000401 McDonald's Tests Shantytown Market

Rio De Janeiro, Brazil - The gleaming stand with those familiar golden arches seems alien amid the rickety shops and bars of Rocinha, Latin America's largest slum.

Mainstream business have long shied from Rio's “favelas,” the hillside shantytowns. The violent drug gangs that rule the slums scare most outsiders away.

But for McDonald's, which opened a kiosk to sell ice cream and mineral water in December, it may be a shrewd business decision that could open up a whole new market.

“It's an experiment,” says Ricardo Roy Blyth, McDonald's field manager for Brazil's southeastern states of Rio de Janeiro and Espirito Santo.

Blyth says the move is part of McDonald's larger strategy to sell more to Brazil's working class. “If all goes well we could open up a restaurant.”

And so far, the stand is thriving, he adds. In its first month, it sold 27,000 ice creams, 15 percent better than the company's expectations.

McDonald's is starting small because there are few statistics on the economic potential of the favelas, which are home to the poorest fifth of Rio's population.

Just as many favela streets don't officially exist, the earning power of slum dwellers is a great unknown, since the vast majority earn their money off the books.

Still, a 1996 study by the Sao Paulo-based Interscience Foundation said poor Brazilians have greater buying power than statistics suggest. Of every 10 Brazilians, nine own a television and seven have a refrigerator.

In Rocinha, a Portuguese word meaning “Little Farm,” many of the precariously built hovels are adorned with satellite TV dishes.

“Before we came here, I went and looked at a demographic study, and it showed that there's a lot more earning power in Rocinha than I imagined,” says Fabio Melo, 26, a manager of the McDonald's kiosk. “People here have cable television, they have domestic appliances - everything they have where I live.”

Blyth says McDonald's would consider opening shops in other favelas, provided they have paved streets, water and electricity.

Few favelas meet those prerequisites now, but that is changing as the city seeks to reclaim the shantytowns with an urbanization program financed in part by the World Bank.

McDonald's came to Brazil in 1979 and opened its first restaurant in the upscale Copacabana district. Until recently, its hamburger restaurants held a certain glamour: When the chain opened in the nation's capital, Brasilia, customers drove up in Mercedes to buy Big Macs.

In recent years, though, McDonald's has been moving into less ritzy neighborhoods to establish itself as a mass-market brand.

With nearly 1,000 outlets across Brazil - about half of them ice cream stands like the one in Rocinha - McDonald's is one of the country's largest private employers, with more than 35,000 workers.

Kathryn Harrigan, the Henry R. Kravis professor of business leadership at Columbia Business School in New York, says moving into a favela was the logical next step.

“It's symbolic they're going to slums even if it's the least slummy of slums,” she says. “In Brazil, where the middle class isn't as large and robust, McDonald's probably feels that in order to get at the basic economies of scale, they have to have a certain volume of transactions and that's why they're there.”

Rocinha, with an estimated population of 250,000 perched on a mountainside overlooking Rio's glittering beaches, is not an average favela. Most roads are paved and a city bus route runs through it. Shops in the thriving commercial district can rent for up to $564 a month.

The favela also is home to a prosperous drug trade, with youngsters openly hawking cocaine and marijuana on the streets by night. During the day, lookouts keep track of outsiders, and photographers are warned when their lenses stray toward the young men sitting along the curb.

Local shopkeepers say they welcome McDonald's because it attracts the right type of customers into the area, not just those looking to buy drugs.

Neighborhood people appreciate the attention, too.

“It's a surprise to see them here, but it's a good surprise,” says Claudete da Silva, a housewife. “It says that just because we live in a favela doesn't mean we aren't people who buy things.”

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