Dec. 3 (Bloomberg) -- The night before appliance retailer Casas Bahia opened in Rio de Janeiro’s largest slum, resident Joana Darc de Morandi couldn’t sleep. Shopping list in hand, she was first in line seven hours before some 200 people began streaming through the store’s front door.
“It’s very important for the neighborhood,” Morandi, 57, said in Rocinha, the slum where she lives. “Casas Bahia being here is a show. It’s beautiful, it means everything. You can find anything you need.”
Casas Bahia isn’t the only company seeking out new customers in Brazil’s favelas, a commonly-used term to describe shantytowns that lack basic public services or urbanization. Drawn by improved security, rising incomes and a booming credit market, retailers are opening shop in the once no-go areas. As millions of favela residents gain middle-income status, consumption has remained buoyant even as economic growth slows, making Brazilian retailers’ stocks the second-most expensive among the world’s four largest emerging economies.
The economic outlook means the shares of Casas Bahia’s parent company, Sao Paulo-based Cia. Brasileira de Distribuicao Grupo Pao de Acucar, will continue to gain, according to analysts recommendations compiled by Bloomberg. Pao de Acucar is a buy for 13 of 24 analysts who cover the stock after gaining 36 percent this year as the benchmark Bovespa index rose 2.1 percent.
Pao de Acucar will rise 20 percent to 30 percent next year, partly fueled by rising sales to lower-income shoppers, said Henrique Kleine, chief analyst at brokerage Magliano SA. Shares were up 0.5 percent at 10:23 a.m in Sao Paulo trading today.
’New Middle Class’
A group of retail stocks in Brazil trade at about 20 times estimated earnings for 2013, compared with 132 times in India, 17 times in China and 14 times in Russia, data compiled by Bloomberg show. Pao de Acucar trades at 19 times its estimated profit.
About 56 percent of the 12 million people who live in slums like Rocinha were considered middle class in 2011, up from 29 percent in 2001, according to a study this year by Instituto Data Popular, a Sao Paulo-based research group.
Casas Bahia’s Rocinha location sold 10 times more on its first day on Nov. 6. than in an average store, and the chain will open its third favela location next year, said Roberto Fulcherberguer, vice president of Via Varejo SA, which operates the Casas Bahia brand. The company’s Belo Horizonte-based competitor, Ricardo Eletro, opened its first store in Rocinha in October 2011.
A linchpin of the expansion has been Rio’s so-called pacification community policing strategy, Fulcherberguer said. Special forces last year took control of Rocinha and expelled drug gangs that controlled the slum of 69,000 sprawling above the city’s wealthiest beachside neighborhoods, including Ipanema. Rocinha was the 28th favela to be pacified in Rio since 2008, and 12 more are slated to be occupied before it hosts the 2014 World Cup.
“We are already looking for properties, either to rent or to buy, in any community that has been pacified and where there is protection by police or the army,” Michael Klein, Via Varejo’s chairman, told reporters at the opening of the Rocinha store. “The more communities that are pacified, the more Casas Bahia stores we’ll have.”
Over the past decade, Brazil led Latin America in reducing poverty. The middle-income class -- those defined as earning $10 to $50 per day -- has expanded by more than 40 percent in the period, according to a World Bank study published in November.
Poor Vs. Rich
During that time, the poorest 10 percent of Brazil’s population saw their incomes rise 5.5 times faster than the richest 10th, according to a study released by the federal government’s Institute for Applied Economic Research, known as IPEA, in September. Unemployment plunged to 5.3 percent in October, less than half the level a decade earlier.
Today, 13 billion reais ($6.1 billion) move through Rio’s favelas annually, according to the Data Popular study. Sales in the first three quarters of 2012 from Via Varejo’s stores, which include Casas Bahia and Ponto Frio locations, were up 9.1 percent from last year, according to financial results released Oct. 31. The company plans for 70 percent of its growth to come from Casas Bahia stores in the Northeast, one of the country’s poorest regions, Fulcherberguer said.
“We look favorably upon this strategy,” Joao Pedro Brugger, who helps manage 220 million reais at Leme Investimentos in Florianopolis, Brazil, said by telephone on Nov. 27. “It’s a good competitive advantage for them, a potential market to be explored.”
A challenge for retailers could arise as more homes inside favelas are formally connected to the power grid rather than tapping in illegally. Such families may not be able to afford appliances that use costly electricity, said Marcelo Neri, an economist who studies poverty and is president of IPEA.
“It’s not just good news for those stores,” he said. “Those communities still have a very low cost of energy.”
Rio’s favela residents make the vast majority of their purchases within their communities, except in the case of electronics and appliances, the Data Popular study said. Morandi, who has lived in Rocinha more than 40 years and until recently wanted to move away, nabbed a blender, a mixer, a fan, a coffee maker and a scale in Casas Bahia. She paid for her goods in two installments.
“We were missing Casas Bahia, and now we’ve got that,” Morandi said. “Rocinha is marvelous.”
To contact the editor responsible for this story: Joshua Goodman at email@example.com; Jessica Brice at jbrice1@bloomberg.