Aug 13 From cigarettes to lipstick to sandals, exports have emerged as a silver lining for Brazilian consumer goods companies that are suffering the worst domestic slump in over a decade.
With Brazil’s currency, the real, at a 12-year low, foreign sales have kept several companies in the black, helping them outperform rivals focused on the local market, according to a Reuters analysis of second-quarter earnings.
Shoemaker Alpargatas SA, cosmetics firm Natura SA and tobacco producer Souza Cruz SA all relied on surging revenue abroad last quarter to offset flat or slipping Brazilian sales.
Their success bolsters hopes that Brazil can diversify beyond the raw materials that now dominate exports, restoring manufacturing competitiveness and opening one of the world’s most closed economies.
To expand on gains, the companies must fight mounting supply chain inflation and strengthen foreign commercial ties that withered during a decade-long domestic boom, say analysts and industry groups.
“The only companies that have been able to benefit are those that already had a track record abroad,” said Guilherme Moura Brasil, an analyst at the Banco Fator brokerage who covers Alpargatas and rival shoemaker Grendene SA.
In total, 15 companies on the Sao Paulo stock exchange’s Consumer index have reported foreign revenue in their latest earnings. That is less than half the index. Their combined operating profit, measured by earnings before interest, taxes, depreciation and amortization (EBITDA), rose nearly 20 percent from a year earlier.
At the 16 other companies on the index that have reported earnings so far this season, EBITDA fell about 10 percent. Six other companies on the index have not yet reported earnings for the quarter.
NO PANACEA
International sales rose for at least 11 of the 15 companies reporting foreign revenue, with growth averaging around 40 percent, in line with the U.S. dollar’s rise against the Brazilian real.
Exports are no panacea, of course, especially for consumer-focused companies in Brazil, where rising unemployment and record-low consumer confidence have pushed down retail sales for five straight months on a seasonally adjusted basis.
Climbing interest rates and nearly 10 percent inflation are also driving up costs and making it hard for Brazilian companies to remain competitive in global markets.
But the biggest drag on exporters in recent years had been a currency that hit a 12-year high as recently as 2011. Strong commodity prices offset the headwinds for exporters of soybeans and iron ore, but manufacturing shrank to about a third of Brazil’s exports in recent years, down from more than 50 percent a decade ago, according to World Bank data.
“Brazilian companies have been gone from some markets for so long that they need to reintroduce themselves as if they were brand new exporters,” said José Augusto de Castro, president of the Foreign Trade Association of Brazil.
The shorter production cycles for apparel make it a strong candidate to lead recovery of manufactured exports, Castro said.
“We’re seeing the fruits of a strategy from years ago, when we sacrificed operating profits so we could invest more abroad,” said Alpargatas Chief Executive Marcio Utsch on a recent earnings call.
“We’ve got several legs of support. We’re not a peg-legged player depending just on Brazil,” he added. Foreign business grew from 2 percent of Alpargata sales in 2005 to 40 percent of revenue and more than half of operating profit currently.
Textile industry group ABIT surveyed producers focused solely on the domestic market and found about four in five have plans to export eventually, a rate that has doubled since the start of the year as the exchange rate moved 30 percent.