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Magalu enjoys bumper year in Brazil but is Correios a target?

Magazine Luiza (Magalu) has grown from a small company from the interior of São Paulo was to one of the largest Brazilian retailers with 1,150 physical stores in 18 Brazilian states and USD 5 billion revenue.

The business has benefited from the COVID-19 pandemic as it was able to rapidly expand its e-commerce footprint: online sales grew 138% in April and 203% in May 2020. The company also expanded its product mix to include food and health items.

However, a market as large as Brazil has attracted international competition with Amazon and Mercado Libre providing significant opposition in addition to Brazilian retailers such as Casas Pernambucanas and Lojas Cem.

A financial analyst in Brazil comments, “Amazon is investing heavily to further increase its market share in Brazil. Like Mercado Libre, they are betting on a business model based on the speedy delivery of products. However, Brazilians still have a very ‘physical’ behaviour when it comes to purchasing. Thus, the wide network of Magalu stores and the facilities that they offer to collect products are well-liked in the Brazilian market.”

“Amazon is investing heavily to further increase its market share in Brazil. Like Mercado Libre, they are betting on a business model based on the speedy delivery of products.”

Financial analyst, São Paulo

This increase in e-commerce and competition has pushed Magalu to focus on expansion in Brazil and particularly improving its distribution and rapid delivery. The Director of Research at an investment bank in São Paulo told us, “Magalu is prioritising its expansion in Brazil rather than focusing on entering new markets in the region. The recent acquisition of Netshoes [an e-commerce sporting goods company] and Canaltech [a fintech] prove that Magalu is primarily concerned in expanding its client base in Brazil.”

One interesting development in this market is that, as part of President Bolsonaro’s privatisation plans, Brazil is seeking to sell Correios [the Brazilian postal service]. While it is too early to tell if this may go ahead and who is likely to acquire Correios, there are obviously some market rumours.

“It all started when Frederico Trajano [CEO of Magalu] said that all retail players were keeping an eye on the privatisation of Correios.”

Director of research, investment bank, São Paulo

The Director of Research explains, “It all started when Frederico Trajano [CEO of Magalu] said that all retail players were keeping an eye on the privatisation of Correios. Clearly, there has to be some truth in Magalu’s interest, as confirmed by Fábio Faria [Minister of Communications who said in December 2020 that Magalu was one of the five companies interested in the privatisation of Correios]. However, we have not seen any specific political steps towards the privatisation of the company and, until the government formalises the tender for the privatisation of Correios, Magalu will not know if it can make a serious winning bid.”

Before deal fever kicks in, we should remember that Brazil’s privatisation plans are already behind schedule, hindered by political resistance in Congress, a shift in economic priorities due to the COVID-19 pandemic and resignations of key secretaries in the Ministry of Economy. The Director of Research admits, “Honestly, I can’t see this government carrying out the ambitious privatisation plan with only one year before the 2022 presidential elections but things may change.”

 

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