Consumer Electronics Market in Brazil

Consumer Electronics Market in Brazil-Dissertation Writing Help

Executive Summary

Sales in 2008 Maintain Growth Scenario of 2007

Sales of consumer electronics in Brazil continued seeing moderate growth in 2008, slightly higher than in 2007. Sales were driven by aggressive strategies among key manufacturers, who launched new products and reduced unit prices. Consumers happily replaced their old consumer electronics with new models with superior technology. However, as a result of the global financial crisis, sales growth slowed down by the end of the year.

Rising Middle Class Stimulates Sales Growth

With Brazil seeing improving macroeconomic stability since 2005, the class structure has seen significant changes. According to Observer Brazil 2008, a research by the IPSOS Public Affairs, the Brazilian middle class saw a substantial rise in the review period, growing by more than 20 million Brazilians. With higher income levels and favourable financing solutions, these Brazilians have stimulated consumption growth in the country. Besides purchasing houses and vehicles, many C class households have also purchased durable goods including consumer electronics.

Digital TV Transmission Driving Sales of TVs

The adoption of digital TV transmission in December 2007 has driven sales of digital TVs in 2008, positioning the TV sector as seeing highest growth in 2008. Fuelled by increased competition among manufacturers increasing domestic production, unit prices of digital TVs continued falling in 2008, stimulating sales. Other sectors also benefitted by the availability of new technologies at falling prices, including laptops, digital cameras, and navigation systems.

Multinationals Strengthening Leadership in Sales

Following the profitable year of 2007, leading multinational manufacturers in Brazil have maintained their positive outlook for 2008 and invested heavily in increasing market shares. Besides increasing production capacity, manufacturers such as Philips, Samsung, LG, Sony, and Nokia have all expanded their product portfolios by entering new sectors, especially those seeing high growth. Given the superiority of their brands and products, leading manufacturers have strengthened their dominance over domestic manufacturers. Whereas some sectors still remain very fragmented, other sectors have become concentrated, with a few manufacturers accounting for the majority of sales.

International Turbulence Expected To Reduce Sales Growth in the Forecast

The global credit crisis began impacting the Brazilian consumer electronics sector in October 2008. The rising US dollar caused manufacturers to review prices, as many components used in these consumer electronics are imported and became more expensive. The impact on consumption of consumer electronics was still marginal in 2008, with the impact expected to be more clearly seen in 2009 as a result of higher unemployment and more expensive financing solutions. Overall volume sales growth of consumer electronics in Brazil are expected to see a significant slowdown in 2009, but growth will still be superior to other leading markets.

Key Trends and Developments

Availability of Consumer Credits Begins To Fall

With fears of rising inflation, the Brazilian Central Bank began raising interest rates in 2008, after three years of falling levels. In March 2008 the Central Bank raised the SELIC interest rate with 50 basis points to 11.75%, and consecutive rises also occurred in later months. By October 2008, the SELIC rate reached 13%.

More importantly, the financial crisis in the American economy began having a more severe impact on Brazilian credit, as Brazilian companies had difficulties in finding cheaper credit solutions abroad. The impact on consumers was still very superficial and mainly psychological, with many Brazilians losing money on falling stock prices. By the end of the year these factors negatively impacted consumer credit, which grew at a less accelerated rate than the previous years.

Current Impact

Given the time-span for the rising interest rate and international turbulence to affect the real economy, the impact of these events on consumer consumption in Brazil was marginal in 2008. One reason for this is that consumer credit, especially in retail sales, are significantly higher than the SELIC interest rate and increases in the latter has a small impact on the other. Brazilian consumers tend to pay close attention to their monthly payments and the number of installed payments, especially among consumers of durable goods.

As a result, most consumer electronic sectors continued seeing high sales growth in 2008, even though at a less accelerated pace than 2007. Most directly impacted were retailers who use third party resources to finance sales, who saw smaller sales than their competitors. More importantly, rising levels of default on payment among consumer have begun to worry banks and retailers.

Outlook

As the Brazilian economy remained largely unaffected by the global financial crisis in 2008, the effects are expected to be seen in 2009. The availability of consumer credit in Brazil is expected to fall, caused by the global risk aversion. Depending on the severity of the crisis, the effects will also be seen in 2010 and possibly even further in the forecast period.

With the international crisis helping to slow down the demand for Brazilian exports and consequently the Brazilian economy, rising inflation could very probably stop being a concern for the Central Bank. As a result, further increases in the SELIC interest rate are not expected in 2009. In contrast, the Central Bank could instead begin lowering interest rates to stimulate the economy.

Future Impact

It is today common belief among Brazilian manufacturers of consumer electronics and retailers that 2009 will be a tougher year, with falling sales not being unrealistic. There will be a general reduction of credit, affecting both retailers and consumers.

For sales of durable goods such as consumer electronics, monthly installments represent an important role in stimulating (and even allowing) sales, especially among the middle and lower income classes. As a consequence of worsened credit solutions for retailers, monthly installments solutions are expected to severely worsen in 2009, with higher interest rates and shorter payment periods. This is expected to negatively impact sales of consumer electronics, especially appliances with larger aggregated value such as TVs, computers, camcorders, and cameras.

The year of 2009 will show a greater amount of uncertainty among manufacturers, with strong market share gains for manufacturers that pursue the best strategies. With less credit options, consumers are expected to give a greater role to pricing and economy priced models are expected to benefit. With tightened budgets, both retailers and manufacturers are expected to invest less money in marketing.

Middle Income Class Driving Sales Growth

Steady improved macroeconomic conditions since 2005, characterised mainly by rising income levels and falling unemployment, have lead to a changing class structure in Brazil. This transformation has also been fuelled by government programmes such as the Accelerated Growth Programme (PAC or Programmea de Aceleração do Crescimento) and family support programmes such as Bolsa Família.

According to Observer Brazil 2008, research by the IPSOS Public Affairs, the Brazilian middle class saw a substantial rise in the review period, growing by more than 20 million Brazilians. According to the study, the participation of the middle class rose from 34% of the population in 2005 to 46% in 2007. Classified as the C class, this class represents total monthly household income ranging from R$ 1064 to R$4591, and its growth has been a result of decreases in the D/E classes.

As a consequence of the rising middle class, Brazil has substantially reduced its poor population, taking steps to becoming a more developed country. The growth of the C class has driven the average per household income in Brazil, which grew from R$1568 in 2004 to R$1957 in 2008. In 2008, the rising consumption of the C class has had a key role in stimulating the overall economy, despite international turmoil.

Current Impact

Besides purchasing houses and vehicles, many C class households have also purchased durable goods including consumer electronics. The increased consumption was most noticeable in 2007, but continued way into 2008 despite rising interest rates. Since the majority of these consumers make purchases through installed payments, leading retailers have aggressively provided improved payment solutions and have in turn seen positive returns.

Even though the rising consumption among the C class consumers positively impacted sales of most sectors, larger sectors such as TVs, computers, mobile phones, and cameras benefited the most from this trend. Falling prices of these appliances, combined with technological innovations, have created a strong demand for them. The C class is particularly searching for products that show status, and this has stimulated strong growth for appliances such as LCD TVs.

In order to deal with this increased demand, manufacturers have invested in increased production and marketing strategies. According to trade sources, manufacturers have chased volume growth and as a result profit margins have fallen.

Outlook

Despite international turmoil, the Brazilian middle income class is expected to continue growing over the coming years. Government programmes such as the Accelerated Growth Programme are expected to continue stimulating growth, and the economy is also expected to be fuelled by increased exports and international investments. Brazil is expected to getting closer to becoming a developed society with mass consumption.

Rising interest rates and adverse effects in the global economy in 2008 are however expected to slow down the pace of the middle class growth in 2009. Rising interest rates to contain inflation will have a particularly negative impact on the consumption of consumers, with less beneficial purchasing solutions at retailers.

Future Impact

The future impact of the rising middle income class is expected to be similar to that seen over the review period, with large sales growth still being probable in many sectors. With increased production among leading manufacturers, prices of many consumer electronics are expected to continue falling, becoming affordable for an increasing number of households.

Sectors which are expected to continue seeing high growth from this trend include leading products such as TVs and computers, but sectors with smaller household penetration are expected to see high growth as the C class consumers continue making purchases to increase convenience and show status. Examples of products which could benefit from this include DVD players and home and theatre systems.

In terms of distribution, C class consumers are increasingly making internet purchases and this is expected to become a threat for traditional retailers in the next five years.

New Technologies Seeing Falling Prices

Over the review period the Brazilian market has seen a constant fall in the price of new technologies, especially with regards to consumer electronic appliances. According to the electronics trade association Abinee the market has seen a desegregation of local value in products such as computers, TVs, and even mobile phones. Part of this trend is a result of the strengthened Brazilian Real, which has paved the way for a rise in cheaper imports into the country, but also due to the global decrease in electronic prices.

The falling price of new technology is also a consequence of increased production by leading manufacturers, who have seen strong sales growth and outlined optimistic future scenarios of Brazil as a mass consumer country. Stimulated by this potential market competition among manufacturers has increased, causing prices to fall. The government has also stimulated this broadening of key technologies to reach the mass population, especially through promoting economy converters and computers.

Current impact

The falling price of new technologies has led to a fast change in consumer purchases, especially in sectors where prices have seen the greatest falls. For example, a 42´ inch LCD TV cost approximately R$20000 in 2004, but since then its price has fallen to less than a quarter being found for R$4500 in 2008. This has resulted in a high demand for these digital TVs, with manufacturers having to increase production to meet demand.

Others sectors which have seen a large fall in prices include computers, especially notebooks, which saw a large fall in prices in 2008. Notebooks have, as a result, become one of the sectors with high sales growth, rising from 10% of total computer sales in 2006 to 33% in 2008. Other sectors which have seen significant falls in unit prices include smaller electronic appliances such as MP3 players, digital cameras and navigation systems.

With the prices of technologies falling, manufacturers increasingly understand the importance of producing economy products for the broader population. This strategy may undergo a broad process of development as newer technologies are produced within shorter time-periods and less expensively, so that consumers will enjoy the greatest benefits. Falling prices have even allowed economy brands to begin producing and importing these new technologies.

Outlook

With the development of the Brazilian economy expected to remain positive in the coming years, price of new technologies are expected to continue seeing falling prices. Competition among manufacturers and retailers is expected to increase, pressing prices. With a greater number of manufacturers increasing their production capacity in the forecast period, economies of scale will provide room for further price reductions.

In coming years we will see a continued popularisation of consumer electronic appliances, especially in notebooks and mobile phones. With a greater variety of new models available at cheaper prices, consumers will be eager to acquire and then replace them with their existing appliances. It is expected that these products will become increasingly popular and will be distributed through stores at lower prices.

Future impact

Falling prices of new technologies are expected to continue stimulating consumption growth in the forecast period. Some sectors which were previously considered a luxury item, such as notebooks and digital TVs, will reach mass market sales. In many cases, this will lead to the complete extinction of old technology, such as analogue camcorders, analogue cameras, and CD players.

From the supply side, the development of new technologies is happening at a faster pace and becoming increasingly widespread among competitors, reducing the costs of new product development and product launches. Consumers are in turn expected to increasingly switch to up-to-date technological features which provide greater convenience and entertainment, thus lowering replacement cycles.

Given these conditions, manufacturers are expected to continue investing in developing cheaper and popular technologies to increase market shares. Sectors which will particularly benefit from this scenario include smart mobile phones, digital TVs, and digital cameras. Niche sectors such as navigation systems and in-car DVD players might also be significantly impacted by this trend by seeing high volume sales over the forecast period.

Leading Manufacturers Increasing Domestic Production Capacity

In 2007 and 2008 leading manufacturers of consumer electronics in Brazil have seen favourable market conditions, with strong sales growth in many sectors. To deal with this increased demand and having positive expectations on the future conditions, these manufacturers have invested in increasing the production capacity of their domestic factories. The majority of them are located in the tax subsidised zone of Manaus, but other cities seeing investments include Ilhéus, São Paulo, and Curitiba.

Both domestic and multinational manufacturers have announced investments in increased domestic production in the review period, including manufacturers such as Samsung Electronics, Positivo Informática, Sony, Panasonic, Nokia, LG Electronics and Pioneer. The majority of this increased production is directed to important sectors which are seeing strong growth, such as digital TVs, computers, mobile phones, digital cameras and in-car media players.

These investments are a consequence of the establishment of the digital TV standard in Brazil in 2007, which has stimulated demand of LCD TVs, but also as a result of a growing number of Brazilians who are using computers for work or leisure on a daily basis.

Current Impact

Investments made by manufacturers to increase domestic production in Brazil are having a very positive impact on the entire industry. By seeing gains from economies of scale, manufacturers making these investments are able to reduce costs and increase sales, being in many cases even able to export production to other markets, especially in Latin America. With increased production, manufacturers are also able to increase distribution and further stimulate sales. The industry as a whole is also benefitting from greater job creation and less dependence on imports.

The benefits of these investments are also reaching consumers. Besides seeing reduced prices, consumers are also seeing a greater variety of models, both of which have stimulated the interest of consumers in such products. With stimulated consumption, replacement cycles are falling and older technologies faster becoming extinct.

Outlook

With many leading manufacturers making large investments over the review period, investments into increased production are expected to slow down over the forecast period, instead highly dependent on the development of sales during the year, which is expected to be negatively impacted by macroeconomic conditions.

Other factors which might stimulate increased investments on production over the forecast period include greater fiscal incentives by the government and increased taxes on imports. Favourable exchange rate fluctuations, such as the depreciation of the Brazilian Real, could also increase the advantages of Brazilian production for exports to other countries.

Future Impact

Despite lower investments on increased production expected during 2009, the investments made during the review period will impact the consumer electronics industry in coming years. With greater production capacity, manufacturers will be better equipped to quickly increase production due to increased demand, but will also have the option of reducing production in adverse conditions.

With these conditions, prices of leading consumer electronic sectors such as digital TVs, computers, and mobile phones are expected to continue falling in 2009, leading to continued stimulated sales. Brazil is also expected to become less dependent on Chinese imports of consumer electronics and increasingly become an exporter to other Latin American countries.

An example of a consumer electronics sector suitable for export is the mobile phone sector. With Brazil being the biggest country and market in Latin America, many leading multinational manufacturers have production facilities in Brazil, now also being used for sales in other Latin American countries. Accordingly, estimates by the trade association ABINEE say that 30 of the 78 million mobile phones produced in the country in 2008 were destined to the international market, and that this number is expected to grow during the coming years.

Branding Grows in Importance As Manufacturers Fight for Market Shares

In line with many other consumer markets in the Brazilian economy, the consumer electronics industry has seen very favourable development in the years of 2007 and 2008, with manufacturers seeing high sales growth. With the market seeing falling entry barriers and increased competition from smaller manufacturers, key manufacturers have found the need to increasingly turn to branding to strengthen market shares.

Today, leading consumer electronic brands in Brazil are commonly found sponsoring football teams and sporting events, or having famous TV actors or singer as front figures for the company brand. When launching a new product, manufacturers are increasingly promoting the key characteristics of the product, such as being the smallest, thinnest, or lightest product in the market.

With marketing campaigns originally concentrated mainly to TV and paper channels, manufacturers have also increasingly prioritised presence in points of sales. Today, leading manufacturers have commonly designated showrooms and company salesperson providing assistance at retail channels. Manufacturers are also increasingly providing colourful product brochures at these channels.

Current Impact

Increased branding by manufacturers is having a positive impact on the consumer electronics industry in Brazil. Besides stimulating sales among consumers, increased branding is also making consumers more aware of the differences between products and brands. In many cases this has put upward pressure on unit prices, with consumers willing to pay more for a superior brand and product.

Given that multinational manufacturers are commonly associated with superior technologies and invested most to promote their stronger brand names, they have mostly benefitted from this trend. With fewer competitive advantages to fight on, smaller domestic manufacturers have focused mainly on pricing. Sectors most heavily impacted by this increased branding included key consumer electronic sectors showing high grow, including digital TVs, digital cameras, laptops, and home theatres.

Outlook

The expected slow down in the Brazilian economy in 2009 will result in slower growth of consumer electronics sales, reducing manufacturers’ investments and marketing budgets. But with limited sales growth opportunities, branding will become increasingly important for manufacturers in stimulating sales and maintaining market shares.

Leading manufacturers are expected to adopt similar branding strategies to those seen in the review period, focusing on media marketing campaigns and points of sales efforts. Over the forecast period an increasing number of manufacturers are expected to have showrooms, company salespeople and brochures at leading retail channels which are expected to stimulate sales.

Future Impact

Similar to the review period, branding will have a key role in driving sales of consumer electronics over the forecast period. With less favourable economic conditions, consumers will be willing to purchase high quality products which are durable and will last for a long time. Those sectors affected by this trend will be those with traditionally high replacement cycles such as such as TVs, computers and hi-fi systems, but even camcorders and navigation systems. Despite being associated with higher unit prices, leading manufacturers with strong brand names are expected to gain from this trend as customers choose them instead of lesser known brands.