What Should You Know In Order To Start Business In Brazil
Starting a business in a new country requires a lot of research. It is important to understand that country's political and economic system as well as cultural values. To establish business in Brazil, Pizza Hut had to study the complex history of Brazilian economy and politics.
It is important to remember that Brazil was a dictatorship for 20 years, from 1964 until 1984.1 During this period it was impossible to implement any kind of foreign business in Brazilian soil. After the authoritarian regime was over, Brazil had its first election in 1984. However, it was not democratic. The only ones allowed to vote were political leaders. It was a big step towards democracy, though. The elected president (Tancredo Neves) passed away right after election. His vice-president became the leader and ruled for four years. It was in 1988 that Pizza Hut implemented its first restaurant in Brazil. The economy was beginning to open up. It was only in 1990 that Brazil had its first democratic elections. In 1994 Fernando Henrique Cardoso was elected president. This president had been the minister of finance for the former government and he performed "miracles" in the Brazilian economy.
Brazil's economy has a lot of potential. Throughout Brazilian economic history, the government has had an economic policy based on import substitution and it was also trying to switch from agriculture to industry.2 To insentivate domestic industry, the government established protective tariffs and import quotas. Most of the enterprises were owned by State such as: steel, oil, infrastructure, and others. These firms also received subsidize "long-term credit expand."3 For these reasons it had been difficult to establish ventures in Brazil.
During the 60s and 70s the economy began to heat up and inflation began to rise reaching an average of 20% a year. Consequently, the government tried to slow down inflation by raising interest rates. However, "the large concentration of industrial power resulted in price inflexibility."4 The prices were high above costs. "Due to the protection, foreign trade remained a small percentage of the GDP."5
In 1973 the first oil shock caused some problems for Brazil.6 Even though Brazil is very rich in natural resources, it depends on imported oil. The government had to borrow money, but 50% of foreign debt was done by state owned enterprises.7 By the end of 1970's inflation had risen to an average of 40% a year. Private sector began to show their discontentment with the "favoritism received by state owned enterprises."8 In 1979 the second oil shock caused interest rates to rise on foreign debt. In 1981 Brazil had recession, devaluation of the currency, rising interest rates, real wage reduction and a widening federal deficit.9 At this point Brazil was not very attractive for foreign investors.
From 1985 through 1990 the government "focused on foreign debt, inflation, and exchange rate policies."10 Over the 1980s, Real per capita income fell 6% over the 1980s. Brazil is known for having one of the highest inflation, but the rate it achieved in the 1980s was incredible, it was 39,043,765%.11 Fernando Henrique Cardoso ended up creating a "new economic plan" and he was able to slow down inflation and to stabilize the exchange rate.12 On the other hand Brazil continued to face serious social and economic problems. There is a big gap between classes and there is big problems regarding "housing, clean water, and good sewage systems."13 However, Brazil decided to expand their economy. As a result there was less trade restrictions, which allowed foreign investment, both direct and portfolio.14
Brazil had a lot of potential of becoming an important market for Pizza Hut. The group's "ten year plan would put Brazil as the second largest market in the world."15 Brazil has many advantages. One advantage is that Brazil is a big Country. According to 1993 data, Brazil's population was the fifth largest in the world, with 156 million people. It was also the 12th largest country in the world's GDP. However, it ranked 13th per capita income. Brazil is an urbanized country, and São Paulo is the second largest city in the world after Cairo.16
The first Pizza Hut in Brazil was established in 1988, when Brazil was economically very instable. It was a period of high inflation. At that time Pizza Hut did not know how to implement a business in Brazil. It entered the market through a franchisee. It was only in 1991 that an office was set up to establish a plan for the country. Pizza Hut was expanding its business through corporate franchise. "In a corporate franchise, the corporate franchisee is given a whole territory, generally the same as a state boundary with the exception of São Paulo, and is not allowed to franchise (sell a franchise to someone else)."17 This was the best option for Pizza Hut at that time, because they needed franchisees with "strong financial backing and experience in operating in an inflationary environment".18 This situation had its pros and cons. The problem is that the franchisee ended up having too much power, which "could affect Pizza Hut's implementation of a Brazilian strategy".19
The only control Pizza Hut had was that they established goals for the franchisee to give them a guideline of "how to grow the business in order to maintain the franchise."20 For being a big city, São Paulo was divided into 5 different franchises. United Food Company (UFC) is one of Pizza Hut's original franchises. UFC also became a supplier of cheese, lowering the costs for all the franchises of the group. In 1997 Pizza Hut had other suppliers and imported cheese from abroad.21
In 1993, Pizza Hut felt like they were losing control of their Brazilian ventures. They had "no equity interest in any of its stores."22 So they decided to buy back the 35 stores that they had sold to UFC. After analysing what they bought, they realised that the stores were not "cost efficient."23 In addition, they were charging too much. They could over-charge and the consumer would never notice, because of inflation. Inflation was rising every day, so consumers lost sense of the prices. Consumers could never make a wise decision. However, in 1994 the environment was beginning to change. In June of 1994, the government instituted the Plano Real, inflation began to slow down. "The new currency Real was created and it had the same value as the dollar. The government would not allow that value to change. As a consequence inflation dropped from an annual rate of 4,060% in the third quarter of 1994 to 33.4% by September 1995".24
Pizza Hut had many problems in the first six months. Managers were very independent without any control from abroad. Now they had to adopt Pizza Hut's control process. As a consequence managers ended up revolting. They did not want to manage differently and have to be held responsible for their actions. During negotiations franchises did not show the real costs and number of employees.25 So costs were a lot higher than expected.
Another problem faced by Pizza Hut's management was inflation. When they had high inflation, there were some tricks used to increase profit. The following example is a good illustration: "Pizza Hut used to collect sales immediately, since the stores operate on a cash and carry basis, and delay the payment of supplies, thereby allowing them to pay for supplies with inflated sales revenues."26 Mall leases were based on 6% of sales and were delayed 30 to 45 days, so they used "inflated revenues" to pay for the leases. In other words, with inflation under control, their expenses went up 30 to 45%.27 In addition, consumers were able to make decisions based on market research. They were now able to compare prices and detect business that were not being fair with their prices.
PRI (PepsiCO Restaurants International) was created to consolidate the international aspects of the profitability. Before the creation of the PRI all restaurants were independent. Their headquarters were located in Dallas and were responsible for every restaurant located overseas. This helped the company to be more organized, efficient, and profitable because they were able to "establish a coordinated restaurant strategy."28
With the Real Plan, prices and the exchange rate of the Real and the dollar were stable. This factor dropped the number of sales by half. The reason is that people could perceive the high price of Pizza Hut. They used two different strategies to try to increase sales. First strategy was to reduce prices by 25% so they could be able to compete with McDonald's (which is very successful).29 The second strategy was to invest in marketing. Many units lowered prices and used the samba (a Brazilian dance of African origin) as a form of advertising.30 The result was a failure. Brazilians thought that by adopting the samba it was very inconsistent with the "US brand image that it had worked so hard to cultivate."31 In the other hand, one franchise in Rio thought that the best option would be to invest in advertising only rather than lowering prices. He was successful. It worked better than for those who dropped the prices. Dropping the price increased the volume in the beginning but it ended up going back to previous level.32
Adelaide de Almeida, a Brazilian physics professor, has had experiences with both: American and Brazilian Pizza Hut, she said: "I think that the Pizza Hut here in the US is much better than the one we used to have in the Mall in Ribeirão Preto."33 She proceeded: "Here they have a buffet with salads, spaghetti, and they have different sizes of pizza."34 The unit where Adelaide went once and never went back, went out of business in 1997. She says: "No wonder they went out of business, they had only one size of pizza (which was very small), they did not have variety and the prices were extremely high."35
Pizza Hut was struggling in the end of 1996 and PepsiCo was thinking about selling its restaurant divisions in 1997. In order to avoid going out of business, just like the unit Dr. Almeida mentioned in her interview, Pizza Hut had to do some drastic changes. According to Reinaldo Zani, manager of marketing in São Paulo, Pizza Hut was having some problems with product adaptation, and also problems with operations and administration.36
Pizza Hut no longer belongs to PepsiCo. Even though PepsiCo still owns a small percentage of Pizza Hut, the main owner now is Tricom. Tricom is an autonomous company owned by shareholders. This transfer of ownership solved many administrative and operational problems.37
Pizza Hut in Brazil is not considered a fast food restaurant. It is a whole different cultural concept. Pizzaria in Brazil is a restaurant to go with the family on the weekends, especially on Saturday nights. It is a tradition. Especially in São Paulo where Italian influence is significant. Pizza Hut's main competitors in Brazil are: TGI Fridays, America, and Brazilian pizza places in general. Zani claims that the presence of competitors is positive because "it forces the search for different markets."38
To compete with Brazilian pizza, Pizza Hut had to modify its product to make it more acceptable to Brazilian tastes. Pizza Hut had to create new toppings. Examples are: frango com catupiry, and portuguesa. The first one consists of chicken and a special cheese only produced in Brazil. The latter consists of : eggs, onions, ham, olives, and olive oil, for the astonishment of Americans, it has no cheese. Claudia Araújo, a PE teacher from Baurú, says: "I like Pizza Hut a lot. It is my favorite restaurant, especially now that they have different toppings. It is a mix of America and Brazil. It is an American pizza with a Brazilian topping."39
Pizza Hut remains openly optimistic about its future in Brazil. It took them a period of adaptation to understand the politics, the economy, and the culture of the country. After that period was passed, it was easier for them to make more accurate predictions of what is efficient and what is not. Today there are 63 units of Pizza Hut in Brazil. Nineteen of those are located in São Paulo. Only this year 2 new restaurants were opened in São Paulo. As Zani alleged, investment in "advertising, marketing, changes in product, and reductions of prices" caused a positive return for the company.40
