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Cablegate: Real Life Brazil: The Downs and Ups of Running A

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 BRASILIA 002240

SIPDIS

USDOC FOR 4322/ITA/IEP/WH/OLAC-SC
USAID FOR LAC/RSD

E.O. 12958: N/A
TAGS: ECON SOCI EFIN BR
SUBJECT: REAL LIFE BRAZIL: THE DOWNS AND UPS OF RUNNING A
SMALL BUSINESS


1. Summary: Despite recent discussion of reforms to aid
small businesses and reduce red tape, owners of small
businesses in Brazil still struggle with suffocating
bureaucratic requirements, unfavorable labor laws and
expensive credit. This cable is a case study of a Sao
Paulo state small business struggling to overcome these
obstacles. Bureaucracy reigns: obtaining official permits
to open the small food service business in question took
over four months, even with a professional facilitator.
The difficulties of firing even non-performing workers
under Brazilian labor resulted in a lawsuit against this
small business. Credit can be had, but at usurious rates.
Despite these challenges, and unlike a large number of
other Brazilian small businesses, this entrepreneur has
chosen not to operate in the informal economy. End
summary.

2. During a recent holiday, ECON OMS visited a long-time
Brazilian friend, Roseli, who runs a marmitex restaurant
service. "Marmitex" are prepackaged meals wrapped in
aluminum foil and sold at a set price.

3. Roseli had worked for 15 years in large multinationals
as a financial analyst, and left to pursue her dream of
setting up her own business. She identified the marmitex
niche in Sorocaba, a town of some 400,000 inhabitants
located around 100 kilometers from the city of Sao Paulo,
known for manufacturing automotive parts, with the presence
of some well-known industrial names like GM, Alcoa and
Votorantim. For her customer base, she is targeting small
and medium businesses that are mandated by Brazilian law to
provide meals to their employees.

4. Roseli was able to start her business by putting
together her life savings and money borrowed from a bank at
6-8% interest per month (the interest rate has been
steadily dropping and she refinances accordingly). She
explained that her bank has no line of credit for small
businesses so it was necessary to take out personal loans.
She has a partner who invested a small amount and
contributes his time; he will receive no salary until the
business becomes profitable.

5. In order to start a food business in Brazil it is
necessary to get three licenses: one federal, one state and
one city. It took about four months to complete the
process. Roseli hired a "despachante" (rough translation:
legal agent) to do all the paperwork and legwork for her at
a cost of 600 Reais (approximately USD200). Technically, a
food business should not commence operations before
undergoing an ANVISA (Agencia Nacional de Vigilancia
Sanitaria - Health Standards Agency) inspection. Although
an inspection was requested right away, it was a year
before ANVISA agents showed up, and then only because of a
complaint made against her by a customer.

6. Roseli rented a storefront and set up an attractive
establishment with a small dining area in the rear where
walk-ins can eat. She calls her business "Gostinho
Caseiro" (Home Cooked Flavor). A standard meal consists of
rice, beans, meat, vegetable and dessert. She works hard
to vary the meals and make sure they are nutritionally
sound and hygienically processed. There are several
competitors in the Sorocaba area. All charge the same
amount, but as the newcomer, Roseli feels she will be able
to win over customers by providing better quality and
variety.

7. Roseli started her business in May 2003 delivering 100
meals a day. Volume grew to 200 meals by November, 2003,
shrank over the holidays, then grew to 250 meals by March
2004. Roseli's original business plan called for expanding
to at least 400 meals a day with current staffing. She has
come to the conclusion that she needs to hire a full-time
sales person to achieve additional growth.

8. The variable cost to produce meals is 2.20 Reals each,
and they are sold to businesses at 3.80 - 4.20 Reals per
meal depending on volume purchased. In addition, walk-ins
can buy standard prepackaged meals at 4.20 Reals or serve
themselves at 10.20 Reals per kilo.

Labor Woes
-----------
9. Staff consists of a receptionist/order taker who also
supervises the kitchen staff, cook, and three assistants.
Basic wage for the staff is determined by the union; R$430
a month for regular staff and a little more for the cook.
These amounts are increased annually based on inflation
rates.

10. Labor and personnel issues have been the most
problematic for Roseli. Brazilian labor laws favor the
employee. Even when an employee is terminated for cause,
they can sue their employer through the union. Roseli
terminated an employee for cause after carefully
documenting unexcused absences and paying her everything
that was due. The employee sued anyway, falsely saying
that she was forced to work 12 hours a day while signing
for 8 hours. The judge awarded her an R$450 settlement; in
addition, Roseli had to pay R$900 attorney costs.

11. Hiring is also a problem. First, Roseli tried hiring
through an agency, but found their prescreening to be
inadequate. She then started hiring only through personal
references. Currently, she has someone on maternity leave,
so she has to maintain the employee on the payroll and pay
someone to take her place for four months. INSS will
reimburse Roseli the 4 months salary once the employee
returns to work.

Hard Times
----------
12. Roseli had hoped to work full time in Sorocaba managing
and growing her business, but after just six months, she
was forced to return to a full-time job in Sao Paulo,
traveling to Sorocaba on the weekends to manage her
business. She uses almost 100% of her Sao Paulo earnings
to keep the business going.

13. Due to a variety of reasons including personnel issues,
utility costs, receivables, and lost business, she almost
had to shut the business down, but managed to keep afloat
by selling the van she owned outright and then leasing one
and hiring the ubiquitous motorcycle delivery boys.

Taxes, Taxes, Taxes
-------------------
14. As an MPE (Micro and Small Business) under the
jurisdiction of SEBRAE (Brazilian Small Business
Administration, a division of the Ministry of Development,
Industry and Commerce) Roseli pays on a monthly basis:
federal income taxes of 3-5% on sales, approximately R$400-
450; IPTU (property tax) of R$161.00, additional city tax
R$23.00 and car taxes of R$70. An additional 8% of payroll
goes to FGTS (Fundo de Garantia). She deducts INSS monthly
contributions from her employees' salaries, but makes no
additional contribution.

15. Queried as to whether she ever considered running her
business on an informal basis (i.e. unregistered and off
the books - effectively, illegal), Roseli emphatically
stated that it never crossed her mind. She prefers to have
a legitimate business with potential for growth that can be
freely advertised to large reputable companies.

16. Despite the mixed economic results to date (NOTE:
during a period that coincided with Brazil's worst economic
environment in recent memory. END NOTE), Roseli has no
regrets, finds her venture very satisfying and spoke
optimistically of the future.

17. This cable was coordinated with Consulate General Sao
Paulo.

DANILOVICH

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