Retail and industry are investing R$19bn this year; uncertainties about new administration weigh on 2023

12/05/2022

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Retail chain Americanas increased its investments by 30%, to R$1.8 billion this year until September — Foto: Brenno Carvalho/Agência O Globo

Consumer goods companies, the sector that employs the most in Brazil and accounts for more than 60% of the country’s GDP, recovered their ability to invest since 2021, after the worst moment of the crisis generated by the pandemic, and reached in 2022 one of the highest levels in recent years. Yet, the sector’s leaders project that they have to invest wisely in the first months of 2023 until there is clarity about how the new government will run the economic policy and whether the Lula administration will be fiscally responsible.

“We don’t think investments will grind to a halt, but people are adopting a wait-and-see approach in the short run,” said , managing director at consultancy Gouvêa Ecosystem and founding member of IDV, a trade group that gathers 70 large chains.

The volume of funds released until now, considering pre- and post-pandemic data, show a rapid recovery of investments between 2021 and 2022.

According to an analysis by Valor based on the earnings reports of the 10 largest retailers and industrial companies from the durable goods, fashion, food, and drinks segments, R$19.7 billion were invested in fixed assets (equipment and furniture in stores and storage centers) and intangible assets (like brands, patents, and software) between January and September. The combined amount is 47% higher than a year ago, and only 10% lower than that seen in the full year 2021.

The data collected from cash flow reports of the past five years include payments for acquisitions and capital raises in controlled businesses, but exclude securities and asset sales.

The combined investment doubles the amount disbursed by September 2019 (R$9.5 billion), the last year before the health crisis. As far as investments are concerned, retailers grew faster than industrial companies.

In these chains, cash directed for investments by September reached R$11.1 billion, up 56% year-over-year and close to the amount disbursed in the full year 2021 (R$11.2 billion). Industrial companies disbursed R$8.6 billion by September, up 38% year-over-year – the sector still depends on the disbursements of the last quarter to overcome 2021. Last year, investments totaled R$10.6 billion.

“Retailers and industrial companies are accelerating again efforts focused on innovation and efficiency gains after the worst part of the pandemic, which forced them to revise priorities for 2020 and part of 2021,” said Mr. Gouvêa. Despite a still weak demand this year, manufacturers resumed launchings and chains reopened stores. Whirlpool, for example, created new lines in 2022 after pushing them to the back burner in 2020, and the payments for acquisitions already concluded of startups and retail businesses accelerated disbursements.

The analysis covered earnings reports in the two sectors – retail chains GPA, Carrefour, Magazine Luiza, Via, and Americanas, and industrial companies Ambev, Natura, Whirlpool, Alpargatas, and M. Dias Branco, the largest ones in their respective activities.

There are divergences in the pace of growth among groups, and the reports themselves explain the data.

The accelerated disbursements of Carrefour weighed on the combined result of retailers – the French group released R$4 billion until September after acquiring Big (former Walmart). Between January and September, Magazine Luiza paid R$540 million for acquisitions agreed in recent years, three times the amount disbursed in the same period of the previous year.

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Americanas comes next, with R$1.8 billion invested by September, up 30% year-over-year, partly driven by the 103% increase in investments on intangible items since last year, including website and system development.

In the view of GPA, the need to speed up investments in its core business in 2022, including new concepts of stores, Pão de Açúcar’s digital model, and the conversion of Extra stores into Pão de Açúcar, has driven disbursements. For 2023, the group projects investments at the same level or slightly above 2022, when discounting the cost of these conversions. Including this value, there will be a decrease.

“Once the dust of political polarization has settled and with a more stable reality, inflation in check, and cle

Marcelo Pimentel — Foto: Carol Carquejeiro/Valor.

ar signs of [the Lula administration’s] commitment to fiscal balance, confidence grows and investors return,” CEO Marcelo Pimentel said last week.

Industrial companies showed mixed performances this year. While Alpargatas and Whirlpool have more cash for investments, Ambev set aside R$4.5 billion, down 5% from a year before. Considering the disbursement of R$7.8 billion in 2021, the brewery would have to invest R$3 billion more by the end of 2022 to be at the same level of last year. The company declined to comment.

Between January and September, Natura reduced investment by 13% year-over-year. The company, which is restructuring operations, have been revising projects with brands this year. The company declined to comment.

At this moment, investment capacity has been discussed by boards of directors because they have to define the budget for the following year in the last quarter of the year. Between October and December, plans may be revised depending on the pace of economic activity.

The still uncertain economic environment impacts the definition of the budget for the year, whose variables include interest rates, inflation, and GDP growth. “The environment is a little confusing, which is natural considering the presidential transition,” said Jorge Gonçalves, IDV’s head.

“In general, our members believe that it is better to understand what the beginning of the year will look like, and whether spending will be well managed as promised, giving them greater clarity. But there is no talk of freezing investments in 2023. Retailers must remain upbeat,” he added.

The first signs show tougher projections for consumption in early 2023. IDV, retail’s largest trade group, projects a 6.4% decrease in sales in January compared to the previous year, adjusted by the Brazil’s official inflation index IPCA.

In the view of Fernando Pimentel, head of the textile sector association Abit, the central issue is the lack of visibility for businesses. “Everyone is adopting a wait-and-see approach,” he said. “For some direction of the path of investments for 2023, it is necessary to know the names of the new administration and the signals they will send to the market. Another thing is the management of the public accounts, whether we will have some fiscal anchor that generates confidence in investors. The market doesn’t fight with anyone, it prices and punishes lack of visibility,” he said.

In the view of Pedro Moreira, head of Abralog, a trade group that represents logistics companies, investments consider the return on invested capital, which can take be longer or shorter depending on variables such as projected revenue. He recalled that interest rates affect the cost of capital, and that “future interest rates rose as we have seen the elected government send mixed signals on the fiscal policy.”

The investments are not at a standstill, nor will they be. But we expect a first half with fewer funds invested and a potential improvement in the second half of the year. The large companies can even maintain higher expenses, but the others have more difficulty in this environment, without knowing what the fleet renewal plan and the investment project in infrastructure will be.”

For Marcos Gouvêa, with IDV, the memory of the Lula administration after 2003 is a positive aspect. “There was a stimulus to consumption, and this remains in the memory. I believe that, as definitions are made, the sector will accelerate its plans in the expectation of income recovery after 2023.”

*By Adriana Mattos — São Paulo

Source: Valor International

https://valorinternational.globo