RIO DE JANEIRO: Opening a gourmet cafe in a country deep in economic and political hot water might seem risky, but like many foreigners, Australian entrepreneur Duncan Hay still thinks Brazil is a tasty investment.
The 44-year-old went through the grinder getting ready for this month’s planned opening of Kraft Cafe, specializing in high-end cappuccinos and the like, in Rio’s swanky Ipanema neighborhood.
After a spell a few years back as Latin America’s economic poster child, Brazil has slid from gentle decline to nosedive, with a biting recession, gaping budget deficit, a massive corruption scandal and the start of impeachment proceedings against President Dilma Rousseff.
Hay’s worries are more down to earth. Unscrupulous suppliers, officials needing months for paperwork that in some countries would take only a week, and constant, alarming cost overruns — the headaches have been continuous.
“It has cost me two times more than I thought it would,” Hay told Agence France-Presse, as a crew put finishing touches to the cafe.
“People tell me that’s normal in Brazil: that you take a figure and double it.”
Hay’s experience will be familiar to anyone who has faced the over regulation, graft, high taxes and other self-inflicted damage in the world’s seventh biggest economy.
It’s the bitter brew, known as the “custo Brasil,” or Brazil cost, that has pushed Brazil down to 116 on the World Bank’s ranking of business-friendly countries.
A good deal?
But a surprising number of foreign investors, Hay among them, have kept faith. In fact by some measurements, foreigners now believe more in Brazil than Brazilians themselves.
Data from PricewaterhouseCoopers shows mergers and acquisition deals signed by Brazilians plummeting 23 percent in the first nine months of this year, compared to the same period in 2014.
Foreigner-signed deals, by contrast, rose three percent and now outnumber domestic signings.
With a population of 204 million, an emerging middle class and diversified economy, Brazil is just too full of potential to ignore, despite the crisis.
Even if total foreign direct investment is down — $62.4 billion last year against $65.3 billion in 2012 — Brazil is still the main target for FDI in Latin America and the fifth biggest in the world, says Santander bank.
Andre Perfeito, chief economist at Gradual Investimentos, said the crumbling economy presents “a real opportunity in a key market,” especially for foreigners buying into the national currency, which is down a third against the dollar this year.
“It’s very cheap to buy any assets here now,” Perfeito said.
PricewaterhouseCoopers’s Rogerio Gollo also says that for “strategic buyers,” it’s the right time to take advantage of the weak real and buy Brazilian.
Strong coffee, strong business
Hay’s start-up investment of 700,000 reais, or $187,000, is a tiny drop in a $2.3 trillion national economy, but his Kraft Cafe adventure says a lot about why foreigners fear — and still love — doing business in Brazil.
Hay was laid off by oilfield services giant Schlumberger in February as the oil industry downturn rippled through Brazil.
But not wanting to leave the country, he looked about and saw what seemed like an ideal niche.
Although Brazil is the world’s biggest coffee grower, it’s hard to get a really good espresso in Rio, let alone one of those fancy lattes with decorative leaves poured into the milk.
“All the coffee here tastes like charcoal and water,” Hay said.
So he found a rental space, studied the art of roasting and brewing, and came up with a menu that, in contrast to most Rio cafes, will focus on fresh, health-conscious sandwiches, raw food and light meals.
But putting that simple idea for a 15-seat cafe into practice meant suffering the full Brazilian experience.
‘Mafia’ and beach life
Paperwork took three to four months, only concluding in October, a process that in the United States would take a mere four days, according to World Bank data.
Even in more comparable China, which ranks 84th in the business-friendly rankings, it takes only 30 days.
Along the way, Hay had half his tools stolen, paid a huge under-the-table sum to finalize the lease, fired an assistant trying to buy equipment at a 200 percent markup, and watched his capital evaporate at a rate that doomed his original plan for expanding to three shops.
When he officially opens this month, Hay will face what he calls “the terrifying part” — the arrival of bribe-taking fire department inspectors.
“They’re the biggest mafia,” Hay said.
But here’s Brazil’s upside: cheap currency, easy access to top quality coffee growers and, even with recession, a product that will exploit an obvious gap in a big market.
“Coffee’s supposed to be addictive,” he added. “I want people waking up and saying ‘I need my big Kraft coffee or I can’t function.’”
Besides, even without huge profits, Hay will have that superior Brazilian lifestyle.
“I can go to the beach in the afternoon [and]be my own boss,” he said.