbers in the footnotes or in the earnings reports. And the subject has already been the target of fraud in the sector years ago.

There are chains and industries that only mention in the footnotes the existence of commercial agreements, and others that specify them in the “accounts receivable” or “suppliers” lines. The amount is also credited as a type of credit of the cost of the goods purchased.

Audit reports on chains’s financial statements often cite the bonuses as a “significant” issue that merits exchange of information with management for further clarification but conclude that the handling of the issue in statements is “acceptable”. In 2003, Dutch retailer Royal Ahold admitted that its profits were inflated by $500 million between 2001 and 2002 because of the inclusion of bonuses that never existed.

Source: Valor International

https://valorinternational.globo.com

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Retailers prepare attacks against foreign online marketplaces

Why Some Retailers Are Thriving Amid Disruption

There is a movement organized by the main Brazilian retailers that is likely to lead to a series of actions against online marketplaces that, in their view, sell counterfeit items and or without the proper collection of taxes. The focus is on foreign companies that bring products from Asia, through cross-border online commerce, or across platform borders, Valor has learned. Those companies rebut criticism and already have lines of defense to react to this move.

The meetings on the issue have been led by the Retail Development Institute (IDV), which represents 75 retailers, such as Americanas, Casas Bahia, Magazine Luiza, Renner and Riachuelo. Last week, there was a virtual meeting with at least 50 associates to address the tax impact of evasion and discuss aspects in which “judicial and administrative proposals” against the platforms are viable, according to IDV material presented at the meeting.

Sources say that there is a long-standing discomfort of the chains with the operation of groups such as Aliexpress and Alibaba (based in China), Shopee (part of Singapore’s Sea Group), Wish and Shein (based in the U.S.), Mercado Libre (based in Argentina), and OLX Brasil, with 50% of the business in the hands of South African Naspers. The decision to harden the tone came from the growth of the activity of these companies in the country, say sources.

The material, prepared with the support of McKinsey consultancy and Mattos Filho law firm — and obtained by Valor — mentions, as main areas of action, competition, tax, criminal, consumer relations and the Civil Rights Framework for the Internet.

Regarding the competition aspect, the IDV is considering filing, in the coming weeks, representation at antitrust regulator CADE, alleging violation of the economic order by foreign platforms. This topic is controversial and former CADE advisers are divided on the hypothesis of success in the strategy.

A meeting with the National Council for Combating Piracy (CNCP), of the National Consumer Secretariat (Senacon), linked to the Ministry of Justice, must still be requested this month. The idea is to present the institute’s study to the CNCP. “There have already been contacts with high levels of the government, informally, and with state leaders to see if there is room to work on changes in state legislation, on tax collection by marketplaces. We’ll start with CADE and then strike harder to change the law,” says the head of one chain.

“Only 5% of shipments were inspected by customs in 2020 and 7% of shipments are effectively stated. In other words, there is a flood of products that enter the country without any analysis, and this increased even more after the pandemic,” says a source close to IDV.

“As the purchase of up to $50 is exempt from import tax, informal shopkeepers or individuals buy from other informal stores, up to this limit of $49.99 per package to avoid inspection”, says the source. “Thousands of packages arrive up to this limit, further favored by the free shipping offer offered by these platforms”.

A proposal being analyzed by the retail chains is the issuance of tax receipts, by the Individual Micro-Entrepreneurs (MEIs), in the sale to individuals. This is only mandatory when selling to companies. But a change would have to involve the general law on micro and small companies.

Another path for IDV is to work with state lawmakers to pass a law that assigns to marketplaces joint liability for tax disputes of their sellers regarding the payment of sales tax ICMS. Some states already make them responsible through specific legislation, but the idea is rejected by platforms outside Brazil because they consider they are only intermediaries in the sale.

The text being discussed still mentions acting on the change in article 19 of the Civil Rights Framework for the Internet, which deals with freedom of expression. According to the article, an internet provider can only be held civilly liable for damages resulting from content from shopkeepers if, after a court order, it fails to take action.

For the IDV, the text is being used in a distorted way to exempt the online marketplaces from responsibility, and the platforms, in turn, say that it is about freedom of expression (of publishing content).

As it is an election year, retail chains linked to the IDV told Valor that they do not believe there is room to put the entire agenda on the table of the federal and state governments today, so the path followed now would be to toughen the demand for greater customs controls, and in greater pressure on states and on regulatory agencies, such as telecom regulator Anatel, which can fine companies. A source close to the Ministry of Justice says that these inspections have grown since the pandemic, as well as the approximation between some websites and agencies, in the search for greater cooperation.

The IDV document calculates a tax evasion of R$19 billion to R$20 billion in the sale of international retailers in 2020 — 80% to 90% of them are from Asia. In the Brazilian chains, this evasion ranges from R$4 billion to R$ 5 billion. There were 47 million orders from Brazilians to international stores, brokered by online marketplaces in 2020, says the document. It is as if one in five Brazilians had placed an order in the year.

For the foreign platforms, the issue is commercial. “They [Brazilians] are saying that because they are losing sales and, in a more difficult consumer environment, they do not have access to the competitive sellers base that others have. Because there are sellers that sell cheap items and within the law, as they have a lower cost structure abroad than in Brazil,” says the head of market relations at a Chinese website. “We are bringing to Brazilians thousands of stores that work correctly. Are there illegal products that pass through controls? Yes, but there is work to improve that.”.

Goldman Sachs estimated, in a recent report, that Shopee is expected to reach a 20% share of the Brazilian online market by 2025. Other analyst reports have highlighted Mercado Libre as the biggest competitor today for Magalu, Americanas and Via.

A point highlighted by three lawyers heard by Valor, focused on antitrust legislation, is the possible legal strategy of Brazilian retail chains. “If they claim unfair competition, this is a subject covered by the 1996 Intellectual Property Law, that is, it is something in the civil or even criminal sphere, and not in CADE,” says a former counselor at the antitrust watchdog.

“You can say that it is a violation of the economic order within a broader idea, as defined in article 36 of the law that structures the Brazilian competition defense system. And claim that tax evasion generates an asymmetry of competitive conditions and market imbalance. But CADE has already made clear, on several occasions, that it does not assess tax matters, even though it is necessary to analyze violations of the economic order,” says a lawyer with 23 years of experience in the area. Sought by Valor, CADE did not return requests for comment.

Local retailers and foreign platforms have had a series of differences for years, which became explicit in 2019, when the sector discussed a self-regulation guide, with Senacon’s direct intermediation. In this debate, foreign companies objected to holding platforms responsible for advertising counterfeit products, claiming freedom of expression. Shopee, Aliexpress, OLX, Wish, Shein did not adhere to the guide. Mercado Livre joined in 2021

In the end, the guide assigns responsibility for enforcing property rights only to the companies that own the products and brands. The IDV was in favor of co-responsibility, and the divergence resulted in tense meetings between the parties in 2019. On February 23 there will be a meeting at the CNCP, and the idea is to tell companies that those who do not act according to the guide’s recommendations or meet suggestions will have to leave it.

Sought by Valor, Mercado Libre says it supports actions to inhibit the entry of pirate and counterfeit products, and that invested $100 million in machine learning technology, which helps in the analysis of data and identification of wrongdoings. It also states that only 5% of the sellers in its base are not formal companies. “We’ve formalized 135,000 new small entrepreneurs since the pandemic, and that’s more [than the total number of member stores] in the IDV. So we generate income and jobs,” says Ricardo Lagreca, head of the legal department of Mercado Libre in Brazil.

According to him, the group has digitalized the control structure to identify “as much as possible” sellers and products. “About 95% of the write-offs we make are already automated.” Mercado Libre has been reinforcing, behind the scenes, sources say, that it cannot be compared to platforms without a local distribution structure and that do not generate employment or tax payments. And they don’t see themselves as a foreign operation.

According to Mr. Lagreca, R$1.2 billion in taxes were collected by the group in 2020, and this year it will be “almost twice as much”. The platform had R$48 billion in transacted value in Brazil. The company said last year that from January 2020 to July 2021 an internal brand protection program allowed the deletion of about 30 million irregular ads — there are 360 million ads in the database.

Shopee says it has “proactive screening measures” to identify violations and “provides procedures” for brand owners to request removal of infringing listings. It says that “it is committed to helping small and medium-sized companies grow and prosper online”. Shopee states that more than 85% of its sales are from local sellers, and that selling counterfeit or intellectual property infringing items is prohibited and requires sellers to follow local laws. “Our team in Brazil serves more than 1 million registered local sellers,” it said in a statement.

Shein says it “operates and will continue to operate in compliance with all local laws within its business operations.” Wish did not return requests for comment. OLX states it helps in the development of the country and provides a space to users “always respecting the terms and conditions of use”, with direct negotiation between seller and buyer. According to the company, there are free advertisements and its revenue comes from optional spaces to highlight the offers.

OLX also informs “it welcomes initiatives that promote a healthy environment of competition and any measure that helps in the fight against illicit practices,” and understands that there are always improvements that can be implemented in the sector and in the legislative environment. It acknowledges that the “IDV plays an important role in the discussion of improvement measures and says it is available for a conversation with the institute”.

Sought by Valor, IDV confirms that there is an internal study on the subject, but does not comment on actions in progress.

Source: Valor International

https://valorinternational.globo.com

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