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### Viewing cable 04BRASILIA2240, REAL LIFE BRAZIL: THE DOWNS AND UPS OF RUNNING A

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
04BRASILIA2240 | 2004-09-03 18:29 | 2011-07-11 00:00 | UNCLASSIFIED | Embassy Brasilia

`

    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

`