Brazil's biggest retailer, GPA , is gearing up for an aggressive price war in its food business, where it aims to maintain its operating profit margin by cutting expenses, according to a presentation to investors on Tuesday.
A push for more competitive prices in all its supermarket formats should win more customers, but at the cost of the unit's gross margin, executives told investors in Sao Paulo, in a sign the company is girding for a tougher competitive landscape.
The aggressive pricing strategy at GPA reflects the strategic influence of Chairman Jean-Charles Naouri, the chief executive of France's Casino, which took control of GPA last year. French rival Carrefour is studying an IPO in Brazil to pay for more ambitious investments.
GPA plans to successfully lower prices by running more efficient stores, cutting corporate overhead and wringing cost savings by working more closely with Casino.
Its three-year outlook came as economists in Brazil are forecasting weaker growth and higher inflation next year - a scenario that will force retailers to fight for each other's market share if they want to keep up robust recent growth.
Still, GPA said it expects sales in stores open at least 12 months to continue to rise faster than inflation.
Lower sales, general and administrative expenses should help GPA keep its edge, management said on Tuesday. The company expects to reduce those costs to 17 percent of net revenue by 2016, from 19.6 percent currently.
As a result, earnings before interest, taxes, depreciation and amortization will continue to represent a stable share of revenue in GPA's food retail unit, they said.
GPA expects to open 400 new food stores in the next three years, focusing growth on 360 new convenience stores in its Mini Mercado format. The group's electronics and furniture unit, Via Varejo, plans to open 210 stores during the period.
The company is also planning aggressive expansion of its wholesaler, Assai, which goes head-to-head with Carrefour's prized Atacadao chain. Assai is aiming to open 12 to 15 stores per year through 2016, with growth focused in Brazil's poorer and faster-growing northeast.
The Assai unit is aiming for EBITDA representing 5 percent of net sales, as it keeps operating expenses below 10 percent of revenue.
