MARKET: BRAZIL – Carnival spirit

There are drinks opportunities aplenty in Brazil, not least in the Northeast region, and with local tipple cachaça, as well as vodka, whisky and beer, writes Anne Nugent, of Euromonitor International

With the fifth largest population in the world, with around three million new potential alcoholic drinks consumers reaching legal drinking age each year, and the economy performing well (real annual GDP growth averaging 3.4% in 2003-2006, fuelled by domestic demand), Brazil offers strong potential for foreign investment. It is little surprise then that drinks companies are stepping up activity here.

Added to the above broad factors are other key positives for alcoholic drinks companies: a competitive US dollar which is making imports more attainable for Brazilian consumers; the potential for “western” style spirits in a market where there is already considerable consumption of spirits through local spirit cachaça; and the fact that beer and wine per capita consumption is below the average compared to a number of major markets. 

Beer interests
High-profile foreign entry into Brazil kick-started in 2004 when InBev became the top brewer in the Brazilian market through the merger of Belgian Interbrew and local brewer AmBev. The company has a comfortable lead of around two-thirds of beer sales in Brazil and earlier in 2007 InBev purchased two production plants from faltering local company Cintra in order to be able to meet demand.

The importance of good distribution is crucial in Brazil and the eventual sell-off of flagging division Kaiser by Molson Coors was in some part down to Kaiser’s inability to achieve a better distribution network. That said, the strategic importance of gaining access to the Brazil market is underlined by the willingness of major Mexican brewer Femsa to take on flailing Kaiser.  

Second-ranked local Brazilian brewer Primo Schincariol, which has overcome a tax scandal in 2005 and has since seen an improved performance, is undoubtedly on major brewers’ watch lists, which, according to Euromonitor International, include SABMiller, Heineken and Femsa.

The attraction of the Northeast
The Northeast is historically a poor region,  plagued by drought, but it has benefited from wealth distribution programmes and increased foreign tourism in the last few years. It is now seeing a burst of economic growth. For drinks companies, this region of Brazil is considered as having the greatest potential for medium-term growth. Competition between Pernod Ricard and Diageo to gain share in this new market is fierce. In mid-2005, Pernod Ricard launched Montilla Cola in the Northeast, and Diageo followed with Merino Rum. Due to rising demand already experienced in the region, more companies are entering the market.

The Northeast is the only region where Smirnoff is not the leader in vodka sales, according to Euromonitor International’s findings; however, Diageo Brazil Ltd intends to change this, by devoting a substantial proportion of its marketing budget to the region. Smirnoff was one of the sponsors of the popular parties which took place in the Northeast in 2005 and 2006. The company signed up as a sponsor for the Fortal – the Carnival in July in Fortaleza – the Carnatal – the Carnival in December in Natal – and the New Year’s celebrations in Salvador, Recife and Fortaleza. Another strategy to develop the brand in the region is investment in advertising in magazines and on television.

Other local companies, including AmBev, Schincariol and Cervejaria Petrópolis, are investing in production expansion or are opening factories and distribution centres in the area.

Grocery retailers have also seen an opportunity in the Northeast, an area where retailing is traditionally small-scale and fragmented. The Bom Breço chain entered the region in 2003, with 118 outlets. Pão de Acúcar is concentrating most of its planned 160 new outlets in the area, with an investment of R$2.4 billion (£0.65bn) over the next four years.

Local spirit going international
Sugar cane-based cachaça, which is similar to rum and is mixable, is Brazil’s signature alcoholic beverage. Brazil consumed almost 1.5bn litres of cachaça in 2006 and steady domestic growth has been responsible for the relatively limited focus by local producers on export markets. That said, Euromonitor International notes that the product is developing a small international market with a focus on countries where there is a sizeable Brazilian community and/or where there is good awareness of the Caipirinha cocktail, in which cachaça is the main ingredient. Germany is the largest export market, while elsewhere in Europe cachaça consumption has carved out a niche in France, Italy, Spain, Portugal and the Netherlands. Exports to the UK and US look set to increase with new products launched in 2005/2006, including Sagatiba and Orinoco.

The massive Brazilian cachaça market, which exceeds sales of rum worldwide by almost half a billion litres, is highly fragmented, with Cia Müller’s number-one selling brand, Pirassununga51, holding 18% of volume share. Pirassununga51 is also exported, selling strongly in the US and is market leader in Portugal. Cachaça51, also owned by Cia Müller, is produced for the export market only and is a top-selling cachaça brand in the US, UK, Italy and Germany.

Pernod Ricard has increased its penetration of the Brazilian cachaça market with its popular São Francisco brand, acquired as part of the Seagram takeover. Pernod Ricard is also exporting the product, with the European introduction of the Janeiro cachaça brand as a cocktail preparation in France, Germany, Portugal, Greece and Romania.

Diageo is also making a play in the cachaça market, both locally and internationally. The company owns Italy’s number-two cachaça brand, Nega Fulô, and in 2005 launched a premium cachaça/rum hybrid, Orinoco, in major US cities including New York and San Francisco.

Diageo and Pernod Ricard’s presence provides a boost for the cachaça market, as well as signalling to other potential multinationals that this market provides good investment prospects.

Informal market has strong presence
According to estimates by the Brazilian government, there are 11 million informal businesses and 43m informal employees operating in the country. The informal market is particularly prevalent in the highly fragmented cachaça sector and also within wine.

Sales of alcoholic products via the black market – products on which import and excise taxes have not been paid – are playing an increasing role in Brazil. This is particularly true of premium Scotch whiskies. The principal point of entry for contraband Scotch whisky is the town of Ciudad Del Este in Paraguay, bordering the south of Brazil. Industry sources believe that sales of contraband whisky, which generally reaches consumers through on-trade sales, equals at least half of formal alcoholic drink sales, and may even exceed them.

Blended Scotch makes up just over half of all sales of whisk(e)y in Brazil and there is also a sizeable market for locally produced whiskey. Pernod Ricard and Campari both operate in this cheaper segment, with Pernod having taken on former Seagram brands, while Campari acquired Old Eight and Drury’s from Diageo in 2001. Johnnie Walker is the top brand within blended Scotch but this is much more fragmented with strong competition from stable mate J&B, as well as from Ballantine’s, Grant’s, Dewer’s and Chivas. 

Vodka is the largest volume product outside of cachaça. It accounts for less than 3% of spirits sales and has seen good growth of around 11% annually over the last five years. Rum – dark rum in particular – has also seen a strong rise in demand with the Northeast accounting for over 60% of sales.   

Major international spirits companies, including Diageo and Pernod Ricard, are heavy sponsors of tasting events and parties in nightclubs, where young adults are the main patrons. In addition to the use of the traditional media, alcoholic drinks manufacturers have also been introducing new mixed drinks at discount prices in various bars and clubs across the country. 

Wine remains a fledgling product
Brazil holds a 13th global ranking position in terms of total volume sales of wine, according to Euromonitor International, but remains an area with strong potential for growth. Per capita consumption is just around 2.5 litres compared to a more typical 25-30 litres for a mature market. Demand is growing well, buoyed by marketing campaigns by major wine producers focusing on drinking occasions for wine. There is some local production of wine, with sparkling wine made from Muscatel grapes, holding a good reputation locally. Recent developments have focused on wineries investing in facilities to accommodate tourists and visitors, which is expected to hone domestic consumers’ interest in wine. 

Specialist stores are a significant selling point for wine and spirits in Brazil. Expand Group and Brasif are among the largest chained outlets, with 30 and 24 outlets, respectively, in 2005. Specialists stock a large number of premium and super-premium wines and spirits that are not often found in supermarkets. Specialist stores are growing in Brazil by targeting the A and B socioeconomic classes. As the economy continues to show growth, these outlets will, in the medium term, continue to attract wealthier consumers purchasing premium wines and spirits.

Product polarisation set to intensify
In many product sectors, a trend has appeared which is of concern to economists and has encouraged manufacturers to innovate and invest in different lines of products: the shrinking of the middle class and the decline of middle-tier products.

Because of the large disparity between high income and low income groups, Euromonitor International believes there will an increased number of super-premium products within alcoholic drinks, made using imported raw materials or focusing on being unique through packaging or ingredients. Flavours are also expected to gain greater presence, with consumers responding well to flavoured vodka. Flavoured beer is likely to be the next introduction. Taking a lead from other industries, manufacturers may want to look to tropical fruits and flavours which appeal to Brazilian tastes. The more exotic the flavour, the more premium the product is perceived to be.

© db December 2007