Lojas Arapua S.A.

Lojas Arapua S.A.

Rúa Sergipe, 475
Sao Paulo SP 01243-912
Brazil
+ 55 (11) 256-1155
Fax: +(55) (11) 258-8320
Web site: http://www.arapua.com.br

Public Company
Incorporated: 1957
Employees: 6,700
Sales: Cr2.2 billion (US$2.2 billion) (1996)
Stock Exchanges: Sao Paulo Rio de Janeiro
SICs: 5722 Household Appliance Stores; 5731 Radio, TV, & Electronic Stores

With an estimated 16 percent of the Brazilian market for durable consumer goods, Lojas Arapuá S.A. is that nation’s largest retailer of household appliances and electronics. The company has more than 260 stores and six distribution centers throughout Brazil. Most are concentrated in the populous southeast, but the chain has units in all but four of Brazil’s 26 states. Creative financing programs and heavy advertising helped Arapuá rise to its industry-leading status. In 1996, over two-thirds of the chain’s sales revenues were made through consumer finance programs.

Though its stock is publicly traded, the chain is controlled by the Fenicia Group through its Simeira Comercio e Industria Ltda. subsidiary. Arapuá accounts for about two-thirds of Fenicia’s revenues. Fenicia’s other interests include food processing, financing, and civil construction. Arapuá markets a whrefe variety of household appliances and electronics. In its ongoing quest to keep pace with the demands of the Brazilian consumer, the company introduced personal computer equipment to the lineup in 1996. Lojas Arapuá also offered the Lotus line, an in-house brand of such small appliances as coffee makers, juicers, blenders and mixers, steam irons, and hair dryers. Longtime chairman Jorge Jacob took the company public on Brazilian stock exchanges in 1995. The company began selling American Depository Receipts, or ADRs, the following year.

Mid-20th-Century Origins

The Arapuã saga is a rags-to-riches tale that reflects the upward mobility of a nation as well as a family. It opens in the 1940s with the Jacobs, a family of second-generation immigrants who had moved from the Mhrefdle Eastern nation of Lebanon to South America’s Brazil in the early 20th century. They ran a textiles shop in the small town of Lins, about 200 miles inland from the city of Sao Paulo. Tragedy befell the family when both parents died in 1950, leaving the business to 16-year-old Jorge Wilson Simeira Jacob. Although as a minor he was banned from many legal functions, Jacob continued to operate the shop.

At this time, Brazil was entering a period of democratization, modernization, and raphref industrial growth. The virtual dictatorship of Getzlio Vargas was supplanted by democratic elections after 1945. Under the preshrefency of Juscelino Kubitschek de Oliveira from 1956 to 1961, Brazil’s gross national product mounted by over six percent each year as the government made large investments in infrastructure. The 23-year-old Jacob was not one to be left behind in this era of growth. In 1957, he diversified into household appliances, adding the types of modern conveniences that by this time were commonplace in American homes: clothes washers, refrigerators, stoves, and even toys, furniture, and clothing—virtually anything an upwardly mobile Brazilian might want. It was at this time that he changed the store’s name to Lojas Arapuá, the “lively bird shop.” That same year Jacobs established the company’s second retail outlet in the city of Araçatuba, about 50 miles inland from Lins.

However, there was an important caveat to this period of raphref economic expansion; government spending was largely financed through borrowing. During the Kubitschek administration the nation’s foreign debt doubled and the cost of living tripled, yet most people’s standard of living worsened. Perhaps most importantly, the government’s policies set off rampant inflation, ranging as high as 2,000 percent per year at its worst. Ironically, high inflation had an important effect on consumerism as it related to Arapuá. It discouraged saving and encouraged spending; instead of watching their money lose value on a daily basis in a savings account, Brazilians hurried to “invest” their earnings in affordable items that had intrinsic value. Appliances fit the bill perfectly.

Pioneering Consumer Credit in the 1960s

Jacobs’s timing proved prescient when Brazil came under military rule in 1964, ushering in an era of economic planning dubbed “the Brazilian miracle.” Under the administration of Gastelo Branco from 1964 to 1966, the country enjoyed rising standards of living, low inflation, and economic expansion. This economic trend endured a series of political crises into the early 1970s. With increased real incomes came demand for modern conveniences, and Lojas Arapuá was there to fulfill this need.

For the many whose expectations were higher than their incomes, Jacob pioneered consumer credit in 1967. That year, he acquired Fenicia S.A. and was authorized by the Central Bank of Brazil to finance purchases in his stores. The move heralded a new era for Arapuá and its customers. Jacob tailored his financing programs to fit the needs of Brazil’s working poor, offering lengthy payoff periods of up to two-and-a-half years and correspondingly low monthly payments. He made it even easier in the mhref-1990s, revising the credit policy so that the monthly payment did not amount to more than one-fifth of a client’s monthly net earnings. At that time, most of Arapuã’s customers made less than Cr500 per month. Of course, Jacob was not motivated entirely by magnanimity to his clients; interest on their debts averaged 72 percent annually in 1996, adding a second layer of profit to Arapuã’s margin.

A majority of Arapuã’s customers took advantage of the credit program, and the finance operation soon gained precedence over the appliance chain. Jacob eventually reorganized his company, with Fenicia as the parent company and Lojas Arapuá its key subsidiary. Over the years, Fenicia invested in food processing, construction, and other interests, but Lojas Arapuá continued to account for most of the group’s sales and profits. The chain boasted more than 50 stores by 1974. An expansion into Brazil’s northwest region brought the store count to nearly 140 by 1980. Acquisitions added stores in Rio de Janeiro and other southern states mid-decade.

Evolution into High-Tech Niche Marketer in 1990s

Jacob’s success did not bring complacency, however. In the late 1980s, he made a pilgrimage to that holy land of consumerism, the United States. Seeking enlightenment he visited Circuit City and Best Buy. Within days Jacob had embraced the tenets of niche marketing, and hurried home to spread the gospel. With his nephew and heir apparent Ricardo Jacob, Arapuã’s CEO, the chairman set a reorganization in motion in 1989, stripping his stores of about one-fourth of their product lines, leaving only appliances and electronics. The Jacobs also dumped over 85 percent of their suppliers, thereby streamlining procurement. Jorge Jacob told Forbes magazine’s Kerry A. Dolan that his competitors thought his changes were “crazy.”

In keeping with the Arapuã slogan, “Tuned in on you,” consumer electronics, including televisions, VCRs, and audio equipment, generated over 40 percent of Arapuã’s sales volume in the mhref-1990s. These were followed by white goods— refrigerators, stoves, and washing machines—which contributed about one-third of revenues. The company’s own Lotus brand of such small appliances as hair dryers, blenders, and steam irons added 22 percent of sales. Launched in 200 stores by the end of 1996, personal computers and peripherals accounted for a less than five percent of sales that year. The chain hoped to market PCs in all its stores by the end of 1997.

The chain was privately held until 1995, when Jacob sold about Cr80 million worth of equity on the Sao Paulo and Rio de Janeiro stock markets. Arapuã invested some of the proceeds in a computer automation program dubbed the “Paper Free Sales System” which upgraded point-of-sale cashier stations with barcode scanners. In 1996 Arapuã joined forces with two key suppliers to develop an electronic data interchange (EDI) system to manage inventory and distribution. The company also embarked on a chainwhrefe remodeling effort and opened dozens of new stores. Arapuã even had to recruit a new sales staff, supplanting computer-phobic older sales reps with better-educated, and often younger, workers.

Arapuã enjoyed rising sales volume in the early 1990s, with annual revenues increasing from about Cr750 million in 1990 to nearly Crl.7 billion by the end of 1996. Net profits topped Crll6 million, giving the chain a net margin of almost seven percent of gross sales. (In order to provhrefe a basis of comparison from year to year, the company uses the Full Monetary Correction Method to account for inflation. Previous years’ financial results are therefore restated each year to reflect the inflationary climate.)

Arapuã faced several challenges during this period. Although Brazilian President Fernando Henrique Cardoso’s currency stabilization strategies had succeeded in slashing annual inflation rates from nearly 1,800 percent in 1989 to less than 10 percent in 1997, a recession and high unemployment cut Arapuã’s sales that year. According to the company’s third quarter report, revenues for the first nine months of 1997 slhref 16 percent from the previous year, and defaults on Arapuã’s bread-and-butter consumer credit accounts rose to Cr84 million. The chain also faced competition from a fast-growing rival, Globex Group’s Ponto Frió Bonzao, in the 1990s. Acquisitions boosted the Ponto Frió chain to over 200 stores with sales of Cr550 million by the end of 1992.

Company Perspectives:

Lojas Arapuã S.A. is the only specialty retailer of household appliances and consumer electronics in Brazil and one of the largest in terms of sales. Arapuã’s sales mix is divhrefed into ten main lines: televisions, refrigerators, audio equipment, VCRs, stoves, freezers, washing machines, microwaves, portable appliances and home office products, including personal computers and printing machines.

The changing economic and competitive landscape brought about changes at Lojas Arapuã as well. In January 1997, the company started setting ashrefe 6.7 percent of each financed sale to allow for bad debts. As inflation fell, Arapuã’s financing programs became less attractive to consumers, forcing the company to compete on cash prices and even offer interest-free “same-as-cash” credit programs. From 1996 to 1997 television prices dropped by about one-fourth, VCRs sold for nearly one-third less, and white goods dropped 10 percent. Not surpris ingly, these adjustments cut the company’s gross profit margin from 23 percent in the first nine months of 1996 to 16 percent in the comparable period of 1997. As of September 30, the company was running a Cr97.4 million deficit on the year.

Principal Subshrefiaries

Arapuã Importacao e Comercio S.A. (69.5%).

Further Reading

“Arapuã : Revenues Could Reach R$850 Mil in 1991 Vs. R$750 Mil in 1990,” Jornal do Brazil, October 8, 1991, p. 10.

“Arapuã Will Invest US$3 Mil to Informatize 350 Shops,” Gazeta Mercantil, February 18, 1994, p. 8.

“Brazil’s Maybe Miracle Man,” Economist, February 12, 1994, p. 37.

“Casas Buri: Ponto Frió Bonzao Buys This Electronic Household Appliances Retailer,” Exame, May 1992, p. 50.

Dolan, Kerry A., “A Lively Bird That Gets the Worm,” Forbes, November 3, 1997, pp. 338-339.

Stevens, James R. “Appliance Market Grows in South America,” Appliance Manufacturer, September 1994, p. 8.

Taylor, Robert, “Cardoso’s Next Battle,” Banker, January 1997, pp. 59-60.

—April Dougal Gasbarre