Irrational Exuberance,
Brazilian Style.

by Alcides Ferreira          Week of March 17 - 23, 2000

Two top Internet executives paid visits to Brazil in the past week. While Yahoo!’s Jerry Yang, whose fortune in Yahoo! stocks is in the US$3 billion ballpark, attracted a youthful crowd to his speaking engagements, Oracle vice-president and e-commerce specialist Mark Jarvis whispered his secrets mostly to top executives.

But what’s really new regarding the e-business scene in Brazil – a strong aspect for the companies both visitors represent? Not their speeches, but a report released by a major Brazilian bank to big investors and selected media outlets, which tries to answer key questions about the issue. The research work was conducted by one of Brazil’s top equity analysts, and made available to us on condition that the source not be identified.

The document says there are between 3.4 and 3.8 million “cybernauts” in Brazil, meaning about 2.4 percent of the population is online. That figure alone makes Brazil the biggest Internet market in Latin America in terms of total number of users and penetration rate. That user total is expected to jump to 9 million by 2003.

Last year, only 900 thousand websurfers in Brazil used the Internet to make a purchase of any kind. The research showed that 57 percent of web consumers are concentrated in the states of So Paulo, Rio de Janeiro and Minas Gerais – Brazil’s more developed southeastern region. Also, 63 percent of all who bought something were males, and their buying preferences hovered around simpler products to order: CDs (20 percent), books (18 percent) and software (16 percent).

Worthy of note is the fact that a sizable chunk of cybernauts is still afraid of buying over the Internet: 27 percent simply would not send their credit card numbers anywhere through cyberspace, a scenario not much different from what happens in the U.S. and Europe. According to the bank report, this is the main reason why e-business is still at a very early stage in Brazil. More numbers support this: of Brazil’s top 500 companies, 302 have websites, but only 29 of those (about 10 percent) use the Internet as a distribution channel, and only 17 (6 percent) maintain complete e-commerce sites.

Another key point: it’s still quite difficult for the average Brazilian to own a computer. In the So Paulo metropolitan area, one of the wealthiest regions in the country, average annual income in 1999 was R$11,400 (around US$6,700), so the average consumer would spend 13 percent of his or her annual income to buy a personal computer equipped for Internet access.

An inadequate infrastructure, which results in astonishingly high freight and delivery costs, is another obstacle that needs to be overcome. The Po de Acar Group (NYSE: CBD) charges R$10 (almost US$6) to deliver goods bought through its website in the So Paulo city area. However, the average purchase totals only R$17 (about US$10), so the average consumer is spending an additional 60 percent of the amount purchased just to have the items delivered. This is happening in Brazil’s biggest city, so it’s not hard to imagine what can happen to shipping costs elsewhere in a continent-sized country. The lack of an efficient freight and delivery infrastructure can also be a barrier to newcomers to e-business in Brazil, since only major retailers with their own logistics and support systems would be able to compete.

A final point to consider: Brazil’s web consumer profile is completely different from that of the country’s average retail consumer. The average supermarket consumer for example is an older female, not a young male as is the case on the Web.

All of these factors have not kept Brazilian companies away from the Web. The already mentioned Po de Acar Group is a good example: it has a well-structured Internet operation, although its Web sales last year totaled only R$11 million (about US$6 million), only a small fraction of the company’s net retail sales figure for 1999: R$5.5 billion (about US$3.2 billion). Recently, Po de Acar announced that all its e-commerce operations will be concentrated on a new site called “Amelia”. The name Amelia is a reference to a well-known, old Brazilian Carnaval song – the lyrics say that Amelia was “the real woman” because she has “no vanity at all”. Amelia, then, would be the prototype of the woman dedicated to the home, and the site’s opening page says it calls itself Amelia “so you won’t have to be one”.

Other companies have been attempting to pick up on what’s been done by successful US Internet companies. The Saraiva Group, a traditional Brazilian publisher and bookstore chain, created an e-commerce website dedicated to selling books and CDs. Its Web sales for 1999 totaled around R$2 million (about US$1.1 million), or less than 2 percent of Saraiva’s total sales for last year.

A completely virtual example, sold only about R$1 million (about US$588,000) last year – the site sells CDs, books, software and toys, and is owned by GP Investimentos, a private equity fund created by well-known entrepreneur Jorge Paulo Lemann. He is the majority shareholder at large Brazilian companies such as top brewery Brahma (NYSE: BRH) and retailer Lojas Americanas.

This is pretty strong evidence that “irrational exuberance”, as described by the Fed’s Alan Greenspan, has definitely touched down in Brazil as well. Difficulties and obstacles to e-commerce notwithstanding, GP Investimentos paid US$5 million last year to buy BookNet, a book-selling site, from Rio de Janeiro entrepreneur Jack London – a Brazilian in spite of his English name. BookNet was then overhauled and converted to Submarino. In other words, GP paid about 10 times BookNet’s annual sales volume in order to buy the company. (NASDAQ: AMZN) is traded at about 8 and a half times its estimated sales for 2000, and E-toys (NASDAP: ETYS) trades at just over 5 times its sales volume.

In spite of all that, ask anyone in Brazil if the savvy Mr. Lemann is now thought of as a man who burns money. The answer is absolutely not.

Related sites:
Po de Acar's new e-commerce site, Amelia (Portuguese only):

Submarino (Portuguese only):

Saraiva online bookstore (Portuguese only):

Lojas Americanas (Portuguese only):

Brahma (for the English site, click on "indice" and select "english version")