Brazil's Bullet Train

Brazil's on-again, off-again bullet train project connecting Rio de Janeiro and Sao Paulo is back on again. A rail project you ask? Ten years into the 21st century?

Yes, it's a backwards, outdated project proposing expensive passenger rail transportation at a time when air transportation is not only faster, but cheaper and more efficient. Yes, it is more of a political move rather than an infrastructure necessity. Yes, thousands of innocent families will be booted out of their homes and paid 10 centavos on the dollar (Real) in the government's eventual appropriations. Yes, Brazilian taxpayers will be footing a large chunk of the bill with no clear benefit for them. Yes, small townships located on the proposed Rio-Sao Paulo line are already fighting to have the trains stop in their municipalities, taking the speed out of the bullet.

Here are some "bullet" points:

• Government estimated costs of US$ 18.7 billion (triple that to get true estimation)
• The company offering the lowest fare will win the bid for the 317 mile train
• The winning (wink, wink) consortium will be announced on December 16th, 2010
• President Lula expects the project to be delivered in 2016, just in time for the 2014 World Cup
• Average train speed of 177mph
• 82 miles of trajectory through tunnels
• Trains leaving every 15 minutes
• Passengers per train - 855
• Estimated time from city to city - 85 minutes
• Projected ticket price R$ 200 each way (US$ 115)

Tuesday News Briefs

Gay Pride = big market

Over 3 million people gathered in Sao Paulo on Sunday to attend the 14th annual Gay Pride Parade, making it the world's largest gay pride march, according to organizers. "Dancing to music blasting from sound trucks Sunday, they condemned homophobia and demanded equal rights for homosexuals. They also said they would push candidates in this year Brazil's presidential election to support their cause." The parade has the backing of the government - and get this - even has the state controlled oil company, Petrobras, as a main sponsor. Companies interested in tapping a big, big market might be wise to investigate how to become involved.

Brazil will meet deadlines for 2014 World Cup

That according to Brazil's Sports Minister, Orlando Silva, who guarantees that construction work will begin on stadiums in the second semester of this year. Despite currently having no stadiums in  Brazil that would be adequate to host a World Cup game under FIFA's standards, Silva appears to be "tranquilo" in relation to the schedule. On a personal note, I can't wait to see the final taxpayer bill for these projects, including the overcharges.

Visa-free in Russia

Monday was the first day that Russians and Brazilians no longer needed visas to visit each other's country. The Russia-InfoCentre states that "The Brazilian government is counting upon the increase of tourist traffic from Russia. Now the tourist flow is not very intensive." (Don't get your hopes up.)

Is privatization of Brazil's air travel industry possible?

Brazil's air travel industry has all the right elements to become a world power. The country has a young population of almost 200 million people along with a rapidly expanding economy and a growing middle class. Brazil has won the rights to host not only the 2014 World Cup, but also the 2016 Summer Olympics in Rio de Janeiro. Different from the US airlines, Brazilian carriers are actually making money. Different from Europe and Japan, the airline industry doesn't have any competition in terms of trains. The BBC recently gave a shiny report (video) on Brazil's aviation sector.

With all these positives, it's hard to imagine any obstacles, right? Wrong. This 66-page government study (Portuguese) on the "Panorama and Perspectives for Air Transport in Brazil and the World" explores all facets of Brazil's air industry and gives a particularly realistic view of its challenges. One particular impediment may be that "Brazil's airports serving World Cup 2014 venues are saturated and eight are on the brink of operational collapse", including both of Sao Paulo's airports and Rio's domestic airport.

Part of the problem lies with Infraero, the Brazilian government's corporation in charge of 67 airports, 80 air navigation support units, 32 warehouse logistic terminals, and 97% of passenger and cargo air transport. Since Infraero is not a private company, it doesn't have any incentive to perform above expectations. It does its job, some of the time, and moves on, usually losing money in operations -- very similar to the US Postal Service or Amtrak.


Interestingly enough, the government study gave five options for improving the airport situation, all of them involving some sort of privatization (see p. 50), from simply privatizing Infraero, to privatizing the airports themselves.


Another obstacle mentioned was the high corporate tax rate for airline companies, close to 39% for Brazilian companies, versus 7.5% in the US - as well as the service taxes (ICMS) that vary from state to state plus abusive storage costs from the monopolistic Infraero.


What do you think will happen? Will the air industry stay in public hands? Or will a move be made towards privatization?

Brazil's economy and the government's spending "cuts"

Two weeks ago, Brazil's Finance Minister promised what seemed like incredible amounts of budget cuts, totaling R$10 billion, in response to the country's "overheating" economy - without affecting social programs or infrastructure investment. The press, Brazilian and international alike, fell for it - hook, line and sinker - and thus made no investigations into its veracity.

Meanwhile, Leandro Roque had the crazy idea of actually looking up the budget figures and seeing how the government planned to cut R$10 billion in an election year. Interestingly enough, Mr. Roque discovered that the "approved" budget from 2009 to 2010 increased by R$168 billion. So the "cuts" are actually an increase of R$158 billion. Nice.

The Economist published a story last week entitled "Flying too high for safety".

NEW skyscrapers are going up along Avenida Faria Lima in the business district of São Paulo. Sales of computers and cars are booming, while a glut of passengers has clogged the main airports. Brazil created 962,000 new formal-sector jobs between January and April—the highest figure for these months since records began in 1992. Everything indicates that over the past six months the economy has grown at an annualised pace of over 10%. Even allowing for an expected slackening, many analysts forecast that growth in 2010 will be 7%—the highest rate since 1986.

The problem is that while it may be growing at Chinese speeds, Brazil is not China. Because it still saves and invests too little, most economists think it is restricted to a speed limit of 5% at the most, if it is not to crash. The growth spurt is partly the result of the stimulus measures taken by President Luiz Inácio Lula da Silva’s government when the world financial crisis briefly tipped the country into recession late in 2008. The trouble, say critics, is that much of the extra government spending is turning out to be permanent—and so the economy is starting to resemble a Toyota with the accelerator stuck to the floor.

The government is still injecting money into the economy in two controversial ways. First, the National Development Bank (BNDES), whose loans cost about half the Selic rate, has expanded its lending by almost half. It has been able to do this because the treasury granted it two long-term credits totalling 180 billion reais. Those credits, for which the BNDES has offered IOUs, have led to accusations of creative accounting. While adding to the government’s gross debt, they have not driven up the more closely watched figure for public debt, net of assets: at 42.7% of GDP, this is back to its level of mid-2008, and is much lower than the debt burdens of European countries.

Second, the government has jacked up its payroll spending. The number of federal civil servants has increased fairly modestly since 2003 (by around 10%). But they have been treated generously: the total federal wage bill more than doubled in nominal terms between 2003 and 2009, while inflation was less than 50%. Lula has pushed up the minimum wage much faster than inflation too. That has helped to make the income distribution less skewed, and boosted consumer demand. But it has a knock-on effect on pension benefits.

What's the bottom line? Well, Brazil is indeed growing quickly, no doubt about that. But it seems to be doing so without making any real structural change. There have been no reductions in the sky-high importation duties. There have been no reductions in runaway government spending. Corruption continues to haunt both companies and individuals. And it's difficult to do business in Brazil - which is ranked #129 in ease of doing business, just ahead of Lesotho and Tanzania. How long will the party last?

Thursday news

Looking to invest in an island?
According to Exame's article, there are several islands for sale off the Brazilian coast. Ilha das Couves in the state of Sao Paulo is the biggest bargain of the bunch, starting at only R$12 million (US$ 6.5 million). According to the sales literature, it's a "true paradise with no big storms, snakes or large mosquitos."  Meanwhile, the most expensive Brazilian island, located in the state of Bahia, goes for a cool R$ 41 million (US$ 22.3 million).

8.5% growth?
Businessweek is reporting that Itau Bank may raise it's growth forecast for Brazil to 8.5% this year. That's approaching Chinese levels! Economists are notoriously famous for missing the mark on economic predictions, but Brazil's economy has been on fire this year. "Citing the growth of employment, expanding retail sales and bank lending as signs that the economy may grow faster than now expected, economist Guilherme da Nobrega said that 'the theme in Brazil is really the risk of overheating.'”

Chic Shopping Mall
To take advantage of increased consumer spending, yet another high-class shopping mall should be completed by 2011 in the Vila Olimpia region of Sao Paulo. Just two years after the opening of the luxurious Shopping Cidade Jardim, located on the other side of the Pinheiros river, JK Iguatemi will try and top it. In a joint development between W Torre and Grupo Jereissati, the 4 level shopping mall plans to attract the world's best luxury brands with over 200 stores (including a 3000 sq. meter Daslu), an international top-of-the-line hotel, and 20,000 expected daily visitors. Some of the expected luxury brands include Louis Vuitton, Prada, and Bottega Veneta.

Why are cars in Brazil so expensive?

Good article from Exame (in Portuguese) regarding the extremely high price of cars in Brazil. Some points from the article:

- Taxes, labor costs, raw materials and lack of infrastructure force Brazilians to pay double what Mexican consumers pay for the same car

- The basic model of the Honda City is sold in Brazil for the equivalent of US$ 32,000 (according to mid-May exchange rates). Considering the car's category, the price is similar to that of its competitors. Rival sedans like the Volkswagen Polo, Fiat Linea and Ford Focus cost between US$ 28,000 and $33,500. What not everybody knows is that crossing the border into Argentina, the same car with several accessories - such as electric power steering, onboard computer and dual airbags - can be purchased for US$ 20,100.

- The price difference in itself is already strange, but what makes it even harder to swallow is that both the car sold in Argentina and the one sold in Brazil come from the same production line in Sumare, located in the state of Sao Paulo. The import cost is zero for the Mercosur neighbors. The biggest explanation for the price difference is the weight of Brazilian taxes.

- Together the Brazilian taxes IPI, ICMS, PIS and Cofins represent between 27 and 36% of the total value of automobiles. For comparison's sake, in the US, taxes add up to about 6.1% of the vehicle's final price.

- The disparity suggests that vehicle produced abroad could invade Brazil. But it's a mistake to think that the tax burden offers relief to imports. Insurance, freight, and a 35% import duty are added to the price of each imported car. Next, the car collects all taxes paid on its home soil which are not charged in the country of origin. According to Abeiva, the Association of Importing Companies, the math makes it clear: by the time the car reaches the Brazilian consumer, it will cost 2.7 times its original price.

- Not only is the purchase price higher than almost every other country, but financing (avg of 25%/year), ownership, and maintenance costs also make Brazil champion of high prices.

- The government is not keen to change its tax policy because it makes so much money. In 2009, it charged over US$ 15.7 billion in taxes from autos.

- Despite the obstacles, the Brazilian auto industry is having the best times in its history. 3.4 million vehicles are expected to sell in 2010 and investment is at record levels.

- If you read this story and are willing to travel to Argentine to enjoy a delicious wine, a juicy chorizo steak and come back with a Honda city purchased at a US$12,000 discount, forget about it. To cut off this potential tax evasion, the Brazilian government prohibits the importation of any vehicle that doesn't come straight from the factory - except those used in diplomatic missions and cars over 30 years old. And you can only drive a foreign vehicle in Brazil for a maximum of 180 days. The only solution is to accept the high prices charged here.

My takes:

• Things are even more expensive than they seem. The annual car ownership tax is 4% of the government estimated car value, which is always higher than what you think it's worth. So the owner of a domestically manufactured 2004 Toyota Corolla would pay approximately US$ 780, while the owner of an imported 2010 BMW X6 would pay over US$ 7000 in yearly ownership tax.

• Gas is more expensive than in the US, currently costing over 5 dollars a gallon in Sao Paulo.

• Load up at the ATM before heading out on the highway. A quick 5 hour trip from Rio de Janeiro to Sao Paulo will cost you US$ 28 each way in tolls. Credit/debit cards are not accepted.

• It's amazing to me that Brazilians - 1) Are able to afford to drive given the tremendous associated costs, and 2) Still put up with these outrageous duties and taxes.

Brazil a middle class country - almost

According to several reports, including these in the WSJ and Exame, Brazilian Finance Minister Guido Mantega said Wednesday that Brazil's economy has embarked on a long-term cycle of growth and won't be subject to a bubble. "We have $250 billion in foreign reserves and we are vaccinated against crisis", he said. Mantega thinks inflation is under control and the country will grow between 5.5% and 6% this year. He also expects Brazil to create 2 million jobs in 2010.  "You can almost confirm" that Brazil is now a middle class country, due to government estimates that 50% of the population falls in the C socioeconomic class. Sounds pretty good, right?

My takes:

• While Brazil's growth prospects and economic situation are currently in favorable situations, investors can't take everything they hear as the absolute truth. The Finance Minister of any country is going to try and "sell" his/her country's growth prospects to attract more investment. 

• Mantega just totally jinxed the economy by saying "we are vaccinated against crisis"! What's the over/under for some far-off international incident (take your pick among a- terrorist attack in the Philippines b-debt crisis in eastern Sudan c- negative US job growth d- anything else you can think of)  to cause Brazil's economy to tank?

• "Almost" a middle class country? And I was almost a professional basketball player. And Cuba is almost a free market society. Better stop here. Like shooting fish in a barrel.

• Never, ever trust a guido in a high governmental position.

Tuesday News

Looking to open up an office in Brazil? 
It's going to cost you. New research from CB Richard Ellis Group finds a couple of Brazilian cities among the world's most expensive office space, ahead of traditionally expensive cities like New York and Geneva. "In Latin America, Sao Paulo moved ahead of Rio de Janeiro in ranking, posting Latin America's highest office occupancy costs at US$100.00 per sq. ft. and is now ranked the 10th most expensive market globally marking the first time that market has been in the top ten. This is a combination of the appreciation of the REAL against the U.S. dollar over the past year, the scarcity of new office product and the strength of the local office market."

Get your TVs here

Brazil's largest retailer, Pão de Açucar, reported a 33% jump in quarterly profit as soccer fans have been buying televisions ahead of the World Cup, according to Bloomberg Businessweek. “'You have several positive economic factors that led to this growth,' Chief Financial Officer Jose Antonio Filippo said in a conference call with journalists late yesterday. 'You also have the World Cup and elections this year, elements that add to the sales.' Net income increased 33 percent to 126.2 million reais ($71.2 million) from 94.9 million reais a year earlier, the Sao Paulo-based company said in a regulatory filing."

Jose Serra Says Central Bank is 'No Vatican'

From FT - Reacting to the central bank's recent interest rate hike, "Brazil’s opposition presidential candidate Jose Serra said that the central bank makes mistakes that should be pointed out by the country’s leader. 'The central bank is no Vatican,' Serra said during an interview on CBN radio today. 'We shouldn’t interfere all the time, but if there is a calamitous mistake the president should make his position count just as the current government does and the one before.'" Which makes us wonder if the Vatican or Brazil's Central Bank will point out this mistake...

Catholic Priest Charged With Abusing 8 Boys

The AP reports -- "A Roman Catholic priest in Brazil is facing charges he abused eight boys in cases dating back to 1995, prosecutors said Wednesday, adding to a growing list of allegations against clergy in Latin America. Father Jose Afonso, 74, is accused of abusing altar boys between the ages of 12 and 16, Sao Paulo state prosecutors said in an e-mailed statement."

Monday news

REAL ESTATE
Brazil's real estate sector continues to provide lots of action. If you recall from past reports at BBB, Brazil's government has a huge US$41 billion housing program aimed at low-income families. The companies that are best able to take advantage of this fast-growing segment are the ones with the best performance recently. Today Reuters reports that "Brazilian real estate developer PDG Realty agreed on Monday to take over rival Agre in an all-stock transaction valued at 2.43 billion reais (US$1.4 billion), creating the nation's largest builder." 

Meanwhile, yesterday's largest builder, Cyrela, "...was added to Itau Unibanco Holding SA’s recommended list of stocks on the outlook for the housing market," according to Businessweek. "Improving economic growth estimates and 'general strength in real estate markets, aided by attractive valuations, will probably push the stock higher,' wrote Itau analysts including Carlos Constantini in a note to clients. Cyrela has lost 12 percent since January 1 after more than doubling in 2009."

RIO DE JANEIRO
This story from Bloomberg talks about Rio's governer and mayor, who are trying to change the city's image as fun-in-the-sun paradise to a boring business destination where one can't even play soccer or purchase a caipirinha on the beach. I particularly enjoyed the title, "Brazil's 'Big Prostitute' Banning Grilled Shrimp on Rio Beaches", although after reading the story, I still don't understand who the prostitute is, or just how big she might be.

Golf anyone?

A company from the south of Brazil, Jat Engenharia, has developed a really neat real-estate project called Florianópolis Village Golf Resort. Besides the professionally designed 18-hole golf course, it will have a ritzy hotel, a trendy spa, and a residential housing complex.

Golf has been growing in popularity in Brazil, but is still reserved for the elite -- due to extremely high green fees, small amount of courses, and the restrictive cost of purchasing clubs and other imported golf equipment - which most often list for 3 times the US price.

The golf resort will be tucked between the mountains and beach at the island's southern tip. They are looking to have the hotel administered by Marriot or a similar hotelier, and the club will also have tennis courts, swimming pools, hot tubs, saunas, restaurants, bars, game rooms, complete fitness center, event center with capacity for 1000 people, and of course --  a helipad.

Unfortunately for golf and investment fans, this project is on hold until the government gives its approval.

Weekend news

From the Economist: "Power and the Xingu. A huge Amazon hydropower project shows how hard it is to balance the demands of the environment and of a growing and prospering country." Due to Brazil's growth, the country has a serious need for more energy. A proposed US$11 billion dam in the Amazon has attracted international attention -- even Avatar director James Cameron was present during protests.

From Reuters: Toyota has agreed to recall all Corollas in Brazil manufactured since 2008. The article states that "calls made to the Sao Paulo-based offices of Toyota on Saturday were not answered." Really? On a Saturday? So strange. They should try calling on Sunday.

From Portal Exame: The size of supermarkets in Brazil is shrinking. The article cites several factors, including consumer preference for shopping close to home,the stability of the Real allowing for more frequent trips and smaller purchases, and the fact that the Brazilian population is getting older and doesn't want to walk up and down long supermarket aisles.

From Businessweek:  The Brazilian central bank promises "vigorous" action to keep the economy from overheating. Base interest rates are expected to rise this week from the current record low of 8.75%. Central bank president Henrique Meirelles states that “Brazil’s challenge in the next 12 months is to keep inflation in line with targets." Well, that should be easy enough. Quit expanding the money supply. Somehow I bet that idea won't make the discussions.

* Thursday's post about a potential bubble generated a lot of email, mainly from Brazilians upset that I was doing a "disservice" to the country by speaking my opinion about touchy political subjects, such as the political background of Lula's hand-picked presidential candidate Dilma Rousseff. However, this blog was not created with the idea of making it seem that every investment in Brazil will magically create millionaires and  have yearly returns of 400%. If you disagree with something, you are welcome to leave your opinion as a comment.

Is a Brazilian Bubble About to Burst?

Thanks to Stefan for sending me an interesting newsletter from Forbes - Latin Stock Investing. Today's issue asked if a Brazilian bubble is about to burst.

According to Rudy Martin, editor of Latin Stock Investing, Brazil still has tremendous upside. He lists five good reasons for his optimism:

1. Low Earnings Multiples. "The average U.S. stock sells at 17 times this year's and 15 times next year's earnings. In contrast, Brazilian stocks are selling at 12.5 times earnings, or 20% less than U.S. stocks."

He goes on to mention a utility company that provides water and sewage to 366 municipalities in the State of Sao Paulo.  "Its stock trades on the NYSE at less than 8 times earnings!" Deductive reasoning would say that the stock in question is Sabesp.

2. Stable Currency. "The strong Brazilian currency is both a blessing and a curse. The Brazilian real currency rallied by 32% in 2009, the biggest advance among the 16 major currencies."

3. Reasonable Interest Rates. "Let's put things in relative perspective. Obviously in the U.S., with near-zero interest rates and a highly leveraged consumer base, a double-digit interest rate would choke the economy. But we are talking about Brazil now. Five years ago, Brazil's central bank benchmark interest rate was 20%! Today rates sit at a low of 8.75%."

4. High Economic Growth. "The IMF forecasts that Brazil's economy will grow by 4.7% this year and another 3.7% next year. Brazil was one of the economies least hit by the global financial slowdown. With the surge in commodity prices, growth estimates have risen to nearly 6%."

5. A Shortage of Homes. "Believe it or not, there is a housing shortage in Brazil estimated at 5.8 million, according to Brazil's Minister of Cities. There's money to be made from this real estate gap. Cyrela Brazil Realty, Brazil's largest developer, reported 2009 earnings that were 2.6 times higher than in 2008. Rudy Martin's favorite Brazilian developer, whose shares trade on the New York Stock Exchange, just raised nearly $600 million in a stock offering to take advantage of this growth opportunity. Over the last year, this stock has split and doubled!" My friend Mike, an avid BBB reader, deduced he was talking about Gafisa.

At any rate, while I don't necessarily disagree with any of his points, there are some things to be aware of.

1. Just because Brazilian stocks have lower earnings estimates than US stocks doesn't mean they will necessarily go higher. US stocks could be overvalued. Or the economic realities of dealing with extreme government regulation could be causing Brazilian companies to be riskier than similar stocks in developed nations.

2. The Brazilian currency is stable this year. But does anyone remember last year, when the Real devalued 35%? Or 8 years ago, before President Lula was elected, when the Real dropped by over 150% in value? 2010 is another election year. Nobody knows anything about Dilma Rousseff, Lula's hand-picked successor (if she wins), but from all accounts, she appears more "pro-government" than Lula and could potentially align with Evo Morales, Hugo Chavez, and other left-wing Latin American presidents. This is a big risk to me! This is a small risk, but a risk nonetheless, despite Dilma's promises to continue with the current economic programs.

3. Brazil's interest rates, while still high, are the lowest they have been in years but are expected to rise again. The Central Bank has already warned us that it will happen. If anything greater than a mild economic "crisis" hits again, central bankers could be spooked into raising rates too high, choking growth, scaring away investors looking for high long-term returns, and putting dampers on Brazil's promising economic future. It has happened plenty of times in Brazil.

4. While Brazil expects "high" growth, it continues to muddle along at less than half of China's pace. Any change in commodity or oil prices can have a big impact on Brazil's economy - for good or bad. Another scary fact has to do with the size of the Brazilian government. One out of five Brazilian employees works in the public sector. With the potential for not one, but both presidential candidates proposing larger roles for government, Brazil could quickly see its growth cut to more modest levels.

5. Home shortages are found in Brazil and throughout Africa. They have existed ever since the Portuguese conquered the native Americans and destroyed their tipis 500 years ago. What is causing the different climate today, for the enrichment of large construction companies, is that the government is offering huge public works programs to build over one million houses - while spending 34 billion reais of taxpayer money to do it. How long will the money last? Will the next president eliminate the program in order to avoid a huge deficit? If so, the "home shortage" is in risk of remaining a shortage.

Wednesday bullets

Wednesday was a national holiday (Tiradentes - Tooth Puller Day) in Brazil, but there is plenty of action happening anyway.

• The capital city of Brasilia turned 50 years old today. The Washington Post has an article describing the city's challenges. "As Brasilia turned 50 years old on Wednesday, vestiges of that dream live on in Oscar Niemeyer's soaring architecture, the uniform residential apartment blocks, and the plane-like city shape that legend has it was meant to signal the Latin American giant's take-off." Meanwhile, Hooters Brasilia celebrated by granting customers two free beers with the purchase of the Hooters Rib plate.

• Big international law firms (Millbank Tweed Hadley & McCloy LLP) and investment banks (Standard Chartered PLC) are opening offices in Sao Paulo. And we wonder why real estate prices are skyrocketing.

• Wizard, a language school franchise with 1200 locations throughout Brazil, has plans to open 10 schools in the state of Pernambuco by 2012. 

 Students loiter outside recently inaugurated Wizard

• Construction material sales grew 26% in March. Brazilian real estate experienced a hiccup in 2009, but it is roaring in 2010, due to lower interest rates, increased consumer confidence, and the governmental Minha Casa, Minha Vida (My House, My Life) program, which plans to spend R$34 billion of newly printed and taxpayer money to help build one million houses for those making less than R$60,000 a year.

Weekend bullets

• The Folha Online reports that Apple wants to manufacturer the iPhone, the MacBook, and possibly the iPod in Brazil. The objective would be to lower costs and increase sales of the devices. Brazil's import duties on electronics are among the highest in the world, causing hoards of Brazilians to load up their bags with iPods on regular trips to Florida and New York.

• An American journalist living in Sao Paulo, Seth Kugel, wrote an article in the GlobalPost where he wonders if Brazil is Iran's best friend in the West. Recent events tend to indicate that Brazil, indeed, has become somewhat cozy with the controversial nation, from President Lula urging the US to hold back sanctions against Iran, to Brazilian politicians and business leaders making field trips to Tehran.

• My buddy Mike sent me an article from the Economist that details the fight for Rio de Janeiro's oil revenues. It appears that most of the states feel that the money should be shared equally, while Rio depends on it to keep their fantastic, high quality public services.

• Brasil Econômico writes of an upscale Brazilian beer, called Xingu, that plans to expand internationally. The beer's creator, Cesario Mello Franco, sold the brand to Kaiser in 2001 but maintained the international distribution rights himself. Now that Kaiser has been acquired by Heineken, he sees a fantastic opportunity and a big paycheck ahead of him if he is able to convince the Dutch company to take it global.

Café Donuts launches 60th franchise

From Pequenas Empresas & Grandes Negócios (Small Companies, Big Business)

By the end of 2011, master franchisee plans to have 100 units in the country

The Café Donuts franchises started with the American chain Dunkin Donuts. Present in Brazil for 21 years, Dunkin Donuts closed up shop in Brazil in 2005. However, the master franchisees, Oscar Curi and Gerson Keila, kept the right to use the same recipe, the same factory, and sell the same products. So they created Café Donuts and soon thereafter partnered with the Franchising Ventures Group, owner of the Nobel bookstore chain and other brands, in order to continue the expansion of the cafes.

Today, Café Donuts has 60 signed contracts to open new stores in 12 states throughout Brazil, with 50 units already open for business. Sergio Benclowicz, director of network expansion for Café Donuts, predicts that be the end of 2011 there will be over 100 units in the country. "We are experiencing fast growth; we have opened approximately two stores per month, in other words, 20 to 25 stores a year," he says.

Ever since Dunkin Donuts became Café Donuts it started to diversify its food and drink menu, with juices, snacks, ice cream, salads, and sandwiches. Today the cafes have lighter food options and social areas. There are three kinds of franchises: the kiosk, that serves donuts, coffee, juices and snacks; the coffee shop, that adds quick meals (grilled meats, salads and pasta) and deserts to the basic menu; and the bistro, or "lunch and dinner", that has complete lunch and dinner, as well as all of the previous items mentioned.

A customer spends an average of R$10 at a traditional establishment, and R$20 or a little more for a full meal. Each unit's revenue also depends on the models. "There are stores in shopping malls which serve lunch and dinner that have sales of R$150,000 a month, and there are kiosks inside bookstores that maybe have sales of R$ 20,000 a month," says Benclowicz. According to him, the national sales average is between R$400,000 and R$500,000 per year.

The units have as little as 16 square meters (kiosk) of space all the way up to 160 square meters, and allow the franchisee to open a Café Donuts in places like shopping centers or even bus stations. The network offers support - from the choice of store location and architectural plan to the training of employees and the franchisee himself/herself.

Costs of a Café Donuts franchise:

Business type:  Cafeteria

Company founded in: 2004

Initial investment: From R$77,000 to R$218,000

Franchise Fee: From R$20,000 to R$40,000

Royalties: 5% of gross sales

Working capital: From R$15,000 to R$25,000

Advertising fee: 3% of gross sales

Average monthly sales: R$35,000

Net income: 15%-20%

Average time of return on investment: 2-3 years

Contract period: 10 years

Regions of interest: Brazil

Franchisee support: Helps in selecting and negotiation of store location, employee selection, franchisee and employee training, on-site store building assistance and architectural plan.

Email: franquias@cafedonuts.com.br

Website: www.cafedonuts.com.br

Telephone: + 55(11) 3706-1494

Source: Café Donuts

* This article appears on the site of Pequenas Empresas & Grandes Negócios & was translated without any consent whatsoever. The franchise will be happy, however, and I hope to be served free coffee and donuts for life.

Wednesday bullets

• According to Exame -- Expedia, the largest online travel agency in the world, with annual revenue of over US$21 billion, is coming to Brazil. According to Exame, Expedia partnered with Brazilian agency Tour House through its subsidiary Egencia and plans for almost US$700 million in sales over the next year.

• So which airline do you think was more profitable in 2009? Jetblue? Delta? Gol? According to a study done by Economatica, two Brazilian airlines were the most profitable in all of America - North and South. TAM was far and away the most profitable, taking home US$ 771 million, followed by Gol with profits of US$ 493 million. Southwest came in 4th place with US$ 99 million. American Airlines lost almost US$ 1.5 billion. In other words, use your AA miles soon. TAM, meanwhile, sees the air traffic growth of 18% in 2010.

• One of my favorite Brazilian clothing stores, Richards, was purchased by the InBrands group, according to Dinheiro. The group already owns Ellus, 2nd Floor, Isabela Capeto, Alexandre Herchcovitch, and Luminosidade - which organizes Sao Paulo Fashion Week and Fashion Rio. The purchase should bring Inbrands' annual revenue from R$ 300 million to R$ 540 million.

Tuesday bullets

• Brazil is set to pass Germany and become the 4th largest auto market in the world -- behind China, the US, and Japan, according to this article at Bloomberg. Vehicle sales totaled 3.1 million in 2009 and are expected to grow in 2010. Just imagine the size of the market without the current crazy prices (result of import duties and taxes). For example, a basic 2010 Toyota Corolla in the US costs around US$16,000. In Brazil it costs the equivalent of US$35,000. This subject deserves its own article. Coming soon to a blog near you.

• From Exame -- The social networking site for "professionals", LinkIn has already been surprisingly popular in Brazil, with approximately one million users. Now it's getting a version in Portuguese. Arvind Rajan, VP of International Affairs, believes this could lead to faster growth in Brazil. Beavis and Butthead would be nodding their heads in agreement right now, saying "Whoa. Cool. He said 'growth'. Huh, huhhuhuh".

• From Isto é Dinheiro - What happens when you merge your retail company with the largest retailer in Brazil, get billions in stock and cash - but find out five months later that you don't really like the direction the new company is going and you don't have control of it because the legal charter says 49% next to your name? Well, if you're the Klein family, you threaten to sue so you can renegotiate the deal. That's the story with Casas Bahia - a massive retailer of affordable furniture and electronics - and the Pão de Açucar Group, which own approximately 98.3% of all grocery stores in Brazil. Ok, I might have exaggerated on their percentage of ownership, but not the rest of the story.

Brazilian IPOs. Good deals or not?

Most companies that went public in the last five years have declined in value on the stock market

Of the 98 companies that issued an IPO from 2005 to today, 51 are in the red; the company with the highest profitability increased in value by 452%

Yolanda Fordelone, from O Estado de S. Paulo 

SAO PAULO - The investor who bought shares in an IPO (Initial Public Offering) over the last five years and kept the stock in his or her portfolio has a high chance of suffering a loss. A study from Economática shows that of the 98 companies that went public betweeen 2005 and 2009, 51 of them had a negative performance since the beginning of trading on the Sao Paulo Stock Exchange (Bovespa).

Motivated by the long growth cycle the Bovespa went through, many companies went public through IPOs. Some, say specialists, did so at the wrong time. "2007, especially, was a period of intense demand from investors and a large supply from companies, almost a bubble phenomenon, in which everyone believed in a quick profit in the first few days after the IPO was issued", recalls Rogerio Sobreira, finance professor at FGV University.

"Everyone expected a bigger return in revenue, sales, etc, that didn't ever happen," says the head of analysis of Link Brokerage, Andres Taihei Kikuchi.

Difficulty

The crisis that hit the stock market soon afterwards, in 2008, caught many companies unprepared, that had issued IPOs expecting the market to continue to climb. Of the 59 offers in 2007, 39 are in the red. In some cases, the current price is more than 80% less than the introductory price.

Investors haven't forgotten the large number of stock offerings during the period and the high percentage of stocks that still haven't recovered. "Many people have grown tired of these operations and the investors perceived that, much of the time, they cannot effectively evaluate the company because they don't know it well enough," says the head analyst at Spinelli Brokerage, Kelly Trentin.

"Makes no sense"

One of the investors who had a frustrating experience was the 33 year-old physician Bruno Coutinho, who last year purchased shares of Visanet (which is now named Cielo).

After the IPO, the stock moved in price with no defined trend and today is worth 2% less than the original price. "Bill payment with credit cards is growing more every day. Plus, the stock had a great performance in its US debut. It doesn't make sense that the price went down," says the investor who decided to sell the stock a little over a week ago.

The decrease in the appetite of investors has been felt by the most recent IPOs. While in the past, IPOs would easily attract more than 10,000 investors, offers this year haven't attracted more than 3000 people, according to the Bovespa benchmark. "The poor IPO performance sticks in the memory of the investor", says the Insper finance professor, Andrea Minardi.


* Translated and reprinted without express written consent -- but hey, it was a free translation. Original article here.

Guides to doing business in Brazil

• US Country Commercial Guide for Brazil 2009  - This website contains a collection of published reports designed to help US companies understand the opportunities and challenges of doing business in Brazil.

• Doing Business 2010, Brazil - PDF file published by the World Bank that gives details of doing business in Brazil and rankings compared to other countries.

• Doing Business in Brazil - Prepared by the legal writer, Elísio de Souza, this guide provides an overview of the early legal issues foreign investors face upon market-entry in Brazil.

• Guide to Doing Business in Brazil - PDF file from Pinheiro Neto Advogados that presents a comprehensive guide to the legal norms ruling foreign investments and corporate activity in the country, and constitutes an important support for foreign businesspeople willing to invest in Brazil.

• Social Tips on Doing Business in Brazil - From Maria-Brazil, home of Brazilian culture on the web.

• Doing Business in Brazil - PDF file published by UHY Moreira - Auditores in Porto Alegre. This detailed report provides key issues and information for investors considering business operations in Brazil.

Videos

• UK Trade and Investment Spotlight on Brazil (Sao Paulo) - Video giving a broad overview of opportunities for British companies in Sao Paulo and all of Brazil.

Weekend bullets

• Earlier this week the US and Brazil appeared to tentatively resolve a trade spat that started with US cotton subsidies. Michael Grunwald at Time tells us the details of the resolution, which incredibly includes US$147 million a year from the US government to Brazilian agribusiness. As weird as that sounds, the US is paying off Brazilian agriculture companies in order to keep its subsidies to US cotton farmers.

• Just eight years ago, Subway had a measly two stores in Brazil. But they have of goal of passing McDonalds as the largest fast food chain in the world by 2014. Through an aggressive expansion, today Subway has 408 Brazilian stores.  Exame has an interesting read (Portuguese) about how they accomplished it.

• Brazil sent their Trade Minister and a 100 person delegation to Iran to explore business opportunities. Maybe in the vacuum of the US and other western nations, there are lots of opportunities. 

• Delta plans to add flights from Detroit to Sao Paulo. It's surprising this route didn't exist before -- since both GM and Ford have headquarters in the two cities.

BlackRock - Investing in Brazil

BlackRock is a global asset management firm with a Latin American fund composed of many Brazilian companies. Financial Times published a recent article explaining how the company is banking on Brazilian growth. Will Landers, the Latin American fund manager, gave his outlook on the country -- "But in Brazil the combination of the domestic growth story, with the Brazilian middle class’s purchasing power continuing to rise, and interest rates as low as they’ve ever been is compelling."

Either BlackRock is lucky or very competent (or both). Their fund has risen in value by 366% in the last five years. Their latest moves include increasing their shares in Petrobras (government controlled monopoly) and Brazil's largest privately controlled bank - Itau, which swallowed up another large competitor, Unibanco. Those sound like safe bets to me!

On a side note, BlackRock is growing tremendously worldwide - both organically and through acquisitions. Take a look at their history chart from their web site. 

Ford betting on Brazil

Now that the US auto market is in the dumps, car makers are desperately looking for growing markets. One of those places happens to be Brazil. The Estadão reports that the President and CEO of Ford, Alan Mulally, met with President Lula today and announced that the US based company will up their investment in the country. Over the next five years, Ford plans to invest R$4.5 billion (US$2.53 billion) in their Brazilian operation. The EcoSport, a model designed in Brazil, will be produced domestically and exported to other markets.

Ford EcoSport

Ford currently stands in 4th place in Brazilian market share for cars and light trucks behind Fiat, Volkswagen, and GM.

Wednesday bullets

• Folha Online reports on new taxi fares from the International Airport. "Besides overcrowded terminals, long check-in lines, even lines to go to the bathroom or to buy a coffee, the users of Sao Paulo's international airport in Guarulhos have another reason to complain. Taxi fares from the airport became about 19% more expensive to most business destinations in the city. This means that a previous R$88 (US$49.50) taxi ride to Paulista Avenue now will cost R$ 105 (US$59) and a trip to Brooklin (south zone) will now run R$127 (US$72)." 

• Bloomberg writes that Morgan Stanley has opened a hedge fund office in Sao Paulo that will serve clients in South America. 

• So did Lenovo buy one of Brazil's largest PC manufacturers? A news source from China seems to indicate that it did. Positivo, the acquisition target in question, denies it.

Hyatt - economic version

After nine years with only one hotel in Brazil -- a five star hotel in Sao Paulo --, the Hyatt Hotel group will start expanding in the country. It plans to invest R$300 million (US$169 million) to open 15 hotels by 2015. Hyatt Place, geared towards the executive market, will have daily rates of approximately R$200 (US$ 113), about one third of the price its current hotel charges.

Grand Hyatt in Sao Paulo: 15 new hotels by 2015

*Article from Exame magazine, April 7th, 2010 print edition

MiniCooper is hot

The price of BMW's MiniCooper is around R$90,000 (US$50,670). However, the high price hasn't slowed the sales success of this car in its first year in Brazil. Between April and December of 2009, 1023 units were sold, which is double what the German car maker expected. BMW continues to be optimistic for 2010. 137 MiniCoopers were sold in January and February, 25% more than initial expectations.

*Article from Exame magazine, April 7th, 2010 print edition

Tuesday bullets

• Flash flooding in the city of Rio de Janeiro has spurred chaos and is responsible for approximately 100 deaths (as of 7:30 p.m. Brasilia time). BBC posted some pictures on their website of what life was like for "cariocas" (residents of Rio) today after receiving 11 inches of rain in 24 hours.

• Meanwhile, bad news for some is good news for others. Businessweek reports that the rain is welcome news for the world's largest producer of coffee, sugar and orange juice, and may boost yields.

• The US and Brazil appear to be slowly resolving their trade dispute over cotton subsidies offered by the US government. Brazil won a case at the World Trade Organization (WTO) and has the right to impose sanctions on US companies. In the end, this sort of action (tariff increase) doesn't help anyone. It just makes products and services more expensive for Brazilian residents.

• Where's the beef? Reuters reports that the world's largest beef processing company, Sao Paulo-based JBS, is looking to raise over one billion dollars in a stock offering. "JBS, which started as a small abattoir in Brazil's Midwest, has ballooned in size in recent years through a series of acquisitions in the United States, Europe and Asia to become the world's biggest beef exporter, the No. 2 global poultry company and the No. 3 U.S. pork processor. The company plans to use two-thirds of the proceeds from the stock offering to expand its direct sales business, including acquisitions of distribution centers and delivery trucks. The remaining funds will be set aside for working capital."

• Kevin Grewal at Minyanville gives his argument of why Brazil is a hot market. Nothing we haven't heard before -- the country is rich in natural resources, it will be hosting international events (World Cup 2014, Olympics 2016), and it has low interest rates. Wait. What? Low interest rates? That point is certainly debatable. Brazilian interest rates have declined, but they are still high compared to most economies.

• Exame has a great article (in Portuguese) on the future of the proposed bullet train linking Sao Paulo and Rio de Janeiro, allowing passengers to get from city to city in a blazing 90 minutes. It has an estimated cost of R$ 34.6 billion (US$ 19.8 billion), but we all know how projects increase in price, scope and corruption.

Monday bullets

• Mary O'Grady of the The Wall Street Journal caused some commotion in Brazil by not agreeing with all the rosy forecasts of Brazil's economy in her article entitled "Curb Your Enthusiasm for Brazil". Despite creating billionaires like Eike Baptista, who rose to 8th place on Forbes list of the world's wealthiest individuals, she tends to believe that his story is just another example of the "same old Latin corporatism" which favors a small, select group with special ties to the government. She argues that true reform hasn't taken place and that there still exists a massive amount of bureaucracy, a stifling regulatory and tax structure, and an increase in protectionism --all which do more harm than good to small and medium-size businesses looking to grow. In retaliation for this critique, President Lula has imposed a 25% reading tax on the US based business newspaper.

• The Folha Online reports that the Sao Paulo Stock Exchange (Bovespa) hit its highest level in almost two years today, aided by good news from the US economy. Today's closing at 71,289 points leaves it remarkably close to the all-time high of 73,516 set in May of 2008. Investment fund operators expect the Bovespa to end up between 80,000 and 81,000 by the end of the year.

• Exame posted an interview with Karen Peetz (in Portuguese), CEO of Financial Markets and Treasury Services for BNY Mellon. Mrs. Peetz, along with the rest of investment world, is bullish on Brazil and believes it will grow more than 5% this year - regardless of this year's presidential election results.  She added, "China is always in the news, but I think Brazil is the best positioned among the BRIC countries (Brazil, Russia, India and China). It's democratic, it has a mature stock market and a reliable legal system." As a side note, I like BNY Mellon because they helped sponsor a recent American Society softball tournament.

Azul plans to double in size in 2010 with the arrival of aircraft

 * Translated and republished without express written consent by Veja or the National Football League

Original article in Portuguese from Veja.com --

Pedro Janot, president of Azul Airlines (founded by David Neeleman, formerly of Jet Blue), said on Wednesday that the airline plans to double in size in 2010 with the arrival of seven Embraer aircraft. According to Janot, the first of seven ordered planes arrived in March and is already in operation, bringing to 15 the number of company aircraft in activity.

The company expects to receive another six planes by the end of the year.

"The market is heating up; it grew 48% in February and 33% in January. We grew very quickly and we expect to double in size this year with the arrival of the aircraft," said Janot to journalists, after participating in a Manufacturing Federation of Rio (Firjan) event. "The company is already in the black, making a profit", he added.

Janot estimates that the Brazilian aviation market will grow this year between 17% and 20%, but said prices shouldn't go down because the companies are making up for margins lost during the global crisis. Last year, the market grew 17%, but first semester growth was basically stagnant.

Azul's occupancy rate in March, according to Janot, was 86% and the objective is to maintain this average until the end of the year. In January, the occupancy rate was 90% and in February, 87%.

The executive mentioned that the two new slots at Congonhas airport in Sao Paulo will be inaugurated in May with flights directed towards weekend tourism.

"We are planning to do tourism packages and not the filé mignon, which is the executive market. We will have connections between Porto Seguro (Bahia) and Sao Paulo," he said.

Why doesn't Zuckerberg pay attention to Brazil?

* Translated and reprinted without any authorization whatsoever from Dinheiro's online edition (Digital Market)

The world's largest online social network is also the fastest growing in this country. But Facebook seems like it is turning its back on one of the most attractive online communities on the planet.


By Ralphe Manzoni Jr. and Bruno Galo

The young founder of Facebook, 25 year-old Mark Zuckerberg, visited Brazil in August of 2009. He met with bloggers, launched an award for developers, talked with the press, but didn't make any important announcements. His tour through the country, however, resulted in a significant market growth. The number of Brazilians on Facebook jumped from 4.2 million to 8 million people in February of 2010.

Its main competitors, Orkut and Twitter, were stagnant in the same period. Brazil has proportionately more people accessing online communities than any country in the world, according to Nielsen Online. Of every 100 people who surf the Internet, 86 spend time in online communities. In second place Spain, only 77 people go to such communities.

In the US, the number is 74. "We won't be able to accomplish our mission if we don't succeed in Brazil", said the entrepreneur, whose fortune is worth an estimated US$ 4 billion, during his time in the country. But don't be fooled by Zuckerberg's statements. Facebook doesn't even have an office in Brazil. Even more: its advertisements are sold by a competitor.

And there is no sign that this will change in the near future. With more than 400 million registered users in the world, why does Facebook, which is the largest online community on the planet, still ignore one of the most attractive social networking markets?

The quick answer is Orkut. Google's site didn't catch on anywhere, except Brazil and India. Of every 100 people that access social networks in the country, 73 say Orkut is their favorite. It's a big barrier to entry for Zuckerberg's company. But that barrier is slowly being broken.

Google's online community is stagnant (see graph above), albeit at very high levels. Facebook, on the other hand, has been growing every month and should soon surpass the great phenomenon of 2009: Twitter. "Facebook is a great business that generates sales and publicity for companies and products. The only thing lacking now is for it to become profitable," said Luli Radfahrer, professor of digital communication at USP (University of Sao Paulo).

There is also another problem in Brazil. The way the site makes money is basically through online advertisements. And the company that sells advertisements in Brazil is .FOX Networks (pronounced "dot FOX", one of the largest international ad networks, is the online division of FOX International Channels), a News Corp. company that belongs to media mogul Rupert Murdoch. For those that don't recall, Murdoch is the owner of MySpace, another social network and Facebook competitor. Around here, .FOX Networks sells both of them. But it created a separate business unit to sell MySpace.

In the US, companies like Burger King, Honda, Johnson & Johnson and Unilever invest in the site. According to Facebook, 80% of the largest North American advertisers have already done some sort of promotional activity. "Facebook wants to build a large user base and afterwards "sell" assets related to this base," says Marcelo Coutinho,  Ibope (Brazilian Institute of Public Opinion and Statistic) consultant and professor at Fundação Getulio Vargas in Sao Paulo. "They can be advertisements, databases of people interested in goods or services, or information on people's online behavior."

The only indication that Facebook's stance may change is a classified ad in the Career and Employment section of its site which states that it plans to hire a Brazil business manager. There is no date for when this will happen. "The contract for the job is from 6 to 12 months", says the statement. Last week, Facebook announced that it will open its first office in Asia.

India, where Orkut is the leader, was the chosen site. Internationally, the social network is in Dublin (Ireland), Milan (Italy), Paris (France), Stockholm (Sweden), Sydney (Australia) and Toronto (Canada). Aren't they missing an office in Latin America?