Brazil: a tempting opportunity
Although having endured difficult economic periods and political instability at times, Brazil entered the millennium increasingly looking like a global economic player. In 2011, this was affirmed by the fact that when European banks needed money for a bail-out, the IMF went to Brazil (among others) for a loan. From financial pariah to saviour of the West in the space of two decades is nothing short of remarkable. That said, the Brazilian economy has not been immune to the problems felt across the global economy as 2011 saw GDP growth fall from the 7.5% reported in 2010 to just 3%.
The slowdown can be attributed to various factors, including government policies intended to ease the pace of growth and reduce pressure on consumer prices, interest rate increases and the debt crisis in Europe, to name a few. The outlook for 2012, although dependent on the health of the wider global economy, could well prove to be an improvement on 2011, however, as social spending programmes and a minimum wage increase have boosted income levels, particularly among low-income households. This will prove to be good news for the tissue market by and large as it is precisely this consumer group which is likely to spend extra income on necessities such as tissue and hygiene products, items which are fast becoming central to the lives of many more Brazilian consumers.
BRAZIL PULLS FURTHER AHEAD OF MEXICO
The Brazilian market is the fourth largest in the world for retail tissue and hygiene, behind only the US, China and Japan, with sales topping US$9bn in 2011. In 2011, the market generated over US$1.2bn of incremental sales (at fixed 2011 exchange rates), almost four times the growth estimated for Mexico, Latin America’s only other trillion dollar economy. Certainly, inflation was a factor in 2011, running at 6.2%, but although tougher economic conditions pushed many to economise, 3.5% volume growth across tissue can be considered the reward for another year of investment and development from both domestic and multinational players.
Brazil remains a tantalising growth prospect for the likes of Kimberly-Clark, already the country’s largest retail tissue manufacturer, although the giant multinational does not have things all its own way. Indeed, local Brazilian players account for over 75% of the retail tissue market and will continue to be a major competitive force, particularly in key developing areas such as the northeast where they have a major competitive advantage, namely their distribution networks, which are essential to gaining traction in the less formal retail environment of these developing and less central areas.
TISSUE IN BRAZIL
Typical to the market structure of most developing countries, toilet paper remains the most significant category in Brazilian retail tissue, commanding an 81% value share in 2011, just a two percentage point decline from 2006, and illustrating that for most, lower incomes still restrict the purchasing of essential items. Whilst kitchen towels and boxed facial tissues saw double-digit growth over much of the last decade from an extremely low base, the real story of tissue sales in Brazil has been the establishment of toilet roll as a mainstream product, with a wide range of price points catering for all income groups. While 2009 and 2010 had seen toilet paper decline in volume in both the standard and luxury segments on account of consumers reducing consumption in a bid to save money, this was also the result of manufacturers launching new offerings in standard and economy toilet paper, including longer-lasting single-ply products.
With economic conditions seemingly on the up, 2011 saw volume sales in luxury and standard toilet paper grow by close to 15% year-on-year in both categories, reversing two years of volume decline since the onset of the global financial crisis. The performance in 2011 was also due in no small part to investment in plant modernisation from the leading manufacturers, which helped increase production efficiency and allow keener pricing without margins suffering significantly. Mili (Brazil’s fourth-ranked tissue manufacturer) led the way in this regard, using the savings it achieved to become more price-competitive, while Santher and Melhoramentos Papéis also followed suit. In addition to expanding its plant, Melhoramentos Papéis also benefited from the decision of parent company CMPC to invest in a eucalyptus plantation, allowing it to reduce its raw material purchasing costs. Santher and Mili, meanwhile, both embraced the ‘offer more for less’ concept, using their newly installed production technologies to produce new longer-lasting single-ply toilet paper products. Santher, for example, launched a 60m roll under its Personal brand, while Mili added a 100m roll to its range.
PRIVATE LABEL VERSUS BRANDS AND DISTRIBUTION
A further boost to the fortunes of the tissue market has come from the dominance of branded products in Brazil. Private label is still a relatively new concept in Brazil and although Carrefour and Wal-Mart are rapidly developing their presence, the vast majority of grocery sales still stem from an ocean of small chains and independent retailers. Of the 450,000 or more grocery retailers in Brazil, as few as 3,000 can be classified as supermarkets or hypermarkets, a channel which typically dominates retailing in more developed Western economies. The lack of a modern retail structure in Brazil is one reason for the strength of domestic brands and manufacturers, which have developed often complex distribution networks to get their products to consumers even in remote areas. The difficulty in distributing in Brazil, even in major cities, has helped insulate domestic players from competition thus far, although the rapid expansion of more modern retail formats, with the number of supermarkets increasing by 50% over the past five years, does point towards a time when competition will increase and private label will likely become a more significant force in the tissue market.
AWAY – FROM – HOME TISSUE
Although not as spectacular as developments in the retail channel, away-from-home (institutional) tissue sales continued to see volumes expand in 2011 and throughout Brazil’s short-lived recession. Through a combination of sporting events and a general upturn in Brazilians eating and socialising outdoors, paper napkins and toilet paper continued to report healthy volume growth as Brazilians continued to be willing to spend money on out-of home activities. Similar to the retail channel, value sales were inflated by the rise in raw material and transportation costs which were evident across the Brazilian economy, although volume growth of 5% over 2010 was evidence of general optimism among consumers, which translated into spending more time socialising outside the home. While the World Cup and national elections in 2010 had presented something of a boost to awayfrom- home sales, the strong performance in 2011 was largely the result of an improving economic outlook which saw Brazilian consumers in particular spending rather than saving, a national trait which continued to serve the economy well.
The future would also appear to be bright for the away-from-home channel, with major events such as the 2014 football World Cup and the 2016 Olympic Games both taking place in Brazil and sure to drive a frenzy of activity in preparation for an influx of both domestic as well as international visitors.
BRAZIL’S NORTHEAST ELDORADO
While upcoming events are likely to see the tissue market grow in Brazil, there is also a regional development story unfolding. Brazil’s northeast region is one of the most compelling consumer goods growth stories in the world, yet it is still a largely unknown (and untapped) entity for leading FMCG brands. It is a modern day frontier story, only the hidden wealth is not gold but consumer opportunity, and instead of gun-toting cowboys the prospectors are Western companies wielding big name brands.
From Carrefour to Coca-Cola, leading FMCG companies have flocked to the northeast in search of growth, driven by the allure of burgeoning numbers of lower-middle income consumers. Few of these Western companies, however, can be altogether sure how things will turn out, not least because of the large volume of small but influential local players with an active presence in the market. It is a region where first-tier global brands can call upon limited brand equity and heritage.
The northeast of Brazil is, in short, a region where aspiration-driven consumption culture has not yet been born. This is because the whole concept of formal retailing is still in its infancy for millions of ‘new consumers’. What we have seen over the past decade is an explosion of the so-called C-Class of Brazil, which comprises consumers who earn approximately US$350-600 a month. Nationally, this C-Class bulged from around 15m in 2005 to upwards of 17.5m in 2011. And it is the northeast, in particular, where the socio-economic revolution has been most pronounced. The comparative newness of formal retail culture means that everything is still up for grabs, while the competitive playing field is unusually even. TW