Brazil Rising

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Brazil Rising

By Laura Heller - 01/01/2012

As a major food-producing nation, Brazil doesn't need to look outside its borders for groceries. Brazilian food companies launched 15,000 SKUs in 2010, the U.S. Agricultural Trade Office in Sao Paulo reports.

But as Brazil's middle-class population increases, consumers with more discretionary income have been willing to pay a premium for imported foods and consumer goods that offer something new. At the same time, Brazil's retail market has provided new opportunities for U.S. manufacturers, as grocery retailers clamor for foreign products that will help make them a destination.

Still, Brazil hit a road bump in its most recent quarter with the economy's growth rate declining to about 3 percent for the year, down from 7.5 percent in 2010, as consumer spending slowed, according to a New York Times report. But Brazilian officials already have launched a stimulus program that involves tax cuts on food and appliances to encourage spending. What's more, Brazil's unemployment rate hit a historic low in October at 5.8 percent, while the nation boasts foreign currency reserves of $352 billion, up from $54 billion at the end of 2005, the Times reports.

"I would think it's a blip as opposed to a trend," says Neil Stern, partner at Chicago-based retail consultancy McMillanDoolittle LLP, regarding Brazil's economy slowing. "There's really nothing to suggest why it wouldn't continue to grow, other than everybody is being impacted tangentially by Europe."

Compared with the debt crisis affecting other countries more severely, though, most experts consider Brazil a bright spot. As mature Western markets have struggled with economic uncertainty, international food companies and retail chains have increasingly looked to Brazil for growth. Walmart has emerged as a top player with 479 stores operating under the Walmart, Sam's Club, Born Preco and BIG banners.

Tops in emerging markets

While China, India and Russia might attract more attention as rapidly emerging markets, "Brazil is much more advanced than those other three markets," Stern says. "It's been an open market for foreign companies and influenced by international retailers for a longer period of time."

The Brazilian government encourages expansion of foreign companies within the country, rather than setting up barriers to entry. And a two-decades-long campaign to curb violence, create jobs and decrease poverty is bearing fruit.

Brazil imported $3.1 billion in food products in 2010, up a whopping 41 percent from the prior year, according to the U.S. Agricultural Trade Office. New growth in Brazil's middle-income population contributed to the increase in imports, which tend to be priced higher than domestic products.

Importers want established brands and high-end products with a shelf life of six months or more, the trade office reports. In particular, they're looking for meat, fish, alcoholic beverages, dried fruit, juice made from cranberries, cherries or pomegranate, sauces, kosher products, diet products, snacks and candy.

But price often determines whether a retailer will stock an imported product. Many U.S. products aren't picked up because their cost is substantially higher than locally produced products or those from Mercosul common-market members–Argentina, Paraguay and Uruguay–which are duty-free. The small volume of product most retailers want can also complicate pricing; unless suppliers can ship a full container of product, the cost is often prohibitive.

Top 5 packaged food manufacturers in Brazil
  1. Nestle SA
  2. BRF Brasil Foods SA
  3. Kraft Foods
  4. Unilever
  5. Danone
Source: Euromonitor International

Top 3 retailers in Brazil
  1. Grupo Pão de Açúcar
  2. Carrefour
  3. Walmart
Source: U.S. Agricultural Trade Office

Brazilian consumer spending on groceries
Source: Planet Retail data and projections

Follow the money

Still, the opportunity is substantial. Brazil avoided the worst of the recession and resumed growth on a large scale in 2010 with consumers spending about $850 billion on goods and nearly $400 billion on grocery items, Planet Retail reports. On average, Brazilians spend about 31 percent of their income on groceries, compared with the 15 percent spent on groceries by U.S. consumers, according to Boris Planer, research director at Planet Retail, a consulting firm that conducts its own research.



On average, Brazilians spend about 31 percent of their income on groceries, compared with the 15 percent spent on groceries by U.S. consumers.

–Boris Planer,

Planet Retail

Looking ahead, Planet Retail estimates that Brazil's grocery spending in 2011 will be $441 billion, climbing to $605 billion in 2016. "It's amazing growth," says Planar. And it's only expected to continue as Brazil matures, gains international attention and grows its middle class.

Brazil's larger moneyed population is concentrated in the urban areas in the Southeast, while the lower-income population largely resides in more rural settings elsewhere.

"The vast majority of Brazilians are just trying to claw their way into the middle class, and a small percent are wealthy," Stern says. Still, both demographics represent huge opportunities for food retailers and suppliers.

The more developed Southeast region of the country accounts for the majority of retail sales, thanks to the concentration of wealth in Rio and Sao Paulo. There, supermarkets, hypermarkets and discount chains are the norm. The region generated 54 percent of Brazil's retail sales in 2010, down from 57 percent the previous year, while the North and Northeast accounted for 20 percent in 2010, up from about 16 percent the prior year, the U.S. Agricultural Trade Office reports. The Central-West region hit 7 percent from about 4.5 percent the prior year, while the South region saw retail sales slip to 19 percent from 22 percent.

The packaged foods market in Brazil was valued at nearly $116 billion for 2011.

Outside the Southeast region, mom-and-pop and open-air markets are the dominant forms of retailing. "A lot of the market is not traditional," says Stern. "Something like 80 percent of retail sales goes through mom-and-pop shops."



"Something like 80 percent of [Brazilian] retail sales goes through mom-and-pop shops."

–Neil Stern,

McMillanDoolittle LLP

On the retail scene

In general, retail in Brazil follows more of a European model than mimicking the United States, say consultants. Successful retailers re-create the feel of outdoor markets and use traditional display materials including baskets and bins to hold local products.



"This is still a market where they're doing a lot of cooking at home or eating out."

–Ira Kalish,

Deloitte

"This is still a market where they're doing a lot of cooking at home or eating out. The area in-between of prepared foods is not yet developed," says Ira Kalish, director of global economics at Deloitte.

In fact, the U.S. Agricultural Trade Office notes that Brazilians often consider U.S. foods to be overly processed and unhealthy. Many Brazilians may not have much disposable income, but they'd rather spend it on something of good quality than on a product that's simply priced at a discount, Kalish says.

Brazil's top retailers include Grupo Pão de Açúcar (which trades under the name Companhia Brasileira de Distribuicao), Carrefour and Walmart, according to the U.S. Agricultural Trade Office. Companhia Brasileira de Distribuicao ranks among some of the fastest-growing retailers in the world with a five-year sales growth rate of 24 percent, according to certified financial analyst Anand Chokkavelu, writing for the Motley Fool. It commands an 18 percent share of market, while Carrefour has 14 percent and Walmart 11 percent, the U.S. Agricultural Trade Office says.

In the remainder of Brazil, it's small retailers, home-based businesses and even hand carts. But what may seem rudimentary retail without infrastructure is already proving fertile ground for resourceful consumer goods manufacturers. Nestle, for example, has gained a foothold in the lower-income Brazilian areas by partnering with pushcart vendors, Planer says. These vendors walk around neighborhoods and sell Nestle products to households. By selling product outright to vendors, Nestle is eliminating all the financial risk and the need to carry inventory. "It's a massively interesting initiative," Planer says.

Packaged foods on the rise

The packaged foods market in Brazil was valued at nearly $116 billion for 2011, up almost 50 percent since 2005, according to Euromonitor International. Multinational packaged foods players like Nestle, Hershey, General Mills, Unilever and Danone are all expanding distribution in Brazil and consider it an important entry point in South America.

The top five packaged food manufacturers in Brazil, according to Euromonitor International, are Nestle SA, BRF Brasil Foods SA, Kraft Foods, Unilever and Danone. While just one, BRF Brasil Foods, is a local vendor, the remaining brands have had a presence in the country for many years and enjoy the loyalty of locals, who tend to favor established brands over the new.

Coca-Cola also has a big presence in Brazil. In 2010, 26 percent of its Latin American business was in that country, second only to Mexico with 43 percent. Coke's Latin American business segment is growing at more than twice the rate of North America, and it represents the company's largest segment in case volume for all its beverages combined, according to Coca-Cola's annual shareholder report for the fiscal year 2010.

Pepsi, too, identifies Brazil as an important target market, and has announced plans to acquire Grupo Mabel, a leading Brazilian maker of cookies, crackers and snacks.

"PepsiCo continues to build its global macro-snacks portfolio and make strategic investments that will drive our business performance and unlock long-term growth opportunities," said John Compton, chief executive officer of PepsiCo Americas Foods and Global Snacks Group, in a statement announcing the Grupo Mabel acquisition. "Brazil is an extremely important market for PepsiCo, and this acquisition well positions us in a key segment in the snack category there."

But U.S. food and CPG companies aren't the only ones knocking on Brazil's door. U.S. exporters are competing with European companies that often have an edge because Brazilian tastes and traditions are more similar to those of Europe, the U.S. Agricultural Trade Office says. The fiercest competition, though, comes from Mercosul member companies that can price their products lower because they are exempt from tariffs. Because of the extra duty charged on other foreign products, U.S. manufacturers have little choice but to focus their efforts on premium goods, which can justify high-end prices.

Laura Heller has been reporting on mass-market retail trends and initiatives since 1995 for Grocery Headquarters, Discount Store News/Retailing Today, Chain Store Age, Consumer Electronics Daily, Drug Store News, Home Channel News, the Photo Marketing Association Magazine and License! Global. She has appeared on national TV and radio programs discussing retail trends, including "ABC News Now," and her blog–The Point of Purchase–appears on Forbes.com.