Largest Bike Factory in South America

Interview with João Claudino Fernandes Junior, President of Claudino Group

First of all we will talk about Piauí. You are tripling the size of a shopping centre in Piauí in 30 months and that tells a story about the business environment here. You are a believer in Piauí and Teresina. There are more and more people in the middle class now who can therefore afford to spend more. Can you tell us more about this?

The story of the Northeast of Brazil is not so different from Piauí state, especially its capital, Teresina. The Claudino Group has invested here in Piauí state for more than 40 years and through those years we have been able to observe the phases that the economy in Brazil, including Piauí state, underwent. Accordingly, we were able to establish what we wanted to invest and develop as investments and to become competitive not only throughout the Northeast part of Brazil but also in Brazil as a whole.

During the last five years, the shopping centre business in Brazil has grown considerably and Piauí state is no different. To our surprise, after two years of study we discovered that the original shopping centre that we established in 1997 had been outdated for quite some time. In 2008, we decided to upgrade this shopping centre. At the beginning, we planned to expand by 100 stores from 108 stores with two anchors – two main retail shops that already existed there – to approximately 210 stores. However, every time we contacted the agency advising us on market trends, we were always positively surprised that the real estate and economy of Piauí state and Teresina had such a large area of influence. We kept increasing the project so that at the beginning of last year – 2011 – we finally decided to release the shopping centre plan, and it comprised more than 310 shops; considering the area located, we moved from about 22,000 sq. m. located area to approximately 70,000 sq. m. located area. To compare this to other states, if the shopping centre had been ready at that time we would have been the third largest shopping centre in the Northeast part of Brazil. So, I think this proves quite effectively that once you are aware and work in Piauí state, you are able to see the potential not only to come but also the existing potential that Piauí and its capital has in this region – inside the state and in neighboring states.

Of course, Piauí is one of the main agricultural centers of Brazil. In the discussion, you mentioned it is the best region for agriculture in Brazil because it has a low concentration of people and lots of land. The price of agriculture has skyrocketed around the world, so this is the perfect environment for business in Piauí. Can you speak a little bit more about Piauí as a state and an investment opportunity and how the business is going to evolve?

Not differently from other parts of Brazil. The price of the land in Brazil increased considerably for many reasons, but for the past 10 years in Piauí state, we saw the price not only increasing but skyrocketing. The reason is very simple – the increase in capacity of agricultural goods in Piauí in the past 10 years has more than doubled, and for the next five years you will see that continue. Even though Brazil is such a large country, Piauí state alone has more than 8 million acres of land ready to be sold for agriculture. For the past five years, many big groups from the south and south east of Brazil came to Piauí and are investing very strongly, not only for soy beans and corn, but also cotton and many other crops. Not more than 20% of this piece of land was already in use, but in the next five to ten years Piauí state has the potential to become a new frontier in Brazil, agriculturally speaking. Considering the numbers that I saw from the government for the past three years, we are growing more than any other state.

You are also a big success story of exported entrepreneurship. Piauí-made entrepreneurship is being exported to other states through your bicycle division; you are now trying to set up a factory in Manaus, which will produce bicycles for the region and your vision is to be the leading manufacturer of bicycles in Latin America. Could you speak more about your plans with respect to your bicycle division, development and strategy to achieve this?

This is a nice story to tell because 11 years ago we decided to manufacture bicycles in Teresina, capital of Piauí, and at that time it was a dream to make the first bicycle factory in the Northeast part of Brazil. If you consider the main bicycle manufacturers in Brazil, they have been established in the southern part of Brazil for more than 50 years; the two main manufacturers at that time were over 70 and 110 years old respectively. So, the bicycle industry has a long history.

In 2001, we decided to establish the first bicycle industry in Teresina and the first year we reached nearly 50,000 bicycles; ten years later, we are aiming to produce 1 million bicycles and become the number one bicycle manufacturer, not only in the Northeast, but in the whole of Brazil. We have one of the most visited bicycle manufacturing plants throughout Brazil and even South America. Houston was established as the brand and is present in more than 38,000 shops throughout Brazil; we reach almost 5,000 km away from Teresina in the extreme southern parts of Brazil, and Roraima state another 4,000 km away and sometimes it takes more than 10 days for trucks to go there. This makes us so proud because it proves the potential of this state once you are aware of what you are looking for and you gain the knowledge and study the possibilities of how to work this market.

Being here in Teresina, we are located centrally considering the major capitals of the Northeast part of Brazil and it was important for us to establish a good base in the first five years that we were here. The effectiveness of being here in Piauí state is also proven, even though Brazil is such a large country, because we were able to conquer the whole country, so that the next step is a new plant in Manaus.

In Manaus, we are moving to another segment: we established ourselves with a class BA bicycle, but we are going to manufacture the higher level bicycles in Manaus, while further developing the plant in Piauí state. We have more than 1,000 direct workers and another 1,600 indirect workers in an area of approximately 70,000 sq. m. and this makes us proud since it was not our aim. Last year, this plant became the largest bicycle manufacturing plant in all the Americas, including South America, Central America and North America.

What’s your target for export? Do you want to stay just in Brazil or export?

We definitely want to export. When we consider the bicycle industry, we first aim at the South American market; with the growth of Mercosul in the past ten years, our expectations will increase not only with the four countries present in the Mercosul block, but also with the coming of other countries, possibly Venezuela, Peru and Chile. We expect that once we are also established in Manaus, we will be able to export to the neighbouring countries.

We all know that, in the manufacturing sector, it is currently very difficult to compete with a major country in the world: China. What makes Brazilian products competitive compared to China?

There is no simple answer because there is such a variety of products, but I can tell you this: I’ve been going to China since 1993 and after more than 40 trips to China and more than two years established in China, if I put all those times together, I was able to notice huge and fast changes in China, particularly that the cost of labor and producing is growing faster than in any other place in the world. I would not say for all the sectors and areas, but I used to say that whatever you do anywhere in the world, it’s necessary for you to pay attention to China.

At the beginning, this was in order to assess how competitive you can become inside your own country, but now I believe very strongly that in the coming years, slowly, you will start to see some countries developing the capacity to compete with China again in a few sectors that are very hard to compete with at the moment. Not only will they compete, but also who knows, in five to ten years, they could start to sell back to China. This may sound like a dream while China is well-known as the industry of the world, but believe me, the changes that have been occurring in China for the past five years give me not only a feeling, but a certainty that this will come, step by step and divided into sectors.

I believe as an industrial in Brazil that those who strongly believe in this future – not only because Brazil is a great and eternal market, but because they are prepared – may in the future not only supply commodities to China, as they do now, but also very likely start to share the Chinese market with China, and other markets abroad as well.

Another sector to consider is technology. You have an Inmetro certification, which is a certification of quality. You are also looking for some breakthroughs for innovative technologies in the bicycle industry. What exactly are you looking for in terms of exchanges of technology at an international level?

I believe that one of the biggest challenges for any country in terms of growth is to invest in education. The greater the capacity of the government to make investments in education, the better the process to integrate not only consumers but also all the steps – consumption, industry, education, and have a positive effect on the society as a whole as well.

Lately, we’ve been noticing big changes and large investments in Brazil in many areas and I believe that this does not depend solely on government decisions; the public as a whole and the private industries and entrepreneurs have an obligation to play their part in this process. For us at the Claudino Group it is no different, especially because here in Teresina we are responsible for more than 45,000 people working directly and indirectly for us. So, for the past 25 years, we have always invested in the obligation to assist all those people who, in the past, have not had the chance to achieve the basic grades at school and university. Every year, we send more than 800 workers present in our companies to finalize their university studies in two to four years.

This is an ongoing process; for example, at Houston company – the bicycle factory – lately we have been making a lot of effort with government institutions to develop knowledge of laboratories throughout Brazil and with Inmetro institution to create regulations similar to CAE in the United States, TUV in Germany, and SGS as well. For the past three or four years, we have been able to collaborate with the Inmetro institution in Brazil to make a new regulation that will be established on April 6, 2012 mainly for bicycle items. It’s a group of companies in which Houston is included; our participation was so strong in this process that the government decided to establish three labs in Brazil and the main one will be here in Teresina. While it won’t be at Houston but through the Federal Technical Institute, Houston is in charge of working with the Federal Institute to train people to supply information and to get knowledge along with the European community, after the establishment of the laboratory, and to supply this service to all other companies throughout Brazil.

Now let’s talk about the leather industry. You are very optimistic about exports of tanned leather and you see Piauí being the leading exporter of this item. What are your plans in this direction? You spoke about integration with some of your industries.

The leather and tanner industry is a new industry that the Claudino Group established a year and a half ago and this was so because, for the past 20 years, we have been one of the leading meatpacking and butchery companies and we supply meat for 10 states throughout the Northeast part of Brazil. We noticed that it would be more efficient to streamline the meatpacking process by including many of the sub-products of meatpacking. Therefore, since leather was one of the sub-products, we decided to move into the leather industry as well. In the past year and a half since we established this new company, we have noticed that the market is in fewer hands throughout Brazil and we did not have a large representative in the Northeast part of the country. We decided to establish a good relationship, not only internally, which is a large market, but as well for export first of cow leather and later for what we call sheep leather. The Northeast of Brazil, especially the states of Piauí, Pernambuco and Bahia, are together responsible for the best quality sheep leather in Brazil and one of the best quality sheep leathers throughout the world. So, we decided to move to cow leather and sheep leather, and we are producing not only for the internal market, but also lately we have developed a very close relationship with suppliers from Portugal, Italy and China. We hope to grow in the sector more and more in the coming years, since we are naturally surrounded by the supply and raw materials.

Entrepreneurship is not always about success, it is also about failure and now one of the more challenging business divisions in your group is probably electronic retail. There is a lot of competition from other states. How are you going to keep competing? What is your strategy?

About 10 to 15 years ago, when I used to visit many retail shops throughout the Northeast part of Brazil, to make a good visit, I needed to go to approximately 35 brands. At that time, they were locally “protected” because two or three were located in each state. There was no separation, but everyone tried to stay in their state because the size of each company was much smaller than today and changes didn’t occur very much probably because the speed of information was very slow.

For the past five years and increasingly with the coming years, the situation has changed and we see that what used to take five years to happen now takes a few months, so retail and wholesale in Brazil is very dynamic. If I go back now and decide to visit a few from those 35 or 40, I will visit maybe 5 or 10 – no more than that. At the Claudino Group and the Paraíba store, we were always aware that this could happen.

Now, we are located mostly in Piauí and Maranhão states with more than 240 stores. After 55 years working in retail, we decided to do the opposite to what other retail shops were doing; all the others wanted to move to bigger areas – the capitals and the bigger cities, but we decided to go inwards to the countryside. This was not a decision as prevention against competition, it was something that we established more than 40 years ago: let’s recognise class C or D. At that time, these classes were not as large as they are now in Brazil. We developed a deep understanding of the market and established ourselves as the main store in cities of 10,000 to 25,000 inhabitants. If we consider all the 230 stores that we have in these two states, we only have 12 stores in the capital, which is Teresina, and another 22 stores in cities with over 100,000 inhabitants. So, almost 200 stores are in cities with under 100,000 inhabitants. I do not consider that as a protection for me, but with the arrival of new competition, we are ready to compete with whoever comes, especially because our intention is to keep investing in the smaller cities.

After 50 years, I assure you that nobody in Piauí and Maranhão state or the region knows this area better than we do. A lot of fusions of bigger companies with smaller companies are happening throughout Brazil. The market is not easy to anyone; there are no more frontiers to cross over. I think the next frontier for companies from Brazil is to move outside Brazil as financial institutions and big companies have done, such as Petrobras and others, especially now that there are so many large retail shops in Brazil. Until that happens, Paraíba and the Claudino Group remain in a place where it feels, not safe, but where we have the knowledge and preparation to work.

How do you quantify the growth of the group in percentages?

For the past five years, we had a double digit growth – on average about 14%. The past year this growth reduced; some years we reached 18%, but last year we grew 9% and for this year we expect to grow in between 5 and 9%. While the economy has become mature and the speed and dynamics that I talked about are moving so fast, we do everything very conservatively; the Claudino Group reinvests back inside the group. I believe that to get between 8 and 9% is a great number for the coming years in Brazil.

As for the business divisions, which one grows the most and which is the underperformer?

To our surprise, the industrial segments – the bicycle industry, for example – has been growing for the past 10 years. The first year we produced 50,000 bicycles and this year we are aiming at almost 1 million bicycles. Growth is more than double digits at 18 or 19% year after year – in the first years it was 30% or 40%. Growth in the furniture business is about 8 to 9%, the mattress segment is about 10% for the past five years, in the meatpacking segment we reached 12% as a whole in the past five years and for retail I think for the next two years we will reach about 8%. However, while growth is important, we also understand that we need to focus on attaining good growth while maintaining the financial health that, for the past 50 years, made the Claudino Group and our presence here in Piauí state strong. I think that’s one of the major challenges for the group and, whatever we decide to invest in, it is necessary to keep that financial health.

Regarding the shopping centre and the construction centre that goes from Northeast to Southeast of Brazil, what are the international opportunities?

It is important to say that when we talk about the shopping centre, besides the point that we are more than tripling the number of the stores that will be there, we will also have the incoming shops that, for many years, never thought about the possibility of establishing themselves in Teresina or Piauí state. So, for example, nowadays it’s very easy to show that we have Walmart already present in our city, but if we check the list of the shops that are already confirmed at our shopping centre, we will see more than 80 different shops that are usually seen in the southern states, either in Sao Paulo, Rio de Janeiro or Belo Horizonte. These shops are bigger companies who, after reading all the numbers, visiting the structure, our construction and seeing our plans for the establishment of a large area shopping centre here in Teresina, said it’s an obligation for them to be present at the shopping centre. So, once again, when we think about crossing frontiers, this is another thing that we are seeing more and more throughout Brazil.

In the past, we used to see southern companies or even international companies that, at best, were established in Sao Paulo and they saw Sao Paulo as the state to invest in. Now, we see those companies looking to the Northeast and more and more looking at the growth of fewer states that they did not even care to study in the past. They did not even know which other states existed in the Northeast, but now they are very much aware of the potential of those states. It was a great surprise that, when we came to talk to those people and we presented our plans for the shopping centre, they already had very clear information. So, one of our strong points when it came to discuss with a few companies, was that many of them already knew not only about the state, but also about the group. This credibility and reliability made it very easy for us to contact those people and to acquire them as stores at our shopping centre. This demonstrates that this movement to the north – 3,000 km away from the usual financial centre of Brazil – is happening now. In the coming years, many states throughout Brazil will independently establish themselves as financial centers and, for this region, I am sure that the city of Teresina will be one of them.

And regarding construction?

Construction is a good example as well. Our construction company was established in the 1980s and at the beginning it was a company devoted to do new business for the group – to grow the new stores, to do industries as well. However, in the mid-90s it expanded to work for some road constructions, and others, such as civil construction. In the passing of the years, it has started to do many jobs outside Piauí state, so that, in our portfolio, we now have business in more than 15 states in Brazil. There is no state in the Northeast part of Brazil in which we have not done any type of job. In addition, we are present in Mato Grosso state, Brasilia state – the federal capital – Minas Gerais state, and some projects in Sao Paulo as well. This proves that when you think about a product, like a construction company, the clients understand that the most important part is your knowledge and capacity not only in terms of machinery or technology, but also in terms of human capacity – all those people who work along with you. This demonstrates that you are able to develop and construct at an equal standard to any other construction company in Brazil, irrespective of where you are located. In the past 10 years, more than 50% of the revenues of the construction company came from states outside Piauí and this makes us proud to be located in Piauí state.

In terms of revenues, which business sector is the most important for the group? Also, which sector are you trying to push the most?

The Claudino Group revenue was above 2 billion reals last year, which is approximately 1.2 billion dollars. As per our expectation, retail remains very strong, as I said previously with an average growth of 8%. I think that, if we consider the expected growth of the Brazilian economy for the coming five years, which I think will be between 3 and 4%, then we expect to approximately double that.

Industrially, we expect to set up a few plants for products that we are already working on. We have high growth expectations for the products that already have a presence throughout Brazil, and for other products, such as meatpacking, we have a strong devotion to establish ourselves stronger throughout the Northeast.

We noticed that many states near Piauí offer great opportunities and sometimes this makes us a little confused. Being from the Northeast, we thought 10 to 15 years ago that in order for us to grow we should search for the southern market, but for the past five years, this has been proven in a certain way the opposite – if you want to grow, you need to grow first in the Northeast because the market there is growing more than the average of Brazil. Our focus for the coming few years is to grow on that average for 8 to 9% while researching and understanding where we are located: Piauí state and the neighbor states.

Do you have a final message about Piauí and the region, witnessing the development that has taken place?

When my father arrived here in 1968, I was six months old and he established his headquarters here. He already had Paraíba shops and the headquarters were in Maranhão, just across the river, but when he came to Teresina after 10 years of business in Maranhão state, he said this is the right place for us to establish. In two months, he changed the headquarters from Maranhão state to Piauí because it was, and still is, the only capital in the Northeast part of Brazil which was not in a coastal area. He saw an opportunity that probably very few that passed by here wanted to see at that time. He said it’s a young capital – Teresina had a little more than 100,000 inhabitants – and this city will grow a lot and give me something that I don’t see in any other capital of the other states: an opportunity to be well-centred, near other states, and at a very good distance from other state capitals, not only for the Northeast but also for the entire north part of Brazil. He was very wise because, throughout the years and with a profound sense of gratitude to the people of Piauí, he was able to establish a business that started with 20 people in collaboration and now we have more than 40,000 people that work directly and indirectly with us in Piauí, which is more than 2% of the population of the state.

Above all, gratitude is the feeling that not only my father, but also myself, have towards this state, and even though I was not born here, I see myself as being from Piauí. So, when we consider any establishment of new companies or growth of companies, we always consider Piauí as being the centre and once again, this decision has been the wisest decision that we have made throughout the past years. Now that the economy in the Northeast is growing and Piauí state economy is growing above the average of Brazil, I confirm that this was not only wise, but that Piauí was well-chosen as a place to live and to establish ourselves and we are happy to distribute the wealth and recognition to these people and the Northeast part of Brazil.