Retailers in Brazil have become consumer finance pioneers, and they are often the first retailers in Latin America to offer credit to lower-income segments. Over the past five years, the rise of store cards has significantly helped boost sales of consumer appliances in Brazil, with the country set to become the third largest major appliances market in the world by 2015.
Store cards serve as a transition to other forms of credit
Store cards will continue to be a big point of entry for the introduction of other forms of credit in the Brazilian market. Brazilian retailers have been partnering with banks in recent years to offer co-branded credit cards, which enable consumers to use the credit card also outside the issuing retailer’s network. It is therefore very likely that in the long run store cards will eventually be replaced with co-branded cards.
Among emerging economies, Brazil now has the second-highest percentage of banked population over the age of 15 years, at 84%, just behind the United Arab Emirates. In fact, the banked population in Brazil has expanded by 20 percentage points since 2005, when it stood at just 64% of the population.
Retailers in Brazil first began offering instalment payment plans through carnês de loja, which are store booklets that contain payment dates and amounts due. Over time, carnês evolved into store cards, which are a common credit instrument for lower-income consumers. Store cards have taken off in Brazil in recent years, with the number in circulation growing by 146% between 2005 and 2010 and the value of transactions growing by 160% during the same period, based on data from Euromonitor International. In fact, Brazil has the second highest volume of store cards among all nations, after the US, and even has twice as many store cards as the combined total of all nations in Western Europe.
The future growth of store cards will be fuelled by the financial inclusion of lower-income groups and small- and medium-sized retailers finding benefit in implementing store card programs similar to those introduced by larger retailers. Perhaps more importantly, Brazil is expected to post one of the highest growth rates for payment value for credit and store cards among all nations over the next five years. One of the key drivers of credit card usage appears to be the Brazilian consumer becoming increasingly sophisticated as he/she uses credit across multiple retailers and begins financing even bigger purchases.
Access to credit key to sales of consumer appliances
The rise of store cards has significantly helped sales of consumer appliances. Despite ranking at the bottom among the BRICs when it comes to per capita savings, Brazil records the BRIC’s highest average household expenditure on major appliances. In Brazil, consumers are expected to spend more on major appliances compared to the other BRICs, with average household annual spending on major appliances reaching US$197 in 2010, close to the Italian average of US$209. In this context, access to credit remains a key variable to sustaining growth. This becomes even more evident when considering that major appliances’ price tags in Brazil are among the most expensive in the world. This is quite relevant, especially when considering that Brazil is still an emerging economy, where sales of built-in appliances command a very small volume share of the appliances market, as opposed to the mature and definitely more premium Italian market. The higher expenditure however does not indicate that Brazilians are all going premium. Due to the country’s complex system of taxation, even mid-tier brands are very expensive. Products like fridge freezers, for example, record the world’s second highest average retail unit price in Brazil.
As Brazilian retailers have historically been the front runners in offering credit to lower-income segments, these consumer groups continue to look to retailers to finance their purchases. In Brazil, the income class C is growing faster than other income brackets, contributing heavily to the boom in the Brazilian economy. Consumers in Brazil are expected to continue increasing their spending levels over the next five years, as the economy continues to grow. Even more crucially, rising employment combined with real income gains has enabled class D consumers to enter the market for several product categories and services, including consumer appliances. Historically excluded from several of these, class D consumers are now achieving improved economic status and gaining access to credit. It is estimated that approximately 70 million Brazilians, with monthly incomes of between R$500 and R$1,500, can now afford to buy televisions, mobile phones and appliances.