Retail News Update

Brazilians’ biggest shopping spree since 2001, fueled by rising wages and credit, is drawing investments to smaller cities as retailers chase consumers outside of Sao Paulo and Rio de Janeiro.

Macae, a former fishing village that’s now the base for Brazil’s offshore oil production, will open its first mall in September, meaning its 169,000 residents won’t need to drive three hours to Rio de Janeiro to shop. The statistics agency today said sales rose 10.5 percent in May from a year ago.

Consumer spending is driving economic growth in some of the poorest corners of Brazil, helping shield the economy from its first decline in exports in two years. CBL & Associates Properties, Inc. the third largest mall operator in the U.S., chose Brazil’s 151st-largest city to build its first overseas shopping center as retail sales slump in the U.S.

“This is probably the first time in history we’ve seen this boom in consumption penetrate so deep into the countryside,” said Alfredo Coutino, senior economist for Latin America at Moody’s Economy.com in West Chester, Pennsylvania.

Brazil, Latin America’s largest economy, expanded 5.8 percent in the first quarter and 6.2 percent in the last three months of 2007, the fastest rate in three years. It’s benefiting from surging domestic demand, public spending and rising prices for soy and other commodities.

Retail, supermarket and grocery store sales have increased more than 10 percent in four of the first six months of 2008.

Brazil’s real gained 0.2 percent 1.5924 per dollar at 1:44 p.m. New York time from 1.5948 late yesterday.

Consumers, Amazon

Average real incomes adjusted for inflation in Brazil’s six largest metropolitan regions jumped 12.7 percent, to 1,208 reais ($758 ) in May, as economic growth has accelerated the past three years, according to the national statistics agency. Bank lending in May rose 32.4 percent from a year earlier.

The strengthening muscle of the Brazilian consumer is being most intensely felt in the impoverished north and northeast.

In Maranhao, Brazil’s second-poorest state, retail sales surged by 14.3 percent last year, above the national average of 9.6 percent. Sadia SA, the country’s second-biggest food maker, is investing 10 million reais to expand a distribution center in the Amazon city of Manaus to satisfy demand from more Brazilians exiting poverty.

“As Brazil makes more money selling oil and commodities, the shopping dollars will follow and we’ll see more malls being built,” said Rich Moore, a real estate investment trust analyst for RBC Capital Markets in Cleveland.

At least 30 malls are under development after sales at the country’s 387 shopping centers surged 16 percent to $58 billion reais last year, says Marcelo Carvalho, president of Brazil’s Association of Shopping Centers. He estimates growth will slow to 11 percent this year.

Macae

Stephen Lebovitz, president of Chattanooga, Tennessee-based CBL, said the company is investing in Macae because of the town’s quick growth and lack of shops.

Macae is the base for ships heading out to the offshore oil platforms in Campos Basin, where Brazil got about 85 percent of its oil production last year. Gross domestic product per capita in Macae jumped 64 percent from 2002 to 2006, to 36,000 reais, triple the national average.

CBL is expanding beyond the U.S. as an economic slump in its home market reduces demand for consumer goods. The company’s net income may drop 38 percent in 2008, the third consecutive annual decline, according to the median estimate of analysts surveyed by Bloomberg. CBL shares fell 46 percent in the past 12 months.

The mall in Macae will cost 60 million reais to build. It’s 65 percent leased before its September opening date.

`100 Percent Leased’

Economic growth is also stoking inflation, which accelerated to a 31-month high of 6.06 percent in June. The central bank has raised interest rates twice this year in a bid to tame prices.

CBL’s minority partner in the Brazilian joint venture is TencoCBL. Chief Executive Officer Eduardo Gribel said he has commitments from CBL to spend $120 million through 2009 building malls in Macae and four other markets where no shopping centers currently exist. Among their prospects: the sweltering Amazonian port city of Macapa.

Lebovitz declined to say how much CBL plans to spend.

The mall in Macae will yield annual returns almost double the 6 percent to 8 percent average of U.S. malls, depending on the outlook for inflation and how much the central bank raises borrowing costs from the current 12.25 percent, Gribel, 54, said in an interview after meeting with the mall’s future tenants at the construction site.

Brazil’s central bank is expected to raise rates to 14.25 percent this year, according to a July 14 central bank survey.

“There’s always a risk of a blip in the economy, but I’ve never been in a mall in Brazil that’s not 100 percent leased,” CBL’s Lebovitz said.