Special Reprint of Three recent exame covers stories on the brazilian economy

THE FASTEST GROWING MARKET

The new middle class is the Brazilian economy’s biggest sensation. But pay attention: in Brazil, no social stratum is growing in proportion as much as classes AB. Today, there are 20 million rich. There will be more than 30 million by 2014 | ROBERTA PADUAN

In the 1980s, economist Edmar Bacha created a neologism that perfectly summarized the feeling in relation to our trajectory as a nation. He created the expression "Belindia", a mixture of small and rich Belgium surrounded by the gigantic and very poor India — a portrait of Brazil’s failure in building a modern society. Much has changed over the past three decades, and today the term Belindia has lost all meaning. As a sign of how realities disappear in thin air, India has become a promising economy, whereas Belgium experiences the disenchantment that has taken over Europe.

However, the main change occurred in Brazil. We are still one of the world champions in income inequalities, but the poor are ascending at an unprecedented rate and our elite have been taking on a unique proportion in history. Belgium, with its 10 million inhabitants, has become too small to serve as a metaphor. "It seems incredible, given our history, but little by little, we are reducing the numbers of poor and increasing those of the rich,” informs economist Ricardo Paes de Barros, one of the country’s greatest authorities in studies of inequalities.

“It is as if everyone was being pushed upwards.” That is the analogy used by economist Marcelo Neri, of the Getulio Vargas Foundation of Rio de Janeiro, to explain the economic ascension of the Brazilian population over recent years. Thus far, the best known side of this change has been the growth of class C, which gained 30 million Brazilians, lifted from classes D and E since 2003. However, other equally important facts emerge from amidst the calculations. “Class C was not the only one to “swell”. The entire social-economic pyramid moved upwards,” says Neri. While the bases shrunk, classes A and B were the ones that grew the most, proportionally. During the period studied by the FGV, from 2003 to 2009, nearly 7 million Brazilians burst into the high income bracket, increasing the numbers of the country’s elite to 20 million people. However, the best news concerns the future: the projection is for the richer classes to keep on growing at a faster pace in coming years. In 2014, they will include 31 million people, 50% more than today – the prognosis takes into account educational attainment of parents and children and access to the Internet, among other indicators that point to the future income generating capacity of the family. Although no one dares making projections further ahead than that, the bets are that the number of people in upper classes will continue to grow by the millions over coming decades.

What do all these numbers mean? For the country, a unique opportunity to turn a page and relaunch the bases for our capitalism. The most important economic thinkers have always viewed equal opportunities as one of the main moral forces of the economic system inaugurated by England after the Industrial Revolution. In real life, we know that this equality took a long time to materialize, and even in developed countries the marks of the older social classes are still present today.

However, in Brazil, the case was always much more severe. Until recently, good or bad luck at birth practically dictated each individual’s limits thought their lifetime – whoever was born in Belgium would rarely die in India, and vice-versa. Now, class limits are being continuously redefined and the opportunities for ascension have never been this notable. Nearly half of those people classified today as classes A and B – that is, people with monthly family incomes greater than 6 941 reais, according to criteria from the Getúlio Vargas Foundation – is the first generation to belong to these strata. This ascertainment is from a study by the Data Popular research institute. "A great many of these consumers have a class A wallet and a middle class head,” affirms Renato Meirelles, a partner at the institute. “They are people who research prices before buying and who make decisions based on cost / benefit.

That’s why deciphering what this huge battalion of consumers wants today is a challenge for countless companies that see the social ascension process as a window of opportunity with fruit ripe for the picking. Currently, classes A and B are responsible for an annual consumption of 930 billion reais in products and services, 40% of the total projected of 2.5 trillion reais for the country as a whole by IPC Editora, specialized in market studies. Growth of the high income population in recent years can be felt in sales in every sector - from yachts to coffee. For example, take a look at the Italian firm Ferretti, which manufactures sport and leisure boats and has just opened a factory in the state of São Paulo. Ferretti has been operating in Brazil for 21 years, but until now, it had licensed its brand to Brazilian Marcio Christiansen. Last year, the Italian company decided to establish itself in the country, in partnership with Christiansen, with an investment of 50 million reais in its new factory installations. The objective is to triple production capacity of yachts that cost between 2.8 million and 15 million reais. For the German car manufacturer, Audi, Brazil was the country where

sales grew the most in percent last year, increasing 62% (after growth of 42% in 2009). In 2001, its executives expect to double sales compared to last year. This increase should come from the recently launched A1, which costs 90 000 reais, the manufacturer’s "cheapest” model. "Our projection is to continue growing 20% to 25% over the next two years, at least,” says Paulo Kakinoff, president of Audi in Brazil.

This larger scale of consumers of premium products also reaches goods that cost little in absolute terms, but that do not fit in the normal budget of low-income Brazilians.
 
These products may include a facial anti-aging cream for 200 reais or a shampoo for 80. The limitation of the more sophisticated Brazilian consumer market postponed for decades the arrival in the country of active cosmetics – products that are half way between cosmetics and medications. This category was inaugurated in the country just 11 years ago by L’Oreal of France, although the segment in Europe is nearly one hundred years old. During the first eight years, the company sold only two of its brands in Brazil, La Roche-Posay and Vichy. Since 2008, excited about the segment’s performance, L’Oreal has brought three more world brands to the country. “In 2008, Brazil was the eighth market for the company. Today, I run the group’s third biggest business, trailing only France and Germany,” says Philippe Mottard, of France, director of the active cosmetic division.

L’Oreal’s example show that today the country is on the radar of companies in the most diverse sectors. That has greatly reduced the time for globally launched products to arrive in Brazil. Nestlé’s Nespresso coffee machines were only launched here in 2006, although they have existed for 25 years. However, the newest line of Nestlé espresso coffee machines, Dolce Gusto, launched globally in 2006, arrived in Brazil less than three years later. The decision was made after a study conducted in 2008 with 400 people, all from classes A and B. “We wanted to be sure of the Brazilian’s interest in the product. Although we have the habit of drinking coffee, we didn’t have the more European custom of making it individually at home,” says Lilian Miranda, director of the Nestlé coffee units. “The survey made it very clear that the Brazilian public is in search of sophistication; it wants to study the products and qualify consumption.” Last year, the sale of beverage machines and capsules grew 55% in the country. The plan to distribute the Dolce Gusto models only in the southeast and south by 2012 was modified. “We had to rush to expand distribution to all of Brazil. People from other states would buy the machines in São Paulo and then call us asking how to find the capsules in their cities,” says Lilian.

WHO ARE THE RICH?

Although it is still a small group compared to the nearly 200 million inhabitants in the country, Brazil’s economic elite is spreading over a huge spectrum: it ranges from billionaires in finance and business to a family with an income of 7 000 reais per month, the minimum to be part of class B. Even in the more restricted spectrum of class A, that is, people with family incomes of at least 9 000 reais per month, the diversity is enormous. São Paulo, the country’s biggest city, has the largest fleet of helicopters in the world. It is the sixth city in number of billionaires and where the most Romanée Conti wine is consumed. Over the past ten years, sales of Porsche sports cars – a consumer’s dream for nine out of ten rich – grew 3 500% It just so happens that in the same class A we have Fernando Morais, 32, from the city of São Paulo, whose salary as human resources director at the American Atlântica Hotels chain places him in one of the top brackets of the highest class. Married and father of an 8 year old daughter, Morais is proud of the standard of living he has with his family. At the end of the year, he changed his wife’s used Ka for a new Fiesta. His home, which he owns and is paid off, is in Vila Matilde, in the east zone of São Paulo, and it measures about 130 square meters. The family’s fixed expenses include about 900 reais for his daughter’s school, 600 reais for the fitness center for him and his wife, subscription TV and other comforts, such as restaurants – the family’s favorite is the Australian chain, Outback. The truth is many of our rich are not all that rich. Almost 80% of those in classes A and B earn 16 000 reais. What we will probably see in coming years is the combination of two movements: more people being lifted from middle class to the higher classes and an enriching of those who comprise the elite.

The diversity also has to do with the various existing family arrangements. A studied conducted at the request of EXAME by Cognatis Geo-marketing, specialized in measuring markets, outlined the profiles that comprise classes A and B. The study identified 8 million people in families called “mature modern couples”. These residences are comprised of a couple where at least one is 45 years of age or older (thus mature) and where both work (thus modern). A notable characteristic of this group is the fact it has few children. “It is natural for this type of family’s income to be higher because both work. Most of these couples also postponed the arrival of a child to invest and advance in their careers,” says demographer Reinaldo Gregori, a partner at Cognatis.

There is a correspondingly similar profile in the United States, the gray dads. People like advertiser Luiz Otávio Ferreira, 45, and graphic designer Fernanda de Assis, 36, married for ten years. The two decided to postpone the arrival of Anita, 2, to enjoy their first years of marriage and invest in their careers. Ferreira and Fernanda are from Belo Horizonte, Minas Gerais, but they spent three years in São Paulo. “It was a period of professional growth, but also a lot of work, where we would never have been able to spend the time we wanted with our daughter,” he says. Back in Belo Horizonte since 2008, the couple enjoys a comfortable standard of living. After the birth of their daughter, they replaced the adventure tourism for weekends on a family farm. Now, they are getting ready to build their "dream home", which, they say, will combine a modern project with plenty of natural lighting, with antiques, such as a wood-burning stove – both love to cook and entertain friends and family. The lot, in the elegant district of Mangabeiras, is already paid for. Construction, with an estimated budget of 500 000 reais, is mostly guaranteed by the savings they have made over the past few years.

It is interesting to observe that traditional families, in which only one member works, seem to be on the endangered list - with a 15% drop between 2003 and 2009, and they are only the fourth family arrangement in number. "Many of these families are unable to remain in higher classes precisely because they have only one income provider, and they end up falling to class C,” says Gregori. There are also types of domiciles that, although not very numerous, are in outright growth. Currently, the fastest growing is independent elderly, people over 65 years of age who live alone, have high incomes and consume more than their peers from previous generations.

 

In six years, this group more than doubled. Plastic surgeon Alcemar Maia Souto, 55, is a perfect fit for the second fastest growing profile, called the "mature bachelor" by Cognatis — he lives alone and has no kids. His monthly income is around 45 000 reais. Born in the state of São Paulo, Souto has lived in Rio de Janeiro for the past 27 years. His parents studied until the fifth grade of elementary school. Although he is the typical target by car manufacturers for the more luxurious segments, Souto does not invest much in cars. A few weeks ago, he bought a model considered to be of average cost for 50 000 reais. The surgeon also does not spend on luxury clothes. “I evaluate the model and quality, but I rarely opt for the most expensive piece just because of the designer brand,” says Souto. He confirms an observation made by Carlos Ferreirinha, owner of the MCF consultancy, specialized in high income consumption: “The act of consumption is getting more and more mixed up, because fortunately we are no longer a country of only poor and rich. A person with high purchasing power can decide to buy a car far below his possibilities. Whoever doesn’t treat him well will lose the sale. And that can happen in clothing store, a coffee shop or a vehicle dealer.”

THE STRENGTH OF EDUCATION

On the other hand, Souto spends on plays, shows, several weekly outings to restaurants and travel. He enjoys spending weekends in Búzios, Angra and, not rarely, travels to São Paulo to watch plays that take too long to get to Rio. He has been to Europe 19 times and he has visited several Latin American countries, but he still doesn’t know the United States. “I have yet to tire of visiting the various regions of France, Spain and Italy,” says Souto. The gastronomy of these countries, including the wines, is among his interests. Souto’s testimony is especially important because it reveals a still new reality in Brazil. While part of the consumers who just arrived in the upper classes tries to incorporate codes of the traditional elite, others reinforced their self-esteem and began to impose their values and their desires. “It may seem repetitious but sales reps, receptionists and clerks are going to have to be increasingly stripped of any bias and better informed. Many of these new consumers have money and still do not know many categories of products and services,” says Ferreirinha.

Everything indicates the leap in higher income was being prepared more than ten years ago. A more recent study by economist Marcelo Neri showed that the phenomenon of classes A and B was mainly driven by the reinforcement in education. It is true that on average Brazilian education is still very poor. But it was once much worse – the number of years of schooling for new adults, that is Brazilians who are 30 years old today, increased to nine compared to six years of study for their parents at the age of 30. Furthermore, a good part of the new elite achieved a preparation much above the reigning standard in the country. When the economy began to get sophisticated – together with the opening to imports and especially stabilization of the currency – professionals with more education rose with the companies. "For the first time in history, the Brazilian executive has the chance to get rich," says Romeo Busarello, professor at Escola Superior de Propaganda e Marketing and director of the construction firm Tecnisa, in São Paulo. According to Busarello, the scarcity of qualified labor opened the way for many professionals to get rich early, based on big increases in salaries and bonuses. "An engineer who made 4 000 reais in 2005, today makes 12 000. He may not even have been ready to assume the functions pushed upon him, but he had to learn in a hurry.” In recent years, high standard real estate sales have begun to increase greatly in February, March and April due to variable remuneration pay to executives, the so-called “bonus effect”. “We discovered that many executives were using extra money to buy a new apartment,” says Busarello. Of course, million dollar bonuses will always be the privilege of a minority. But better salaries may be becoming a norm, at least while the country's economy remains strong. It is true that poverty will still be with us for decades, but there is a real chance for it to gradually be restricted to the more distant corners of the country. “If we know how to keep the good things we have achieved and advance faster in what we still need to do, we have a rare chance for success,” says Paes de Barros. ■

With a report by Nicholas Vital