US embassy cable - 04BRASILIA2240

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, Economic Policy & General Analysis 
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