- BRAZIL´S GURU

Brazil Cities
Sao Paulo and its lights: in 15 years, the city could have the sixth largest GDP in the world

The human imagination used to hold the future of large cities in a dismal light. The Metropolis of film director Fritz Lang enslaves workers and forces them to live underground. In Blade Runner, the Los Angeles conceived by Ridley Scott is a dark hell where humans and androids fight for their lives. The Gotham City of comic books is home to so many criminals that not even Batman is able to pacify it. Fortunately, things don't look all that bad in real life, especially for Sao Paulo, the main Brazilian megalopolis. Today, the Sao Paulo metropolitan region is the fifth largest agglomeration of human beings on the planet - trailing Tokyo, New York, Mexico City and Mumbai. Nearly 19.4 million people live in the city of Sao Paulo and the other 38 cities that ended up merging borders, forming the country's economic heart. The good news is that rather than show signs of exhaustion, Sao Paulo is proving to be one of the most fertile places in the world for business opportunities. That is the conclusion reached by a study conducted by British consulting firm PricewaterhouseCoopers, obtained with exclusivity by EXAME magazine, which projected the population and income of some of the main metropolises in the world for the year 2025. According to PwC, Sao Paulo will gain another 2.1 million inhabitants over the next 15 years, reaching 21.4 million people. Over that same period, the region will practically double its GDP to 782 billion dollars in purchasing power parity, which will position it as the sixth richest metropolis in the world - moving up four positions from today's ranking.
What is most important is how this wealth will be distributed (The most important is how...). The PricewaterhouseCoopers consultants project a substantial increase in the number of people with per capita income of more than 4500 reais per month, the highest bracket analyzed in the study. The consulting firm estimates that Sao Paulo currently has 4.5 million people in that category. In 2025, there will be 9.5 million inhabitants in that same situation. Sao Paulo will then have more people with that consumer potential than London and Paris, two of the richest and most sophisticated cities in the world. Of course, the largest city in Brazil will still have more poor than Paris, which statistically no longer has any low-income population, the current situation for 22% of Sao Paulo's inhabitants. Regardless, if PwC's projections are confirmed, the coming years shall be marked by intense social mobility in the region.

FROM A CONSUMPTION perspective, these transformations shall have brutal impacts. "The middle class will get stronger, with the advantage that most of the growth will be precisely in the higher income brackets," says economist and survey coordinator Yael Selfin, of PwC in London. "Although the Chinese and Indian cities are in greater evidence today, Sao Paulo should offer better opportunities for companies that work with higher value-added products and services, because China and India will still need to pull many people out of poverty." PwC's projections are encouraging, especially since they indicate the region will remain on the path of sustained growth for another decade and a half. "We believe the temporary surges in consumption, such as those that succeeded the Cruzado and Real plans, will be replaced by a more gradual and consistent growth in consumption," says Selfin. PwC's projections are founded on an estimated average annual growth in the region's GDP of 4.2%.
The real estate sector is one of the areas that should benefit the most if these projections hold true. "We are optimistic, and we are not the only ones. We have just received 1 billion reais from investors for our expansion plan," says Ubirajara Spessoto, general director of Cyrela, the largest real estate developer in the country, which captured funds at Bovespa on October 27. Spessoto spent the entire month of October in a marathon of meetings with investors in the United States, Europe and Brazil. The slides used during Cyrela's road show have a lot in common with PwC's survey. They show a combination of growth in population with an increase in salary mass and a reduction in the number of people per dwelling.

"It is the right formula. It translates into greater demand for new properties and more people with the capacity to realize their dream of owning their own home. Sao Paulo is perfect for this expansion, because it still has a low level of verticalization." As always, real estate business makes room for the sale of a broad range of products, especially in the higher income brackets. This includes furniture, household appliances and several household services, such as telecommunications. "A population that size and with that income profile practically eliminates the barriers in our sector from a demand perspective," says Renan Leal, executive director of strategic planning at Telefônica. "The connected home, where the resident is able to control illumination and sound systems from a distance will be a well-disseminated reality in 15 years." He also adds that entertainment over the Internet, such as films by demand, will also evolve a great deal over coming years.The fact is Sao Paulo population's rising income creates opportunities in practically every segment, from ready-made foods to luxury products. The city currently represents 70% of the country's luxury market, estimated at 5.9 billion dollars per year. The 4.5 million people who are going to enter the over 4500 real income bracket are candidates to feed the sophisticated products and services sector. "It is the climbing middle class that turns the wheels of the luxury economy," says Carlos Ferreirinha, partner at MCF Conhecimento, a consulting firm specialized in this market. The air travel sector is another that shall be benefited over coming years by the so-called aspirational consumption - the kind that is motivated more by desire than by need. "The number of airline passengers should triple in Sao Paulo, and in Brazil, by 2025," says Andre Castellini, from the consulting firm Bain & Company. "After furniture, household appliances and cars, the tourism is the Brazilian population's greatest ambition."

The number of airline passengers shall triple by 2025, especially due to tourism

The city of Sao Paulo was founded 455 years ago and remained dormant for centuries. It only began to become a more dynamic center of development over the past eight decades, especially after the success of coffee production in the state, and later on, industrialization. But it was in the 1970s that the city entered its phase of demographic explosion, almost tripling in size between 1970 and 1990. That is also when characteristics that have become Sao Paulo's trademarks established themselves - violence, chaotic traffic, shantytowns. Today, the challenge is to gradually modernize itself, and little-by-little to untie the knots that have accumulated over all these years. The city's airports are strangled - and without them tourism cannot grow. There is no more room on the highways - but more and more cars continue to arrive. Public authorities play an important role to avoid having this increase in consumption become urban chaos. "Fifteen years from now we will probably have vehicle rotations on alternating days, urban tolls, but we will also have more subway lines and we may possibly be discussing a second beltway," says Paulo Cardmone, of CSM Auto, a company specialized in information for the automobile market. He says the potential for consumption opened by PwC's projections would significantly increase luxury car sales. The region's fleet would undergo strong modernization, also making room for the city car, small and economical vehicles used basically to get back and forth to work.

Infrastructure must be modernized for growth not to become chaos

EXAMINING SAO PAULO'S EXPERIENCE from a historical perspective reveals that the city is getting ready to repeat, with several decades of delay, the trajectory of other great metropolises in the world. Up until the beginning of the 20th Century, New York had a chronic problem with violence and did not know what to do with the mountains of horse manure. But it was already an important industrial center and was getting its first subway line - and it has become the power we know today. Little by little, Sao Paulo is beginning to follow that same path. That makes room for a cultural evolution as well. "A large part of the middle class recently climbed up from lower classes and is still quenching its thirst of repressed consumption," says Marcos Pazzini, from the consulting firm, Target Marketing, specialized in consumption. After buying and improving his home, car and wardrobe, the consumer tends to rationalize consumption. "The tendency is for him to valorize his children's education more, and financial investments." Today, private schools are responsible for only 15% of students enrolled in Greater Sao Paulo, fewer than 600,000. "This number could double with the increase in income," says Renato Souza Neto, of Prismapar, specialized in business finance, with clients in the education sector.
Projecting the future is risky business. Surprises are part of life, but that is not always something bad. For the founders of the Tok&Stok decoration chain, French couple Ghislaine and Regis Dubrule, the Sao Paulo of today was unimaginable 30 years ago, when they opened their first store totaling 80 square meters in the city. Today, Tok&Stok has 28 stores in 11 states of Brazil. Graduated in political science, the Dubrules thought of taking on academic careers. The idea for the store emerged when the couple had a hard time furnishing their home. "Everything was either too expensive or too popular," says Paul Dubrule, son of the chain's founders and responsible for Tok&Stok's finance area. Obviously, the Dubrules did not have a study capable of showing them what would happen with the Brazilian economy. They went through periods of recession, hyperinflation and witnessed a radical change in Brazilian consumer behavior, which remained practically isolated from the world until the 1990s due to the economic barriers the country imposed on international trade. "Today, people want to know much more about product quality. They want to know if the furniture is made with certified wood and if it complies with global standards. The scenario has changed, but it looks as, if not more, promising than when by parents began," says Paul.

With a report by Roberta Paduan