Brazilian Retail in Crisis

Can traditional Brazilian retail recover soon?

The second quarter laid bare the low performance that has spread throughout the retail industry, affecting not only the apparel and fashion segment but also sporting goods, electronics, and food retail.

 The Via (owner of Casas Bahia and Ponto (formerly-Pontofrio), announced in its second-quarter results report that it will close approximately 100 stores as part of a set of measures to seek better future results.

The textile retail sector saw an 8% decline in the first half of this year.

Lojas Renner S.A., MARISA, Riachuelo and CENTAURO ended the second quarter with falling sales, larger losses, or smaller profits. They were forced to cut prices to clear their elevated inventory, all while losing margins.

The post-pandemic period has been challenging for traditional retail. Most of them incurred debts during the pandemic, and now, with high interest rates, they are facing reduced consumer spending, low sales, and consequently, cash flow difficulties to sustain their businesses. Despite their digital channels, the weight of their physical structures is jeopardizing their overall sustainability.

If we look at primarily online companies focused on logistics and distribution, they are making significant progress despite the market's adversities. Mercado Livre Brazilfor example, has already started its foray into the fashion retail sector. We are witnessing a turning point in the business model of traditional retail.

Data from the Institute for Retail Development (IDV) shows that SHEIN had a 16.1% share of total revenue in 2022, after just three years of operation in Brazil.

The retailers that ceded the most market share to SHEIN were Marisa, Riachuelo, and C&A Brazil, with losses ranging from 33% (C&A) to nearly 50% of their market share (Marisa) compared to 2019, before the Asian brand entered the market. SHEIN has stated that one of its differentiators is its online operation, operating without inventory and investing in its distribution capacity. Is it a coincidence that they are thriving?

This brings me back to an article I wrote about H&M , which will start its operations in Brazil in 2025 and is already negotiating large store spaces in shopping malls. Is this the best strategy for H&M, given that the market suggests the opposite: fewer (or smaller) physical stores and more online presence? It's food for thought.

We hope that market conditions improve (interest rates, inflation, etc.), but it's clear that a strategic reevaluation and possible operational and organizational restructuring of these retail companies are necessary to adapt their businesses to the new market environment they are facing.

 Those who are already doing their homework will have Black Friday this year to reduce the current high inventory levels of most of these chains. A good pricing and traffic strategy for their online channels will be crucial. It will serve as a barometer for what the future might hold and what it will require to endure.