Friday’s disclosure of Brazil’s benchmark inflation index IPCA for March exceeding the ceiling of the projections enhances the signs of a persistent rise in prices, which should require higher levels of interest rates, with a direct effect on the population’s purchasing power. This environment brings more uncertainties to a consumption scenario that is already more unequal and complex for business.
On Friday afternoon, banks and economists began to revise upward projections for inflation and the Selic policy interest rate in 2022 and shares of highly credit-dependent chains closed in sharp decline in the trading session.
Two recently concluded surveys, from research companies GfK Brasil and NielsenIQ, obtained by Valor, which cross-reference income and purchase profile, show the effects of the crisis at the client end. There is a decrease in the participation of the poorest in trade sales, and a greater dependence of industries and retailers on the demand of the richest – a clear sign of increased social inequality. In addition, the percentage of people afraid to spend, even with money in their pockets, is at 45%, almost half of the surveyed sample, and above the global average.
“There is an effect of the current scenario, and also remnants of the previous crises, of 2015 and 2016, which add to the pandemic,” says Jonathas Rosa, retail executive at NielsenIQ.
According to the GfK survey, the upper and upper-middle classes reached a 56% share in the sale of durable goods (TVs, refrigerators, washing machines) from October to December 2021, the highest rate in 12 quarters (three years), the survey’s analysis period. From January to March 2020, with the health crisis in its initial phase, these classes accounted for 51% of purchases and, a year earlier, for 50%.
Those with lower income (low and lower middle classes) participated with 39% of sales at the end of 2021, when the Selic and inflation already weighed on credit costs and purchases, versus 47% at the end of 2020, the period when the emergency aid was paid. According to the survey criteria, low income means families with a monthly income (before taxes) of less than R$1,600; lower middle class, from R$1,601 to R$3,000; upper middle class, from R$3,001 to R$5,200, and in the high class, above R$5,201.
The survey concluded that the “safe” income of employed people (part of them, classes A and B) and pensioners are sustaining the consumption of durable goods. Employed workers accounted for 49% of purchases in the fourth quarter, the highest rate since the beginning of 2020. The unemployed participated with 14%. Between October and December 2020, with emergency aid being distributed, employed people made 44% of purchases, and the unemployed accounted for 18%. Between 10,500 and 11,500 people were surveyed each quarter in questionnaires covering in-store and digital sales.
“There are resources left in the higher income population, but the lower class is in need of more stimuli, which take some time to be reflected in consumption,” says Felipe Mendes, head of GfK Brazil. In the second quarter, he understands that poorer workers will still bear stronger pressure on their expenses, “but it is possible that the increase in the minimum wage, high percentages of collective bargaining and the return of the [cash-transfer program] Auxílio Brasil, in the role of demand stimulators, will improve the situation of this group after May or June.” There will also be the impact of the drop in energy prices, with the change of the flags, and possible retreats in the unemployment rate, but he reminds that there will still be the after-effect of the rising interest rates since 2021. “There are negative and positive factors, and we will have to follow their effects, but it will be a difficult balance.”
Mr. Mendes highlights that when the crisis started, the poorest bought more “survival items”, growing their participation in microwave or stove sales. “With Auxílio Brasil, they took the opportunity to equip their homes, and their participation grew in items in general, until 2021 comes and they lose their position in most products.” The upper class, on the other hand, reduced its participation in sales for a brief period in 2020, but regained its position in total, and today there is a dispute for its income among segments, such as tourism and services.
Data from the Nielsen survey show a higher rate in Brazil (45%), compared to the rest of the world (at 38%), of people who, despite not having been affected by the crisis after 2020, do not feel so confident to buy. “Those people need to be convinced to spend,” says the 64-page study. Those who saved money in the crisis and are even more comfortable with their situation (called “small but powerful group”) are 6% in Brazil, the same global average, by the survey concluded in March, in 16 countries.
There are still the “strugglers”, in financial difficulty until now, (22% in the country and 23% in the world), the “recovered”, who have experienced losses, but have already recovered (19% and 21%, respectively), and the “unchanged”, who have not felt anything (8% and 12%, respectively). According to Mr. Rosa, with NielsenIQ, about 80% of the population is in the range of those most susceptible to the crisis (struggling, cautious and recovered).
“We have been following these groups since 2016 and 2017, when inflation and unemployment also exploded. And these groups have experienced many cyclical processes, many ups and downs, so they entered the pandemic already very weakened,” he says.
As the consumer market is strengthened by the expansion of scale and production, the loss of income in the lower classes compromises investment plans and job creation. This is also why this volatility worries the sector. “The tight retail margin makes it depend on a lot of volume to dilute costs, and if the base starts to flatten, it is a warning sign”, says economist Fabio Bentes, with the National Confederation of Commerce of Goods, Services and Tourism (CNC).
Within this logic, José Jorge do Nascimento Jr., president of Eletros, the electronics industry association, says that part of the sector that sells high value-added items, focused on classes with higher purchasing power, is “well satisfied”. “But in general terms, the market has been bad since October. There are no really relevant new investments and there is also the announcement [in March] of the 10% drop in the import tax for some goods, which brings insecurity to companies,” he says.
“The income of the great mass of consumers is crushed. For example, in 2020 and part of 2021 we sold many robot vacuum cleaners, which cost R$2,000. We sell a certain number of them, but ten times more of conventional vacuum cleaners, which cost R$300, R$400. It is very good to sell the robot, but it is not the one that really generates tax collection and volume,” he adds.
For Mr. Bentes, with CNC, the announcement of an IPCA of 1.62% in March (the highest for the month since 1994), above the ceiling of the projections, adds risk to the scenario in the short term – until December, the association projected a rise of 0.9% in trade sales in 2022, and this year revised it to 0.5% (discounting inflation). However, it says it is necessary to consider “compensatory factors” throughout 2022, with a greater effect in the second half of the year.
“A real appreciated against the dollar helps today, with stocks entering the stores less expensive, and there is still a ‘gap’ between wholesale and retail prices, because the chains have not been passing on all the pressure that comes from the factory floor,” he says. “The wholesale inflation, which has already been 25% in 12 months, until December, in total until February is 20%, and we expect that the retail market will still pass on half of this, due to the macro scenario that is still difficult.”
On Friday, Itaú revised the projection for the IPCA in 2022 to 7.5% from 6.5% and expects the monetary authority to continue raising the Selic to up to 13.75% per year. Also on Friday, Santander Asset raised its IPCA estimate to 7% from 6.5% and sees interest rates at 13.75% for the year – 50 basis points above the previous analysis.
In Friday’s trading session, the shares of Via, Americanas and Magazine Luiza, with business more linked to credit, fell 7.93%, 7.72%, 6.55%, respectively. In the view of the head of equity research at Itaú BBA, Thiago Macruz, this decline needs to be analyzed from the standpoint of the cost of capital, pressured in a scenario of persistent inflation and high interest rates over a longer period. “Retailers more exposed to the C class even tend to have a better second half, but partly because of the comparison base of this easier period over 2021,” he says.
Source: Valor International