Martim Prado Mattos, a senior executive at one of Brazil's biggest consumer goods conglomerates, doesn't have anything against globalization. After all, it has served his country well. But unlike other companies with big ambitions, going global isn't a priority right now for Hypermarcas, the São Paulo-based firm where Mattos is CFO. Expanding the Hypermarcas footprint outside Brazil is "not a short-term objective," he says. After all, he notes, there's enough opportunity to be chasing at home, and any international attempt to replicate Hypermarcas's success — it now has a portfolio of nearly 200 brands and 4,000 products — wouldn't "add much in terms of synergies."

But just shy of its tenth birthday, the firm has, by many measures, already cracked the code to growth at home. Often referred to as the "Unilever of Brazil," the firm has a market capitalization of R$31.5 billion (US$20 billion) as of March this year, net 2010 revenue of R$3.2 billion — up from around R$2 billion the previous year — and sizable market share in many parts of Brazil's health, beauty, personal care, home care and food businesses, making it number one or number two nationally for products ranging from sweeteners to body lotion to condoms.

That in itself is remarkable. But what is also sparking the interest of the international investor community is that Hypermarcas has built its vast empire using nothing more than an arsenal of tried-and-tested marketing, pricing and distribution tactics, along with a hefty dose of M&A and razor-sharp management of its brands — "our most important asset," as Mattos says. It's a combination that has made Hypermarcas one of the largest, most diversified companies in Brazil.

Race to the Top

And it's a combination that makes emerging market companies like Hypermarcas one of the biggest competitive headaches for today's expansive multinational corporations (MNCs). In Hypermarcas's universe, that includes the likes of Unilever, Procter & Gamble (P&G), Colgate and L'Oreal, all of which have businesses spanning the globe and are now looking to the BRICs — Brazil, Russia, India and China — and other emerging markets to drive their growth as older markets in the U.S. and Europe stagnate, or even decline.

"Hypermarcas is an example of how local companies can go after a huge market leader," says Fernando Robles, professor of international marketing at George Washington University's Elliott School of International Affairs in Washington, D.C. In this case, one market leader in Hypermarcas's local patch is Unilever. The Anglo-Dutch consumer goods firm is a force to be reckoned with, selling more than 400 brands — 13 of which generate annual sales of more than US$1 billion — and spanning 180 countries, including Brazil for more than 50 years. But like other MNCs, keeping its lead in a fast-changing country like Brazil isn't as straightforward as it once was.

"The consumer market in Brazil used to be very stable," says Robles. "Now, it is becoming more fragmented, geographically and by social class and type of channel. Companies like Unilever have a hard time trying to figure out what their strategies should be for all these little niches, so they struggle. The smaller [firms] can be more focused and go after those niches, and they do it well, without much heavy investment in advertising and communications."

Despite enviable economies of scale, MNCs are indeed generally facing more complexity, particularly when aiming to take a product global and into new markets "where consumers tick slightly differently," adds Martin Boehm, marketing professor at the IE Business School in Spain. "It's a challenge for them to compete with one brand in Western Europe at premium prices and then take it to, say, Brazil and sell it for 20% less. That was relatively easy 20 to 30 years ago. Now, it's a lot more complicated because consumers [everywhere] are more aware about what's available and [the MNCs know] they can't position a product both ways."

Right Place, Right Time

There's no question about how Hypermarcas positions its products, according to Mattos. Rather than competing directly against the MNC giants and their premium products, its products fall within low- to mid-range price points, appealing to middle-class aspirants with rising disposable incomes and the budget-conscious. "It was a decision taken from the beginning that we would always look for segments that are mass consumption," says Mattos.

With its roots firmly planted in Latin America's booming — and biggest — economy, Hypermarcas is reaping the rewards of that decision. Analysts at Citi, for example, consider the firm “one of the most direct plays on the growth of the middle class in Brazil.” Academics at the Fundação Getúlio Vargas (FGV) in Brazil say the country's so-called "C class" — that is, middle-income families earning roughly between US$720 and US$3,100 a month — increased from 38% of the population in 2003 to 51% in 2009, and will reach a projected 56% by 2014. While its overall per capita GDP at purchasing power parity last year was slightly below the overallLatin America average — at US$11,210 — it was nonetheless well ahead of China and India, according to a research note from Crédit Agricole published in May. 

It's against this backdrop that Hypermarcas has flourished under "typically Brazilian management," according to local business magazine, Exame. A recent profile in the magazine of Hypermarcas's founder and chairman, João Alves de Queiroz Filho– or "Junior," as he is most often called — recounts how some 20 years before Hypermarcas began, he and his father were already making a name for themselves with Arisco, their modest cleaning products company that mushroomed into a national food firm. In 2000, Junior sold Arisco to Bestfoods of the U.S. in a US$760 million deal, cementing his reputation as a sharp negotiator and presaging Brazil's growing attractiveness for investors. 

The idea behind Hypermarcas was to replicate Arisco's success, only at a faster pace. Starting off with a steel wool company in 2002, Junior snapped up rivals around the country, and was soon diversifying into other consumer goods. "That set the trend," says Daniel Weil, an analyst with market research firm Datamark in São Paulo."Since then, he's bought companies that have a name for themselves, regionally or nationally, but for some reason haven't fulfilled their potential…. He's done well focusing on Brazil."

By the time Mattos joined the firm in 2008 – as head of investor relations, which he has continued to oversee since being promoted to CFO last year – it was a far cry from the startup with R$30 million of annual revenue that it was just a few years earlier. It's the result of what Mattos calls a "very consciously focused, step-by-step" strategy. The key, he says, is Hypermarcas's acquisitions strategy — 27 acquisitions since the company began, with 10 in2010 alone, including its biggest-ever deal to buy a local pharmaceutical company called Mantecorp for roughly US$2.5 billion.

The good news for Hypermarcas is that there has been no shortage of rivals to snap up. By "picking up small gems at reasonable prices," says Weil, Hypermarcas has been part of a larger M&A wave in Brazil. The number of M&A deals in Brazil rose 36%, to 141, and the value 83%, to US$39.4 billion, in the first half of this year from the same period two years ago, according to M&A analysts at Mergermarket.

What's more, the companies on Hypermarcas's radar are generally in sectors ripe for consolidation. A case in point: Beauty products. ABIHPEC, a Brazilian industry association, says there are more than 1,600 companies competing in the country, the world's third-largest cosmetics, toiletries and fragrance market (after the U.S. and Japan) — 20 of which each generate after-tax revenues of more R$100 million annually and represent 73% of the sector's total gross sales.

But with or without an abundance of takeover targets, pulling off an aggressive M&A strategy is always a challenge, and in some sectors it's an even greater challenge, warn experts. In a briefing paper published last spring on the sectors in which Hypermarcas is involved, for example, Bain & Company consultants noted how"scale is important in consumer goods as it is in most product and service industries, but it is not sufficient by itself. A brand may look to an investor like an underachiever that can be turned around when, in fact, it is performing at its strategic full potential."

According to Mattos, one reason Hypermarcas manages to avoid such traps is that it has a portfolio that's regularly refreshed and diverse enough to spread risks. He says it also helps that "we see M&A as a continuous process. At any given moment, we'll be analyzing and talking to several companies at a time. And at a certain point, we'll accelerate some, and leave others behind. So we have walked away from deals."

Getting There First

When does Hypermarcas decide to stick with a deal? Along with traditional metrics like national market share and gross margin, Junior and his M&A team consider the longevity of a brand. "Not just the founder, but the rest of [the executive team] have been in Brazil our whole lives," says the finance chief. "We know the brands and the owners [of the companies we are analyzing] personally. We understand the potential, and limitations, of the market." He reasons that if a brand has been able to survive the huge waves of volatility that have regularly swept through Brazil over the past half century, "that's a sign of its strength" and the staying power Hypermarcas expects of products in its portfolio.

And Mattos contends that Hypermarcas's ability to identify and go after those brands sets it apart from rivals. "The challenge is to find the brand, and we've gone after brands before others," he says.

That was the case with Monange, a lackluster moisturizer brand that had been around for 40 years when Hypermarcas acquired it in 2007. Hypermarcas swiftly updated its marketing, relaunching existing products with trendy packaging while expanding the brand into new lines, such as razor blades and shampoo. The result: Annual sales jumped from pre-acquisition R$81 million to R$218 million. Last year, Monange — along with Bozzano and Niasi, the other so-called "dormant brands" that were suffering from underinvestment in innovation before landing in Hypermarcas's portfolio at around the same time — accounted for 30% of its total organic growth.

"That's what Hypermarcas is all about," says Robles of the Elliott School. "It's about how to be smart with good brands, and just being good enough for a bunch of consumers who find it hard to pay the premium prices of global brands."

'Like a Boa'

Hypermarcas's executive team has vowed to use this year to slow the pace of M&A to focus on integration. “It is like a boa after eating a cow,” CEO Claudio Bergamo said in an interview in August 2010. “It needs some time to digest. We will go through this digestion phase in 2011.” Of the acquisitions concluded in late 2010 and early 2011, Mattos has targeted R$257 million of synergies to be achieved by the end of next year, of which Mantecorp and another new acquisition — Mabesa — account for more than half, at R$142 million.

Analysts also expect a tidying up its portfolio to jettison underperforming brands and focus on faster-growing segments. According to Datamark, the key sectors will be beauty products (which an annual growth rate of around 8% every year between 2009 and 2014); personal care (at 4.5%) and pharmaceuticals (at around 5%). Divestments and less investment are likely in cleaning products and food since growth in those areas, at 3% or less, look less robust.

"It's a good year to organize the house," agrees Mattos. "What we have to balance when deciding whether to reduce our focus on a particular brand is how much we are leaving behind in terms of scale, bargaining power and strategic strength."

An analysis of first quarter earnings by Morgan Stanley this spring noted that the integration of Mantecorp and Mabesa, the two big acquisitions from last year, "are off to a slower start than we would have guessed." The report also drew attention towhat it called a "hiccup" that has dampened earnings, which involves working capital – a hot button for any CFO. In a bid to boost revenue in the second half of last year, Hypermarcas extendedthe payment terms for its customers — wholesalers and large supermarket and drug store chains. While that might have pleased customers then, it was another matter as 2011 rolled in and Hypermarcas reversed the terms, introducinghigher prices and stricter deadlines for payments. Not surprisingly, many customers balked and delayed or reduced their orders, leading Hypermarcas to miss first quarter revenue expectations by 20% and its share price to seesaw, reported Morgan Stanley.

Caution Ahead

But there are other, external factors affecting Hypermarcas's earnings that Mattos is watching just as closely. An overheating national economy is one. Like China and India, Brazil has been battling with rising inflation and an increasingly strong local currency. In June, consumer prices in Brazil rose at the fastest pace in six years. To the central bank's consternation, inflation has been climbing past the 6.5% upper range it has set, leading the central bank to raise the benchmark Selic rate recently for the fifth time this year, to 12.50%.

"High inflation is the worst possible thing for us," says Mattos. In late July, as Brazil's rising inflation raised concerns among investors about the impact on companies dependent on consumer demand, shares in Hypermarcas — which listed on Brazil's main board in 2008 — fell 6%, to R$11.30, the lowest level in more than two years. Some observers say household belt-tightening is inevitable. Research published in the Financial Times on July 1 found that the average interest rate for consumer credit in the country has climbed from 41% last year to 47% in 2011, "which means families must leave aside not 24% but 28% of their disposable income to service debts," compared with 16% in the U.S., 4.8% in India and 6.5% in China.

But after dipping the three previous months, consumer confidence data from the FGV did show a recovery in June. To be sure, Brazil's consumers have experienced ropier times than these — something Datamark's Weil says is still fresh in many consumers' memories. "Brazilians remember when inflation was pretty bad," soaring more than 700% in the early 1990s. "So people are still wary every time the government publishes statistics, especially this year, since GDP growth will be slowing [from a 20-year high of 7.5% in 2010 to a forecast of less than 4% in 2011]," he says. "Everyone is on alert, and watching consumer purchasing power. But it's normal caution."

The macroeconomic picture is just one of the larger concerns shared by executives in Brazil like Mattos. It's no accident that the World Bank's latest ease of doing business indicator, which measures the bureaucratic burden of regulations of 183 countries — those with highest rankings being the least conducive to starting and operating a local firm — ranked Brazil 127, between Russia and India, and far behind most other Latin American countries and China.

And it's not just onerous red tape holding back corporate Brazil. "The challenge has to do with the fact that the country has not followed through with the market expansion," says Robles. "While the market expansion has been rapid, infrastructure development has not been."He cites Brazil's roads and railway network, which have suffered from years of underinvestment."Just to get products to retail sites is very expensive and it takes a long time, and we're talking about urban markets — forget about the rural markets," says Robles.

The big debate, then, for Brazilian companies is whether better opportunities lie outside their country. After all, says IE Business School's Boehm, they could take a leaf out Grupo Bimbo's book. The well-known Mexican bakery began expanding across the globe more than 50 years ago, venturing into both developed and developing countries, including China.

But the risks are just as high today as ever. "If you start expanding abroad, you could lose yourself," says Robles. "On the other hand, if you don't do it, you're missing opportunities. For some companies that are more commodity or resource based, the answer is very clear — they go abroad. For companies like Hypermarcas, going abroad is just another battle. Those are competitive markets, and they may not have the resources to do it well. And if they do it, they may lose their home market."

All told, Mattos says Hypermarcas's home market is worth hanging on to, especially as the country continues to benefit since being grouped under the BRIC umbrella by market analysts several years ago. "It's quite positive for Brazil as a whole as we become more attractive to investors. It also creates more responsibility," says the CFO. "The world is now watching us, and looking to see if we can fulfill our potential. We have to deliver."