A Prime Opportunity for Brazil’s Hospitality Flooring ... · PDF fileBRAZIL HOSPITALITY FLOORING 2 Abstract Brazil‟s hosting of the upcoming World Cup and Summer Olympic Games,

Running head: BRAZIL HOSPITALITY FLOORING MARKET 1

A Prime Opportunity for Brazil’s Hospitality Flooring Market?

Sheri Stroop

Fall 2013 MRKT605

University of Maryland University College

Flooring picture courtesy of Shawhardsurface.com

BRAZIL HOSPITALITY FLOORING 2

Abstract

Brazil‟s hosting of the upcoming World Cup and Summer Olympic Games, along with its

growing tourism rates, make this seem a prime opportunity for market entry for foreign investors.

This data analysis explores the economic, political, cultural and competitive factors that apply to

the hospitality flooring industry; specifically, the focus will be on entry into this industry through

hotel development and refurbishment as a peripheral industry. Market conditions in the

hospitality industry drive those in the hospitality flooring industry, and main indicators have been

taken from both the hospitality and construction industries in Brazil.


Executive Summary

With Brazil hosting the upcoming World Cup games in 2014 and the Summer Olympics

in 2016, its hospitality market is one that U.S. companies can scarcely ignore. Numerous hotel

chains are investing in the country, claiming some of the record tourism dollars entering into the

country. Existing hotel chains are focused on refurbishing in expectation of higher competition

due to sports traffic in the coming years. There is a limited window of opportunity for peripheral

industries, such as hospitality flooring, to make an entrance into the country on this mass wave of

hotel expansion. The coming months and years will be a prime time to consider investing in

Brazil for commercial flooring companies.

The subject of this paper‟s analysis is a privately held manufacturer of commercial

flooring, to be referred to henceforth as SHG, Inc., which has interest in entering the Brazilian

hospitality flooring market. While SHG, Inc. manufactures and sources all types of flooring, the

primary focus for the purpose of this data analysis and marketing plan will be luxury vinyl tile

(LVT) products, a new entrant into the hospitality market in general, and one with high potential

in Brazilian hotels. The company‟s main target market in the Brazilian hospitality sector will be

contacts made through major hotel chains such as Accor, Intercontinental, Marriott, Hyatt and

Hilton. In Brazil, these hotels are locally owned and operated by independent developers, who

typically hire designers. Therefore, the focus of this research will be from the B2B perspective.


Prime Opportunity for Brazil’s Hospitality Flooring Market

Many of the hotels in Brazil are resort hotels located in coastal areas of the country, and

they have customarily placed ceramic tile in common areas and guest rooms. More urban hotels

tend to have ceramic tile in the common areas and carpet tile or broadloom carpet in hallways

and rooms. Liability issues result from the nature of ceramic tile, such as higher incidence of

falls and increased likelihood that dishes falling on these surfaces will break, while carpeting is

more expensive to clean. For these reasons, the hotel industry is open to a change from the norm.

U.S. hotels have started to move more toward LVT as an alternative to ceramic, and as other

countries tend to follow the trends in U.S. hotels, Brazil should not be a hard sell on this product

(Chipman, 2013).

Country Analysis

Brazil is the largest country in South America, with the world‟s 5th

largest economy and 6th

largest population, so naturally businesses would want to investigate potential opportunities

there. However, with 26 states and over 5,500 municipalities, navigating the country‟s numerous

laws and regulations, some of which are contradictory, can be a daunting task (CIA World Fact

Book, 2013). Brazil is divided up into 5 regions – Southeast, South, Northeast, North, and

Center-West. Each region has a different cultural and economic makeup, with the South and

Southeast regions considered to be the most developed (Brasilglobalnet.gov.br). However, the

North region‟s potential should not be discounted from the hotel development industry, as it is

home to the Amazon Forest, a draw for tourists.

Economic Analysis


In order to make an educated decision about entering into the Brazilian hospitality

market, SHG, Inc. must understand the economic state of the country and how its economy

works. Brazil has long established “agricultural, mining, manufacturing, and service sectors,”

and the country exports many commodities including “transport equipment, iron ore, soybeans,

footwear, coffee and autos” (CIA World Fact Book, 2013). Brazil currently maintains an overall

trade surplus of around $19 Billion, with the US comprising 14.7% of the imports. In addition,

the country‟s debt was granted “investment grade status” in 2008 (CIA World Fact Book, 2013).

Brazil‟s GDP stood at $2.394 Trillion in 2012, making it the 8th

largest in the world, with GDP

per capita (PPP) at $12,100 (CIA World Fact Book, 2013).

Brazil‟s middle class has increased by 50% in the last ten years, growing the disposable

income of a significant portion of the population (Higgins, 2013). With more disposable income,

the people of Brazil will more likely increase participation in domestic tourism. However,

overall, the Brazilian economy has stalled in recent years, with GDP Growth stagnating between

2 and 3 percent (CIA World Fact Book, 2013). The exchange rate for the Brazilian real appears

relatively stable at first glance, however, even small jumps over time can affect foreign

investment (Banco Central Brasil, 2013). Unemployment stands at 5.5% in a labor force of

106.3 million, 68% of which works in the services industry (CIA World Fact Book). Although

unemployment is relatively low, shortages in skilled labor abound, which is a cause for concern

to industries on the development sidelines. Recent improvements in infrastructure, such as

widening of highways, port dredging, construction of two new subway lines and the creation of a

rapid bus transport system (BRT), in addition to the modernization of two of Brazil‟s largest

airports and revitalization of the Port of Rio show that the country is committed to improving


itself to host the recent Confederations Cup and upcoming World FIFA Cup and Olympics (US

Department of Commerce Building Opportunities).

Inflation stands at a CPI of 6.6%, triggering Brazil to raise its interest rates to the highest in

the world at 9.5%, which makes borrowing for investments very expensive and can explain to a

certain extent the declines in various indices (BRICSPost, October 2013). However, higher

interest rates also make foreign investment more attractive, and the Export-Import Bank and

Overseas Private Investment Corporation (OPIC) both offer financing to U.S. companies that

wish to invest in Brazil; and OPIC offers risk mitigation services in emerging markets to

encourage U.S. expansion (US Department of Commerce, 2012). Consumers and small-

businesses also have easy access to credit, albeit at premium rates (Marcelino & Lucchesi, 2013).

Therefore financing projects, though more expensive than in the U.S., continues to be an option

for investors.

Future growth of the Brazilian economy will depend largely on social program reform, as

the country‟s current tax burden stands at 32.5% of GDP, with public spending over one-third of

GDP. Effective corporate tax rates of 34% will prove difficult for the country to attract

businesses, and high levels of regulation and bureaucracy make starting a business and obtaining

permits take inordinate amounts of time (The Heritage Foundation, 2013). Brazil has taken

strides in the last decade to improve income distribution, largely through government programs,


and Brazil‟s GINI has decreased from 55.1% in 2008 to 51.9% in 2012; this continues to be

much higher than other similarly developed countries1.

The Construction and Hotel Development Industries

While typical economic indicators are important to note in a B2C analysis, other indicators,

such as tourism statistics and construction and building indices are more vital in evaluating the

economic environment in the country‟s potential B2B development sector. Of more concern to a

commercial flooring business, the macroeconomic indicators for the general contracting and

construction industries are in decline. The Construction Confidence Index (ICST), which

measures factors in the construction industry such as land preparation, civil construction,

infrastructure, finished projects and rented construction and demolition equipment has been

dropping for the last 4 years, going from a high of 145 in 2010 to a four year low of 115 in

September 2013 (See Appendix A) (FGV IBRE, 2013). Brazil‟s Industry Confidence Index has

declined 1.1% in 2013, while the Consumer Confidence Index has decreased .4% (Brazilian

Economy, 2013). These numbers do not encourage foreign investment in construction, however

investors should evaluate them in conjunction with hotel development numbers to get a clearer

picture of how this affects peripheral industries, such as hospitality flooring.

While the construction industry as a whole might look bleak, the hotel development

industry still promises continued growth in the coming years. Over 120 new hotel properties are

scheduled for development in the next 4 years, with existing hotel chains increasing their

1 The GINI coefficient represents income distribution. The closer to 0, the more even the

distribution. The closer to 1 the more uneven the distribution (Investopedia).


investments (Hotel News Resource, 2012). The strongest sectors for hotel development include

budget and economy hotels, as high end luxury hotels pose a higher risk for developers due to

market uncertainty (Santos Cypriano, 2013). Historically, hotels in Brazil have been owned by

independent hotel operators, leaving the market wide open to name-brand international chains

such as Accor, Choice, and Intercontinental. These hotel chains will comprise the majority of

new hotel development in the coming years (Mayock, 2012). Considering that the primary

interest of SHG, Inc. lies in the building and refurbishing of hotels in particular, the outlook

looks optimistic for investment.

International Trade Implications

In addition to country economic factors, SHG, Inc. will need to consider the trade related

factors that can impact its ability to do business in Brazil. The country levies three main import

related taxes – an import duty, which stands at 35% for imported flooring products, the

industrialized product tax (IPI) and the merchandise and service circulation tax (ICMS).

According to the U.S. Department of Commerce, only the import duty constitutes a cost to the

importer, as the IPI and ICMS are typically passed on to product consumers (Doing Business in

Brazil, 2012).

Brazil belongs to both the World Trade Organization and MERCOSUR (CIA World Fact

Book, 2013). When contemplating entering into the Brazilian economy, companies should

understand the implications of Brazil‟s membership in MERCOSUR, a South American common

trade area that includes Argentina, Paraguay, and Uruguay (Ilon & Jaffe, 2013). MERCOSUR‟s

Common External Tariff (CET) may also apply to imports. Although the sum of taxes and fees

foreign companies must contend with when bringing foreign products into Brazil can be


daunting, paperwork has been lessened in recent years through the government‟s SISCOMEX

system and the Foreign Trade Secretariat‟s online import-export registry (Department of

Commerce – Doing Business in Brazil, 2012).

Brazil has a long-term free-trade zone (FTZ) in Manaus, located in the Amazon, which

has attracted many foreign companies, mostly in electronics and automotive industries.

Companies considering importing goods to Brazil should consider starting here, as imports are

duty free as long as they stay in the FTZ or are exported out of the country. In addition, many

FTZ‟s exist that suspend import duty on products produced for certain industries, including those

that support tourism. These are currently located in Tabatinga, Boa Vista, Macap , Santana, and

Guajar -Mirim (PWC, 2013).

Political Analysis

Brazil has a parliamentary democracy with three separate branches – executive, legislative

and judicial. In addition to the federal government, there are also state governments that have

governors, similar to the US, and many regulatory agencies. The Brazilian legal system is based

on the Civil Code, which has been in effect since 2002 (PWC, 2013). Doing business in Brazil

can be confusing for foreigners, as many laws and regulations are contradictory and each state

has its own import taxes, rules and restrictions.

According to the Heritage Foundation‟s Economic Freedom Index (2013), Brazil‟s lack of

an “efficiently functioning legal and regulatory framework” makes doing business in the country

extremely difficult. The sheer number of political parties that a business might come in contact

with during changes in leadership can cause great uncertainty for businesses due to the vast

differences in the parties. In addition, recent outbreaks of protests about government spending on


non-infrastructure related projects can cause construction delays and potentially discourage

potential tourists. Labor strikes are also commonplace, adding complexity to the construction

industry, which is already short of labor.

More concerning to businesses, criminal institutions have targeted the government in the

past, and corruption within local governments, bribery in particular, has also been a problem.

However, Brazil is a member of the Organization for Economic Cooperation and Development

(OECD) and Open Government Partnership (OGP), which shows its commitment to fighting

corruption. Brazil has a high rate of crime, more so in big cities and in areas frequented by

tourists (Department of Commerce – Doing Business in Brazil, 2012). High levels of crime and

corruption increase the cost of doing business in a foreign country, due to potential theft of

products, the possibility of products being held up in customs and threats to foreign nationals that

travel to Brazil for business.

Cultural Analysis

Prior to undertaking business in Brazil, a company should study the local customs and

culture. There are many different aspects to culture, from how groups are structured and interact

to how a society views time and space. Companies that endeavor to enter foreign markets need

to appreciate these differences and their potential impact on business relations. Though not the

only authority on deciphering culture norms, Hofstede‟s 5-D model offers a comprehensive

means of determining differences in a culture from one‟s own and how to navigate those

differences.

Cultural Attributes


Brazil derives much of its culture from its Portuguese, Indian and African roots (Levine,

1997). Its official national language is Portuguese, and Brazilians prefer English to the assumed

Spanish as a secondary language. Color carries significance in the country and dictates fashion

and gift giving dos and don‟ts. For example, Executive Planet recommends never wearing the

green and yellow of the Brazilian flag together, and it is considered poor form to give gifts that

are purple or black, which are mourning colors (2008). One of the most symbolic aspects of

Brazilian culture, Carnival, allows people to set aside the pronounced distinctions between social

classes during the time before lent, and consists of music and costumes and dancing. With the

country‟s hosting of the Confederations Cup and the upcoming World Cup, it should be no

surprise that the other prominent symbol in Brazilian culture is soccer or futebol

(EveryCulture.com). Knowing these traditions can better facilitate when to make new contacts in

the country, as many businesspeople take vacation time during the Carnival season and

businesses may be closed during major soccer events.

Hofstede‟s cultural dimensions can help us better understand the way Brazilians interact

and perceive the world around them. For instance, power distance involves the extent to which

power is unequally distributed throughout a society. Organizations and groups in Brazil have

distinct hierarchical structures, with position and status emphasized (Hofstede, 2013). Brazilians

regard the attire and physical appearance of business professionals as extremely important,

attributing status based on the way one dresses (Novais, 2013). Managers are expected to act and

dress to their position and should expect that respect be shown to them by subordinates and those

younger than them (World Business Culture, 2013). However, the boss maintains a relationship

with his employees, seen as more of a father-figure than a dictator (Sledge, Miles & Coppage,


2008). Furthermore, appointments are a formal part of business etiquette, requiring a 15 day

notice and a confirmation call or email. Cold calling is considered extremely rude (Executive

Planet, 2008).

Brazil has a low score on Hofstede‟s dimension of individualism, which means that the

culture emphasizes the group over the individual. The family unit trumps all other ties in Brazil,

where family members are extremely loyal to one another and children are expected to take care

of their parents when they are older (Hofstede, 2013). In this type of culture, nepotism is often

seen in business, where family presides over outside relationships. Relationships between

Brazilian partners and foreigners need to be cultivated and maintained, as Brazilians consider

relationships the most essential part of business. Personal communication works best in person

or over the phone as more emphasis is given to verbal communication than to written (World

Business Culture). The importance of building relationships with hotel developers and designers

by SHG, Inc. will be paramount to its success in the country.

In Brazil, the culture dictates a high level of uncertainty avoidance. This means that

many rules and regulations are enacted with the purpose of making people feel safe. However,

according to Levine (1997), the enactment of rules is done with the understanding that a majority

of them will not be followed. Brazilians get around the rules through the use jeitos. While the

connotations of jeitinho are neither inherently good nor bad, Brazilians apply this concept in

various ways to manage uncertainty and conflict (Sledge, Miles & Coppage, 2008). They can do

this to circumvent laws that they consider unnecessary or unfair, or for more sinister and corrupt

purposes. Foreign companies need to remain cognizant that this type of favoritism exists and

plan ways to conduct business within the law of the land.


The Brazilian culture views time and space very differently from that of the U.S.

Meetings may not start on time and can last far beyond scheduled end times because the business

relationship takes precedence over time and schedules (World Business Culture). Brazil shares a

high long-term orientation with Asian countries, where heritage and future growth are both

important (Hofstede, 2013). Brazilians will take as much time as needed in meetings and

gatherings socializing to build relationships with business partners. They prefer a closer

intimacy, so may be more prone to be in what an American would consider their personal space.

In addition, Brazilians are “very passionate and demonstrative people” (Hofstede, 2013).

According to World Business Culture, emotion is common during business transactions and

should be understood as “as sign of enthusiasm and emphasis” (2013).

Due to the potential bureaucratic nature of organizations, foreign investors should

identify and communicate with the person in the organization that has the power to make

decisions. Foreign businesses should look for a local despachante or middle man to facilitate

navigating complex political alliances inside of organizations, to understand local regulations,

and help build relationships with the right people (World Business Culture, 2013).

Competitive Analysis

In the flooring industry, entering a market as close in proximity as Brazil means

competing not only with Brazilian flooring manufacturers, but also those operating in the United

States. Some of SHG, Inc.‟s main competitors in LVT include Beaulieu, Mohawk, Armstrong,

and Tarkett (Chipman, 2013). Due to the flooring industry being peripheral to hotel

development, the most important numbers in determining competition and prospects are those

related to projected hotel development projects and hotel refurbishments. Although these


prospects are driven by projected tourism numbers, which are projected to grow at least 10% in

the next year, hotel related investment numbers are more important in peripheral industries,

where the main concern is the building or refurbishment of the hotel, and not the hospitality

indices that will project the hotel‟s future earnings or growth (Brazil Tourism Report, 2013).

According to the U.S. Department of Commerce, several hotels plan to refurbish in light of the

upcoming sporting events being held in Brazil, while brand name hotels plan to increase their

presence in the country (Department of Commerce Building and Construction Opportunities for

2016 Olympic Games).

Availability and Impact of Media

Brazilians get the majority of their information through television, with 97% of urban and

91% of rural households having at least one TV. Radio is the second largest method of

communication in the country with 86% of urban and 84% of rural households having access to a

radio. Less popular forms of communication are newspapers and magazines, as less than half the

population reads a newspaper on a weekly basis, and popular magazines are published quarterly.

The Internet is the least likely method to reach households, especially in poorer, rural areas.

Overall, only about 18% of households have access to the Internet, and connections are slower

than broadband (Bailey & Pretto).

With media availability in mind, foreign companies must plan accordingly to ensure that

marketing messages reach the intended target audience. In the case of SHG Inc., the company

will be selling to other businesses such as hotel developers and interior designers. The best

method to reach this audience with marketing is through participation in trade shows and expos,

where those in attendance are in the market to purchase flooring.


Availability of Distribution Channels

While there are numerous institutions available to help foreign companies export their

goods to Brazil, a general lack of information on the finer points of import regulations, as well as

existing incentives for South American countries to export to the country, can hinder the export

process. Understanding the available distribution channels is important to successfully exporting

to Brazil. Importers in Brazil typically will choose a port of entry, and goods are transported

inland either by truck or HGV (PWC, 2013). While Brazil has a number of wholesalers and

retailers, SHG Inc. will be focused on selling directly to an agent or intermediary who is working

with a hotel development project and places a specific order for flooring.

Market Conditions

Hotel development continues to be a lucrative business in Brazil, and winning the

competition between commercial flooring companies for contracts boils down to relationships on

the ground with the people making the design decisions. Aside from the obvious development

opportunities in the cities hosting the upcoming Olympic Games and World Cup, foreign

investment in hotel development has continued to grow on the northern beaches of Bahia, Rio

Grande do Norte, and Alagaos, as well as in the Amazon, which is a popular tourist destination

(Business Monitor International, 2011). Flooring companies can contribute to adding value to

hotels by offering inspiring designs, comfort and functional safety. Foreign flooring providers

are at a disadvantage to local providers, as high customs duties and a bureaucratic regulatory

environment add costs that do not exist for local ones.

Strengths


While Brazil can be a formidable place to conduct business, the hospitality market is

attractive to foreign investors as a result of increased demand for hotels in recent years. Rising

occupancy rates in recent years from 44% to 50% and anticipated demand for the upcoming

World Cup and Olympics make developing hotels a lucrative opportunity in the short-term in the

country (Hotelmanagement.net, July 2013). The Brazilian government has also launched two

growth programs called PAC and PAC 2, aimed at improving infrastructure for the same reason

(Department of Commerce – Doing Business in Brazil). In addition, more recent concerns for

energy conservation has lead the hospitality market into seeking out greener solutions, offering

advantage to companies such as SHG, Inc. that have historically been leaders in more

environmentally friendly flooring.

Weaknesses

Even in the best of conditions, Brazil has an extremely high import duty of 35%, which

significantly cuts into foreign competitor margins and presents a huge barrier to entry. In

addition, unless a foreign company establishes an office on the ground in country, it is necessary

to work with a service provider in order to conduct business efficiently and cost effectively

(Chipman, 2013). In the current stagnating economy, prospects for business growth for a new

manufacturer would not outweigh the costs, making the market extremely unattractive for this

type of market entry, leaving fewer options open to potential investors.

Opportunities

While several brand name hotel chains will be expanding their presence in Brazil, long-

term growth in the hospitality market will be driven by increased domestic tourism and business

traffic. As a result, hotels in the economy and mid-price range are likely to have more sustained


growth, with rising demand for condo-hotels as well (Santos Cypriano, 2013). Tax incentives for

hotel development and refurbishment as a result of upcoming sporting events further makes the

hospitality market attractive to investors. Furthermore, the U.S. Department of Commerce lists

flooring as one of the opportunity sectors presently in Brazil (Doing Business in Brazil, 2012).

Although Brazil customarily has independent owners when it comes to even the brand-

name chains, the Forum of Hospitality Operators of Brazil (FOHB) allows for collaboration

between developers, creating opportunities for additional development in less populous cities and

providing a starting point for international investors to make contact (Hotelmanagement.net, July

2013). Trade shows represent the primary means of advertising and promotion for commercial

flooring companies, making a relationship with the FOHB a noteworthy investment. However,

foreign companies should not overlook the immense direct mail marketing culture in the country

and should take the opportunity to increase name recognition among hotel owners through this

type of media as well (Department of Commerce – Doing Business in Brazil).

Threats

Threats are ever-present in the hospitality flooring market, and especially so for a foreign

investor. While SHG, Inc. has a reputation for abiding by trade rules and regulations, corruption

at ports of entry can be common in container ship transfer, allowing less scrupulous companies to

pay lower import duties on goods and creating a disadvantage to those that follow the rules

(Chipman, 2013). Brazil‟s recent outbreaks of protests over spending for the Olympics and

World Cup have cast uncertainty into the continued pace of growth in tourism, which in turn

could delay current development projects and indefinitely put on hold those in the pipeline.

Furthermore, uncertainties due to Brazil‟s upcoming elections make it a less than ideal time for


investment. Compounded by a shortage of skilled construction labor, this uncertainty leaves

foreign investors at risk from currency fluctuation, as projects put on hold could easily be

devalued if exchange rates change significantly.

While at first glance, Brazil‟s currency seems to be relatively stable, the amount of

movement in the past year would have a negative effect on a company with lower margins

making a pricing offer up front to service providers. In addition, customs regulations can make

participating in trade shows in the country more expensive, as many companies have had to write

off trade show materials as a total loss, being unable to export back out of the country due to

immense amounts of bureaucracy and paperwork (Department of Commerce – Doing Business in

Brazil).

Data Analysis Conclusion

While Brazil‟s hospitality market is booming and will continue to do so in the short term,

doing business in the country requires a lot of research and forethought prior to market entry.

Recommendations for commercial flooring market entry include making contact with service

providers or deschpande on the ground and cultivating a partnership with these companies to

increase the likelihood of winning contracts and gaining an audience with the independent

owners of hotel chains in Brazil. While the deschpande’s name will be one that should be

recognized in Brazil, the international company name may not be, so all advertising and trade

show related materials should include both names to increase brand recognition of the foreign

company and promote loyalty to the local one.

Marketing Plan


With imports at only 9% of GDP, Brazilian market entry will only be feasible with the

right marketing plan, executed by forming the appropriate relationships in country. SHG Inc.

will need to identify and evaluate the most effective way to distribute its flooring to its main B2B

customers. In addition, the firm will need to work with an industry specific export-import

agency to ensure compliance with local regulations and laws and to make contacts on the ground.

Product

SHG Inc.‟s luxury vinyl tile product (LVT) will be introduced to the Brazilian market

under a new brand line called Unbreakable Luxury or s in Portuguese. This

brand name was chosen after careful thought into the finer qualities of the LVT products,

including those qualities that counter the weaknesses of traditional hospitality flooring (carpet

and ceramic tile). The Unbreakable Luxury line will be positioned as a more viable alternative to

the carpet and ceramic tile that hotels typically use in construction, being placed in the mind of

the hotel developer or designer as having the look of luxury expected of hotel flooring without

the mess. SHG Inc.‟s task in selling this product will be to convince hotel developers and

designers that LVT can replace traditional hospitality floor covering without an adverse affect on

hotel guest perception.

SHG Inc. will likely face some opposition to the idea of replacing traditional flooring

with what in the past has been relegated to kitchens and bathrooms in lower end housing. It is

important that the LVT product be placed as far away in the mind of the developers and designers

from traditional vinyl products as possible to avoid this stereotype and encourage the buyers to

embrace this new concept. It will help that many US hotels are already moving away from


traditional products in favor of LVT. In addition, design will play an important role in wooing

buyers to consider LVT as an option.

Marketing Objectives & Product Strategy

The marketing objectives in this first phase of market entry for SHG Inc. will be to:

1. Introduce the LVT products to the hospitality flooring market in Brazil through trade

shows and flooring expos

2. Position LVT as a luxury, lasting alternative to traditional hospitality flooring,

differentiating it from competing LVT products through superior quality and design

3. Increase brand recognition for SHG Inc. as a company and the Unbreakable Luxury

line as a whole.

The initial product strategy will mostly rely on making contact with key buyers in the hotel

development market, especially in the urban centers of Sao Paulo, Rio and Brasilia, but also in

more exotic locations, such as Amazonia.

Market Share & Expected Sales

Overall, the world flooring market value is an estimated $150 Billion industry, with

resilient flooring estimated at $15 Billion globally (Reportlinker, 2009; Responsive Industries,

2009). The LVT category of flooring is currently the fastest growing in the US, with other

markets expected to follow suit (Pina, 2013). Expected market share upon entry to the Brazilian

hospitality market is expected to be low at around 5%, as SHG Inc. will only be pursuing

individual contracts and is not currently looking to fully expand into Brazil. With Brazil

projected to begin at least 120 new hotel projects in the next few years, if SHG Inc. reaches its

estimated market entry, it will capture 6 of those hotel projects. According to USA Today, the


average hotel with 115 rooms will require 48,000 square feet of flooring (Fixr, 2013). With SHG

Inc.‟s average foreign price for LVT standing at $5.50 per square foot, this would generate

approximate sales of $1,584,000 (48,000 square feet*6 hotels*$5.50 per square foot).

Market Entry Plan

SHG Inc. will enter the Brazilian hospitality flooring market by means of an indirect

exporting alliance. This method has been determined to be the least expensive method of market

entry for SHG Inc. with the least amount of risk. The advantages to market entry via strategic

alliance for SHG Inc. is that the company will gain name recognition and will be able to build

relationships with hotel developers without excessive costs incurred on the part of the firm.

Once SHG Inc. is established in Brazil, it may expand its market entry, however, due to the

nature of doing business in Brazil and difficulty of market penetration, SHG Inc. felt that indirect

exporting was the most viable option for initial entry.

Brazil provides a Trade Directory through the Agency for Export and Investment

Promotion (Apex-Brasil) of companies that specialize in import, market data, customs and other

areas pertinent to doing business in the country (Brasilglobalnet, 2010). From this directory, and

through careful research, SHG Inc. chose Guriexport as its Export/Import company because of its

experience in various import industries and its vast contacts within the Sao Paulo area. This

Export/Import agent will adhere to all customs regulations, in addition to maneuvering through

the legal documentation required to import into Brazil for SHG Inc. In addition, Guriexport will

provide transport from port to storage of the LVT flooring until the building site is ready for the

products. It will then deliver the products to the building site.


Although Guriexport is quite versed in handling the import piece of doing business in

Brazil, SHG Inc. will also need to form a strategic alliance with a local retailer that has contacts

with designers and commercial developers. For this piece of its market entry plan, SHG Inc. will

partner with Ace Coatings, a leading commercial flooring and wall covering retailer in Sao

Paulo. The decision to partner with Ace stemmed from Ace‟s knowledge of the commercial

vinyl industry in Sao Paulo, as well as its name recognition in the flooring industry in Brazil.

Ace Coatings will work with the developers and designers, placing orders for LVT flooring from

SHG Inc. in the US.

Communication Plan

SHG Inc.‟s communication plan will consist of trade show participation, personal selling

and direct mail advertisement. The main thrust of the message will be, “Unbreakable Luxury –

superior flooring design that outperforms traditional flooring” and in Portuguese, “Luxo

Indestrutível - projeto piso superior que supera piso tradicional” (Google Translate). SHG Inc.

will begin its introduction into the hospitality flooring market by attending the Brazil Hospitality

Investment Conference, hosted annually in Brazil (Hotel Management, 2013). There, SHG Inc.

can make key contacts with hotel investors such as Grupo HG, which is a leading hotel property

manager in Brazil (Hotel News Resource, 2012). SHG Inc. will have a booth co-branded with its

strategic alliance partner Ace Coatings in order to make the most of the relationship and play off

of Ace Coatings‟ brand recognition.

In addition to participation in trade shows, SHG Inc. will conduct a direct marketing

campaign via the mail to known developers in the major urban areas where it is seeking to do


business. This campaign will be designed to increase name recognition of the Unbreakable

Luxury line and also emphasize SHG Inc.‟s relationship with Ace Coatings.

Leads generated by attending trade shows and through direct marketing campaigns will be

followed up on by sales specialists through personal communication. Guriexport will provide

sales specialists with samples of potential products, as well as the product catalogue furnished by

SHG Inc. in order to facilitate the sales process. Sales specialists will attend product specific

training to ensure that a uniform brand image and marketing message is conveyed by both Ace

Coatings and SHG Inc. and that sales associates adhere to all local laws and regulations

throughout the selling process.

Distribution Plan

The value chain for the movement of SHG Inc. flooring to customers in Brazil will begin

with customers placing an order for flooring from Ace Coatings. Ace will then source the

flooring from SHG Inc. in the US through a Pro Forma Invoice. SHG Inc. will send this invoice

to Guriexport, who will negotiate price, shipment schedule and payment options with Ace based

on predetermined conditions, exchange rate and product catalogue. Generally, payment options

will be set to advance payment due to the extreme risk involved with retrospective collection.

Once price, shipment schedule and payment options have been agreed to, SHG Inc. will

manufacture the flooring and ship from the Port of Pascagoula via container ship to the Port of

Santos. Container ship is the only viable and cost effective means of transporting flooring from

the US to South America. Guriexport will take possession of the product at the Port of Santos

and ship the product to a holding facility until the end customer is ready for the product. Once


product transfer has occurred, Ace Coatings will pay Guriexport and Guriexport will pay SHG

Inc.

The primary method of distribution that SHG Inc. will be pursuing in Brazil will be to

sell its products to Ace Coatings through its Export/Import agent Guriexport. The Export/Import

agent will ensure all tariffs, documents and import paperwork are in order and will be the

Brazilian company of record for the products. As recommended by Guriexport, the Port of

Santos will be the primary import destination for SHG Inc. products, with the origination port

being the Port of Pascagoula in Mississippi. The origination port is one of the closest to SHG

Inc.‟s manufacturing facilities in Dalton, Georgia and can handle large container ships needed to

transport flooring products. The destination port is the one with which the Export/Import

company is most familiar and is close to the city of Sao Paulo, where materials will be shipped

and stored until the developer is ready for them.

As mentioned previously, Guriexport will handle all documentation to be shipped with

the containers. Guriexport is registered as an importer with the Secretariat of Foreign Trade

(SECEX) and will key in the necessary registration for products into the computerized

documentation system (SISCOMEX). Under Brazilian import law, floor covering is an

automatic import, with no authorization required from any specific ministry or agency in Brazil.

Documentation requirements include:

Certification of the importer‟s eligibility on the SISCOMEX

Classification of imported goods through submission of Pro Forma Invoice,

containing detailed product information for appropriate classification, full

identification of importer and exporter, country of origin, unit price in USD, form


of sale, total value, term of validity, cargo weight, loading and unloading points

and form of payment

Registration of the transaction on SISCOMEX

International documents and customs clearance including electronic bill of lading,

commercial invoice signed by the exporter, packing list

Payment of applicable duties: import tax, excise tax, social integration

contribution and social security financing contribution, goods and service tax,

additional freight for the renovation of the merchant marine, SISCOMEX use fee

and additional port related costs such as wharfing and customs clearance (all told,

a total of up to 35% of customs value)

Import declaration (Brasilglobalnet, 2010).

Pricing Plan

The pricing plan for Brazil is based on carefully thought out pricing based on all costs

associated with doing business in the country, as well as manufacturing costs. Some of the costs

of doing business in Brazil include handling expenses at the port, customs duties and import

taxes. In addition, Guriexport charges a 10% services fee that includes transport from port to

storage, storage fees and transport to construction site, as well as import documentation. Ace

Coatings receives a 3% commission for selling SHG Inc.‟s products to the developers. With the

cost of manufacturing the LVT at approximately $1.50 per square foot for an average hotel

project (48,000 square feet), the total manufacturing costs total $72,000. An additional $54,880

in costs is added to the manufacturing cost as a result of the costs of doing business in Brazil,

bringing the total cost to SHG Inc. to $126,880 per hotel project on average. After adding an


approximately 106% markup, the price per square foot becomes $5.50, bringing the total price

for the average hotel floor covering project to $264,000. The 106% markup allows for additions

to the budget for selling flooring in Brazil, such as marketing budget, training expenses for sales

specialists, company travel and expense and alliance relationship management.

Table 1: Manufacturing, Sales and Distribution Costs

Customs Value of Hotel

Flooring

$1.50/Sq Ft after

manufacturing costs and

transport before markup

$ 72,000

Import Tax 6% of cost $ 4,320

Excise Tax (IPI) 4% of cost $ 2,880

Social Taxes (PIS/COFINS) 2% of cost $ 1,440

Goods Tax (ICMS) 18% of cost $ 12,960

Wharfage Fee $ 400

Guriexport Service Fee 10% of price $ 26,400

Ace Coatings Commission 3% of price $ 7,920

Total Country Expenses $ 54,880

Total Cost After Expenses $126,880

Cost per Square Foot before

additional line items

$ 2.67

Commercial Markup 106%

Price per Square Foot $ 5.50

Total Price 48,000 Square Ft $264,000

Budgets and Profitability Analysis

In order to determine SHG Inc.‟s average standard margin on products sold in Brazil, the

other aforementioned budget line items need to be taken into consideration. The marketing

budget is comprised of direct mail marketing to prospective designers and developers,

participation in trade shows and expos, and production of samples and product catalogues.

Table 2 – Marketing Budget

Marketing Budget Item Description Cost


Direct mail marketing to

prospective designers and

developers (Postage)

Approximately 100 mailings

per year $ 100

Design of marketing

products, including sample

delivery vehicles, trade show

materials, product

catalogues and direct mail

advertising

One full-time employee in the

US with knowledge of

Brazilian markets at a salary

of approximately $80,000 per

year

$ 80,000

Sample Packages

2 marketed programs per year

at a cost of $25 per sample and

an average of 30 samples per

program for 2 sales specialists

$ 3,000

Trade Shows

Booth, trade show samples,

trade show entry fee for two

trade shows per year

$ 11,000

Product Catalogues

Printing, distribution and

website maintenance – 2

different product catalogues

(in English and Portuguese)

printing 12 copies twice a year

$ 24,000

Travel and Expense for

Trade Shows

2 employees, 2 trade shows, 4

nights $ 9,580

Total Marketing Budget $127,680

Sales training will be an ongoing expense for the company, as it is fundamental to

relationship building in Brazil with hotel developers and designers. Two paid trainers will be

employed to work for SHG Inc. on a contract basis in Brazil. Contract trainers will be paid by

the day in the amount of $2702, with an average of 48 training days a year. This brings

compensation for trainers to $25,920 per year. In addition, training will be provided to the

trainers on new marketed programs twice a year by a US employee of SHG Inc. The cost for this

employee to travel to Brazil to conduct training for two and a half days will include airfare of

2 Salary based on average salary for Senior Sales Trainers on Salary.com


approximately $2,700, $800 for meals for training sessions and the trainer‟s meals outside the

classroom (it will be expected that the sales trainers being trained also be provided food), hotel

accommodations for four nights adding up to $1,040 and transportation costs of around $400.

Total costs of having contract trainers in Brazil totals $35,800.

Table 3 – Sales Training Budget

Training Budget Line Item Description Cost

Sales Training

Compensation

2 Trainers 48 days a year $25,920

Train the Trainer Expenses 1 Trainer 2 times per year $ 9,880

Total Cost $35,800

In addition to the travel and expense that will need to be paid for the trainer‟s training,

SHG Inc. management will need to travel to Brazil to meet with strategic alliance partners and

anytime a new hotel negotiation comes up. Meetings with alliance partners will be paid for by

SHG Inc., including meals, travel and entertainment. An estimated three members of

management at SHG Inc. will attend various meetings and events in Brazil throughout the year.

Since SHG Inc. anticipates 6 new hotel clients per year, and semi-annual meetings with alliance

partners, in addition to 2 trade shows a year, this will be a considerable expense. While the cost

of attending the trade shows will be included in the marketing budget, other travel and expense

will have its own line item in the budget.

Table 4 – Travel and Expense Budget

Travel and Expense Line

Item Description Cost Description Extended Cost

Air Travel

3 employees 10 times a year

round trip for a total of $2,700

per roundtrip flight

$ 81,000


Hotel Accommodations

3 employees 10 times a year

for 4 nights for a total of

$1040 per stay

$ 31,200

Meals (Individual)

3 meals a day for 3 employees

6 times a year for 5 days at an

average of $25 per meal

$ 6,750

Business Meetings

Meeting Room, Snacks and

drinks during meetings, meals

for business partners (2

separate meetings twice a

year) and entertainment after

meetings – per meeting cost

$4,800

$ 19,200

Business Entertainment

Entertainment for building

relationships with developers

and designers

$ 6,000

Incidental Expenses Not to exceed $100 per person

per trip $ 3,000

Total T&E Budget $ 147,150

With manufacturing costs, distribution and selling costs, marketing costs, training costs

and travel and expense costs, the total cost of selling LVT products in Brazil comes to

$1,071,910 per year if SHG Inc. reaches its projected 6 hotels and averages 48,000 square feet

per hotel. The total cost per square foot averages out to $3.72 per square foot. With a selling

price of $5.50 per square foot, this leaves SHG Inc. with a very favorable profit margin of 47.8%.

However, pricing the LVT at this price point will exclude SHG Inc. from lower budget hotel

contracts, stifling its ability to grow long-term in the Brazilian market.

Table 5 – Pro Forma Income Statement


Conclusion

While doing business in Brazil can be quite risky for some industries, utilizing the

appropriate method of entry ensures that a company‟s endeavors into business there remain

profitable. After thorough market analysis, it appears that SHG Inc. will remain profitable in the

country as long as it continues to maintain a higher price point on its LVT products. However it


will capture less market share of the industry as a result. It is difficult to project the continued

expansion of the hotel market in Brazil beyond 2015, as after the boom caused by the World Cup

and Olympics, the market becomes much more uncertain.


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Appendix A

Source: FGV.br/IBRE (Title translated from Portuguese courtesy of Google Translate)

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