Low cost businesses are booming with inflation squeezing middle class

The Brazilian has become poorer in recent years and is being forced to reconsider the services and products that fit in the pocket. In times of high inflation and loss of purchasing power, traditional brands leave and more economical options enter.

Although this adaptation of consumption is seen in all social classes, the way in which it occurs is quite different. While the poorest are looking for ways to overcome hunger, for the middle class, the issue is reducing expenses without necessarily giving up a lifestyle — which has been boosting the so-called low-cost businesses.

With the budget squeezed, higher income families are looking for alternatives to alleviate expenses, especially those that weigh at the end of the month, such as health insurance, gym and even their children’s school.

The movement has translated into good results for companies whose proposal is to be accessible, as is the case of Luminova. The school network is part of the SEB group, one of the largest basic education networks in Brazil, and currently has six units in operation, four in the city of São Paulo, one in Sorocaba and another in Natal.

When the business was created in 2019, the target audience was families from classes C and D. According to Victor Hugo Santana, director of franchises at Luminova, the objective was to allow public education children to have access to private education without having to pay such an expensive monthly fee.

However, for some time now, the proportion of students coming from public schools has been decreasing, while the number of graduates from more expensive schools only grows.

“Throughout the economic scenario, families ended up reducing the monthly disbursement and are looking for cheaper alternatives to keep their children in private education”, he says.

Currently, Luminova’s tuition costs around R$720, while most private schools in São Paulo charge over R$1,200, says Santana.

In 2019, in the first year of operation, 75% of students at Luminova were from public schools. Today, the scenario is divided. Considering all 4,200 students, half were in private education. “But there are schools that are already reaching almost 70% of students from the private sector”, says the director.

The trend, he says, is that this proportion will increase even more. In the 2023 enrollment cycle, for example, the network already expects to reach 60% of students from the private network.

For Santana, this reflects the current context of high prices and loss of purchasing power. “Families are looking for alternatives so that the budget can still deliver all the basic necessities of the house.”

In the last 12 months, inflation measured by the IBGE (Brazilian Institute of Geography and Statistics) reached 11.89%. Since September 2021, the cumulative level has been in double digits, i.e. above 10%.

Although rising prices are not unique to Brazil, impoverishment in the country seems to be worse than in the rest of the world.

A survey carried out in 100 countries by Nielsen Media Research shows that 64% of Brazilians say they suffer budget restrictions after the pandemic. On the global average, the proportion is well below: 46%.

The scenario becomes fertile ground for low cost businesses, which have been noticing a greater flow of customers who have room to manage expenses without abandoning habits.

An example of this is Red Fitness, a network of low-cost gyms. According to Ellen Fernandes, co-founder of the company, the number of customers has been increasing in the post-pandemic period.

Today, there are already 8,000 students in the four units of the network, all located in the north of São Paulo.

Fernandes says he receives people daily leaving more expensive gyms and migrating to Red Fitness units, whose monthly fee is around R$100.

“Today 40% [dos nossos alunos] they are people who left the ’boutique gyms’ and came to ours”, he says. “Whoever paid R$ 500 today doesn’t pay more. A-level only,” she adds.

According to her, the pandemic was a watershed for business, both in the search for physical activity and in the profile of the public. “It’s not just C and D classes that attend our academy. B class comes too,” she says.

The model has worked so well that, in May of this year, Red Fitness began a franchise expansion process. The expectation is to open two this year, four next year and another 60 by 2026. The projection, says Fernandes, considers that the search for low cost services and products should remain high.

Low cost gains strength in the crisis

For Marco Vinholi, superintendent director of Sebrae-SP, there is a clear movement of consumers heading towards low cost services and products. He recalls that, from 2021 onwards, 90% of the professions were impacted by the loss of the real value of the salary, which increases the attractiveness of low-cost products for all classes.

“This search for low cost models has been constant. At the other end, the entrepreneur perceives this window of opportunity and the number of companies that work with this model has grown”, he says.

In his view, when there is a long period of inflation, the gap for economic businesses becomes clearer and there is a boom in these companies. However, even in scenarios of economic recovery, consumers tend to opt for low-cost companies, as is the case with airlines.

Lauro Gonzalez, coordinator of the center for studies on microfinance and financial inclusion at FGV (Fundação Getulio Vargas), also perceives a similar phenomenon.

According to him, the low-income budget has been undergoing not only conjunctural changes, but structural changes as well, as a result of changes in the labor market. He cites uberization, pejotization and informality — which would indicate a certain precariousness of work.

“Within these budgets, a notable thing is the inconsistency in income. This makes people have to use a series of strategies to achieve what economists call consumption smoothing. of time”, he says.

On the conjunctural side, he mentions the crisis generated by the pandemic and the War in Ukraine, which also had similar effects.

“People turn to these low cost companies precisely to try to find a smoother in the midst of a scenario of rising inflation”, he says.

Low cost health plan enters the basket

The pandemic helped change the reality of health plans. At the same time that interest increased —given the severity of the health crisis—, values ​​rose and a part of Brazilians had to give up the benefit in the face of inflation and unemployment.

Others, however, resorted to low cost plans to try to reconcile private service and a squeezed budget. Caring for.me, a low-cost health plan startup, has been experiencing high demand in recent months.

Healthtech, which has been operating in the state of São Paulo since 2021, went from 500 customers at the turn of the year to more than 6,000 now. According to Rafael Morgado, the company’s financial director, the deal was already planned to capture a class B that has been losing purchasing power — but the speed of growth is surprising.

“It is possible that, in this month of July, we will become the fastest growing healthtech. We should bring 2,000 clients this month alone, in June there were 1,200”, he says.

Morgado says that the plans atcuidado.me range between R$169 and R$949, ​​which is about 50% or 70% cheaper than competitors with similar coverage.

In the last two months, sales have accelerated a lot. “As we made a product aimed at this middle class with budgetary challenges, it is working”, he says. “By the end of the year, our expectation is to have between 12,000 and 15,000 lives”, he adds.

In the cosmetics sector, Vult, today controlled by the Boticário group, also noticed an expansion of the business in the face of the loss of purchasing power of Brazilians. The company says that it was born in 2004 with a low cost positioning and, therefore, ends up feeling the current economic downturn in a more positive way than other companies.

Although it is not aimed at a specific audience, Vult dialogues more with women from the C and D classes. However, for some time now, more customers from other income brackets have been consuming the brand.

“What we have noticed now is that consumption is very heated. The issue of cost-benefit, linked to quality, is really what the consumer is looking for”, says Bruna Carneiro, brand manager, innovation and business make at Vult.

According to her, with the current global economic context and the war, the availability of raw materials for the pharmaceutical and cosmetics sector has dropped dramatically. If it weren’t for that, sales could be even more heated.

“We wanted to have more inputs to produce more. If we had the economic and political issues stabilized, we could sell more than we already are”, he says.