Rua Sergipe, 475
Lojas Arapua S.A. is the only specialty retailer of household appliances and consumer electronics in Brazil and one of the largest in terms of sales. Arapua's sales mix is divided 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.
Once the largest retailer of household appliances and electronics in Brazil with 16 percent of the market for durable consumer goods, Lojas Arapua S.A. plunged from success to bankruptcy in the late 1990s due to mounting debt. The company decreased in size from 265 stores in 1997 to 88 stores in 2003. It operates stores in the northeast region of Brazil, selling consumer electronics and affordable furniture.
The Arapua 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 Middle 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 rapid industrial growth. The virtual dictatorship of Getzlio Vargas was supplanted by democratic elections after 1945. Under the presidency of Juscelino Kubitschek de Oliveira from 1956 to 1961, Brazil's gross national product mounted by more than 6 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, as well as 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 Arapua, the "lively bird shop." That same year Jacobs established the company's second retail outlet in the city of Aracatuba, about 50 miles inland from Lins.
There was an important caveat, however, to this period of rapid economic expansion; government spending was financed in large part 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 important, 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 Arapua. 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
Jacob'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 Castelo 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 Arapua 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 Arapua 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 mid-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 Arapua's customers made less than Cr 500 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 Arapua's margin.
A majority of Arapua'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 Arapua its key subsidiary. Over the years, Fenicia invested in food processing, construction, and other interests, but Lojas Arapua 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 by mid-decade.
Evolution into High-Tech Niche Marketer in the 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 he hurried home to spread the gospel. With his nephew and heir-apparent Ricardo Jacob, Arapua'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 more than 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 Arapua slogan, "Tuned in on you," consumer electronics, including televisions, VCRs, and audio equipment, generated more than 40 percent of Arapua's sales volume in the mid-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 less than 5 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 Cr 80 million worth of equity on the Sao Paulo and Rio de Janeiro stock markets. Arapua 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 Arapua 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 chainwide remodeling effort and opened dozens of new stores. Arapua even had to recruit a new sales staff, supplanting computer-phobic older sales reps with better educated, and often younger, workers.
Arapua enjoyed rising sales volume in the early 1990s, with annual revenues increasing from about Cr 750 million in 1990 to nearly Cr 1.7 billion by the end of 1996. Net profits topped Cr 116 million, giving the chain a net margin of almost 7 percent of gross sales. (In order to provide a basis of comparison from year to year, the company used the Full Monetary Correction Method to account for inflation. Previous years' financial results, therefore, are restated each year to reflect the inflationary climate.) With an estimated 16 percent of the Brazilian market for durable consumer goods, Lojas Arapua S.A. was the nation's largest retailer of household appliances and electronics. The company ended 1996 with more than 260 stores and six distribution centers throughout Brazil. In fact, the chain had units in all but four of Brazil's 26 states.
Instability and Uncertainty in the Late 1990s and into the Early 2000s
Although Arapua's accelerated growth had driven the chain to the top of its market, the company faced several challenges as it headed toward the end of the millennium. 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, but a recession and high unemployment began to cut into Arapua's sales. In January 1997, the company started setting aside 6.7 percent of each financed sale to allow for bad debts. As inflation fell, Arapua's financing programs became less attractive to consumers, forcing the company to compete on cash prices. From 1996 to 1997 television prices dropped by about one-fourth, VCRs sold for nearly one-third less, and white goods dropped 10 percent.
Arapua fought to lure and retain customers by sweetening consumer credit deals. Despite the rising interest rates and falling demand for durable goods, Arapua forged ahead, offering payment plans that lasted up to three years, a duration unheard of in Brazil's retail market. In addition, Arapua offered these credit deals with no down payment required. As a result, defaults on consumer credit accounts skyrocketed. The defaults, in combination with an industrywide drop in sales and high interest rates, severely impacted Arapua's bottom line, and the company reported a net loss of R$183 million ($164 million) in 1997, a significant contrast to its 1996 reported net income of R$124 million ($111 million). Half of that total loss occurred during the fourth quarter. Sales dropped 28.6 percent from 1996 to $1.1 billion. Financial analysts attributed the majority of Arapua's problems to the credit default rate, which was twice as high as competitors' default rates. Retail analyst David Wheeling of Bear Stearns Investments told Latin Trade, "Arapua's aggressive sales policy would have been O.K. if the economy had kept clipping along, ... but in Brazil the market can turn on a dime and that's what happened."
Unable to lift itself out of the financial quagmire, Arapua filed for bankruptcy protection in 1998. The company was estimated to have outstanding debts of about R$800 million ($720 million). Sales of Arapua shares were suspended following the announcement. Arapua had been in negotiations with its primary suppliers for several months in an attempt to reschedule payments, but the inability to reach agreements left the company with no alternative but to seek help from the government. Arapua agreed to repay some R$550 million ($495 million) of its debt over the following two years at a yearly interest rate of 4 percent. Among Arapua's suppliers were Philips Electronics NV, Samsung Electronics, Sony Corporation, Matsushita Electric Industrial Co. Ltd., and Sharp SA Equipamentos.
Speculation arose that a competing retailer might acquire the beleaguered chain. The likely buyer was business magnate Ricardo Mansur, owner of the Mappin department store chain. Mansur also purchased Brazilian bankrupt retailer Mesbla in 1997. The acquisition of Arapua would give Mansur a leading edge in the consumer electronics market in Brazil.
In May 1999 Arapua transferred all of its business operations to subsidiary Arapua Comercial. The company also succeeded in renegotiating 66 percent of its debts with creditors by agreeing to pay its debts with new debentures that would mature in ten years. By the end of July, Sony, to which Arapua owed about R$25 million, accepted the compromise, but major creditor Evadin, a maker of consumer electronics, refused the new terms. Arapua owed Evadin about R$100 million. Arapua ended 1999 with a net loss of R$270.53 million.
Arapua continued its decline into the new millennium. The Comissao de Valores Mobiliarios launched an investigation into Arapua's financial operations in August 2000. Arapua reported a net loss of R$204.8 million and debts of R$1.2 billion at the close of 2000. Controller Arapua Comercial's net income of R$492.4 million helped to offset Arapua's operating loss, which decreased from R$267 million in 1999 to R$197 million in 2000.
Financial hardship continued to plague Arapua, and bankruptcy seemed imminent. Arapua proved unable to pay either of the two installments it had agreed to pay when it sought bankruptcy protection in June 1998. The company missed its first installment of an estimated R$260 million in June 1999. Over the course of the next few years, Arapua tightened its operations, closing 167 stores and laying off 4,700 employees. Arapua finally managed to emerge from the bankruptcy reorganization process in mid-2003.
Amid the chaos of bankruptcy, Arapua moved ahead as best it could, seeking to elevate sales by meeting consumer demand. In 2001 the stores began selling MDF furniture, an inexpensive furniture line targeted to lower-income customers. That year Arapua invested some R$30 million on furniture. Sales of the furniture rose quickly, accounting for 15 percent of sales during the first nine months of 2002. In 2003, after closing 30 stores, which resulted in the exit of Arapua from the south and central west regions of Brazil, the company focused on the northeast region and furniture sales. Although consumer electronics still accounted for the majority of Arapua's sales at 70 percent, furniture sales continued to climb, and Arapua expected furniture transactions to account for 50 percent of total sales in 2003.
In 2003 the company turned a profit by offering insurance to its customers who made purchases based on installment plans. The financial protection insurance, made through Assurant Seguradora, helped protect consumers in case of death or unemployment. Of Arapua's 1.2 million customers who opted for the credit plan, 720,000, or 60 percent, purchased the insurance. Insurance premiums amounted to some R$150,000 per month for Arapua.
Nearly obliterated by its financial decline in the late 1990s, Arapua managed to beat the odds and emerge from disaster in the early 2000s. Although the company had decreased in size from 265 stores in 1997 to 88 stores in 2003, it began to show some signs of growth and profit, helped in large part by its attention to consumer needs and desires.
Principal Subsidiaries: Arapua Importacao e Comercio S.A. (69.5%).
Principal Competitors: Ponto Frio S.A.; Telelok; Casas Bahia S.A.; Mappin.
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