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Retail boom acts as stimulus for investment in northeast Brazil

For Gilson Alexandre, a 42-year-old truck mechanic, there is nothing better than spending an afternoon at the local shopping centre.

“It has everything you could want,” he says, browsing the food court of Shopping Recife, one of the largest retail centres in the northeastern Brazilian city.

With more than 450 shops, 19 restaurants, 10 cinema screens and plenty of benches on which to take a nap in the comfort of the building’s air conditioning, Shopping Recife attracts about 65,000 people a day.

Visiting shopping centres has become a national pastime in Brazil. Aside from being somewhere to meet friends and family, they are a relatively safe place to hang out in otherwise dangerous cities, thanks to heavily armed guards on the doors.

Demand for new shopping centres is strongest in the country’s poorer northeast region, which until recently had been largely neglected by developers. As consumer spending begins to slow across the rest of the country, the region’s nine states remain a bright spot for retailers, as millions of Brazilians enter the middle class for the first time.

As of December last year, 32 shopping centres were under construction across Brazil’s northeast, up from 30 at the end of 2012, says Luis Augusto Ildefonso da Silva, institutional director of the national retail association Alshop.

The number of shopping centres being built nationally decreased to 153 from 157 over the same period.

“Many of the new shopping centres [in the northeast] are in smaller cities that don’t already have one,” says Ildefonso da Silva. “It is hard to go wrong when you are building a city’s first shopping centre.”

To a large extent, the northeast is simply catching up with the rest of Brazil. Lumbered with a vast, barren hinterland and located thousands of kilometres from the country’s southern centres of power, the northeast has long ranked as the poorest and least developed region.

Despite the recent growth, development indicators in some parts of the region are still comparable with those of African countries.

However, this is what makes the northeast one of the country’s most promising consumer markets, says Renato Meirelles, president of the Instituto Data Popular, a consultancy.

“The ownership of televisions, mobile phones, computers, washing machines and other goods is lower in the northeast than across the rest of Brazil, so there is a lot of pent-up demand,” Meirelles says.

“Like the rest of Brazil, the northeast will grow at a slower rate than in the past decade, but the region will still grow faster than the rest of the country.”

However, the northeast’s consumer boom is also a result of concerted efforts by the federal government to accelerate the region’s development.

“In spite of the necessity of [public investment in the northeast], the decision to focus on the region has been a political one,” says Otto Nogami, an economics professor at São Paulo’s Insper business school.

The Bolsa Familia welfare programme, a cornerstone policy of the ruling Workers’ Party (PT), has been responsible for lifting millions out of poverty over the past decade and has helped keep the PT in power since 2003.

Meirelles estimates that more than 40 per cent of families in the northeast receive the stipend, making the region a loyal base of political support.

Other government programmes have boosted consumer spending, such as “Minha Casa Melhor” (“My Better Home”), which gives lower-income families a four-year loan of up to R$5,000 ($2,174) to buy home appliances and furniture.

Families are only eligible for it if they bought their home via the government’s “Minha Casa Minha Vida” (“My Home, My Life”) programme.

The region’s consumer boom has encouraged many firms to build factories in the region. O Boticario, one of the country’s most popular cosmetics chains, is to open a production plant and distribution centre this year in the state of Bahia at a cost of R$535m. The factory will serve as a base for the whole of northeast and north Brazil.

International consumer groups have also ventured into the region. In 2011, Kraft opened a factory in Pernambuco – its first in the northeast – to produce chocolate and powdered drinks. Upmarket brands such as Pernod Ricard’s Chivas Regal whisky have also found success, as the region’s new middle classes start to spend. In 2012, the company ranked Recife as the top market in the world in terms of per capita whisky consumption.

“This is a sign of social mobility, which in Brazil is shown through the capacity to consume,” says Insper’s Prof Nogami.

However, for producers of higher-value durable goods such as home appliances, it still does not make sense to build a factory in the northeast, he says.

“You will find strong demand in the state capitals but not outside the cities – the market is not mature enough,” Prof Nogami says, adding that the northeast’s logistical problems and lack of skilled labour can also drive up companies’ costs.

“The region has huge potential, but it is still only that,” he says.