10/06/2013 21:52:00

Brazil's Pao de Acucar Ramps Up Investments In Spite of Weak Growth

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--Group Pao de Acucar is focusing on organic growth in 2013, CEO says in interview

--CEO speaks as one-year anniversary of Casino takeover of GPA approaches

--GPA seeks to expand in less-served areas, such as the Northeast, CEO says

--Inflation remains under control in Brazil, says GPA's CEO

By Luciana Magalhaes

SAO PAULO--Brazil's weak economy and high inflation aren't holding back the country's largest retailer, which is deploying about $1 billion in 2013 to expand its network with emphasis on new neighborhood stores and cash-and-carry units.

The firm is also expanding into the less-served yet fast-growing Northeast of the country, Eneas Pestana, chief executive officer of CBD, said in an interview, approaching the one-year anniversary of a control change in the giant group.

In June last year, France's Casino Guichard-Perrachon SA (CGUSY, CO.FR) took full control of Companhia Brasileira de Distribuicao Grupo Pao de Acucar (CBD, PCAR4.BR), or GPA, after a fierce dispute between Brazilian businessman Abilio Diniz, chairman of GPA, and Casino's chief executive officer, Jean-Charles Naouri.

Mr. Pestana, who has been in the company since 2003 and at his current position for a little over three years, says the giant retail company's direction hasn't changed over the last 12 months. Pao de Acucar, the Portuguese term for Sugarloaf, continues to focus on organic expansion to cater to the changing needs of the Brazilian consumer, who now shops more often and seeks convenience.

Acquisitions are not ruled out, but they are currently not a priority, and will only happen if a good opportunity arises, the CEO said.

"The exchange of experiences has become more intense," Mr. Pestana said, giving as an example gains the Brazilian group has had with Casino's large experience in the developing commercial centers around supermarket areas, a model Pao de Acucar has also been adopting in Brazil, through its GPA Malls & Properties arm.

There has also been a growing interest among GPA's employees to learn French. "However, there's no request or orientation from Casino on that regard," Mr. Pestana added. "There has never been any move to change the culture of the company; our relation is of deep respect."

The control change in GPA has happened simultaneously with a worsening of Brazil's economic environment, with growth repeatedly below expectations, persistent high inflation and, more recently, a strengthening of the dollar against the real, after months of jawboning by government officials and central bank interventions to keep the currency in a tight band.

While admitting there have been some industry pressure for mark-ups in prices, Mr. Eneas said, competition has led the retail to fight to keep the prices down. "No one wants to be first to raise prices," he said. In a broader sense, Mr. Pestana said that inflation continues to be under control in Brazil and some of the concern over prices can be exaggerated as the "situation is far from being disastrous or a big problem."

Brazil's inflation continues to be close to the 6.5% upper limit of Brazil's inflation range. Brazil's inflation target is 4.5%, with a tolerance band 2 percentage points in either direction. Price hikes in food, among other factors, have contributed to current level of inflation and led the central bank to recently raise the country's interest rate from 7.5% to 8.0% a year.

Growth in Latin American largest economy has also disappointed and is expect to be below 3% in 2013, after moving at a 0.9% rate in 2012 and at a 2.7% pace in 2011. But weakness has not curbed GPA's growth.

"I don't depend on the GDP to grow," Mr. Eneas said. "I can gain market shares from others."

In the first three months of the year, GPA's consolidated gross sales revenues totaled close to 15 billion Brazilian reais ($7 billion), and net income was up 70%, to BRL275 million. GPA consolidates its GPA Foods' and durable goods arm Viavarejo's results.

For the full year, GPA is investing BRL2 billion, of which BRL1.5 billion will be invested in food focused chains, such as Extra, Pao de Acucar and Assai. Last year, the company invested around BRL1.5 billion.

The company is opening 12 to 15 cash-and-carry Assai stores and introducing the brand in seven Brazilian states. It plans to open 100 mini-markets by December in the state of Sao Paulo. The plan, Mr. Eneas said, is to open 100 to 150 new mini stores per year in Brazil. The model will first be expanded in Sao Paulo, and later in Rio de Janeiro.

The company's decision to utilize a smaller format is directly linked to changes in the Brazilian economy and society. Inflation, although beyond expectations, is historically low, so consumers no longer feel they need to make large purchases at the beginning of the month before their money loses its value. Also, the fact that a higher number of women now work outside from home and increasingly look for convenience makes the new model seem attractive.

Internet shopping has also been growing, he said.

A step beyond Brazilian borders is not in the cards right now for the giant Brazilian group, but the possibility exists. "In the short and medium terms, we have no plans. But I don't rule it out," he said. If the company ever takes a step outside Brazil, a natural option will be for markets close to home, in Latin America, he said.

Mr. Pestana says the company is constantly exploring new store formats. He likes the concept of the U.S-base Whole Foods Market, which emphasizes organic and natural products, and Costco Wholesale Corporation, a membership-only warehouse club. However, he added, the membership model wouldn't work in Brazil.

"It's an interesting model...but the Brazilian consumer wouldn't agree to pay an annual membership to shop," he said.

Write to Luciana Magalhaes at luciana.magalhaes@dowjones.com

(END) Dow Jones Newswires

June 10, 2013 16:52 ET (20:52 GMT)

Copyright (c) 2013 Dow Jones & Company, Inc.

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