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Brazil Food and Drink Report Q1 2011
Business Monitor International, Nov 2010, Pages: 75
The Brazil Food and Drink Report provides industry professionals and strategists, corporate analysts, food and drink associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on Brazil's food and drink industry.
The opportunities present in Brazil have attracted significant interest, especially in the grocery sector, and the leading retailers continue to expand. This rapid expansion has been good for top-line growth, but with three powerful retailers all competing there has also been significant pressure on prices and margins and it is notable that margins at the country’s leading retailer, Companhia Brasileira de Distribuição (CBD), are well below both its developed and its emerging market peers.Over the past five years CBD’s margins have hovered around 4%, while Tesco and Wal-Mart are both at 6% and emerging market operators in Mexico and Russia regularly report margins above 8%. This can also be attributed to the difficult logistics of the country, with transportation and distribution more expensive. We believe these low margins are likely to put off new entrants into the grocery sector and may partly explain CBD’s recent decision to diversify its operations into durable goods with the acquisition of a 51% stake in Casa Bahia in a non-cash deal and the purchase of a 70% stake in electronics retailer Globex Utilidades. This decision was also likely to be partly driven by the outperformance of the company’s nonfood segment during 2009, with the category boosted by government initiatives to aid ownership of white goods by low-income families.
Headline Industry Data:
- 2010 per capita food consumption = +9%; forecast to 2015 = +45%
- 2010 alcoholic drink sales = +6%; forecast to 2015 = +21%
- 2010 mass grocery retail sales (MGR) = +8%; forecast to 2015 = +45%
Key Company Trends
Danone Targeting Ambitious Growth Levels – In October 2010, the Brazilian subsidiary of international food giant Danone announced an ambitious target for revenue growth. Danone Brazil said that it expects to generate revenues of BRL1.3bn (US$754mn) in 2010, which would represent a 10% increase on the sales achieved in 2009. It hopes to reach BRL2.0bn by 2012, nearly doubling its revenues in just three years. BMI believes this level of growth is achievable, and to deliver it the firm will focus on dairy products and bottled water. The firm is the market leader in the yoghurt sector and will hope to grow this part of the business by expanding the overall dairy category. Its bottled water business will likely be pushed by expansion of its brands into untapped regions and the acquisition of small local players. Immature Retail Sector Offers Opportunities For Smaller Players – In October 2010, emerging-marketfocused private equity firm Actis announced it is to invest US$58mn in Brazilian retailer Companhia Sulamericana de Distribuição, which owns the supermarket chains São Francisco and Cidade Canção. The firm is a small player in the retail sector, controlling less than 1% of the market. However, with a focus on the undeveloped north of the country, the business is well positioned for strong growth and is likely to attract takeover attention from a larger operator as the Brazilian retail sector gradually consolidates.
Key Risks to Outlook:
Rising Inflation – The strength of consumer demand clearly poses a risk of inflation, and we are pencilling in several rate hikes over the coming year as the government looks to avoid allowing the economy to overheat. Reining in credit availability is likely to be one such measure, subsequently weighing on private consumption as we move into 2011. Growth will consolidate at a slower pace in the months ahead as more fiscal stimulus measures are wound up and aggressive monetary tightening begins to weigh on consumer demand.
Slowdown in China – In 2009 China became Brazil’s main trade partner and strong Chinese demand for strategic raw materials helped to prop up Brazilian exports. However, overly accommodative fiscal and monetary stimuli in China have led to an overheating that could result in a sharp withdrawal in 2011. As a major commodity-exporting country, Brazil now faces the additional challenge of shifting its exports to markets with more promising longer-term demand than the US and possibly even China.
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