On the face of it, Euromonitor data showing 8.5% growth in retail sales of packaged foods and 7.1% growth in retail sales of soft drinks in 2016, might suggest things are going pretty well, but much of that growth can be attributed to food price inflation, given that many leading CPG companies including Unilever, Coca Cola and PepsiCo have been reporting declining volumes in Brazil.
And while food at home inflation has calmed down significantly since last year's highs, reflecting price declines in beans, sugar, garlic, carrots, rice, boxed milk, potatoes and tomatoes, record numbers of Brazilian consumers say they are still trading down to cheaper options when they go grocery shopping, according to a May 2017 report from Bernstein.
According to a survey of 800 Brazilian shoppers commissioned by Bernstein, “Respondents' economic outlook continues to be very pessimistic, as only 14% believe that the Brazilian economy is improving, while 71% think it is deteriorating.”
Meanwhile, a record 75% of respondents said they had traded down in at least one grocery category in the past 12 months, said Bernstein. “The trade down rate in Brazil (75%) remains meaningfully above that in the US (58%).”
Unilever: Brazil volumes declining as volumes in Mexico and Argentina surge
Speaking to analysts during the company's Q1 earnings call in late April, Unilever CFO Graeme Pitkethly explained how challenging the environment has been for large CPG brands in Brazil, adding: “There’s been a slowdown in the rate of decline in Brazil but the market is still declining between 5% and 6%."
Given that interest rates were much higher than inflation during the first quarter, some of Unilever’s wholesalers and distributors in Brazil had also cut down on inventor,y “as it’s quite a good place to invest at the moment,” he said.
“I think we will struggle to get Brazil itself to positive volumes during the second half of this year. It would be great if that happened, but we’re not planning and expecting that will happen.”
In stark contrast to the 10% volume decline Unilever experienced in Brazil in Q1, is the “double-digit growth in Argentina and Mexico and solid growth in Chile and Colombia,” he said. “Mexico in particular has had couple of quarters, now very, very strong growth for us. So [it's] very much a story of Brazil... and the others.”
“In Brazil, we are in the midst of resetting our price pack architecture to hit key price points as consumers' purchasing power has decreased during the country's worst economic contraction. While we are still in early days, we expect by the end of the year, the actions we are taking will return our Brazil business to growth.”
James Quincey, CEO, Coca-Cola, Q1 earnings call, April 25, 2017
Euromonitor: ‘Regional, niche, smaller brands are better able to innovate’
That said, people still have to eat… So where does this leave other big CPG brands competing to feed Brazil’s 200million+ population, and is Brazil seeing the same kind of growth opportunities for smaller, more entrepreneurial brands that we are seeing in the US market right now?
Yes, to some degree, says Euromonitor International, which reported reasonably robust retail sales growth in several more premium food & beverage categories in 2016, including organic fresh foods (sales +13.4%), organic packaged foods (+11.7%), lactose-free dairy (+53.3%), milk alternatives excluding soy (+59.6% - albeit from a very low base), ready meals (+12.5%), and nuts, seeds and trail mixes (+11.5%) – all areas in which smaller, more agile brands often have a stronger position.
Renata Benites, research analyst at Euromonitor, also points out that packaged food companies have picked up some business from the foodservice market as more consumers seek to save money by eating out a little less, which has boosted sales of (mostly) frozen ready meals sold in grocery stores, but has also boosted sales of things such as cream as consumers make their desserts at home.
What claims are being made on new product launches in Brazil?
Mintel Global New Products (GNPD) data reveals that almost a quarter (23.7%) of new products launched in 2016 featured environmentally friendly packaging claims, while 12.3% of new launches featured no additives/preservatives claims – a higher percentage than those making low/no/reduced sugar claims (8.4%) and low/no/reduced transfat claims (6.9%). Almost one in five new launches (18.3%) featured some kind of social media claim (eg. Hashtags, facebook mentions).
While almost two thirds (64.1%) of new packaged food and beverage products launched in Brazil in 2016 featured some kind of allergy friendly claim, we can't read too much into this given that regulations require all companies to label whether their products contain gluten or not, such that gluten free claims will appear on bottled water or other products in which gluten is clearly not something you might typically expect to be there.
As for the big vs small brand dynamic, says Benites at Euromonitor: “In Brazil as in the US, regional, niche, smaller brands are better able to innovate and get new ideas to the market more quickly than big brands; we’re seeing what you might call niche brands growing well in snacks such as trail mixes, sweet potato snacks, fruit and vegetable snacks, for example.”
One trend that has been slower to take off, however, is online grocery retailing, she says, with just 0.2% of packaged food sales in 2016 being sold via the internet, although retailers such as Pão de Açúcar are now offering click and collect-type services whereby consumers can order online and pick up goods at the store.
“The Latin American continent, outside of Brazil, Argentina and Venezuela, is good, but Brazil, Argentina and Venezuela are causes for concern.”
Indra Nooyi, CEO PepsiCo, Q1 earnings call, April 26, 2017
Mintel: ‘Several big CPG brands are changing their mindset’
The market dynamics are tough, agrees Naira Sato, Brazil research category director at Mintel, but companies are adapting: “CPG brands are struggling. Similar to the US market, there are more food start-ups and smaller business popping up. Brazil’s economic situation is one of the factors contributing to this; unemployment rates are increasing monthly, driving some people to go into business for themselves.
“To compete in this scenario, several big CPG brands are changing their mindset and implementing their own start-up hubs in order to speed up new product innovation, think differently and have less bureaucratic process in the way.”
As for prices, food inflation is “decreasing due to good crop yields this year, which is a positive factor for both smaller and bigger brands,” she claims.
Asked about niche growth opportunities in areas such as plant-based milk/meat, Brazilian consumers “are seeking alternatives to dairy and meat mostly because they are becoming flexitarians [reducing meat/dairy rather than avoiding it altogether],” she claims. “This means that sometimes they follow vegan and/or vegetarian regimes, but not all the time and they want to have options when they do.”
As for prepared meals, Mintel research shows an appetite for convenience, although just over a third of ready meal consumers say that “ready meals are too unhealthy to be eaten frequently,” adds Sato.
“Also, it’s important to note that 50% of Brazilians say they tend to cook meals from scratch, while 37% claim to cook at home to have more control of what goes into the food they eat, indicating, again, that consumers are after healthier eating habits.”
According to Mintel’s 2017 Global Food & Drink Trends report, Brazilian consumers claim to be seeking more fruits, vegetables, grains, seeds, herbs and other plant-based ingredients, while 25% of Brazilian adults who eat meat and are eating the same or less meat compared to 12 months ago say they are now eating more protein from other sources.
Meanwhile, 24% of Brazilian adults would eat more whole grains, if they knew how to use them in different recipes, says Mintel.