Experiencing Brazil

Today is our last official day of the trip. We’re meeting with four important people and will finish the day with an amazing “End of the World” party 😉

So let’s start..

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Groupo Pão de Açúcar

Grupo Pão de Açúcar (literally “Sugar loaf group” as you probably can see from their logo) is one of the biggest retail company in Brazil. They have different brands of stores, mostly targeting middle and upper class people. In total they have 1,900 points of sales and are present in all parts of the country, however with a strong focus on the Southeast (Rio & Sao Paolo).

Here is one of their stores I visited in Rio:

Really nice supermarket.. felt absolutely the same like in the US or in Europe..

The interesting thing is that they see themselves as a logistic company instead of a supermarket chain. Their official slogan is even “the largest distributor in Latin America”. However, when we asked them about how they make the logistics in the rural parts of Brazil work, he mentioned that they always have to make a profit analysis. And as a result, they are less focused on less populated regions such as the north.

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Key takeaways:

• Inflation & price sensitivity: In the past, high inflation made it very difficult to compare prices. Therefore, since the inflation has been lower and more stable, people started to compare prices more and to search for the cheapest price available. In general, Brazilians are not loyal shoppers.

• Change in consumer behavior: The consumer basket is getting more diverse: more categories, more foreign products, more brands. Furthermore, people from lower income classes also want to have the products the middle & upper class uses. Therefore, they usually develop smaller product sizes in order to make if more affordable to them. In the US and Europe it’s the total opposite. You try to buy in bulk so that it gets cheaper.

• e-commerce: So far there is low trust in e-commerce. They had a lot of issues with fraud, stolen data and so on. Therefore, people are still more willing to call and order than to fully buy online.

• Product penetration: Change in the last couple of years: Washing machine: 36 > 44%, fridge: 89 > 93%, TV: 90 > 96% (so there are more TV’s than refrigerators in this country?!??), Computers: 15 > 39% (no wonder e-commerce is not developed yet)

• Demographic bonus: Similar to what the CEO & CFO from Camargo Corrêa mentioned, Brazil will have a demographic bonus in the next couple of years because the baby boomers are entering the workforce. However, this will effect will decline over time, so they have to make us of it as much as possible.

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The life of Roger Agnelli

The next meeting was one of the most fascinating of our trip! We met with Roger Agnelli (apparently part of the wider Italian Agnelli family), former CEO of Vale, one of the biggest mining companies in the world. He was recently named one of the most valuable CEOs by the Harvard Business Review for his work at Vale (total shareholder return was about 1,000% – not bad) > check out the analysis.

However, he was kicked out of Vale, because he apparently disagreed with Dilma (oh boy, no woman with whom you want to disagree with). Anyway, now he has more time to speak with interested Stanford students 😉

The cool thing about this meeting that he just did Q&A. He basically talked for an hour about life in general and his outlook about Brazil in particular. And he definitely had some strong opinions..

A short summary how Mr. Agnelli sees the world:

• China: Incredible economic boom and grow of urbanization. In his view, all the negative opinions about China are just rumors. China will continue to grow and consume more commodities and especially proteins. They have money and people, but not enough resources.

• Brazil: And this is where Brazil comes into the game. Brazil has the most advanced agriculture technology in the world (e.g. yield per hectare). However, in order to connect those two countries, logistics are key (roads, ports etc.)

• Europe: He sees no future in Europe. Maybe they might be able to do a little bit of tourism (boom, wow..)

• Africa: For him this is the place to go!!! It’s unbelievable how excited he is about Africa. In his view, it is like Brazil 50 years ago! They have a lot of natural resources and about one billion people, however they don’t use it! They import everything! So if you really want to make big business and change something – go to Africa!

• Investing in Africa: A lot of Africans are very rich. But there are not many good opportunities to invest in Africa. So they hide all their money in Switzerland.

• About supporting the community: “If you don’t include the community into your business, you’re done! It’s not a matter of being good, it’s a matter of making money”

• “You are rich, because you are young!” He literally used this slogan twenty times during our meeting 😉 Maybe his in a midlife crisis ;)??

• Advise for us: Build a legacy! Do something! Think long-term, be smart short-term!

In general, his opinions were mostly common sense. But the way he presented them was incredibly charismatic. He probably really likes to hear his voice 😉

For me the main takeaway was that we have to align our careers and lives with the long-term prospect of the world. I definitely want to go back to Switzerland. But as he correctly pointed out, Europe is not the future of the world.. rather the opposite.. So this will definitely affect my life..

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Meet Mr. Central Bank

In the afternoon, we met with Henrique Meirelles, former president of the Brazilian central bank from 2003-10. During his period at the central bank, he was able to reduce the inflation and improve the stability of the country.

He is almost 70 now, but still an incredible knowledgeable and wise man. He is also on the board of J&F, the biggest meat producer in the world, and Azul Airlines, which we met earlier in this week. Furthermore, he’s an advisor to KKR.

Key takeaways:

• About the inflation decades: From 1900-70, Brazil had one of the highest growth rate in the world. However, in the 70ies the government started to leverage more and more. So when the FED stopped the liquidity, Brazil basically went bankrupt.

• About Lula: When Lula won the elections in 2003, he made a smart move. Although he is from another party, he elected Meirelles as president for the central bank. This was a completely unexpected move, but it increased the respect and the independence Meirelles had in his role.

• About his beginning: He made the joke that you can clearly see who is the current “problem child” in the global financial system. So in the early 2000, he was always the center of attention during the meetings of all the central bankers.

• About the current politics: He was very wise in saying that he has a rule of never commenting on the current government or central bank policies. I felt this was a very intelligent and mature decision. He was probably also glad when his predecessor did the same.

• Why Brazil’s growth rate is slowing down: Their growth rate basically dropped from 10% to 2% without any problems or increase in unemployment. Everything is still going smooth. For him this drop is mainly a problem of success: no enough skilled labor, not enough credit to finance all their projects etc. However, Brazil might open up its borders (e.g to people from Portugal or Spain) to improve the labor market.

• Low savings rate: Compared to other countries, Brazil has a very low savings rate. In his view, this is because people didn’t have money before, so they want to enjoy their new wealth.

• BNDES vs. capital markets: The government thinks the financial system doesn’t invest enough in Brazil. So they force BNDES to do it. But in his view, it might also be that BNDES is draining the market with their low interest rates.

I can’t even write down all the details he mentioned, because it was such a dense meeting. He had a really interesting life!

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Banking, banking, banking..

The last meeting of our trip was with the CEO of Itau Unibanco, one of the biggest banks in Latin America. They basically have branches everywhere you go!

Key takeaways:

• Global banking system: The banking system is a reflection of the power of a country. E.g. in the 80s the global banking system was dominated by Japanese banks. Today two of the Top 5 banks in the world are Chinese.

• High inflation: During the time with high inflation, the main goal of the bank was to protect its assets. This totally changed in the past couple of years. Furthermore, since the inflation decreased investors are more interested in long-term products.

• Their clients: Most of the people have their bank account through their job. Therefore, they don’t do for example student financing, because the students will switch their bank account anyway once they start working.

• Investors: As mentioned by other speakers as well, most of the companies are controlled by BNDES, institutional investors and pension funds and of course foreign investors. So there is actually not a big free flow of capital.

Because we already had a lot of other meetings, it was actually difficult to find new insights. However, the meeting was very good to confirm a couple of statements we already heard from other speakers.

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End of the world!!!!!

Or not..

Anyway, we still celebrated accordingly by partying all night long in Sao Paolo 😉 One of the best parties ever :)!!!!

Thank you Sao Paolo!

Today we had one of the best meetings on this trip! Azul Airlines!

Azul Airlines was founded in 2008 by Brazilian-born David Neeleman, the former CEO of Jet Blue. Within four years they became the biggest low-cost airline in Brazil with ~15% market share. Furthermore, they also have the highest load factor (how full their airplanes are) in the Brazilian airline industry. Their main competitors are LAM and GOL, which both have about 40% market share.

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Unfortunately, David Neeleman had to go to Brasilia on the day of our meeting, because Dilma announced a plan to build 800 new airports. And if Dilma calls, you have to follow.

So instead we met with the CFO and Chief Marketing/Revenue officers of Azul. They both worked with David at Jet Blue and decided to come with him to Brazil when we wanted to build Azul. They are truly American: their language and accent, they opinions, their behavior.. In a way, this was the easiest meeting because they “spoke our language”. Interesting, how such cultural things can be very connecting.. (However, in their whole company they have about 9,000 Brazilian employees and only a handful of Americans. So they’re an actual Brazilian company).

Furthermore, even though they used a lot of slides, it didn’t seem like a practiced company presentation. They talked very freely and gave us a lot of inside stories about the beginning of the company. We definitely got a lot of great insights into the Brazilian airline market. A really cool meeting!

Key takeaways:

• About the airline business in general: “It’s not a business we recommend if you wanna make a lot of money” 😉 For example, if you take the S&P 500 over the last couple of years, the airline industry has the worst return on investment.

• The market before their entry: Before Azul was launched, GOL and TAM formed a perfect oligopoly, because they were exactly the same. The both had the same market share, the same airplanes, the same routes and the same prices. Everything was very inefficient and fares were 50% higher than in the US.

• Roads: In Brazil, a lot of the roads are either in very bad conditions, or they are in good conditions but you have to pay toll fees. So if you count the toll fees from Sao Paulo to Rio, it is so expensive that flying doesn’t cost much more.

• Inertia: When they started their business, they heard a lot of “oh, it doesn’t work” or “oh, you can’t do that.. it’s the law”. For example, they got told that they had to provide the pilots with a hot meal during the flight, because “it’s the law”. However, this costs a lot of money, because you have to put a microwave in every single airplane.. just for the pilots.. However, they checked with their lawyers and found out that there is no law about this in Brazil. So if you’re new in a country, don’t believe everything they say.

• Hierarchy in Brazil: In this country, managers are treated like gods and are paid very well (also because of the skilled labor shortage). It is not common for a CEO to speak to employees two or three levels below him. If someone would do that people would probably think they did a huge mistake and will get punished now.

  Furthermore, people also don’t like to do work which of lower hierarchy people. For example, at Jet Blue the whole cabin crew helps to clean the airplane, because external cleaning companies cost a lot. Here in Brazil, the cabin crews refused to do this work, because they have a very strong culture of hiring people to clean instead of doing it yourself. So in the end, they had to hire an external company for it. Luckily, labor is relatively cheap in Brazil.

  However, in their view it is very important to have flat hierarchies. Therefore, things which are visible to the front line staff should be equal (e.g. parking, eating etc). You can still pay the differently, but the rest should be the same for everyone.

• American vs. Brazilian culture: The American culture is very much “in your face”. Brazilians are more relationship driven. They would never publicly disagree or argue. Their Brazilian employees never understood in the beginning how the Americans could have a very hard argument with each other and afterwards still drink a beer together.

• Short-team focus: Brazilians are very much short-term focused. 90% of all airplane tickets are sold in the respective month of the flight, compared to 50/60% in the US. There is no culture of booking or planning in advance.

• Economic classes: In Brazil, everyone speaks very openly about the economic classes (which are called A to E here, with C being the middle class). And everyone really likes to show the graph how the middle class developed over the past couple of years (we literally saw this graph in EVERY meeting)

• Government and taxes: The government thinks only the rich people travel, so they don’t focus on making airfares cheaper. Instead they use it as a cash cow to generate taxes. For example, on an average airline ticket of 200 USD, at least 50 USD are taxes.

• Unions: In the US, unions take care of everything (healthcare, working hours etc.). In Brazil, unions mostly care about wages. However, the union represents all airlines. So if they negotiate a 5% salary increase, it counts for Azul as well as all the competitors. And because their competitors pay higher salaries in general, the 5% increase hurts them even more.

After the meeting they showed us the airplane simulator 🙂 Really cool!

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In the afternoon, we met with the famous soccer player Rai. He played for Sao Paulo and Paris Saint-Germain and won the World Cup in 1994 with the Brazilian team. After his professional career, he started to NGO’s which deal with obesity in Brazil (and after traveling for three weeks in this country I can testify that it’s a real problem.. no wonder if everything here is deep-fried and with lots of cheese)

However, I felt this meeting was not really insightful, so I didn’t even take notes.. The only thing I jotted down was that teachers in Brazil need a bachelor’s degree in order to be allowed to teach. However, this creates a shortage of teachers. We have the same rule in Switzerland, but I don’t really see the reason why we need it. If I think about the most important skill for a teacher than they would be empathy and teaching skills. And none of them is bound to a Bachelor’s degree. This only works if teaching is such a popular job that highly talented people see it as a real option next to other jobs.

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Tomorrow is already our last day!! However it’s also one of the most important ones with four meetings! Looking forward to more insights into Brazil!

Today we discussed two completely different company types: Family businesses vs. start-ups or traditional sectors vs. internet.

Most of the big companies in Brazil either belong to the government or very important families. One of the biggest companies

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Camargo Corrêa

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The first meeting was with one of the biggest private conglomerates in Brazil: Camargo Corrêa. They have about 11bn USD revenue and over 16,000 employees. Their main divisions are:

• Engineering and construction: 2nd biggest in Brazil

• Cement: No. 11 in the world, 2nd in Brazil and 1st in Argentina

• Highway concessions: largest toll operator in Brazil, no. 3 in the world

• Energy concessions: largest private power utility company in Brazil

• Others: Everything from airport and port operations, railway concessions etc. etc.

• And, last but not least, footwear! Among other brands, they also own the famous Havaianas brand :)! Although I really don’t know how this company fits into their portfolio. However, even they acknowledge this fact. Apparently they are currently discussing whether they should stay an infrastructure company or develop into a portfolio holding.

I have to admit here that I was dragged into the Havaiana flagship store in Sao Paulo twice ;)! And although I rarely wear flipflops, I actually bought one pair.. 😉

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The meeting was really interesting and insightful! We met with the CEO and the CFO of the company and both were very open and informal about their answers. Great meeting!

They opened the meeting with the famous saying: “Brazil takes off..”

However, in their view the question is “.. but where will it land?” 😉

And they also meant it literally, because the airports in Brazil are horrible 😉

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The second important comment was: “More important than being a good rower, is choosing the right boat!”

Brazil might have some issues at the moment (corruption, bad infrastructure, inefficient economy etc. etc.), but the fundamentals are still strong. Therefore, they absolutely believe in a positive future of Brazil.

Interesting side note is that the CFO actually got this quote from a Finance class at Columbia. He hated the class, but the quote stuck with him. Or as our faculty advisor on the trip said: Never dismiss a course for not being relevant for your career. Because you don’t know what will be important in your future!

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Additional key takeaways:

• International partnerships: They like to work with international partners. Because if the government tries to privatize their business, they get international help 😉 Smart!

• International companies in Brazil: The problem with working for an international company in Brazil is that you will never be part of the decision, because the decision is made somewhere else.

• Infrastructure: Very much dependent on the government (BNDES and pension funds). In their view, there is probably no such thing as a successful public private partnership (PPP); maybe for 10-15 years, but certainly not for projects that last 30 years or longer. However, in the next couple of years Brazil needs to build a lot of infrastructure (World Cup, Olympics, Pre-Salt etc.). Therefore, they probably need some private investments.

• Cement: They are currently betting on cement, because you don’t have to worry about government and regulations. That their client’s problem.

• Airports and ports: They are closely watching this industry, because a lot of them will be privatized in the next couple of years.

• Why Brazil doesn’t have a lot of railroads: Railroads are very capital intensive. Roads are much cheaper and faster to build.

• Lack of engineers: In Brazil, there are 6 engineers per 100,000 people. In contrast, India has 22 and China 25. They have a serious lack of skilled labor at the moment.

• Ageing: In the next couple of years, the Brazilian “baby boomers” will enter the workforce. However, because since then the birth rate dropped to western standards (<2 children per woman) the population will age very quickly. Usually, countries should try to follow the rule “get rich, before you get old”; (e.g. US, Europe, Japan). But they are afraid that Brazil will not reach the necessary level of wealth before the baby boomers retire. Therefore, the next 5-10 years will be crucial for Brazil.

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And, last but not least, the mandatory question about the World Cup 😉

Of course, first of all, they are concerned with the performance of the Brazilian team. However, when it comes to the infrastructure they have a more pessimistic view. In their opinion, it will probably be a “lousy” World Cup! The government will probably solve the infrastructure problems with a lot of last-minute short-term measures (e.g. the holiday rule). Therefore, they don’t believe that the World Cup will be a big driver for innovation and change.

It was very interesting to hear such a pessimistic view about the World Cup. And those guys are experts when it comes to infrastructure.. So far, everyone was always very excited and optimistic about the World Cup organization. Let’s hope that the optimists will win!

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Entrepreneurship in Brazil

In the afternoon we changed from family businesses to start-ups. We met with Monashees, one of the most important VC firms in Brazil, and two of their start-ups:

• Baby.com.br: An online shopping website for moms

• Medicina: A website where doctors answer medical questions from users

Eric Archer, one of the founders of Monashees, is a super charismatic person and it was really interesting listening to him because he basically knows the start-up scene in Brazil from the very beginning!

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Key takeaways about entrepreneurship in Brazil:

• Entrepreneurs: Brazil has one of the highest percentages of entrepreneurs. However most of them are not entrepreneurs by choice, but by necessity. The traditional Silicon Valley type of entrepreneur is still rare.

• Copying ideas: Most of the start-ups here are inspired by proven US concepts. This reduces the risk of a new venture. And the advantage here is that you’re usually the first one and have less competition.

• Failure stigma: The bad reputation of failure is still very strong in Brazil. This does not only affect founders, but also the first employees of a start-up. Why working for a company where there is a risk of failure, when you can work for an established firm? (sounds very similar to the public opinion in Switzerland!)

  In Eric’s view, it is also the responsibility of the investors to continue to support failed entrepreneurs in order to change the public perception.

• Equity salary: Doesn’t work in Brazil. People are too much short-term oriented and rather want to see money than a promise for the future. Furthermore, most of the employees don’t really understand what an equity share is, so you have to teach them first what it exactly means.

• High Inflation: The high inflation in the 80/90ies basically killed a whole generation of entrepreneurs. Therefore, they have a lack of successful start-ups today.

• Full circle: They haven’t had a full investment circle with a successful IPO yet (launch, growth, stability/exit). So their concept of Silicon Valley like entrepreneurs is not fully proven yet.

• Monashees financing: In order to make money as VC’s without regular IPO’s, they cash out a little in every financing round. Furthermore, they finance themselves in every financing round instead of having a long-term fund. This means less stability and predictability, but one bad round doesn’t affect the other deals.

• IPO’s in Brazil: In order to get listed in Brazil they need 300m USD, which is too late for a start-up to exit. So it’s more realistic for them to go to NASTAC, where you only need 70m USD. Another possible exit would be to get acquired by a bigger tech company.

• Logistics in Brazil: Transport in Brazil is horrible. But luckily, the wealth is very concentrated in the south east (Sao Paulo & Rio). However, if you’re creative, you can still solve the logistical nightmare:

  For example, for Baby.com.br they teamed up with P&G, the producer of Pampers baby diapers. In the beginning, they sponsored all the shipping and in return were allowed to put a sticker with “free shipping was made available by Pampers” on all the packages.

  Furthermore, the good thing about the Brazilians in the far north is that they know that they live at the end of the world. So they are used to pay more for delivery than people in the south. Americans on the other hand expect free delivery everywhere in the US, no matter in what kind of backwater they live.

• Law suits: People sue for everything! Apparently, it’s even worse than in America (and I always thought Americans are the worst: don’t burn your lip with a hot coffee, don’t make coffee in your camper while on cruise control.. you know what I mean..). For example, they just had to pay someone about a thousand dollars, because they forgot to giftwrap the package. This service costs a dollar or so and people still sue. Apparently people get very aggressive and serious over these lawsuits.

Key takeaways about entrepreneurship in general:

• “Hope is not a strategy!”

• “You’re crazy! It’s not gonna work!” Great thing for an entrepreneur, because this means that you will not have a lot of competition 😉

• Culture! Build a culture from a early stage on which is different and controversial. For example, at Facebook they decided that they will hire inexperienced engineers. This increased their creativity and the “college” vibe and resulted in a distinct culture (however, it also had the negative side-effects that they had more program mistakes and re-work in the beginning.. but in the end it worked out for them).

  At Baby.com.br they choose “family” to be their distinct factor. They have a lot of women and moms working at their company. It’s perfectly fine to work part-time or from home and so on. Therefore, they have a strategic advantage over other start-ups.

Listening to Eric and his team was really cool. It must be amazing to be one of the first one’s who start a whole new industry in a country!