(Bloomberg) -- Brazil’s retailers are already reeling from foreign competition, high interest rates and stubborn inflation. Now a dramatic slump in the currency is threatening their profits.
The real is at historic lows against the US dollar, which is driving up prices for Brazilian retailers by raising the cost of imported goods. To adjust, grocers and major shopping chains plan to pass those costs along, increasing prices for some food products and electronics as much as 10% from a year earlier, according to people familiar with the matter.
Proteins, software and PC monitors are specific areas of concern, the people said. Increases in those categories are expected to be well above the annual inflation rate of 4.3% that economists are forecasting for 2025. The price hikes will make it difficult for the central bank to rein in inflation, especially since economists have already been ratcheting up their estimates for 2025.
Brazil’s statistics agency is scheduled to release consumer-price data on Friday.
The currency’s slump is also restricting food supplies by making exports more attractive than the domestic market for grain and protein producers. A severe drought has also contributed to higher food prices.
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This scenario has sparked the most difficult negotiations in years between retail chains and their suppliers, said a person familiar with the matter. Retailers, faced with higher costs to source their groceries and merchandise, are seeking to avoid sharp price increases that would further spook consumers, who are already saddled by higher debt costs after Brazil’s central bank started hiking interest rates last year to curb inflation.
Chains are increasing their inventories by moving purchases forward rather than risk paying more for the same goods later in the year, according to the person, who asked not to be identified talking about confidential discussions.
“Prices will still reflect a very heated economy,” said Andrea Angelo, an inflation analyst at Warren Investimentos, in an interview. Government stimulus, low unemployment, the weaker exchange rate and higher protein prices are all contributing to higher prices, she added.
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Brazilian stores have struggled in recent years as well-capitalized foreign competitors such as Amazon.com Inc., MercadoLibre Inc. and Shein Group Ltd. make inroads in the country. Shares of publicly-traded retail companies such as grocery-store operator Carrefour Brasil and Magazine Luiza SA, which sells electronics, have lagged the performance of Brazil’s benchmark stock index for years.
Brazilian companies are expected to start releasing fourth-quarter results in early February.
Higher food prices may drive up retailers’ revenue from food sales, but this will likely drain consumption from discretionary sectors such as durable goods, according to Danniela Eiger, an analyst at XP Inc. Higher interest rates, which have driven up the cost of borrowing, are also hurting consumers, she said.
“As income is restricted due to inflation, consumers focus on their priority areas, such as food, health, transport, electricity,” Eiger said.
The situation is similar to 2020, when the Brazilian real also weakened sharply against the US dollar and retailers had to pass along the price increases to consumers. However, pandemic lockdowns helped to insulate retailers at the time as consumers diverted spending toward e-commerce and away from travel and other areas. But with economic activity normalized nearly five years later, companies won’t get the same benefit this time.
--With assistance from Beatriz Amat and Gabriel Diniz Tavares.
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