How Brazil's Consumption Patterns are Shaping its Macro-Environments

Executive Summary 

Brazil’s economy got affected by the high debts and increased inflation rates that hit the country in the 1990s. The economy of Brazil picked after policies and reforms to stabilize the economy came into place. Currently, more solid social and macroeconomic policies have significantly lead to the stabilization of the Brazilian economy. In 2014 and 2016, Brazil was lucky to host the World Cup and the Olympics Games respectively leading to more interior developments. Brazil boasts being a leading economy in the South of America as well as being the pioneer Latin nation to experience economic recovery. Political, ecological, social, economic, legal and technological factors form part of the macro-environment in Brazil. Brazil got to adopt the automated wealth manager technique in majority of its investments. The automated strategic service works to offer detailed automated and reliable investment advice that was previously unavailable in the economy. Brazil’s risk premium is best calculated using alternative 3; R m * (Country X Volatility of Stock Returns / US Volatility of Stock Returns) * β . It is possible to accurately compute the economy’s volatility of stock returns in relation to US volatility of stock returns. Investors in Brazil therefore rely on accurate risk premiums so as to make wise business decisions. 

Brazil’s Consumption and Macro-Environments 

Consumption 

Brazilian household saves less in comparison to world-class economies such as China. Reports indicate that Brazil saves close to 20 % on average. The hyper-inflation experienced in the 1980-1990s posed a significant threat to potential savers. People residing in rural areas of Brazil are still less enlightened on matters of the economy given the limited financial institutions in the region. The Brazilian economy has high propensity rates of consumptions. Energy consumption is rampant in Brazil. Private consumption is meant to accelerate economic growth in Brazil. Indexation to the lowest wage with the pension and unemployment benefits also played a role in increased consumption in Brazil. Brazilian economy adopted economic policies meant to raise incomes of households and ensuring proper spending of the acquired revenue. Minimum wage rule, income tax cut, subsidized lending for automobiles as well as increased borrowing allowed by public banks are all policies to boost economic growth in Brazil. Consumption raised the economy of Brazil over the past years (Damodaran, 2012). Expanded infrastructural underdevelopment and reduced levels of investments set in following the substantial consumption rates in the economy. High consumption rates in Brazil negatively affected the economy of Brazil since several gaps in infrastructural advancements emerged. 

Government spending in Brazil rose significantly following the Lula da Silva and Dilma Rousseff authorities. Increased prices of items led to the expanded exports thus more revenue for the economy. The cash transfer program ensured the majority of the Brazilian people secured proper paying jobs resulting in increased purchasing power in the marketplace (Brainard & Martinez-Diaz, 2009) . 

Other than private consumption, government spending and savings in Brazil, Brazil embraces retailing services. The three major retailers in the economy are the Grupo Pão de Açúcar, Carrefour and Wal-Mart. Brazil’s retail sales grew by 43% between the years 2012 and 2016 which boosted the GDP by approximately 4.2 %. Investors in Brazil have ventured majorly in automobiles and agro food products with the hope that government lowers the rate of borrowing extended to them. Social networking has been useful in reaching product consumers in Brazil. According to research, Brazilian consumers are assumed to access the internet 5 times more than people in other countries thus boosting business dealings in the country (Damodaran, 2012). 

Over the years from 2000, Brazil enjoyed rising incomes, real wages, reduced rates of unemployment as well as high economic productivity. However, in the short term of economic advancement, cyclical factors are likely to affect consumption following slower income generation, higher real interest rates and low credits offered by the banks and other financial institutions (Damodaran, 2012). Reports by the IMF in 2016, indicate that Brazilian GDP was set to contract by approximately 7 %. The contraction of the GDP can be best explained by the increased first government spending which as of 2014, was at 36 %. Taxes on consumption got raised, and labor-market enactment came into the act during the period of increased GDP. The Brazilian economy has been struggling to correct price regulation through exchange-rate depreciation which resulted in great inflation rates over the previous year. 

Macro-environment in Brazil 

Macroeconomic situation in Brazil has somewhat gained stability over the past few years. Brazil’s central bank has taken up the role of maintaining a favorable exchange rate while targeting higher rates of inflation. As from 1998, Brazil adopted a floating exchange rate. Initially, the economy used the real peg rate. Brazilian government made use of foreign exchange policy interventions to make the exchange rate friendly to the economy while imposing numerous capital restrictions. Capital inflows got controlled through tax imposition on portfolio inflows. However, the limitations have been done away with following depreciation of the real exchange rate. By August 2013, Brazil’s central bank had close to 13 billion dollars stock of foreign exchange in its account. Fiscal policies in Brazil have changed positively in the past years. There has been significant overlook over public spending following the inception of the Fiscal Responsibility Law in the economy (Damodaran, 2012). The manageable surplus for the government got accumulated with a 2 % of GDP in 2009 being primary surplus. The high primary surplus is of the essence in the Brazilian economy due to the enormous interest rates and high public debt in the country. Relatively low inflation rates, moderate budget deficits, and public debts declined as part of Brazil’s GDP in 2011 from a percentage of 77 to 54. The public sector in Brazil is vast with the economy being an external creditor. 

Anti-inflation policies get widely supported in Brazil. The central bank aims at maintaining inflation rates at 4.5%. Also, Brazil’s central bank has shifted to practical macro rules as harmonizing gears for monetary policy. Practical macro controls imply that the central bank regulates credit growth through increasing or lowering capital and cash requirements in banks in a bid to maintain a flexible exchange rate in the economy. It is worth noting that the external macro-environment for Brazil is very friendly. China and other economies have benefitted Brazil through the high demand for iron ore, soy products, coffee, meat, and sugar. In 2008, Brazil got affected economically through the instant decline in commodity prices as well as strain on financial markets. Brazil was brave enough to establish countercyclical economic policies to curb the financial crisis experienced. The enacted policies led to an increased public spending and lower rates of interest. In 2010, the Brazilian economy improved with changes in GDP from -0.9% in 2009 to significant 7.5 % in 2010 (Santos et al., 2014). During the year 2010, significant oil discovery was made in the Atlantic Ocean making Brazil one of the largest oil producer in South of America. Sadly, economic growth in Brazil reportedly fell to 0.9 % from 2.7 % in 2012. According to economic predictions, Brazilian economic growth is said to reach 2.8 % in 2019. Growth is expected to improve in regards to investments a recovery of primary consumption on the back of declined inflation. 

Political Environment 

The political environment in Brazil is currently stable. Brazil has an efficient government and almost no political unrests. It is important to note that political changes could occur at any time in Brazil since elections pose risks of restlessness. Like many other economies in the US, Brazil still struggles with the issue of corruption from time to time (Damodaran, 2013). Establishing a company or any business in Brazil entails paying government authorities which are usually not legit in most cases. Report from the Transparency International placed Brazil in the 70th position in corruption out of a total of 180 countries. Consumer Protection Defence Code is one of the banking regulations related to automated wealth management in Brazil. The Consumer protection code requires banks and financial institutions to establish consumer relationship with their clients. Consumer information held by the bank must therefore be objective, simple and easy to comprehend. Custody of third-party resources and the use of other party to make application of resources is restricted to banks in Brazil. Therefore, international banks operate in Brazil only if they are recognized by the Brazilian Central Bank and the President of the host country. Brazil has a good image on protecting intellectual property for its people. The anti-piracy law is one of the intellectual property laws in Brazil which seeks to deal with criminals pirating property belonging to other investors and consumers. Brazilian government has made progress in enforcing the anti-piracy rule by stabling the National Institute of Industrial Property (NIPI). The NIPI is a program that enlightens federal employees in the country on how to deal with property piracy. 

Economic Environment 

Brazil has a high probability of advancing economically. The country possesses a large population. The breach between the rich and less fortunate is relatively low in Brazil. The country’s central bank is at the forefront in controlling inflation and guarding against domestic currency devaluation. The real, Brazil’s currency is currently doing well. Brazilian government placed its stand on treating both foreign and domestic business operations in the same manner. The ratio of unskilled, skilled workers to labor costs on the global level are insignificant in the economy. The unemployment rate in Brazil as per August 2018 stood at 12.1 percent with more than 600,000 jobs created. Brazilian importers get a reduction in rates of tariffs following more years of importation through a system introduced by the government (Talamini et al., 2013). The local governments in Brazil get to offer business enterprises with incentives. Currently, the corporate tax in Brazil is at 15 % a rate relatively higher than the rate of other economies such as Greece and Portugal. Price Water Coopers urges exporters to get proper information from local trade and tax firms before making shipments. Currently, Brazil’s interest rated as voted by the Central bank is at 6.50 %. The central Bank promised to keep borrowing costs as low as possible. 

Social Environment 

Regarding the social environment, there is still a significant portion of the Brazilian population living under the poverty line. Many people are classified under the minimal income group while a few being placed under the rich. However, the standard group is rapidly growing in Brazil. Close to 18 million Brazilians are considered wealthy (Damodaran, 2013). Generally, Brazilians are said to be conversant with fashion trends and are at a position to purchase high-quality products. In Brazil, the south and south-east parts are quite prestigious hosting the wealthy citizens contributing larger size of total GDP. Brazil is home to many internationals ranging from European domination and Africans who came in as slaves. Brazil’s culture is therefore diverse. The total population of Brazil is approximately 190 million with more than half being whites. Majority of Brazilians are Roman Catholics following the Portuguese influence in the country. Social and economic classes in Brazil are formed based on color and financial capabilities one holds. Wage gaps get created as a result of the social classes in which the rich fail to interact with the poor. Brazilian women also get low paying jobs compared to their male counterparts. In Brazil, business person prefer coming into contact with individuals rather than companies thus the need to build trust with the locals before establishing any form of business. 

Ecological Environment 

Ecological environment in Brazil is useful in steering the economy in terms market advancement, technology and the general goal of economic sustainability. Policy makers in Brazil examine the social, economic and ecological factors in the country before making final economic decisions. Brazil is a member of the BRIC community and is currently termed as an emerging and newly industrialized country in South America (Talamini et al., 2013). The high rate of economic growth in Brazil is accounted for by the increased demand for natural resources by economies such as China. Brazil gets to sustain the high demand from China through building large modern ports and airports to expand on transportation capacity. There are regulations in Brazil regarding environmental protection. Restoration of degraded areas, control over the use of resources, proper use of soil, subsoil, water and air, creating awareness on environmental preservation are among the principles set by the Ministry of Environment in Brazil. 

Technological Environment 

Brazil’s technology is still wanting compared to China and Russia. Investment and infrastructural developments are also not up to the world standards of successful economies. Brazil is currently working to improve its technological situation in almost all cities in the country. As of 2009, the International Telecommunications Union (ITU) stated that some internet users rose rapidly with approximately 80 million people accessing the internet. Brazilian enterprises get to market their products online as well as consuming what gets advertised and sold online. Brazil’s economic growth led to reduced taxes on electronic gadgets such as mobile phones and personal computers as the government promised to make internet reachable to all persons in Brazil (Talamini et al., 2013). Brazil’s local and federal governments are both supportive in adopting the latest technological trends in a bid to boost the economy. 

Legal Environment 

Ease of conducting business in Brazil is still a challenge. Lengthy procedure and a lot of paperwork get required by authorities before a trade gets legalized. Bureaucracy is high in Brazil. However, the government is currently working to help investors authorize their enterprises with less hassle. Brazilian government provides manuals with detailed steps of acquiring legit licenses. Also, Brazil made a bilateral pact on eliminating double taxation on business persons with countries such as Denmark. There are regulations in Brazil on pricing models, sales promotions (Santos et al., 2014). It is a requirement for all enterprises in the country to offer their employees an extra salary. 

Threats and Opportunities based on the PESTEL analysis 

Threats 

Brazil’s economy is still recovering after the hyperinflation that hit the country in the previous years. However, the rate of recovery in Brazil is relatively slower than the competition facing the economy especially from China. Also, the automated wealth management service faces stiff competition from local banking sector (Talamini et al., 2013). Brazil is still struggling to maintain equilibrium in the demand and supply of its natural resources to avoid depletion. Also, Brazil has a challenge of keeping up with innovations in banking and financial sector implying more focus on its level of technology. 

Opportunities 

Currently, Brazil has a huge opportunity of advancing in E-commerce since the government is trying to distribute internet across its cities. Since Brazil is endowed with natural resources such as god soil and sufficient water, the country has a chance to advance its agro food sector (Talamini et al., 2013). The positioning of the People’s United Bank in Brazil also means that the country’s laborforce can be expanded through training. 

Brazil’s Premium Risk 

10 Year US Treasury = 3.094 % 

US Volatility of Stock Returns= 25 % 

Brazil 10 Year Gov Bond= 17.91% 

Brazil Equity Returns= 12.7 % 

Brazil Bond Returns = 4.19 % 

Brazil Volatility of Stock Returns= 87.65% 

R m = 3.1554 

Β= 0.90 

Alternative 1 

Brazil 10 Year Gov Bond- 10 Year US Treasury 

17.91%-3.094%= 14.816% 

Alternative 2 

(Brazil 10 Year Gov Bond - 10 Year US Treasury Rate) * Brazil Equity Returns / Brazil Bond R 

(17.91%-3.094%) * 12.7 %/ 4.19 %= 44.9076% 

Alternative 3 

R m * (Country X Volatility of Stock Returns / US Volatility of Stock Returns) * β 

3.1554 *(87.65%/ 25 %) 0.90= 9.9565% 

Average= (14.816 + 44.9076+ 9.9565= 69.6801) / 3= 23.2267% 

Alternative 3 is the best method in calculating risk premiums for Brazil since it is easier when dealing with the economy’s stock returns in comparison to the US stock market values. Given the PUB’s interest rate, investors in Brazil get an opportunity to plan their investments in advance. There is need for adjustments to be made particularly on the interest rates applied by the PUB and the Brazilian stock market. Brazil has had a definite index of equity returns over the last 10 years and needs to be corrected. Adjustment of the equity index will improve the volatility of the economy’s stock returns. Brazil’s stock market is currently gaining investor trust after the Brazilian government introduced some friendly policies. Fortunately, the Brazilian risk premium is shrinking given that the government is working to correct the credibility gap in the economy. Shares of some business firms with the Petriobras’ stock rising to 14 % (Santos et al., 2014). 

The Fit between Brazil’s Consumer/Macro-Environments and People United Bank’s Strategic Profile 

Currently, the People’s United Bank has approximately 5,500 workers offering services to multinationals in Brazil. The Bank provides equipment finance, asset management, brokerage and general financial guide to its members. People’s United Bank aims at improve human development in the economy (Damodaran, 2013). After 2010, Brazil experienced a structural change in manufacturing and agriculture. This fundamental concern came up as a result of a majority of the population living in poverty. The People’s United Bank joined efforts with the Brazilian economy to minimize poverty rates in the country. By hiring more workers in Brazil, the Bank was working to increase the percentage of people working in the formal sector. More people got skills through programs meant to enlighten them on ways of enriching themselves economically. Apart from offering jobs, the strategic service ensured the low-income earners got a salary increase to better themselves. Brazil’s economy has improved immensely over the past decade. 

The People’s United Bank is at the forefront of providing people with automated options to make use of their extra cash. Automated Investment sweep and the Loan management sweep got adopted by the People’s United Bank in a bid to effectively cater to the economy’s needs. To properly manage bank savings in the least time possible, the Bank gets equipped with the Zero Balance Concentration Sweep (Talamini et al., 2013). Brazilian macro-environment works best with the strategic service of the People’s United Bank. Brazil is characterized by social and political systems as well as adverse technology enabling the population to get information concerning the People’s United Bank. Through the internet access, Brazilians get to seek financial advice from the Bank thus their financial assets get well secured through the Automated Investment Sweep. All the financial assets available less active bank accounts get possessed by the People’s United Bank and regarded as profits. With the Zero Balance Concentration, the Bank gets to save on both time and resources. The Balance has a target balance to keep up with thus the need to properly check on cash deposits made into its accounts. 

The United Bank has an ultimate goal of empowering all internationals as well as the local people in Brazil. The PUB can take advantage of the large Brazilian population to train unskilled persons formally before granting them job opportunities. The automated service provided in the PUB is made possible through the well-established internet connectivity in major parts of Brazil. The main threat to the PUB is the stiff competition from the Brazilian banks. The People’s Bank can reach its target of covering wider population by creating close client relationship in the economy. 

The People's United Bank also strives to ensure liquidity at all times in a bid to secure funds readily available to its bank account holders and other business operations. It is worth noting that the Bank collects all the deposited cash into one central account to maintain a target balance. As investors in the Brazilian economy make seek credit services, the Bank automatically offers and clears individual loans using their initial deposits with the Bank. People’s United Bank through its branch in Brazil gets to advise investors while enlightening them on possible business opportunities to watch out. Brazil harbors many immigrants thus the Bank is in a better position to advocate for the rental facilities being made available to its immigrant workers. Technological developments in the economy also necessitate retail financial deposits with the Bank by the people (Talamini et al., 2013). Currently, there is a significant investor trust in Brazil which got perpetuated by the People’s United Bank fitting into the business environment of the economy. 

Porter’s Five Forces 

Threat of New Entrants 

As a tool, Porter’s five forces characterize the competitive landscape of an industry and the position of a particular business within it. It identifies the forces that drive a particular sector (Dobbs, 2014). The threat of new entrants in the Brazilian banking industry is low. This is due to the stringent regulations placed by the country’s central bank. The threat is equally low due to the high initial investment required. New entrants have to invest in human resource, technology, and infrastructure. Building trust in this industry is a challenge, which further dilutes the power of new entrants. The bank has a high brand positioning, which would take new entrants considerable resources and time to establish. However, the entry of foreign banks from other BRICS countries is a considerable threat. 

Bargaining Power of Consumers 

The bargaining power of consumers is moderate. This is due to the fact that consumers mostly purchase banking services as individuals. This makes difficult for them to bargain for better rates. The high switching costs further discourage customers from migrating to rival banks. It is costly to switch providers as the customers have to experience costs related to account management, ability to acquire easy loans, checking among others. Customers cannot easily wave these accrued benefits. Customer loyalty suppresses consumer bargaining power. Loyal customers have less incentive to bargain. However, the presence of the internet has enhanced consumer power as they can easily compare rates offered by different banks ( Allen, Clark, & Houde, 2014). Consumers can use the information to demand better service. 

Bargaining Power Suppliers 

The power of supplier is high. Providers of mortgage securities have the power to demand better rates from the bank. Other financial institutions that offer loans have the capacity to influence the banks’ policies. Customers also qualify as suppliers since they provide the deposits (monetary resources) ( Allen, Clark, & Houde, 2014). Large depositors such as institutions can demand a better return on investment. However, the bank can dilute this power through the use of long term contracts. Such contracts prohibit suppliers from revising the terms of the agreement. Suppliers of books, furniture and stationeries have no power to influence the bank’s decisions. This is so as the banks can easily switch to other players. 

Competitor Rivalry 

Competitor rivalry is high. This is due to the high number of players targeting a similar consumer segment. Brazil has more than 15, 000 bank branches that attempt to win new while also preserving their customers which effectively enhances the level of competition (Statista, 2018) . The banks have ambitious marketing budgets geared toward expanding the client base (Honka, Hortaçsu, & Vitorino, 2017). The intense competitive landscape is further evidenced by the high rate of mergers and acquisitions. Prior to 2014, M&A had been growing at over 100% annually (Financier Worldwide, 2017) . The M&A are, among other factors, driven by economic pressures. The presence of internet platforms and applications bring a new competitive dimension as new players can operate without intensive physical infrastructure. For instance, consumers can conveniently access loans and other financial services from Apps such as the ‘Airfox’. 

Availability of Substitutes 

The threat of substitutes can be treated as high on the side and moderate on another. The associated switching costs dilute the threat of substitutes. The potential costs discourage consumers from trying substitutes. Customer trust issues and loyalty diminish the viability of available substitutes ( Allen, Clark, & Houde, 2014). The regulator also imposes a limit on the volume of transactions a non-monetary player can conduct, thereby giving the banks a competitive edge. However, non-monetary players such as insurance companies, salary securities, and joined finances offer effective substitutes. These non-monetary players may have a competitive edge in terms of higher rates on deposits or fewer conditions to access services. 

The Fit between Brazil’s Consumer/Macro-Environments and the Service’s Ability to Compete Effectively in that Country 

The strategic service of My People’s United Bank is better positioned to compete effectively in Brazil. Brazil is a fast-rising economic with a significant advancement in its technological environment. The adoption of the internet by almost all regions in the country enhances the proper functioning of the People’s United Bank. Over the past years, people in Brazil got less awareness of financial management regarding earning, positioning as well as saving. The emergence of the People’s United Bank acts as a robot-advisor to both consumers and investors in the economy. The Bank boast of reaching a large portion of the economy (Talamini et al., 2013). The Bank further has systems which provide automated wealth consultancy services to business persons. The technology adopted by the People’s United Bank is such that it caters for the financial needs of its clients thus competing effectively in the economy. Cash withdrawals and deposits get easily accessed by clients for business advancements. The strategic service has a probability of competing effectively in the Brazilian economy since the People’s Bank charges very little on any investments transactions made with clients. Also, management of client’ investments is highly recognized by the Bank. 

The service is quick to avail automated solutions on investments and auto-rebalance on financial assets of the consumers thus attracting more clients in the economy. The strategic service is more likely to succeed in Brazil since it readily accounts for investor profits and direction of investment goals for clients associated with the People’s United Bank. The automated wealth advisors are rapidly adopted in Brazil particularly by the high-net-worth (HNW) investors. The HNW clients get high levels of connectivity and transparency by the Bank in the economy. In the past, wealth managers made use of the private bankers to come up with economic predictions (Santos et al., 2014). Digitalization brought about by the automated wealth managers, however, does not entirely take away previously enjoyed personal relations with the financial managers. The automated technology makes the process of transactions relatively easier while using client information to predict what might appeal to their investment accurately. 

Additionally, automated wealth management gets availed to the less wealthy thanks to the strategic service brought about the People’s United Bank. The poor who got business establishments deserve to get financial advice in regards to their investments since all investments face risks. Adequately designed automated wealth manager ensure that clients get the best wealth advice and that investors deal with the correct products in the market. The strategic service will no doubt gain popularity in the Brazilian economy. The current automated wealth manager avails automatic investor portfolio management both affordable and convenient to reach. The automated wealth management service also ensures that every client gets proper and specific attention as desired without basing on their background wealth (Damodaran, 2013). The automated wealth managers get to translate investor inputs into items such as risks or liquidity characteristics involved while suggesting new business opportunities to venture. Brazilian investment companies, therefore, have the challenge of incorporating automated wealth management services into the business systems to reap profits in the long-run. With the current macroeconomic environment in Brazil, the socio-political systems get to ensure that almost all business companies get training on how the automated wealth management service operates. 

References 

Allen, J., Clark, R., & Houde, J.-F. (2014). The Effect of Mergers in Search Markets: Evidence from the Canadian Mortgage Industry. American Economic Review, 104 (10), 3365–3396. 

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Damodaran, A. (2013). Equity risk premiums (ERP): Determinants, estimation and implications—The 2012 edition. In Managing and Measuring Risk: Emerging Global Standards and Regulations After the Financial Crisis (pp. 343-455). 

E. Dobbs, M. (2014). Guidelines for applying Porter's five forces framework: a set of industry analysis templates.  Competitiveness Review ,  24 (1), 32-45. 

Financier Worldwide. (2017).  The outlook for M&A in Brazil . [online] Available at: https://www.financierworldwide.com/the-outlook-for-ma-in-brazil/#.W7798HszbIU [Accessed 11 Oct. 2018]. 

Honka, E., Hortaçsu, A., & Vitorino, M. A. (2017). Advertising, consumer awareness, and choice: evidence from the U.S. banking industry. The RAND Journal of Economics, 48 (3), 611–646. 

Santos, T. J. A., Lima, A. M., Reis, C. A. L., & Reis, R. Q. (2014, June). Automated support for human resource allocation in software process by cluster analysis. In Proceedings of the 4th International Workshop on Recommendation Systems for Software Engineering (pp. 30-31). ACM. 

Statista. (2018).  Number of branches of leading banks in Brazil 2018 | Statistic . [online] Available at: https://www.statista.com/statistics/795464/number-bank-branches-leading-banks-brazil/ [Accessed 11 Oct. 2018]. 

Talamini, E., Wubben, E. F., Domingos Padula, A., & Dewes, H. (2013). Scanning the macro-environment for liquid biofuels: A comparative analysis from public policies in Brazil, United States and Germany. Journal of Strategy and Management , 6 (1), 40-60.