CPG should take Brazilian opportunity now

Source: Boris Planer, Monday, Feb 26, 2018

After three years, Brazil is finally emerging from its most brutal recession ever recorded. As business confidence recovers, retailers will make investments they had previously paused. CPG brands now have a historic opportunity to drive growth while accompanying digital transformation and consolidation in the world’s sixth-largest food retail market.

The economic recession from 2014-2017 drove high unemployment and inflation, rapidly eroding consumer spending power and prompting cuts in retail investment. Three years on, the job market is improving, inflation is under control, consumer confidence returning and spending recovering. These factors, combined with lower interest rates, are encouraging retailers to return to previously-deferred investments. These will now accelerate Brazil’s digital transformation and market consolidation.

Opportunities now outweigh policy risks 

The fundamental outlook for Brazil is strong, although the exact speed at which the economy will develop depends on the political environment. Influencers to watch include:

  • Success or failure of the clampdown on endemic corruption (with almost half of Members of Parliament involved in legal proceedings)
  • Uncertainty surrounding the political direction following presidential elections this October
  • Limited government control on public expenditure, with pensions and much of welfare spending protected under the constitution. 

In the short and medium term, retailers and CPG brands will still encounter familiar challenges – including red tape, high import duties, high taxes and exchange rate volatility. Yet, we believe this is a good time for CPG to focus on the opportunities as a market which has always offered attractive demographics embarks on economic recovery.

Close proximity to consumers

Brazil’s social and demographic structure is highly attractive compared to other emerging markets. Per capita consumer spending – due to hit USD6,600 this year – is much higher than equivalent emerging markets, like Russia (USD5,700) and China (USD3,800).

Around 90% of Brazil’s 210 million-strong population live in the urban strip stretching along the Atlantic coastline, giving the country the highest urbanisation rate among key emerging markets worldwide. As a consequence, access to consumers is efficient, with a high share of addressable (72%) and digitally addressable (47%) population. The digitally addressable population is now expanding particularly fast, with mobile phone ownership rising, opening up new digital paths to the mass market.

Ongoing urbanisation combined with improving incomes means that retail sales per square kilometre are climbing long-term, giving the megacities of São Paulo (22.4 million inhabitants) and Rio de Janeiro (12.5 million) greater resilience to economic shocks than the country as a whole.

The vast urban population density shortens routes to consumers, allowing for the emergence of fulfilment models that will satisfy demanding consumers valuing convenience. The benefits of this will become increasingly apparent as digital transformation takes hold.

Consolidation and digital transformation ahead

In coming years, we expect the fragmented grocery retail landscape to consolidate and to see greater investment in experiential store concepts and digital integration. These will feature improved curation, more frictionless shopper experiences and heightened social elements, as highlighted in our Store of the Future report. Amazon is already investing in a company-run logistics infrastructure. We expect its presence to eventually exert pressure on established store-based players.

We predict transformation to be particularly dynamic in two market segments: hypermarkets and regional supermarket chains. Hypermarkets are dominated by three leading players, the only grocers with a nationwide presence: Casino (GPA), the recently-listed Carrefour Brasil and Walmart.

Unlike in many other markets, Brazilian big-box outlets are often located in residential areas, with large numbers of shoppers visiting frequently and on foot. As the shift online drives in-store assortment rationalisation and opens up sales areas, Brazilian hypermarkets are particularly well-suited for the implementation of discovery, frictionless and social elements.

Online grocery is also gaining investment and seeing consumer uptake, as demonstrated by Carrefour’s launch of an e-grocery offer in Q3 2017. CPG companies have an opportunity to support change at big-box operators on a broad level through targeted ranges, relevant promotions, product innovation and ecommerce capabilities.

We also anticipate fast change in the fragmented landscape of Brazil’s regional supermarket operators. Here, the urgent need to digitise will trigger merger & acquisition activity, as the required funding levels will be too great for many small players to handle alone. CPG companies have the opportunity to identify and support tomorrow’s sector leaders and grow with them.

Meanwhile, at the bottom end of the market, Brazil’s urban townships (favelas) will offer opportunities for direct-to-consumer (D2C) initiatives which CPG should now take, inspired by projects such as Nestlé Até Você. Brazil’s large independent trade sector captures 43% of national food retail sales and is deeply embedded in Brazil’s lower-income areas. It will be among the first segments to benefit from economic recovery. Independent neighbourhood stores and D2C initiatives will increasingly develop a digital component that suppliers must be aware of.

Recommendations for suppliers:

  • As the rollout of digital strategies accelerates in Brazilian grocery retail, CPGs have an opportunity to establish themselves as category knowledge-leaders, becoming embedded in online-to-offline customer journeys to support long-term transformation.
  • Suppliers should focus on the winners that emerge from the imminent consolidation process. These will include forward-focused regional supermarket operators that are early adopters of digital transformation.
  • The price quality ratio of many Brazilian CPG companies has room for improvement, as they have escaped international competition for too long. International CPGs with their efficiencies, innovative cultures and quality credentials can use the economic recovery and sector change to push to the forefront of consumer awareness.
  • In an unstable political environment, international brands must be aware of currency risks that can temporarily drive up the cost of imported items for local consumers.
  • In face of this currency risk, and with high import duties part of Brazil’s protectionist policy framework, CPGs engaging in the market for the long-term must consider establishing domestic production facilities. 
  • CPGs with mass-market ambitions have an opportunity to sell directly into favelas in Brazil’s megacities. They can do this by securing shelf space in independent neighbourhood stores, or by building direct distribution capabilities involving independent neighbourhood vendor forces, similar to Nestlé até Você.