food and drink brazil

Brazil Food & DrinkReport Q1 2007

Published quarterly by BUSINESS MONITOR INTERNATIONAL LTD

Including 5-year industry forecasts

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ISSN 1749-2602

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Brazil Food & DrinkReport Q1 2007Including 5-year industry forecasts by BMI

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Publication Date: March 2007

Brazil Food & Drink Report Q1 2007

© Business Monitor International Ltd Page 2



CONTENTS

Executive Summary .........................................................................................................................................5

Chapter 1 – Business Environment................................................................................................................7

Retail Business Environment Rankings....................................................................................................................................................................... 7

Table: Latin America Business Environment Rankings ....................................................................................................................................... 12

SWOT Analysis ......................................................................................................................................................................................................... 13

Brazil Food And Drink Industry SWOT ............................................................................................................................................................... 13

Macroeconomic Outlook........................................................................................................................................................................................... 15

Table: Economic Activity – Historical Data And Forecasts ................................................................................................................................ 16

Chapter 2 – Retail ...........................................................................................................................................17

Regional Overview: Rising Purchasing Power Of Low And Middle-Income Groups ............................................................................................... 17

Table: Inflation Versus Minimum Wage Increases In Colombia (%)................................................................................................................... 18

Table: What Would You Do With Any Extra Income? ......................................................................................................................................... 19

Table: Food And Drink Purchases Made In Supermarkets In Latin America By Income Group, 2006 (%)......................................................... 20

Sales Offering For Stable Food Products In Latin American Retail Sales Channels ........................................................................................... 21

Industry Forecast Scenario....................................................................................................................................................................................... 22

Table: Brazil MGR Value Sales By Format – Historical Data And Forecasts (US$bn)....................................................................................... 23

Industry Developments ............................................................................................................................................................................................. 24

Company Developments ........................................................................................................................................................................................... 25

Market Overview ...................................................................................................................................................................................................... 28

Table: Structure Of Brazil’s MGR Market By Number Of Outlets ('000s) ........................................................................................................... 30

Table: Brazil MGR Value Sales By Format (US$bn)........................................................................................................................................... 30

Chapter 3 – Food And Drink..........................................................................................................................31

Regional Overview: Growing Market For ‘Light’ Food And Drink In Latin America.............................................................................................. 31

Table: Soft Drink Sales Globally And In Latin America (2006)........................................................................................................................... 31

Table: Packaged Juice And Not-From-Concentrate Juice Markets In Latin America (litres per capita, 2006)................................................... 32

Table: Food And Drink Industry As A Proportion Of GDP, 2006 ....................................................................................................................... 33

Table: Consumers Seeking The Following Descriptions On Food Labels In Latin America (%)......................................................................... 34


Table: Brazil Food And Drink Indicators ............................................................................................................................................................ 40


Company Developments ........................................................................................................................................................................................... 43

Market Overview ...................................................................................................................................................................................................... 46

Table: Brazil Agricultural Sub-Sector Production – Historical Data .................................................................................................................. 47

Chapter 4 – Tobacco ......................................................................................................................................50


Table: Cigarette Value/Volume Sales – Historical Data And Forecasts.............................................................................................................. 50


Market Overview ...................................................................................................................................................................................................... 51

Chapter 5 – Competitive Landscape ............................................................................................................52

Key Players............................................................................................................................................................................................................... 52

Table: Key Players In Brazil's Mass Grocery Retail Sector................................................................................................................................. 52



Table: Key Players In Brazil's Mass Grocery Retail Sector (cont.) ..................................................................................................................... 53

Table: Key Players In Brazil's Food And Drink Sector........................................................................................................................................ 54

Regional Company Case Studies .............................................................................................................................................................................. 55

Cencosud In Latin America ...................................................................................................................................................................................... 55

Table: Cencosud: Principal Shareholders ........................................................................................................................................................... 55

Table: Cencosud: Store Portfolio ........................................................................................................................................................................ 56

Table: Cencosud: Revenues By Business Line In Chile, 2006.............................................................................................................................. 58

Table: Cencosud: Revenues By Business Line In Argentina, 2006 ...................................................................................................................... 58

Table: Dominant Mass Grocery Retailers In Chile.............................................................................................................................................. 59

Cadbury Schweppes In Latin America ................................................................................................................................................................. 61

Table: Revenue By Region, 2006 ......................................................................................................................................................................... 62

Table: Profits By Region, 2006............................................................................................................................................................................ 62

Table: Cadbury Schweppes: Manufacturing Plants............................................................................................................................................. 63

Table: Americas Region: Latest Figures.............................................................................................................................................................. 65

Kraft Foods In Latin America................................................................................................................................................................................... 66

Table: Kraft – Overview, 2005 ............................................................................................................................................................................ 66

Table: Business Segment Revenues For Q306, US$bn......................................................................................................................................... 67

Table: Kraft In Brazil: Timeline .......................................................................................................................................................................... 68

Table: Kraft Foods Inc – Latest Revenues (US$bn)............................................................................................................................................. 69

Almacenes Exito In Latin America....................................................................................................................................................................... 71

Table: Almacenes Exito – Latest Results (Colombian pesos, mn)........................................................................................................................ 72

Table: Grupo Casino*: Geographical Breakdown Of Sales ................................................................................................................................ 72

Table: Almacenes Exito – Store Profile ............................................................................................................................................................... 74

Company Analysis .................................................................................................................................................................................................... 76

Grupo Avipal ....................................................................................................................................................................................................... 76

Perdigão .............................................................................................................................................................................................................. 77

Sadia SA .............................................................................................................................................................................................................. 78

Embotelladora Andina SA.................................................................................................................................................................................... 79

Companhia Brasileira de Distribuição (CBD)..................................................................................................................................................... 80

Wal-Mart ............................................................................................................................................................................................................. 81

AmBev.................................................................................................................................................................................................................. 82

BMI Forecast Modelling.................................................................................................................................83

How We Generate Our Industry Forecasts ............................................................................................................................................................... 83

Retail Industry .......................................................................................................................................................................................................... 83

Sources ..................................................................................................................................................................................................................... 85



Executive Summary

In GDP terms, the Brazilian economy continues to tread the sluggish path it has been on since early 2005.

Following on from a growth rate of 2.25% in 2005, less than half that achieved in 2004, 2006 saw a slight

improvement, at an estimated 3.5% growth rate. We are, in turn, forecasting a similar pattern for 2007,

with a predicted growth rate of 3.75%.

Inflation has been moving downwards as well, reflecting both the slow-moving economy and the high

real. In 2005 it stood at 5.7%, from where it has moved down steadily since, to a rate of 3.4% in

December 2006. We forecast a small increase for 2007, as the economy continues its slow-paced

improvement. The continued appreciation of the real against the US dollar and the euro has served to

keep the costs of imports down, thereby stimulating the domestic economy overall and the retail sector in

particular.

With the domestic economy being very much the bright spot on the Brazilian horizon at the moment, as

exporters are having a hard time coming to terms with the overvalued real, grocery retailers and food and

drink producers are ramping up investments to take full advantage of consumers’ strong purchasing

power.

Needless to say, Wal-Mart is leading the way, announcing plans to spend a record US$385mn to expand

its Brazilian operations in 2007. The company plans to open 28 new stores over the course of the year:

‘Brazil is an opportunity, with a solid base that we know how to grow,’ Vicente Trius, Wal-Mart Brazil’s

president, said. ‘We are committed and we are going to continue investing in Brazil.’ Equally, it will

expand its Sam’s Club retail warehouse format. Sam’s Club has entered into an innovative deal with

Brazil’s Café Bom Dia to market and sell a range of gourmet and organic coffees.

Local retailer Lojas Americanas has extremely been active too, opening 12 new outlets in four Brazilian

states in 2006 – four in south-eastern São Paulo state, two in neighbouring Minas Gerais, one in Rio de

Janeiro and another one in Rio Grande do Sul. The openings are part of the company’s network expansion

strategy, which envisages the opening of 45 new stores in 2007.

Lojas Americanas was also involved in last year’s biggest internet deal, when, in December 2006,

shareholders from Brazil’s leading internet retailer, Submarino, approved a plan to merge with

Americanas.com, its main rival. By joining forces, Submarino and Lojas Americanas expect to save a

combined BRL800 mn (US$372mn) a year, putting them in position better to exploit the fast-growing on-

line retail market, which we expect to reach more than BRL200bn (US$94mn) this year. The on-line

market for purchasing grocery products has been growing particularly fast in Brazil – by more than 10% a



year over the past three years. One reason for this is that a good deal of the web-site traffic is composed

of expatriate Brazilians wanting to purchase grocery items to send to family members living in Brazil. We

estimate that between 13mn and 15mn Brazilians live and work abroad, representing between 6% and 8%

of the 190mn that live inside the country.

On the food and drink side, sectors to watch in 2007 are those of confectionery, meat and poultry, and

beverages (speciality coffees, beer and wine, and non-carbonated soft-drinks). The confectionery market,

in particular, is the site of some intense competition. US-based Hershey’s strategic decision to

concentrate on the Brazilian market in its product-line expansion outside the US has coincided with

Argentinean confectioner Arcor’s plans to expand its operations in the north-east of the country, adding

14,000 tonnes of new capacity. And not to be outdone, Cadbury Adams has announced that it sees

Brazil an an ideal market for the testing and launching of many of its new products, beginning with the

launch of Trident Drops, an extension of the Trident bubble gum brand.

The unknown quantity for confectionery producers in Brazil, of course, is the direction that the price of

sugar will take over the coming year. As the global demand for ethanol (alcohol fermented crops) gets set

to reach new highs, the price of sugar is likely to do the same, something producers would not welcome,

for despite the trend towards ‘light’, low-sugar sweets in Brazil, a higher sugar price would inevitably

impact profit margins. However, should Brazilian sugar cane growers succeed in their attempts to convert

large tracts of public land over to sugar cane production, they may yet be able to keep the price stable.



Chapter 1 – Business Environment

Retail Business Environment Rankings

With economic and political policies from the left, right and centre, Latin America is far from a

homogenous zone. One thing most of the countries do have in common across the region, though, is

economic growth – lots of it. In 2006, the overall growth rate for the region was 5.3%, which represents

the fourth consecutive year of relatively high growth (4% or above). Cuba saw the highest growth, at

12.5%, followed by Venezuela and the Dominican Republic (both at 10%), Argentina (8.5%), and

Panama (7.5%).

Up to now, the current decade is far brighter than the previous one (1991-2000), during which annual

GDP growth averaged 2.8%. Another lost decade, then, we are not experiencing. On the contrary, it is

looking distinctly like we may be in a ‘won decade’, to use the terminology of José Luis Machinea,

executive director of the Economic Commission for Latin America and the Caribbean (ECLAC).

While these growth rates are positive, they do not compare favourably to those of other countries when

they were at a similar stage of economic development. Countries such as Spain, Portugal, Ireland and

South Korea regularly recorded annual growth rates of 15% and above as they were passing through the

‘middle income’ development stage, not many decades ago.

In large part, this is due, we think, to the slow progress in the region on legal and bureaucratic reforms,

and to the continued presence of significant corruption in local and national governmental organisations.

Many of the big city local authorities, or councils, in the region are frequently cited in international

accounting and consulting journals as some of the most corrupt in the world, yet they continue to exist.

President Álvaro Uribe of Colombia has perhaps spoken out most on this issue, saying that the best way

to deal with corrupt authorities – and they are randomly scattered throughout the region – is to close them

down completely and start all over again. Fine, fighting words, but Uribe has been unable to stamp out

widespread corruption in his own backyard, finding it difficult to get to the core of the problem in each

city.

In terms of the relative attractiveness of the different markets, BMI sees Chile and Peru as the most

alluring, followed by Mexico and Colombia – which share third place – and then Venezuela, Brazil and

Argentina.



Despite Chile’s small population of 16.5mn, its average food consumption of US$1,082 per person is one

of the region’s highest. Furthermore, its barriers to entry are the lowest by far in Latin America, so

offsetting the not-so-appealing small market size. Michelle Bachelet’s administration has a firm political

base and legal institutions are relatively free of the rampant corruption present elsewhere in the region.

In second-placed Peru growth, which for a long time was fuelled mainly by exports, is now driven by

private consumption, which continued apace in the final quarter of 2006. Per-capita consumption of food

and drink, while still low for the region, looks set to climb in 2007, on the back of the 7.2% GDP growth

last year, and the expansion of mass grocery retailers (MGRs) into cities outside Lima. On the political

front, Alan García’s victory over nationalist candidate Ollanta Humala in 2006 has calmed investors’

nerves to the extent that we expect a noticeable increase in foreign direct investment (FDI) into Peru in

2007.

Though they share third place in our overall regional ranking, Mexico and Colombia differ on some

important aspects. Colombia’s market entry potential is far greater than Mexico’s, as the latter is a more

mature economy with the highest per-capita consumption in the region, while Colombia has burgeoning

lower-middle and middle income populations.

Meanwhile, Mexico’s 2006 growth rate was just below the regional average, and Colombia’s just above.

The two share the same middle-ranking score of five for long-term political risk, if for different reasons:

in Mexico, we witnessed the not-so-smooth presidential elections and somewhat troubled transition to

power of Felipe Calderón last year, leading us to question the strength of the country’s political

institutions; and in Colombia President Uribe has had only limited success so far in his second term in

putting out the guerrilla and paramilitary conflagrations that continue to dominate events.

Fifth-placed Venezuela goes on enjoying a double-digit growth rate, though its scores on barriers to entry

and long-term political and economic risk remain low. The Chávez administration appears set to serve a

full second term, through to 2013, though the opposition remains strong. Also, while the government’s

main policy planks are dependent upon the continuing high price of oil, there will always be an element

of doubt about the long-term. The administration’s policy of ensuring what it calls ‘food sovereignty’ via

encouraging domestic production and severely limiting food and drink imports will not play well with

investors.

Brazil lies in sixth place, mainly due to its low scores on per-capita consumption, market entry potential

and long-term political risk. With almost 190mn inhabitants, per-capita income reached barely US$4,500

in 2006 (compared to Mexico and Chile, which have roughly the same per-capita income level –

US$7,400 – 60% higher than Brazil’s). Per-capita spending on food and drink is a little over 9% of the



total, at US$412. Our score of five for long-term political risk reflects re-elected President Luiz Inácio

Lula da Silva’s controversial social policies and his continued involvement in corruption scandals. We

give a slightly higher score, of six, to long-term economic risk, thinking of the Lula administration’s

relatively prudent, market-oriented policies and the warm reception they have received from the

investment community.

Argentina, in seventh place in our ranking of seven, has a composite score of 29. Its lowest score of two is

for market entry potential. Entry into the country for new firms is made difficult for a host of reasons:

inflation continues to build; price restrictions remain on a wide range of food and drink items – which is

getting wider by the month; and the president continues to defy international creditors, which has the

effect of lowering local banks’ credit ratings and their ability to attract international funds for local

investment lending purposes. Despite this, net capital inflows remained positive in 2006, which should

increase productive capacity in 2007, and thereby take some of the steam out of inflation.

Brazil comes sixth in the overall business environment rankings, owing to its low market entry

potential and the low per-capita consumer spending. While the former is owing to an already well-

developed and highly competitive MGR sector – with supermarket penetration of over 80% in the

biggest cities – the latter is a consequence of substantial income inequalities across the country.

Brazil also shows the second-lowest compound annual growth rate (CAGR) for MGR sales over the

forecast period, again owing to the highly established nature of the sector. Where long-term

economic and political risk ratings are concerned, the country ranks slightly below average; the

same applies to barriers to entry.

In 2005 GDP growth in Brazil (at 2.325%) was less than half of that in 2004 (4.91%). Most of this

growth has been driven by external demand. If world GDP and trade continue to expand as

forecast by the World Bank, Brazil’s current account will stay in surplus, although the surplus will

likely decline as imports strengthen. For full-year 2006, we estimate that GDP growth will come in

at 3.5%.

While the economy has performed well overall, there remain important economic challenges for the

government. The most significant are debt-related: the government’s – mainly domestic – debt

increased steadily from 1994 to 2003 – straining government finances – before falling to a still-

concerning 51% of GDP in 2005; while Brazil’s foreign debt (a mix of private and public debt) is

large in relation to Brazil’s small (but growing) export base. The challenge, then, is to generate

sufficient economic growth over the next few years to stimulate employment and render the

government debt burden less onerous. This will involve a stronger emphasis upon exports than has

hitherto been the case, in order to bring in valuable foreign currency.



The high debt profile exposes the economy to the ebbs and flows of the international financial

markets. The Lula administration is seeking to lessen this exposure through an increasing emphasis

on exports. Some analysts, however, worry that this will lead to an equally high level of exposure to

the ups and downs in international trade. To mitigate against this, the government would be wise to

encourage an export-diversification approach, on the lines of that in Argentina at the moment,

which would make the economy much less vulnerable to the fortunes of a single market (the US).

Despite its size, the Brazilian economy has a large agricultural sector, accounting for 10% of GDP

and 40% of exports. It is the world’s largest producer of sugar cane, coffee, tropical fruits and

frozen concentrated orange juice. Exports of these products performed well in 2006, especially of

tropical fruits and frozen orange juice; both segments enjoy significant production cost advantages

over their regional competitors, particularly growers in Florida. Its cattle herd numbers 170mn

head, 50% larger than that of the US. The industrial sector, accounting for 33% of GDP, is large,

diversified and increasingly important in global terms. Automobile and parts manufacturing, for

example, now represents a significant slice of total worldwide production. The service sector,

meanwhile, makes up half of total GDP.

In Brazil, the ruling Partido dos Trabalhadores (PT) recently made headlines as a result of party

infighting. The party is roughly divided between those who support the conservative economic path

of President Lula and those who would like to see greater spending on social and redistributive

programmes. The issue is fundamental. As many Latin American countries continue to elect left-of-

centre governments, it was seen as a great victory for the neo-liberal economic model (promoted by

international financial institutions, especially the IMF that a ‘leftist’ such as Lula would follow its

policy prescriptions so closely. Indeed, Lula has been even more fiscally conservative than his right-

of-centre predecessor, Fernando Henrique Cardoso, of the Partido da Social Democracia Brasileira

(PSDB). Lula loosened the purse strings prior to the presidential election in 2006, at a time when

his own popularity was falling. Meanwhile, the political crisis in Brasília and public arguments

within the ruling party have significantly undermined public support for the president. This led us

to believe that Lula’s shot at a second term in office was far from the racing certainty that it seemed

at the mid-point of his term in late 2004 and early 2005. In the event, the 2006 election was not as

bitterly contested as we thought, and Lula emerged victorious from the run-off on October 29 with

60% of the votes, well ahead of Geraldo Alckmin of the PSDB, who gained 39% of the votes. The

opposition parties tried in vain to capitalise on the corruption scandal, while the PT successfully

held up the economy card – moderate economic growth combined with lower inflation – as its

strongest achievement.



Having had to contend with sluggish sales growth and the necessity of structural adjustments to

reflect changed consumption patterns during the economic crisis of 2002-2003, Brazil’s MGRs saw

sales grow at higher rates during 2005 and the first nine months of 2006. Judging by their

expansion plans for the first half of 2007, they have found new confidence in the sustainability of

the country’s recovery. Investments in the sector during 2005, at US$734.5mn, were almost double

those of 2003, according to Abras, the Brazilian supermarket association, with a plethora of new

store openings and retailers moving to into ‘frontier’ regions of the country, thus increasing

competitive pressures. Wal-Mart has, for example, acquired the Brazilian operations of Sonae; and

Makro announced ambitious expansion plans, in a move to regain its lost status and prestige in the

country. As in Argentina, MGR penetration is already high in the wealthy and most populous areas

of the country. As such, further expansions in these areas will be accompanied by slower growth

rates, with an estimated CAGR of 26.2% between 2006 and 2010. As retailers begin to open stores

in areas where large retailers have not yet ventured – outside the Rio de Janeiro, São Paolo and

Brasília triangle – growth rates will accelerate. We see this trend gaining momentum in 2007.

Brazil achieves a score of two for the market potential indicator, based on the number of retail

outlets in 2006, the number of hypermarkets in 2006 and the number of people per outlet in the

same year. The country has by far the largest number of MGR outlets and hypermarket outlets in

the region. It also leads in terms of people per outlet and number of people per hypermarket outlet.

The figures reflect the fact that Brazil hosts several of the world’s largest MGRs, which take

advantage of the country’s massive purchasing potential and its suitability as a strategic base for

the rest of Latin America. The level of consolidation and concentration in the market has

significantly increased over recent years, with the top 10 operators having a market share of close

to 50% in September 2006. Expansion into the regions is now underway and the established

operators cover all outlet formats, limiting the potential for new entrants. In common with other

Latin American markets, significant potential may indeed exist, but in the lower income areas of

cities and towns that have yet to be exploited by MGRs. This would involve adapting food and

drink product portfolios and marketing approaches, but with such large markets beckoning among

the lower and lower-middle income groups, it would be worthwhile for both incumbents and new

entrants to explore these possibilities.

Brazil achieves a score of six in the barriers to entry ranking, placing it in an average position

across the region. On the plus side, the government’s compliance with orthodox economic measures

and its encouragement of financial intermediation has won it the support of both the IMF and the

business community, contributing to a more stable and welcoming business climate. Export growth

remains strong, if decelerating, with particularly strong demand for key commodities and agro-

industrial goods. Despite economic liberalisation, significant trade barriers and a complex customs



system do, however, increase business risk and despite moves to ameliorate external debt ratios, a

high debt burden will weigh on investor sentiment during the forecast period. Furthermore,

ongoing reform is needed to simplify and increase the efficiency of Brazil’s complex and onerous

tax system.

Brazil, with its low score of four in the per-capita consumption ranking, comes bottom of the list

across the region together with Colombia. The score is a reflection of the fact that, in this vast

country with substantial rural and underdeveloped areas, inequality of income distribution is very

high, with a significant proportion – almost 40% – of the population living below the poverty line.

In addition, the literacy rate is low for such a highly rated economy (now the 10th largest in the

world, after Canada and ahead of South Korea); at 86.4% it is lower than Mexico’s. Life

expectancy, at 72.1 years, is also low for such a large economy, indicating that a large section of the

population lacks adequate access to health or decent living conditions. Indeed, a 2006 report by the

World Bank said that unemployment levels, lack of access to education and health, and public

order issues, were all at ‘worrying levels’ in Brazil, particularly in the big cities, where over four-

fifths of the population live.

Table: Latin America Business Environment Rankings

CountryEconomics

LT RiskPoliticsLT Risk

MGR SalesGrowth

Market EntryPotential

BarriersTo Entry

Per-CapitaConsumption

CompositeScore

RegionalRank

Chile 7 9 10 1 8 7 42 1

Peru 7 5 10 9 5 5 41 2

Mexico 7 5 10 2 7 7 38 3=

Colombia 6 5 10 7 6 4 38 3=

Venezuela 5 4 10 5 4 5 33 5

Brazil 6 5 8 2 6 4 31 6

Argentina 6 5 5 2 6 5 29 7

LT Economic Risk:Based on BMI Country Risk Service long-term economic risk rating. LT Political Risk:Based onBMI Country Risk Service long-term political risk rating. MGR Sales: Based on BMI forecasts for 2006-2011 MGRsales (hypermarket, supermarket, co-operatives, discount stores). Market Entry Potential: Based on saturation ofmarket. Barriers To Entry: Based on BMI Business Environment Rankings, foreign direct investment and industryregulations. Per-Capita Consumption: Based on BMI consumer expenditure figures and BMI population figures.Composite Score: Unweighted total of preceding six scores. Regional Rank: Highest composite score = mostattractive food and drink sector environment in Latin America; lowest composite score = least attractive. Source: BMI



SWOT Analysis

Brazil Food And Drink Industry SWOT

Strengths Brazil’s very large market makes it an attractive target for internationalretailers; market consolidation and concentration is increasing in the MGRsector, with the discount and convenience store formats set to experiencethe fastest growth rates over the forecast period

New and existing retailers have announced a series of expansion plans, withcompanies diversifying their range of store formats as well as targetinggrowth in new regions, away from the largest cities and into new ‘frontier’parts of the country

Brazil is a major producer and exporter of agricultural commodities, with theagribusiness sector accounting for over 40% of total exports and 10% ofGDP. Exports of agricultural products exceeded imports by over US$34bn in2006. Productivity gains in the sector have been in the order of 70% duringthe period 1990 to 2006

Brazil is the world’s largest producer of sugar cane, coffee, tropical fruits andfrozen concentrated orange juice. Moreover, it is one of the few countries inthe world still capable of increasing its planted area

The spiraling demand for ethanol domestically and from abroad, willnecessitate a significant increase in sugar cane production in 2007 andbeyond. Exports will see the biggest increase, as the US begins to importethanol for the first time.

The food processing sector is well developed and highly sophisticated; mostleading international operators have a strong presence

Weaknesses Brazil’s stock of agricultural machinery is aging and in urgent need ofupgrading. Since the 1990s, investment in agricultural machinery in Brazilhas declined alarmingly. At the end of 2006, approximately 45% of tractorsand 70% of pickers were obsolete, according to the Ministry of Agriculture.The lack of investment threatens the competitive position of the entire sectorover coming years. Exports are at particular risk, as outdated machinerywould lower the cost advantages they currently enjoy at the production level.

The recent economic slowdown has meant slowing retail growth, forcingMGRs to alter their strategies to take into account new and changingconsumer preferences

Income inequality is a major concern, with local consumption patternsvarying significantly according to income. More than one-third of the overallpopulation, close to 4 in 10, lives in poverty; outside the main urban areasthe proportion is closer to half.

The country’s infrastructure is in need of upgrading, with poor distributionlinks driving up company costs. The road network is one of the poorest in theregion: just 5.5% of the country’s 1,725,000 km of road are paved, making itdifficult for large delivery trucks to move freely about the country.

More recently, downward price trends for food products in particular haveput pressure on MGRs’ margins



Opportunities Despite significant increases in agricultural production over the past 20years, Brazil still has more unused commercially viable agricultural land thanany other country in the world. This offers investment opportunities for bothincumbent and new producers

Private-label products are proving increasingly popular, with many retailersdiversifying their range of product offerings to include higher-end to discounteconomy products to target different income groups. Recent surveys haveshown Brazilians to be much more accepting of own-label products thanthey were just five years ago

A young, expanding population and rising disposable incomes should resultin strong growth rates in sub-segments such as soft drinks and alcoholicbeverages, with companies investing substantial sums in recent years

Convenience foods and healthier product offerings now have strong appealamong the middle and upper-income groups, whose life pattern increasinglymirrors that of their counterparts in developed countries, with fewer of themreturning home, for example, for the traditional Latin lunch and siesta.

Moves on the part of chambers of commerce and government trade officialsto encourage exports to countries other than the US, which currentlyaccounts for the vast majority of exports, could result in significantly highertotal export volumes in the medium term. At present, though, such movesare more rhetorical than action-oriented.

Threats The increasing value of the real against the US dollar is jeopardisingexports, especially those in the agricultural sector, which are very sensitiveto small changes in price.

Economic stability cannot be guaranteed over the longer term. Decliningconsumer confidence or a return to the days of high inflation would havesevere consequences for the MGR and food and drink industries, with price-stretched consumers once again cutting back on ‘non-essential’ purchases

High interest rates place significant constraints on company investmentplans



Macroeconomic Outlook

Waiting For Growth

The Q206 result put into doubt hopes that the economy would pick up during 2006, following 2005's

lacklustre 2.3% expansion (the second-slowest in the Americas, ahead of only Haiti). Indeed, by almost

any measure, the figures were a disappointment, particularly after it appeared that the economy had

finally turned a corner in Q106 (when expansion came in at 3.3% y-o-y). The quarter-on-quarter (q-o-q)

expansion of 0.5% was the worst since Q305’s 1.2% contraction. Several sectors were weak: industrial

output fell by 0.3% year-on-year (y-o-y), while the important services and agriculture sectors contracted

by 0.6%, and 0.8%, respectively. The contribution of exports to overall growth has also ground to a

standstill – down 0.6% y-o-y – which was the first contraction since Q103, probably the result of the

strong real, and a strike by government customs workers.

The Q206 result left policymakers wondering whether the economy had stalled, or if the poor result was

an aberration. For instance, while the government was sticking by its projection of 4%-plus growth for

2006, the Instituto de Pesquisa Econômica Aplicada (IPEA), which is associated with the Ministry of

Planning, lowered its 2006 growth forecast in September from 3.8% to 3.2%. For our part, at the

beginning of that year, we projected real GDP growth in 2006 at 3.5%. This optimistic appraisal reflected

our view that the economy would take advantage of benign external conditions, a reduction in real interest

rates, and the most stable macroeconomic environment in decades. We still believe these conditions are in

place, and see a chance that growth will reach our target, despite a weak Q2. The first reason for cautious

optimism is a series of calendar and base effects, which should allow for a higher rate of growth at year-

end. The Q206 growth figures were distorted by two major seasonal effects: the Easter holiday falling in

April (rather than March, as in 2005), and the World Cup in June, which left several sectors at a virtual

standstill. Additionally, H205 was much weaker on the growth front than H105 (y-o-y growth in Q205

was a very strong 4.0%), suggesting that the base effects should work in favour of solid H206 growth.

The Importance Of Declining Rates

A major piece of positive news comes from the interest rate front. The Banco Central do Brasil (BCB)’s

monetary policy committee (Copom), lowered the Selic benchmark lending rate by 50 basis points (bps)

to 13.75% at its October 2006 meeting. This was a big move, the upshot of which for growth is that

looser monetary conditions should help two key factors of the economy: private consumption and fixed

capital formation, both of which are dependent on the expansion of cheaper credit. The former has

actually been the biggest driver of growth over the present expansionary cycle, with a 4.0% y-o-y

increase in Q206, the 11th consecutive quarterly rise. We think the best may yet be to come on this front,

as unemployment continues to wane and lower interest rates encourage the expansion of credit. As for

fixed capital formation, however, there are still some concerns, given the fairly unimpressive 2.9% y-o-y



rate of increase in Q206 (compared with 9.0% y-o-y in Q1). One of the biggest complaints about Brazil’s

relatively high interest rate levels is that it encourages firms to invest in fixed income securities rather

than capital expansion. That said, it has now been easing since the BCB began easing in earnest in

September 2005, and we may see the effects translate into economic growth.

Private consumption grew by 4.0% y-o-y in Q206, the highest figure since Q105, and the biggest

contributor to real GDP growth in the quarter. Also pointing to improvement on this front is the Fundação

Getulio Vargas’ consumer confidence survey, which showed steadily more optimistic views of the future

(the ‘expectations’ index rose to 104.9 in September from 104.1 in August). We are convinced that the

600bps worth of cuts since mid-2005 will feed into the economy, allowing real GDP growth rates to reach

3.5% in 2006 and 2007. Increases in government consumption during the run-up to the presidential

election would also have helped growth rates. The 12-month trailing primary government budget surplus

peaked at 4.53% of GDP in April and headed steadily downward, to 4.47% in August, which is above the

4.25% official target. By comparison, under former finance minister Antonio Palocci, the government

routinely ran 12-month primary surpluses over 5.00%. While we are not advocates of looser fiscal policy,

we think that it will boost economic growth figures in the medium term.

Risks To Outlook

We believe that there are risks to our forecasts. If oil prices remain at lower levels and the US continues

to experience positive consumer sentiment, we do not expect the external environment to deteriorate

rapidly, allaying fears of a flight to quality assets. This scenario would pose upside risks to our year-end

forecasts. Should the US economy shows further signs of slowing, it would have negative knock-on

effects on Brazil, which will pose downside risks to our real 2006 and 2007 GDP growth figures.

Table: Economic Activity – Historical Data And Forecasts

2003 2004e 2005e 2006e 2007f 2008f 2009f 2010f 2011f

Nominal GDP (BRLbn) 1,556.18 1,766.62 1,937.6 2,092.5 2,244.21 2,425.99 2,632.2 2,853.31 2,967.44

Nominal GDP (US$bn) 505.75 604.18 796.52 921.81 1,008.63 1,032.34 1,063.52 1,141.32 1,186.97

Population (mn) 176.9 181.8 184.18 186.76 189.38 192.03 194.72 197.44 199.25

GDP per capita (US$) 2,858.94 3,323.32 4,324.6 4,935.72 5,326.06 5,375.95 5,461.85 5,780.52 5,957.09

Real GDP growth (%change) 0.5 4.91 2.25 3.5 3.5 3.75 4.0 4.0 4.0

Industrial output (%change) 0.3 7.62 3.45 3.9 4.0 3.5 3.3 3.1 3.1

e/f = BMI estimate/forecast. Source: IBGE, BMI



Chapter 2 – Retail

Regional Overview: Rising Purchasing Power Of Low And Middle-IncomeGroups

Introduction

Many economists still assume that Latin American society is divided simply into the haves and the have-

nots, with little or no purchasing power in the middle. This concept took root in the 1960s, when the first

research appeared on poverty and income distribution profiles in the region, which showed immense gaps

in both income and wealth, some of the widest in the world.

Over the last four decades, however – and particularly during the last five years – BMI contends that the

income distribution profile has undergone significant change, such that low and middle-income groups in

Latin America have become increasingly important within the individual economies. Indeed, many

retailers are now openly courting them, via establishing outlets outside their traditional (upper-income)

comfort zones and offering distinct product ranges.

Poverty, Income Distribution And The Minimum Wage

In terms of numbers in poverty, the continent-wide percentage has been declining, albeit slowly, for some

time, standing at 44% of the region’s population (of 548mn) in 2000, and declining to 39% in 2006.

Additionally, the middle six deciles within the distribution – not the bottom 20% nor the top 20%of

income earners – now earn a higher proportion of the region’s overall wealth than they did just six years

ago. This rump of income earners – the median 60% - is what MGRs have in their sights at the moment,

as the top 20% have long been converts to western-style supermarkets and hypermarkets, while the

bottom 20% is characterised by individuals and families living hand-to-mouth, with no resources to even

travel to a supermarket.

Coupled with a rising GDP (ECLAC recorded annual growth rates for Latin America as a whole of 4.5%

in 2005 and 5.3% in 2006) retailers’ client base appears healthy for the coming year. With GDP growth

for the region for 2007 estimated at 5.1%, it will be the fifth consecutive year that the rate has exceeded

4% – after an annual average growth rate of just 2.2% between 1980 and 2002. Argentina, Venezuela,

Uruguay, Peru and Panama have had the highest annual growth rates in the region since 2002.

As a result of these growth rates, and of increased remittances from abroad, growth in regional income (of

7.2%) again exceeded GDP expansion in 2006. In addition, other factors, such as growing investor and

consumer confidence after several years of sustained growth, real interest rates that remain relatively low

despite recent hikes in many countries, a stronger boost to public spending, an expansion in total wages



driven by rising employment, and a modest upturn in real wages, have helped to turn domestic demand

into an additional engine for growth in most countries. In fact, overall domestic demand in Latin America

rose by 7.0% in 2006, with gross domestic investment up by 10.5% and consumption by 6.0%.

Furthermore, in many countries the minimum wage has either moved in line with inflation or even a little

ahead of it over the last few years, which has become an important factor in maintaining purchasing

power among the lower income groups in the region. Even in Venezuela, where inflation remained

stubbornly high in 2006, the minimum wage almost kept pace, with an increase of more than 10%.

In Colombia, as the table below indicates, the minimum wage has risen by more than the rate of inflation

since 1997, frequently by as much as 50% more. In 2006, for instance, inflation reached 4.2% in

Colombia, while the minimum wage was increased by 7.0%.

Table: Inflation Versus Minimum Wage Increases In Colombia (%)

Inflation Minimum wage

1996 22 20

1997 19 21

1998 17 20

1999 10 16

2000 9 11

2001 8 10

2002 7 8

2003 6 7

2004 5 8

2005 5 7

2006 4 6

Source: Departamento Nacional de Estadística, Ministerio de Protección Social

BMI estimates that, across Latin America, between 20% and 40% of workers receive the minimum wage,

depending on the country. This, in and of itself, while a significant enough figure, is not really the point:

more importantly, the minimum wage tends to drag other workers’ wages – those earning less than the

minimum – along with it, acting as a guide, or ‘signal’ to employers on the annual percentage increases to

be granted to employees. In Latin America, this has meant that, over the last five years, the overall



purchasing power in each economy has risen over and above the sum total of the increases to actual

minimum wages – and that those on low incomes are also experiencing increasing purchasing power,

allowing them to participate in the MGR economy for the first time.

Expectations Of Different Income Groups

It is one thing for retailers in Latin America to have a new, expanding market to go after, in the form of

the middle 60% of the income distribution, but it is another thing entirely to have a sound understanding

of the food and drink tastes of these groups, and how they may differ from those of the top 20% of

income earners in the region. Also, do the frequency of purchases differ among income groups? And what

are the ‘product expectations’ of each income group – lower, middle and upper?

A number of recent studies, such as the one completed in 2006 by Synovate, have concluded that lower

incomes do not mean lower expectations. Rather, that when it comes to attitudes, low-income consumers

in Latin America – most studies have focused on Argentina, Brazil and Mexico – have the same life

priorities, values and brand perceptions as their middle-income counterparts.

The Synovate study, for instance, finds that just under two-thirds of low-income consumers prefer local

brands if price and quality are equal: one-third believe that local brands are as good as international

brands; and almost one-third believe that most people do not know the difference between local and

international brands. These responses all mirror those for middle-income consumers.

When asked how they would spend any extra income that came their way, more low income consumers

than middle income ones replied that they would spend the additional money, which will hearten retailers

in the region. Additionally, as the chart below shows, fewer (47%) said they would save any extra

income, against 56% of middle income consumers.

Table: What Would You Do With Any Extra Income?

Low-income group High-income group

Spend it 38 34

Save or invest it 47 56

Pay off debts 15 10

Source: Synovate (2006). Latin American survey data was drawn from Argentina, Mexico and Brazil



As retailers ponder how to persuade low income consumers to shop in their outlets, it may be helpful to

consider another of Synovate’s findings – that low-income consumers tend to shop locally and develop a

loyal, trusting relationship with the owner of their small neighbourhood store. This gives the owners of

such stores a unique ability to influence low-income consumer purchasing habits, both through the

products they stock and those that they recommend. Retailers, then, when opening up outlets in low-

income neighbourhoods, may do well to begin with a smaller, more ‘local’ store, rather than the large

hypermarket format that works well in upper-income areas.

Another way to attract low-income consumers’ attention in Latin America is to offer credit of one form or

another. Most lack sufficient credit history to take out loans or credit cards at conventional banks, giving

retailers a significant opportunity to step in and fill the gap. Some have already done so to profitable

effect; others, though, have been successful, mainly because they pitched interest rates far too high –

charging as much as an exorbitant 50% a year in some cases. Those retailers offering credit at reasonable

rates will do well – witness Exito in Colombia and Cencosud in Chile – while others will find that

charging very high rates only tends to backfire. Apart from anything else, they give the low-income

consumer little or no money left over with which to purchase the products on the shelves.

Table: Food And Drink Purchases Made In Supermarkets In Latin America By Income Group, 2006 (%)

Central America South America

Overall 42 62

Upper income 95 97

Middle income 62 71

Lower income 18 23

Source: Food distributors, BMI

Importance Of Product Tailoring

Catering for lower-income groups will require some tailoring of product on the part of retailers, including

offering the same item in smaller, more affordable packaging, in scaled down versions, and with

simplified, less expensive design. It may be that retailers’ existing lines of own-brand products would be

a good place to start when considering which product ranges and mixes to place in the new stores.

Another useful reference point would be the form in which existing stores in low-income areas sell staple

food and drink products. In most of Latin America, small neighbourhood tiendas, frequently run out of a



house, co-exist with what distributors call ‘mini-markets’ – self-service stores which have at least one

check-out point, with either a mechanical or electronic cash register.

Sales Offering For Stable Food Products In Latin American Retail Sales Channels

Supermarket Mini-market Tienda/corner shop

Cooking oil Plastic bottle, various sizes Plastic bottle, small bottle only Tablespoon

Sugar Sealed bag Loose Teaspoon

Eggs Dozen or tray of 30 Half-dozen only By unit

Rice/beans/maize Sealed bag Loose By cup/half-cup

ButterWrapped, sealed stick:

small/medium /large Stick, small only By ounce

Source: BMI

In tiendas, eggs can be bought, not only by the dozen, but individually; cooking oil can be purchased by

the spoonful (the customer takes along the plastic container into which to pour the oil); and single ounces

of sugar or flour are measured out and sold. All this is true in the mini-markets, with the addition that a

wider variety of packaged products – canned goods, sauces, rice, confectionery, milk – are available on

the shelves as well.

The task for MGRs, such as Carrefour, which is on the point of opening an outlet to the east of Cali,

Colombia, in the sprawling, low-income neighbourhood of Aguablanca, is twofold: firstly, somehow to

bridge the two-store concepts of tienda and mini-market; and secondly, to match or beat the product

prices of both store types. BMI sees the latter task to be the easier of the two, as the large volumes that

MGRs purchase from suppliers will ensure a lower selling price. More difficult will be to develop a range

of products and packaging sizes that fit the needs of low-income groups.

First-mover advantage will go the MGR that figures this out: compared to selling to the upper-income

segment, catering to lower-income groups will be much more of a volume game – challenging the

logistical machines of even the biggest MGRs.



Industry Forecast Scenario

Brazil’s MGRs, having contended themselves with sluggish sales growth and the structural adjustments

during the economic crisis of 2002-2003, have seen overall sales grow at higher rates during 2005 and

2006, supported by stronger sales of non-food products in particular. Food sales have, in contrast, been

growing sluggishly in value terms. This is due to falling prices for perishables, and commodities in

particular, an excess of supply in specific products, declining consumer spending because of higher debt

levels as a result of purchasing durable goods on credit, as well as the appreciation of the real against the

US dollar.

Judging by MGRs’ expansion plans for forthcoming 2007, there is, however, a newfound confidence in

the sustainability of the country’s recovery. Contributing factors to the improved performance of MGR

sales have been declining unemployment, an increased level of job creation, increases in real wages, and

thus disposable incomes, and wider accessibility to credit, all of which have led to stronger overall

consumer demand. Furthermore, food and drink prices have increased at lower levels than prices in many

other sectors.

The purchasing power of the significant proportion of Brazilians on very low incomes, or no income at

all, has, however, not improved, despite the government’s increased focus on the quality of delivery of its

social programmes, Bolsa Familia and Fome Zero (Zero Hunger). The successful implementation of the

programmes continues to suffer from limited funds, patchy coverage and administrative shortcomings,

achieving little progress in pulling Brazil’s poor out of poverty and thereby increasing the size of the

domestic market. For those slightly higher up on the income scale – in the lower and lower-middle

income brackets – overall purchasing power has, by contrast, been increasing, such that one of the

competitive focal points in 2007 will be the rush to cater to these groups among retailers, via locating

outlets away from their traditional comfort zones in middle and upper-middle income neighbourhoods.

BMI is forecasting that sales in the MGR sector will grow by 19.7%, to reach US$55.566bn in 2011.

Supermarkets will continue to take the lion’s share of sales by value and should experience steady growth

of around 6.1% during the period, reaching US$25.350bn by 2011. Hypermarkets, through their sheer

size and selling power per unit, are expected to experience significantly more rapid sales growth, rising

by 27.5% to US$15.098bn by 2011. Smaller outlets in the form of discount stores will also experience

considerable growth rates, albeit from a much lower base. Due to the many price-sensitive consumers in

Brazil, sales from discount stores are likely to grow by more than 43% in the forecast period to reach

US$10.918bn. Sales in convenience stores are expected to increase by 36.8% over the forecast period to

reach US$4.199bn by 2011, since they fit in with the lifestyle of urbanised Brazilians, who like to be able

to shop around the clock.



Table: Brazil MGR Value Sales By Format – Historical Data And Forecasts (US$bn)

2005 2006e 2007f 2008f 2009f 2010f 2011f

Supermarkets 22.79 23.44 23.89 24.27 24.66 25.09 25.35

Hypermarkets 10.31 11.10 11.84 12.60 13.40 14.27 15.10

Discount stores 5.83 7.06 7.60 8.28 9.10 10.03 10.92

Convenience stores 2.58 2.83 3.07 3.32 3.60 3.90 4.20

Total MGR sector 41.51 44.43 46.40 48.00 50.76 53.29 55.57

e/f = BMI estimate/forecast. Source: BMI, Central Bank of Brazil, IBGE



Industry Developments

The on-line market for purchasing grocery products has been growing particularly fast in Brazil – by

more than 10% a year over the past three years. With the number of internet users in the country

growing rapidly as well, BMI sees much promise in this segment. One reason for our optimism is

that, in common with other food and drink retailers in Latin America, Americanas.com has

discovered that a good deal of its web-site traffic is composed of expatriate Brazilians wanting to

purchase grocery items to send to family members living in Brazil. We estimate that between 13mn

and 15mn Brazilians live and work abroad, representing between 6% and 8% of the 190mn that live

inside the country. A good deal of them wire funds, or remesas, to family members on a weekly or

monthly basis. If Lojas Americanas and Submarino, Brazil’s largest internet retailer, can find a way

for its website to capture even a small proportion of these transfers – perhaps via a marketing

campaign highlighting the savings in bank transfer commissions by sending food and drink items

direct to family members’ homes – then the online segment will see significant growth in 2007.

As most countries in the region seek to ally themselves with as many international trade pacts as

possible, trade between Latin American economies and those outside the region will continue to

increase, no more so than in Brazil, the region’s largest exporter. More often than not, though, little

consideration is given to the infrastructural consequences of increased economic activity, such as the

stress higher road transport volumes is likely to put on already poor road networks. Brazil is

experiencing this problem more acutely than any of its neighbours. Of the 1,724,929 km of roadways

in the country, 1,630,058 km (94.5%) remain unpaved. This is putting stress on retailers’ national

logistics operations, as they work to expand their presence in and around more and more cities

nationwide. With Brazil’s vast landmass, we foresee bottlenecks in this regard in the near future, with

retailers’ large trucks struggling to access many parts of the country by road. At a minimum,

retailers’ sourcing strategies will have to be revised towards more local, as opposed to national,

purchasing of products.

Since the entry of Wal-Mart into the Brazilian market in the early 1990s, the retail sector has

undergone rapid change, spurred principally by the fierce competitive spirit that the world’s largest

retailer brings with it when it enters a new market. Wal-Mart entered market with the opening of two

Supercenters and two Sam’s Club outlets. Today, it operates over 300 outlets. Wal-Mart is currently

ranked third in MGR sector, after Companhia Brasileira de Distribução (CBD) and Carrefour.

Prior to the acquisition of the Bompreço chain from Dutch retailer Ahold in 2003, Wal-Mart had

only a small presence in Brazil, with just 25 outlets, including 13 Supercenters, 10 Sam’s Club

warehouse stores and two Wal-Mart Todo Dias 24-hour stores.



Company Developments

Following the success of its gourmet and organic food ranges this year, Sam’s Club and Café Bom

Dia launched, in October 2006, Marques de Paiva Fair Trade Certified Gourmet French Roast coffee.

The coffee, to be sold in 40 ounce bags, will initially be available in the US and subsequently in its

stores in Mexico, Argentina and Brazil. Sam’s Club first opened in Brazil (São Paulo) in 1995 – 12

years after appearing in the US – when it sought to expand its presence in Latin America, following

the opening of its first store in Mexico City in 1991. Since then, it has constructed 14 more Sam’s

Club outlets in Brazil. The no-frills stores average 129,000 sq ft and offer more than 4,000

discounted items, including bulk office supplies and food, electronic goods, jewellery, clothes,

insurance and travel services, and Member’s Mark store-brand products. Most of the outlets also sell

fresh meat and produce and have bakeries. Sam’s Club Brazil posted 2006 Christmas sales a full 30%

ahead of those for 2005.

The proposed sale, in December 2006, of cash-and-carry operator Atacadão did not go ahead as the

company was unable to prove that it is a profitable business. CBD, Carrefour and Wal-Mart are all

understood to be interested in acquiring the chain. Atacadão hired Deloitte to carry out a financial

audit, which was completed in August 2006. However, this was not a formal process and is

understood not to have satisfied prospective bidders.

Wal-Mart Stores plans to spend a record US$385mn to expand its Brazilian operations in 2007, Wal-

Mart Brasil’s president, Vicente Trius, announced in October 2006. The company plans to open 28

new stores over the course of the year: ‘Brazil is an opportunity, with a solid base that we know how

to grow,’ Trius said. ‘We are committed and we are going to continue investing in Brazil.’

Retailer Lojas Americanas has opened 12 new outlets in four Brazilian states. The investments in the

12 outlets totalled BRL26mn (US$11.2mn). The stores will employ 1,120 people. Four of them are

located in south-eastern São Paulo state, two in neighbouring Minas Gerais, one in Rio de Janeiro and

another one in Rio Grande do Sul. The openings are part of the company’s network expansion

strategy, which envisages the opening of 45 new stores in 2007.

In December 2006, shareholders from Brazil’s leading Internet retailer, Submarino, approved a plan

to merge with Americanas.com, its main rival. In November, Submarino and Americanas.com said

they had reached a deal to merge into one company called B2W, or Companhia Global de Varejo,

which will be listed on the São Paulo Stock Exchange. Lojas Americanas will control the new

company, holding 53.25% of its voting shares. Submarino shareholders will own the remaining

46.75%. The market value of the combined company will be approximately BRL7bn (US$3.2bn;



EUR2.47bn). By joining forces, Submarino and Lojas Americanas expect to save a combined

BRL800mn (US$372mn) a year, putting them in position to better exploit the fast-growing on-line

retail market, which we expect to reach more than BRL200bn (US$94mn) this year. The on-line

market for purchasing grocery products has been growing particularly fast in Brazil – by more than

10% a year over the past three years.

Providing an update on 2007 plans, Wal-Mart noted that the renovation and expansion plan launched

by the retailer in Brazil in 2006 will continue at full steam in 2007. The company’s aim is to renovate

all of its 138 stores in Brazil's south by 2009. The total investment for the scheme will be around

BRL270mn (US$123.9mn). The plan includes re-designed layouts, store fittings and signage.

Overall, the company is planning to launch 28 new stores in Brazil in 2007, including hypermarkets,

supermarkets, cash-and-carries and soft discounters. Through these openings, Wal-Mart will

essentially double its speed of organic growth when compared with 2006, which should end with a

total of 14 newly-opened stores. The investment scheme should be worth around BRL850mn

(US$390.2mn), including the opening of 19 pharmacies. While the expansion scheme for 2007 will

involve all store formats, there will be a special focus on low-margin formats. Of the new stores, 12

will be dedicated to low-income consumers, including 10 Todo Dia stores and 2 Maxxi Atacado.

Brazil’s largest MGR, CBD, posted a Q306 net loss of BRL43.4mn (US$19.9mn) because of a

charge related to provisions for outstanding tax payments on soy purchases. Net revenue rose by

2.5% to BRL3.3bn (US$1.5bn). ‘The sales of food products dropped 5.1% in the quarter, still under

the affect of price deflation in some categories – primarily perishable and commodity food items – as

well as price reductions following a strategy adopted by the company,’ CBD said in a statement.

However, the company said it enjoyed continued growth in non-food sales, such as consumer

electronic goods, which increased 17% in Q306. Earnings before interest, taxes, depreciation and

amortization, or EBITDA, tumbled 38% to BRL182mn (US$85.5mn). Despite the provisional tax

charge, CBD said that the company continued to see gains from its cost-cutting programmes, which

will be reinvested in promotions to gain market share. ‘The gains obtained enabled us to increase

investments in competitive prices compared with the third quarter of 2005 and second quarter 2006, a

move we consider crucial to gaining market share in the future,’ said a company statement.

Wal-Mart Brasil has inaugurated a new Supercenter in Guarulhos that has been designed to cater

especially for female shoppers, which account for 80% of the retailer’s customer base. The 7,400m2

outlet has a totally new layout, a new colour scheme, clearer signage and an improved ambience. The

store is split into ‘worlds’, such as a health and beauty department that congregates all relevant

products into a single destination area. Household goods have been reorganised into room-themed

sections; while the grocery section has been bolstered with an expanded organics section. An



innovative move has been the introduction of a ‘husband parking’ facility – an area adjacent to the

electronics and entertainment department that includes a café, seating, and magazines. The new

concept follows a year of research and focus groups.

French group Casino announced in early December 2006 that its stake in Brazil’s leading retailer

CBD will rise from 34.2% to around 38% in 2008. This transaction will generate total tax savings for

CBD to the amount of BRL517mn (EUR179mn) beginning in 2007.

The retail group Atacadão is in the sights of four other major MGRs, each of whom has submitted an

unbinding bid to purchase the group, valued at approximately US$1bn. The four bidders are Wal-

Mart, CBD, Carrefour and Makro. Atacadão operates 33 stores across eight states in Brazil, with

almost half of its outlets in the wealthy São Paulo area. Its revenues in 2005 amounted to US$2.2bn.

Two other prominent retail groups, Costco and Cencosud (from Chile), have also been rumoured to

be considering the purchase, but no formal notification of interest from either has been submitted.

Should either Wal-Mart or Carrefour be successful in their bid, they would overtake CBD as the

country’s leading retailer.



Market Overview

Brazil is the largest and most populous country in Latin America, with a population of almost 189mn

citizens. The socio-demographic structure of the country is characterised by significant inequalities in the

distribution of wealth. The poorest 20% of Brazilians account for only 2% of all income, while the

wealthiest 2.5% earn over 30% of all income. The overall income distribution profile is improving, but

very slowly.

Food retailing accounts for around 30% of total retail sales in Brazil, and 7% of GDP, with sales

approaching US$70bn. Hypermarkets and supermarkets have gradually taken market shares from

traditional stores over recent years. Brazil’s current MGR structure developed following the

implementation of the Real Plan in 1994. Today, the market is home to several of the world’s largest

grocery retailers, with operators attracted by the massive purchasing potential of the large Brazilian

population, as well as the country’s suitability as a strategic base for the rest of Latin America.

In recent years, the market has experienced increasing levels of consolidation and concentration as well as

the development of a greater diversity in store formats. Some 12 of the top 20 supermarket chains in 1997

have since been absorbed by other groups. Currently, the two leading companies, CBD (otherwise known

as Pão de Açúcar) and French retailer Carrefour have a combined market share of 27.2%, while the top

five have a 38.8% share and the top ten a share of 44.9%. Most international operators were initially

attracted to wealthy and populous areas in the south-east of the country as well as the highly populated

region of the north-east, but have since expanded into other regions. CBD and Carrefour have been

expanding from their traditional power base in São Paulo state into the less wealthy but well-populated

state of Rio de Janeiro and the north-east, where nearly 30% of the population live. This trend will

intensify over our forecast period, as MGRs seek to take a greater share of the food and drink sales of

lower income groups, which represents a significant market opportunity over the coming years –

particularly in such a populous country as Brazil.

While the number of hypermarkets and their market share of all food and drink products is increasing,

consumers were much more dependent on them prior to 1994, as they were predisposed to purchase larger

quantities to overcome the impacts of inflation. Once the government had inflation under control,

consumers changed their behaviour and new consumption patterns were established, forcing retailers to

focus their investments on other formats. Large retail chains started to develop supermarkets, discount

stores and online shopping services and, due to weaknesses in the non-food sector, also captured a share

of domestic appliances and home entertainment sales. Currently, stores with a size of up to 25m2 are most

popular, with consumers less willing to travel long distances to shop. Large retailers, while maintaining

the hypermarket format, have thus expanded with the launch of small and medium-sized stores.



Convenience stores have also experienced rapid growth in recent years, the majority of which are ‘gas

marts’ associated with petrol stations.

Brazil’s leading MGR is local group CBD, which operates around 643 hypermarkets and supermarkets in

12 states under the fascias Pão de Açúcar, Extra, Sendas and CompreBem. The group also operates a

chain of 55 Extra Eletro consumer electronics and home appliance stores.

French retail giant Carrefour entered the Brazilian market in 1975 and now operates a chain of 134

hypermarkets, 60 supermarkets and 242 discount stores. In June 2005, the company acquired 10

hypermarkets under the Big fascia from local operator Sonae.

Wal-Mart has been operating in Brazil since 1995, opening its first Sam’s Club store in metropolitan São

Paulo. The US group’s network now includes a broad range of different fascias and store formats, with

the overall portfolio consisting of 300 MGR outlets. In 2004, Wal-Mart purchased the Bompreço retail

chain in north-east Brazil from Dutch operator Ahold. Bompreço operates 118 hypermarkets and

supermarkets under the Hiper Bompreço and Bompreço fascias. In December 2005, Wal-Mart acquired

Sonae’s operations in Brazil, consisting of 140 outlets.

Wal-Mart’s annual sales we estimate at US$5bn for full-year 2006. Wal-Mart is ranked third in Brazil’s

MGR sector, after CBD and Carrefour. Prior to the acquisition of the Bompreço chain from Ahold in

2003, Wal-Mart had only a small presence in Brazil, with just 25 outlets, including 13 Wal-Mart

Supercenters, 10 Sam’s Club warehouse stores and two Wal-Mart Todo Dias 24-hour stores. In the US,

Sam’s Club generates 13% of Wal-Mart’s total sales; in Brazil BMI estimates the percentage to be

slightly higher, at 15%.

Makro Atacadista, a subsidiary of the Netherlands-based SHV, operates 45 stores in 21 states, including

the federal capital district. Makro reported sales of US$1.2bn in 2004.

In all major grocery retail formats, sales in value terms continued to be dominated by food in 2006, which

had a share of 95% in discount stores, 89% in supermarkets, 83% in convenience stores and 60% in

hypermarkets. This pattern is, however, expected to change over coming years, with MGRs increasingly

focusing on higher-margin non-food items.

In terms of sheer selling power and efficiency, hypermarkets, with average sales of US$1.24mn per

outlet, are by far the strongest grocery retail format in Brazil. In this respect, they are 3.9 times more

efficient than supermarkets (US$320,056 per outlet). Convenience stores (US$366,714 per outlet) are



more than two-times as efficient as discount stores (US$160,389). However, by definition, discount stores

sell on the basis of a high-volume/low-unit profit strategy.

Table: Structure Of Brazil’s MGR Market By Number Of Outlets ('000s)

2000 2001 2002 2003 2004 2005

Supermarkets 63.6 66.5 67.4 67.8 69.2 70.9

Hypermarkets 6.6 7.0 7.35 7.5 8.0 8.3

Discount stores 28.8 30.7 31.8 33.5 35 36

Convenience stores 2.1 3.4 5.0 5.5 6.3 7.0

Total MGRs retailers 101.1 107.6 111.55 114.3 118.5 122.2

Source: Official statistics, BMI

Table: Brazil MGR Value Sales By Format (US$bn)

2000 2001 2002 2003 2004 2005

Supermarkets 20.7 20.45 20.43 21.70 22.16 22.79

Hypermarkets 7.4 7.68 8.12 8.95 9.57 10.31

Discount stores 2.8 2.91 3.17 3.68 4.47 5.83

Convenience stores 0.5 0.96 1.29 1.81 2.15 2.58

Total MGR sector 31.4 32.00 33.00 36.14 38.35 41.50

Source: Official statistics, BMI calculations



Chapter 3 – Food And Drink

Regional Overview: Growing Market For ‘Light’ Food And Drink In LatinAmerica

Introduction

It may be that global eating and drinking habits are converging towards a single ‘ideal diet’, or it may just

be a fad; whatever the case, across Latin America the words ‘low fat’, ‘low sugar’, low cholesterol, ‘low

salt’, ‘low in saturated fats’, and ‘sin calorias’ (no calories) are appearing on an increasing number of

items. It is not that producers are worried about consumers’ high fat, high sugar intake, rather that they

see an irresistible opening in the market and are modifying their product ranges accordingly.

The trend began in up-market, gourmet outlets at the end of the 1990s, and has since seeped into

mainstream supermarkets – so much so that low fat milk and butter, for example, can now be found on

the shelves in even the most provincial of towns. Of course, the same is not true in rural areas, where

village stores stock neither ‘light’ soft drinks, nor any low-fat food items, due to lack of demand.

Drinks Sector

The soft (carbonated) drinks sector in Latin America, perhaps more than any other, has undergone a

metamorphosis over the past two years. With the region consuming more litres than any other, apart from

the US, it is a high priority for producers; Mexico alone consumes 10% of all Coca-Cola sales

worldwide, and is the highest per-capita consumer of its products globally.

Table: Soft Drink Sales Globally And In Latin America (2006)

Global total (%) Latin America total (%)

Carbonates 47 75

Bottled water 28 12

Fruit juices 12 8

Functional drinks 8 2

Tea and coffee 5 3

Source: BMI



The emergence of the healthy-living trend means that a diverse, non-carbonated range of drinks is today a

must for the likes of Coca-Cola and Pepsi. Pepsi was the first to widen its portfolio in the region, offering

bottled water, energy drinks and fruit juices, which allowed it to gain a march on Coca-Cola and other

local bottlers. Coca-Cola has since caught up somewhat, following strong criticism from shareholders of

foot dragging and lack of market responsiveness.

We believe carbonated soft drinks in Latin America will lose more ground to bottled waters, fruit-

flavoured drinks and functional energy drinks in 2007, due to the latter’s – perceived or real – health

advantages and due to the level of investment these products are receiving. As the table below shows, the

potential is enormous. However, the average market share of carbonates in the region remains high, at an

estimated 75%, much higher than in developed markets, where it is between 40% and 50%, depending on

the country.

Table: Packaged Juice And Not-From-Concentrate Juice Markets In Latin America (litres per capita, 2006)

Juice Not-from-concentrate

US 44.0 11.0

Canada 41.0 10.0

Brazil 7.2 0.8

Argentina 7.1 0.6

Chile 6.8 0.4

Mexico 7.0 0.3

Colombia 6.5 0.3

Venezuela 4.9 0.2

Source: Tropicana, Minute Maid, Florida Natural Growers, BMI

Staying with the drinks sector, alcoholic beverage producers have been forced to adapt their portfolios in

response to changes in demand, particularly from younger consumers. While beverages with long-

standing traditions, such as lager-type beers, and spirits such as brandy, aguardiente and cachaça, will

likely maintain their strong positions within the region, lighter drinks and new flavours are catching on

with younger consumers influenced by global brands and trends.

In 2006, 18-34 year-olds accounted for 30% of the population in Latin America and the Caribbean, and as

a percentage of the total population for the region this is expected to hold steady through to 2015.

Regional and local brewers are working to expand beer’s appeal across age groups and both genders.

Brews with lower calories, smoother taste and lighter flavours are becoming much more commonplace.



Brewers are taking the light beer concept further, repackaging their products with a younger image.

Grupo Modelo in Mexico has taken this approach with its Modelo Light Azul brand, changing from a

white to blue bottle and targeting younger consumers through novelty through the slogan, ‘Beer like

you’ve never imagined it’. And Bavaria in Colombia developed its new Brava brand to have a less

filling, refreshing taste.

Food Sector

The strong influence that things North American have on Latin American food and culture created a

hybrid diet in the region, introducing a host of new flavours and foods. It also gave rise, in the 1970s and

1980s, to a dietary paradox: an increase in the consumption of non-traditional fats and calories at the

expense of widely available, flavourful and nutritious local vegetables, fruits and whole grains.

Table: Food And Drink Industry As A Proportion Of GDP, 2006

% of GDP % of total that is health ('light' or 'low in') food

US 10 32

Canada 13 31

EU 12 34

Mexico 11 10

Argentina 9 12

Chile 9 14

Brazil 8 9

Source: FAO, BMI

Over the past few years a growing recognition of the unhealthy nature of the high fat, high calorie food

diet ‘imported’ from the US has produced something of a backlash, resulting in a renewed interest in a

‘light’ diet, particularly among middle- and upper-income groups and young people.

This ‘dietary paradox’ – where industrialisation and affluence leads to a preference for fatty, deep-fried

dishes, instead of the more nutritionally balanced and flavourful meals – remains, however, alive and well

across the region. The new interest in ‘light’ food is, though, beginning to make important dents in its

armour, such that certain low fat products are beginning to have mass-market appeal.

‘Light’ butter and margarine, milk, cheese, ham, cooking oil – even salt – are now the norm in most

middle- and upper-income homes. Alpina, for instance, the multinational dairy group, has just launched a

low-fat, high-vitamin milk for children in the Andean markets of Colombia, Ecuador and Venezuela,



available in large supermarkets. The product has been so successful that most supermarkets sell out of it

within a few days of delivery, causing some consumers to write letters to local newspapers complaining

of its periodic unavailability. Alpina, unable to keep up with demand, has apologised to customers.

Table: Consumers Seeking The Following Descriptions On Food Labels In Latin America (%)

2000 2006

Light/lite 48 73

Low fat 49 63

Low cholesterol 42 61

Low in saturated fat 31 55

Low carbohydrates 22 40

Free of trans fats 4 17

Source: Supermarket surveys, BMI

The ‘light’ trend has even reached so far as the Mexican tortilla: a team of food researchers was awarded

a patent in October 2006 for a new variety of tortilla that targets consumers eager for a low fat, low-carb,

soy-free version of the popular bread alternative. The scientists claim to have developed a low

carbohydrate, high protein tortilla recipe with a negligible fat content of less than 0.5g of fat per 50g.

The patent allows for the production of round, thin tortillas with up to 70% animal protein content,

derived from either poultry, beef or fish, as an alternative to the standard corn or flour variety. The

chicken-based tortilla, used as an example in the patent, contains 2.6g of carbohydrates compared to the

23g found in flour versions and 12.6g of protein compared to flour’s 4g. This high-protein content allows

for a longer shelf-life and reduced microbial disintegration, according to its inventors at the University of

Florida’s Research Foundation.

The patent states: ‘The high protein food tortillas of the subject invention provide a flavourful, as well as

a functional vehicle for a wide variety of foods including, for example, fresh salads or grilled vegetables.

… The tortillas of the subject invention are a healthy replacement for the typical high calorie, high-fat

tacos, burritos and sandwich breads on the market today.’

As well as being advantageous nutritionally, the product is more durable than standard tortillas with less

tearing when rolled or folded. It has a ‘unique meaty texture’ and can carry flavours such as spicy herb

baked chicken.



Tortillas are traditionally made from cornmeal or wheat flour and form a stable of Latin American diets,

and are becoming increasingly popular throughout Europe. The snack is regarded as a convenient and

healthier alternative to bread thanks to its versatility and low fat content. The tortillas are now available

under the brand name Flaquitas and are marketed by US company Aspirion, which has plans to distribute

them throughout Latin America.

Sterols: A Trend to Watch

Considering the intense interest in healthy eating, and the large research budgets devoted to the area, one

would expect the sector to regularly come up with new products and ingredients. Not all these, of course,

will be successful, but of the new ideas we single out the following one for the Latin American market,

from both a consumption and export-potential perspective: sterols and tocopherols, including natural

vitamin E.

Sterols are plant-derived compounds that have been shown to have a cholesterol-lowering effect on

humans. According to the Inter-America Heart Foundation, the English-speaking Caribbean, Canada,

Argentina, Chile and Uruguay come close to the US in having the highest mortality rates for all

cardiovascular diseases in the Americas. In the US, 42% of all deaths in 2006 were down to coronary

heart disease.

BMI understands that an Argentine company, Advanced Organic Materials (AOM), has reached a stage

in its technological development where it can begin producing tocopherols and sterols for the mass Latin

American market, initially via supplying food companies such as ADM, Cognis and Cargill. The primary

markets consist of Argentina, Chile, Uruguay and Brazil, with extension into Mexico planned for 2008.

Although high-end products containing these ingredients have been available for some time, for example

sterol-containing milk and margarine, these have had very limited market penetration, and have not been

available to a broad slice of the population.

The company is working on end-user applications to facilitate its ingredients’ use in consumer products,

and is working with a WHO-affiliated organisation called Propia, which has sterols as one of seven

dietary recommendations to help meet health needs in the area.. Propia has already undertaken work to

promote the use of omega-3 and omega-6 in food products. Competition in the field in currently limited,

although low-cost Chinese producers have begun offering sterols in small quantities.

Now that its own technology is fully developed, allowing it to process for itself, AOM has ceased

providing other suppliers with raw material. For export, its point of differentiation for vitamin E is that it

is of pure sunflower origin, while most of the world's natural vitamin E is derived from other sources,



such as soy or other oils. As Argentina is the world’s largest sunflower producer, the company can be

sure of a strong, high-quality supply, which further gives us confidence in its future.

The company is increasing its capacity by as much as 50% in the next 12 months. Current annual capacity

is 300 tonnes of tocopherols and 250 tonnes of sterols.



Food Consumption Expenditure Level (LHS), % Of GDP (RHS)

5860626466687072

2002

2003

2004

2005

2006

e

2007

f

2008

f

2009

f

2010

f

2011

f

0

5

10

15

20

25

Food consumption (US$bn)Food consumption as % GDP

e/f = BMI estimate/forecast. Sources: Central Bank of Brazil, Agency for Statistical & Geographic Information


Food and drink manufacturers in Brazil, similar to MGRs, suffered from the economic crisis of 2002-

2003, albeit to a lesser degree owing to their strong export focus. However, confidence in the recovery of

domestic demand has continued to pick up during the last two years . This is reflected in both investments

into production facilities for the domestic market, such as in the case of Nestlé, Sadia and Perdigão, and

plans for product launches in premium product segments, such as InBev’s Stella Artois premium beer

brand.

The recovery of domestic demand is

essential in the face of the continued

appreciation of the real, which cut

increasingly into exporters’ margins in

2006; agricultural exports have been

especially affected, since even small

changes in price tend to lead to buyers

looking elsewhere. Domestic consumption

will thus be the principal growth engine in

2007, just as it was in the second half of

2006, reducing the economy’s vulnerability

to the global trade cycle, but lowering its

export earnings.

High lending rates do, however, make investment extremely costly, and sectors for which investment is

most directly linked to production, such as agriculture, continue to be hampered by the rigid domestic

business conditions. Thus agriculture and livestock activity has been down since the end of 2005,

declining by a quarterly average in 2006 of 3.1%.

Manufacturers’ confidence in the country’s growth prospects and the propensity to engage in long-term

investments has, however, been strengthened by the enactment, more than a decade behind schedule, of

new bankruptcy legislation, which should bring down the high cost of domestic lending. Furthermore, the

judicial reform that has been passed has strengthened the doctrine of lel precedent and improved

transparency.

The recently-passed Public-Private Partnership Bill will help to secure the necessary investments in

infrastructure to clear the bottlenecks hampering the export sector and, as such, long-term growth. The

principal challenge for Brazil’s government now is to set the economy on the path of sustainable



Size of Brazil's Confectionery Market - Value (LHS) / Volume (RHS)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,00020

02

2003

2004

2005

2006

e

2007

f

2008

f

2009

f

2010

f

2011

f

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000Confectionery sales (000 tonnes)

Confectionery sales (US$mn)

e/f=BMI estimate/forecast. Sources: National Institute of Statistics, Geography and Informatics

economic growth and avoid the cyclical balance of payments crises that have accompanied previous

recoveries.

Investment in the food and drink sector rose once more in 2006, and the evidence of strong and building

consumer demand, combined with positive external signals, stimulated higher levels of capital

expenditure. As a result, food and drink manufacturers, like MGRs, remain more confident in the

sustainability of economic growth in 2007.

Brazilians are very fond of canned foods, especially vegetables, meat, fish and beans, sales of which can

be expected to increase over the forecast period. This is especially the case among the poor segment of

the population, where these comparatively cheap products represent a substantial part of the diet.

Confectionery sales have seen steady

growth over recent years, a trend that

can be expected to continue over the

forecast period – though with a higher

proportion of ‘light’ and low-sugar

products in producers’ portfolios – as a

substantial percentage of the population

(over 50%) is young and therefore

forms a desirable target demographic

for confectionery products. The median

age in the country in early 2006 stood at

27.1, between 10 to 12 years lower than

the average for developed countries.

Retail value sales of coffee have been influenced by falling commodity prices. Consumers, however, tend

to switch to added-value products, in line with rising disposable incomes, partly making up for decreasing

prices. Tea value sales can be expected to increase over the forecast period, as consumers switch to

speciality brands. In early 2004, the Brazilian Coffee Industry Association (ABIC) introduced a quality

programme setting minimum standards for domestic coffee production, with the dual aims of increasing

per-capita consumption of coffee and stimulating export of higher quality blends. Traditionally, the

Brazilian coffee industry has concentrated on producing cheap coffee and has been missing out on

increasing consumer preferences for premium and speciality varieties. Exports of higher value coffees

increased in 2006 – by 8% – and we foresee double-digit growth for 2007.



Over recent years, Brazil’s alcoholic drinks industry has suffered from macroeconomic factors, including

high interest rates, rising unemployment and general uncertainty about the country’s further development.

Volume sales have thus been growing slowly, while the development of value sales was largely driven by

manufacturers’ price adjustments and the introduction of value-added products. With the economy’s

recovery expected to continue throughout 2007, the industry’s outlook is improving.

Soft drinks sales can be expected to show substantial growth, owing to the large number of young

consumers in Brazil. The country’s climate favours the consumption of cold soft drinks and increasing

health consciousness further drives sales, especially in the low-calorie, bottled water, and natural juice

sub-sectors. Soft drinks sales, of course, happen all the way along the economic spectrum, with even the

poorest groups opting for them as an alternative to contaminated water, especially in urban areas.



Table: Brazil Food And Drink Indicators

2005 2006e 2007f 2008f 2009f 2010f 2011f

Food consumption (US$bn) 65.6 67.4 68.4 69.1 69.8 70.6 70.8

Food consumption (BRLbn) 159.7 146.7 159.2 179.6 198.0 211.8 222.1

Per capita food consumption (US$) 351.9 356.8 358.4 358.0 357.7 357.9 355.2

Food consumption as % GDP 8.2 7.0 7.1 7.4 7.6 7.5 7.3

Canned food sales (000 tonnes) 423 436 450 464 479 494 510

Canned food sales (US$mn) 1005 1039 1073 1109 1146 1146 1146

Confectionery sales (000 tonnes) 1233 1310 1389 1476 1568 1665 1769

Confectionery sales (US$mn) 8259 9091 9812 10570 11397 12310 13196

Coffee sales (US$mn) 1,896.1 1,832.4 1,770.9 1,711.4 1,653.9 1,598.3 1,544.6

Tea sales (US$mn) 9.3 9.7 10.1 10.4 10.8 11.2 11.7

Alcoholic drinks sales (US$mn) 13,580.5 14,060.5 14,557.4 15,071.8 15,604.4 16,150.6 16,723.9

Alcoholic drinks sales (mn litres) 9,416.6 9,640.0 9,887.3 10,152.4 10,433.9 10,730.2 11,452.1

Beer sales (US$mn) 11,400.6 11,847.0 12,251.3 12,680.7 13,136.8 13,608.0 14,274.8

Beer sales (mn litres) 8,695.5 8,912.9 9,153.5 9,409.8 9,682.7 9,973.2 10,394.5

Wine sales (US$mn) 1,293.3 1,298.5 1,359.1 1,415.7 1,464.9 1,514.8 1,555.1

Wine sales (mn litres) 324.9 326.1 328.0 331.5 334.8 335.6 336.9

Spirits sales (US$mn) 886.6 915.0 947.0 975.4 1,002.7 1,027.8 1,056.2

Spirits sales (mn litres) 396.2 401.0 405.8 411.1 416.4 421.4 427.2

Soft drinks sales (mn litres) 11,004 11,428 11,875 12,339 12,820 13,319 13,838

Soft drinks sales (US$mn) 12,597 13,463 13,769 13,943 14,273 14,631 15,021

Exports (food, drink, tobacco)(US$mn) 9,414 9,782 10,184 10,547 10,911 11,297 11,710

Imports (food, drink, tobacco)(US$mn) 1,370 1,295 1,214 1,134 1,057 988 924

Balance (US$mn) 8,045 8,487 8,970 9,413 9,853 10,309 10,786

e/f = BMI estimate/forecast. Source: Banco Central do Brasil, IBGE




Not unlike the difficulties Colombian coffee producers have always had in marketing and selling

their product within their own country, Brazilian orange juice farmers have never found it easy to

convince their country-folk to drink their fruit as a packaged juice product, in boxes or bottles. This

may be changing, though, as the health and wellness trend takes hold among middle- and upper-

income groups in the country, with consumers seeking healthier products with natural ingredients

and low sugar content. As demand for convenience increases, beginning in Latin America’s most

developed economies – and as fewer meals are taken at home – the demand for not-from concentrate

(NFC) juices is likely to increase as well. Brazil, the world’s largest producer of orange juice, ahead

of Florida, has by far the largest (though still miniscule) NFC juice market in the Latin America

region, with sales of 132 mn litres in 2006. Volume sales have grown particularly rapidly during the

last 10 years; between 1997 and 2005, sales grew by over 200%. With these growth rates, BMI

foresees a 200mn litre market for full-year 2007.

Following meat and poultry producer Sadia’s failed attempt in 2006 to buy its main competitor,

Perdigão, the meat sector finds itself in uncertain times. The deal would have created no less than

Brazil’s fourth-biggest exporter and, moreover, the world’s fourth-largest meat processor, behind

Tyson Foods, Smithfield Foods, and Pilgrim’s Pride Corp, all from the US. It would also have

reversed, at a stroke, Sadia’s declining sales curve, caused by the fall-out from bird flu. Sadia’s

exports to Europe, the Middle East and Africa have been in decline now for the past 12 months,

making deep cuts in profits. Perdigão was also attractive to Sadia because of its greater presence in

Asia. BMI believes the broken deal leaves the way open for foreign firms to move in and offer a

higher price for Perdigão – or to perhaps make an offer for Sadia. Both Tyson and Smithfield have

been the subject of local press speculation lately, though neither has yet made a move. Tyson’s

recent joint-venture in Argentina, its first outside the US, confirmed its strategy of seeking lower

production costs, so we would not be surprised to see it make an overture in either Sadia’s or

Perdigão’s direction.

In total, 310mn tonnes of sugar cane were crushed in Brazil in 2006, to produce 6.5mn litres of

ethanol. Exports in 2006 approached US$2bn, a figure BMI expects to go up considerably when, as

anticipated, the US begins to import ethanol from Brazil on a grand scale. The environmental

question, of course, is never far away from any debate on mass fuel production. In this case, land,

and lots of it, is the issue: to meet demand, sugar cane producers are calling for large tracts of both

public and private land to be given over to sugar cane production. The São Paulo state government is

currently reviewing the requests. The concern is that, as more farmers grow sugar cane, cattle and



other farmers will be forced to move to forest areas, further depleting the country’s rainforest – and

possibly, in the longer-term, even jeopardising food production.

Shortages of organic food and drink products reached critical levels in the final quarter of 2006. The

shortages are most evident in North America and Europe; many US- and European-based companies

are currently scouring the globe for organic ingredients. Organic ingredients like nuts, beans, and

seeds are increasingly being imported from Brazil, herbs and spices from Paraguay, India, and

Ethiopia, and organic fresh fruit and vegetables from African and Asian countries.

A six-year investigation into allegations of an orange juice cartel in Brazil is to continue. CADE, the

antitrust arm of the country’s Justice Ministry, decided to continue the investigation after rejecting a

proposal by the Justice Ministry’s consumer affairs division, SDE, that would have seen the

companies involved pay BRL100mn (US$46.3mn) in reparations charges, in exchange for dropping

the case. The companies would also have to agree to frequent federal audits. The companies under

investigation include Cutrale, Coinbra and Citrovita. Cargill is also under the microscope, despite

having sold its juice division in 2004. It is alleged that the companies begun a price-fixing scheme in

the mid 1990s.

Sales of Brazilian beef suffered a blow in June 2006, when the Asda retail group, the UK unit of

Wal-Mart, withdrew the product from its shelves following talks with the National Farmers’ Union

(NFU). The NFU said that the beef was not produced in accordance with British farm assurance

standards and was not fully traceable, thus rendering part of the supply chain for the beef ‘less than

transparent’.

The UN international food standards body, the Codex Alimentarius Commission, met in Geneva in

July 2006 to consider proposals designed to improve consumer protection from disease-causing

organisms and substances by reducing contamination of foods. Among other issues, officials

discussed measures for the prevention of aflatoxin contamination of Brazil nuts. The issue is close to

the hearts of Brazil nut farmers in the country, which is the second-largest producer of the crop in the

world, harvesting over 30mn tonnes a year. Most exports go the US. Following the meeting, the

commission released codes of practice to deal with the contaminant in August 2006.



Company Developments

Pennsylvania-based Hershey is concentrating on the Brazilian market in its product line expansion

outside the US. Hershey recently launched four new cereal bars, as it seeks to extend its ‘light’

product line in Brazil at a time when domestic demand is high. The Brazilian market offers a growth

rate of 15% a year and, BMI estimates, 350mn cereal bars were manufactured in the country in 2005

– more than double the volume registered in 2004. Isabel Maranhão, Hershey’s marketing manager,

said the cereal bars market grew 50% in value during 2005. In 2006, we estimate there was a further

27% increase in production, amounting to 445mn bars. Hershey began production in Brazil in 2002,

as part of its global effort to reduce costs. At the same time, the company outlined an aggressive

expansion strategy for the market, where the brand is known as Hershey’s. Its entry into the

Brazilian market coincided with a decline in revenues for the company globally.

Argentinean confectionery company, Arcor, is planning to expand its operations in Brazil. While its

Brazilian subsidiary already accounts for over one-quarter of Arcor’s global sales, which reached an

estimated US$1.4bn in 2006, the company hope to expand the business even more in 2007 – by

15%, according to company sources. In 2005, the Brazilian unit’s revenues reached US$353mn, a

20% increase on the previous year. For full-year 2006, revenues are expected to be confirmed at

close to US$400mn. Operations will be expanded in the north-east of the country, to add to the new

plant opened in November 2006, with a projected capacity of 14,000 tonnes of sugar confectionery a

year.

Cadbury Adams, part of the Cadbury Schweppes sweets to soft drinks group, is to extend its

Trident bubble gum brand with the launch of Trident drops. The company has spent 18 months

developing the new product, for which Brazil will be a test market. Trident gum has been marketed

in Brazil for 25 years. Cadbury Adams is looking to take a 30% market share with the Trident drops,

which are being targeted at the adult market, competing with the market-leading Tic Tac mint brand.

Sambazon Acai, a California-based company that imports the tropical fruit known as acaí from

Brazil's Amazon region, plans to increase its volumes in 2007, due to fast-rising demand. The berry

is used in organic energy drinks, and is becoming increasingly popular in North America. The

company works with 5,000 farmers who harvest the tropical fruit from tall trees in the Pacá and

Macapá states in north-eastern Brazil

Spanish wine producer Freixenet is launching a sparkling wine brand in Brazil. The cava producer

announced in September 2006 that it was set to begin selling a new product, Tourne, in Brazil.

Freixenet hopes the product will boost its sales in Brazil, where its products are distributed by drinks



giant Diageo. Freixenet is forecasting annual case sales of 40,000 for the Tourne brand. The

company, which has been present in Brazil for 10 years, sells a stable of products in the Latin

American country, including its Cordon Negro and Carta Nevada brands.

Meat and poutry producer, Sadia, is to invest BRL2.3bn on technology improvements and

expansion, including three meat packing facilites in Matto Grosso state – two chicken, one pork. It is

also building a chicken meat packing facility in Russia, its main export market, to make a range of

frozen chicken goods for retail sale.

Mexican brewer FEMSA is to launch a new version of flagship brand Sol in a fresh assault on the

Brazilian beer market. The company, which owns Brazilian brewer Kaiser, is looking to bolster its

presence in the mainstream segment of the world’s third-largest beer market. A source at FEMSA

said that the ‘new’ Sol, dubbed Sol Pilsen, had been developed after seven months of consumer

testing. The brand will sell for around BRL1.10 (US$0.52) throughout the country.

‘Since the acquisition of Kaiser, FEMSA had noticed the opportunity of launching a new beer to fill

the demand for a beer that is not too strong but at the same time, not too light. It is just right,’ said a

FEMSA senior executive. ‘The Brazilian beer market had not seen much innovation or the launching

of a mainstream brand in several years. That is why, after seven months of intensive research,

FEMSA is finally launching the beer that the Brazilians indicated to be what they want.’

Meanwhile, its Kaiser business was performing ‘much better’ than in previous years after FEMSA

leveraged its distribution network to increase sales. ‘Most of our initial objectives are being

accomplished. We have a long-term view for the business, and it will be a gradual process. However,

everything looks to be in the right place to start harvesting upon the actions implemented throughout

the year,’ added the senior executive.

Brewer AmBev will invest US$75mn to construct a new bottle factory in Campo Grande, Rio de

Janeiro. The new installation will comprise 24,000m2 and will come on stream in the second half of

2007.

Chile-based Coca-Cola bottler Embotelladora Andina said continuing growth in Brazil drove a

surge in third-quarter 2006 sales. Andina, which bottles Coke products in Argentina, Brazil and

Chile, said sales for the three months to the end of September 2006 were up almost 13% y-o-y, to

US$234.8mn. The company did not disclose quarterly profit figures. Sales in Brazil have jumped

30% so far this year. Andina has also seen some growth in Chile and Argentina, with sales up 3.2%

and 4.1%, respectively. Group revenues for the nine months to the end of September rose 13% to

US$712mn, driving a 25% leap in profits to US$82mn.



According to reports in Brazil, FEMSA has invested BRL1m (US$500,000) in developing its

brewery at Ponta Grossa in Paraná state, adding a new production line for 30-litre and 50-litre kegs.

The addition of the new line is aimed at keeping pace with rising demand in the region. The Paraná

unit already produces beer in 600ml bottles, 350ml cans and 355ml long-neck bottles. FEMSA

Cerveja Brasil has eight production units in Brazil, with a total capacity of 19m hectolitres a year.

Schincariol, the Brazilian brewer, is not for sale – to SABMiller or anyone else. This is according to

a spokesperson from the company, when asked recently about continuing rumours of a takeover by

the South African brewer. SABMiller, equally, has refused to comment on what it calls idle gossip.

Nonetheless, it is well know that SABMiller is looking to build on its Bavaria business in South

America, which it acquired last year in a US$5bn deal. AmBev controls over 70% of the Brazilian

beer market, in which Schincariol has risen to the number-two position, mainly due to increased

sales of its Nova Schin brand. Schincariol’s 14% market share would, in theory at least, be a near-

perfect platform on which SABMiller could enter Brazil.

Chilean wine group, Concha y Toro, announced in June 2006 that it had launched its flagship brand,

Casillero del Diablo in Brazil. The wine will be distributed by Pernod Ricard’s local arm in Brazil,

Pernod Ricard do Brasil. The wine will be sold at a price of US$13.



Market Overview

Brazil is largely self-sufficient as far as food is concerned, due to its large and diversified agricultural

sector. The country is one of the world’s greatest producers and exporters of agricultural commodities.

Agri-business is one of the pillars of the economy, accounting for over 40% of Brazilian exports. Soya,

meat, sugar, leather, maize and cotton are the main export products. In addition to its position as the

number one coffee producer for more than a century, Brazil also leads in oranges, orange juice

concentrate, alcohol, sisal, cassava and bananas.

Brazil’s milk production has increased over the review period, mainly owing to improvements in

productivity and the dairy sector benefiting from the overall improved economic conditions. Consumption

of dairy products is also on the rise, supported by higher purchasing power and lower unemployment

rates. Production increases have mainly been achieved by large multinational and domestic operators,

including for example Nestlé, Parmalat and Itambe. A key characteristic of these operators is that they

support the development of the sector by investing in genetics, nutrition, quality and improved

management practices at dairy farms. Furthermore, the Brazilian government, through its Pro Leite

national milk development programme, supports dairy producers financially, with US$37mn having been

allocated for increasing productivity through herd improvement, emphasis on quality and improved

management practices for the 2006-2007 marketing year.

Meat production in Brazil has been steadily increasing over the review period, mainly driven by strong

demand from export markets, particularly where beef and pork are concerned, and the restrictions on beef

exports in Argentina. The latter will continue to benefit Brazilian producers in 2007, as importers look for

an alternative to Argentine beef. Domestic demand, meanwhile, has been growing at a slower rate, owing

to wide income disparities, with many consumers not being able to afford meat on a regular basis.

Production increases have been facilitated by higher investments in animal genetics, improved pasture

and management practices as well as government credit programmes. Poultry production has also been

increasing, with both export and domestic demand being strong, owing to the cheaper retail prices. The

Brazilian poultry sector is fairly concentrated, with the top ten processors accounting for around 60% of

the market.

For full-year 2006, we expect poultry exports to increase by between 5% and 10%. In 2007 the increase is

likely to be even higher, with rising demand for white-meat in developed economies. The Brazilian

Chicken Exporters Association has been a vocal campaigner for boosting sales via the opening of new

markets, including the Philippines, China, Turkey, Malaysia and Serbia. In 2005, the country’s poultry

exports increased by 35% to 2,854mn tonnes, worth US$3,508bn. In 2006, they increased by a further



25%, to US$3567mn tonnes, at a value of almost US$4.2bn. These figures make the sector something of a

rising star in the food export market.

The Brazilian fisheries sector is characterised by the presence of a total of 300 both small scale and

industrial scale producers and is focused on both coastal areas and the river basins of the Amazon and

other big rivers. Furthermore, the aquaculture sector, which harvests fish, crustaceans and molluscs, is of

some significance. Catches are both consumed fresh and processed for both the domestic and

international markets. Overall, the Brazilian fisheries sector accounts for around 0.5% of GDP and

production, which remains low considering the large coastal area, has constantly increased over the

review period.

Table: Brazil Agricultural Sub-Sector Production – Historical Data

1999 2000 2001 2002 2003 2004

Eggs Volume (‘000 dozen) na na na na 2,714,618 1,922,556

Fish Volume (tonnes) 544,984 606,062 642,244 676,127 na na

Meat Volume (tonnes) 14,588,400 15,395,450 16,185,200 17,482,641 18,482,641 14,849,952

Milk Volume (‘000 litres) na na na na 22,253,863 14,502,565

na = not available. Source: IBGE

The Brazilian food and beverage industry is well developed and highly sophisticated, and leading

international operators have a strong presence. During the 1990s, the implementation of the Real Plan, the

globalisation process and the creation of trade agreements forced the local industry to invest heavily in

technology to maintain its competitive edge. Thus the production of high-value products and overall

product quality increased. There are around 45,000 food processing companies, including major

multinationals that manufacture more than 820 different products. The sector is, however, composed

mostly of small- and medium-sized companies. Nestlé is the clear leader in the Brazilian packaged food

industry with a market share of 7%, followed by Parmalat and Unilever. Small- and medium-sized

regional manufacturers do, however, also have a strong presence, benefiting from an intrinsic

understanding of the local market and, often, cheaper prices. They account for around 24% of total

packaged food value sales.

Nestlé produces food and nutritional products in a variety of segments including milk, coffee, cereals,

biscuits, chocolate, frozen goods and ice cream. The Swiss firm produces 1,300 different items under 200



marks. There are 26 production plants in the states of São Paulo, Minas Gerais, Rio Grande do Sul, Goiás,

Rio de Janeiro and Espírito Santo.

Danone brought its fresh dairy products to Brazil in 1970. Today, it is the market leader in fresh dairy

produce and is a leading producer of biscuits and snack foods, as well as bottled water. The company has

four production plants in Minas Gerais and São Paulo. Unilever has 14 production plants in São Paulo,

Minas Gerais, Goiás and Pernambuco that produce food, ice cream, hygiene and beauty products.

Sadia is among the country’s meat exporters, operating 12 production plants capable of producing a

combined 1.3mn tonnes of protein-based products including chicken, turkey, pork and beef as well as

pasta, margarine and desserts. Sadia’s main rival is Seara Alimentos, a subsidiary of US agri-business

giant Cargill. Seara operates nine plants in the southern states of Santa Catarina, Paraná, São Paulo and

Mato Grosso do Sul. Perdigão is a leading poultry exporter, operating 13 industrial facilities in southern

and mid-western Brazil.

The beverage industry in Brazil is ranked third worldwide, manufacturing 11.5bn litres of non-alcoholic

drinks a year. However, most of this production is for export purposes, as per-capita consumption levels

place Brazil in 25th position worldwide. The leading company is Companhia Brasileira de Bebidas

(AmBev), which produces beer as well as soft drinks. Brazil is considered a young country, with over half

of its population under the age of 24. In the past few years, the beverage industry has begun to try and

attract these consumers, while soft drinks producers in particular have invested substantial amounts in the

country. The soft drinks industry is quite concentrated, with the three leading players accounting for 60%

of value sales in 2006. They are Coca-Cola, AmBev and Kraft Foods. Competition in the sector is strong

and is carried out mainly via strategic pricing. Furthermore, manufacturers try to gain market share by

frequently introducing product innovations, new flavours and novel packaging options. The leading soft

drinks producers in Brazil are Coca-Cola’s various bottlers – the US cola giant’s products are produced

by 16 different companies. Key bottlers include Coca-Cola FEMSA and Chile’s Embotelladora Andina,

which holds the franchise for Rio de Janeiro. The group operates two bottling plants. Coca-Cola FEMSA

holds the franchises for Greater São Paulo, Campinas and Santos in São Paulo state as well as the states

of Mato Grosso do Sul and part of Goiás. AmBev is the second-largest soft drinks producer,

manufacturing and distributing PepsiCo drinks as well as its own brands. Market share is equal to around

31.3%.

Wine production is concentrated in southern Brazil, notably the state of Rio Grande do Sul. Although

production has increased over recent years, it is not sufficient to accommodate increases in demand, and a

substantial amount of wine is imported. The small, but growing number of ‘boutique’ wine producers in

Brazil have been attracting the interest of international wine buyers recently, as they seek to respond to



consumers’ calls for new, exciting wine varieties. A Harris Poll in 2006 found that the majority of wine

drinkers in the US would be willing to purchase wines from non-traditional wine producing countries.

This makes the wine sector in Brazil one to watch over the coming years.

Where alcoholic drinks are concerned, national companies have improved the quality of their products

significantly after sizeable ongoing investment and are paving the way for greater national acceptance of

more sophisticated products. International players have recognised the immense, largely untapped

potential of the Brazilian alcoholic drinks market and are constantly increasing their production.

Furthermore, to compensate for declining volume sales growth in Brazil owing to the uncertain economic

situation, leading alcoholic drinks manufacturers have established manufacturing facilities and/or

acquired local manufacturers in other South American countries. On the domestic market, the focus of

recent years and months has clearly been the development of premium products as well as the

introduction of new product formulae and innovative packaging options.



Chapter 4 – Tobacco


Cigarette consumption in Brazil can be expected to decline further over the coming years as a result of

government actions and the increasing health consciousness of consumers. Volume sales growth of

cigarettes can be expected to slow down owing to increased health consciousness and the activities of the

anti-smoking lobby.

Table: Cigarette Value/Volume Sales – Historical Data And Forecasts

2005 2006e 2007f 2008f 2009f 2010f 2011f

Cigarette sales (mn units) 1,233 1,310 1,389 1,476 1,568 1,665 1,769

Cigarette sales (US$mn) 8,259 9,091 9,812 10,570 11,397 12,310 13,196

e/f = BMI estimate/forecast. Source: Banco Central do Brasil, IBGE


Following the ratification of the World Health Organization (WHO)’s Framework Convention

on Tobacco Control in November 2006, the Brazilian government faces the challenge of

replacing tobacco with alternative crops in order to ensure an adequate income for around

200,000 family farms currently depending on tobacco growing. Strong candidates as alternative

crops would be corn (maize) and sugar cane, considering the dramatic growth in demand for both

as a result of rising ethanol production. Latin America generally, and Brazil in particular, will

likely form a large part of any ‘grand-plan’ in the Americas to devote a much greater proportion

of agricultural land to these crops; lots of sunlight and relatively cheap production and labour

costs, compared to North America, make the region an ideal site.

In January 2006, the Brazilian government has thus launched a programme in Rio Grande do

Sul, Brazil’s biggest tobacco-growing state, aimed at assisting tobacco farmers to diversify.

Under the programme, the government will provide financing, technical assistance, research and

commercialisation of diversified crops. There will, however, be no restrictions on tobacco

cultivation in Brazil.



Market Overview

Souza Cruz, which is a subsidiary of British American Tobacco (BAT), is the leading operator in

Brazil’s tobacco industry with a market share of around 70%. Souza Cruz and second-ranked Philip

Morris account for almost all legally sold cigarettes in Brazil. In April 2003, Souza Cruz opened a new

factory in Cachoeirinha, southern Brazil, one of the most modern cigarette plants in Latin America, with a

production capacity of 45bn cigarettes a year. Its leading market position is due not only to the popularity

of its brands, but also to the company having established a strong distribution network, which is an

important factor in a country the size of Brazil.

Around one-third of all cigarettes consumed in Brazil are either smuggled or counterfeit, with the

government losing a total of US$487.9mn a year to this trade. During 2006, the average price of a legal

cigarette pack remained around US$0.91, while the average price of contraband goods stood at US$0.48.

Brazil is also the world’s second-largest market for Kreteks (clove cigarettes), and PT Djarum is

manufacturing these products under licence in a new purpose-built factory.

Brazil has some of the world’s toughest laws on tobacco advertising, which is limited to points of sale. In

January 2002, Brazil became the second country in the world to attach anti-smoking images on cigarette

packages to remind smokers of the damage done to their health. It was the first country to prohibit

expressions such as ‘light’, ‘ultra-light’ and ‘mild’ from being printed on packages. In November 2005,

Brazil ratified the Framework Convention on tobacco control. The country has some 40mn smokers, out

of its total population of almost 182mn.

As a result of tough government actions and consumers’ increasing health consciousness, the number of

smokers has declined over recent years. Brazilian cigarettes are some of the least expensive worldwide,

making them highly accessible to children and adolescents. This accessibility is something that has been

widely criticised by anti-tobacco lobbyists as counteracting the government’s tobacco control activities.

Brazil is also the world’s second-largest tobacco producer after China and has two tobacco-growing areas,

in the north-east and the south of the country, with around 170,000 family farmers harvesting around

500,000 tonnes a year. The southern tobacco-growing regions feature cigarette manufacturing and

processing plants, while the tobacco harvested in the poorer north-east is used predominantly to produce

cigars.



Chapter 5 – Competitive Landscape

Key Players

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

Parentcompany

Countryof

origin

2005sales

(US$mn) Fascia Format

No. ofoutlets, year

end 2005

Currentno. of

outlets Est.No of

employees

Cia Brasileirade Distribuição Brazil 5,500.0 643 643 1948 63,671

Pão de Açúcar Supermarkets 199 199

Extra Hypermarkets 71 71

Sendas* Supermarkets 60 60

CompreBemBarateiro Discount stores 168 168

Econ Discount stores 90 90

Carrefour Com.Ind. Ltda France 5,400.0 400 436 1975

Carrefour Hypermarkets 85 124

Champion Supermarkets 97 60

Dia Brasil Discount stores 208 242

Big Hypermarkets 10 10

Wal Mart USA 4,500.0 155 295 1994

Supercentres Hypermarkets 13 23

Sam's Club Cash-and-carry 10 15

Todo DiasConvenience

stores 2 2

Bompreço Supermarkets 118 69

Bompreço Hypermarkets 0 29

BompreçoMini-Market

Conveniencestores 0 8

Balaio(Brompreço) Supermarkets 0 7

Magazine(Bompreço) Supermarkets 0 3

BIG Hypermarkets 0 37

Nacional Supermarkets 0 68

Mercadorama Supermarkets 0 24

Maxxi AtacadoWholesale

Clubs 0 10



Table: Key Players In Brazil's Mass Grocery Retail Sector (cont.)

Parentcompany

Countryof

origin

2005sales

(US$mn) Fascia Format

No. ofoutlets, year

end 2005

Currentno. of

outlets Est.No of

employees

MakroAtacadista

Nether-lands 1,216.4† Makro Cash-and-carry 45 45 1972

ModeloContinente(SonaeDistribuicãoBrasil SA)‡ Portugal 1,200† 140 140 1990 20,000

Big Hypermarkets 37 37

CandiaMercadorama Supermarkets 24 24

Nacional Supermarkets 66 66

Maxxi Hypermarkets 11 11

Cia Zaffari Com.Ind. Brazil 361.3 Zaffari Supermarkets 23 23 1960

COOP Coop.De Consumo Brazil 340.9† Coop Plus Supermarkets 22 22 1954

G BarbosaCom. Ltda.(ACONInvestments) USA 280.3 G Barbosa Supermarkets 32 32 1955

Irmãos Bretas,Filhos e Cia Brazil 230 Bretas Supermarkets 36 36 na

na = not available/applicable. * Joint venture of CBD and Sendas Distribuidora in Rio state. † 2004 sales. ‡ Purchased byWal-Mart in December 2005. Source: ABRAS, BMI



Table: Key Players In Brazil's Food And Drink Sector

Company Sub-sector 2005 sales (US$mn) No. of employees Est,

AmBev Beverages 4,814.2 17,000 1885

Sadia Food 3,828.3 40,600 1944

Nestlé Brazil Food and beverages 3,005.6 16,000 1876

Unilever Bestfoods Brazil Food and beverages 2,850e 13,450 1929

Danone Brazil Food and beverages na na 1970

Perdigão SA Food 2,600.0 5,300 1934

Seara Alimentos SA Food 1,475* 10,000 1956

Parmalat Brasil SA Food and beverages na 6,000 1972

Schincariol Beverages 975.2 3,500e 1939

Embotelladora Andina SA Beverages 800e 4,124 1994

Cervejarias Kaiser Beverages 350e 3,200 1980

Coca-Cola FEMSA Beverages 300e na na

e = estimate. na = not available. * 2004 sales. Source: BMI



Regional Company Case Studies

Cencosud In Latin America

Introduction

Chile’s second-largest MGR, Cencosud operates in its home country of Chile and in neighbouring

Argentina. In both countries, the retail sector is highly competitive, with relatively low (for the region)

profit margins. Despite this, Cencosud, in common with its main rival D&S, has become one of the

strongest and most financially solid MGRs in Latin America, with total 2006 group revenues of

US$5.8bn, up 21% on 2005. It is currently seeking to use this strength to diversify into other markets in

the region. BanChile issued a ‘strong buy’ recommendation for the stock in January 2007.

The company’s roots go back to 1960, when Horst Paulmann Kemma, a German immigrant, turned a

restaurant called Las Brisas into Chile’s first self-service grocery store, of 160m², in the city of Temuco.

This was followed, in 1976, by the launch of Jumbo, a much larger, supermarket-format store, opened in

the capital, Santiago, with 7,000m² of selling space. Jumbo soon multiplied, becoming the country’s first

MGR. Six years later, in 1982, Jumbo opened in Argentina. The Jumbo chain was Cencosud’s only

interest in Argentina for twenty-two years, until it bought that country’s Disco grocery chain in 2004.

Table: Cencosud: Principal Shareholders

% share

Quichamalì SA 29.2

Inversiones Latadìa SA 27.6

Mehuin SA 7.2

Citibank Chile 2.8

Horst Paulmann Kemna 2.8

The Bank of New York 2.7

AFP Provida SA (Pension Fund C) 1.9

Celfin Capital SA 1.5

AFP Habitat SA 1.3

AFP Provida (fund type B) 1.2

Banchile Corredores de Bolsa SA 1.0

Cia de Inversiones Transoceanica SA 0.7

Other shareholders 19.6

Source: Cencosud



Store Portfolio

Cencoosud’s portfolio of store-types is wide, comprising shopping malls, hypermarkets, supermarkets

(groceries only), home-improvement warehouses, pharmacies, convenience stores, open-air markets,

clothing, and furniture shops As a result of its purchase of the Almacenes París chain in 2005, so far the

biggest transaction in the company’s history, it now manages the largest number (23) of department stores

in the country. Additionally, in 2006 Cencosud announced the construction of the Costanera Center,

which, at a cost of US$400mn, will be the tallest building in South America. The building, scheduled for

completion in 2010, will include a mall with 400 stores, 14 cinemas and a food court with 2,000 seats.

Cencosud’s property division estimates it will bring in US$150mn a year in office and store rentals and

sales.

Table: Cencosud: Store Portfolio

Chile Argentina

Santa Isabel ●

París ●

Jumbo ● ●

Easy ● ●

Commercial Center ● ●

Disco (Plaza Vea and Mini Sol) ●

Source: Cencosud

Meanwhile, the financial services arm of París is growing rapidly and represents a new business segment

for Cencosud, which it will seek to graft onto its hypermarket and supermarket stores, via the introduction

of banking, credit card, insurance and travel services. The ‘Tarjeta París’, or ‘Paris Card’, unit gives the

company 2.6mn new clients, who can now make purchases with the credit card at any of Cencosud’s

stores, including its Jumbo, Easy and Santa Isabel outlets, as well as in Paris Insurance and Paris Travel.

The Banco París (‘Paris Bank’) business is currently the fastest growing part of the entire group. Retail

banking deposits grew by more than 40% in 2006, double the rate of growth (20.6%) in the sector as a

whole. An analyst report in December 2006 put the bank within the top five most profitable financial

services institutions in Chile, with a ratio of profit to capital employed of 24.9%. During the last two

years, 15 new banking points have been opened either inside, or adjacent to, its supermarket and

department stores.



Cencosud: Revenues By Country, 2006 % Contribution

Argentina32%

Chile68%

Source: Cencosud, Stock reports

Cencosud: EBITDA By Country, 2006 % Contribution

Chile24%

Argentina76%

EBITDA = earnings before interest, taxes, depreciation and amortisation. Source: Cencosud, Stock reports

It also inherited one of the country’s most

active websites from Almacenes París, which

has been offering a good number of its

products for sale online for some time.

Cencosud will now look to develop the service

across its entire portfolio of stores, in this way

leveraging the relatively high – for Latin

America – educated, middle-class population

in Chile. With Chile having the highest

internet penetration rate in the region, new

technological sales channels are likely to be

well received. The virtual sales website

operated by the Colombian MGR, Exito, is

perhaps the most sophisticated and successful

‘alternative’ sales channel in Latin America.

Cencosud’s fortunes are, then, inextricably linked to those of the retail sector. In Chile over the past few

years, this has meant steady growth, as low inflation and expanding GDP have increased overall

purchasing power. It also helps, of course, that the majority (70%) of groceries in the country are

purchased in supermarket chains, with the remaining 30% purchased via more traditional channels of

independent ‘mini-markets’, corner stores and street markets.

In Argentina, the sector has not fared as well,

with high levels of inflation eroding the

spending power of all groups in 2006,

especially those in the lower- and middle-

income brackets. Government-imposed price

restrictions on a range of food and drink items

have made trading conditions even more

challenging. Added to this is the fact that more

than two-thirds (68%) of food and drink items

in Argentina are purchased via traditional

channels, as opposed to 32% bought in MGR

outlets. In 2005, seeking to generate capital

and pay down debt, Cencosud sold 38.6% of

its supermarket business in Argentina to,

among other investors, the International



Finance Corporation (IFC) arm of the World Bank.

Growth Strategy For 2007 And Beyond

Despite its small population, 16.5mn, Chile has produced three large retail chains – Cencosud, Falabella

and D&S – all in Latin America’s top 10 retailers. Of the remaining seven, three are from Mexico, one is

from France/Colombia, one from Brazil, one from France, and the number one, Walmex, from the US.

Net profits in all three Chilean chains increased impressively in 2006. At Cencosud, they reached

US$250mn, the result of a 21% increase in revenues and a narrower income-cost ratio. With healthy cash-

reserves to boot, the retailer finds itself in a position to make investments for the future. Considering

Chile’s limited market size, however, last year’s growth rate cannot be repeated forever – even taking into

account new store openings and the like in its home market.

Table: Cencosud: Revenues By Business Line In Chile, 2006

% contribution

Credit cards 8

Others 1

Hypermarkets 28

Supermarkets 32

Home improvement centres 8

Commercial centres 2

Department stores 21

Source: Stock reports, BMI

Table: Cencosud: Revenues By Business Line In Argentina, 2006

% contribution

Comercial centres 3

Hypermarkets 20

Supermarkets 52

Home improvement stores 23

Credit cards 2

Source: Stock reports, BMI



Table: Dominant Mass Grocery Retailers In Chile

Revenues, 2006 (e)

Distribución & Servicio (D&S) 3,314

Cencosud (groceries only) 1,985

Supermercados Unimarc 332

Montserrat 281

Falabella 259

e = BMI estimate. Source: Quarterly company reports

This means that it will have to look elsewhere for dramatic growth opportunities, in fast-growing, less

mature retail markets than Chile. In Latin America, these would include Mexico, Peru, Colombia, Panama

and Guatemala. In these countries, the most successful retailers are growing by up to four times faster

than Cencosud, as the sector responds to the challenge of persuading growing numbers of lower- and

middle-income consumers to purchases most of their groceries in modern, supermarket channels.

Cencosud has not been blind to these regional opportunities, indeed quite the opposite: over the last 12

months it has been exploring, almost hyperactively, how best to enter firstly the Colombian retail market,

followed by Mexico and Peru.

Its much-trailed offer to buy a quarter of Almacenes Exito, Colombia’s leading MGR, in December 2006,

proved unsuccessful. Once French retailer Groupe Casino became aware of Cencosud’s offer for the Toro

family’s 24.5% of Exito, it wasted no time in manoeuvering to exercise its right of first refusal – being

already a one-third shareholder. More than a wish to secure an additional slice of the company, the move

reflected the stronger desire to stop Cencosud from getting into a position from which it could mount a

full-scale takeover bid.

Where, then, will Cencosud go from here? BMI sees two possible scenarios. Either it will continue to

insist on entering the Colombian market, in which case the Olímpica chain – still wholly Colombian

owned – would seem the most logical target. It is solid financially, with little or no debt, and it has made

no secret of its desire to court a well-capitalised partner to enable it to compete with Almacenes Exito.



Alternatively, it could seek to enter the Mexican market, where the ratio of supermarkets per inhabitant is

1:10,000, higher than Chile (1:7,500) and much higher than Argentina (1:3,300). Second-largest Mexican

retailer Soriana is certainly becoming a target for takeover, for it is experiencing a rising cost base and

will need a significant cash injection if it is to challenge Wal-Mart’s (Walmex) market share in the

country.

Cencosud’s need to break out of its traditional southern cone sphere is urgent, for it, more than anyone

else, knows that if it does not diversify geographically – and soon – its growth will be stunted. Many

shareholders in such a case, having grown accustomed to high profits, would likely jump ship, thus giving

rival D&S, Chile’s biggest MGR, a critical advantage.

In the meantime, the company will press on with its plans for 2007 in its two traditional markets, opening

up more stores in each, as it seeks bigger market shares. In Argentina, where 180 new stores will be

opened during 2007 and 2008, the retailer is betting on an increase in spending by consumers this year,

forecast to be between 10% and 20% by local economists. Among the new ventures in the country will be

the introduction of the Almacenes París department stores and of the group’s credit card business.



Cadbury Schweppes In Latin America

Introduction

Cadbury Schweppes (CS) refers to itself as the world’s leading confectionery company and the world’s

third-largest soft drink company. While its products are marketed in most countries, it is especially strong

in North America and Australia. From its Swiss origins, almost 225 years ago, CS has built up global

sales of over GBP6.5bn; it employs over 70,000 people.

The CS portfolio of products includes cocoa powder, sugar confectionery, cough drops, chewing gum,

milk chocolate bars, sugar-coated gum, breath freshener, chewing gum, sugar-free gum, bubble gum,

carbonated water, carbonated soft drinks, non-carbonated soft drinks, tomato-based drinks and apple

juice.

The company’s business in Latin America grew significantly in March 2003, following its acquisition of

Adams. At the time, over 75% of Adams’ interests, and 86% of its profits, were in the Americas,

including the US and Canada.

Latin American Markets

As a direct result of the purchase, in Latin America CS now holds the lead in the overall confectionery

market, with a share of 20%, more than double that of its nearest competitor. It has a 64% share of the

Latin American gum market, putting it in first place in that market in Mexico, Brazil, Venezuela,

Argentina and Colombia.

Furthermore, it has the leading share of the highly fragmented sugar confectionery market, at 8%, and a

number one or number two position in each of its Latin American markets. The company’s distribution

infrastructure in Latin America has improved lately, enabling it to better supply the highly fragmented

customer base of small shops and kiosks. In Mexico, its most important market in the region, outside the

US and Canada, CS has a 70% slice of the gum market and almost 10% of the sugar market. Other brands

sold in Latin America include Clorets, Swedish Fish, Sour Patch Kids, Beldent, Bazooka and Mantecol.

Apart from Canada and the US, CS has regional manufacturing facilities in Mexico, Argentina, Brazil and

Colombia. The company’s Americas Confectionery region operates businesses in all the continent’s

major countries, including the US, Canada, Mexico, Brazil, Argentina and Colombia. Almost 60% of

sales are in the US and Canada, with the remainder in Mexico and Latin America. In common with many

companies with a large portfolio of products, a very small number of them – five – account for the

majority (60%) of sales: Trident, Dentyne, Cadbury Dairy Milk, Caramilk and Mr Big. Globally, just four



products, or ‘power brands’, account for almost 70% of sales: Halls medicated confectionery, Trident

sugar-free gum, Dentyne Ice chewing gum, and the Bubbas bubble gum range.

Corporate Structure And Strategy

Globally, CS is divided into regions and functions. Each region is focused principally on what the

company calls ‘commercial operations’, and supports a team from each of the six functions. The four

regions are:

Americas Beverages

Americas Confectionery

Europe, Middle East and Africa (EMEA)

Asia Pacific

Table: Revenue By Region, 2006

% total revenue

Americas Beverages 28

Americas Confectionery 20

EMEA 32

Asia Pacific 20

EMEA = Europe, Middle East and Africa. Source: Cadbury Schweppes, BMI

Table: Profits By Region, 2006

% total profits

Americas Beverages 45

Americas Confectionery 16

EMEA 27

Asia Pacific 12

EMEA = Europe, Middle East and Africa. Source: Cadbury Schweppes, BMI



The six functions, or functional groups, are the following, each of which also has a small central team at

the company’s headquarters, in London, UK.

Global Supply Chain

Global Commercial

Science and Technology

Human Resources

Finance and Information Technology

Legal

CS has a total of 101 manufacturing plants and bottling facilities (shown in the table below), of which 41

are located in Europe, the Middle East and Africa; 11 in Americas Confectionery; 11 in Americas

Beverages; 25 in Asia Pacific; and 13 in Europe Beverages. Of these, 67 are engaged in the manufacture

of confectionery products and 34 in the manufacture and bottling of beverage products. In 2006 thirteen

of the facilities were sold, as part of the sale of the Europe Beverages business. The remainder are all

owned by CS, apart from nine that are leased: five in Europe, Middle East and Africa, two in Asia Pacific,

one in Americas Confectionery and one in Americas Beverages.

Table: Cadbury Schweppes: Manufacturing Plants

No. of confectionery plants No. of beverage plants Total

Americas beverages 0 11 11

Americas confectionery 11 0 11

EMEA 38 3 41

Asia Pacific 18 7 25

Total 67 21 88

EMEA = Europe, Middle East And Africa. 13 European beverage plants were sold in 2006. Source: CadburySchweppes

Global Expansion And Brand Concentration

CS’s overall strategy over the past four years has been one of global expansion and concentration on its

core brands, in both the confectionery and soft drinks segments. Needless to say, this has resulted in an

active programme of acquisitions and divestments. The majority of acquisitions have occurred in

developing regions, mainly Eastern Europe and Latin America.



The biggest, and most controversial among shareholders, of the acquisitions has been that of Adams in

2003, purchased from Pfizer for US$4.2bn. Apart from propelling it into the number one position

globally as far as confectionery sales go – overtaking both Nestlé and Mars – the deal gave it immediate

access to new markets in Latin America – where confectionery sales have been growing faster than in

developed countries for some time.

The deal was controversial at the time largely because 55% of Adams’ sales were in the declining

sugarised gum and bubble gum sectors. With sugarised gum sales declineing since the end of the 1990s in

all world markets except Asia Pacific and Australasia – markets where Adams was weak or entirely

absent – the future was bleak, according to many shareholders. They did not reckon on the meteoric rise

in non-sugarised gum sales, a segment in which CS is seeking to challenge Wrigley’s global dominance.

While the outlook for the bubble gum sector has improved since the purchase, BMI forecasts that total

bubble gum sales are likely to be smaller than the more profitable functional gum sector by the end of

2008, a sector where Adams has failed to build on its strengths.

Additionally, a significant minority of stockholders spoke out in 2003 against the greater exposure to

Latin America that the deal would bring. Many were concerned about economic uncertainty and civil

unrest, citing the economic collapse and political upheaval in Argentina in 2001. On this point their fears

have not been borne out, for sales growth in the Latin American markets have been very healthy since

2003, much more so than in the developed economies. The Chiclets and Clorets gum brands have

increased market share in the region over the last four years, as has the Bubbaloo bubble gum brand.

One year before its purchase of Adams, in 2002, CS bought Squirt, the eighth-largest soft drink brand in

Mexico, which put it in third place overall in the soft drinks segment in that country, the second-largest

carbonated soft drinks market in the world. At the end of 2006, we estimate that CS had 6% of the

Mexican carbonated soft drinks market, and 18% of the non-cola market. Its brands in Mexico are

Peñafiel, Squirt, Crush and Canada Dry. Peñafiel has become the leading brand in the mineral water

sector, with a 36% market share. Squirt, meanwhile, is the number two grapefruit carbonated soft drink.

In 2001 CS bought the Mantecol sweet brand in Argentina, adding to its portfolio in the country, where it

had earlier secured a 100% share in confectionery firm, Stani.

Latest Results

Growth in income for the company as a whole – excluding the UK market – for 2006 looks likely to come

in at around 3% or 4%, lower than expectations, which were within the 5% to 7% range. This is

principally due to the lower-than-forecast sales in the UK over the summer months, as the unusually hot



weather meant that consumers opted more for cold beverages and ice-creams than sweets, pushing

confectionery sales down by 5% for the year in the UK.

The Americas region, by contrast, performed much better, ahead of analysts’ forecasts in some cases. The

beverage sector saw revenues rise by 4% and profits by 7%. Non-carbonates led the growth in the US,

with revenues up by 4%, compared with the 2.5% increase in revenues in carbonates. In Mexico, revenue

growth was much more impressive, reaching double-digits for many products. Sales of higher-value

brands rose the most, especially Clamato.

Table: Americas Region: Latest Figures

Beverages 2005 % of group total % change in 2006e

Revenue GBP1,781 28 4

Profits from operations GBP537 46 7

Operating margin 30.1%

Confectionery

Revenue GBP1,228 16 7

Profit from operations GBP153 13 13

Operating margin 12.4%

e = estimate. The Americas Region encompasses the US, Canada, Argentina, Brazil, Mexico, Colombia, andVenezuela. Source: Cadbury Schweppes, Stock reports, BMI

The confectionery segment in the Americas also outperformed the company as a whole in 2006: revenues

rose by 7%, while profits climbed by an eye-catching 13%. In the US, the performance was driven in

large part by gum, in which CS now has a 31% market share – up form the 26.5% share it had prior to the

Adams acquisition in 2003. The traditional Trident and the new Stride brands recorded the highest sales

figures.

Meanwhile, in Latin America both revenues and profits grew in the double-digits. The focus was on core

brands, notably Trident and Halls, and the expansion of those brands in affordable packaging for the

expanding middle and lower-income groups. The growth was achieved despite a slow first-half in

Mexico, where revenues suffered due to inventory clearance and de-stocking by many large wholesalers.



Kraft Foods In Latin America

Kraft Foods Inc traces its origins back to 1903, when JL Kraft, with a horse and wagon, bought cheese at

Chicago’s Water Street wholesale market and re-sold it to local merchants. Just three years later, the

company launched Kaffee Hag, the first commercially available decaffeinated coffee. Then followed

Kool-Aid (in 1927), as the first powdered soft drink, and Kraft Deluxe (in 1950), the first commercially

packaged processed-cheese slices.

In the last 50 years, Kraft Foods has grown into the second-largest food and beverage company in the

world, with 2005 net revenues of US$34bn, from operations in more than 150 countries. Its portfolio of

packaged snack and beverage products includes 50 brands with annual revenues of US$100mn or more,

and seven that generate over US$1bn. Its close-to-95,000 employees are spread across 70 countries, with

the company’s headquarters being in Illinois, US. Its two geographic research and development centers

are located in Curitiba, Brazil and Melbourne, Australia.

Table: Kraft – Overview, 2005

Annual global revenues US$34bn

Countries in which products distributed 160

Number of brands with US$100mn+ revenues 50

Number of brands with US$1bn+ revenues* 7

* Kraft Cheeses and Salad Dressings, Jacobs; Maxwell House, Milka, Oscar Mayer, Philadelphia, Post CerealsSource: Kraft Foods Inc, BMI

With more than two-thirds (68%) of revenues coming from the US and Canada, the breakdown of Kraft’s

seven consumer business segments is heavily dominated by North American activities. The segments,

through which the company reports its financial results, are the following:

North America Beverages

North America Cheese and Foodservice

North America Convenient Meals

North America Grocery

North America Snacks and Cereals

European Union

Developing Markets, Oceania and North Asia (DEMONA)



The company’s International Commercial unit is broken down into four geographic regions:

Asia-Pacific

Eastern Europe, Middle East and Africa

European Union

Latin America.

Table: Business Segment Revenues For Q306, US$bn

Revenues % change % group sales

North America beverages 731 2.0 8.9

North America cheese and foodservice 1,450 -0.9 17.6

North America convenient meals 1,230 5.1 14.9

North America grocery 597 -7.6 7.2

North America snacks and cereals 1,590 1.8 19.2

European Union 1,540 3.0 18.6

Developing markets, Oceania, and North Asia* 1,118 10.0 13.6

Total 8,256 2.3 100.0

* Kraft does not publish the Latin America share of total revenues, BMI estimates it to be 6%. Source: Kraft Foods Inc,BMI

During the last 10 years, Kraft has been steadily strengthening its presence in Latin America. In 1996, for

example, it purchased chocolate producer Lacta in Brazil, as a way of entering the fast growing chocolate

market in the country – Kraft is now the largest seller of chocolates in the entire region – and in 1997 it

introduced the Crystal Light powdered soft-drink into the Mexican market, as Clight. At the time, it was

the only such low-calorie beverage available in Mexico.

Within Latin America, Brazil represents the major focus, for it is also one of the company’s four priority

markets globally. Kraft first entered Brazil in 1985, with the purchase of General Foods, via which it

gained control of Kibon and Q-Refresco. This gave it an operational base in the country. Since then, it

has been steadily introducing more of its core brands into the market, most recently with the launch of

Philadelphia cream cheese – which now counts among of the ‘most widely purchased’ products in

household food surveys in Brazil – and the re-launch of Royal jelly and pudding mixes, which were first

distributed in Brazil 80 years ago. Since 2003, it has launched over 200 new products in the country.



Table: Kraft In Brazil: Timeline

First Kraft product (Royal) distributed in Brazil 1925

First operational base in the country (via purchase of General Foods) 1985

Philadelphia brand introduced 2003

100 new products introduced 2003

70 new products introduced 2004

Brazil declared one of four global priority markets 2005

95% of households with between one and two Kraft products in the house 2006 (August survey)

Source: BMI

Kraft has nine production plants in Brazil, including one with more than 7,000 employees. Each plant

supplies the entire country with products, through third-party regional distribution and logistics operators.

Plants in Curitiba, in the state of Paraná, produce chocolates, powdered juices, and cheeses (including

cream cheese). In Jundiaí, in the state of São Paulo, the raw materials for jellies are produced; while in

Araguari in Minas Gerais, concentrated drinks and ready-to-drink beverages are made. In Aracati, in the

state of Ceará, concentrated juices are manufactured, and in Piracicaba, in the state of São Paulo, sweet

and savoury biscuits are made.

While Brazil is a priority market for Kraft in its medium-term strategic plan, the proportion of the

company’s overall sales in the Latin America region remains small. In fact, it does not report the region

as a stand-alone item in its annual results, rather grouping it with the Asia Pacific region. In 2005, the two

regions together generated US$2.82bn, representing a little over 8% of total group revenues. Kraft’s other

international region, reported in its results as Europe, Middle East and Africa, had revenues of

US$7.99bn, 23% of the total. Overall international revenues in 2005, totalling US$10.82bn, represented

almost 32% of the group total. Revenues in developing economies, removing Europe from the equation,

represent 12% of the total, of which Latin America accounts for approximately half, or 6%.

When looked at from the perspective of y-o-y revenue and profit growth, however, the Latin America and

Asia pacific region increases in importance to the group. While the growth in revenues for Kraft overall

in 2005 was 6% against its 2004 performance, and operating income grew by 3%, in Latin America and

Asia Pacific the respective figures were 9.1% and 29.6%.



The Europe, Middle East and Africa region performed better than the group overall, but its 6.3% increase

in revenues and 16.8% increase in operating income were well below Latin America and Asia Pacific. In

fact, with some of its North American business segments showing negative operating income for 2005,

we can expect to see the strategic emphasis shift even more towards Kraft’s international regions,

especially Latin America and Asia Pacific.

Overall, 2005 proved to be a difficult year for the company, with many shareholders troubled by the

future, particularly in developed markets, where concerns about diet, sugar and fat levels in food and

drink are becoming more widespread. With a large slice of its product portfolio being made up of high

sugar- and fat-content products (biscuits, chocolates, cream cheeses, and snacks), Kraft will need to

manoeuvre quickly to maintain its market share. Not that it has been blind to people’s changing tastes and

preferences, but with negative operating income cropping up in a range of business segments, the pace of

change will likely have to be upped.

Table: Kraft Foods Inc – Latest Revenues (US$bn)

Q3 2006 % change 2005 2004

Total revenue 8,256 2.3 34,113 32,168

Gross profit 3,000 0.9 12,268 11,887

Operating profit 1,398 18.2 4,943 4,792

Source: Kraft Foods Inc, Stock reports

More light biscuit and chocolate products, more natural juice lines, more ‘healthy’ cheeses, and more

whole grain products would all be well received by the market over the next few years. However, more

products will have to be taken out of the market as they become increasingly inappropriate to new tastes

and represent a drag on profits. Indeed, Kraft has announced that, for full-year 2006, it will withdraw 10%

of its entire product portfolio from the US market; in developing markets the speed of withdrawal will be

slower.

Increases in commodity prices have hurt the company most during the past two years; in 2005 alone we

estimate that expenditure on commodities rose by US$800mn. Additionally, Kraft’s decision to defend its

market shares, in order to ‘sustain the vitality of the categories in which we compete and the shares

thereof’, according to Louis Camilleri, Kraft Foods’ chairman, has eaten into revenues and eroded profit

margins. Assuming this ‘maintain competitiveness at all costs’ approach continues, Kraft will be forced in

2007 to take a harder look at its cost base and leverage its immense volumes further with suppliers. Its



programme of divestments will need to speed up as well, adding to the recent sales of its global

confectionery and Canadian grocery businesses.

One bright spot is that revenue and profit ratios (per dollar invested) from new products, in both 2004 and

2005, grew far faster than those from established products – by an average of 50%, in fact, between the

end of 2003 and the end of 2005. Sales of what Kraft terms ‘Health & Wellness’ products, a range of

nutritional food and beverages, accounted for a full 30% of its entire retail food revenues in the US

(excluding coffee, tea, and pet snacks).

The introduction of the fortified Tang beverage into the Latin American market earlier in 2006 has

generated what the company calls ‘very strong revenues’. It plans to follow up this success with region-

wide distribution of Crystal Light, Kool-Aid on-the-go beverage sticks, and Oreo wafer sticks.

Meanwhile, its new range of tropical ready-to-drink fruit juices in Brazil, marketed under the brand

Maguary, have been particularly successful. Following the introduction of new flavours, including grape

(uva), peach (melocotón), passion fruit (maracuyá) and mango – in light and non-light versions – sales

have risen by more than 12% in 2006.

Louis Camilleri, Chairman and CEO of Altria, said that this would provide the board with the necessary

time to complete the formal decision making process; and that furthermore it would coincide with the

planned public announcement of Kraft’s new growth strategy – also planned for early 2007 – and thus

address the potential overhang created by the tax-free distribution of close to 1.5bn Kraft shares to Altria

shareholders.



% Ownership Of Almacenes Exito

Grupo Empresarial Antioqueno

(GEA) -

Colombia

65.3%

Grupo Casino - France34.7%

Source: Almacenes Exito

Almacenes Exito In Latin America

The Colombian MGR market is booming.

We forecast that MGR sales will rise from

their US$5.96bn level in 2005 to US$11.9bn

by 2010 – a growth of 98.7%. With the

recent improvements in the security

environment across the country, particularly

in the major cities, we feel we can stand

behind such a forecast. President Uribe’s

second term has ushered in a level of

optimism unknown since 1949, when

Colombia’s troubles began.

Indeed, the spirit of our forecast is held by

incumbents like Carrefour and Exito, as

much as by the likes of Wal-Mart and

Chilean retail group Cencosud, which are both looking to establish a foothold in the country. Wal-Mart,

although still without a presence in the country, was spotted early in 2006 registering a long list of

products and brands with the health and food regulators in Bogotá; and Cencosud appeared as a merger or

partner candidate in a whole host of possible deals in 2006. As such, BMI expects to see other foreign

firms attempt to enter the market in the short-to-medium term.

Almacenes Exito has 100 supermarkets in 35 cities across Colombia, 47 under the Ley banner, 41 under

the Exito name, and 12 under that of Pomona. In addition, the group has six supermarkets in Venezuela

(as part of the Cativen CA group), and similar stores in other Andean countries, including Ecuador and

Peru, are under consideration. In all, it has almost 3,000 providers, the vast majority (86%) of which are

small and medium-sized businesses.

The group is now the leading MGR in Colombia – with a 35% market share. It leads its nearest

competitor, Carulla Vivero (19.8% of whose shares it purchased in August 2006), by a revenue margin

of some US$500mn. Indeed, its 2005 sales of almost US$1.5bn are roughly equal to the combined sales

of its two closest competitors, Carulla Vivero and Carrefour. Its y-o-y growth has been impressive lately;

we estimate that its 2006 revenue growth will be close to 22%. In terms of EBITDA, growth in 2006 will

reach almost 30%. Net profits in the first half of 2006 rose by an impressive 83%.



Table: Almacenes Exito – Latest Results (Colombian pesos, mn)

Item 2005 2006 % increase

Revenues 2,419,860 2,934,389 21.3

Gross profit 578.761 705.632 21.9

Operational costs -528.508 -607.691 14.9

EBITDA 178.711 230.223 28.8

Operating profit 49.956 97.941 96.1

Profits before taxes 47.107 78.729 67.1

Net profit 21.514 40.052 86.2

Source: Almacenes Exito, BMI

Table: Grupo Casino*: Geographical Breakdown Of Sales

Country Sales (EURmn) % of total sales

France 17,062 59.7

Outside France 5,744 20.2

North America 1,609 5.6

Poland 809 2.8

Latin America 1,621 5.7

Asia 1,282 4.5

Indian Ocean 424 1.5

Total 28,551 100.0

* Grupo Casino owns 34.7% of Almacenes Exito. Source: Grupo Casino

Exito puts its record performance in 2006 down to three factors: increased use of its in-store credit card,

Tarjeta Exito; opening of additional stores; and a ‘very active’ marketing and promotional campaign.

Business success in Colombia, though, is always in stark contrast to some of the country’s other realities:

very aware of the social and economic environment in which it operates – high levels of poverty coexist

with an on-going internal war between the government and various armed groups – Almacenes Exito has



given more resources (and devoted more marketing material) to its charitable foundation, Fundación

Exito, over the past two years. Together with its largest foreign shareholder (Grupo Casino, which owns

34.7%), funding for the foundation has increased to almost US$2mn in 2006. The monies go towards

hunger relief in the country and to improving facilities and teacher training in schools in ‘socially

vulnerable’ areas of cities in which the group operates.

In addition, Exito has begun what it calls an ‘employment creation’ programme, in which it gives ‘jobs’

to young Colombians, mostly under 20 years of age, as grocery packers for its customers. Exito pays the

youths’ health and social security costs and the tips they receive for packing groceries and taking them

out to customers’ cars or to the taxi rank, constitute their ‘salary’. The programme has been commended

by the Ministry of Labour, as being a ‘good way for young people to enter the labour market, learn new

skills and combine study with work’.

The group has been putting increased emphasis on its web presence over the past two years, which is now

located at www.virtualexito.com. The emphasis is explained by the fact that the site is used mostly by

Colombians living and working abroad, seeking to purchase groceries and other goods, including

electrical products and furnishings, for family members inside Colombia. The goods are paid for by credit

card and then shipped directly to an address in Colombia. Exito currently offers direct, express (within 3

hours of payment approval) shipment to any address in the three largest cities of Bogotá, Medellín and

Cali, and slower shipments (2-5 days) to other parts of the country. The feasibility of offering home

delivery in other countries, beginning with the US, Spain and Venezuela, is under study.

There are an estimated 4mn Colombians based abroad (8.7% of the 46mn population), mostly in North

America, Europe, Venezuela and Ecuador. The remesas, or money transfers, they send back to their

families, usually on a weekly or monthly basis, have come to form an important part of the country’s

national income, as much as 5% – almost US$7bn – by some estimates.

With its shopping website, Exito seeks to gain a share of this very significant movement of funds between

families – and thus be one step ahead of its competitors, who are considering something similar. Indeed,

sending food and other goods to family members in this way may be more cost effective than sending

cash via money exchange houses or high street banks, whose commissions and handling charges can be

high. Consequently, BMI believes this aspect of Exito’s business will show strong growth in both the

short- and medium-terms. The service is being heavily marketed both inside and outside Colombia.



Exito’s three brands in Colombia, Exito, Ley and Pomona, are spread across 20 cities. The Exito and Ley

‘standard supermarket’ formats are somewhat similar and compete against one another. The Exito stores

tend to be larger than Ley stores, though the latter have recently introduced a superstore concept in the

three major cities, Bogotá, Medellín and Cali. Both brands try to cater for a range of income groups, from

the lower-middle upwards.

Table: Almacenes Exito – Store Profile

Stores in Colombia: Number of outlets Number of cities Market share (%)

Exito 41 19 17

Ley 47 28 14

Pomona 12 4 4

Total 100 35 35

Stores in Venezuela:

HM Exito 6 3 5

Source: Almacenes Exito, BMI

The Pomona supermarket brand, by comparison, is aimed at middle and upper-middle income groups. Its

store format is smaller than Exito or Ley, and while it stocks many of the same products, it seeks to

differentiate itself by also offering a range of gourmet items. More emphasis is put upon the delicatessen

and upon non-Colombian products; and each store gives a concession to the Colombian premium coffee

provider, Oma. The stores are located in upper-income neighbourhoods of the four largest cities: Bogotá,

Medellín, Cali and Barranquilla.

Meanwhile, Exito announced in November 2006 that it will be introducing two new Exito concepts, Exito

Vecino, a neighbourhood store, and Exito Supermercado, a supermarket format.

Exito Vecino focuses on proximity to customers’ homes, with a product mix adapted to the store’s

catchment area. With the Vecino brand, Exito seeks to enter a new area of the market, namely that of

catering to low-income groups. It has long been the case in Latin America that lower-income groups pay

significantly higher prices for food and drink items than higher income groups, mainly due to the

unavailability of MGRs in poorer neighbourhoods. As other MGRs make plans to compete in this new

market segment also, Exito hopes that, with first-mover advantage, it will quickly establish a strong

following.



The second concept, Exito Supermercado, is a smaller version of a normal Exito hypermarket. Within

these stores, customers will be able to buy ‘a full range of grocery products as well as health and beauty,

home entertainment and textiles’, according to the company. The Supermercado concept also includes a

pharmacy, liquor store and in-store bakery. The first two stores of this type will be piloted in Medellín in

early 2007.

Finally, Exito’s remaining interest in Colombia, a 19.8% share of second largest MGR, Carulla Vivero,

may be about to become more significant: rumours abound that it may ‘soon’ buy up to 77.5% of the

company. The acquisition, assuming it goes ahead, would be financed via a bank loan for up to

US$300mn, a share offering of 24.7mn common shares at US$4.44 a share, as well as its own funds.



Company Analysis

Grupo Avipal

Market Position Company Data

Grupo Avipal is one of Brazil’s largest chicken exporters, operating two processing

units in the states of Mato Grosso do Sul and Rio Grande do Sul. Around 180,000

chickens are processed per day, and around 200,000 tonnes of fresh and frozen

chicken are exported each year. The company is active in the areas of animal and

vegetable protein, through its pork, dairy, and grain divisions. Grupo Avipal is Latin

America’s largest producer of long-life milk, processing around 1bn litres of milk a

year. Brands include Elege, Santa Rosa, Dobon and El Vaquero.

StrategyBuilding on the strength of its brands, Grupo Avipal follows a strategy of both

domestic and international growth, supported by strict quality controls and the

building of solid relationships with both suppliers and end customers worldwide.

Investment PotentialGrupo Avipal is one of the largest operators in Brazil’s foodstuff industry, and one of

Latin America’s largest producers of long-life milk. In addition to its domestic

operations, the company is also strong in the export business, with major markets

including the Middle East, Eastern Europe, Russia, Central America, Europe, Japan

and Africa.

Products/Service Launches

In 2007 the company will increase emphasis on the production and marketing of soy

and its derivatives, in response to the surge in global demand. Through its two sites

in the state of Rio Grande do Sul, it aims to increase its total capacity for the daily

milling of soy from 2,300 tonnes per day to 2,500 tonnes per day.

Annual sales volumeUS$1,096mn

Established 1959



Perdigão

Market Position Company DataPerdigão is Brazil’s second-largest meat processor, focusing on the breeding,

production and sale of pork and birds (mainly chicken and turkey). In addition, the

company processes frozen pasta, soybeans and their derivatives and distributes

frozen vegetables. Perdigão currently operates 13 industrial units in the south and

midwest of the country, as well as 16 distribution centres and 13 outsourced

distributors. It exports to more than 100 countries and has offices in Europe and the

Middle and Far East.

StrategyPerdigão’s core business is directed to chilled and frozen food. The company was a

pioneer in chicken meat exports, and, in 2003, it opened Latin America’s largest

slaughterhouse, the Rio Verde Agroindustrial Complex. Currently, the company’s

key focus is on the diversification of the product mix, an increasing of the share of

higher value products, as well as the expansion and improvement of the distribution

network.

Investment Potential

During 2006, Perdigão invested heavily in new facilities, investing more than

BRL440mn, 50% more than during 2005. The money is being spent on the new

agro-industrial complex in Mineiros, the expansion of production units in Rio Verde

and Nova Mutum, increases in slaughtering and processing capacities as well as

productivity at the various units, and bolstering the company’s sales and logistics

teams. Early 2006 saw the company flush with funds, following record

performances in 2004 and 2005. In fact, during each of the last 10 years,

performance has been impressive, with average annual growth in gross sales of

28%; 14% in volumes of meat sold; 35% in terms of EBITDA; 38% in net income;

and 10% in the number of employees. In Q306 Perdigão concluded a primary share

offering of BRL800mn. It will use the funds to expand its meat and dairy segments,

to include the launching of a range of new products, such as margarines and

butters.

Q306 Sales: +8%

Q306 Meat VolumeSales: +10.6%

Annual sales volumeUS$2.6bn

No. of employees5,300

Established 1934



Sadia SA

Market Position Company DataSadia is one of Brazil’s leading meat exporters, operating 12 production plants

capable of producing a combined 1.3mn tonnes of protein-based products including

chicken, turkey, pork and beef as well as pasta, margarine and desserts. The

company is Brazil’s largest pork and poultry processor. With upwards of 700

products, it has become one of the country’s leading makers of convenience frozen

foods (including hamburgers, patties, pizzas and ready-to-eat meals) and

processed foods (Frankfurters and sausages). Its products are sold, through its 14

distribution centres, in 70,000 direct points of sale in Brazil and to 200 foreign

distributors around the world.

Strategy

A key feature of Sadia’s strategy is horizontal integration, with the company

operating breeding farms for poultry and hog grandparent and parent stock,

hatcheries, hog breeding farms, slaughterhouses, processing units and animal feed

production plants. Production is divided between the three business lines:

processed foods, poultry and pork. A further key strategy component is Sadia’s

international focus, with exports to around 65 countries, which account for half of

total sales. It has increased its number of commercial offices outside Brazil to eight,

including in the UK, Japan, China and Argentina.

Investment PotentialSadia’s investment focus is both on its international and domestic operations. In

March 2005, the company announced plans to set up its first poultry processing

plants outside Brazil, in order to gain entry to markets that are currently closed to its

exports. The new plants are to focus on higher-value products that also generate

the bulk of earnings in Brazil. Within the country, Sadia continues to expand in Mato

Grosso state, where the company invested in two poultry slaughterhouses in

September 2005. In all, it operates 12 plants in Brazil, producing up to 1.5mn

tonnes of meat products a year.


In March 2006, it was reported that Sadia is considering an investment of US$70mn

into the construction of a meat processing plant in Russia in a joint venture with

Russian meat wholesaler Mitatorg, currently the company’s exclusive distributor in

Russia. Production would initially be limited to sausage and other meat products,

and be extended into frozen prefabricated meats, including processed chicken

products.

Annual sales volumeUS$3,828.3mn


Established 1944

Operates 12production plants,with a capacity of1.3mn tonnes ofprotein-basedproducts

Commercial offices inthe UK, Italy, theUAE, Japan, China,Argentina, Chile andUruguay



Embotelladora Andina SA


Embotelladora Andina is a manufacturer and distributor of soft drinks, including

Coca-Cola, bottled water and lager, with headquarters in Chile. The company is

51% owned by investment group Freire Inversiones and 11% owned by The Coca-

Cola Company. In Brazil, the company operates two plants and 11 production lines

through Rio de Janeiro Refrescos Ltda and has a market share of 53%. Brands

manufactured and distributed include Coca-Cola, Fanta, Sprite, Guarana,

Schweppes, Kapo, Burn, Nestea, Kaiser, Heineken and Bonaqua mineral water.

Strategy

A key strategic focus for Embotelladora Andina’s Brazilian operations is the

achievement of distribution efficiencies, enabling the company to operate in

geographic zones with high growth potential. Furthermore, strategic decisions focus

on obtaining greater territory coverage, by expanding beyond the largest cities,

redefining formats in the supermarket channel and reinforcing price leadership.


Embotelladora Andina continues to focus on its three markets: Chile, Argentina and

Brazil. Within the respective markets, investments are predominantly channelled

into the further diversification of the brand and format portfolio and, in Argentina and

Brazil in particular, on achieving greater territory coverage. Embotelladora Andina

saw a surge in third-quarter sales in 2006.

Q306 Sales:US$234.8mn, +13%

9mth Sales:US$712mn, +13%

9mth Profit:US$82mn, +25%

2006 Brazil SalesGrowth: +33%

2006 Chile SalesGrowth: +3.2%

2006 Argentina SalesGrowth: +4.1%

Annual sales volumeUS$800mn


Established 1946

Operates two plantsand 11 productionplants in Brazil



Companhia Brasileira de Distribuição (CBD)


CBD is the largest MGR in Brazil and operates under five different formats, with

almost 600 stores: Pão de Acucar and Sendas (supermarkets), CompreBem and

ECON (discount stores), Extra (hypermarkets) and Extra Eletro (electronics and

home appliance stores). Since 1999, CBD has had a strategic partnership with

French retailer Grupo Casino. Casino’s initial 27.5% shareholding in the group has

now increased to 37.3% after a transaction completed in July 2005.

Strategy

CBD’s current focus is on reducing expenses. This will be achieved through the

carrying out of a rationalisation plan, identifying best practice and applying it

throughout the company’s network. The company will also increase the level of

shared services across the group. The money received through Casino’s increase

of its stake in CBD will be used to pay down debts, reinforce the capital structure

and continue to expand operating activities as the company moves its focus from

growing market share to growing profits. Furthermore, CBD aims to fight its

competition in a tougher way, including price reductions and credit card promotions,

such as 0% financing.


In next four years, CBD plans to invest US$932.8mn in its Brazilian operations, with

40 new hypermarkets and 120 new supermarkets. With this continuing expansion

strategy, the retailer takes advantage of the still significant potential for growing

MGR sales in a vast country, in which areas with low MGR penetration remain

despite the developed nature of the sector. Capital investments for full-year 2006

will reach US$410.4mn, compared to US$345.9mn in 2005. A focus for spending

will be the opening of new stores as well as the maintenance and upgrading of

existing outlets. In 2007 period, CBD plans to open 16-20 new hypermarkets and

40-60 new supermarkets. Investors are supporting the expansion programme,

having driven up the company’s share price by 20% since October 2006.


CBD has announced that it will strengthen its efforts to capitalise on fast-growing

sales of non-food products in Brazil, which recorded sales growth of 12.5% in 2005.

In February 2006, CBD was authorised by the Brazilian National Social and

Economic Development Bank (BNDES) to sell PCs, manufactured by Positivo

Informatica, within the framework of the government’s programme for the

popularisation of PCs and internet use.

Q306 revenueUS$1.5bn;growth of 2.5%

Q306 EBITDAUS$85.5mn;decline of 38%

Q306 lossUS$19.9mn

2005 sales US$5.5bn


Established 1948

643 stores located in12 Brazilian states inthe south-east andnorth-east of thecountry

10 distribution centreswith a total storagecapacity of 316,000m2



Wal-Mart


Wal-Mart is ranked third in Brazil’s MGR sector after CBD and Carrefour. Prior to

the acquisition of the Bompreço chain from Dutch retailer, Ahold, in 2003, Wal-Mart

had only a small presence in Brazil, with 25 outlets including 13 Wal-Mart

Supercenters, 10 Sam’s Club warehouse stores and two Wal-Mart Todo Dias 24-

hour stores. The Supercenters, which are hypermarket outlets, are located in the

states of São Paulo, Parana, Minas Gerais and Rio de Janeiro. The Bompreço

chain consists of 118 outlets in the north-east of the country, including Hiper

Bompreço hypermarkets, mini-markets, supermarkets, Balaio discount stores and a

small number of Hiper Magazine stores.

StrategyWal-Mart has repeatedly expressed interest in further acquisitions and is set to grow

further in Brazil. Investments during 2006 were expected to reach US$329.2mn,

and US$263.3mn was to be dedicated to the opening of the 15 new outlets. The

remaining amount of US$65.8mn was to be spent on remodelling and modernising

the Bompreço supermarket outlets in the north-east of the country. Wal-Mart plans

to spend a record US$385mn to expand its Brazilian operations in 2007. The

company plans to open 28 new stores over the course of 2007. The renovation plan

launched by Wal-Mart in Brazil in 2006 will continue at full steam in 2007. The

company's aim is to renovate all of its 138 stores in Brazil's south by 2009. The total

investment for the scheme will be around BRL270mn (US$123.9mn). The plan

includes re-designed layouts, store fittings and signage. Overall, the company is

planning to launch 28 new stores in Brazil in 2007, including hypermarkets,

supermarkets, cash-and-carries and soft discounters.


Similar to Brazil’s other leading MGRs, Wal-Mart continues to expand, with a key

focus on entering regions of the country so far dominated by other players. With this

continuing expansion strategy, the retailer takes advantage of the still significant

potential for growing MGR sales in a vast country, in which areas with low MGR

penetration remain despite the developed nature of the sector. Wal-Mart is set to

increase its presence in Brazil by 50% over the next two years, as it seeks to

challenge for the number one MGR spot in Brazil.

Annual sales volumeUS$4.5bn

No. of employees7,000 (Wal-Mart),20,000 (Bompreço)

Established 1994

Total of 295 outlets



AmBev


AmBev (Companhia de Bebidas das Americas) is the largest brewer in Latin

America. The company has cornered over two-thirds of the beer market and nearly

one-third of the soft drinks market in Brazil. The company produces beer, soft

drinks, iced tea, isotonic drinks and mineral water. Beer accounts for 80% of

AmBev’s income, while 17% of sales are attributed to soft drinks and the remaining

3% to mineral water and malt drinks. In March 2004, Interbrew bought a controlling

share in AmBev.

Strategy

AmBev’s Brazilian market share increased from 63.2% at the end of 2003 to 68.1%

at the end of 2004 as a result of increased spending on sales and marketing, which

more than doubled to BRL698mn, with the aim to win back market share lost to

competitor, Schincariol, during 2003. During 2005, the company continued with this

strategy of increased marketing and sales spending in order to further increase

market share. In April 2006, the brewer increased its stake in Argentina’s largest

brewer Quinsa from 56.7% to 91.2% by paying around US$1.2bn to Beverages

Associates Corp. AmBev expects the transaction to increase synergies between its

own and Quinsa’s operations throughout the region and, according to company

spokespeople, reflects AmBev’s commitment to market growth in Argentina,

Uruguay, Paraguay, Bolivia and Chile. Inbev confirmed in November 2006 that

AmBev is try to purchase the remaining shares it does not yet own in Latin

American unit Quinsa. AmBev indirectly owns approximately 97% of the voting

interest and approximately 91% of the economic interest in Quinsa.


AmBev continues to strengthen its operations in Latin America with further

acquisitions in Peru, Ecuador and Dominica. It already has operations in Argentina,

Venezuela, Uruguay and Paraguay. In further expanding throughout the region, the

company takes advantage of the young and growing population and rising

disposable incomes, providing significant sales potential for its range of brands. On

each of these criteria, Central American markets score highly, particularly

Guatemala, Costa Rica, Honduras and Panama. These will form the platform for

AmBev’s next wave of expansion in the region, planned for 2007 and 2008.


AmBev will invest US$75mn to construct a new bottle factory in Campo Grande, Rio

de Janeiro. The new installation will comprise 24,000m2 and will come on stream in

the second half of 2007.

Q306 net profitUS$226mn;growth of 21.8%

Q306 Latin AmericaVolume SalesGrowth: +7% (beer:+4.8%, non-beer:+12.7%)

2005 salesUS$4,814.2mn


Established 1885



BMI Forecast Modelling

How We Generate Our Industry Forecasts

BMI’s industry forecasts are generated using the best-practice techniques of time-series modelLing. The

precise form of time-series model we use varies from industry to industry, in each case being determined,

as per standard practice, by the prevailing features of the industry data being examined. For example, data

for some industries may be particularly prone to seasonality, meaning seasonal trends. In other industries,

there may be pronounced non-linearity, whereby large recessions, for example, may occur more

frequently than cyclical booms.

Our approach varies from industry to industry. Common to our analysis of every industry, however, is the

use of vector autoregressions. Vector autogressions allow us to forecast a variable using more than the

variable's own history as explanatory information. For example, when forecasting oil prices, we can

include information about oil consumption, supply and capacity.

When forecasting for some of our industry sub-component variables, however, using a variable's own

history is often the most desirable method of analysis. Such single-variable analysis is called univariate

modeling. We use the most common and versatile form of univariate models: the autoregressive moving

average model (ARMA).

In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data

quality is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a

basis for analysis and forecasting.

It must be remembered that human intervention plays a necessary and desirable part of all our industry

forecasting techniques. Intimate knowledge of the data and industry ensures we spot structural breaks,

anomalous data, turning points and seasonal features where a purely mechanical forecasting process

would not.

Retail Industry

There are a number of principal criteria that drive our forecasts for each retail variable:

Mass Grocery Retail Sales

Figures for MGR sales are based, where possible, on primary government/ministry/trade association

sources and official data. Where these are unavailable, MGR sales forecasts are based on a range of

variables including:



company information about past and expected sales and market shares;

likely sales development based upon the future development of population, disposable incomes

and general macroeconomic climate;

political factors (likely changes in legislation affecting the MGR sector).

Food Consumption And Expenditure

Criteria used to aid our forecasts for food consumption and expenditure include:

the growth or otherwise of the population and its disposable incomes, as well as the development

of price indices;

company results and expansion plans;

changes in the industry/new product developments affecting the price level.

Food, Drink And Tobacco Sales

Figures are forecasted by taking into account:


of price indices;

changes in lifestyles/general societal trends;

likely development of product taxation and other government measures, such as anti-smoking

legislation.

Food, Drink And Tobacco Imports And Exports

Forecasted based on the following criteria:


of price indices;

developments in domestic food, drink, and tobacco production;

currency exchange rate developments;

development of bilateral and multilateral trade agreements and negotiations, as well as political

developments affecting trade.



Sources

Sources used in retail reports include local statistics offices, central banks, and government departments,

officially released company results and figures, trade associations, multinational organisations, including

the OECD, the FAO, and the World Bank, and international and national news agencies.

food and drink brazil

Documents