BMI's Executive Summary

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The Sector At A Glance

Key Insights On The Food & Drink Sector Of Brazil

GDP growth reached 3.5% year-on-year (y-o-y) in 2005, only half that achieved in 2004. Despite this, domestic demand has been boosted by the strong real and falling interest rates. Furthermore, while inflation reached 5.7% at the end of 2005, slightly above the target of 5.1%, it looks set to decline for the fourth consecutive year during 2006; we forecast it to reach 4.7% by the end of December. Indeed, the recovery of domestic demand is now essential in view of the continued appreciation of the real. We expect GDP growth in 2006 to end the year within the 3.5-4.0% band.

Brazil’s mass grocery retailers (MGRs) 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 only 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 still-appreciating real against the US$.

Judging by MGRs’ expansion plans for 2007, there is, however, a new-found confidence in the sustainability of the country’s recovery. Contributing factors to the improved performance of MGR sales have been declining unemployment, an increased level of job creation, increases in real wages, and thus disposable incomes, and wider accessibility to credit, all of which have led to stronger overall consumer demand. Furthermore, food and drink prices have increased at lower levels than prices in many other sectors.

The big news in the MGR sector in Q406 is that Wal-Mart has thrown down the gauntlet to its main competitors – CBD and Carrefour – by announcing two large investment tranches for 2007: the first amounts to US$385mn for the building of 28 new stores; the second to US$123mn for the modernising and renovating of its existing store network. While the investments are targeted at 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. We forecast that sales from the new stores will take Wal-Mart very close to the number one MGR spot in the country, in terms of total turnover, overtaking both CBD and Carrefour (both of whom have more than double the number of stores held by Wal-Mart).

Food and drink producers have also stepped up their investments in the second half of 2006, reflected in investments into production facilities for the domestic market from the likes of Nestlé, Sadia and Perdigão, and plans for product launches in premium product segments, such as InBev’s Stella Artois premium beer brand.

We believe the recovery of domestic demand is now somewhat urgent in the face of the continued appreciation of the real, which has been cutting into exporters’ margins more and more in 2006. Agricultural exports have been affected more than most, since even small changes in price tend to lead to buyers looking elsewhere. Domestic consumption will thus be the principal growth engine in final quarter 2006 and in 2007, reducing the economy’s vulnerability to the global trade cycle, but lowering its export earnings.

Segments to watch this quarter and throughout 2007 are specialty coffees and teas (export market in particular); natural frozen juices, especially the export of orange juice (of which Brazil is now the largest importer into the US); beer, the market for which is about to become still more competitive, with Femsa’s release of its new Sol brand and AmBev constructing a new factory in Campo Grande, Rio de Janeiro; and confectionery, the market for which is soaring as Brazil’s very large youth population finds new purchasing power. Argentine confectioner Arcor has announced further investments to increase its capacity in Brazil for 2007. A new plant opened in November 2006, with projected output of 14,000 tonnes of sugar confectionery per year.

Contents

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Chapter 1 – Business Environment

Retail Business Environment Rankings

Table: Latin America Business Environment Rankings

SWOTs

Brazil Food & Drink Industry SWOT

Macroeconomic Outlook

Table: Economic Activity – Historical Data And Forecasts

Chapter 2 – Retail

Regional Overview

Trending Towards Hypermarkets In Latin America

Rise Of Hypermarkets

Table: Number Of Supermarkets/Hypermarkets, 2005

Table: Top Five Mergers & Acquisitions In The Latin American Retail Sector, 2005

Share of MGR Sales In Total Sales

Industry Forecast Scenario

Table: Brazil MGR Value Sales by Format – Historical Data & Forecasts

Industry Developments

Company Developments

Market Overview

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

Table: Brazil MGR Value Sales By Format

Chapter 3 – Food & Drink

Regional Overview

The Growing Market For Wine Sales And Production In Latin America

Table: Per-Capita Consumption Of Wine (litres)

Table: Wine Production Estimates By Country 2005

Industry Forecast Scenario

Table: Brazil Food & Drink Indicators

Industry Developments

Company Developments

Market Overview

Table: Brazil Agricultural Sub-Sector Production – Historical Data

Chapter 4 – Tobacco

Industry Forecast Scenario

Table: Cigarette Value/Volume Sales – Historical Data & Forecasts

Industry Developments

Company Developments

Market Overview

Chapter 5 – Competitive Landscape

Key Players

Table: Key Players In Brazil’s MGR Sector

Table: Key Players In Brazil’s MGR Sector (Cont)

Table: Key Players In Brazil's Food & Drink Sector

Latin America Regional Company Case Studies

Company Case Study – Organization Soriana

Table: Organizacion Soriana: Stores By Format, June 2006

Table: Organizacion Soriana, S.A. – Income Statement, January-June 2005 & 2006

Table: Organizacion Soriana: New Store Openings, April-June 2006

Table: Market Shares Of The Four Largest MGRs In Mexico, 2005

Company Case Study – SABMiller

Table: Top Five M&As In Latin America In 2005

Table: SABMiller In Colombia, As At June 2006

Table: SABMiller In Peru, As At June 2006

Wal-Mart In Latin America

Table: Wal-Mart Latin America Regional Operations

Table: Wal-Mart de Mexico (Walmex)

Table: Wal-Mart Brazil

Nestlé In Latin America

Table: Nestlé Operations In Latin America

Company Analysis

Grupo Avipal

Perdigão

Sadia S.A.

Embotelladora Andina S.A.

Companhia Brasileira de Distribuicao (CBD)

Wal-Mart

AmBev

BMI Forecast Modelling

How We Generate Our Industry Forecasts

Retail Industry

Sources

Competitive Landscape for Latin America Food & Drink Reports: Sample of  
Companies Ranked

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At-a-glance perspective on the strengths, weaknesses, opportunities and threats facing each market’s food & drink industry. BMI also provides similar economic and business environment studies. Company SWOTs (Strengths, Weaknesses, Opportunities, Threats) covering all leading food and drink companies operating in each market, including competitive intelligence on geographic presence and competitive positioning of multinationals against local companies; leading products, services and brands; sales and local market share; foreign direct investment, projects, partners and acquisition strategy. Illustration of the industry via rankings tables comparing revenues, number of outlets, number of employees and registration dates. BMI analyses each company’s performance, market position, strategy and investment potential.

Network of Latin American Food Sources

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BMI's Latin American Food Reports are based on an extensive network of multilateral organisations, government departments, food industry associations, chambers of commerce and company reports. Information sources include: