The consumption revolution in emerging markets is happening right as we speak. Tens of thousands of people are getting out of poverty and are starting to consume everyday household goods. In Latin America’s largest country, Brazil, the policies of former President Luiz Inácio Lula da Silva have lifted between 40 million and 50 million people out of poverty over the last decade. Many of these people are finding their way to organized retail outlets for the first time, and supermarket chains are often the first beneficiaries.
Grupo Pao de Acucar (ticker: CBD) is the largest retailer in the country. Its business is based on different form factors, which include hypermarkets, supermarkets, electronics stores, the cash-and-carry segment, drugstores and e-commerce activities. The group’s brands include Extra Hiper, Casas Bahia, extra. com.br, Minimercado Extra, Assai and PontoFrio.com.
Grupo Pao de Acucar has a market capitalization of $12 billion. Its sales are expected to reach close to $27 billion by the end of 2012, with earnings estimated to total more than $2 per share. The company will likely pay a dividend of $0.51 per share.
Pao de Acucar has grown by a buy-and-build model in which every few years it’s added new concepts by acquisitions that complement its organic growth.
The problem for many food retailers in the United States and Europe has been the ability to pass on rising costs to consumers. In Brazil there’s generally been a higher inflation rate for decades. In 1990 inflation peaked at a monthly pace of 82.4 percent! Over the last decade the inflation has been in the single digits and has benefited retailers by helping them raise prices and maintain margins. Since 2007 inflation in Brazil has been around 4 percent to 5 percent each year, and we expect this trend to continue.
Same-stores sales growth over the last few years has hovered between 6 percent and 8 percent. This trend should continue into 2013 and 2014.
Recently the company’s stock was trading at around $47 per share, very close to its 52-week high. The stock isn’t cheap at a price-earnings ratio of 21.
As with any investment, there are risks regarding investing in Grupo Pao de Acucar. The main owner, Abilio Diniz, sold a large stake of the company to French company Casino in 2005. Later, he also allowed Casino’s largest rival, Carrefour, to bid for the company. This has resulted in a complicated ownership structure. Pao de Acucar is now under the control of Casino and its main shareholder, Jean Charles Naouri, who’s also a Pao de Acucar board member.
Other risks include the possibility of a price war among other retailers, which might hurt margins. And if the Brazilian unemployment rate rises, consumers will have less disposable income.
