SAO PAULO After a lackluster Christmas, Brazilian retailers are pinning their hopes for a happy 2013 on a risky plan to open a record number of new stores.
Convinced they can outperform a cooling market, leading chains are set to expand their floor space more than their sales this year, according to some estimates.
"The growth plans we're seeing are very aggressive," said Julia Monteiro, retail analyst at banking group Caixa Geral de Depositos in Rio de Janeiro. "In the short run, that means pressure on margins, without a doubt."
Household spending has been key to Brazil's robust economic growth over the past decade, as record-low unemployment and unprecedented access to credit transformed the shopping habits of a swelling middle class.
Retail sales increased an average 9 percent a year from 2007 to 2010. Although it has since cooled, the Brazilian market remains a crucial source of growth for companies like Casino (CASP.PA) and Carrefour (CARR.PA). Both French retailers face stagnant markets in Europe.
But some economists warn that policymakers in Brazil are leaning too hard on consumer confidence to keep a struggling economy out of recession. Despite a raft of lending incentives and tax breaks in 2012, household consumption probably grew less than 3 percent, its smallest increase in nine years.
Retailers are also confronting the consequences of a credit boom that has doubled Brazilian household debts since 2005.
Consumer defaults with banks, utilities and retailers rose 15 percent in 2012, according to credit research agency Serasa Experian. Tepid sales over Christmas suggest families are now putting spending in check.
This month Casino's Grupo Pão de Açúcar SA (PCAR4.SA), Brazil's biggest retailer, reported its weakest quarterly increase in sales at stores open at least a year since the 2009 global crisis. At clothing chain Cia Hering SA (HGTX3.SA), same-store sales for the period fell slightly.
The results were at odds with analysts' expectations of robust growth for major Brazilian retailers, which have boosted price-to-earnings ratios as high as twice those of European rivals, according to Thomson Reuters Starmine.
Still, companies are pushing on with record expansion plans.
Industry group IDV estimates its members - Brazil's 40 biggest retailers - will open 720 new stores this year, expanding sales area by 14 percent. The group forecasts a more modest 11.5 percent increase in sales volumes, with just 5 percent growth at stores that have been open for a year or more.
Pão de Açúcar alone expects to open 500 stores by the end of 2015, nearly doubling the annual pace from 95 openings in 2011.
"It's an ambitious and aggressive goal, but it's feasible if we keep up the pace of 51 new stores in the fourth quarter," said Vitor Fagá, head of investor relations at Pão de Açúcar.
The retailer is focusing growth in Minimercado Extra stores, whose footprint is one-sixth the size of its standard supermarkets, as it targets smaller cities with less direct competition.
The Minimercado is also a bet on emerging spending patterns. New members of Brazil's middle class are more likely to stop at a nearby store throughout the week rather than load up a car at a huge supermarket, according to analysts at Fator Corretora.
Clothing retailer Lojas Renner SA (LREN3.SA), which plans to double the pace of openings this year to 50 new stores, has also turned to smaller, more flexible formats to cut expansion costs.
Rival Hering plans to boost openings to 107 stores this year from an annual average of 72 since 2007, concentrating on new segments such as children's apparel.
The dangers of such aggressive expansion have already played out in Brazil's online commerce market. Vendors there sacrificed profitability to stake out promising new turf, posting steep losses despite booming demand.
Online sales leader B2W Companhia Global do Varejo (BTOW3.SA) has reported net losses for the past two years as it struggled to expand its delivery network. In November, Bank of America Merrill Lynch analysts said the company's regional operations now seem ready to back up aggressive delivery times.
Brick-and-mortar stores will also face rising operating costs as they move into new markets with more fragmented and informal retailing.
Pão de Açúcar, for example, plans to expand in northeastern Brazil, where a larger share of the population has climbed out of poverty in recent years and the company faces less competition from traditional rivals.
The push up the coast means a confrontation with Chilean retail giant Cencosud CEN.SN, which has made a half-dozen acquisitions in the region in five years.
Other foreign companies may be caught taking a breather and risk losing market share as locals grow faster.
Wal-Mart Stores Inc (WMT.N) has said it is slowing expansion in Brazil to improve the profitability of existing stores.
France's Carrefour is expected to invest most of its free cash in the maintenance of European stores, triggering speculation that it may list part of its Brazilian wholesale unit on the Sao Paulo stock market to finance local expansion.
For the retailers already fast-tracking their new stores, the benefits may not be immediate, as new locations usually take at least three years to reach their potential.
With unemployment near an all-time low, the same economic forces encouraging growth are also driving up costs when it comes to recruiting and retaining new workers - 30,000 new employees by 2015 in the case of Pão de Açúcar.
"To speed up expansion, you have to accept a reduction in your operating margins - that's the game," said Marcos Gouvêa, chief executive of retail consultancy GS&MD Gouvêa de Souza. "The big challenge now is how to do it when labor is so scarce."
(Additional reporting by Juliana Schincariol in Rio de Janeiro; Editing by Todd Benson, Kieran Murray and Lisa Von Ahn)