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Brazil faces new challenges (Excerpt)

Brazil faces new challenges (Excerpt)

 

Source: The IWSR Magazine July Issue

By Guy Shingles

July 7th

 

The large Brazilian spirits market is now feeling the hangover after the binge. Brazil has enjoyed a period of huge economic development over the last decade, with unemployment declining, poverty falling, and the middle class expanding by almost 40m. This fuelled a dramatic increase in consumption overall – and of imported and luxury goods in particular. In the last two years, however, the economy has begun to contract, with a concomitant effect on spending. The market may be spurred, at least temporarily, by this summer’s Olympic Games in Rio, although visitor numbers may be depressed by concerns over the Zika virus. The localised nature of the event and its strongly health-oriented image mean that most players do not expect a significant positive impact.

 

Certainly the experience of past Olympics, such as London and Beijing, is that it doesn’t necessarily translate into higher liquor sales. However, it may lift the general mood and even give the economy a short-term boost. After flattening in 2014, Brazil’s economy entered full-blown recession last year, with real GDP growth falling to -3%, according to the IMF, and a resulting increase in unemployment. Combined with high levels of household debt and double-digit inflation, this has squeezed disposable incomes, leading to reduced consumer spending. Even the wealthier part of the populace has become cautious, preferring to save surplus income due to uncertainty about the country’s future prosperity. Problems have been compounded by the plummeting value of the Brazilian real, which lost a third of its value against the dollar over the course of 2015. This considerably increased the cost of imported products, forcing local distributors to raise prices several times during the year.

 

Unsurprisingly, the drinks market was therefore characterised by falling consumption and widespread downtrading last year. Brazil’s new middle class, who fuelled the volume growth and premiumisation push of the last decade, are those most affected by the current economic problems. They are now being forced to cut back their spending, effectively resetting several years of market development.

 

Consequently, a distinct trend last year was the growth of ‘premium value’ products: cheaper, but well-regarded brands capable of bridging the gap between the standard and value segments, that have succeeded in capturing volumes shed further up the scale.

 

Economy aside, the Brazilian market also presents other difficulties. The country’s size and relatively poor infrastructure makes its drinks market vast, but fragmented. Consumer trends and consumption habits are highly regional, with few brands enjoying a genuine national presence. Even supermarkets are not ubiquitous, with market leader Pão de Açucar the closest thing to a genuinely national chain.