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  • Brazil Food & DrinkReport Q1 2007

    Published quarterly by BUSINESS MONITOR INTERNATIONAL LTD

    Including 5-year industry forecasts

    2007 Business Monitor International. All rights reserved.All information, analysis, forecasts and data provided by Business Monitor International Ltd isfor the exclusive use of subscribing persons or organisations (including those using the service ona trial basis). All such content is copyrighted in the name of Business Monitor International, andas such no part of this content may be reproduced, repackaged, copied or redistributed withoutthe express consent of Business Monitor International Ltd.

    All content, including forecasts, analysis and opinion, has been based on information and sourcesbelieved to be accurate and reliable at the time of publishing. Business Monitor International Ltdmakes no representation of warranty of any kind as to the accuracy or completeness of anyinformation provided, and accepts no liability whatsoever for any loss or damage resulting fromopinion, errors, inaccuracies or omissions affecting any part of the content.

    Business Monitor InternationalMermaid House, 2 Puddle DockLondon EC4V 3DS UKTel: +44 (0)20 7248 0468Fax: +44 (0)20 7248 0467email: [email protected]: http://www.businessmonitor.com

    ISSN 1749-2602

  • Business Monitor InternationalMermaid House,2 Puddle Dock,London, EC4V 3DS,UKTel: +44 (0) 20 7248 0468Fax: +44 (0) 20 7248 0467email: [email protected]: http://www.businessmonitor.com

    2007 Business Monitor International.All rights reserved.

    All information contained in this publication iscopyrighted in the name of Business MonitorInternational, and as such no part of this publicationmay be reproduced, repackaged, redistributed, resold inwhole or in any part, or used in any form or by anymeans graphic, electronic or mechanical, includingphotocopying, recording, taping, or by informationstorage or retrieval, or by any other means, without theexpress written consent of the publisher.

    DISCLAIMERAll information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time ofpublishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business MonitorInternational accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of thepublication. All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kindas to the accuracy or completeness of any information hereto contained.

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

    Part of BMIs Industry Report & Forecasts Series

    Published by: Business Monitor International

    Publication Date: March 2007

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  • Brazil Food & Drink Report Q1 2007

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    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 Brazils 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

    Industry Forecast Scenario....................................................................................................................................................................................... 37

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

    Industry Developments ............................................................................................................................................................................................. 41

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

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

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

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

    Industry Forecast Scenario....................................................................................................................................................................................... 50

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

    Industry Developments ............................................................................................................................................................................................. 50

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

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

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

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

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    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

    Perdigo .............................................................................................................................................................................................................. 77

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

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

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

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

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

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

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

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

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

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    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 Brazils

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

    expand its Sams Club retail warehouse format. Sams Club has entered into an innovative deal with

    Brazils Caf 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 So 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 companys network expansion

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

    Lojas Americanas was also involved in last years biggest internet deal, when, in December 2006,

    shareholders from Brazils 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

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    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 Hersheys strategic decision to

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

    Argentinean confectioner Arcors 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.

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    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 Jos 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 lvaro 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.

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

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

    offsetting the not-so-appealing small market size. Michelle Bachelets 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 Garcas 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. Colombias market entry potential is far greater than Mexicos, 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, Mexicos 2006 growth rate was just below the regional average, and Colombias 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 Caldern last year, leading us to question the strength of the countrys 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 Chvez administration appears set to serve a

    full second term, through to 2013, though the opposition remains strong. Also, while the governments

    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 administrations 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 Brazils). Per-capita spending on food and drink is a little over 9% of the

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

    Lula da Silvas 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 administrations

    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, Brazils 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 governments mainly domestic debt

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

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

    large in relation to Brazils 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.

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    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 worlds 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 Braslia and public arguments

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

    to believe that Lulas 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.

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    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, Brazils 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 countrys 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, So Paolo and

    Braslia 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 worlds largest MGRs, which take

    advantage of the countrys 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 governments 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

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    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 Brazils 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 Mexicos. 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

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    SWOT Analysis

    Brazil Food And Drink Industry SWOT

    Strengths Brazils 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 frontierparts 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 worlds 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 Brazils 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 countrys 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 countrys 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

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    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

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    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 Q305s 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 Econmica 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

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

    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 Fundao

    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

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    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 regions 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 regions 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

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    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 Estadstica, Ministerio de Proteccin 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

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    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

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

    consider another of Synovates 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

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    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.

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    Industry Forecast Scenario

    Brazils 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 countrys 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 governments 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 Brazils 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 lions 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.

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    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

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    Industry Developments

    The on-line market for purchasing grocery products has been growing particularly fast in Brazil bymore 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, Brazils 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 aspossible, trade between Latin American economies and those outside the region will continue to

    increase, no more so than in Brazil, the regions 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 Brazils 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 hasundergone rapid change, spurred principally by the fierce competitive spirit that the worlds largest

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

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

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

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

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

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

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    Company Developments

    Following the success of its gourmet and organic food ranges this year, Sams Club and Caf BomDia 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. Sams Club first opened in Brazil (So 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 Sams

    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 Members Mark store-brand products. Most of the outlets also sell

    fresh meat and produce and have bakeries. Sams 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 Atacado did not go ahead as thecompany 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. Atacado 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 Brasils 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 the12 outlets totalled BRL26mn (US$11.2mn). The stores will employ 1,120 people. Four of them are

    located in south-eastern So 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 companys network expansion

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

    In December 2006, shareholders from Brazils leading Internet retailer, Submarino, approved a planto 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 So 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;

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    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 launchedby the retailer in Brazil in 2006 will continue at full steam in 2007. The companys 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.

    Brazils largest MGR, CBD, posted a Q306 net loss of BRL43.4mn (US$19.9mn) because of acharge 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 caterespecially for female shoppers, which account for 80% of the retailers 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

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

    electronics and entertainment department that includes a caf, 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 Brazils leading retailerCBD 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 Atacado is in the sights of four other major MGRs, each of whom has submitted anunbinding bid to purchase the group, valued at approximately US$1bn. The four bidders are Wal-

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

    almost half of its outlets in the wealthy So 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

    countrys leading retailer.

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    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. Brazils current MGR structure developed following the

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

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

    population, as well as the countrys 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 Po de Acar) 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 So 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.

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

    marts associated with petrol stations.

    Brazils leading MGR is local group CBD, which operates around 643 hypermarkets and supermarkets in

    12 states under the fascias Po de Acar, 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 Sams Club store in metropolitan So

    Paulo. The US groups 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 Bompreo retail

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

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

    Sonaes operations in Brazil, consisting of 140 outlets.

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

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

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

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

    Sams Club generates 13% of Wal-Marts 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

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    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 Brazils 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

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    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,