McXperiment: serving billions in the slums?

Although her meat and shrimp empanadas have always sold well, Edina Nascimento is worried about the arrival of a McDonald's nearby.

She knows that next to Happy Meals, her pastries would look decidedly sad. She says customers here in Rio's largest slum care about price, not quality, she says.

This little McDonald's kiosk - selling only ice cream and water - is part of an aggressive marketing move that may be duplicated in other impoverished cities worldwide. Until now, the conventional wisdom was that there was no money to be made in Brazil's favelas, or slums.

However, not everyone is thrilled with the prospect.

"A big McDonald's opening here will kill off small businesses," says Ms. Nascimento.

McDonald's hopes fries and shakes will sell in Brazil slums

"People here sell the same things McDonald's sells, but this is not New York. We cannot compete on a level playing field. How will we survive?"

In the past, Nascimento and small merchants never worried about being undercut by bigger and better-equipped businesses like McDonald's because such franchises never ventured into the more than 500 slums that dot Rio de Janeiro's hillsides. Executives doubted locals would spend enough to make a move worthwhile.

That logic is being tested. Having successfully opened a series of outlets in the working-class suburbs around Rio, McDonald's is realizing that people in the poor neighborhoods also have money to spend on hamburgers and french fries.

The next logical step was to open branches in the city's favelas . On Dec. 29, the company unveiled its kiosk in Rocinha selling ice cream and mineral water.

So far, so good. A steady stream of customers make their way down Rocinha's grimy streets to buy strawberry, chocolate, caramel, or vanilla cones. At 90 reals (US 51 cents) for a cone, prices are competitive. "People are delighted," says McDonald's marketing manager Ricardo Roy. "We are meeting our targets. In 20 days we have sold the number of ice creams we expected to sell in 30 days."

Although it sells no Quarter-Pounders or Big Macs yet, the mini-McDonald's is a success. Brazil is the first country to set up small kiosks as an alternative to bigger restaurants. As a result, the South American nation is the company's fastest growing market worldwide.

Almost half the 671 McDonald's in Brazil are kiosks, and the company has an aggressive marketing strategy that has brought it success and widespread name recognition. McDonald's is so well known in Brazil that soccer star Ronaldo said when his child is born in the spring he will name it Ronald after Ronald McDonald if it is a boy.

That popularity, however, was never easily accessible to the people from the sprawling favelas on the hills of Brazil's urban community. That could change as McDonald's and other companies realize there is money to be made in the slums. A few small pharmacy chains have opened in Rocinha, and branches of a major electronics chain can now be found just a few feet from old women selling bags of mangos or live chickens.

So far, the drug dealers who control large parts of the favela have not bothered them. Some thugs did tell the store manager he should close at 9 p.m. if he knew what was good for him but they also came one day and bought 17 sundaes for a group of local kids.

If the Rocinha experiment continues to be a success, McDonald's says it will open outlets in other economically deprived areas.

"If our projections are correct we can think about opening in other similar areas," says McDonald's personnel manager Amauri Toledo. "This is a pioneering experience for the company...."

But Nascimento doesn't share the enthusiasm for the McDonald's venture. She has already seen a drop off in the sale of her pastries. "They'll create jobs, but many people will become unemployed," she says. "If they open a big McDonald's here we're finished."

Other business owners are less pessimistic and hope the Golden Arches will mean more money in local stores. Kids, too, are understandably happy, not least because they do not now have to cross Rio's main north-south highway to get to the nearest restaurant.

Dimitri da Silva had never even seen a McDonald's before the Rocinha kiosk opened, but today, as he wanders down the street with a half-chocolate, half-vanilla cone, all is well with his 13-year-old world. School's out for summer and Ronald McDonald has just moved in.

"They are great in this heat," he says with a huge smile. "I used to buy ice cream down the road, but they weren't as good. These ones are expensive but worth it."

(c) Copyright 2000. The Christian Science Publishing Society