Brazil Country Profile

Market Overview:

Euromonitor reports that Brazil’s economy continued to contract in 2016. Brazil’s economy is experiencing one of its worst recessions in decades. Real Gross Domestic Product (real GDP) contracted by 3.8% in 2015 and another decline of 3.4% happened in 2016. Falling exports, a sharp drop in consumer demand, a corruption scandal, a decline in government expenditure and a political crisis all contribute to the dismal economic performance. Consumer spending is undermined by a rise in unemployment, a collapse in consumer credit and a rapid deterioration in consumer confidence. A feeble recovery will begin in 2017, with growth of real GDP gradually rising to about 2% per year by 2020.

The real value of private final consumption fell by 3.2% in 2015 and a decline of 3.5% is forecast for 2016. Consumer spending is being undermined by a rise in unemployment, a collapse in consumer credit and a rapid deterioration in consumer confidence. Households have also seen their spending power eroded by high inflation and a weakened currency (real). The new government has recently announced a plan to increase private investment. The plan calls for the sale of four airports and two port terminals as well as offering contracts to private firms for a wide range of projects from building new roads to running mining projects.

Brazil’s long reliance on a consumption-led growth model – at the expense of investment – has run its course. Capital outflows are more than US$12 billion per year and the trend must be reversed. Brazil invests less than 20% of GDP – the lowest among the “BRICs” (Brazil, Russia, India, and China) and below the regional average of about 23%.  Infrastructure alone will require investment of up to US$150 billion in 2014-2019 according to the International Monetary Fund (IMF). A particular challenge is to expand railways and other logistics networks connecting ports to the interior of the country. Part of the problem is poor execution but the current economic slowdown and growing uncertainty are also deterrents to investors.

Total U.S. agricultural exports to Brazil rebounded strongly and increased 28% to US$873.1 million in 2016. Most of the increase was in the bulk sector including cotton, corn and wheat. Exports of U.S. consumer-ready products to Brazil dropped 3% to US$225.9 million in 2016, which represented nearly 26% of the agricultural total. Brazil imported US$253.7 million in processed foods from the U.S. in 2016, also a drop of 11% 29% of the agricultural total. Top processed food exports to Brazil in 2016 included food preparations, chocolate and confectionery, processed/prepared dairy products, syrups and sweeteners, non-alcoholic beverages, condiments and sauces, distilled spirits and other alcoholic beverages, processed vegetables and pulses, fats and oils and baby food. 

USDA’s Agricultural Trade Office, ATO, in Sao Paulo, hereinafter referred to as “Post” also reports that the negative trend of Brazil’s GDP continued in 2016 but is expected to shift in 2017. In 2015, imports of agricultural products were impacted by the economic crisis, but less than expected. While U.S. exports of bulk products suffered, the U.S. maintained market share for intermediate and consumer-oriented products compared to competitors in the market, demonstrating a consolidated position in the market, with room to grow. Despite the delicate political and economic situation, Brazil is still a major player and an important market for agricultural products. Food processors, wholesalers, retailers, food service operators and food importers are all part of a well-developed food industry, that contributes to making domestic scenario competitive and dynamic.

Certainly Brazil is going through a difficult time, but the food sector is a key sector for the country and has been less affected than other sectors of the economy. Brazilians spent around 17% of their disposable income on food and this remains unchanged. Brazil continues to be an attractive consumer market. Half of the country population of approximately 200 million is considered middle class and around 16 million are at the top of the social pyramid, the very rich consumers.

Some competitive advantages U.S. companies can work with include the fact that retailers offer foreign goods to differentiate themselves; develop new niche markets and gain high-end consumers’ attention. And price is not always the determinant purchasing criteria for high-end consumers. Brazilian importers are frequently searching for new-to-market products as they must update their portfolio from time to time in order to gain market share. The U.S. food industry is able to respond to consumer demand promptly, regardless of the segment of products.

But like most competitive markets there are also come distinct challenges as well. Brazil is self-sufficient in food supply. Imported products are considered a luxury item, as price of such items are way above domestic produced goods. High-end consumers are more demanding regarding other aspects of products such as innovation, packaging, status, new trends, etc. Importers tend to buy small quantities to test market. And U.S. companies are not always willing to go through foreign trade bureaucracy to sell restricted quantities.  Brazilian consumers perceive U.S. food products to be overly processed and relatively unhealthy. This perception restricts some business of U.S. high-end products.

Post suggests that when approaching the Brazilian market, exporters should be aware that most imported foods and beverages are not priced competitively compared to locally produced products. The Brazilian food industry is well developed and major multinational companies have a consolidated presence in the market, making the sector highly competitive. A common mistake U.S. Company’s make is assuming that products that fit well in other Latin American countries will fit well in the Brazil market. In general terms, a product imported from the United States or Europe reaches 3-5 times the Ex-Works (EXW) price at retail. U.S. exporters should bear in mind that when an imported product reaches supermarket shelves it will fit in the premium price category. For this reason, premium attributes must be recognized by consumers.  

U.S. food and beverages directly compete with European products. This is mainly due to entry costs, the local tariff system, and the exchange rate itself. Products imported from Mercosul members (Argentina, Paraguay, Uruguay and Venezuela) enjoy duty-free status and Chilean products face a reduced duty rate. U.S. and European products are generally positioned within the premium price category. As a result, U.S. exporters must evaluate the extent to which their products can compete and maintain attractiveness vis-à-vis European competition.

Because approximately 80% of food and beverage distribution takes place through retail stores, developing a relationship with retailers will be more likely to guarantee visibility and country-wide coverage. The commercial power of the retail industry vis-à-vis food suppliers has steadily increased over the past years. Retailers are well aware of their importance in the food distribution system and their advantageous position in comparison with suppliers. They exert considerable purchasing power as they reach the overwhelming majority of Brazilian households.

Foreign products may be imported directly from the processor or distributor or purchased locally from an importer. When importing, Brazilian companies are considered conservative. It is generally preferable to import a wide variety in small quantities. This aversion to risk becomes even more apparent during challenging economic scenarios, such as the current time. Driven by consumer demand, retailers have to offer an extensive range of imported products, otherwise they may compromise competitiveness.

Retail Sector:

According to Euromonitor, retail sales in the packaged food market in Brazil had been estimated to reach US$82.2 billion in 2016. That makes it the largest in Latin America and the 7th largest in the world. That also represents a growth rate of 42.2% or US$24.4 billion since 2012. The forecast for growth in this market is also quite promising. By the year 2021, the retail sales in the packaged food market in Brazil is expected to reach US$116.6 billion, a growth rate of 32.2%, or US$28.3 billion. High growth rates in the forecast include ready meals, breakfast cereals, baby food, sauces dressings and condiments, processed meat and seafood and soup.

Post reports that for the Brazilian retail sector, it seems the worst has passed. The recession is gradually easing and growth is being reported, although at modest levels. Since June 2016, the retail index became stable and sales turned positive when compared to the previous year. According to the Brazilian Supermarket Association (ABRAS), business confidence is increasing, and approximately 80% of retailers forecast supermarket gross sales to expand until the end of 2016. However, the economic forecast for the end of the year suggests Brazil will remain in recession.   

Overall government finance still is a concern, while high inflation, tight credit, and lower job availability weigh on consumer demand. President Dilma Rousseff’s impeachment tamed political disruption, and the current government under President Temer brought political stability to the country. In the short term, Brazil’s government will focus on policy reforms, control of government debt, and bringing inflation down to a credible target.

Despite the challenging scenario, expectations for the Brazilian economy seem to be improving. Thus far, food retailers have been less affected than other segments of the economy. The crisis led consumers to eat more at home, which helped sustain retail sales. In addition, many consumers had to adapt purchases to the economic scenario, which pushed the food industry to redesign packages and the growth of “cash & carry” store formats. In general, cash & carry stores offer prices that are about 15% lower than other retailers. According to Nielsen, between January and September 2016, 400,000 Brazilians migrated from supermarkets to hypermarkets and 1 million migrated from hypermarkets to cash & carry formats.

The Brazilian retail sector is considered fragmented. Brazil is a country of continental size and regionalism is strongly delineated. In 2015, the top 10 retail companies (including cash & carry revenues) accounted for 34.7% of total industry sales, while the top 20 and top 50 represented 39.8% and 47.2% respectively. These figures were quite steady compared to the previous year. The three largest retailers, Companhia Brasileira de Distribuição (Grupo Pão de Açucar), Carrefour and Wal-Mart, are the companies with widest geographic coverage. All three are headquartered in Sao Paulo and their strong presence in the state of Sao Paulo leads to a much higher concentration of stores within the state.

In 2015 while Pao de Acucar and Carrefour registered sales increase, Wal-Mart concluded the year with a slightly negative result. Among the group of top 10 retailers, only Wal-Mart and Cencosud experienced sales deceleration. Wal-Mart has recently gone through internal changes and closed 59 stores in 2015, while Cencosud, according to analysts, must still adapt its business model to the Brazilian market. Because of cultural differences, regional retail companies are important players and present stiff competition to larger retailers with countrywide distribution. In most cases they represent a significant barrier to the power of top retailers.

Brazilian consumers are definitely rearranging their food basket. Higher prices, lower incomes, and economic uncertainties are the major drivers shifting demand from premium brands to more affordable products. The offer of imported items has been also affected. According to Post contacts, within the imported products category, retailers are maintaining well-known brands but redesigning the mix of imported products, opting for less expensive products in most cases. Sales promotion, through price discounts or bonus packs, became important tools to push sales in 2015. The trend continued through 2016. In order to maintain a reasonable offer of foreign goods at stores, supermarkets are renegotiating prices and terms of payment with their suppliers.

International suppliers, with a long presence in Brazil, have shared the burden with local companies, with both ends operating with lower margins. Despite the lack of consistent data on sales of imported products, Post estimates that the share of imported items varies from 2% in large supermarkets to 25%-30% at specialty stores.

Post advised U.S. suppliers and other stakeholders that when launching new-to-market products, Brazilian buyers are hesitant to purchase full containers of single products while, on the other hand, U.S. suppliers are often unwilling to deal with small volumes. Oftentimes exporters are cautious to do business with a single supermarket chain as their perception of reaching consumers through a single source does not seem attractive. Post advises this perception does not always correspond to the reality. It is a matter of strategy, as retailers may achieve significant market penetration. 

Best Product Prospects:

Post reports that Brazilian importers are generally looking for well-known brands and high-end products. They usually prefer products with one year shelf-life or more.  In addition to the product itself, packaging, status and level of innovation are important attributes. Products that combine these characteristics are more likely to successfully enter the market. The food categories that are most frequently exported to Brazil from the United States are: dairy products, fresh fruit, processed fruit, processed vegetables, fruit and vegetable juices, tree nuts, chocolate and cocoa products, snack foods, breakfast cereals, condiments and sauces, prepared food, wine, beer, distilled spirits, non-alcoholic beverages (ex. juices) and fish products. Other food categories that are getting more supermarket shelf space are products for special diets, such as lactose and gluten free products.

Food Service Sector:

Euromonitor reports that the Brazilian economic crisis is affecting consumer food service sales. High inflation and the devaluation of the Brazilian Real are increasing costs for companies, and consumers are afraid to spend in a time of economic uncertainty. As a result, consumer food service current value sales grew by only 10% in 2015, a rate of growth which, given inflation of 10.7% (Extended National Consumer Price Index - IPCA), actually represents a downturn. For Brazilians, going out to eat is often one of the first expenses to be cut when dealing with financial constraints while those consumers who need to eat out are trying to look for alternatives to spend less per meal. However, consumer food service areas were affected differently as companies and consumers adapted to new market developments.

Given the current economic uncertainty in Brazil, the consumer food service companies which have managed to perform well are mostly those that have adapted to the new changing landscape. Many food service operators are making changes to their menus, offering food options that use less expensive ingredients so as to maintain a price that is competitive and appealing to consumers. In addition, they have also been running promotional campaigns and investing in collective buying and food passport schemes. Furthermore, many restaurants are investing in delivery so as to compensate for the loss in sales. Finally, new business models are being adopted by many brands in an attempt to overcome the obstacles during this time of uncertainty.

For example, home delivery/takeaway was the strongest performing area within consumer food service in 2015, recording current value growth of 20%. As consumers try to cut down on expenses, delivery appears a cheaper option for many and an alternative to full service restaurants. Moreover, food delivery is a segment that has not yet reached maturity in Brazil and which is growing strongly, partly due to the growing e-commerce drive. Many brands are coming up with new business models (such as Pizza Hut Express, where one can buy one piece of pizza and without waiting), and expanding through kiosks instead of stand-alone outlets.

There are other ways in which companies can deal with this scenario, which is expected to continue through 2017. One is to focus on some niche markets that have been growing in spite of the economic downturn, especially the rapidly growing health and wellness area. Restaurants that target consumers looking for healthier food options - such as organic, low fat, vegetarian, and vegan food - have been able not only to sustain their business in this harsh economy but also grow, while many other players are closing down. For those starting a business in consumer food service, a good bet would be to target higher-income consumers, as they are less impacted by the crisis. Also, it would be better to invest in a chain, as the brand is already established in the country, thus making it less risky.

Franchising is present in all consumer food service channels in Brazil, with there being chains operated by multinational as well as domestic players. Franchising contracts usually have a five-year period, and investments vary greatly, depending on the type of business and the expected return. It is interesting to note that the food segment plays an important role in Brazilian franchising, accounting for over 20% of national franchising sales.

Although franchising covers all consumer foodservice channels, it could be said it is somewhat more prominent in fast food. This is because the fast food business model requires a more fixed structure in terms of menu options and food preparation in order for it to work. Such a level of inflexibility is common among chains, given that they need to offer the same level of service in different outlets. There are a few players - such as Starbucks and Havanna Café - that operate in Brazil through master franchisers. Most players, however, operate in the country through partnerships and/or company-owned outlets. Some examples are América, Viena Delicatessen (International Meal Co), Outback Steakhouse, Galeto’s Grill & Pasta, and Burger King.

Amongst the large operators present in consumer food service in Brazil there are both international and local players. Examples of international companies are McDonald’s, Doctor’s Associates and Yum! Brands. Al Saraiva Empreendimentos Imobiliários e Participações, Brazil Fast Food Corp and Restpar Alimentos are examples of some of the most prominent domestic players. Most franchising operators in Brazil are local players and are concentrated in cafés/bars, fast food, self-service cafeterias and street stalls/kiosks. It is estimated that around 90% of such chains are franchises.  McDonald’s, Subway and Pizza Hut are some of the leading foreign franchise brands present in Brazil.

McDonald’s operates in Latin America through Arcos Dorados. In Brazil, the operator manages company-owned outlets as well as outlets franchised to individuals or companies. Pizza Hut entered Brazil through a joint-venture partnership with a local operator while Subway operates through a franchising model and is represented by Subway Systems do Brasil.

Post suggests that in this sector U.S. exporters should look for opportunities to occupy niche markets. The growth in the Hotel Restaurant and Institutional (HRI) sector has led import companies to create specific divisions to assist the sector. Restaurants, snack shops, bakeries and pastry shops tend to buy imported products from local companies.  Direct imports rarely occur in this sector as imports seldom reach the appropriate volume to justify such an operation. Nevertheless, executives from this sector frequently travel to the U.S. and Europe to investigate new trends. They are opinion leaders and can influence buying decision.

Food-Processing Sector:

Post reports that according to the Brazilian Food Processors’ Association (ABIA), in 2015, the Brazilian food processing industry generated US$168.3 billion, accounting for 9.5% of the country’s GDP of US$ 1.8 trillion. With a status of self-sufficiency in its food supply, Brazil relies on a well-developed food processing industry, with around 45,000 food companies established throughout the country. In addition to domestic enterprises there are major multinationals such as Nestle, Unilever, Bunge, Kraft, and Cargill operating in the country.

Food processors supply various channels: retail, wholesale, other food processing companies and the food service segment. Production of food and beverage goods tends to be concentrated in large urban areas. The state of Sao Paulo is home for most processing companies. Meat products; tea, coffee and cereals processing; dairy products; oils and fats; sugar refining; wheat products; fruits and vegetables processing; chocolate and candies; dehydrated and frozen products; and fish products are the largest segments in terms of gross sales in Brazil.

According to ABIA, around 70% of food and beverage produced in Brazil is distributed through the retail segment. Although the Brazilian market does not present a high concentration level compared to international standards, the top ten retail companies exert considerable purchasing power. This commercial power is only balanced by regional chains that maintain leadership in territories where consumption patterns based on regional culture differ from major urban centers, such as Sao Paulo and Rio de Janeiro.  In 2015, retail sales summed US$94.5 billion, 5.4% of the country GDP.

Another important channel for the food distribution system is the food service sector. As reported by ABIA, purchases from the food service industry in 2015 reached US$43 billion. The food service industry is highly fragmented, and is characterized by the presence of many family owned businesses and a high level of informality. The growing presence of restaurant chains is expected to change the industry profile, leading to higher productivity levels and higher profitability. The 2009-2013 macroeconomic scenarios highly impacted the industry performance; strong employment growth and increase of wages in real terms were the key drivers to accelerate demand from the food service sector. From 2014 to the date of this report, the food service industry has struggled to maintain demand, as consumers are forced to cut down on expenses.

The different food channels mentioned above have different methods to purchase food products. Negotiations with retailers/distributors may include exclusive or semi-exclusive contracts with limitations on geographic areas covered and/or restrictions on product lines available to a company’s competitors. In contrast with the United States, Brazilian retailers have relatively easy access to food processors. Purchases may be made directly from processing companies. However, the option of buying from wholesalers and distributors remains. Most large size food processing companies have a food service department within the company. It is also common for food service operators to buy goods, local or imported, from wholesalers.

Local importers/distributors serve both retailers and food service companies. However the number of distributors dealing solely with food service products is limited. Larger restaurant chains and food service operators, on the other hand, are becoming more demanding and increasing purchases from other countries, which may change the market structure of this segment in the future. The food processing industry follows strict standards to purchase or import ingredients. In general, there are specifications related to the product in question and a bid process must be open. There are also import companies specialized in serving the food industry with ingredients available in the market. These companies also conduct imports. While avoiding the middleman is a general goal, if the volume to be imported does not justify the operation, agents will prefer to purchase domestically or acquire imported items locally from importers/distributors.

Post advises that in Brazil the number of importers operating with foreign ingredients is limited. Food processing companies will purchase foreign ingredients domestically, through distributing companies or import directly. Food ingredient companies are also buyers of imported inputs for use in further processed ingredients. The import decision is based on many factors as sourcing ingredients for processing companies are a multi-tasked operation. The supplier needs to fulfill several criteria established by the manufacturer. The most common requirements besides product specification and cost are related to risk of contamination, packaging material, product yield, quality assurance and food safety. 

Best Product Prospects:

The U.S. exports eight categories of intermediate products present in list of major products exported to Brazil. They are: Animal Feed Prep Except Dog Or Cat Food, Retail Pack; Mixtures Odoriferous Substance Use Food/ Drink Ind; Vegetable Seeds For Sowing; Vegetable Fats & Oils/Fractions Hydrogenated Etc.; Vegetable Saps And Extracts Of Hops; Animal (Not Fish) Guts, Bladders, Stomachs & Parts; Essential Oils, Nesoi; and, Mucilage’s/Thickeners From Locust Bean/Seed, Guar Seed. 

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