What’s next for printing and writing papers in Brazil?

Brazilian paper demand has been falling due to the rise of the digital age, a retail crisis and increased competition in the last 10 years. What other demand risks are lined up on the horizon?

Printing and writing (P&W) paper demand in Brazil has been falling since its peak in 2010-13 at a historical high of 2.34 million tonnes. After crashing during the pandemic, followed by a small recovery, consumption reached around 1.48 million tonnes in 2022, a 37% decline from the 2010-13 historical peak, commonly explained by the structural shift-to-digital megatrend affecting the segment.

However, were there any characteristics of the Brazilian market that helped to accelerate the drop? And what is next for P&W markets in the country?

Brazilians are quick to adopt the digital world

The structural change in people’s behavior of consuming content via digital devices instead of printed materials is a global trend. This shift-to-digital megatrend has been reducing the consumption of paper products worldwide over the past 20 years, following the widespread use of computers and laptops in offices, schools and universities and the invention of the iPhone in 2007, which revolutionized the market for smartphones and digital content and allowed people to consume it anywhere and anytime.

However, one thing is a cultural fact: Brazilians love to be in the tech vanguard. The country is famous worldwide as a place for first adopters of new social media, electronic gadgets or any sort of digital improvements. Brazilians spent an average of 9.5 hours per day online in 2019, second only to Filipinos, who average 10.03 hours per day online, and way above developed countries, which average 6.0-7.0 hours, according to data from Hootsuite.

So, what causing the delayed decrease in P&W demand in Brazil, which grew by 41% between 2000 and 2012 and only started falling – very quickly – after that to 1988 levels by 2022?

There are several reasons, but the major one is economic inequality, which results in lower access to digital devices, despite the culturally positive attitude toward the adoption of new technology. Brazil’s economy is historically more uneven, in terms of income distribution, than economies in Europe or the US. This inequality not only affected the ability that Brazilians had to purchase consumer goods, such as digital devices, but was also reflected in the country’s infrastructure, i.e., internet access, which was considered to be behind the more mature markets. Only since 2012 have the consumer patterns seen in mature markets finally started to appear in Brazil as well thanks to a few factors:

  1. Infrastructure investments made in the 2000s finally started to mature, from electric grid expansion to small cities and rural areas to wider internet access in big cities. Between 2002 and 2012, more than 16 million people were added to the national electric grid and had access to electricity for the first time in their lives. Not only did their standard of living improve, but average monthly incomes in this group were positively affected, rising 41% over the 10 years.
  2. Brazilians saw steady income growth over those years, with more than 30 million people escaping the extreme poverty income range and more than 35 million people moving from the poor segments to the middle-class population of around 105 million Brazilians by 2012. The growth of the middle class until 2012 drove consumer goods consumption in the country, accounting for more than 40% of overall consumption in the country, according to government data.
  3. Higher national income and broader internet access exposed Brazilians to a worldwide strategy: marketing. Global electronic device producers realized the enormous growth potential for sales in Brazil as consumers there were now more informed, with access to electricity, the internet and more disposable income.

Improved mobile phone ownership and internet access

Internet penetration in Brazil has escalated quickly, closely approaching the shares seen in mature markets. It has improved from 51% of houses in 2015 to 84% in 2019 (before the pandemic) to 90% by 2022, boosted by the pandemic and a wider use of mobile phones to access the internet and consume content, according to data from the National Bureau of Statistics (IBGE). By comparison, internet penetration in the US was around 83% of houses in 2013 and 93% in 2022. Among Brazilians, smartphones are the most common device used to access the internet, used by roughly 99.5% of the population with internet access.

As more time passed, internet access in Brazil increased and marketing strategies continued to push people online. Additionally, the creation of content for printed media became more difficult as advertising in this segment plummeted, causing the content to lose readership and further encouraging people to go online to consume more popular, heavily sponsored content. Overall marketing investments in printed media reached BRL 15 million ($7.6 million at the time) when it peaked in 2012 before tumbling to BRL 5 million by 2020 ($970,000).

Unsurprisingly, advertising in printed media and sales of printed materials are strongly correlated, with both peaking in 2012 before plummeting to historically low levels since. Similarly, printing activity in the country has also plummeted since 2012 due to weaker demand for printed goods, including magazines, catalogs, menus, books and other printed materials. Higher usage of digital devices to consume not only once-printed-but-now-digital content, such as an e-book or a news article, but also digital-only content such as watching videos or playing video games, has clearly hammered the consumption of printed materials in Brazil over the past 10 years.

Paper consumption drop accelerated by retail crisis

The crisis that has affected the Brazilian book retail segment since 2012 has accelerated the drop in consumption of P&W papers. After years of acquiring smaller competitors and publishers, the major brick-and-mortar book retailers in Brazil made disastrous decisions that led to the doom of the whole market.

First, they increased investments by opening new stores using credit, expecting that more locations would increase total sales. Second, most Brazilian book retailers waited too long to start selling books online, leaving the market open to the arrival of Amazon and brutal competition. Finally, the largest Brazilian book retailers waged a price war between 2011 and 2018, attempting to increase their market share at the expense of their profitability.

The opening of new stores did not increase overall sales as expected, but the costs of expansion and funding their increased operations rose sharply in a short period of time. Due to political and economic turmoil in tandem with high inflation, interest rates in Brazil jumped from 7.25% in 2012 to a historical high of 14.25% by 2016, heavily increasing the cost of capital in the country and hitting those with high debt levels, including many book retailers.

Meanwhile, the price war intensified as retailers went online and aimed to increase their market share of the still nascent, but growing e-commerce market in Brazil – this happened at about the same time that retailers other than booksellers also migrated online to increase sales and their client base. The effect of the price war between the two major retailers in Brazil also affected other smaller retailers, as they were caught in the crossfire. As a result, earnings in the sector – and thus profits of book sales – plummeted, putting several companies in financial difficulty.

Brazilian book retailers faced competition from other online vendors

The slow speed at which Brazilian book retailers started selling online also contributed to the retail crisis seen in the past decade, as local players faced strong competition against non-book retailers and online vendors, such as Amazon, in a market that was once solely theirs.

Livraria Saraiva’s online book sales accounted for less than 15% of its total sales by 2015, a year in which total online-only book sales grew by more than 250% in the country, according to data from the National Union of Book Publishers (SNEL). Livraria Cultura’s online presence was somewhat stronger than Livraria Saraiva’s, with an estimated 30% of its sales coming from online. However, this was still not enough to support the retailer’s operations.

Data from SNEL shows that Brazilian book sales earnings on the open market adjusted by 2022 inflation have decreased by an average of 4.2% per year since 2011, due to the price war and eroding demand. However, the largest declines occurred between 2013 and 2014 and in 2018, years that market participants consider the toughest of the price war between major book retailers and highly associated with their bankruptcies.

Similarly, earnings on sales to the government, which accounted for 40% of the market, also fell because of cuts in public expenditures during that time and higher competition among publishers and printers in public tenders as earnings in the private sector fell – and payments were delayed.

The mounting debt of the largest book retailers in Brazil hit publishers and the P&W market hard. By 2015, Livrarias Saraiva and Livrarias Cultura together accounted for an average of 35% of publishers’ overall sales, but reports from that time mention that this was only true for a limited number of large publishers. The situation for smaller companies was even worse, with the two giants accounting for more than half of their earnings – so, their filing for Chapter 11 bankruptcy protection and debt haircuts pummeled the segment.

What’s next for the P&W market?

There was a domino effect from the book retailer crisis in Brazil on the P&W market, with several publishers and smaller companies also eventually filing bankruptcy. However, it does appear that the worst is over for the P&W market, as what is left is basically scorched earth.

Livraria Saraiva and Livraria Cultura have both declared insolvent, and only small bookstores are now operating in the country, amid an already fading consumer demand. Also, there is the risk of huge, unsold inventories from the two former leaders to hit the market, which is likely to squeeze publishers and bookstores’ margins even further.

We project that P&W consumption in Brazil will decline by 2% in 2023 and 1% on average in the next two years, slipping to 1.41 million tonnes by the end of 2025 – still 75,000 tonnes above the 1.34 million tonnes consumed in 2020.

From an overall perspective, the pandemic lockdowns and business and school closures between 2020 and 2022 are now water under the bridge. The pandemic and its aftermath heavily damaged the segment, with P&W apparent consumption plummeting 22% (370,000 tonnes) in 2020, although it had recovered 140,000 tonnes of that loss by 2022.

From a practical perspective, most of the demand decline expected to happen in the 2020s before the pandemic – such as the substitution of paper menus and forms by digital options and increased use of technological devices in schools and universities – ultimately rapidly occurred because of the pandemic. Therefore, we understand that even though there is still an ongoing effect of the shift-to-digital trend, it tends to get smoother each year.

However, several risks still need to be considered, and much can change quickly in Brazil, which would force us to adjust our forecast. Upside risks can cause demand to decline less than forecasted, while downside risks cause demand to fall further.

The upside risks to Brazilian paper demand

1. More book fairs and events

One upside risk for Brazilian P&W demand is the growing presence of book fairs and events in the sector’s total sales. As consumers are more oriented to living experiences and making memories, publishers quickly jumped on this trend and started to organize bigger and more grandiose events to attract consumers, promoting book signings and offering significant discounts for quantity purchases. The end of restrictions on events due to the pandemic also brings the hope that there may be pent-up demand for attending events, such as the coming fairs.

2. Boosting consumer goods demand

Another upside risk for the Brazilian P&W segment is that the election of Luiz Inácio Lula da Silva (Lula) as president could mean an increase in demand for printed materials from both consumers and the government. Lula has previously advocated for better consuming conditions for people from the lower and middle classes, and many market participants assume that his government will issue some sort of credit or income aid program during his term (2023-26), which would boost overall demand in the country for consumer goods – and thus somewhat support P&W paper consumption. He also advocates for higher investments in education, which could result in larger purchases by the government; again, this sector accounts for roughly 40% of earnings.

3. Preference for paper-based learning materials

A third upside risk is the global trend of resistance to technological devices replacing printed materials in daily life, including in schools and universities. More and more people have been questioning the effectiveness of using technological devices instead of paper and printed materials as learning tools, arguing that the carbon footprint of digital devices is higher than for paper products and that exposure to certain light spectrums is harmful to one’s health. Additionally, recent studies argue that learning opportunities and effectiveness are higher when using paper products and printed materials instead of technological devices, which further fuels the debate whether the shift-to-digital trend, and its effects on the market in the long run, are permanent.

The downside risks to Brazilian paper demand

On the other side, one downside risk is that the Brazilian market shows the consumption of books and other printed materials is not strongly correlated with GDP. Unlike other paper grades, such as containerboard, the consumption of P&W products does not necessarily expand in step with gains in GDP. However, whenever GDP decreases because of an economic crisis, the consumption of printed materials and P&W papers tends to fall because they are not viewed as essential.

This strong elasticity, in tandem with the secular decline trend, explains the fragile condition of P&W industry margins and the high exposure of the segment in the event of an economic crisis in the future. For example, in 2021, total book production increased 24.3%, but book sales grew 15.4% and total book sales earnings adjusted for inflation decreased 4% year over year.

Another downside risk is related to the country’s giant retailer Americanas filing for Chapter 11 bankruptcy protection in early 2023, which has a strong potential to reduce total sales (and production) of books in Brazil in 2023-24.

Although not exclusively a book retailer, the company owes about BRL 72 million ($15 million) to publishers; the majority of this debt, which equates to roughly 3% of the sector’s projected annual earnings, is owed to big publishers. The complicated financial situation for the company could lead it to start another round of aggressive book sales discounts, further damaging the margins of other competitors and creating another domino effect, like that seen between 2012 and 2018 when Livraria Saraiva and Livraria Cultura fought that war.

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