Too Big to suffer?
Too Big to suffer?

We imagine that size prevents a company from “suffering”. Surely is size that gives access to financial and human resources, intelligence and technology. It, also, brings with it complexity and increased risks.

Three of the largest retailers in Brazil have been suffering in the last years. These retailers have size, access to resources and are linked to larger groups. Together the three have combined sales of impressive R$ 107 billion (in the neighborhood of US$ 30 billion)!

In descending order of sales these retailers are: GPA, LASA e Makro. The three show deterioration in their figures in spite of, clearly, being in motion.

And what appears to be happening? Why these companies are suffering that much? Would these problems be environmental or structural? And what would be necessary to leave this state?




GPA is the largest multi-format retailer operating in Brazil. Its banners are well known and are among the leaders in each format: Extra (Hypermarket); Pão de Açucar and Extra Super (Supermarkets); Minuto Pão de Açucar e Mini Mercado Extra (Convenience); Assaí (Cash & Carry wholesaler); and Ponto Frio and Casas Bahia (furniture and electronic stores). There is yet Cnova a company in which GPA is a shareholder, responsible for operating the ecommerce.

The description of the different businesses per se already demonstrates the degree of complexity in terms of corporate organizational, and, consequently, management.

GPA is in a process of complete its integration to the Casino Group. This without any doubt is an important change as it involves the substitution of people and acculturation of those that stay.

Casino Group has a more finance oriented culture. It means: focus on working capital management, more scrutiny on investments and expenses and a lower tolerance to experimentation (outside the finance area).

Those that visit stores of the group perceive an increased level of out of stock when compared to the previous management. On top of that the quality in service has been sacrificed in favor of an increment in productivity.

The non-food division adds to the complexity in regard to the management of categories linked to technology that demands a higher investment and, consequently, increasing the risk profile.  Also these categories are more exposed to direct competition with the ecommerce.

Cnova, as any ecommerce, has its success measured by the speed it can grow. And accelerated growth generates challenges in finance, controls and lack of structure and prepared people. Also the merger with the international operations and the listing in a US Stock Exchange only increased complexity and a brought further pressure on results. This combination was explosive. The losses associated to fraud involving stocks show it.

2Q2016 figures show it all: the company went from a net cash position of R$ 3 billion to a net debt position of R$ 5 billion (included R$ 2,5 billion in funds for consumer credit). Losses of the 1H2016 reached R$ 740 million. This situation, per se, limits the capacity of investment of the company and obliges it to spend more time on the assets at hand aiming to extract from them their true potential.



Lojas Americanas S.A. (LASA) was the first incursion of GP (former-Banco Garantia, now 3G guys) out of the financial sector. Only some time after the acquisition of Brahma (now part of AB Inbev) took place. LASA reunited back  in 1982 all important elements that could justify an acquisition: established brand and installed base of stores, “dormant” management, non-defined shareholding control, and, above all, real estate assets and a high and constant cash flow.  We have now, to step back in order to better understand that moment. In the 1980s Brazil suffered with an annual inflation rate of 3-4 figures!  Imagine in such a high inflationary environment one being able to make purchases at 30, 60, 90 or 120 payment term days and selling at sight! One could sell the product at below cost price and the end result would be fantastic. This was the secret for Carrefour’s growth in this highly inflationary period. And the GP guys perceived this opportunity after all they had the necessary abilities: cash management knowledge, they were frugal, were intelligent, had courage and were not afraid of making mistakes.

Since those years in up to date they spun-off the real estate business (today’s São Carlos), and created B2W, surely the closer we have to Amazon in Brazil.

LASA deals with the complexity of having under the same roof an operation of physical stores that, yet “pays the bill” for the ecommerce, but that suffers and is on a declining trend and an ecommerce operation that continues on an ascending trend but that consumes cash at an hallucinating rhythm. In the last 5 years LASA invested and paid in dividends something in the region of R$ 6 billion, partially funded by cash generation and suppliers and a big chunk by debt issuance. This is not yet worrisome.

Worrisome is indeed, the fact that, yet to date, the business is very much focused on treasury management, something that generates discomfort in the relation with suppliers. It is a fact that to reposition the physical stores making them more relevant is a difficult task. If the drugstore model was applicable in Brazil, LASA would be enormously benefited. When I see Rite Aid or Walgreens in US, LASA always comes to my mind: location and size are ideal.

B2W reached a size and degree of complexity that demands a “cleaning up”, something that, from outside one could say they are already promoting it. An example is the focus on marketplace, very healthy as it eliminates the risk of investing in inventories and margin of categories that they are not relevant or that do not understand.  Fact is that is not sustainable continuing “burning” cash for an undetermined time. It is the moment for “sweating” the assets.



Makro is bleeding for the last 6 years. The figures show, that Makro between 2010 (inclusive) and 2015 posted a combined net loss of R$ 3,6 million while investing around R$ 600 million, and opening 4 stores. Between 1997 and 2009, the company presented a combined net profit of R$ 1,1 billion, invested R$ 960 million, opened 51 stores (started the gas station business and the delivery business through the acquisition of EZFoods) and paid R$ 744 million in dividends.

Where Makro got lost?

First, it did not adapt neither in order to capture the emerging middle class (Lula cycle) nor to be truly professional. Cash and carry wholesale, in its inception, serves manufacturers and importers by distributing their products in a more economic manner (as it shares the cost among various suppliers) to small businesses or businesses that purchase in small batches for own use or yet for transformation or resale. Such a format adapts very well to developing countries, geographically dispersed and with deficient infrastructure. Its advantage over the traditional wholesalers resides, mainly, on an ampler assortment (including perishables) and in the convenience (one stop shopping, no minimum order and lower administrative costs). This model, with a few important adaptations, suited well the emerging middle class, even by substituting the hypermarket in this role. The main adaptations to better serve individual customers that buy for own use were: smaller or unitary packages; “dual-pricing” (price for box and unit); increasing payment options; and the use of “fat lady Mary” cart.

Additionally, in moments of economic crisis, such as this Brazil is going through, consumers tend to seek for value for their money, a phenomenon known as “trade down” (migration from a format with more service and more expensive for another based solely on price) takes place, benefiting this format. And, Makro, once more, did not take advantage of this window of opportunity.

Other lost opportunities involved the non-development of supermarkets alliance under a banner created by the Cash and Carry, similar to IGA or to Martins’ Smart;  non-acquisition or merger with a national traditional wholesaler; and non-selling the business as a whole to a large retail group (the window of opportunity is closed and the company lost value).

What one may learn from these three examples?

1)    Multi-format or multi-business it is something difficult to handle from a managerial point of view, being imperative to count with experienced professionals from within the sector;
2)    Working capital management is very important, more important yet, is to be focused on customers;
3)    Ecommerce is the present and not the future, thus, it has to be sustainable!
4)    Large companies must give large steps. Doing a pilot is acceptable, however once it is proven, speed and resolution are a must;
5)    It is mandatory to be courageous to make choices while there is yet time to make them.

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