Brazil Food and Drink Report Q1 2013

A number of pressing challenges are facing Brazil’s economy over the next few years, informing our view that the country is in for a period of lower-trend growth. We highlight slowing private consumption and the end of China’s investment boom as major contributors to Brazil’s medium-term growth trajectory. Following substantial growth in the last decade, we believe Brazil’s consumer story is in for a period of more moderate expansion over the medium term due to reduced consumer purchasing power on the back of currency weakness and high household indebtedness following significant credit growth in recent years.

Household debt levels have ballooned in recent years, a factor we expect to constrain consumer borrowing despite government pressure on commercial banks to bring down their lending rates. As such, we have revised our medium-term growth forecasts to reflect a more moderate consumer story in coming years. We forecast private consumption to contribute an average of 2.0 percentage points to real GDP growth between 2012 and 2017, implying average real private consumption growth of 3.1% between 2012 and 2017.

Headline Industry Data (local currency) ?? 2013 per capita food consumption = +9.8% year-on-year (y-o-y); forecast compound annual growth rate (CAGR) to 2017 = +9.3%. ?? 2013 alcoholic drink sales = +10.8% y-o-y; forecast CAGR to 2017 = +10.7%. ?? 2013 soft drink sales = +9.0% y-o-y; forecast CAGR to 2017= +9.3%. ?? 2013 mass grocery retail sales = +8.0% y-o-y; forecast CAGR to 2017 = +8.7%.

Key Company Trends AmBev Volume Growth Muted: In August 2012, AmBev, the Brazilian subsidiary of beer giant Anheuser-Busch InBev, posted muted growth for its fiscal first half. For the six months to the end of June, total volumes were up by 3.4% , with beer volumes up by 2.7% and soft drink sales up by 4.9% (on an organic basis). Net sales advanced by 10.1% on an organic basis. However, growth of just 2.7% for beer sales points to the firm’s recent push for revenues over volumes as well as the ongoing challenges within the Brazilian beer market due to slowing economic growth – a situation set to be compounded by upcoming duty hikes.

Brasil Foods Facing Cost Challenges: In August 2012, Brasil Foods, Brazil’s largest food producer, registered a massive drop in profitability after seeing commodity and financial costs eat into its earnings. For the six months to the end of June, the firm reported a 7% increase in net sales, which reached BRL13.2bn. However, earnings before interest, taxes, depreciation and amortisation fell by 32% to BRL1,097mn, while net profits slumped by 82% to BRL160mn.

Key Risks To Outlook Two Scenarios: The risks to our growth forecasts for Brazil remain substantial. We previously outlined two potential scenarios for the country’s economic imbalances to unwind over the coming years, both of which remain on the table. First, given policymakers’ massive toolkit and demonstrated willingness to use it, we do not rule out that the current policy mix could achieve higher returns to growth through the 2014 general election than we currently forecast, particularly if the authorities change their view on a weak real. However, this would result in a sharper adjustment thereafter, as the reduction of massive fiscal stimulus would likely prompt a substantial drop in private consumption, and two more years of strong credit and money supply growth would make the ensuing deleveraging period even more painful. Meanwhile, given the real’s break through long-term trend-line support, and analysts’ and investors’ increasingly bearish views on the economy, we believe our worst-case scenario has become increasingly likely in recent months. A significant and sustained change in investor sentiment could precipitate an aggressive currency sell-off, sending the unit towards BRL2.5000/US$ much faster than we currently anticipate. This would severely dampen private consumption and likely drag headline growth down as well. Such a scenario also implies greater potential for a full-fledged banking sector crisis given the currency mismatch on banks’ balance sheets and potential for loan quality to deteriorate substantially.

Table of contents

Chapter 1 - BMI Industry View

Chapter 2 - SWOT Analysis

Brazil Food Industry SWOT

Brazil Drink Industry SWOT

Brazil Mass Grocery Retail Industry SWOT

Chapter 3 - Business Environment

BMI’s Core Global Industry Views

Table: Core Views

Latin America Risk/Reward Ratings

Table: Latin America Q Food & Drink Risk/Reward Sub-Factor Ratings (scores out of )

Table: Latin America Q Food & Drink Risk/Reward Ratings

Brazil Food & Drink Risk/Reward Ratings

Macroeconomic Outlook

Table: Economic Activity

Chapter 4 - Industry Forecast Scenario

Consumer Outlook

Food

Consumption

Table: Food Consumption Indicators – Historical Data & Forecasts, -

Processed Food

Table: Canned Food Value/Volume Sales – Historical Data & Forecasts, -

Table: Pasta Volume Sales, Production & Trade – Historical Data & Forecasts, -

Table: Meat Volume Sales, Production & Trade – Historical Data & Forecasts, -

Table: Fish Volume Sales, Production & Trade – Historical Data & Forecasts, -

Table: Jams & Jellies Volume Sales, Production & Trade – Historical Data & Forecasts, -

Table: Frozen Fruit & Vegetables Volume Sales, Production & Trade – Historical Data & Forecasts, -

Dairy

Table: Dairy Volume Sales, Production & Trade – Historical Data & Forecasts, -

Confectionery

Table: Confectionery Value/Volume Sales – Historical Data & Forecasts, -

Table: Biscuits Volume Sales, Production & Trade – Historical Data & Forecasts, -

Drink

Hot Drinks

Table: Hot Drink Value Sales – Historical Data & Forecasts, -

Alcoholic Drinks

Table: Alcoholic Drinks Value/Volume Sales – Historical Data & Forecasts, -

Soft Drinks

Table: Soft Drinks Value/Volume Sales – Historical Data & Forecasts, -

Mass Grocery Retail

Table: Mass Grocery Retail Sales By Format – Historical Data & Forecasts, -

Table: Sales Breakdown By Retail Format Type (%)

Trade

Table: Trade Balance – Historical Data & Forecasts, -

Chapter 5 - Food

Key Company Trends And Developments

Terms Of Dairy IPO Confirms Rosy Outlook For Industry

Brasil Foods Investing to Take Advantage of Margarine Consumption

General Mills Acquires Local Player

Brazilian Biscuit Growth Prompting Consolidation

Nestlé Opens New Dairy Plant As Consumption Ticks Up

Market Overview

Prepared Food/Canned Food

Confectionery

Dairy

Meat

Poultry

Seafood

Chapter 6 - Drink

Key Company Trends And Developments

Cachaça Buy Continues Diageo’s Move Towards Local Brands

Petrópolis Sale Would Change Beer Landscape

Brazilian Coffee Industry Remains of Interest

Rising Demand for Energy Drinks

Champagne Makers Targeting BRIC Countries

Coca-Cola Femsa Invests As Soft Drinks Consumption Increases

Brazilian Wine Industry Hoping For Sales Boost From World Cup In

Market Overview

Hot Drinks

Soft Drinks

Alcoholic Drinks

Chapter 7 - Mass Grocery Retail

Key Company Trends And Developments

Carrefour Committed To EMs

Change of Strategy For CBD Under Casino?

Cencosud Ramps up Presence in Brazil

High Competition Means Other Retail Sectors Likely To Attract New Entrants

Market Overview

Table: Structure Of Mass Grocery Retail Market By Estimated Number of Outlets, -

Table: Mass Grocery Retail Sales By Format, - (US$bn)

Table: Mass Grocery Retail Sales By Format, - (BRLbn)

Table: Average Annual Sales Value By Format –

Chapter 8 - Competitive Landscape

Key Players

Table: Key Players In Brazil’s Food Sector

Table: Key Players In Brazil’s Drink Sector

Table: Key Players In Brazil’s Mass Grocery Retail Sector

Chapter 9 - Company Profiles

Food

JBS SA

Brasil Foods

Drink

Embotelladora Andina

AmBev

Schincariol (Kirin)

Mass Grocery Retail

Companhia Brasileira de Distribuição (CBD)

Walmart Brazil

Carrefour Brazil

Chapter 10 - Demographic Outlook

Table: Brazil’s Population By Age Group, - (‘)

Table: Brazil’s Population By Age Group, - (% of total)

Table: Brazil’s Key Population Ratios, -

Table: Brazil’s Rural And Urban Population, -

Chapter 11 - Risk/Reward Ratings Methodology

Table: Rewards

Table: Risks

Weighting

Table: Weighting

Chapter 12 - BMI Food & Drink Industry Glossary

Food & Drink

Mass Grocery Retail

Chapter 13 - BMI Food & Drink Forecasting & Sourcing

How We Generate Our Industry Forecasts

Sourcing

Related research categories

By sector: General drinks

By market: Brazil (in South America), Brazil (in BRICM)