"A person's understanding of Brazil comes through football" (José Lins do Rego, writer). I guess a person’s understanding of football comes through Brazil as well. Thus, I decided to create “BRASILEIRAO”, a series of features focusing on the business model of clubs in the "país do futebol", whose fragile situation is contrasting with the Seleçao, winner of the FIFA World Cup a record 5 times.
PREVIOUSLY ON BRASILEIRAO...
A focus on Corinthians, an insightful overview of the major Brazilian football clubs and their future stadia.
THIS WEEK ON BRASILEIRAO...
A week ago, the world celebrated Pelé’s 70th birthday and Santos prodigy Neymar wore the number 70 shirt in tribute to him during this Sunday’s game. In 1941, only a year after the birth of Pelé, Stefan Zweig wrote in his “Brazil, Land of the Future”, that the country was “destined undoubtedly to play one of the most important parts in the future development of our world”.
Nowadays, this prophetic thought seems truer than ever: Brazil is already the 9th country in terms of GDP. Besides, by the end of the decade, roughly 40% of the world’s population will have achieved middle-class status by global standards, up from less than 20% today. This means opportunity in emerging markets such as Brazil, which should become at least as important as drivers of consumption as they are platforms for low-cost operations.
The profit opportunities should be enormous as 4bn people in emerging markets triple or quadruple their incomes and wealth over the next 20 years. As the centre of economic growth shifts from developed to developing countries, this decade will mark the tipping point in a long-term economic rebalancing that should leave traditional Western economies with a lower share of global GDP in 2050 than they had in 1700. For instance, the number of BRIC companies on the Fortune 500 has already more than doubled in the past 4 years alone.
Even if the state remains remarkably inefficient and its bureaucracy a barrier to business, as Brazil ranked 129th in the World Bank’s latest Doing Business report, the country seems well positioned to play a more prominent global economic role on a 10-year perspective thanks to a large domestic market, a consistent macroeconomic framework, a well-capitalised and developed financial system and increased opening to trade and foreign investment.
MACROECONOMIC STABILITY
According to Miguel Jorge, Development Minister, Brazil has “macroeconomic, political and institutional stability." The era of military rule, which ended in 1985, seems distant, as well as the days of inflation, which peaked at an annual rate of 2,950% in 1990. Brazil’s success goes back to the 90s when the country confronted its own successive economic crises. Brazil’s banks have weathered the recent crisis thanks to strong capitalisation, few troubled assets and the legacy of strict regulatory oversight.
When Lula was elected in 2002, Brazil had already been given a R$51bn (€21.5bn) loan. The subsequent 8 years constituted a rare successful run for social democracy in Latin America, including fiscal orthodoxy, steady growth, poverty alleviation through employment and the Bolsa Família system of welfare benefits. Brazil recently lent R$23.8bn (€10bn) to the IMF and G20 members decided to increase the voting rights of emerging markets up to 6%, in order to better reflect their driving role in the world economic growth.
In 2010, Brazil is expanding its presence in world markets and its economy outweighs that of all other South American countries. After record growth in 2007 and 2008, the global financial crisis hit Brazil in September 2008. However, the country has quickly overcome its effects and returned to a path of sustainable growth, benefiting from selling into a recovering world economy with rising commodity prices. Simultaneously, a high dependence on exports and commodity prices pushed Latin American economies into recession after consumer spending and industrial production fell in Europe and the USA.
Brazil’s share of world output has actually fallen over the past 15 years, from 3.1% in 1995 to 2.9% in 2009 and even if Brazil has roughly 190m inhabitants, making it the 5th most populated country in the world, it “cannot become as big a player as the two Asian giants” (Martin Wolf, FT’s chief economics commentator).
Nevertheless, Brazil is enjoying “propitious conditions in four areas that used to pose serious limitations to growth” (R. Ricupero, diplomat): commodities, oil, demography and urbanisation.
In terms of commodities, the country is well-placed to benefit from the emerging markets’ commodity boom. Besides, Petrobras, the Brazilian state oil company, concluded last month the biggest share issue ever undertaken by raising R$114bn (€48bn), in order to finance its huge CAPEX programme, which includes starting work on the potentially enormous “pre-salt” fields discovered off Brazil’s coast in 2007. The vast, deep-water reserves of crude promise to transform Brazil into a key energy producing nation.
Brazil has also undergone a demographic shift that historically have unleashed dynamic economic change: labour force growth together with a rapidly declining fertility rate, which has fallen from 6.2 in 1964 to below replacement level, at 1.8.
Finally, Brazil is now largely an urban country: about 80% of the population lives in cities. Thus, “the period of frantic and chaotic growth of big cities that is now taking place in Asia and Africa is already a thing of the past” (R. Ricupero), even if the country still has to face with related issues such as “lack of educational and health facilities, poor public transportation, marginalisation and criminality.”
A NEW ELDORADO
These favourable conditions simultaneously help Brazilian companies like Petrobras, Embraer, Gerdau, Vale or Banco do Brasil expand abroad and make Brazil a very attractive proposition. However, the country is a relatively new landscape for foreign investors. For more than 15 years up until the mid-90s, Brazil closed its economy, adopting a policy of self-sufficiency, hence a lack of familiarity in the market and a steep learning curve for investors.
In recent years, mega-events were usually held in emerging markets and the choice of host countries obviously driven by business opportunities, as shown by the 2008 Olympics in China, the 2010 WC in South Africa, the 2010 Commonwealth Games in India, not to mention the next EURO 2012 in Ukraine and Poland, or the 2014 Olympics in Russia. Major global players in their respective industries want to position themselves ahead of the 2014 WC and Rio 2016, especially when they are directly related to these events.
For instance, the local hotel industry is still very fragmented. Approximately 93% of hotels are unaffiliated with an international or domestic brand, representing 75% of the country's current room inventory. However, the proportion of branded hotels is on the rise as the market continues to be evaluated by foreign investors.
The infrastructure refurbishment program should drive upgrades, including branded conversions, and a much-needed level of sophistication. Besides, thanks to a growing middle class (defined as households with a monthly income over R$1.1k), Brazil announced a record number of domestic travellers during 2008 and then again during 2009. Together with the anticipated boom of international tourism, this situation makes the country “a favourite market for hotel chains" (Julius Tendril, Director of Development in Brazil for Hyatt), thus leading to major investment by international hotel brands.
According to Jones Lang LaSalle Hotels' Lodging Industry in Numbers - Brazil 2010, there are currently 150+ hotel projects in construction or in an advanced stage of planning that will be affiliated with the main hotel chains present in Brazil. 3 major hotel chains (Hilton, Hyatt and Starwood) revealed ambitious investment plans for Brazil 2 months ago. Hyatt intends to build 50 hotels over the next 10 years, while Accor is also looking to open 90 hotels over the next 4 to 5 years.
A NEW 4-YEAR CYCLE
The football industry itself has all eyes on this rapidly growing market and several major players recently opened Brazilian offices, especially in São Paulo and Rio.
As “Brazil is a strategically important market for SPORT+MARKT” (Marcel Cordes, Executive Director), the international research and consultancy company announced the opening of a permanent office in São Paulo. Once he retires next year, Ronaldo should become chairman of 9ine, a sports consultancy to be launched by WPP with offices in London and São Paulo.
Octagon acquired B2S, a sports marketing agency with offices in Rio and São Paulo. B2S are well known for their work with the CBF and their sports marketing consulting role for major companies such as Itaú, AmBev, Vivo, Panini, Red Bull, EA Sports or Andrade Gutierrez.
Populous has created Populous Arquitetura Limitada, a division based in Rio. Apart from the 2014 WC and the Olympic Games, the global design practice specialized in sports architecture is targeting the numerous Brazilian stadiums in need of improvement.
BTD Group, the German IT and online integrated solutions provider strongly involved in sports, has established a South American subsidiary in Rio, as Brazil “offers limitless potential for business development around football” (Stefan Leibhard, BTD founder).
Obviously, the next mega-events will generate further stimulus for a sponsorship market which, in an economy the size of Brazil’s, has enormous potential. According to David Abrutyn, MD and Head of IMG Global Consulting, “the Brazilian economy is strong and is seen by all as a growth market. The timing for a South American Games is good. And from a commercial standpoint, there is a parallel with Beijing and the impact the Chinese Games had in bringing new companies into a thriving and important BRIC market. A Rio Games represents a big appeal for companies looking to do business and hoping to get into the South American market. It will act as a catapult for their business interests.”
The 2014 WC and Rio 2016 should also logically widen the historical huge financial interregional gap.
4 CARDINAL CITIES, 1 CARDINAL DIRECTION
According to PwC, “fast-growing cities in emerging market economies like Brazil could challenge the dominance of current leading global cities such as NY, Tokyo, Paris and London by 2025”.
Apart from Brasilia, the 4 other Brazilian cities ranked among the global Top 100 in terms of GDP (PPP) are all located in the South or Southeast regions.
Besides, the highest population concentrations are along the Atlantic coastlines, most notably in the 2 largest cities, São Paulo and Rio. The Southeast region is the most heavily-populated in Brazil with almost 80m inhabitants, roughly 40% of the total.
Rio will of course host the 2016 Summer Olympics and the final match for the 2014 WC. “A Cidade Maravilhosa” ("The Marvelous City") was the capital of Brazil for nearly 2 centuries, from 1763 to 1960, and was chosen as headquarters for companies such as Petrobras, Eletrobras, Caixa Economica Federal, Vale or Globo.
But São Paulo is the current major economic powerhouse of the country, the largest city in the southern hemisphere and the hub for the financial services (headquarters for Itaú and Bovespa), automotive and agriculture industries. With 40m+ inhabitants, the state of São Paulo is the 3rd most populous political unit of South America, only surpassed by Brazil and Colombia.
This geographical imbalance is also echoing in football.
Last year, 3 paulista clubs were among the Top 5 Brazilian earners, together with Internacional-RS and Flamengo-RJ.
Major clubs from the states of São Paulo, Rio de Janeiro, Rio Grande do Sul and Minas Gerais accounted for a combined annual revenue of R$1.4bn in 2009, which represents about 90% of the Top 20.
All the teams which won several national titles come from São Paulo, Rio or Porto Alegre.
According to both CBF and CONMEBOL rankings, the Top 12 Brazilian clubs are exactly the same and represent the same 4 cities ranked among the PwC Top 100: São Paulo, Rio, Porto Alegre and Belo Horizonte.
According to Crowe Horwath RCS, these clubs are also leading the way in terms of brand value.
Even more importantly for sponsors, this Top 12 benefits from the largest fan bases, according to a Lance!-Ibope report.
If we take a closer look, São Paulo and Corinthians are best-in-class among the richest fans, whereas Flamengo is by far the most popular club among supporters with less purchasing power. In that regard, the profile of the Fluminense fan base is the opposite, reflecting the historical fact that the Fla-Flu clásico has been centred on issues of class and race: white students and members of the middle class vs. ordinary people of colour.
Even if highly unequal income distribution remains a major issue, FCs should benefit from the emergence of a wealthy middle class. As in other strong football markets in Western Europe, companies consider football as a premium platform to consolidate their brands through sponsorship.
A POWERFUL VEHICLE TO DRIVE BRAND AWARENESS
Major clubs are obviously partners of choice.
Regarding main shirt sponsors, Flamengo and Corinthians have been leading the way by monetizing their respective fan bases. Compared to the English Big 4, whose huge global media coverage as members of the Premier League allow them to offer a worldwide proposition to potential sponsors, the Brazilian Big 4 can only claim a national, and to a lesser extent continental profile. That is why the performance of Corinthians, ranked ahead of Chelsea, is even more remarkable.
Besides, whereas the English Big 4 have all exclusive deals with their sponsors, and a specific double sponsoring/naming agreement for Arsenal with Fly Emirates explaining its low shirt sponsor value, Corinthians and Flamengo have no such clause in their respective contracts with Brazilian companies Neo Quimica (Pharmaceuticals) and Batavo (Food). Consequently, thanks to secondary sponsors, both clubs are ahead of Chelsea in terms of total shirt sponsor value, but still behind Liverpool and Man U.
It is worth noticing that Corinthians offered Ronaldo 80% of every secondary kit sponsorship deal, which helped him make over R$17m (€7.2m) last year, according to The Observer. A direct downside saw players turn into advertising Christmas trees, with ad space offered even on the armpits (sold to a deodorant brand), thus limiting the awareness of related brands and the impact of sponsorship on their sales.
Among the Top 12 Brazilian clubs, only high-profile clubs from São Paulo and Rio have signed deals with national players (Corinthians and Botafogo with Neo Quimica, Fluminense with Unimed, Santos with Seara, Vasco with Eletrobras, Flamengo with Batavo) or international companies for 2 paulista clubs : Palmeiras with FIAT, replacing Samsung, and São Paulo with LG.
FCs from Porto Alegre and Belo Horizonte are sponsored by their respective local banks: Banrisul for both Gremio and Internacional, and Banco BMG for both Cruzeiro and Atlético-MG. Itaú, the country’s leading bank, decided to sponsor both CBF and FIFA, whereas Banco Santander is the title sponsor of the Copa Libertadores.
“WHERE QATAR’S EMIR GOES, MONEY FOLLOWS”
In addition to traditional industries in most Gulf investors’ portfolios, such as real estate and financial services, Hussein al Abdullah, vice chairman of Qatar Holding, said last year that the country planned to invest more in “commodities, food, energy and water” in the future and Brazil looks like an ideal candidate.
Earlier this year, a Qatari investment company launched two R$850m (€358m) real estate funds targeted at Russia and Brazil. Besides, Qatar Holding’s recent purchase of a 5% stake in Banco Santander Brazil comes 8 months after the country’s emir, Sheikh Hamad bin Khalifa al Thani, visited Brazil, and is part of an investment strategy in emerging market assets.
At stake are huge opportunities for financial services. The rapid growth of consumer finance is based on a burgeoning middle class, rising per capita incomes and relatively low inflation. Retail banking expansion should be sustained by mortgage and consumer-durable financing and steady penetration of credit and debit cards. Even with the rapid expansion of credit, Brazil is still underleveraged by global standards. The country still has significant room to expand consumer lending on sound principles, which creates many opportunities for investors and service providers.
Since 1990, poverty levels have halved and according to a 2008 study by the Getulio Vargas Foundation (FGV), Brazil’s middle class now represents the majority of the population, up from roughly 30% 15 years ago. In the past 5 years, nearly 30m people have joined the ranks of the middle class. Many of these consumers were previously employed in the informal sector and transacted mostly in cash, but are now joining the financial system. For the first time, they have access to bank accounts, credit cards and other forms of consumer finance: a consumer society is taking hold in Brazil.
Even if football fans have become somewhat more diverse in terms of sex, age and class, companies are targeting the same typical male supporter using different vehicles, whether it is a club (local/national reach), CBF (national/international reach, 2009 sponsorship budget: R$282m, +57% vs. 2008), CONMEBOL (continental reach), FIFA (international reach) or a player. Seara, a brand of Marfrig, one of the largest food companies in the world, has implemented a comprehensive sponsorship strategy by signing deals with Santos, the national team and the WC.
Unless strictly identical (Itaú and Seara), no wonder that CBF and the 13 FIFA sponsors (Partners, WC Sponsors, National Supporter) are usually in direct competition: Nike vs. adidas, Guaraná Antarctica (AmBev) vs. Coca-Cola, TAM vs. Emirates, Volkswagen vs. Hyundai-Kia, Vivo (a new 2010 CBF sponsor) vs. Oi, Brazil’s largest telecommunications company, which “has a rapidly-expanding reputation throughout Latin America" (Thierry Weil, Director of FIFA’s Marketing Division).
In the near future, we could imagine a potential cliché including all the 6 FIFA Partners, with a Brazilian football fan using his VISA credit card to buy a ticket and fly with Emirates, then driving his Hyundai-Kia back home to watch a game on his Sony flat-screen TV, wearing an adidas shirt and drinking Coke. These last 3 companies are also sponsors of the next Soccerex Global Convention, which will be held in Rio in a few weeks.
On the whole, the FIFA Partners are all representing industries with great potential in Brazil. As the Financial Services industry was analysed above, and the Airline industry was addressed in BRASILEIRAO Part III through the issue of Airports, let’s briefly focus on the Automotive, Flat-Screen TV, Beverage and Sportswear markets.
In 2009, a record 3.1m new cars were sold. In just 10 years, the country went from 10th to 4th largest car market. According to Stephan Keese, Principal in the Automotive Competence Center at Roland Berger Strategy Consultants, "Brazil is an up-and-coming market with great potential [...] for the automotive industry".
Mercosur, South America's main trading bloc, should attract significant new investments from global automotive manufacturers keen to benefit from the region's strong economic growth prospects and free trade tariffs. “There is going to be a substantial flow of cash in that direction, mainly because of rising demand from Brazil" (Guido Vildozo, a Latin America automotive analyst at IHS Global Insight).
Brazil is Mercosur's pumping heart, accounting for 80% of production. It also has the biggest market with car sales expected to grow 9% this year. Meanwhile, foreign companies are turning to Brazil not just for the size of its booming domestic market, but also as a platform to its Spanish-speaking neighbours. FIAT’s factory in Brazil, for example, is the second biggest in the world, and the Italian brand sponsors Palmeiras. While Volkswagen is a CBF sponsor, Hyundai-Kia signed a deal with FIFA, and Nissan is the title sponsor of the Copa SudAmericana.
Before being replaced by FIAT last year, Samsung was the main shirt sponsor of Palmeiras. Besides, LG has an agreement with Sao Paulo FC. More generally, South Korean TV manufacturers overwhelmingly dominate the Brazilian flat-screen TV market, whereas their Japanese competitors have a combined 15% market share.
Japanese firms saw the 2010 WC as an opportunity to regain lost ground. Sony activated their sponsorship deals with Kaka and FIFA in stores and on TV. Panasonic and Toshiba, which both have flat-screen TV manufacturing plants in Brazil, also plan to develop their promotional efforts.
The Brazilian flat-screen TV market grew by about 50% in 2009, with 4.2m units sold. That figure is estimated to surpass 10m in 2013. Ahead of the next 2 mega-events, demand for new TVs in the nation should continue to grow. Ryuji Tsutsui, president of Sony Brazil, considers Sony’s "image is still stronger than South Korean firms'”. His objective is to get the leadership by 2012, as “Sony is working with a full range of products developed to improve football stadiums, arenas and areas related to the expansion of tourism in cities that will host a major event, such as transportation, and the tourism industry” (Armando Ishimaru, head of Sony's professional Electronics division).
In 2006, Brazil already ranked as the 4th largest beverage market, after the USA, China and India, with 5% of the global market share. Spirits manufacturers continue to invest heavily in marketing to increase their consumer base, particularly targeting the 18-35 segment.
Moreover, AmBev announced the WC was a blessing for Budweiser, its most recognizable brand, which “volumes were essentially flat in the first half of 2010 thanks to its 2010 FIFA WC sponsorship”. While US volumes have recently dropped by almost 5%, they rose sharply in Latin America, Western Europe and Asia. AmBev also aims at increasing the sales of its Guaraná Antarctica brand through its deal with CBF, while Coca-Cola should take full advantage of its agreement with FIFA.
Apart from these sponsors, sportswear companies are of course traditional partners of football. “In Latin America, growth of the sporting goods industry is expected to continue in 2010, also fuelled by the positive impact of sales related to the 2010 FIFA WC. Nevertheless, higher import duties in key markets such as Brazil are forecasted to dampen the industry growth prospects for international manufacturers” (adidas Annual Report, 2009).
ADIDAS 5-2 NIKE
75% of the Top 12 clubs have signed a deal with a major international brand. In other words, only 3 of them (Atlético-MG with Topper, Vasco-RJ with Penalty, and more surprisingly, Flamengo-RJ with Olympikus) have an agreement with a local kit supplier.
adidas group is the dominant force through both its Reebok (Sao Paulo-SP, Internacional-RS and Cruzeiro-MG) and adidas (Palmeiras-SP, Fluminense-RJ) brands. Latin America accounted for 10% of its total revenues in 2009 (vs. 8% in 2008). adidas group is followed by Nike group and its strategy of paulista exclusivity with both its Nike (Corinthians-SP) and Umbro (Santos-SP) brands.
Nike acquired Umbro in 2008, in order to strengthen its market position in UK and expand its global leadership in football by providing positions in emerging markets such as China, Russia and Brazil. The company is counting on shoppers in these countries to offset slowdowns in its mature markets. In 2010, “excluding currency effects, nearly every territory and category grew double-digits, with Brazil and football leading the way. Revenues in Brazil grew 74% in Q4, driven by football, athletic training, sportswear and action sports” (Don Blair, CFO).
Revenues of Nike in emerging markets accounted for 11% of total revenues (vs. 9% in fiscal 2009). “Excluding changes in currency exchange rates, all markets in the Emerging Markets geography reported revenue growth for fiscal 2010, most notably Brazil, Mexico and Korea, driven by sales growth in all product categories” (Annual Report, 2010).
In 2009, about 730k replica jerseys were sold domestically by the top 20 teams, thanks to the establishment of several chains and online versions of official club shops. Even if these figures are still very low by European standards, merchandising sales are on the rise, while 44% of Brazilian fans keep on buying counterfeited products. Another 8% buy both pirated and official merchandise (Ibope, 2010). In 2009, São Paulo FC tripled their income with the licensing of official products, but Adalberto Baptista, their marketing director, defended the alliance of Clube dos 13 members to restrain piracy.
CRM KEY TO SUSTAINABLE PROFIT
Marketing used to be a simple tactical lever trying to solve the short-term cash-flow issues. For instance, in 2008, Corinthians generated R$2.3m by selling 400 spaces so that fans could put their faces onto the 10 outfield shirts of the first team. But in recent years, several clubs have initiated true CRM strategies, including membership schemes, in order to maximize the loyalty of their supporters and minimize the proportion of glory hunters among their fans.
These socio-torcedor programmes operate on a subscription basis. Besides, they should provide clubs with accurate estimates of the size of their core fan base and reliable data to segment their supporters’ market and propose targeted offers through a refined range of services.
As of July 2009, just a decade after the first programmes were launched in the country, Brazilian clubs cumulated 380k+ members, according to Clube dos 13. Fabio Koff, its president, thinks that "club member programs are consolidated models in Europe. With projects launched in other Brazilian clubs, it will not take a long time to reach 500k members."
For example, Cruzeiro already had 18k members just a month and a half after the launch of the “Football Partner” project. According to Rogê David, responsible for the membership scheme at São Paulo FC, "club members are essential. Through the program, fans can contribute financially to the club, which, on the other hand, can offer them some benefits such as discounts on tickets”.
But with 100k+ members, Internacional have the most successful Brazilian programme and the 6th largest membership worldwide, Benfica being the leader with 171k members. According to Jorge Avancini, Internacional marketing director, the project of the club was to raise at least R$38m (€16m) in 2009 with the members’ monthly fees.
"The implementation of the project of club members has been gradual since 2003, when we began to work with the emotional side of the fans, emphasizing the importance of joining the club. We have done all this together with a strong media campaign for conventional vehicles, mouth to mouth work and offering a loyalty team card, in a very intense way, and also rewarding members with advantages and benefits which the common fan does not have access to." Through the Alma Colorada project, members can win a trip with the team on an away game, visit the stadium and speak with the president, win a kit of their favourite player, or kick-off a match.
While Palmeiras, Botafogo, Bahia and Sport do Recife were reformulating their programs to launch them soon, Clube dos 13 gave no information about Flamengo.
With a dedicated membership scheme, Flamengo should strengthen their popular leadership and at the end of the day, increase their recurrent cash flows. According to Patricia Amorim, the club’s president, “Flamengo has the highest number of fans in Brazil, and because of that, TV Globo broadcasts most of our games. This is, undoubtedly, a huge opportunity to our sponsors to expose their labels on live TV. Flamengo’s games on TV bring great visibility to the sponsors”.
A clear CRM strategy should especially prove useful in the near future, when brands will look for more than visibility, when the market will be more mature and sponsorships will transform into partnerships. Meanwhile, even if some regional powerhouses have increased their influence on young supporters, such as Sport (winner of 10 out of the 14 Pernambuco State championships), Vitoria (11/15, Bahia) and Fortaleza (8/10, Ceara), Flamengo, Corinthians and São Paulo account for more than half of the 10-15 fan segment.
By 2025, these supporters could be part of their core fan bases and fuel the continuous rise of their revenues. Florent Malouda, the French Guyana-born Chelsea player, recently declared he would like to end his career in a Brazilian club, following the 2014 WC. The most optimistic prospective analysis could suggest that in 15 years time, the transfer corridor between Brazil and Western Europe could become a two-way traffic, with Brazilian players still flowing to the Old Continent and European promising players, instead of career-ending stars, flying to Brazil.
NEXT IN BRASILEIRAO...
Part V - A "SUPER" MARKET
