A Report On Fast Food Business Investing In Brazil Report
An emerging market is characterized by low to middle per capita income, the economy in transition, economic reforms, and liberalization and globalization. Emerging market economies are also referred as fast growing economies. Russia, India, China, Brazil, East European countries are examples of some of the emerging market economies. Around 80% of the world, population live in such countries, and their share in the world economies constitute 20%. Emerging economies are often referred as transitional, meaning thereby that they have started to open up their markets. The open market economies are being promoted in place of closed economies. They strive to bring efficiency and transparency in the capital market, and reform exchange rate to instill confidence in the investors. They promote both local and foreign investments, and the regular inflow of foreign investments is indicative of increasing confidence of the foreign investors in the emerging economy. The businesses from the developed economies and other foreign investors find emerging markets as outlets for their expansions such as for the establishment of a factory or to set up their branches. On the other hand, the recipient nation is also benefited by the creation of employment opportunities and the sharing of the technical know-how. It also helps increase the gross domestic product of the country which receives investments. At the same time, the gap between the emerging market and the emerged one diminishes. Emerging markets are becoming unstable; these offer opportunities to investors to take risks for larger benefits. However, risk factors involved in investing in emerging economies are far greater than investing in developed markets. The 1997 Asian crises exhibited this when there was a reversal in the portfolio flows (Heakal, 2003).
Though, there have been considerable improvements in the economic, political, and social conditions in emerging market countries during the last two-three decades, there are still wide differences in these conditions in different countries. Hence, establishing or carrying on a business in a foreign country is, doubtlessly, fraught with danger. There are risks in promoting a business in a country the economy of which is still emerging, and also advantages. In this treatise, we shall strive to assess risks and advantages involved in carrying out fast food business in Brazil.
Among risks involved in investing in emerging markets, the first is the country risk, and the second arising out of lack of transparency and poor corporate governance. With the growth of emerging market economies, the financial markets have also grown, and the public listings of companies have immensely increased. In such markets as in India and China, the publically traded companies have increased tremendously. They have doubled or even trebled during the last decade. Some of these particular companies have grown to become global players having large market capitalization and operations beyond the domestic markets. Recently, many Chinese, Brazilian, and Indian companies have grown in stature to become global players such as Tata Group of India and Geradau Steel and Vale of Brazil. The risks in emerging markets include currency volatility, country risk, unreliable market measures, information gaps and differences in accounting, corporate governance, and discontinuous risk (Damodaran, 2009).
In most of the emerging markets, the local currency is volatile in terms of exchange rates and inflation, too. In some emerging economies, the exchange rate for the foreign currency is fixed. Consequently it gives rise to the illusion of stability, but the currency has to be valued or devalued in such cases, and there are considerable changes every time. Thus, there is the lack of risk-free rates. Talking about the country risk, the growth in emerging market economies is quite impressive. However, the growth brings with it a considerable amount of macroeconomic risk. Thus, the company operating in such a market runs the risk of economic collapses, economically and politically. The third risk arises due to the unreliable market measures. Under the circumstances, publically traded companies draw liberally from the risk’s market-based measures. In fact, emerging markets not being liquid companies have to borrow from banks instead of raising funds by issuing market-traded bonds. Fourthly, in emerging markets rules do not require to disclose much information contrary to a developed economy. Such vital information as earnings, total investment, and debt are withheld in most of the emerging markets. Besides information gap, there are differences in accounting standards due to which it becomes difficult to compare data with that of developed markets. Fifthly, the corporate governance in the emerging markets poses problems both due to history and the environment. A majority of companies in emerging markets are family-owned businesses. Many of which might have changed into publicly traded companies. But still the control lies with the families through a variety of measures such as with shares having different voting rights, cross-holdings, and pyramid holdings across companies. Other investors are hard put to challenge the top management due to legal restrictions and other such measures. Consequently, changing the management under emerging markets is much more difficult than in developed economies. Lastly, there is the risk of nationalization or terrorists in the emerging market countries (Damodaran, 2009).
Brazil, with a population of around 195 million, is one of the largest democracies of the world. For decades, it suffered from rampant corruption, runaway inflation, and military coup like other South American countries, but with transitioning to the democratic system in 1985 things changed. However, it still is economically weak due to rising inflation till the promulgation of the “Plano Real” in 1994 with the introduction of a new currency which helped reduce the inflation to the single digit. However, doing business in fast food in Brazil is as problematic as in any other emerging market. The first problem is political instability as the country is still not out of the woods despite decades of a lull, and absence of coups and regime overthrows. There are rampant corruption, rising inflation, and income inequality. The legacy of instability is still evident in its arbitrary tax system. Consequently, the fast food business in Brazil has been adversely affected by the tax system. The Brazil Fast Food, a fast food company, has been seriously plagued by tax liabilities. The company disputes the computation of tax which it claims to have been wrongly calculated. However, it put its tax liability at $3.2 million in its balance sheet. The company is also facing a dispute over taxes on the payment of royalty received by it from its franchisees. Hence, the company has a reservation that these payments do not attract any municipal tax on services received. However, the Brazilian authorities believe to the contrary. The company has, nevertheless, provisioned $4.3 million on this score (Waters, 2013).
As the characteristic of an emerging market, it is an insider controlled company. The promoters Jose Ricardo Bomeny and Romulo Fonseca own together 57.7% of the company’s share outstanding, and other insiders control another 3%. This company made an agreement to sell its owned real estate properties numbering eight to these investors at fair market value as claimed by the company. The company gained from the sale. The franchisee of 64 of its restaurants has been given to Fonseca and Bomeny, and these units pay royalties like any other franchisee. According to annual report 2012 of the company, no other party-related information is there (Waters, 2013).
The success in business in Brazil depends upon the adaptation to the Brazilian business culture which is characterized by the development of strong personal relations. Personal relationship development by frequent visits to Brazil is the cornerstone of productive business through partnerships. Establishment of a branch or appointment of a representative in Brazil is necessary for the success of a venture there whether it is fast food or any other business. The medium of exchange is heavily regulated by such institutions as National Monetary Council, Banco Central do Brasil, Security Exchange Commission, National Council of Private Insurance, and Superintendence of Private Insurance. (Fast Food in Brazil, 2014). McDonald and Dunkin are believed to have been well settled in the Brazilian environment. Pizza Huts is an example of a company which entered the Brazilian market and had to reduce its presence there. It had to redesign its business strategies to attract consumers of Brazil and continue to earn profits. Subway encountered so many difficulties in Brazil that it had to abandon its business there. (Risner, 2001). The Food and clothing sectors have stabilized in Brazil, and only the best well planned company can survive and grow in Brazil. The advertising in Brazil is very expensive (Risner, 2001).
Brazil, the seventh largest economy of the world, registered an annual growth rate of 2.5% during 2013, and Gross Domestic Product of $ 2.3 trillion, is the fifth largest consumer market in the world. The inflation figure was 6.3%, urban unemployment 4.9% in 2014, and wages continued to rise. The benchmark of Brazil’s Central Bank was historically low at 7.25% during October 2012. Berger King, McDonald's, and others have increased their value share during the last two years. In 2010, Burger King had been acquired by the Brazilian private equity group in order to increase its share by outlet expansion; primarily in retail locations and cities where there was no chain available as yet. The sale of chained fast food in Brazil was led by McDonald with 32% value share in 2013. The fast food is estimated to grow by 46% at the 2013 prices. It will be possible due to the expansion of the three biggest group of fast food namely bakery product fast food, other fast food, and burger fast food. These groups are slated to capture a combined value share of 91% by 2018. Pizza Hut opened its first establishment in Brazil in 1989. However, the chain of fast food restaurants in Brazil included besides Pizza Hut, KFC and Taco Bell (Fast Food in Brazil, 2014).
As per the Senior Food Analyst, fast food consumption in Brazil is extensive as one out of every two Brazilians consumes this type of food. With a large population, inflation in single digit, GDP rising, and the growing consumer market make Brazil a good destination for fast food business. However, there are several factors conducive to doing fast food business in Brazil. With international opportunities expanding due to the global media promoting brand names, trade agreements and economic integration like MERCOSUL and NAFTA have led to the reduction of barriers existing previously. In addition to these broad external impacts, the internal factors of nations have influenced positively the fast food businesses in Brazil. These factors include enhanced demand for goods and services, growing urbanization and an increase in mobility. In addition, it includes increasing number of women in the workforce, surplus disposable incomes, and change to service economies that have contributed to the thriving of the fast food business in Brazil. (Risner, 2001).
Thus, the fast food business in Brazil being well established and well entrenched, it requires extra effort, planning and business strategies to succeed. McDonald, which opened its first restaurant in Brazil in 1979, has more than 800 restaurants and 700 kiosks in addition to 100 McCafe units situated in more than 190 Brazilian cities. However, due to reduced economic barriers, reformed tax laws, and improved political situations minimized the hurdles in fast food business in Brazil. Political stability and democratization of the country are great inducements to local as well as foreign investors. The increase in population and economic growth of people has escalated demand for fast food in that country. With the increasing demand for fast food due to rapid urbanization, the environment in Brazil is conducive to fast food business, but not to for fast food chain. The growing population being poor, there are little prospects for the fast food chain. Nevertheless, restaurants and privately owned small kiosks are more likely to succeed. Hence, due to my perception, the time is not opportune for doing fast food chain business in Brazil.
Damodaran, A. 2009. Volatility Rules: Valuing Emerging Market Companies. . Stern School of Business. [Online] Available at: <http://people.stern.nyu.edu/adamodar/pdfiles/papers/emergmkts.pdf> [Accessed 1 April. 2015].
Euromonitor.com, 2014. Fast Food in Brazil. [Online] Available at: <http://www.euromonitor.com/fast-food-in-brazil/report> [Accessed 1 April, 2015].
Heakal, R. 2003. What Is An Emerging Market Economy? [Online] Investopedia. Available at <http://www.investopedia.com/articles/03/073003.asp> [Accessed 1 April 2015].
Risner, M. 2001. Successful Fast-Food Franchising In Brazil and the Role of Culture: Four Cases. MA. University Of Florida.
Waters, D. 2013. Brazil Fast Foods Corp. Is Emerging Markets Restaurants At A Discount – BOBS, [Online] OTC Adventures. Available at: <http://otcadventures.com/?p=727> [Accessed 1 April 2015].
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