Food Fight: Dispute in Brazil Over Billion-Dollar Meal Allowance Market

Local startups such as iFood and large companies such as Alelo, Sodexo, Ticket and VR are awaiting discussion of a bill that would prohibit markdowns in food allowance contracts, while opening up the market to more competitors

A restaurant em São Paulo: Big companies are fighting over the meal allowance market in Brazil
July 06, 2022 | 03:20 PM

Bloomberg Línea — On the eve of the parliamentary winter recess in Brasília, a dispute has erupted over the meal allowance market, which moves an estimated 150 billion reais ($27 billion) per year and involves large companies engaged in one of the largest sectors of the economy.

On the one side are local and global giants such as Alelo, Sodexo, Ticket and VR, which dominate 90% of the meal allowance market; on the other, startups seeking to expand the 10% slice they currently hold, of which the one that stands out is another giant, iFood.

Also in contention are large companies in the country, which pay food allowance benefit to millions of employees.

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The target of the negotiations is a provisional measure that the government issued to set new rules for the food allowance paid by companies to their workers through specialized groups.

The measure was issued in March and has had its validity extended, and remains in force. But in order to become law, rather than simply a temporary measure, which is fundamental to give legal security to the contracts between the parties, it needs to be approved by Congress and the Senate by mid-August.

The problem is that the debate process has yet to begin.

With the imminent parliamentary recess, scheduled to begin on July 18 for two weeks, followed by the start of electoral campaigns in August ahead of the October presidential elections, and which usually empties the congressional offices, the chance of the law’s approval is considered remote.

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If the bill fails to be approved, the measure will expire on August 17, leaving the food allowance market as it currently operates.

So far, the text of the provisional measure has received more than 150 amendments submitted by deputies in Congress, 138 of which call for the revocation of the main changes.

The bill was amended by the government with the purpose of bringing new rules to the food allowance model, defined by a decree modifying the Worker’s Food Program (PAT).

PAT was created in 1976 to grant tax benefits to companies that offered an extra amount to their employees so that they could have meals without having to increase their salaries. Today, companies that adhere to PAT can deduct the amount spent with the payment of the benefit from their income tax and social contribution payments.

The food allowance, on the other hand, was created by the 2017 labor reform to allow companies to pay for the benefit generically, without joining PAT or receiving tax benefits, but without having to incorporate the amount into employees’ wages.

The aim was to reduce the volume of lawsuits that demand the money paid as meal vouchers be included in the total salary, something that increases tax and social security costs for employers.

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There are two main changes in the decree, also included in the temporary measure, that are at the center of the disagreement.

One bans the rebate, a discount offered by the largest benefit payment companies to companies in exchange for signing a meal allowance contract. The other opens up the market to companies to offer the benefit and other related services.

The value ‘lost’ by companies that offer the discount is recovered in two ways: by dominating the market, that is, having a larger volume of workers, and through the fees charged by the restaurants that accept the allowance cards. These fees range from 5% to 8% on the value of the meal paid with the food allowance, according to a presentation made to parliamentarians by Câmara-e.net, an association representing companies engaged in the digital economy.

An end to free lunches

Câmara-e.net explained in an email to Bloomberg Línea that putting an end of the discount “could bring numerous benefits to the worker by encouraging innovation and competition in a highly concentrated sector, and this translates into cheaper food”.

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This would also be the end of the ‘illusion’ of the free lunch, an expression coined by one of the fathers of liberal economics, Milton Friedman, in the 1970s, and which refers to the fact that any benefit or discount offered by governments and companies actually has a built-in cost that has to be paid for by someone.

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One of the companies that has been leading the efforts to secure the approval of the billMP is iFood, the leading startup in the meal delivery market in Brazil.

For iFood, ending the discount practice would allow restaurants to operate with lower fees, which would open up room to charge lower prices to their end customers in order to maintain or increase demand.

“We understand that the big beneficiary of the measure is the worker,” João Sabino, iFood’s director of public policy, told Bloomberg Línea.

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“Since the measure equated the PAT rules to those of the food allowance and prohibited the rebate, the worker is once again at the center of public policy,” Sabino said.

According to Sabino, permission for the discount allowed for the supply of food allowances to have its current configuration, which he describes as “a business between four companies that control 90% of the market, and the human resources sectors of large companies”.

Sabino refers to the country’s largest companies in the sector: Sodexo, VR, Ticket and Alelo. The four companies were contacted by Bloomberg Línea, but said they would speak as one through the sector’s association, Brazil’s Worker Benefits Association (ABBT).

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ABBT told Bloomberg Línea that it is not against ending the rebate system.

“If there is one entity that is against the ‘rebate,’ that entity is ABBT. And the reason is obvious: we know that this negative rate is a distortion of the market,” Alaor Aguirre, chairman of the board of ABBT, said.

According to Aguirre, ABTT represents about 20 companies that pay meal allowances, and which account for 95% of the market. “All of them are in favor of ending the discount,” he said. “The ones who benefit are the big companies, which receive the discounts.”

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Brazil’s Human Resources Association (ABRH), which represents the HR area in large companies across the country, said it is against the discount being phased out.

“This is a commercial relationship, and the government should not intervene. If there is a discount and this does not affect the worker, it is a matter of competition, and competition is the market. If the company offers a discount, there is no problem,” ABRH’s director Wolnei Ferreira told Bloomberg Línea.

The same argument was presented in amendments submitted by Congress members in a bid to thwart the prohibition of the discount. .

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Although the rebate or discount is not considered an illegal practice under current laws, courts of auditors have already suspended contracts that provided for the offer of discounts to state-owned companies.

Opening up the market

The provisional measure was issued by the government soon after the companies that benefit from the allowance questioned the decree that resulted in a change to the PAT program in the Supreme Court. In a direct action of unconstitutionality, ABBT claims that the decree dealt with issues that could only be defined by law, and the Attorney General’s Office had already positioned itself against the action.

But the ABBT lawsuit is also an appeal against the open payment arrangement. Before the decree, only companies providing the benefit could offer services related to the food ticket, such as the registration of restaurants and workers and the payment system.

With the open arrangement, such services can be distributed among several companies. For Câmara-e.net, which represents startups such as iFood, this “will increase innovation in the sector with the entry of new players, leading to a consequent reduction in fees. There are startups such as Caju and Flash that are stakeholders in a market that is considered one of the most promising in the Brazilian economy.

According to ABBT, fees charged by restaurants will approach the values charged by credit and debit card operators, between 0.5% and 2.5%. The thesis is that this cost reduction will be passed on to workers by restaurant owners.

But ABBT says that the change will “financialize” the market and harm its members.

In the lawsuit, ABBT, which represents Sodexo, VR, Ticket and Alelo, says that several companies already have the open arrangement system implemented and in operation, “causing huge losses, not only to ABBT’s associated companies, but also to companies that are beneficiaries of PAT, and which have suffered from the losses of tax benefits, as have workers.

ABBT’s Aguirre told Bloomberg Línea that today there are about 600,000 accredited establishments in the food allowance supplier networks. If the open arrangement is allowed, this number could jump to three or four million.

As a result, “it would become impossible to control the quality of the food and meals offered, which is the obligation of the voucher vendors. And, instead of the voucher being used for food, it will be used for anything,” Aguirre said.

ABBT cites iFood in the lawsuit it filed in the Supreme Court, alleging that iFood, which already offers a food allowance, called iFood Benefits, already practices the open arrangement on its platforms. And, according to ABBT, this money can be used for any product or service, and not only for food.

At ABBT’s request, the Brazilian antitrust agency (CADE) opened an investigation into iFood, alleging that the company offers “cross benefits”, such as discounts on delivery fees, to those who contract iFood Benefits, which would be an anticompetitive practice.

iFood denies the irregularities. “The allegations are unfounded. The platform does not exercise actions that impede the performance of payment players. Having one payment method or another is an assignment of the registered partner. The more payment options, the better for the customer”, the company said in a statement.

Translated from the Portuguese by Adam Critchley