Everyone is buying on credit

Brazilians these days, even the most humble of them, seem always to be stuck
in endless installment payments. The other side of the coin is that modern life’s
little gadgets are quickly arriving in many more houses than ever.

Carlos Emmanuel da Fonseca Barreto

In July 1994, the Real Plan controlled an inflation rate that haunted the Brazilian economy for many decades. The
first reaction to this episode was a boost in investments, consumption and sales. But it also changed consumer
behavior due to the increase in average purchasing power. Brazil contains a large lower-class population that for a long time
has felt deprived of technological advancements. Today, firms are learning to adapt themselves to this new consumer
class, creating conditions for purchases and offering new products totally focused on their needs.

In a one-bedroom house in a Rio slum a family of five might live on a $410 monthly income. The introduction of
the real did not help them afford a bigger home, but for sure helped them live a little more comfortably. They no
longer need to watch television at their neighbors; they may listen to compact discs; they now cook on a brand new
stove; and they keep their clothes inside a recently purchased four-door closet.

None of this was a gift from generous entrepreneurs or politicians. In the new Brazilian economic setting,
without inflation, the lower level portion of the population learned how to budget their earnings and the companies
discovered the consumption power of this class. The real brought an increase in the average Brazilian standard of living.
Day-to-day life is still hard for these people, but they can buy a lot more than in the past.


The rise of the lower classes purchasing potential was recently tested by a survey conducted by the Brazilian
consulting firm Target. The survey indicated that the annual per capita consumption of the social classes C, D and E (families
with earnings up to $1,120 monthly) increased almost four fold, from $225 in 1983 to $880 today.

It is important to notice that the lowest class, known as E, was the biggest winner changing from an $8 monthly
earning to $252 in the last 13 years. According to Target, in 1983 this new purchasing power represented 11% of the
total country’s consumption. In the real era, they represent 36% of the national consumption.

This figure encompasses 101 million
workers who in 1996 will spend $89 billion. The most important factors
contributing to this increase are the price stability, availability of
credit and cheaper but better products. Until now, in Brazil a cheap
product was synonymous with a bad product. Since 1994, however,
companies have been working to change this equation.

Japan’s Sanyo, for example, formed a joint venture with the American firm Newtech to produce in Brazil
electronic equipment with good quality at lower prices. They are investing $10 million to manufacture modern designed
products. An important economic theory says that when consumers raise their incomes, the first thing that they look for is
better quality. Contrary to what happens to the elite, the lower classes know the real value of money. They do not just
look for cheaper prices. They may pay a little bit more for a product if they consider it to be of better quality.

In foodstuff alone, the classes C, D and E will spend $27 billion during 1996. This means a better diet through
the purchase of healthier food. Imported products also contributed to this improvement in eating habits. It
created competition forcing prices to decline and quality to increase.

Arthur Sendas, President of a large supermarket chain which carries the name of his family, confirmed that
sales increased 15% on average since the adoption of the Real. According to Sendas, “Families with earnings up to $350
a month experienced an increase in their purchasing power and therefore, they were able to invest in what they
consider to be most important: food.”

Target’s survey also pointed to an increase in credit. The lower-paid consumer rarely buys with cash. Moreover,
for that fact, they are the ones with better credit ratings. Because they need good credit to live. According to Nelson
Assad, director of Fininvest Credit, people earning as little as $100 a month are getting credit, while in the past, they
weren’t considered before they made at least $300 a month. Fininvest manages $340 million in credit today and plans to
double this amount by year’s end.

Target’s research showed that in 1995 credit sales skyrocketed. There were, for example, 830 thousand CD
players sold, a 69.9% increase when compared to the previous year. The number of TV sets sold jumped 23% during the
same period, representing the sale of 6.1 million televisions. Close to 475 thousand air conditioners were also
purchased which represented a growth of 83% in this segment.

If the earnings of these sectors of the population are limited, the same cannot be said about their desire to
consume. The crucial dilemma is to find a monthly payment that fits into their budgets.

Cristina Oliveira, a housekeeper in São Paulo, for example, earns a salary of $450 from which she reserves $250 to
pay her monthly credit bills. Says Oliveira, “As soon as I finish paying for one product, I buy another one.”

This is what the market calls bicycle: the habit of pedaling from one credit bill to another. Moreover, this habit
helps to reduce bad debts as the need to survive takes a different dimension. Even though interest rates are still very
high, it is now a secondary problem to borrowers and lenders.

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