May 26, 2012 Turning Up the Heat

Volume 15 | Issue 2

Paulo Products Company – their customers experience the most efficient and closely controlled heat treating processes.

Esmaltec didn’t quite invent the gas stove, but it did invent the market for it – at least in the Brazilian Northeast. Back in 1963, when the company based in Fortaleza, capital of the state of Ceará, first went into business, gas stoves were a virtually unheard modern innovation; the vast majority of residents of this then largely rural region swore by wood burning stoves. When Esmaltec started out, its mission was to promote the use of gas in Brazil. In fact, the company initially manufactured kitchen gas cylinders (which, to this day, supply gas to stoves throughout the country) before launching its first line of stoves in 1964.

A FULL “WHITE LINE”
Responsible for developing the gas stove category throughout Ceará and the rest of the Northeast, Esmaltec remains the only major Northeast-based manufacturer of gas stoves in the country. However, the company is about a lot more than just stoves. Once it had dominated the stove market, the company began manufacturing other domestic appliances as well. Beginning in the 1980s, it gradually added new product lines – water coolers, refrigerators, freezers, washing machines, and microwaves – until it had a full selection of “linha branca” items (in Brazil, “white line” refers to domestic appliances that have traditionally been finished with white enamel).

In 2002, the company took another big step forward when it inaugurated a new facility, considered one of the most modern domestic appliance plants in all of Latin America. Located on a 36-hectare site outside of Fortaleza, the new complex allowed Esmaltec to expand existing lines and increase its production capacity exponentially. As a consequence, the company consolidated its presence around the country. Along the way, it doubled its market share, becoming Brazil’s top manufacturer of gas stoves as well as the leading producer of water coolers.

Today, in terms of sales volume, Esmaltec is national market leader in terms of gas cookers (25 percent market share) and water coolers (50 percent market share). Overall, it boasts a 12 percent share of Brazil’s “white line” segment. “The Brazilian market for ‘white line’ items is huge,” declares Esmaltec’s CEO, Annette de Castro. “Last year, average growth reached 10 percent, but here in the Northeast it was between 15 and 20 percent.”

Traditionally Brazil’s poorest region, the Northeast is making up for lost time with a vengeance. A robust economy that has led to record unemployment, rising wages, and increased access to credit, combined with government programs aimed at diminishing the enormous divide between Brazil’s haves and have-nots, has resulted in the area’s transformation into the fastest growing consumer market in the country.

TAPPING INTO A GROWING MARKET
Spurred on in part by its strong position in the Northeast, Esmaltec – which grew by close to 20 percent last year (currently monthly production capacity is 350,000 units) – has enjoyed annual growth rates higher than those of the industry average, which last year hovered around 10 percent. “This year, the national market will probably expand by between 5 and 10 percent,” predicts de Castro, adding that 10 percent is already high for the segment. “The reason for this is that the market for stoves and refrigerators is pretty much saturated. Around 98 percent of Brazilian households already own these items, which means that new purchases are inevitably replacements.”

With this tendency in mind, Esmaltec is branching out into new product lines – and new markets. The biggest novelty is its development of a range of products for the commercial sector: horizontal and vertical refrigeration and freezer units with which the company is targeting major players in the beverage and ice cream industries. Although still in the early stages – sales currently account for 10 percent of revenues – the company is enthusiastic about the new division’s potential, especially viewed Brazil’s upcoming hosting duties of the 2014 World Cup and 2016 Summer Olympics, events that should see a major increase in demand for frosty foodstuff.

“This commercial line is very different from the domestic line,” points out de Castro. “For this reason, we have plans to invest in an independent manufacturing unit that allows us to expand production capacity. This year, we’re already adding another 20,000 square meters (66,000 square feet) of production facilities. When completed our total constructed area will be over 90,000 square meters (295,000 square feet).”

Esmaltec has another motivation for moving into the food and drink segment. Over the last few years, the Brazilian retail market has been undergoing vast changes as a consequence of major consolidation of the retail industry. Today, for example, a trio of big conglomerates – Casas Bahia, Máquinas de Venda, and Magazine Luiza – is responsible for 70 percent of the “white line” appliance market in Brazil. “For us, the upshot has been a lower return on investment, lower margins, and far more difficult negotiations,” confesses de Castro. “In order to remain lucrative, we’ve had to develop a really strong cost reduction program.”

Among the cost reducing measures the company has adopted are streamlining of internal processes (unlike many of its competitors, Esmaltec is a vertically integrated manufacturer as opposed to an assembler), re-evalution of raw materials (importing some whose prices have increased as a result of rising Brazilian inflation), and the reconfiguration of its present lines with the aim of creating products that offer the same benefits at more economical prices. A case in point are the company’s newest water coolers, whose modified refrigeration system results in reduced energy costs (which can be passed on to consumers) while maintaining the same performance.

FULFILLING NEW NEEDS – AND DESIRES
Keeping prices low is key since Esmaltec’s main target market consists of the so-called C, D, and E socio-economic classes. While they comprise the majority of the population, these Brazilians also possess the least amount of disposable income. “We’re a national company, but we’re also a Northeastern company,” underscores de Castro. “We’ve grown by providing point of entry products to lower-income consumers, and it’s because of these consumers that we’ve reached a leadership position in the market. Our goal is to continue giving them what they need, but also what they desire. This means products that are economical – both from a financial and ecological standpoint – and better in terms of the designs and features they offer.”

Indeed, one of the consequences of the improved economic situation of Brazil’s C, D, and E classes are that, for the first time, they can afford to invest in products that go beyond the basics. For instance, instead of washing clothes by hand, many Brazilians can now afford to invest in washing machines. The fact that the market has only a 45 percent saturation rate means the segment has enormous growth potential. And while to date, 95 percent of machines sold in Brazil are top load, consumers are beginning to discover the benefits (in terms of more efficient energy use and water consumption) of front loaders and direct drive machines, which in turn is creating new opportunities.

Similar discoveries are being made with respect to other product lines as well, which is why Esmaltec is constantly adding new added value features to its products. The demand for frost-free fridges, for instance (which currently represents 30 percent of all fridges sold in Brazil), is rising as is the popularity of two-door fridges, in which refrigerator and freezer units are placed conveniently side by side. At the end of last year, the company also launched a water purifier to complement its pre-existing line of filters.

Meanwhile, Brazilians are increasingly interested in form as well as function. In the last two years, for example, Esmaltec has seen demand grow significantly for its line of stainless steel products. According to de Castro, one of the reasons stems from the increasing scarcity of domestic help (another reason for the rise in sales of washing machines), which has resulted in more owners using their appliances, not to mention caring for – and about – them. However, another major factor is aesthetics. “Brazilians have more purchasing power than ever before and when people feel secure, they’ll buy better products, which don’t just function better, but look better as well,” notes de Castro. “Two-door fridges, stainless steel products… these are dream products for many people.”

Next year Esmaltec will celebrate 50 years in business. To commemorate its history, and celebrate its future, the company is preparing the launch of special products, all of which are inspired by its founding philosophy. “We want to continue giving our loyal consumers the products they need, but also those that they desire,” admits de Castro. “We also want to give them more than they’ve had in the past. In the end, this is how we’ve become one of the most respected companies in the domestic appliance segment among our customers and retailers. To keep earning their respect is what drives us constantly forward.”

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