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Brazil: Strong Opportunities

Opportunities remain strong in Brazil, especially for consumer goods and services, despite the slowdown and global crisis.

BY MARCEL MOTTA
Euromonitor

Prospects for economic growth and consumer markets in the developed world look bleak. However, despite the global economic slowdown and its negative impacts across the globe, the opportunities and challenges encountered today in the Brazilian economy, and in the fast moving consumer goods markets and services, are no smaller than before the onset of the crisis. 

Yet, looking at the broadest measure of the Brazilian economic activity for 2009, Brazilian GDP is expected to present growth of no more than 2 percent for the current year, according to latest estimates from the Institute of Applied Economics (IPEA), a research body linked to Brazil’s federal government. This broad economic indicator alone, when compared to real GDP growth of 5.8 percent  for 2008 and 5.7 percent for 2007, makes it hard to convincingly present a positive scenario for consumer demand. However, manufacturers, distributors and retailers have shown an overall conservative, but positive, stance on consumer markets for 2009. 

POSITIVE SIGNS

Income and employment, two important consumer fundamentals, have been presenting substantial positive signs in recent years. According to Euromonitor from national statistics data, unemployment in Brazil stood at a 9.7 percent  mark in 2003 but showed a decline to 6.4 percent  in 2008. This 3.3 percentage point reduction in unemployment alone has had large positive impacts in consumption across consumer goods markets in the country.

Even though some recent data from CAGED (National Employment General Registry) shows that 750,000 jobs have been closed between December 2008 and January 2009 bringing unemployment to 8 percent  in February, the same government bureau estimates that 10 million new formal jobs have been created in the country between 1998 and 2008. This large number of new formal jobs created represents substantial improvements in the structure of the labor market that is unlikely to disappear during the current crisis. According to Euromonitor, the negative impact on job losses on the overall positive picture of new jobs created is only marginal and represents a quick supply-side reaction for capacity adjustment carried out by export-focused businesses and durable goods companies which have seen a drop in orders for big-ticket items in face of diminished consumer credit and the falling global demand. 

Recent improvements in income and income distribution in Brazil also plays a key role in this new scenario. According to consumer data from Euromonitor, the lower-middle class, or economic consumer group commonly denominated as C in the country,  accounting for households with annual disposable income between USD$5,000 and $25,000, corresponded to 31 percent of total number of households in 2002. In 2008, this important group had mounted to represent 63 percent of total number of households in Brazil. This has been a substantial gain from this group, which today represents 32.7 million households, or some 95 million consumers. This huge consumer base, which accounts to slightly over 50 percent of Brazil’s total population, is expected to hold consumer demand better than higher economic consumer groups which have felt a more direct impact of the plummeting financial markets.

CONSUMER STAPLES

According to Euromonitor, Brazilian consumers are expected to continue spending on consumer staples, at the same time they are expected to cut back or postpone spending on discretionary items. This trend and this newly formed large middle-class will positively impact consumer demand and create opportunities in categories such as fresh and packaged foods, daily use personal care categories and essential household care products. Within the market for packaged foods in Brazil, Euromonitor expects categories such as dairy and dried processed foods products to present a constant average growth rate in value terms of 9.1 percent and 8.6 percent, through 2012, respectively. Personal care products of daily use are also expected to continue to follow positive trends. Categories such as deodorant will present growth of 4 percent while one of its sub-categories, deodorant sprays, is expected to expand at 17 percent annually through 2012.  In addition, categories such as bar soap and laundry care will see growth of 4.4 percent and 5 percent annually in the same period.

Food items will tend to offer stability and consistency and are likely to be the last category to be cut back in a “share of pocket” analysis. However, Euromonitor anticipates a decline in consumption of premium products or products priced at the high-end, especially imported products whose retail prices have been directly affected by the fast depreciation of the local currency.  In this scenario, an increase of B-brands and private label items is expected in categories considered non-essential and with affordable substitutes, like olive oil for example. In such cases, B-brands and private label items are expected to pick up incremental sales from consumers trading down from imported and premium higher-priced items.

Opportunities will lie in advancing consumption of consumer staples through the new middle class. Instead of launching higher-priced branded items which should demand high investments in brand building and in marketing support, manufacturers and distributors should focus efforts in further developing and exploring existing brands. A way to take advantage of this should be to extend availability of product offerings using brand extensions, granting the consumer a chance to spend more on essential goods. During the economic downturn and through an environment of negative expectations, moving consumers to higher-priced branded items will prove to be difficult. This is especially true at a time when current price-sensitive Brazilian consumers can easily access non-name substitute products through small independent stores or home made substitutes sold in street markets.

ATTRACTIVE SIZE

Moreover, strategically, population has always been an extremely important aspect for potential growth. In the long run, emerging economies like Brazil have huge populations and the sheer size of its market continues to make Brazil very attractive. Not considering China and India, Brazil with a population of 182 million is larger than emerging markets like Russia, 141 million, or Mexico, 106 million.

New consumers are springing forth in the Brazilian market like the new middle class. Because of the country’s large consumer base and the momentum consumption has gained underpinned by formal job creation and higher incomes, the Brazilian economy is expected to be one of the few to escape the worst of the global downturn. As most advanced economies face severe recession in 2009 and beyond, Brazil’s ability to sustain moderate growth based on its domestic market during this crisis, puts the country in a better position to slowly catch up with the developed world once the worst of the crisis is over.

Marcel Motta is a research manager at Euromonitor International. This article was written for Latin Business Chronicle.

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