Can International SMEs afford to enter the Brazilian market?

We were discussing the various economic indicators plus costs and resources of entering the Brazilian market with a potential client. A United Kingdom SME with around £1,000,000 in annual revenues. We talked to them last week and thought we would share some of the discussion as we are getting a lot of enquiries in this area.

At a high level what we discuss with SME/smaller sized potential clients is fairly simple, essentially:-

1. If in a 1 to 3 year window. if you do not forecast your annual Brazilian revenues to be – say 400k in US Dollars or 300k in Euros or 250k in Pounds – with a reasonable margin – forget Brazil. Of course this depends on your profit margins and ability to generate cash to sustain the operation.
2. If you are looking at doing revenues of over 1 million in any of the above currencies in a 1 to 3 year window then you need to do some serious financial planning.
3. Anything in-terms of revenues between points 1 and 2 above you need to do some financial planning and analysis but you can still err on the side of ‘let’s try it and see’ – we see this a lot especially with more entrepreneurial companies who just want to get on with it and truly believe – even if they fail – they should at least break even – so in the spirit of nothing ventured = nothing gained – they go for it!
4. When forming your strategy – forget a strategy for Brazil. Instead develop a strategy based on each major city in Brazil and then regional strategies etc. Brazil is too large to go with a big bang strategy. If you were outside of Europe and looking to enter, you would more than likely have a completely different strategy for say UK, France, Germany, Netherlands, Greece, Spain etc Not a European strategy per se.
5. If you do not have the appetite to invest coupled with a reasonable medium to long term outlook – forget Brazil.
6. Ask yourself – if you have a problem with one of your key accounts that needs urgent resolution, will this consume your total company resource pool or are you still able to have some resource free for Brazil? Selling in Brazil is predominantly based on relationships, you need to keep the relationships going at all times. With a local employee or presence this becomes much easier. Dealing with Brazil from afar is tricky. Dealing with Brazil on a fly in and fly out strategy is almost impossible and can be extremely costly. And this is before you get to the point of trying to sell FOB.

As a point of note – in our experience the fly-in and fly-out sales strategy for Brazil usually results in failure. Failure equals high costs (flights, hotels, general expenses etc combined with few or no business wins). Brazilian companies, typically do not like to deal with companies operating in this mode.

Brazilian companies like to do business with Brazilian companies. By this for clarification we mean – Brazilian companies and entities like to do business with Brazilian entities – in Portuguese, with Portuguese contracts, i.e. everything kept local.

From a regional strategic viewpoint Sao Paulo has almost 20 million people in the city and suburbs and almost 40 million people in the state. This is often and usually a great place to start. Rio coming in second is generally either the place to start due to the products or services you have or usually the second place to enter and its proximity to Sao Paulo certainly helps in this regard. There are many flights per hour between Sao Paulo and Rio de Janeiro and the flight time is around 45 minutes.

Rio de Janeiro and it’s suburbs have over 10 million and possibly 14 million depending on who you believe, the state around 20 million. So combined. Sao Paulo and Rio offer huge potential before you have to consider looking elsewhere in Brazil.

If you are looking at supply chain and logistics costs these two cities/states are usually the number 1 and number 2 places to start.

As mentioned above. Armed with a small amount of knowledge. it is quite straight-forward. If you have a reasonable medium to long term vision combined with the appetite and funding to invest plus the management resources available then Brazil offers a wealth of exciting and potentially highly profitable opportunities.

We talk to many small companies and individual traders from across the globe who think they can enter Brazil or even sell into Brazil FOB as easily as they can in some of the other western countries. Once we have explained the process, timelines and costs to them they are usually stunned.

According to the World Bank’s 2012 annual global report “Doing Business”, which evaluates the ease of starting a business, dealing with construction permits, registering property, and paying taxes etc, Brazil ranked 126th out of 183 countries in terms of being difficult to deal with.

As they say in Brazil – Football is a religion but paperwork and bureaucracy still rule.

Make no mistake the costs to enter Brazil are significant for smaller businesses. Unless you have a great understanding of your own niche in Brazil and understand the opportunities that exist for a small business it can be quite daunting.

As an example we have seen prices to open a legal entity range from $5,000 to $25,000+ (US Dollars) depending on who does it for you, then there are the various registrations with all the government bodies, opening a bank account and registering foreign invested capital with the Brazil central bank plus various translations plus the trouble of getting all the documents together in your home country. Realistically the cost to open a legal entity and do all of the required work is around $6,000 at the cheaper end of the scale. We (icaabs) have a very competitive offering where this is concerned.

Then you have to think of monthly ongoing costs:-

1. You need an address in Brazil to open a company – for a virtual type address plan on $200 a month with phone services at a minimum
2. You need a permanent Brazilian resident as a shareholder or legal representative – this is usually a short-term measure until you have your first senior employee but you can plan on anything between $500 and $25,000 per month for this. Again we (icaabs) have a competitive offering here.
3. You need someone to do all of your fiscal/tax/accounting etc on a daily/monthly/annual basis – with minimal transactions and maybe 1 or 2 employees you can budget on $700 a month and upwards, again we (icaabs) have a competitive offering in this respect.

So in summary a new entrant can look at spending in their first year an absolute minimum of:

• Up front costs $6,000
• Say 6 months of a Permanent Brazilian representative $3,000
• 12 months virtual address $1,200 – THIS DOES NOT GET YOU AN OFFICE – if you need a warehouse then it is obviously much higher! Although we (icaabs) do have some reasonably priced solutions.
• Accounting/tax etc $8,400

So in the first year a bare bones cost is going to run around $18,600 before employees, sales costs, demo costs, exhibitions, marketing and advertising etc.

If you believe this is a lot of money then we also provide feasibility study projects and business planning type projects where we can gather all of the crucial information for you that will enable you to make some kind of decision based off relevant financial and non-financial information to enter the market. These reports are usually charged at less than the cost of a business trip to Brazil so are extremely good value. As they are bespoke based on customer requirements the cost of each does vary based on needs and requirements.

So the small company or SME does need to understand the ramifications for their business in terms of resources, cashflow, abilities to supply and taxes. Yes Brazil is an enormous market with huge potential but with inadequate planning and funding it has the ability to swallow a lot of resources that within the SME/ Small Company are often critical and in limited supply.

If you need any help in this areas please contact us via the contact us page on our website. We look forward to helping you!