Food and Drink Brazil

Published quarterly by BUSINESS MONITOR INTERNATIONAL LTD
Brazil
Food & Drink
Report Q1 2007
Including 5-year industry forecasts
ISSN 1749-2602
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2007 Business Monitor International. All rights reserved.

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Brazil Food & Drink

Report Q1 2007
Including 5-year industry forecasts by BMI
Part of BMIs Industry Report & Forecasts Series

Published by: Business Monitor International
Publication Date: March 2007
Business Monitor International

Mermaid House,
2 Puddle Dock,
London, EC4V 3DS,
UK
Tel: +44 (0) 20 7248 0468
Fax: +44 (0) 20 7248 0467
email: subs@businessmonitor.com
web: http://www.businessmonitor.com
2007 Business Monitor International.

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Brazil Food & Drink Report Q1 2007
Business Monitor International Ltd
Page 2
CONTENTS
Executive Summary .........................................................................................................................................5
Chapter 1 Business Environment................................................................................................................7
Retail Business Environment Rankings....................................................................................................................................................................... 7
Table: Latin America Business Environment Rankings ....................................................................................................................................... 12
SWOT Analysis ......................................................................................................................................................................................................... 13
Brazil Food And Drink Industry SWOT ............................................................................................................................................................... 13
Macroeconomic Outlook........................................................................................................................................................................................... 15
Table: Economic Activity Historical Data And Forecasts ................................................................................................................................ 16
Chapter 2 Retail ...........................................................................................................................................17

Regional Overview: Rising Purchasing Power Of Low And Middle-Income Groups ............................................................................................... 17
Table: Inflation Versus Minimum Wage Increases In Colombia (%)................................................................................................................... 18
Table: What Would You Do With Any Extra Income? ......................................................................................................................................... 19
Table: Food And Drink Purchases Made In Supermarkets In Latin America By Income Group, 2006 (%)......................................................... 20
Sales Offering For Stable Food Products In Latin American Retail Sales Channels ........................................................................................... 21
Industry Forecast Scenario....................................................................................................................................................................................... 22
Table: Brazil MGR Value Sales By Format Historical Data And Forecasts (US$bn)....................................................................................... 23
Industry Developments ............................................................................................................................................................................................. 24
Company Developments ........................................................................................................................................................................................... 25
Market Overview ...................................................................................................................................................................................................... 28
Table: Structure Of Brazils MGR Market By Number Of Outlets ('000s) ........................................................................................................... 30
Table: Brazil MGR Value Sales By Format (US$bn)........................................................................................................................................... 30
Chapter 3 Food And Drink..........................................................................................................................31

Regional Overview: Growing Market For Light Food And Drink In Latin America.............................................................................................. 31
Table: Soft Drink Sales Globally And In Latin America (2006)........................................................................................................................... 31
Table: Packaged Juice And Not-From-Concentrate Juice Markets In Latin America (litres per capita, 2006)................................................... 32
Table: Food And Drink Industry As A Proportion Of GDP, 2006 ....................................................................................................................... 33
Table: Consumers Seeking The Following Descriptions On Food Labels In Latin America (%)......................................................................... 34
Table: Brazil Food And Drink Indicators ............................................................................................................................................................ 40
Company Developments ........................................................................................................................................................................................... 43
Market Overview ...................................................................................................................................................................................................... 46
Table: Brazil Agricultural Sub-Sector Production Historical Data .................................................................................................................. 47
Chapter 4 Tobacco ......................................................................................................................................50

Table: Cigarette Value/Volume Sales Historical Data And Forecasts.............................................................................................................. 50
Market Overview ...................................................................................................................................................................................................... 51
Chapter 5 Competitive Landscape ............................................................................................................52

Key Players............................................................................................................................................................................................................... 52
Table: Key Players In Brazil's Mass Grocery Retail Sector................................................................................................................................. 52
Page 3
Table: Key Players In Brazil's Mass Grocery Retail Sector (cont.) ..................................................................................................................... 53
Table: Key Players In Brazil's Food And Drink Sector........................................................................................................................................ 54
Regional Company Case Studies .............................................................................................................................................................................. 55
Cencosud In Latin America ...................................................................................................................................................................................... 55
Table: Cencosud: Principal Shareholders ........................................................................................................................................................... 55
Table: Cencosud: Store Portfolio ........................................................................................................................................................................ 56
Table: Cencosud: Revenues By Business Line In Chile, 2006.............................................................................................................................. 58
Table: Cencosud: Revenues By Business Line In Argentina, 2006 ...................................................................................................................... 58
Table: Dominant Mass Grocery Retailers In Chile.............................................................................................................................................. 59
Cadbury Schweppes In Latin America ................................................................................................................................................................. 61
Table: Revenue By Region, 2006 ......................................................................................................................................................................... 62
Table: Profits By Region, 2006............................................................................................................................................................................ 62
Table: Cadbury Schweppes: Manufacturing Plants............................................................................................................................................. 63
Table: Americas Region: Latest Figures.............................................................................................................................................................. 65
Kraft Foods In Latin America................................................................................................................................................................................... 66
Table: Kraft Overview, 2005 ............................................................................................................................................................................ 66
Table: Business Segment Revenues For Q306, US$bn......................................................................................................................................... 67
Table: Kraft In Brazil: Timeline .......................................................................................................................................................................... 68
Table: Kraft Foods Inc Latest Revenues (US$bn)............................................................................................................................................. 69
Almacenes Exito In Latin America....................................................................................................................................................................... 71
Table: Almacenes Exito Latest Results (Colombian pesos, mn)........................................................................................................................ 72
Table: Grupo Casino*: Geographical Breakdown Of Sales ................................................................................................................................ 72
Table: Almacenes Exito Store Profile ............................................................................................................................................................... 74
Company Analysis .................................................................................................................................................................................................... 76
Grupo Avipal ....................................................................................................................................................................................................... 76
Perdigo .............................................................................................................................................................................................................. 77
Sadia SA .............................................................................................................................................................................................................. 78
Embotelladora Andina SA.................................................................................................................................................................................... 79
Companhia Brasileira de Distribuio (CBD)..................................................................................................................................................... 80
Wal-Mart ............................................................................................................................................................................................................. 81
AmBev.................................................................................................................................................................................................................. 82
BMI Forecast Modelling .................................................................................................................................83

How We Generate Our Industry Forecasts ............................................................................................................................................................... 83
Retail Industry .......................................................................................................................................................................................................... 83
Sources ..................................................................................................................................................................................................................... 85
Page 4
Executive Summary
In GDP terms, the Brazilian economy continues to tread the sluggish path it has been on since early 2005.
Following on from a growth rate of 2.25% in 2005, less than half that achieved in 2004, 2006 saw a slight
improvement, at an estimated 3.5% growth rate. We are, in turn, forecasting a similar pattern for 2007,
with a predicted growth rate of 3.75%.
Inflation has been moving downwards as well, reflecting both the slow-moving economy and the high
real. In 2005 it stood at 5.7%, from where it has moved down steadily since, to a rate of 3.4% in
December 2006. We forecast a small increase for 2007, as the economy continues its slow-paced
improvement. The continued appreciation of the real against the US dollar and the euro has served to
keep the costs of imports down, thereby stimulating the domestic economy overall and the retail sector in
particular.
With the domestic economy being very much the bright spot on the Brazilian horizon at the moment, as
exporters are having a hard time coming to terms with the overvalued real, grocery retailers and food and
drink producers are ramping up investments to take full advantage of consumers strong purchasing
power.
Needless to say, Wal-Mart is leading the way, announcing plans to spend a record US$385mn to expand
its Brazilian operations in 2007. The company plans to open 28 new stores over the course of the year:
Brazil is an opportunity, with a solid base that we know how to grow, Vicente Trius, Wal-Mart Brazils
president, said. We are committed and we are going to continue investing in Brazil. Equally, it will
expand its Sams Club retail warehouse format. Sams Club has entered into an innovative deal with
Brazils Caf Bom Dia to market and sell a range of gourmet and organic coffees.
Local retailer Lojas Americanas has extremely been active too, opening 12 new outlets in four Brazilian
states in 2006 four in south-eastern So Paulo state, two in neighbouring Minas Gerais, one in Rio de
Janeiro and another one in Rio Grande do Sul. The openings are part of the companys network expansion
strategy, which envisages the opening of 45 new stores in 2007.
Lojas Americanas was also involved in last years biggest internet deal, when, in December 2006,
shareholders from Brazils leading internet retailer, Submarino, approved a plan to merge with
Americanas.com, its main rival. By joining forces, Submarino and Lojas Americanas expect to save a
combined BRL800 mn (US$372mn) a year, putting them in position better to exploit the fast-growing online retail market, which we expect to reach more than BRL200bn (US$94mn) this year. The on-line
market for purchasing grocery products has been growing particularly fast in Brazil by more than 10% a
Page 5
year over the past three years. One reason for this is that a good deal of the web-site traffic is composed
of expatriate Brazilians wanting to purchase grocery items to send to family members living in Brazil. We
estimate that between 13mn and 15mn Brazilians live and work abroad, representing between 6% and 8%
of the 190mn that live inside the country.
On the food and drink side, sectors to watch in 2007 are those of confectionery, meat and poultry, and
beverages (speciality coffees, beer and wine, and non-carbonated soft-drinks). The confectionery market,
in particular, is the site of some intense competition. US-based Hersheys strategic decision to
concentrate on the Brazilian market in its product-line expansion outside the US has coincided with
Argentinean confectioner Arcors plans to expand its operations in the north-east of the country, adding
14,000 tonnes of new capacity. And not to be outdone, Cadbury Adams has announced that it sees
Brazil an an ideal market for the testing and launching of many of its new products, beginning with the
launch of Trident Drops, an extension of the Trident bubble gum brand.
The unknown quantity for confectionery producers in Brazil, of course, is the direction that the price of
sugar will take over the coming year. As the global demand for ethanol (alcohol fermented crops) gets set
to reach new highs, the price of sugar is likely to do the same, something producers would not welcome,
for despite the trend towards light, low-sugar sweets in Brazil, a higher sugar price would inevitably
impact profit margins. However, should Brazilian sugar cane growers succeed in their attempts to convert
large tracts of public land over to sugar cane production, they may yet be able to keep the price stable.
Page 6
Chapter 1 Business Environment

Retail Business Environment Rankings
With economic and political policies from the left, right and centre, Latin America is far from a
homogenous zone. One thing most of the countries do have in common across the region, though, is
economic growth lots of it. In 2006, the overall growth rate for the region was 5.3%, which represents
the fourth consecutive year of relatively high growth (4% or above). Cuba saw the highest growth, at
12.5%, followed by Venezuela and the Dominican Republic (both at 10%), Argentina (8.5%), and
Panama (7.5%).
Up to now, the current decade is far brighter than the previous one (1991-2000), during which annual
GDP growth averaged 2.8%. Another lost decade, then, we are not experiencing. On the contrary, it is
looking distinctly like we may be in a won decade, to use the terminology of Jos Luis Machinea,
executive director of the Economic Commission for Latin America and the Caribbean (ECLAC).
While these growth rates are positive, they do not compare favourably to those of other countries when
they were at a similar stage of economic development. Countries such as Spain, Portugal, Ireland and
South Korea regularly recorded annual growth rates of 15% and above as they were passing through the
middle income development stage, not many decades ago.
In large part, this is due, we think, to the slow progress in the region on legal and bureaucratic reforms,
and to the continued presence of significant corruption in local and national governmental organisations.
Many of the big city local authorities, or councils, in the region are frequently cited in international
accounting and consulting journals as some of the most corrupt in the world, yet they continue to exist.
President lvaro Uribe of Colombia has perhaps spoken out most on this issue, saying that the best way
to deal with corrupt authorities and they are randomly scattered throughout the region is to close them
down completely and start all over again. Fine, fighting words, but Uribe has been unable to stamp out
widespread corruption in his own backyard, finding it difficult to get to the core of the problem in each
city.
In terms of the relative attractiveness of the different markets, BMI sees Chile and Peru as the most
alluring, followed by Mexico and Colombia which share third place and then Venezuela, Brazil and
Argentina.
Page 7
Despite Chiles small population of 16.5mn, its average food consumption of US$1,082 per person is one
of the regions highest. Furthermore, its barriers to entry are the lowest by far in Latin America, so
offsetting the not-so-appealing small market size. Michelle Bachelets administration has a firm political
base and legal institutions are relatively free of the rampant corruption present elsewhere in the region.
In second-placed Peru growth, which for a long time was fuelled mainly by exports, is now driven by
private consumption, which continued apace in the final quarter of 2006. Per-capita consumption of food
and drink, while still low for the region, looks set to climb in 2007, on the back of the 7.2% GDP growth
last year, and the expansion of mass grocery retailers (MGRs) into cities outside Lima. On the political
front, Alan Garcas victory over nationalist candidate Ollanta Humala in 2006 has calmed investors
nerves to the extent that we expect a noticeable increase in foreign direct investment (FDI) into Peru in
2007.
Though they share third place in our overall regional ranking, Mexico and Colombia differ on some
important aspects. Colombias market entry potential is far greater than Mexicos, as the latter is a more
mature economy with the highest per-capita consumption in the region, while Colombia has burgeoning
lower-middle and middle income populations.
Meanwhile, Mexicos 2006 growth rate was just below the regional average, and Colombias just above.
The two share the same middle-ranking score of five for long-term political risk, if for different reasons:
in Mexico, we witnessed the not-so-smooth presidential elections and somewhat troubled transition to
power of Felipe Caldern last year, leading us to question the strength of the countrys political
institutions; and in Colombia President Uribe has had only limited success so far in his second term in
putting out the guerrilla and paramilitary conflagrations that continue to dominate events.
Fifth-placed Venezuela goes on enjoying a double-digit growth rate, though its scores on barriers to entry
and long-term political and economic risk remain low. The Chvez administration appears set to serve a
full second term, through to 2013, though the opposition remains strong. Also, while the governments
main policy planks are dependent upon the continuing high price of oil, there will always be an element
of doubt about the long-term. The administrations policy of ensuring what it calls food sovereignty via
encouraging domestic production and severely limiting food and drink imports will not play well with
investors.
Brazil lies in sixth place, mainly due to its low scores on per-capita consumption, market entry potential
and long-term political risk. With almost 190mn inhabitants, per-capita income reached barely US$4,500
in 2006 (compared to Mexico and Chile, which have roughly the same per-capita income level
US$7,400 60% higher than Brazils). Per-capita spending on food and drink is a little over 9% of the
Page 8
total, at US$412. Our score of five for long-term political risk reflects re-elected President Luiz Incio
Lula da Silvas controversial social policies and his continued involvement in corruption scandals. We
give a slightly higher score, of six, to long-term economic risk, thinking of the Lula administrations
relatively prudent, market-oriented policies and the warm reception they have received from the
investment community.
Argentina, in seventh place in our ranking of seven, has a composite score of 29. Its lowest score of two is
for market entry potential. Entry into the country for new firms is made difficult for a host of reasons:
inflation continues to build; price restrictions remain on a wide range of food and drink items which is
getting wider by the month; and the president continues to defy international creditors, which has the
effect of lowering local banks credit ratings and their ability to attract international funds for local
investment lending purposes. Despite this, net capital inflows remained positive in 2006, which should
increase productive capacity in 2007, and thereby take some of the steam out of inflation.
Brazil comes sixth in the overall business environment rankings, owing to its low market entry
potential and the low per-capita consumer spending. While the former is owing to an already welldeveloped and highly competitive MGR sector with supermarket penetration of over 80% in the
biggest cities the latter is a consequence of substantial income inequalities across the country.
Brazil also shows the second-lowest compound annual growth rate (CAGR) for MGR sales over the
forecast period, again owing to the highly established nature of the sector. Where long-term
economic and political risk ratings are concerned, the country ranks slightly below average; the
same applies to barriers to entry.
In 2005 GDP growth in Brazil (at 2.325%) was less than half of that in 2004 (4.91%). Most of this
growth has been driven by external demand. If world GDP and trade continue to expand as
forecast by the World Bank, Brazils current account will stay in surplus, although the surplus will
likely decline as imports strengthen. For full-year 2006, we estimate that GDP growth will come in
at 3.5%.
While the economy has performed well overall, there remain important economic challenges for the
government. The most significant are debt-related: the governments mainly domestic debt
increased steadily from 1994 to 2003 straining government finances before falling to a stillconcerning 51% of GDP in 2005; while Brazils foreign debt (a mix of private and public debt) is
large in relation to Brazils small (but growing) export base. The challenge, then, is to generate
sufficient economic growth over the next few years to stimulate employment and render the
government debt burden less onerous. This will involve a stronger emphasis upon exports than has
hitherto been the case, in order to bring in valuable foreign currency.
Page 9
The high debt profile exposes the economy to the ebbs and flows of the international financial
markets. The Lula administration is seeking to lessen this exposure through an increasing emphasis
on exports. Some analysts, however, worry that this will lead to an equally high level of exposure to
the ups and downs in international trade. To mitigate against this, the government would be wise to
encourage an export-diversification approach, on the lines of that in Argentina at the moment,
which would make the economy much less vulnerable to the fortunes of a single market (the US).
Despite its size, the Brazilian economy has a large agricultural sector, accounting for 10% of GDP
and 40% of exports. It is the worlds largest producer of sugar cane, coffee, tropical fruits and
frozen concentrated orange juice. Exports of these products performed well in 2006, especially of
tropical fruits and frozen orange juice; both segments enjoy significant production cost advantages
over their regional competitors, particularly growers in Florida. Its cattle herd numbers 170mn
head, 50% larger than that of the US. The industrial sector, accounting for 33% of GDP, is large,
diversified and increasingly important in global terms. Automobile and parts manufacturing, for
example, now represents a significant slice of total worldwide production. The service sector,
meanwhile, makes up half of total GDP.
In Brazil, the ruling Partido dos Trabalhadores (PT) recently made headlines as a result of party
infighting. The party is roughly divided between those who support the conservative economic path
of President Lula and those who would like to see greater spending on social and redistributive
programmes. The issue is fundamental. As many Latin American countries continue to elect left-ofcentre governments, it was seen as a great victory for the neo-liberal economic model (promoted by
international financial institutions, especially the IMF that a leftist such as Lula would follow its
policy prescriptions so closely. Indeed, Lula has been even more fiscally conservative than his rightof-centre predecessor, Fernando Henrique Cardoso, of the Partido da Social Democracia Brasileira
(PSDB). Lula loosened the purse strings prior to the presidential election in 2006, at a time when
his own popularity was falling. Meanwhile, the political crisis in Braslia and public arguments
within the ruling party have significantly undermined public support for the president. This led us
to believe that Lulas shot at a second term in office was far from the racing certainty that it seemed
at the mid-point of his term in late 2004 and early 2005. In the event, the 2006 election was not as
bitterly contested as we thought, and Lula emerged victorious from the run-off on October 29 with
60% of the votes, well ahead of Geraldo Alckmin of the PSDB, who gained 39% of the votes. The
opposition parties tried in vain to capitalise on the corruption scandal, while the PT successfully
held up the economy card moderate economic growth combined with lower inflation as its
strongest achievement.
Page 10
Having had to contend with sluggish sales growth and the necessity of structural adjustments to
reflect changed consumption patterns during the economic crisis of 2002-2003, Brazils MGRs saw
sales grow at higher rates during 2005 and the first nine months of 2006. Judging by their
expansion plans for the first half of 2007, they have found new confidence in the sustainability of
the countrys recovery. Investments in the sector during 2005, at US$734.5mn, were almost double
those of 2003, according to Abras, the Brazilian supermarket association, with a plethora of new
store openings and retailers moving to into frontier regions of the country, thus increasing
competitive pressures. Wal-Mart has, for example, acquired the Brazilian operations of Sonae; and
Makro announced ambitious expansion plans, in a move to regain its lost status and prestige in the
country. As in Argentina, MGR penetration is already high in the wealthy and most populous areas
of the country. As such, further expansions in these areas will be accompanied by slower growth
rates, with an estimated CAGR of 26.2% between 2006 and 2010. As retailers begin to open stores
in areas where large retailers have not yet ventured outside the Rio de Janeiro, So Paolo and
Braslia triangle growth rates will accelerate. We see this trend gaining momentum in 2007.
Brazil achieves a score of two for the market potential indicator, based on the number of retail
outlets in 2006, the number of hypermarkets in 2006 and the number of people per outlet in the
same year. The country has by far the largest number of MGR outlets and hypermarket outlets in
the region. It also leads in terms of people per outlet and number of people per hypermarket outlet.
The figures reflect the fact that Brazil hosts several of the worlds largest MGRs, which take
advantage of the countrys massive purchasing potential and its suitability as a strategic base for
the rest of Latin America. The level of consolidation and concentration in the market has
significantly increased over recent years, with the top 10 operators having a market share of close
to 50% in September 2006. Expansion into the regions is now underway and the established
operators cover all outlet formats, limiting the potential for new entrants. In common with other
Latin American markets, significant potential may indeed exist, but in the lower income areas of
cities and towns that have yet to be exploited by MGRs. This would involve adapting food and
drink product portfolios and marketing approaches, but with such large markets beckoning among
the lower and lower-middle income groups, it would be worthwhile for both incumbents and new
entrants to explore these possibilities.
Brazil achieves a score of six in the barriers to entry ranking, placing it in an average position
across the region. On the plus side, the governments compliance with orthodox economic measures
and its encouragement of financial intermediation has won it the support of both the IMF and the
business community, contributing to a more stable and welcoming business climate. Export growth
remains strong, if decelerating, with particularly strong demand for key commodities and agroindustrial goods. Despite economic liberalisation, significant trade barriers and a complex customs
Page 11
system do, however, increase business risk and despite moves to ameliorate external debt ratios, a
high debt burden will weigh on investor sentiment during the forecast period. Furthermore,
ongoing reform is needed to simplify and increase the efficiency of Brazils complex and onerous
tax system.
Brazil, with its low score of four in the per-capita consumption ranking, comes bottom of the list
across the region together with Colombia. The score is a reflection of the fact that, in this vast
country with substantial rural and underdeveloped areas, inequality of income distribution is very
high, with a significant proportion almost 40% of the population living below the poverty line.
In addition, the literacy rate is low for such a highly rated economy (now the 10th largest in the
world, after Canada and ahead of South Korea); at 86.4% it is lower than Mexicos. Life
expectancy, at 72.1 years, is also low for such a large economy, indicating that a large section of the
population lacks adequate access to health or decent living conditions. Indeed, a 2006 report by the
World Bank said that unemployment levels, lack of access to education and health, and public
order issues, were all at worrying levels in Brazil, particularly in the big cities, where over fourfifths of the population live.
Table: Latin America Business Environment Rankings

Economics
LT Risk
Politics
LT Risk
MGR Sales
Growth
Market Entry
Potential
Barriers
To Entry
Per-Capita
Consumption
Composite
Score
Regional
Rank
Chile
10
42
Peru
10
41
Mexico
10
38
3=
Colombia
10
38
3=
Venezuela
10
33
Brazil
31
Argentina
29
Country
LT Economic Risk:Based on BMI Country Risk Service long-term economic risk rating. LT Political Risk:Based on
BMI Country Risk Service long-term political risk rating. MGR Sales: Based on BMI forecasts for 2006-2011 MGR
sales (hypermarket, supermarket, co-operatives, discount stores). Market Entry Potential: Based on saturation of
market. Barriers To Entry: Based on BMI Business Environment Rankings, foreign direct investment and industry
regulations. Per-Capita Consumption: Based on BMI consumer expenditure figures and BMI population figures.
Composite Score: Unweighted total of preceding six scores. Regional Rank: Highest composite score = most
attractive food and drink sector environment in Latin America; lowest composite score = least attractive. Source: BMI
Page 12
SWOT Analysis
Brazil Food And Drink Industry SWOT
Strengths
Weaknesses
Brazils very large market makes it an attractive target for international

retailers; market consolidation and concentration is increasing in the MGR
sector, with the discount and convenience store formats set to experience
the fastest growth rates over the forecast period
New and existing retailers have announced a series of expansion plans, with
companies diversifying their range of store formats as well as targeting
growth in new regions, away from the largest cities and into new frontier
parts of the country
Brazil is a major producer and exporter of agricultural commodities, with the

agribusiness sector accounting for over 40% of total exports and 10% of
GDP. Exports of agricultural products exceeded imports by over US$34bn in
2006. Productivity gains in the sector have been in the order of 70% during
the period 1990 to 2006
Brazil is the worlds largest producer of sugar cane, coffee, tropical fruits and
frozen concentrated orange juice. Moreover, it is one of the few countries in
the world still capable of increasing its planted area
The spiraling demand for ethanol domestically and from abroad, will
necessitate a significant increase in sugar cane production in 2007 and
beyond. Exports will see the biggest increase, as the US begins to import
ethanol for the first time.
The food processing sector is well developed and highly sophisticated; most
leading international operators have a strong presence
Brazils stock of agricultural machinery is aging and in urgent need of

upgrading. Since the 1990s, investment in agricultural machinery in Brazil
has declined alarmingly. At the end of 2006, approximately 45% of tractors
and 70% of pickers were obsolete, according to the Ministry of Agriculture.
The lack of investment threatens the competitive position of the entire sector
over coming years. Exports are at particular risk, as outdated machinery
would lower the cost advantages they currently enjoy at the production level.
The recent economic slowdown has meant slowing retail growth, forcing
MGRs to alter their strategies to take into account new and changing
consumer preferences
Income inequality is a major concern, with local consumption patterns

varying significantly according to income. More than one-third of the overall
population, close to 4 in 10, lives in poverty; outside the main urban areas
the proportion is closer to half.
The countrys infrastructure is in need of upgrading, with poor distribution

links driving up company costs. The road network is one of the poorest in the
region: just 5.5% of the countrys 1,725,000 km of road are paved, making it
difficult for large delivery trucks to move freely about the country.
More recently, downward price trends for food products in particular have
put pressure on MGRs margins
Page 13
Opportunities
Threats
Despite significant increases in agricultural production over the past 20

years, Brazil still has more unused commercially viable agricultural land than
any other country in the world. This offers investment opportunities for both
incumbent and new producers
Private-label products are proving increasingly popular, with many retailers

diversifying their range of product offerings to include higher-end to discount
economy products to target different income groups. Recent surveys have
shown Brazilians to be much more accepting of own-label products than
they were just five years ago
A young, expanding population and rising disposable incomes should result

in strong growth rates in sub-segments such as soft drinks and alcoholic
beverages, with companies investing substantial sums in recent years
Convenience foods and healthier product offerings now have strong appeal
among the middle and upper-income groups, whose life pattern increasingly
mirrors that of their counterparts in developed countries, with fewer of them
returning home, for example, for the traditional Latin lunch and siesta.
Moves on the part of chambers of commerce and government trade officials

to encourage exports to countries other than the US, which currently
accounts for the vast majority of exports, could result in significantly higher
total export volumes in the medium term. At present, though, such moves
are more rhetorical than action-oriented.
The increasing value of the real against the US dollar is jeopardising

exports, especially those in the agricultural sector, which are very sensitive
to small changes in price.
Economic stability cannot be guaranteed over the longer term. Declining

consumer confidence or a return to the days of high inflation would have
severe consequences for the MGR and food and drink industries, with pricestretched consumers once again cutting back on non-essential purchases
High interest rates place significant constraints on company investment

plans
Page 14
Macroeconomic Outlook
Waiting For Growth
The Q206 result put into doubt hopes that the economy would pick up during 2006, following 2005's
lacklustre 2.3% expansion (the second-slowest in the Americas, ahead of only Haiti). Indeed, by almost
any measure, the figures were a disappointment, particularly after it appeared that the economy had
finally turned a corner in Q106 (when expansion came in at 3.3% y-o-y). The quarter-on-quarter (q-o-q)
expansion of 0.5% was the worst since Q305s 1.2% contraction. Several sectors were weak: industrial
output fell by 0.3% year-on-year (y-o-y), while the important services and agriculture sectors contracted
by 0.6%, and 0.8%, respectively. The contribution of exports to overall growth has also ground to a
standstill down 0.6% y-o-y which was the first contraction since Q103, probably the result of the
strong real, and a strike by government customs workers.
The Q206 result left policymakers wondering whether the economy had stalled, or if the poor result was
an aberration. For instance, while the government was sticking by its projection of 4%-plus growth for
2006, the Instituto de Pesquisa Econmica Aplicada (IPEA), which is associated with the Ministry of
Planning, lowered its 2006 growth forecast in September from 3.8% to 3.2%. For our part, at the
beginning of that year, we projected real GDP growth in 2006 at 3.5%. This optimistic appraisal reflected
our view that the economy would take advantage of benign external conditions, a reduction in real interest
rates, and the most stable macroeconomic environment in decades. We still believe these conditions are in
place, and see a chance that growth will reach our target, despite a weak Q2. The first reason for cautious
optimism is a series of calendar and base effects, which should allow for a higher rate of growth at yearend. The Q206 growth figures were distorted by two major seasonal effects: the Easter holiday falling in
April (rather than March, as in 2005), and the World Cup in June, which left several sectors at a virtual
standstill. Additionally, H205 was much weaker on the growth front than H105 (y-o-y growth in Q205
was a very strong 4.0%), suggesting that the base effects should work in favour of solid H206 growth.
The Importance Of Declining Rates
A major piece of positive news comes from the interest rate front. The Banco Central do Brasil (BCB)s
monetary policy committee (Copom), lowered the Selic benchmark lending rate by 50 basis points (bps)
to 13.75% at its October 2006 meeting. This was a big move, the upshot of which for growth is that
looser monetary conditions should help two key factors of the economy: private consumption and fixed
capital formation, both of which are dependent on the expansion of cheaper credit. The former has
actually been the biggest driver of growth over the present expansionary cycle, with a 4.0% y-o-y
increase in Q206, the 11th consecutive quarterly rise. We think the best may yet be to come on this front,
as unemployment continues to wane and lower interest rates encourage the expansion of credit. As for
fixed capital formation, however, there are still some concerns, given the fairly unimpressive 2.9% y-o-y
Page 15
rate of increase in Q206 (compared with 9.0% y-o-y in Q1). One of the biggest complaints about Brazils
relatively high interest rate levels is that it encourages firms to invest in fixed income securities rather
than capital expansion. That said, it has now been easing since the BCB began easing in earnest in
September 2005, and we may see the effects translate into economic growth.
Private consumption grew by 4.0% y-o-y in Q206, the highest figure since Q105, and the biggest
contributor to real GDP growth in the quarter. Also pointing to improvement on this front is the Fundao
Getulio Vargas consumer confidence survey, which showed steadily more optimistic views of the future
(the expectations index rose to 104.9 in September from 104.1 in August). We are convinced that the
600bps worth of cuts since mid-2005 will feed into the economy, allowing real GDP growth rates to reach
3.5% in 2006 and 2007. Increases in government consumption during the run-up to the presidential
election would also have helped growth rates. The 12-month trailing primary government budget surplus
peaked at 4.53% of GDP in April and headed steadily downward, to 4.47% in August, which is above the
4.25% official target. By comparison, under former finance minister Antonio Palocci, the government
routinely ran 12-month primary surpluses over 5.00%. While we are not advocates of looser fiscal policy,
we think that it will boost economic growth figures in the medium term.
Risks To Outlook
We believe that there are risks to our forecasts. If oil prices remain at lower levels and the US continues
to experience positive consumer sentiment, we do not expect the external environment to deteriorate
rapidly, allaying fears of a flight to quality assets. This scenario would pose upside risks to our year-end
forecasts. Should the US economy shows further signs of slowing, it would have negative knock-on
effects on Brazil, which will pose downside risks to our real 2006 and 2007 GDP growth figures.
Table: Economic Activity Historical Data And Forecasts
2003
2004e
2005e
2006e
2007f
2008f
2009f
2010f
2011f
Nominal GDP (BRLbn)
1,556.18
1,766.62
1,937.6
2,092.5
2,244.21
2,425.99
2,632.2
2,853.31
2,967.44
Nominal GDP (US$bn)
505.75
604.18
796.52
921.81
1,008.63
1,032.34
1,063.52
1,141.32
1,186.97
176.9
181.8
184.18
186.76
189.38
192.03
194.72
197.44
199.25
2,858.94
3,323.32
4,324.6
4,935.72
5,326.06
5,375.95
5,461.85
5,780.52
5,957.09
Real GDP growth (%

change)
0.5
4.91
2.25
3.5
3.5
3.75
4.0
4.0
4.0
Industrial output (%
change)
0.3
7.62
3.45
3.9
4.0
3.5
3.3
3.1
3.1
Population (mn)
GDP per capita (US$)
e/f = BMI estimate/forecast. Source: IBGE, BMI
Page 16
Chapter 2 Retail
Regional Overview: Rising Purchasing Power Of Low And Middle-Income
Groups
Introduction
Many economists still assume that Latin American society is divided simply into the haves and the havenots, with little or no purchasing power in the middle. This concept took root in the 1960s, when the first
research appeared on poverty and income distribution profiles in the region, which showed immense gaps
in both income and wealth, some of the widest in the world.
Over the last four decades, however and particularly during the last five years BMI contends that the
income distribution profile has undergone significant change, such that low and middle-income groups in
Latin America have become increasingly important within the individual economies. Indeed, many
retailers are now openly courting them, via establishing outlets outside their traditional (upper-income)
comfort zones and offering distinct product ranges.
Poverty, Income Distribution And The Minimum Wage
In terms of numbers in poverty, the continent-wide percentage has been declining, albeit slowly, for some
time, standing at 44% of the regions population (of 548mn) in 2000, and declining to 39% in 2006.
Additionally, the middle six deciles within the distribution not the bottom 20% nor the top 20%of
income earners now earn a higher proportion of the regions overall wealth than they did just six years
ago. This rump of income earners the median 60% - is what MGRs have in their sights at the moment,
as the top 20% have long been converts to western-style supermarkets and hypermarkets, while the
bottom 20% is characterised by individuals and families living hand-to-mouth, with no resources to even
travel to a supermarket.
Coupled with a rising GDP (ECLAC recorded annual growth rates for Latin America as a whole of 4.5%
in 2005 and 5.3% in 2006) retailers client base appears healthy for the coming year. With GDP growth
for the region for 2007 estimated at 5.1%, it will be the fifth consecutive year that the rate has exceeded
4% after an annual average growth rate of just 2.2% between 1980 and 2002. Argentina, Venezuela,
Uruguay, Peru and Panama have had the highest annual growth rates in the region since 2002.
As a result of these growth rates, and of increased remittances from abroad, growth in regional income (of
7.2%) again exceeded GDP expansion in 2006. In addition, other factors, such as growing investor and
consumer confidence after several years of sustained growth, real interest rates that remain relatively low
despite recent hikes in many countries, a stronger boost to public spending, an expansion in total wages
Page 17
driven by rising employment, and a modest upturn in real wages, have helped to turn domestic demand
into an additional engine for growth in most countries. In fact, overall domestic demand in Latin America
rose by 7.0% in 2006, with gross domestic investment up by 10.5% and consumption by 6.0%.
Furthermore, in many countries the minimum wage has either moved in line with inflation or even a little
ahead of it over the last few years, which has become an important factor in maintaining purchasing
power among the lower income groups in the region. Even in Venezuela, where inflation remained
stubbornly high in 2006, the minimum wage almost kept pace, with an increase of more than 10%.
In Colombia, as the table below indicates, the minimum wage has risen by more than the rate of inflation
since 1997, frequently by as much as 50% more. In 2006, for instance, inflation reached 4.2% in
Colombia, while the minimum wage was increased by 7.0%.
Table: Inflation Versus Minimum Wage Increases In Colombia (%)
Inflation
Minimum wage
1996
22
20
1997
19
21
1998
17
20
1999
10
16
2000
11
2001
10
2002
2003
2004
2005
2006
Source: Departamento Nacional de Estadstica, Ministerio de Proteccin Social
BMI estimates that, across Latin America, between 20% and 40% of workers receive the minimum wage,
depending on the country. This, in and of itself, while a significant enough figure, is not really the point:
more importantly, the minimum wage tends to drag other workers wages those earning less than the
minimum along with it, acting as a guide, or signal to employers on the annual percentage increases to
be granted to employees. In Latin America, this has meant that, over the last five years, the overall
Page 18
purchasing power in each economy has risen over and above the sum total of the increases to actual
minimum wages and that those on low incomes are also experiencing increasing purchasing power,
allowing them to participate in the MGR economy for the first time.
Expectations Of Different Income Groups
It is one thing for retailers in Latin America to have a new, expanding market to go after, in the form of
the middle 60% of the income distribution, but it is another thing entirely to have a sound understanding
of the food and drink tastes of these groups, and how they may differ from those of the top 20% of
income earners in the region. Also, do the frequency of purchases differ among income groups? And what
are the product expectations of each income group lower, middle and upper?
A number of recent studies, such as the one completed in 2006 by Synovate, have concluded that lower
incomes do not mean lower expectations. Rather, that when it comes to attitudes, low-income consumers
in Latin America most studies have focused on Argentina, Brazil and Mexico have the same life
priorities, values and brand perceptions as their middle-income counterparts.
The Synovate study, for instance, finds that just under two-thirds of low-income consumers prefer local
brands if price and quality are equal: one-third believe that local brands are as good as international
brands; and almost one-third believe that most people do not know the difference between local and
international brands. These responses all mirror those for middle-income consumers.
When asked how they would spend any extra income that came their way, more low income consumers
than middle income ones replied that they would spend the additional money, which will hearten retailers
in the region. Additionally, as the chart below shows, fewer (47%) said they would save any extra
income, against 56% of middle income consumers.
Table: What Would You Do With Any Extra Income?
Low-income group
High-income group
Spend it
38
34
Save or invest it
47
56
Pay off debts
15
10
Source: Synovate (2006). Latin American survey data was drawn from Argentina, Mexico and Brazil
Page 19
As retailers ponder how to persuade low income consumers to shop in their outlets, it may be helpful to
consider another of Synovates findings that low-income consumers tend to shop locally and develop a
loyal, trusting relationship with the owner of their small neighbourhood store. This gives the owners of
such stores a unique ability to influence low-income consumer purchasing habits, both through the
products they stock and those that they recommend. Retailers, then, when opening up outlets in lowincome neighbourhoods, may do well to begin with a smaller, more local store, rather than the large
hypermarket format that works well in upper-income areas.
Another way to attract low-income consumers attention in Latin America is to offer credit of one form or
another. Most lack sufficient credit history to take out loans or credit cards at conventional banks, giving
retailers a significant opportunity to step in and fill the gap. Some have already done so to profitable
effect; others, though, have been successful, mainly because they pitched interest rates far too high
charging as much as an exorbitant 50% a year in some cases. Those retailers offering credit at reasonable
rates will do well witness Exito in Colombia and Cencosud in Chile while others will find that
charging very high rates only tends to backfire. Apart from anything else, they give the low-income
consumer little or no money left over with which to purchase the products on the shelves.
Table: Food And Drink Purchases Made In Supermarkets In Latin America By Income Group, 2006 (%)
Central America
South America
Overall
42
62
Upper income
95
97
Middle income
62
71
Lower income
18
23
Source: Food distributors, BMI
Importance Of Product Tailoring

Catering for lower-income groups will require some tailoring of product on the part of retailers, including
offering the same item in smaller, more affordable packaging, in scaled down versions, and with
simplified, less expensive design. It may be that retailers existing lines of own-brand products would be
a good place to start when considering which product ranges and mixes to place in the new stores.
Another useful reference point would be the form in which existing stores in low-income areas sell staple
food and drink products. In most of Latin America, small neighbourhood tiendas, frequently run out of a
Page 20
house, co-exist with what distributors call mini-markets self-service stores which have at least one
check-out point, with either a mechanical or electronic cash register.
Sales Offering For Stable Food Products In Latin American Retail Sales Channels
Cooking oil
Supermarket
Mini-market
Tienda/corner shop
Plastic bottle, various sizes
Plastic bottle, small bottle only
Tablespoon
Sealed bag
Loose
Teaspoon
Dozen or tray of 30
Half-dozen only
By unit
Sealed bag
Loose
By cup/half-cup
Wrapped, sealed stick:

small/medium /large
Stick, small only
By ounce
Sugar
Eggs
Rice/beans/maize
Butter
Source: BMI
In tiendas, eggs can be bought, not only by the dozen, but individually; cooking oil can be purchased by
the spoonful (the customer takes along the plastic container into which to pour the oil); and single ounces
of sugar or flour are measured out and sold. All this is true in the mini-markets, with the addition that a
wider variety of packaged products canned goods, sauces, rice, confectionery, milk are available on
the shelves as well.
The task for MGRs, such as Carrefour, which is on the point of opening an outlet to the east of Cali,
Colombia, in the sprawling, low-income neighbourhood of Aguablanca, is twofold: firstly, somehow to
bridge the two-store concepts of tienda and mini-market; and secondly, to match or beat the product
prices of both store types. BMI sees the latter task to be the easier of the two, as the large volumes that
MGRs purchase from suppliers will ensure a lower selling price. More difficult will be to develop a range
of products and packaging sizes that fit the needs of low-income groups.
First-mover advantage will go the MGR that figures this out: compared to selling to the upper-income
segment, catering to lower-income groups will be much more of a volume game challenging the
logistical machines of even the biggest MGRs.
Page 21
Industry Forecast Scenario

Brazils MGRs, having contended themselves with sluggish sales growth and the structural adjustments
during the economic crisis of 2002-2003, 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 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 appreciation of the real against the
US dollar.
Judging by MGRs expansion plans for forthcoming 2007, there is, however, a newfound confidence in
the sustainability of the countrys 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 purchasing power of the significant proportion of Brazilians on very low incomes, or no income at
all, has, however, not improved, despite the governments increased focus on the quality of delivery of its
social programmes, Bolsa Familia and Fome Zero (Zero Hunger). The successful implementation of the
programmes continues to suffer from limited funds, patchy coverage and administrative shortcomings,
achieving little progress in pulling Brazils poor out of poverty and thereby increasing the size of the
domestic market. For those slightly higher up on the income scale in the lower and lower-middle
income brackets overall purchasing power has, by contrast, been increasing, such that one of the
competitive focal points in 2007 will be the rush to cater to these groups among retailers, via locating
outlets away from their traditional comfort zones in middle and upper-middle income neighbourhoods.
BMI is forecasting that sales in the MGR sector will grow by 19.7%, to reach US$55.566bn in 2011.
Supermarkets will continue to take the lions share of sales by value and should experience steady growth
of around 6.1% during the period, reaching US$25.350bn by 2011. Hypermarkets, through their sheer
size and selling power per unit, are expected to experience significantly more rapid sales growth, rising
by 27.5% to US$15.098bn by 2011. Smaller outlets in the form of discount stores will also experience
considerable growth rates, albeit from a much lower base. Due to the many price-sensitive consumers in
Brazil, sales from discount stores are likely to grow by more than 43% in the forecast period to reach
US$10.918bn. Sales in convenience stores are expected to increase by 36.8% over the forecast period to
reach US$4.199bn by 2011, since they fit in with the lifestyle of urbanised Brazilians, who like to be able
to shop around the clock.
Page 22
Table: Brazil MGR Value Sales By Format Historical Data And Forecasts (US$bn)
2005
2006e
2007f
2008f
2009f
2010f
2011f
Supermarkets
22.79
23.44
23.89
24.27
24.66
25.09
25.35
Hypermarkets
10.31
11.10
11.84
12.60
13.40
14.27
15.10
Discount stores
5.83
7.06
7.60
8.28
9.10
10.03
10.92
Convenience stores
2.58
2.83
3.07
3.32
3.60
3.90
4.20
41.51
44.43
46.40
48.00
50.76
53.29
55.57
Total MGR sector
e/f = BMI estimate/forecast. Source: BMI, Central Bank of Brazil, IBGE
Page 23
Industry Developments
The on-line market for purchasing grocery products has been growing particularly fast in Brazil by
more than 10% a year over the past three years. With the number of internet users in the country
growing rapidly as well, BMI sees much promise in this segment. One reason for our optimism is
that, in common with other food and drink retailers in Latin America, Americanas.com has
discovered that a good deal of its web-site traffic is composed of expatriate Brazilians wanting to
purchase grocery items to send to family members living in Brazil. We estimate that between 13mn
and 15mn Brazilians live and work abroad, representing between 6% and 8% of the 190mn that live
inside the country. A good deal of them wire funds, or remesas, to family members on a weekly or
monthly basis. If Lojas Americanas and Submarino, Brazils largest internet retailer, can find a way
for its website to capture even a small proportion of these transfers perhaps via a marketing
campaign highlighting the savings in bank transfer commissions by sending food and drink items
direct to family members homes then the online segment will see significant growth in 2007.
As most countries in the region seek to ally themselves with as many international trade pacts as
possible, trade between Latin American economies and those outside the region will continue to
increase, no more so than in Brazil, the regions largest exporter. More often than not, though, little
consideration is given to the infrastructural consequences of increased economic activity, such as the
stress higher road transport volumes is likely to put on already poor road networks. Brazil is
experiencing this problem more acutely than any of its neighbours. Of the 1,724,929 km of roadways
in the country, 1,630,058 km (94.5%) remain unpaved. This is putting stress on retailers national
logistics operations, as they work to expand their presence in and around more and more cities
nationwide. With Brazils vast landmass, we foresee bottlenecks in this regard in the near future, with
retailers large trucks struggling to access many parts of the country by road. At a minimum,
retailers sourcing strategies will have to be revised towards more local, as opposed to national,
purchasing of products.
Since the entry of Wal-Mart into the Brazilian market in the early 1990s, the retail sector has
undergone rapid change, spurred principally by the fierce competitive spirit that the worlds largest
retailer brings with it when it enters a new market. Wal-Mart entered market with the opening of two
Supercenters and two Sams Club outlets. Today, it operates over 300 outlets. Wal-Mart is currently
ranked third in MGR sector, after Companhia Brasileira de Distribuo (CBD) and Carrefour.
Prior to the acquisition of the Bompreo chain from Dutch retailer Ahold in 2003, Wal-Mart had
only a small presence in Brazil, with just 25 outlets, including 13 Supercenters, 10 Sams Club
warehouse stores and two Wal-Mart Todo Dias 24-hour stores.
Page 24
Company Developments
Following the success of its gourmet and organic food ranges this year, Sams Club and Caf Bom
Dia launched, in October 2006, Marques de Paiva Fair Trade Certified Gourmet French Roast coffee.
The coffee, to be sold in 40 ounce bags, will initially be available in the US and subsequently in its
stores in Mexico, Argentina and Brazil. Sams Club first opened in Brazil (So Paulo) in 1995 12
years after appearing in the US when it sought to expand its presence in Latin America, following
the opening of its first store in Mexico City in 1991. Since then, it has constructed 14 more Sams
Club outlets in Brazil. The no-frills stores average 129,000 sq ft and offer more than 4,000
discounted items, including bulk office supplies and food, electronic goods, jewellery, clothes,
insurance and travel services, and Members Mark store-brand products. Most of the outlets also sell
fresh meat and produce and have bakeries. Sams Club Brazil posted 2006 Christmas sales a full 30%
ahead of those for 2005.
The proposed sale, in December 2006, of cash-and-carry operator Atacado did not go ahead as the
company was unable to prove that it is a profitable business. CBD, Carrefour and Wal-Mart are all
understood to be interested in acquiring the chain. Atacado hired Deloitte to carry out a financial
audit, which was completed in August 2006. However, this was not a formal process and is
understood not to have satisfied prospective bidders.
Wal-Mart Stores plans to spend a record US$385mn to expand its Brazilian operations in 2007, WalMart Brasils president, Vicente Trius, announced in October 2006. The company plans to open 28
new stores over the course of the year: Brazil is an opportunity, with a solid base that we know how
to grow, Trius said. We are committed and we are going to continue investing in Brazil.
Retailer Lojas Americanas has opened 12 new outlets in four Brazilian states. The investments in the
12 outlets totalled BRL26mn (US$11.2mn). The stores will employ 1,120 people. Four of them are
located in south-eastern So Paulo state, two in neighbouring Minas Gerais, one in Rio de Janeiro and
another one in Rio Grande do Sul. The openings are part of the companys network expansion
strategy, which envisages the opening of 45 new stores in 2007.
In December 2006, shareholders from Brazils leading Internet retailer, Submarino, approved a plan
to merge with Americanas.com, its main rival. In November, Submarino and Americanas.com said
they had reached a deal to merge into one company called B2W, or Companhia Global de Varejo,
which will be listed on the So Paulo Stock Exchange. Lojas Americanas will control the new
company, holding 53.25% of its voting shares. Submarino shareholders will own the remaining
46.75%. The market value of the combined company will be approximately BRL7bn (US$3.2bn;
Page 25
EUR2.47bn). By joining forces, Submarino and Lojas Americanas expect to save a combined
BRL800mn (US$372mn) a year, putting them in position to better exploit the fast-growing on-line
retail market, which we expect to reach more than BRL200bn (US$94mn) this year. The on-line
market for purchasing grocery products has been growing particularly fast in Brazil by more than
10% a year over the past three years.
Providing an update on 2007 plans, Wal-Mart noted that the renovation and expansion plan launched
by the retailer in Brazil in 2006 will continue at full steam in 2007. The companys aim is to renovate
all of its 138 stores in Brazil's south by 2009. The total investment for the scheme will be around
BRL270mn (US$123.9mn). The plan includes re-designed layouts, store fittings and signage.
Overall, the company is planning to launch 28 new stores in Brazil in 2007, including hypermarkets,
supermarkets, cash-and-carries and soft discounters. Through these openings, Wal-Mart will
essentially double its speed of organic growth when compared with 2006, which should end with a
total of 14 newly-opened stores. The investment scheme should be worth around BRL850mn
(US$390.2mn), including the opening of 19 pharmacies. While the expansion scheme for 2007 will
involve 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.
Brazils largest MGR, CBD, posted a Q306 net loss of BRL43.4mn (US$19.9mn) because of a
charge related to provisions for outstanding tax payments on soy purchases. Net revenue rose by
2.5% to BRL3.3bn (US$1.5bn). The sales of food products dropped 5.1% in the quarter, still under
the affect of price deflation in some categories primarily perishable and commodity food items as
well as price reductions following a strategy adopted by the company, CBD said in a statement.
However, the company said it enjoyed continued growth in non-food sales, such as consumer
electronic goods, which increased 17% in Q306. Earnings before interest, taxes, depreciation and
amortization, or EBITDA, tumbled 38% to BRL182mn (US$85.5mn). Despite the provisional tax
charge, CBD said that the company continued to see gains from its cost-cutting programmes, which
will be reinvested in promotions to gain market share. The gains obtained enabled us to increase
investments in competitive prices compared with the third quarter of 2005 and second quarter 2006, a
move we consider crucial to gaining market share in the future, said a company statement.
Wal-Mart Brasil has inaugurated a new Supercenter in Guarulhos that has been designed to cater
especially for female shoppers, which account for 80% of the retailers customer base. The 7,400m2
outlet has a totally new layout, a new colour scheme, clearer signage and an improved ambience. The
store is split into worlds, such as a health and beauty department that congregates all relevant
products into a single destination area. Household goods have been reorganised into room-themed
sections; while the grocery section has been bolstered with an expanded organics section. An
Page 26
innovative move has been the introduction of a husband parking facility an area adjacent to the
electronics and entertainment department that includes a caf, seating, and magazines. The new
concept follows a year of research and focus groups.
French group Casino announced in early December 2006 that its stake in Brazils leading retailer
CBD will rise from 34.2% to around 38% in 2008. This transaction will generate total tax savings for
CBD to the amount of BRL517mn (EUR179mn) beginning in 2007.
The retail group Atacado is in the sights of four other major MGRs, each of whom has submitted an
unbinding bid to purchase the group, valued at approximately US$1bn. The four bidders are WalMart, CBD, Carrefour and Makro. Atacado operates 33 stores across eight states in Brazil, with
almost half of its outlets in the wealthy So Paulo area. Its revenues in 2005 amounted to US$2.2bn.
Two other prominent retail groups, Costco and Cencosud (from Chile), have also been rumoured to
be considering the purchase, but no formal notification of interest from either has been submitted.
Should either Wal-Mart or Carrefour be successful in their bid, they would overtake CBD as the
countrys leading retailer.
Page 27
Market Overview
Brazil is the largest and most populous country in Latin America, with a population of almost 189mn
citizens. The socio-demographic structure of the country is characterised by significant inequalities in the
distribution of wealth. The poorest 20% of Brazilians account for only 2% of all income, while the
wealthiest 2.5% earn over 30% of all income. The overall income distribution profile is improving, but
very slowly.
Food retailing accounts for around 30% of total retail sales in Brazil, and 7% of GDP, with sales
approaching US$70bn. Hypermarkets and supermarkets have gradually taken market shares from
traditional stores over recent years. Brazils current MGR structure developed following the
implementation of the Real Plan in 1994. Today, the market is home to several of the worlds largest
grocery retailers, with operators attracted by the massive purchasing potential of the large Brazilian
population, as well as the countrys suitability as a strategic base for the rest of Latin America.
In recent years, the market has experienced increasing levels of consolidation and concentration as well as
the development of a greater diversity in store formats. Some 12 of the top 20 supermarket chains in 1997
have since been absorbed by other groups. Currently, the two leading companies, CBD (otherwise known
as Po de Acar) and French retailer Carrefour have a combined market share of 27.2%, while the top
five have a 38.8% share and the top ten a share of 44.9%. Most international operators were initially
attracted to wealthy and populous areas in the south-east of the country as well as the highly populated
region of the north-east, but have since expanded into other regions. CBD and Carrefour have been
expanding from their traditional power base in So Paulo state into the less wealthy but well-populated
state of Rio de Janeiro and the north-east, where nearly 30% of the population live. This trend will
intensify over our forecast period, as MGRs seek to take a greater share of the food and drink sales of
lower income groups, which represents a significant market opportunity over the coming years
particularly in such a populous country as Brazil.
While the number of hypermarkets and their market share of all food and drink products is increasing,
consumers were much more dependent on them prior to 1994, as they were predisposed to purchase larger
quantities to overcome the impacts of inflation. Once the government had inflation under control,
consumers changed their behaviour and new consumption patterns were established, forcing retailers to
focus their investments on other formats. Large retail chains started to develop supermarkets, discount
stores and online shopping services and, due to weaknesses in the non-food sector, also captured a share
of domestic appliances and home entertainment sales. Currently, stores with a size of up to 25m2 are most
popular, with consumers less willing to travel long distances to shop. Large retailers, while maintaining
the hypermarket format, have thus expanded with the launch of small and medium-sized stores.
Page 28
Convenience stores have also experienced rapid growth in recent years, the majority of which are gas
marts associated with petrol stations.
Brazils leading MGR is local group CBD, which operates around 643 hypermarkets and supermarkets in
12 states under the fascias Po de Acar, Extra, Sendas and CompreBem. The group also operates a
chain of 55 Extra Eletro consumer electronics and home appliance stores.
French retail giant Carrefour entered the Brazilian market in 1975 and now operates a chain of 134
hypermarkets, 60 supermarkets and 242 discount stores. In June 2005, the company acquired 10
hypermarkets under the Big fascia from local operator Sonae.
Wal-Mart has been operating in Brazil since 1995, opening its first Sams Club store in metropolitan So
Paulo. The US groups network now includes a broad range of different fascias and store formats, with
the overall portfolio consisting of 300 MGR outlets. In 2004, Wal-Mart purchased the Bompreo retail
chain in north-east Brazil from Dutch operator Ahold. Bompreo operates 118 hypermarkets and
supermarkets under the Hiper Bompreo and Bompreo fascias. In December 2005, Wal-Mart acquired
Sonaes operations in Brazil, consisting of 140 outlets.
Wal-Marts annual sales we estimate at US$5bn for full-year 2006. Wal-Mart is ranked third in Brazils
MGR sector, after CBD and Carrefour. Prior to the acquisition of the Bompreo chain from Ahold in
2003, Wal-Mart had only a small presence in Brazil, with just 25 outlets, including 13 Wal-Mart
Supercenters, 10 Sams Club warehouse stores and two Wal-Mart Todo Dias 24-hour stores. In the US,
Sams Club generates 13% of Wal-Marts total sales; in Brazil BMI estimates the percentage to be
slightly higher, at 15%.
Makro Atacadista, a subsidiary of the Netherlands-based SHV, operates 45 stores in 21 states, including
the federal capital district. Makro reported sales of US$1.2bn in 2004.
In all major grocery retail formats, sales in value terms continued to be dominated by food in 2006, which
had a share of 95% in discount stores, 89% in supermarkets, 83% in convenience stores and 60% in
hypermarkets. This pattern is, however, expected to change over coming years, with MGRs increasingly
focusing on higher-margin non-food items.
In terms of sheer selling power and efficiency, hypermarkets, with average sales of US$1.24mn per
outlet, are by far the strongest grocery retail format in Brazil. In this respect, they are 3.9 times more
efficient than supermarkets (US$320,056 per outlet). Convenience stores (US$366,714 per outlet) are
Page 29
more than two-times as efficient as discount stores (US$160,389). However, by definition, discount stores
sell on the basis of a high-volume/low-unit profit strategy.
Table: Structure Of Brazils MGR Market By Number Of Outlets ('000s)
2000
2001
2002
2003
2004
2005
Supermarkets
63.6
66.5
67.4
67.8
69.2
70.9
Hypermarkets
6.6
7.0
7.35
7.5
8.0
8.3
28.8
30.7
31.8
33.5
35
36
2.1
3.4
5.0
5.5
6.3
7.0
101.1
107.6
111.55
114.3
118.5
122.2
2000
2001
2002
2003
2004
2005
Supermarkets
20.7
20.45
20.43
21.70
22.16
22.79
Hypermarkets
7.4
7.68
8.12
8.95
9.57
10.31
Discount stores
2.8
2.91
3.17
3.68
4.47
5.83
Convenience stores
0.5
0.96
1.29
1.81
2.15
2.58
31.4
32.00
33.00
36.14
38.35
41.50
Discount stores
Convenience stores
Total MGRs retailers
Source: Official statistics, BMI
Table: Brazil MGR Value Sales By Format (US$bn)
Total MGR sector
Source: Official statistics, BMI calculations
Page 30
Chapter 3 Food And Drink

Regional Overview: Growing Market For Light Food And Drink In Latin
America
Introduction
It may be that global eating and drinking habits are converging towards a single ideal diet, or it may just
be a fad; whatever the case, across Latin America the words low fat, low sugar, low cholesterol, low
salt, low in saturated fats, and sin calorias (no calories) are appearing on an increasing number of
items. It is not that producers are worried about consumers high fat, high sugar intake, rather that they
see an irresistible opening in the market and are modifying their product ranges accordingly.
The trend began in up-market, gourmet outlets at the end of the 1990s, and has since seeped into
mainstream supermarkets so much so that low fat milk and butter, for example, can now be found on
the shelves in even the most provincial of towns. Of course, the same is not true in rural areas, where
village stores stock neither light soft drinks, nor any low-fat food items, due to lack of demand.
Drinks Sector
The soft (carbonated) drinks sector in Latin America, perhaps more than any other, has undergone a
metamorphosis over the past two years. With the region consuming more litres than any other, apart from
the US, it is a high priority for producers; Mexico alone consumes 10% of all Coca-Cola sales
worldwide, and is the highest per-capita consumer of its products globally.
Table: Soft Drink Sales Globally And In Latin America (2006)
Global total (%)
Latin America total (%)
Carbonates
47
75
Bottled water
28
12
Fruit juices
12
Functional drinks
Tea and coffee
Source: BMI
Page 31
The emergence of the healthy-living trend means that a diverse, non-carbonated range of drinks is today a
must for the likes of Coca-Cola and Pepsi. Pepsi was the first to widen its portfolio in the region, offering
bottled water, energy drinks and fruit juices, which allowed it to gain a march on Coca-Cola and other
local bottlers. Coca-Cola has since caught up somewhat, following strong criticism from shareholders of
foot dragging and lack of market responsiveness.
We believe carbonated soft drinks in Latin America will lose more ground to bottled waters, fruitflavoured drinks and functional energy drinks in 2007, due to the latters perceived or real health
advantages and due to the level of investment these products are receiving. As the table below shows, the
potential is enormous. However, the average market share of carbonates in the region remains high, at an
estimated 75%, much higher than in developed markets, where it is between 40% and 50%, depending on
the country.
Table: Packaged Juice And Not-From-Concentrate Juice Markets In Latin America (litres per capita, 2006)
Juice
Not-from-concentrate
US
44.0
11.0
Canada
41.0
10.0
Brazil
7.2
0.8
Argentina
7.1
0.6
Chile
6.8
0.4
Mexico
7.0
0.3
Colombia
6.5
0.3
Venezuela
4.9
0.2
Source: Tropicana, Minute Maid, Florida Natural Growers, BMI
Staying with the drinks sector, alcoholic beverage producers have been forced to adapt their portfolios in
response to changes in demand, particularly from younger consumers. While beverages with longstanding traditions, such as lager-type beers, and spirits such as brandy, aguardiente and cachaa, will
likely maintain their strong positions within the region, lighter drinks and new flavours are catching on
with younger consumers influenced by global brands and trends.
In 2006, 18-34 year-olds accounted for 30% of the population in Latin America and the Caribbean, and as
a percentage of the total population for the region this is expected to hold steady through to 2015.
Regional and local brewers are working to expand beers appeal across age groups and both genders.
Brews with lower calories, smoother taste and lighter flavours are becoming much more commonplace.
Page 32
Brewers are taking the light beer concept further, repackaging their products with a younger image.
Grupo Modelo in Mexico has taken this approach with its Modelo Light Azul brand, changing from a
white to blue bottle and targeting younger consumers through novelty through the slogan, Beer like
youve never imagined it. And Bavaria in Colombia developed its new Brava brand to have a less
filling, refreshing taste.
Food Sector
The strong influence that things North American have on Latin American food and culture created a
hybrid diet in the region, introducing a host of new flavours and foods. It also gave rise, in the 1970s and
1980s, to a dietary paradox: an increase in the consumption of non-traditional fats and calories at the
expense of widely available, flavourful and nutritious local vegetables, fruits and whole grains.
Table: Food And Drink Industry As A Proportion Of GDP, 2006
% of GDP
% of total that is health ('light' or 'low in') food
US
10
32
Canada
13
31
EU
12
34
Mexico
11
10
Argentina
12
Chile
14
Brazil
Source: FAO, BMI
Over the past few years a growing recognition of the unhealthy nature of the high fat, high calorie food
diet imported from the US has produced something of a backlash, resulting in a renewed interest in a
light diet, particularly among middle- and upper-income groups and young people.
This dietary paradox where industrialisation and affluence leads to a preference for fatty, deep-fried
dishes, instead of the more nutritionally balanced and flavourful meals remains, however, alive and well
across the region. The new interest in light food is, though, beginning to make important dents in its
armour, such that certain low fat products are beginning to have mass-market appeal.
Light butter and margarine, milk, cheese, ham, cooking oil even salt are now the norm in most
middle- and upper-income homes. Alpina, for instance, the multinational dairy group, has just launched a
low-fat, high-vitamin milk for children in the Andean markets of Colombia, Ecuador and Venezuela,
Page 33
available in large supermarkets. The product has been so successful that most supermarkets sell out of it
within a few days of delivery, causing some consumers to write letters to local newspapers complaining
of its periodic unavailability. Alpina, unable to keep up with demand, has apologised to customers.
Table: Consumers Seeking The Following Descriptions On Food Labels In Latin America (%)
2000
2006
Light/lite
48
73
Low fat
49
63
Low cholesterol
42
61
Low in saturated fat
31
55
Low carbohydrates
22
40
17
Free of trans fats
Source: Supermarket surveys, BMI
The light trend has even reached so far as the Mexican tortilla: a team of food researchers was awarded
a patent in October 2006 for a new variety of tortilla that targets consumers eager for a low fat, low-carb,
soy-free version of the popular bread alternative. The scientists claim to have developed a low
carbohydrate, high protein tortilla recipe with a negligible fat content of less than 0.5g of fat per 50g.
The patent allows for the production of round, thin tortillas with up to 70% animal protein content,
derived from either poultry, beef or fish, as an alternative to the standard corn or flour variety. The
chicken-based tortilla, used as an example in the patent, contains 2.6g of carbohydrates compared to the
23g found in flour versions and 12.6g of protein compared to flours 4g. This high-protein content allows
for a longer shelf-life and reduced microbial disintegration, according to its inventors at the University of
Floridas Research Foundation.
The patent states: The high protein food tortillas of the subject invention provide a flavourful, as well as
a functional vehicle for a wide variety of foods including, for example, fresh salads or grilled vegetables.
The tortillas of the subject invention are a healthy replacement for the typical high calorie, high-fat
tacos, burritos and sandwich breads on the market today.
As well as being advantageous nutritionally, the product is more durable than standard tortillas with less
tearing when rolled or folded. It has a unique meaty texture and can carry flavours such as spicy herb
baked chicken.
Page 34
Tortillas are traditionally made from cornmeal or wheat flour and form a stable of Latin American diets,
and are becoming increasingly popular throughout Europe. The snack is regarded as a convenient and
healthier alternative to bread thanks to its versatility and low fat content. The tortillas are now available
under the brand name Flaquitas and are marketed by US company Aspirion, which has plans to distribute
them throughout Latin America.
Sterols: A Trend to Watch
Considering the intense interest in healthy eating, and the large research budgets devoted to the area, one
would expect the sector to regularly come up with new products and ingredients. Not all these, of course,
will be successful, but of the new ideas we single out the following one for the Latin American market,
from both a consumption and export-potential perspective: sterols and tocopherols, including natural
vitamin E.
Sterols are plant-derived compounds that have been shown to have a cholesterol-lowering effect on
humans. According to the Inter-America Heart Foundation, the English-speaking Caribbean, Canada,
Argentina, Chile and Uruguay come close to the US in having the highest mortality rates for all
cardiovascular diseases in the Americas. In the US, 42% of all deaths in 2006 were down to coronary
heart disease.
BMI understands that an Argentine company, Advanced Organic Materials (AOM), has reached a stage
in its technological development where it can begin producing tocopherols and sterols for the mass Latin
American market, initially via supplying food companies such as ADM, Cognis and Cargill. The primary
markets consist of Argentina, Chile, Uruguay and Brazil, with extension into Mexico planned for 2008.
Although high-end products containing these ingredients have been available for some time, for example
sterol-containing milk and margarine, these have had very limited market penetration, and have not been
available to a broad slice of the population.
The company is working on end-user applications to facilitate its ingredients use in consumer products,
and is working with a WHO-affiliated organisation called Propia, which has sterols as one of seven
dietary recommendations to help meet health needs in the area.. Propia has already undertaken work to
promote the use of omega-3 and omega-6 in food products. Competition in the field in currently limited,
although low-cost Chinese producers have begun offering sterols in small quantities.
Now that its own technology is fully developed, allowing it to process for itself, AOM has ceased
providing other suppliers with raw material. For export, its point of differentiation for vitamin E is that it
is of pure sunflower origin, while most of the world's natural vitamin E is derived from other sources,
Page 35
such as soy or other oils. As Argentina is the worlds largest sunflower producer, the company can be
sure of a strong, high-quality supply, which further gives us confidence in its future.
The company is increasing its capacity by as much as 50% in the next 12 months. Current annual capacity
is 300 tonnes of tocopherols and 250 tonnes of sterols.
Page 36

Food and drink manufacturers in Brazil, similar to MGRs, suffered from the economic crisis of 20022003, albeit to a lesser degree owing to their strong export focus. However, confidence in the recovery of
domestic demand has continued to pick up during the last two years . This is reflected in both investments
into production facilities for the domestic market, such as in the case of Nestl, Sadia and Perdigo, and
plans for product launches in premium product segments, such as InBevs Stella Artois premium beer
brand.
The recovery of domestic demand is
Food Consumption
essential in the face of the continued
Expenditure Level (LHS), % Of GDP (RHS)
appreciation of the real, which cut
to the global trade cycle, but lowering its
2011f
2010f
2009f
2008f
2007, just as it was in the second half of

2006, reducing the economys vulnerability
0
2007f
will thus be the principal growth engine in
5
2006e
looking elsewhere. Domestic consumption
10
2005
changes in price tend to lead to buyers
15
2004
especially affected, since even small
25
20
2003
2006; agricultural exports have been
72
70
68
66
64
62
60
58
2002
increasingly into exporters margins in
Food consumption (US$bn)

Food consumption as % GDP
e/f = BMI estimate/forecast. Sources: Central Bank of Brazil,

Agency for Statistical & Geographic Information
export earnings.
High lending rates do, however, make investment extremely costly, and sectors for which investment is
most directly linked to production, such as agriculture, continue to be hampered by the rigid domestic
business conditions. Thus agriculture and livestock activity has been down since the end of 2005,
declining by a quarterly average in 2006 of 3.1%.
Manufacturers confidence in the countrys growth prospects and the propensity to engage in long-term
investments has, however, been strengthened by the enactment, more than a decade behind schedule, of
new bankruptcy legislation, which should bring down the high cost of domestic lending. Furthermore, the
judicial reform that has been passed has strengthened the doctrine of lel precedent and improved
transparency.
The recently-passed Public-Private Partnership Bill will help to secure the necessary investments in
infrastructure to clear the bottlenecks hampering the export sector and, as such, long-term growth. The
principal challenge for Brazils government now is to set the economy on the path of sustainable
Page 37
economic growth and avoid the cyclical balance of payments crises that have accompanied previous
recoveries.
Investment in the food and drink sector rose once more in 2006, and the evidence of strong and building
consumer demand, combined with positive external signals, stimulated higher levels of capital
expenditure. As a result, food and drink manufacturers, like MGRs, remain more confident in the
sustainability of economic growth in 2007.
Brazilians are very fond of canned foods, especially vegetables, meat, fish and beans, sales of which can
be expected to increase over the forecast period. This is especially the case among the poor segment of
the population, where these comparatively cheap products represent a substantial part of the diet.
8,000
1,200
6,000
800
(over 50%) is young and therefore
4,000
forms a desirable target demographic
2,000
27.1, between 10 to 12 years lower than

the average for developed countries.
600
400
200
0
2011f
0
2010f
age in the country in early 2006 stood at
1,000
2002
for confectionery products. The median
1,600
2009f
substantial percentage of the population
1,800
1,400
2008f
products in producers portfolios as a
2,000
10,000
2007f
proportion of light and low-sugar
12,000
Confectionery sales (000 tonnes)

Confectionery sales (US$mn)
2006e
forecast period though with a higher
14,000
2005
can be expected to continue over the
Size of Brazil's Confectionery Market

- Value (LHS) / Volume (RHS)
2004
growth over recent years, a trend that
2003
Confectionery sales have seen steady
e/f=BMI estimate/forecast. Sources: National Institute of

Statistics, Geography and Informatics
Retail value sales of coffee have been influenced by falling commodity prices. Consumers, however, tend
to switch to added-value products, in line with rising disposable incomes, partly making up for decreasing
prices. Tea value sales can be expected to increase over the forecast period, as consumers switch to
speciality brands. In early 2004, the Brazilian Coffee Industry Association (ABIC) introduced a quality
programme setting minimum standards for domestic coffee production, with the dual aims of increasing
per-capita consumption of coffee and stimulating export of higher quality blends. Traditionally, the
Brazilian coffee industry has concentrated on producing cheap coffee and has been missing out on
increasing consumer preferences for premium and speciality varieties. Exports of higher value coffees
increased in 2006 by 8% and we foresee double-digit growth for 2007.
Page 38
Over recent years, Brazils alcoholic drinks industry has suffered from macroeconomic factors, including
high interest rates, rising unemployment and general uncertainty about the countrys further development.
Volume sales have thus been growing slowly, while the development of value sales was largely driven by
manufacturers price adjustments and the introduction of value-added products. With the economys
recovery expected to continue throughout 2007, the industrys outlook is improving.
Soft drinks sales can be expected to show substantial growth, owing to the large number of young
consumers in Brazil. The countrys climate favours the consumption of cold soft drinks and increasing
health consciousness further drives sales, especially in the low-calorie, bottled water, and natural juice
sub-sectors. Soft drinks sales, of course, happen all the way along the economic spectrum, with even the
poorest groups opting for them as an alternative to contaminated water, especially in urban areas.
Page 39
Table: Brazil Food And Drink Indicators
2005
2006e
2007f
2008f
2009f
2010f
2011f
Food consumption (US$bn)
65.6
67.4
68.4
69.1
69.8
70.6
70.8
Food consumption (BRLbn)
159.7
146.7
159.2
179.6
198.0
211.8
222.1
Per capita food consumption (US$)
351.9
356.8
358.4
358.0
357.7
357.9
355.2
Food consumption as % GDP
8.2
7.0
7.1
7.4
7.6
7.5
7.3
Canned food sales (000 tonnes)
423
436
450
464
479
494
510
Canned food sales (US$mn)
1005
1039
1073
1109
1146
1146
1146
Confectionery sales (000 tonnes)
1233
1310
1389
1476
1568
1665
1769
Confectionery sales (US$mn)
8259
9091
9812
10570
11397
12310
13196
1,896.1
1,832.4
1,770.9
1,711.4
1,653.9
1,598.3
1,544.6
9.3
9.7
10.1
10.4
10.8
11.2
11.7
Alcoholic drinks sales (US$mn)
13,580.5
14,060.5
14,557.4
15,071.8
15,604.4
16,150.6
16,723.9
Alcoholic drinks sales (mn litres)
9,416.6
9,640.0
9,887.3
10,152.4
10,433.9
10,730.2
11,452.1
Beer sales (US$mn)
11,400.6
11,847.0
12,251.3
12,680.7
13,136.8
13,608.0
14,274.8
Beer sales (mn litres)
8,695.5
8,912.9
9,153.5
9,409.8
9,682.7
9,973.2
10,394.5
Wine sales (US$mn)
1,293.3
1,298.5
1,359.1
1,415.7
1,464.9
1,514.8
1,555.1
Wine sales (mn litres)
324.9
326.1
328.0
331.5
334.8
335.6
336.9
Spirits sales (US$mn)
886.6
915.0
947.0
975.4
1,002.7
1,027.8
1,056.2
Spirits sales (mn litres)
396.2
401.0
405.8
411.1
416.4
421.4
427.2
Soft drinks sales (mn litres)
11,004
11,428
11,875
12,339
12,820
13,319
13,838
Soft drinks sales (US$mn)
12,597
13,463
13,769
13,943
14,273
14,631
15,021
Exports (food, drink, tobacco)

(US$mn)
9,414
9,782
10,184
10,547
10,911
11,297
11,710
Imports (food, drink, tobacco)

(US$mn)
1,370
1,295
1,214
1,134
1,057
988
924
Balance (US$mn)
8,045
8,487
8,970
9,413
9,853
10,309
10,786
Coffee sales (US$mn)

Tea sales (US$mn)
e/f = BMI estimate/forecast. Source: Banco Central do Brasil, IBGE
Page 40
Not unlike the difficulties Colombian coffee producers have always had in marketing and selling
their product within their own country, Brazilian orange juice farmers have never found it easy to
convince their country-folk to drink their fruit as a packaged juice product, in boxes or bottles. This
may be changing, though, as the health and wellness trend takes hold among middle- and upperincome groups in the country, with consumers seeking healthier products with natural ingredients
and low sugar content. As demand for convenience increases, beginning in Latin Americas most
developed economies and as fewer meals are taken at home the demand for not-from concentrate
(NFC) juices is likely to increase as well. Brazil, the worlds largest producer of orange juice, ahead
of Florida, has by far the largest (though still miniscule) NFC juice market in the Latin America
region, with sales of 132 mn litres in 2006. Volume sales have grown particularly rapidly during the
last 10 years; between 1997 and 2005, sales grew by over 200%. With these growth rates, BMI
foresees a 200mn litre market for full-year 2007.
Following meat and poultry producer Sadias failed attempt in 2006 to buy its main competitor,
Perdigo, the meat sector finds itself in uncertain times. The deal would have created no less than
Brazils fourth-biggest exporter and, moreover, the worlds fourth-largest meat processor, behind
Tyson Foods, Smithfield Foods, and Pilgrims Pride Corp, all from the US. It would also have
reversed, at a stroke, Sadias declining sales curve, caused by the fall-out from bird flu. Sadias
exports to Europe, the Middle East and Africa have been in decline now for the past 12 months,
making deep cuts in profits. Perdigo was also attractive to Sadia because of its greater presence in
Asia. BMI believes the broken deal leaves the way open for foreign firms to move in and offer a
higher price for Perdigo or to perhaps make an offer for Sadia. Both Tyson and Smithfield have
been the subject of local press speculation lately, though neither has yet made a move. Tysons
recent joint-venture in Argentina, its first outside the US, confirmed its strategy of seeking lower
production costs, so we would not be surprised to see it make an overture in either Sadias or
Perdigos direction.
In total, 310mn tonnes of sugar cane were crushed in Brazil in 2006, to produce 6.5mn litres of
ethanol. Exports in 2006 approached US$2bn, a figure BMI expects to go up considerably when, as
anticipated, the US begins to import ethanol from Brazil on a grand scale. The environmental
question, of course, is never far away from any debate on mass fuel production. In this case, land,
and lots of it, is the issue: to meet demand, sugar cane producers are calling for large tracts of both
public and private land to be given over to sugar cane production. The So Paulo state government is
currently reviewing the requests. The concern is that, as more farmers grow sugar cane, cattle and
Page 41
other farmers will be forced to move to forest areas, further depleting the countrys rainforest and
possibly, in the longer-term, even jeopardising food production.
Shortages of organic food and drink products reached critical levels in the final quarter of 2006. The
shortages are most evident in North America and Europe; many US- and European-based companies
are currently scouring the globe for organic ingredients. Organic ingredients like nuts, beans, and
seeds are increasingly being imported from Brazil, herbs and spices from Paraguay, India, and
Ethiopia, and organic fresh fruit and vegetables from African and Asian countries.
A six-year investigation into allegations of an orange juice cartel in Brazil is to continue. CADE, the
antitrust arm of the countrys Justice Ministry, decided to continue the investigation after rejecting a
proposal by the Justice Ministrys consumer affairs division, SDE, that would have seen the
companies involved pay BRL100mn (US$46.3mn) in reparations charges, in exchange for dropping
the case. The companies would also have to agree to frequent federal audits. The companies under
investigation include Cutrale, Coinbra and Citrovita. Cargill is also under the microscope, despite
having sold its juice division in 2004. It is alleged that the companies begun a price-fixing scheme in
the mid 1990s.
Sales of Brazilian beef suffered a blow in June 2006, when the Asda retail group, the UK unit of
Wal-Mart, withdrew the product from its shelves following talks with the National Farmers Union
(NFU). The NFU said that the beef was not produced in accordance with British farm assurance
standards and was not fully traceable, thus rendering part of the supply chain for the beef less than
transparent.
The UN international food standards body, the Codex Alimentarius Commission, met in Geneva in
July 2006 to consider proposals designed to improve consumer protection from disease-causing
organisms and substances by reducing contamination of foods. Among other issues, officials
discussed measures for the prevention of aflatoxin contamination of Brazil nuts. The issue is close to
the hearts of Brazil nut farmers in the country, which is the second-largest producer of the crop in the
world, harvesting over 30mn tonnes a year. Most exports go the US. Following the meeting, the
commission released codes of practice to deal with the contaminant in August 2006.
Page 42
Company Developments
Pennsylvania-based Hershey is concentrating on the Brazilian market in its product line expansion
outside the US. Hershey recently launched four new cereal bars, as it seeks to extend its light
product line in Brazil at a time when domestic demand is high. The Brazilian market offers a growth
rate of 15% a year and, BMI estimates, 350mn cereal bars were manufactured in the country in 2005
more than double the volume registered in 2004. Isabel Maranho, Hersheys marketing manager,
said the cereal bars market grew 50% in value during 2005. In 2006, we estimate there was a further
27% increase in production, amounting to 445mn bars. Hershey began production in Brazil in 2002,
as part of its global effort to reduce costs. At the same time, the company outlined an aggressive
expansion strategy for the market, where the brand is known as Hersheys. Its entry into the
Brazilian market coincided with a decline in revenues for the company globally.
Argentinean confectionery company, Arcor, is planning to expand its operations in Brazil. While its
Brazilian subsidiary already accounts for over one-quarter of Arcors global sales, which reached an
estimated US$1.4bn in 2006, the company hope to expand the business even more in 2007 by
15%, according to company sources. In 2005, the Brazilian units revenues reached US$353mn, a
20% increase on the previous year. For full-year 2006, revenues are expected to be confirmed at
close to US$400mn. Operations will be expanded in the north-east of the country, to add to the new
plant opened in November 2006, with a projected capacity of 14,000 tonnes of sugar confectionery a
year.
Cadbury Adams, part of the Cadbury Schweppes sweets to soft drinks group, is to extend its
Trident bubble gum brand with the launch of Trident drops. The company has spent 18 months
developing the new product, for which Brazil will be a test market. Trident gum has been marketed
in Brazil for 25 years. Cadbury Adams is looking to take a 30% market share with the Trident drops,
which are being targeted at the adult market, competing with the market-leading Tic Tac mint brand.
Sambazon Acai, a California-based company that imports the tropical fruit known as aca from
Brazil's Amazon region, plans to increase its volumes in 2007, due to fast-rising demand. The berry
is used in organic energy drinks, and is becoming increasingly popular in North America. The
company works with 5,000 farmers who harvest the tropical fruit from tall trees in the Pac and
Macap states in north-eastern Brazil
Spanish wine producer Freixenet is launching a sparkling wine brand in Brazil. The cava producer
announced in September 2006 that it was set to begin selling a new product, Tourne, in Brazil.
Freixenet hopes the product will boost its sales in Brazil, where its products are distributed by drinks
Page 43
giant Diageo. Freixenet is forecasting annual case sales of 40,000 for the Tourne brand. The
company, which has been present in Brazil for 10 years, sells a stable of products in the Latin
American country, including its Cordon Negro and Carta Nevada brands.
Meat and poutry producer, Sadia, is to invest BRL2.3bn on technology improvements and
expansion, including three meat packing facilites in Matto Grosso state two chicken, one pork. It is
also building a chicken meat packing facility in Russia, its main export market, to make a range of
frozen chicken goods for retail sale.
Mexican brewer FEMSA is to launch a new version of flagship brand Sol in a fresh assault on the
Brazilian beer market. The company, which owns Brazilian brewer Kaiser, is looking to bolster its
presence in the mainstream segment of the worlds third-largest beer market. A source at FEMSA
said that the new Sol, dubbed Sol Pilsen, had been developed after seven months of consumer
testing. The brand will sell for around BRL1.10 (US$0.52) throughout the country.
Since the acquisition of Kaiser, FEMSA had noticed the opportunity of launching a new beer to fill
the demand for a beer that is not too strong but at the same time, not too light. It is just right, said a
FEMSA senior executive. The Brazilian beer market had not seen much innovation or the launching
of a mainstream brand in several years. That is why, after seven months of intensive research,
FEMSA is finally launching the beer that the Brazilians indicated to be what they want.
Meanwhile, its Kaiser business was performing much better than in previous years after FEMSA
leveraged its distribution network to increase sales. Most of our initial objectives are being
accomplished. We have a long-term view for the business, and it will be a gradual process. However,
everything looks to be in the right place to start harvesting upon the actions implemented throughout
the year, added the senior executive.
Brewer AmBev will invest US$75mn to construct a new bottle factory in Campo Grande, Rio de
Janeiro. The new installation will comprise 24,000m2 and will come on stream in the second half of
2007.
Chile-based Coca-Cola bottler Embotelladora Andina said continuing growth in Brazil drove a
surge in third-quarter 2006 sales. Andina, which bottles Coke products in Argentina, Brazil and
Chile, said sales for the three months to the end of September 2006 were up almost 13% y-o-y, to
US$234.8mn. The company did not disclose quarterly profit figures. Sales in Brazil have jumped
30% so far this year. Andina has also seen some growth in Chile and Argentina, with sales up 3.2%
and 4.1%, respectively. Group revenues for the nine months to the end of September rose 13% to
US$712mn, driving a 25% leap in profits to US$82mn.
Page 44
According to reports in Brazil, FEMSA has invested BRL1m (US$500,000) in developing its
brewery at Ponta Grossa in Paran state, adding a new production line for 30-litre and 50-litre kegs.
The addition of the new line is aimed at keeping pace with rising demand in the region. The Paran
unit already produces beer in 600ml bottles, 350ml cans and 355ml long-neck bottles. FEMSA
Cerveja Brasil has eight production units in Brazil, with a total capacity of 19m hectolitres a year.
Schincariol, the Brazilian brewer, is not for sale to SABMiller or anyone else. This is according to
a spokesperson from the company, when asked recently about continuing rumours of a takeover by
the South African brewer. SABMiller, equally, has refused to comment on what it calls idle gossip.
Nonetheless, it is well know that SABMiller is looking to build on its Bavaria business in South
America, which it acquired last year in a US$5bn deal. AmBev controls over 70% of the Brazilian
beer market, in which Schincariol has risen to the number-two position, mainly due to increased
sales of its Nova Schin brand. Schincariols 14% market share would, in theory at least, be a nearperfect platform on which SABMiller could enter Brazil.
Chilean wine group, Concha y Toro, announced in June 2006 that it had launched its flagship brand,
Casillero del Diablo in Brazil. The wine will be distributed by Pernod Ricards local arm in Brazil,
Pernod Ricard do Brasil. The wine will be sold at a price of US$13.
Page 45
Market Overview
Brazil is largely self-sufficient as far as food is concerned, due to its large and diversified agricultural
sector. The country is one of the worlds greatest producers and exporters of agricultural commodities.
Agri-business is one of the pillars of the economy, accounting for over 40% of Brazilian exports. Soya,
meat, sugar, leather, maize and cotton are the main export products. In addition to its position as the
number one coffee producer for more than a century, Brazil also leads in oranges, orange juice
concentrate, alcohol, sisal, cassava and bananas.
Brazils milk production has increased over the review period, mainly owing to improvements in
productivity and the dairy sector benefiting from the overall improved economic conditions. Consumption
of dairy products is also on the rise, supported by higher purchasing power and lower unemployment
rates. Production increases have mainly been achieved by large multinational and domestic operators,
including for example Nestl, Parmalat and Itambe. A key characteristic of these operators is that they
support the development of the sector by investing in genetics, nutrition, quality and improved
management practices at dairy farms. Furthermore, the Brazilian government, through its Pro Leite
national milk development programme, supports dairy producers financially, with US$37mn having been
allocated for increasing productivity through herd improvement, emphasis on quality and improved
management practices for the 2006-2007 marketing year.
Meat production in Brazil has been steadily increasing over the review period, mainly driven by strong
demand from export markets, particularly where beef and pork are concerned, and the restrictions on beef
exports in Argentina. The latter will continue to benefit Brazilian producers in 2007, as importers look for
an alternative to Argentine beef. Domestic demand, meanwhile, has been growing at a slower rate, owing
to wide income disparities, with many consumers not being able to afford meat on a regular basis.
Production increases have been facilitated by higher investments in animal genetics, improved pasture
and management practices as well as government credit programmes. Poultry production has also been
increasing, with both export and domestic demand being strong, owing to the cheaper retail prices. The
Brazilian poultry sector is fairly concentrated, with the top ten processors accounting for around 60% of
the market.
For full-year 2006, we expect poultry exports to increase by between 5% and 10%. In 2007 the increase is
likely to be even higher, with rising demand for white-meat in developed economies. The Brazilian
Chicken Exporters Association has been a vocal campaigner for boosting sales via the opening of new
markets, including the Philippines, China, Turkey, Malaysia and Serbia. In 2005, the countrys poultry
exports increased by 35% to 2,854mn tonnes, worth US$3,508bn. In 2006, they increased by a further
Page 46
25%, to US$3567mn tonnes, at a value of almost US$4.2bn. These figures make the sector something of a
rising star in the food export market.
The Brazilian fisheries sector is characterised by the presence of a total of 300 both small scale and
industrial scale producers and is focused on both coastal areas and the river basins of the Amazon and
other big rivers. Furthermore, the aquaculture sector, which harvests fish, crustaceans and molluscs, is of
some significance. Catches are both consumed fresh and processed for both the domestic and
international markets. Overall, the Brazilian fisheries sector accounts for around 0.5% of GDP and
production, which remains low considering the large coastal area, has constantly increased over the
review period.
Table: Brazil Agricultural Sub-Sector Production Historical Data
1999
2000
2001
2002
2003
2004
na
na
na
na
2,714,618
1,922,556
Eggs
Volume (000 dozen)
Fish
Volume (tonnes)
544,984
606,062
642,244
676,127
na
na
Meat
Volume (tonnes)
14,588,400
15,395,450
16,185,200
17,482,641
18,482,641
14,849,952
Milk
Volume (000 litres)
na
na
na
na
22,253,863
14,502,565
na = not available. Source: IBGE
The Brazilian food and beverage industry is well developed and highly sophisticated, and leading
international operators have a strong presence. During the 1990s, the implementation of the Real Plan, the
globalisation process and the creation of trade agreements forced the local industry to invest heavily in
technology to maintain its competitive edge. Thus the production of high-value products and overall
product quality increased. There are around 45,000 food processing companies, including major
multinationals that manufacture more than 820 different products. The sector is, however, composed
mostly of small- and medium-sized companies. Nestl is the clear leader in the Brazilian packaged food
industry with a market share of 7%, followed by Parmalat and Unilever. Small- and medium-sized
regional manufacturers do, however, also have a strong presence, benefiting from an intrinsic
understanding of the local market and, often, cheaper prices. They account for around 24% of total
packaged food value sales.
Nestl produces food and nutritional products in a variety of segments including milk, coffee, cereals,
biscuits, chocolate, frozen goods and ice cream. The Swiss firm produces 1,300 different items under 200
Page 47
marks. There are 26 production plants in the states of So Paulo, Minas Gerais, Rio Grande do Sul, Gois,
Rio de Janeiro and Esprito Santo.
Danone brought its fresh dairy products to Brazil in 1970. Today, it is the market leader in fresh dairy
produce and is a leading producer of biscuits and snack foods, as well as bottled water. The company has
four production plants in Minas Gerais and So Paulo. Unilever has 14 production plants in So Paulo,
Minas Gerais, Gois and Pernambuco that produce food, ice cream, hygiene and beauty products.
Sadia is among the countrys meat exporters, operating 12 production plants capable of producing a
combined 1.3mn tonnes of protein-based products including chicken, turkey, pork and beef as well as
pasta, margarine and desserts. Sadias main rival is Seara Alimentos, a subsidiary of US agri-business
giant Cargill. Seara operates nine plants in the southern states of Santa Catarina, Paran, So Paulo and
Mato Grosso do Sul. Perdigo is a leading poultry exporter, operating 13 industrial facilities in southern
and mid-western Brazil.
The beverage industry in Brazil is ranked third worldwide, manufacturing 11.5bn litres of non-alcoholic
drinks a year. However, most of this production is for export purposes, as per-capita consumption levels
place Brazil in 25th position worldwide. The leading company is Companhia Brasileira de Bebidas
(AmBev), which produces beer as well as soft drinks. Brazil is considered a young country, with over half
of its population under the age of 24. In the past few years, the beverage industry has begun to try and
attract these consumers, while soft drinks producers in particular have invested substantial amounts in the
country. The soft drinks industry is quite concentrated, with the three leading players accounting for 60%
of value sales in 2006. They are Coca-Cola, AmBev and Kraft Foods. Competition in the sector is strong
and is carried out mainly via strategic pricing. Furthermore, manufacturers try to gain market share by
frequently introducing product innovations, new flavours and novel packaging options. The leading soft
drinks producers in Brazil are Coca-Colas various bottlers the US cola giants products are produced
by 16 different companies. Key bottlers include Coca-Cola FEMSA and Chiles Embotelladora Andina,
which holds the franchise for Rio de Janeiro. The group operates two bottling plants. Coca-Cola FEMSA
holds the franchises for Greater So Paulo, Campinas and Santos in So Paulo state as well as the states
of Mato Grosso do Sul and part of Gois. AmBev is the second-largest soft drinks producer,
manufacturing and distributing PepsiCo drinks as well as its own brands. Market share is equal to around
31.3%.
Wine production is concentrated in southern Brazil, notably the state of Rio Grande do Sul. Although
production has increased over recent years, it is not sufficient to accommodate increases in demand, and a
substantial amount of wine is imported. The small, but growing number of boutique wine producers in
Brazil have been attracting the interest of international wine buyers recently, as they seek to respond to
Page 48
consumers calls for new, exciting wine varieties. A Harris Poll in 2006 found that the majority of wine
drinkers in the US would be willing to purchase wines from non-traditional wine producing countries.
This makes the wine sector in Brazil one to watch over the coming years.
Where alcoholic drinks are concerned, national companies have improved the quality of their products
significantly after sizeable ongoing investment and are paving the way for greater national acceptance of
more sophisticated products. International players have recognised the immense, largely untapped
potential of the Brazilian alcoholic drinks market and are constantly increasing their production.
Furthermore, to compensate for declining volume sales growth in Brazil owing to the uncertain economic
situation, leading alcoholic drinks manufacturers have established manufacturing facilities and/or
acquired local manufacturers in other South American countries. On the domestic market, the focus of
recent years and months has clearly been the development of premium products as well as the
introduction of new product formulae and innovative packaging options.
Page 49
Chapter 4 Tobacco
Cigarette consumption in Brazil can be expected to decline further over the coming years as a result of
government actions and the increasing health consciousness of consumers. Volume sales growth of
cigarettes can be expected to slow down owing to increased health consciousness and the activities of the
anti-smoking lobby.
Table: Cigarette Value/Volume Sales Historical Data And Forecasts
2005
2006e
2007f
2008f
2009f
2010f
2011f
Cigarette sales (mn units)
1,233
1,310
1,389
1,476
1,568
1,665
1,769
Cigarette sales (US$mn)
8,259
9,091
9,812
10,570
11,397
12,310
13,196
e/f = BMI estimate/forecast. Source: Banco Central do Brasil, IBGE
Following the ratification of the World Health Organization (WHO)s Framework Convention
on Tobacco Control in November 2006, the Brazilian government faces the challenge of
replacing tobacco with alternative crops in order to ensure an adequate income for around
200,000 family farms currently depending on tobacco growing. Strong candidates as alternative
crops would be corn (maize) and sugar cane, considering the dramatic growth in demand for both
as a result of rising ethanol production. Latin America generally, and Brazil in particular, will
likely form a large part of any grand-plan in the Americas to devote a much greater proportion
of agricultural land to these crops; lots of sunlight and relatively cheap production and labour
costs, compared to North America, make the region an ideal site.
In January 2006, the Brazilian government has thus launched a programme in Rio Grande do
Sul, Brazils biggest tobacco-growing state, aimed at assisting tobacco farmers to diversify.
Under the programme, the government will provide financing, technical assistance, research and
commercialisation of diversified crops. There will, however, be no restrictions on tobacco
cultivation in Brazil.
Page 50
Market Overview
Souza Cruz, which is a subsidiary of British American Tobacco (BAT), is the leading operator in
Brazils tobacco industry with a market share of around 70%. Souza Cruz and second-ranked Philip
Morris account for almost all legally sold cigarettes in Brazil. In April 2003, Souza Cruz opened a new
factory in Cachoeirinha, southern Brazil, one of the most modern cigarette plants in Latin America, with a
production capacity of 45bn cigarettes a year. Its leading market position is due not only to the popularity
of its brands, but also to the company having established a strong distribution network, which is an
important factor in a country the size of Brazil.
Around one-third of all cigarettes consumed in Brazil are either smuggled or counterfeit, with the
government losing a total of US$487.9mn a year to this trade. During 2006, the average price of a legal
cigarette pack remained around US$0.91, while the average price of contraband goods stood at US$0.48.
Brazil is also the worlds second-largest market for Kreteks (clove cigarettes), and PT Djarum is
manufacturing these products under licence in a new purpose-built factory.
Brazil has some of the worlds toughest laws on tobacco advertising, which is limited to points of sale. In
January 2002, Brazil became the second country in the world to attach anti-smoking images on cigarette
packages to remind smokers of the damage done to their health. It was the first country to prohibit
expressions such as light, ultra-light and mild from being printed on packages. In November 2005,
Brazil ratified the Framework Convention on tobacco control. The country has some 40mn smokers, out
of its total population of almost 182mn.
As a result of tough government actions and consumers increasing health consciousness, the number of
smokers has declined over recent years. Brazilian cigarettes are some of the least expensive worldwide,
making them highly accessible to children and adolescents. This accessibility is something that has been
widely criticised by anti-tobacco lobbyists as counteracting the governments tobacco control activities.
Brazil is also the worlds second-largest tobacco producer after China and has two tobacco-growing areas,
in the north-east and the south of the country, with around 170,000 family farmers harvesting around
500,000 tonnes a year. The southern tobacco-growing regions feature cigarette manufacturing and
processing plants, while the tobacco harvested in the poorer north-east is used predominantly to produce
cigars.
Page 51
Chapter 5 Competitive Landscape

Key Players
Table: Key Players In Brazil's Mass Grocery Retail Sector
Parent
company
Cia Brasileira
de Distribuio
Carrefour Com.
Ind. Ltda
Wal Mart
Country
of
origin
2005
sales
(US$mn)
Brazil
5,500.0
France
USA
Fascia
Format
Current
no. of
outlets
Est.
No of
employees
643
643
1948
63,671
Po de Acar
Supermarkets
199
199
Extra
Hypermarkets
71
71
Sendas*
Supermarkets
60
60
CompreBem
Barateiro
Discount stores
168
168
Econ
Discount stores
90
90
400
436
5,400.0
Carrefour
Hypermarkets
85
124
Champion
Supermarkets
97
60
Dia Brasil
Discount stores
208
242
Big
Hypermarkets
10
10
155
295
4,500.0
Supercentres
Hypermarkets
13
23
Sam's Club
Cash-and-carry
10
15
Todo Dias
Convenience
stores
Bompreo
Supermarkets
118
69
Bompreo
Hypermarkets
29
Bompreo
Mini-Market
Convenience
stores
Balaio
(Brompreo)
Supermarkets
Magazine
(Bompreo)
Supermarkets
BIG
Hypermarkets
37
Nacional
Supermarkets
68
Mercadorama
Supermarkets
24
10
Maxxi Atacado
Wholesale
Clubs
No. of
outlets, year
end 2005
1975
1994
Page 52
Table: Key Players In Brazil's Mass Grocery Retail Sector (cont.)
Parent
company
Country
of
origin
2005
sales
(US$mn)
Fascia
Makro
Atacadista
Netherlands
1,216.4
Makro
Portugal
1,200
Modelo
Continente
(Sonae
Distribuico
Brasil SA)
Format
No. of
outlets, year
end 2005
Current
no. of
outlets
Est.
Cash-and-carry
45
45
1972
140
140
1990
Big
Hypermarkets
37
37
Candia
Mercadorama
Supermarkets
24
24
Nacional
Supermarkets
66
66
Maxxi
Hypermarkets
11
11
Cia Zaffari Com.

Ind.
Brazil
361.3
Zaffari
Supermarkets
23
23
1960
COOP Coop.
De Consumo
Brazil
340.9
Coop Plus
Supermarkets
22
22
1954
G Barbosa
Com. Ltda.
(ACON
Investments)
USA
280.3
G Barbosa
Supermarkets
32
32
1955
Brazil
230
Bretas
Supermarkets
36
36
na
Irmos Bretas,
Filhos e Cia
No of
employees
20,000
na = not available/applicable. * Joint venture of CBD and Sendas Distribuidora in Rio state. 2004 sales. Purchased by
Wal-Mart in December 2005. Source: ABRAS, BMI
Page 53
Table: Key Players In Brazil's Food And Drink Sector
Company
Sub-sector
2005 sales (US$mn)
No. of employees
Est,
Beverages
4,814.2
17,000
1885
Food
3,828.3
40,600
1944
Nestl Brazil
Food and beverages
3,005.6
16,000
1876
Unilever Bestfoods Brazil
Food and beverages
2,850e
13,450
1929
Danone Brazil
Food and beverages
na
na
1970
Perdigo SA
Food
2,600.0
5,300
1934
Seara Alimentos SA
Food
1,475*
10,000
1956
Food and beverages
na
6,000
1972
Schincariol
Beverages
975.2
3,500e
1939
Embotelladora Andina SA
Beverages
800e
4,124
1994
Cervejarias Kaiser
Beverages
350e
3,200
1980
Coca-Cola FEMSA
Beverages
300e
na
na
AmBev
Sadia
Parmalat Brasil SA
e = estimate. na = not available. * 2004 sales. Source: BMI
Page 54
Regional Company Case Studies

Cencosud In Latin America
Introduction
Chiles second-largest MGR, Cencosud operates in its home country of Chile and in neighbouring
Argentina. In both countries, the retail sector is highly competitive, with relatively low (for the region)
profit margins. Despite this, Cencosud, in common with its main rival D&S, has become one of the
strongest and most financially solid MGRs in Latin America, with total 2006 group revenues of
US$5.8bn, up 21% on 2005. It is currently seeking to use this strength to diversify into other markets in
the region. BanChile issued a strong buy recommendation for the stock in January 2007.
The companys roots go back to 1960, when Horst Paulmann Kemma, a German immigrant, turned a
restaurant called Las Brisas into Chiles first self-service grocery store, of 160m, in the city of Temuco.
This was followed, in 1976, by the launch of Jumbo, a much larger, supermarket-format store, opened in
the capital, Santiago, with 7,000m of selling space. Jumbo soon multiplied, becoming the countrys first
MGR. Six years later, in 1982, Jumbo opened in Argentina. The Jumbo chain was Cencosuds only
interest in Argentina for twenty-two years, until it bought that countrys Disco grocery chain in 2004.
Table: Cencosud: Principal Shareholders
% share
Quichamal SA
29.2
Inversiones Latada SA
27.6
Mehuin SA
7.2
Citibank Chile
2.8
Horst Paulmann Kemna
2.8
The Bank of New York
2.7
AFP Provida SA (Pension Fund C)
1.9
Celfin Capital SA
1.5
AFP Habitat SA
1.3
AFP Provida (fund type B)
1.2
Banchile Corredores de Bolsa SA
1.0
Cia de Inversiones Transoceanica SA
0.7
Other shareholders
19.6
Source: Cencosud
Page 55
Store Portfolio
Cencoosuds portfolio of store-types is wide, comprising shopping malls, hypermarkets, supermarkets
(groceries only), home-improvement warehouses, pharmacies, convenience stores, open-air markets,
clothing, and furniture shops As a result of its purchase of the Almacenes Pars chain in 2005, so far the
biggest transaction in the companys history, it now manages the largest number (23) of department stores
in the country. Additionally, in 2006 Cencosud announced the construction of the Costanera Center,
which, at a cost of US$400mn, will be the tallest building in South America. The building, scheduled for
completion in 2010, will include a mall with 400 stores, 14 cinemas and a food court with 2,000 seats.
Cencosuds property division estimates it will bring in US$150mn a year in office and store rentals and
sales.
Table: Cencosud: Store Portfolio
Chile
Argentina
Santa Isabel
Pars
Jumbo
Easy
Commercial Center
Disco (Plaza Vea and Mini Sol)
Source: Cencosud
Meanwhile, the financial services arm of Pars is growing rapidly and represents a new business segment
for Cencosud, which it will seek to graft onto its hypermarket and supermarket stores, via the introduction
of banking, credit card, insurance and travel services. The Tarjeta Pars, or Paris Card, unit gives the
company 2.6mn new clients, who can now make purchases with the credit card at any of Cencosuds
stores, including its Jumbo, Easy and Santa Isabel outlets, as well as in Paris Insurance and Paris Travel.
The Banco Pars (Paris Bank) business is currently the fastest growing part of the entire group. Retail
banking deposits grew by more than 40% in 2006, double the rate of growth (20.6%) in the sector as a
whole. An analyst report in December 2006 put the bank within the top five most profitable financial
services institutions in Chile, with a ratio of profit to capital employed of 24.9%. During the last two
years, 15 new banking points have been opened either inside, or adjacent to, its supermarket and
department stores.
Page 56
It also inherited one of the countrys most

active websites from Almacenes Pars, which
Cencosud: Revenues By
Country, 2006 % Contribution
has been offering a good number of its

products for sale online for some time.
Cencosud will now look to develop the service
Argentina
32%
across its entire portfolio of stores, in this way

leveraging the relatively high for Latin
America educated, middle-class population
in Chile. With Chile having the highest
internet penetration rate in the region, new
technological sales channels are likely to be
well received. The virtual sales website
Chile
68%
operated by the Colombian MGR, Exito, is

perhaps the most sophisticated and successful
Source: Cencosud, Stock reports
alternative sales channel in Latin America.

Cencosuds fortunes are, then, inextricably linked to those of the retail sector. In Chile over the past few
years, this has meant steady growth, as low inflation and expanding GDP have increased overall
purchasing power. It also helps, of course, that the majority (70%) of groceries in the country are
purchased in supermarket chains, with the remaining 30% purchased via more traditional channels of
independent mini-markets, corner stores and street markets.
In Argentina, the sector has not fared as well,
with high levels of inflation eroding the
Cencosud: EBITDA By Country,

2006 % Contribution
spending power of all groups in 2006,

especially those in the lower- and middleincome brackets. Government-imposed price
Chile
24%
restrictions on a range of food and drink items

have made trading conditions even more
challenging. Added to this is the fact that more
than two-thirds (68%) of food and drink items
in Argentina are purchased via traditional
channels, as opposed to 32% bought in MGR
outlets. In 2005, seeking to generate capital
and pay down debt, Cencosud sold 38.6% of
its supermarket business in Argentina to,
among other investors, the International
Argentina
76%
EBITDA = earnings before interest, taxes, depreciation

and amortisation. Source: Cencosud, Stock reports
Page 57
Finance Corporation (IFC) arm of the World Bank.

Growth Strategy For 2007 And Beyond
Despite its small population, 16.5mn, Chile has produced three large retail chains Cencosud, Falabella
and D&S all in Latin Americas top 10 retailers. Of the remaining seven, three are from Mexico, one is
from France/Colombia, one from Brazil, one from France, and the number one, Walmex, from the US.
Net profits in all three Chilean chains increased impressively in 2006. At Cencosud, they reached
US$250mn, the result of a 21% increase in revenues and a narrower income-cost ratio. With healthy cashreserves to boot, the retailer finds itself in a position to make investments for the future. Considering
Chiles limited market size, however, last years growth rate cannot be repeated forever even taking into
account new store openings and the like in its home market.
Table: Cencosud: Revenues By Business Line In Chile, 2006
% contribution
Credit cards
Others
Hypermarkets
28
Supermarkets
32
Home improvement centres
Commercial centres
Department stores
21
Source: Stock reports, BMI
Table: Cencosud: Revenues By Business Line In Argentina, 2006
% contribution
Comercial centres
Hypermarkets
20
Supermarkets
52
Home improvement stores
23
Credit cards
Source: Stock reports, BMI
Page 58
Table: Dominant Mass Grocery Retailers In Chile
Revenues, 2006 (e)

Distribucin & Servicio (D&S)
3,314
Cencosud (groceries only)
1,985
Supermercados Unimarc
332
Montserrat
281
Falabella
259
e = BMI estimate. Source: Quarterly company reports
This means that it will have to look elsewhere for dramatic growth opportunities, in fast-growing, less
mature retail markets than Chile. In Latin America, these would include Mexico, Peru, Colombia, Panama
and Guatemala. In these countries, the most successful retailers are growing by up to four times faster
than Cencosud, as the sector responds to the challenge of persuading growing numbers of lower- and
middle-income consumers to purchases most of their groceries in modern, supermarket channels.
Cencosud has not been blind to these regional opportunities, indeed quite the opposite: over the last 12
months it has been exploring, almost hyperactively, how best to enter firstly the Colombian retail market,
followed by Mexico and Peru.
Its much-trailed offer to buy a quarter of Almacenes Exito, Colombias leading MGR, in December 2006,
proved unsuccessful. Once French retailer Groupe Casino became aware of Cencosuds offer for the Toro
familys 24.5% of Exito, it wasted no time in manoeuvering to exercise its right of first refusal being
already a one-third shareholder. More than a wish to secure an additional slice of the company, the move
reflected the stronger desire to stop Cencosud from getting into a position from which it could mount a
full-scale takeover bid.
Where, then, will Cencosud go from here? BMI sees two possible scenarios. Either it will continue to
insist on entering the Colombian market, in which case the Olmpica chain still wholly Colombian
owned would seem the most logical target. It is solid financially, with little or no debt, and it has made
no secret of its desire to court a well-capitalised partner to enable it to compete with Almacenes Exito.
Page 59
Alternatively, it could seek to enter the Mexican market, where the ratio of supermarkets per inhabitant is
1:10,000, higher than Chile (1:7,500) and much higher than Argentina (1:3,300). Second-largest Mexican
retailer Soriana is certainly becoming a target for takeover, for it is experiencing a rising cost base and
will need a significant cash injection if it is to challenge Wal-Marts (Walmex) market share in the
country.
Cencosuds need to break out of its traditional southern cone sphere is urgent, for it, more than anyone
else, knows that if it does not diversify geographically and soon its growth will be stunted. Many
shareholders in such a case, having grown accustomed to high profits, would likely jump ship, thus giving
rival D&S, Chiles biggest MGR, a critical advantage.
In the meantime, the company will press on with its plans for 2007 in its two traditional markets, opening
up more stores in each, as it seeks bigger market shares. In Argentina, where 180 new stores will be
opened during 2007 and 2008, the retailer is betting on an increase in spending by consumers this year,
forecast to be between 10% and 20% by local economists. Among the new ventures in the country will be
the introduction of the Almacenes Pars department stores and of the groups credit card business.
Page 60
Cadbury Schweppes In Latin America

Introduction
Cadbury Schweppes (CS) refers to itself as the worlds leading confectionery company and the worlds
third-largest soft drink company. While its products are marketed in most countries, it is especially strong
in North America and Australia. From its Swiss origins, almost 225 years ago, CS has built up global
sales of over GBP6.5bn; it employs over 70,000 people.
The CS portfolio of products includes cocoa powder, sugar confectionery, cough drops, chewing gum,
milk chocolate bars, sugar-coated gum, breath freshener, chewing gum, sugar-free gum, bubble gum,
carbonated water, carbonated soft drinks, non-carbonated soft drinks, tomato-based drinks and apple
juice.
The companys business in Latin America grew significantly in March 2003, following its acquisition of
Adams. At the time, over 75% of Adams interests, and 86% of its profits, were in the Americas,
including the US and Canada.
Latin American Markets
As a direct result of the purchase, in Latin America CS now holds the lead in the overall confectionery
market, with a share of 20%, more than double that of its nearest competitor. It has a 64% share of the
Latin American gum market, putting it in first place in that market in Mexico, Brazil, Venezuela,
Argentina and Colombia.
Furthermore, it has the leading share of the highly fragmented sugar confectionery market, at 8%, and a
number one or number two position in each of its Latin American markets. The companys distribution
infrastructure in Latin America has improved lately, enabling it to better supply the highly fragmented
customer base of small shops and kiosks. In Mexico, its most important market in the region, outside the
US and Canada, CS has a 70% slice of the gum market and almost 10% of the sugar market. Other brands
sold in Latin America include Clorets, Swedish Fish, Sour Patch Kids, Beldent, Bazooka and Mantecol.
Apart from Canada and the US, CS has regional manufacturing facilities in Mexico, Argentina, Brazil and
Colombia. The companys Americas Confectionery region operates businesses in all the continents
major countries, including the US, Canada, Mexico, Brazil, Argentina and Colombia. Almost 60% of
sales are in the US and Canada, with the remainder in Mexico and Latin America. In common with many
companies with a large portfolio of products, a very small number of them five account for the
majority (60%) of sales: Trident, Dentyne, Cadbury Dairy Milk, Caramilk and Mr Big. Globally, just four
Page 61
products, or power brands, account for almost 70% of sales: Halls medicated confectionery, Trident
sugar-free gum, Dentyne Ice chewing gum, and the Bubbas bubble gum range.
Corporate Structure And Strategy
Globally, CS is divided into regions and functions. Each region is focused principally on what the
company calls commercial operations, and supports a team from each of the six functions. The four
regions are:
Americas Beverages
Americas Confectionery
Europe, Middle East and Africa (EMEA)
Asia Pacific
Table: Revenue By Region, 2006
% total revenue
Americas Beverages
28
20
EMEA
32
Asia Pacific
20
EMEA = Europe, Middle East and Africa. Source: Cadbury Schweppes, BMI
Table: Profits By Region, 2006
% total profits
Americas Beverages
45
16
EMEA
27
Asia Pacific
12
EMEA = Europe, Middle East and Africa. Source: Cadbury Schweppes, BMI
Page 62
The six functions, or functional groups, are the following, each of which also has a small central team at
the companys headquarters, in London, UK.
Global Supply Chain
Global Commercial
Science and Technology
Human Resources
Finance and Information Technology
Legal
CS has a total of 101 manufacturing plants and bottling facilities (shown in the table below), of which 41
are located in Europe, the Middle East and Africa; 11 in Americas Confectionery; 11 in Americas
Beverages; 25 in Asia Pacific; and 13 in Europe Beverages. Of these, 67 are engaged in the manufacture
of confectionery products and 34 in the manufacture and bottling of beverage products. In 2006 thirteen
of the facilities were sold, as part of the sale of the Europe Beverages business. The remainder are all
owned by CS, apart from nine that are leased: five in Europe, Middle East and Africa, two in Asia Pacific,
one in Americas Confectionery and one in Americas Beverages.
Table: Cadbury Schweppes: Manufacturing Plants
No. of confectionery plants
No. of beverage plants
Total
11
11
Americas confectionery
11
11
EMEA
38
41
Asia Pacific
18
25
Total
67
21
88
Americas beverages
EMEA = Europe, Middle East And Africa. 13 European beverage plants were sold in 2006. Source: Cadbury
Schweppes
Global Expansion And Brand Concentration

CSs overall strategy over the past four years has been one of global expansion and concentration on its
core brands, in both the confectionery and soft drinks segments. Needless to say, this has resulted in an
active programme of acquisitions and divestments. The majority of acquisitions have occurred in
developing regions, mainly Eastern Europe and Latin America.
Page 63
The biggest, and most controversial among shareholders, of the acquisitions has been that of Adams in
2003, purchased from Pfizer for US$4.2bn. Apart from propelling it into the number one position
globally as far as confectionery sales go overtaking both Nestl and Mars the deal gave it immediate
access to new markets in Latin America where confectionery sales have been growing faster than in
developed countries for some time.
The deal was controversial at the time largely because 55% of Adams sales were in the declining
sugarised gum and bubble gum sectors. With sugarised gum sales declineing since the end of the 1990s in
all world markets except Asia Pacific and Australasia markets where Adams was weak or entirely
absent the future was bleak, according to many shareholders. They did not reckon on the meteoric rise
in non-sugarised gum sales, a segment in which CS is seeking to challenge Wrigleys global dominance.
While the outlook for the bubble gum sector has improved since the purchase, BMI forecasts that total
bubble gum sales are likely to be smaller than the more profitable functional gum sector by the end of
2008, a sector where Adams has failed to build on its strengths.
Additionally, a significant minority of stockholders spoke out in 2003 against the greater exposure to
Latin America that the deal would bring. Many were concerned about economic uncertainty and civil
unrest, citing the economic collapse and political upheaval in Argentina in 2001. On this point their fears
have not been borne out, for sales growth in the Latin American markets have been very healthy since
2003, much more so than in the developed economies. The Chiclets and Clorets gum brands have
increased market share in the region over the last four years, as has the Bubbaloo bubble gum brand.
One year before its purchase of Adams, in 2002, CS bought Squirt, the eighth-largest soft drink brand in
Mexico, which put it in third place overall in the soft drinks segment in that country, the second-largest
carbonated soft drinks market in the world. At the end of 2006, we estimate that CS had 6% of the
Mexican carbonated soft drinks market, and 18% of the non-cola market. Its brands in Mexico are
Peafiel, Squirt, Crush and Canada Dry. Peafiel has become the leading brand in the mineral water
sector, with a 36% market share. Squirt, meanwhile, is the number two grapefruit carbonated soft drink.
In 2001 CS bought the Mantecol sweet brand in Argentina, adding to its portfolio in the country, where it
had earlier secured a 100% share in confectionery firm, Stani.
Latest Results
Growth in income for the company as a whole excluding the UK market for 2006 looks likely to come
in at around 3% or 4%, lower than expectations, which were within the 5% to 7% range. This is
principally due to the lower-than-forecast sales in the UK over the summer months, as the unusually hot
Page 64
weather meant that consumers opted more for cold beverages and ice-creams than sweets, pushing
confectionery sales down by 5% for the year in the UK.
The Americas region, by contrast, performed much better, ahead of analysts forecasts in some cases. The
beverage sector saw revenues rise by 4% and profits by 7%. Non-carbonates led the growth in the US,
with revenues up by 4%, compared with the 2.5% increase in revenues in carbonates. In Mexico, revenue
growth was much more impressive, reaching double-digits for many products. Sales of higher-value
brands rose the most, especially Clamato.
Table: Americas Region: Latest Figures
Beverages
Revenue
Profits from operations
Operating margin
2005
% of group total
% change in 2006e
GBP1,781
28
GBP537
46
GBP1,228
16
GBP153
13
13
30.1%
Confectionery
Revenue
Profit from operations
Operating margin
12.4%
e = estimate. The Americas Region encompasses the US, Canada, Argentina, Brazil, Mexico, Colombia, and
Venezuela. Source: Cadbury Schweppes, Stock reports, BMI
The confectionery segment in the Americas also outperformed the company as a whole in 2006: revenues
rose by 7%, while profits climbed by an eye-catching 13%. In the US, the performance was driven in
large part by gum, in which CS now has a 31% market share up form the 26.5% share it had prior to the
Adams acquisition in 2003. The traditional Trident and the new Stride brands recorded the highest sales
figures.
Meanwhile, in Latin America both revenues and profits grew in the double-digits. The focus was on core
brands, notably Trident and Halls, and the expansion of those brands in affordable packaging for the
expanding middle and lower-income groups. The growth was achieved despite a slow first-half in
Mexico, where revenues suffered due to inventory clearance and de-stocking by many large wholesalers.
Page 65
Kraft Foods In Latin America

Kraft Foods Inc traces its origins back to 1903, when JL Kraft, with a horse and wagon, bought cheese at
Chicagos Water Street wholesale market and re-sold it to local merchants. Just three years later, the
company launched Kaffee Hag, the first commercially available decaffeinated coffee. Then followed
Kool-Aid (in 1927), as the first powdered soft drink, and Kraft Deluxe (in 1950), the first commercially
packaged processed-cheese slices.
In the last 50 years, Kraft Foods has grown into the second-largest food and beverage company in the
world, with 2005 net revenues of US$34bn, from operations in more than 150 countries. Its portfolio of
packaged snack and beverage products includes 50 brands with annual revenues of US$100mn or more,
and seven that generate over US$1bn. Its close-to-95,000 employees are spread across 70 countries, with
the companys headquarters being in Illinois, US. Its two geographic research and development centers
are located in Curitiba, Brazil and Melbourne, Australia.
Table: Kraft Overview, 2005
Annual global revenues
US$34bn
Countries in which products distributed

Number of brands with US$100mn+ revenues
160
50
Number of brands with US$1bn+ revenues*
* Kraft Cheeses and Salad Dressings, Jacobs; Maxwell House, Milka, Oscar Mayer, Philadelphia, Post Cereals
Source: Kraft Foods Inc, BMI
With more than two-thirds (68%) of revenues coming from the US and Canada, the breakdown of Krafts
seven consumer business segments is heavily dominated by North American activities. The segments,
through which the company reports its financial results, are the following:
North America Beverages
North America Cheese and Foodservice
North America Convenient Meals
North America Grocery
North America Snacks and Cereals
European Union
Developing Markets, Oceania and North Asia (DEMONA)
Page 66
The companys International Commercial unit is broken down into four geographic regions:
Asia-Pacific
Eastern Europe, Middle East and Africa
European Union
Latin America.
Table: Business Segment Revenues For Q306, US$bn
Revenues
% change
% group sales
731
2.0
8.9
North America cheese and foodservice
1,450
-0.9
17.6
North America convenient meals
1,230
5.1
14.9
597
-7.6
7.2
North America snacks and cereals
1,590
1.8
19.2
European Union
1,540
3.0
18.6
Developing markets, Oceania, and North Asia*
1,118
10.0
13.6
Total
8,256
2.3
100.0
North America beverages
North America grocery
* Kraft does not publish the Latin America share of total revenues, BMI estimates it to be 6%. Source: Kraft Foods Inc,
BMI
During the last 10 years, Kraft has been steadily strengthening its presence in Latin America. In 1996, for
example, it purchased chocolate producer Lacta in Brazil, as a way of entering the fast growing chocolate
market in the country Kraft is now the largest seller of chocolates in the entire region and in 1997 it
introduced the Crystal Light powdered soft-drink into the Mexican market, as Clight. At the time, it was
the only such low-calorie beverage available in Mexico.
Within Latin America, Brazil represents the major focus, for it is also one of the companys four priority
markets globally. Kraft first entered Brazil in 1985, with the purchase of General Foods, via which it
gained control of Kibon and Q-Refresco. This gave it an operational base in the country. Since then, it
has been steadily introducing more of its core brands into the market, most recently with the launch of
Philadelphia cream cheese which now counts among of the most widely purchased products in
household food surveys in Brazil and the re-launch of Royal jelly and pudding mixes, which were first
distributed in Brazil 80 years ago. Since 2003, it has launched over 200 new products in the country.
Page 67
Table: Kraft In Brazil: Timeline
First Kraft product (Royal) distributed in Brazil
1925
First operational base in the country (via purchase of General Foods)
1985
Philadelphia brand introduced
2003
100 new products introduced
2003
70 new products introduced
2004
Brazil declared one of four global priority markets
2005
95% of households with between one and two Kraft products in the house
2006 (August survey)
Source: BMI
Kraft has nine production plants in Brazil, including one with more than 7,000 employees. Each plant
supplies the entire country with products, through third-party regional distribution and logistics operators.
Plants in Curitiba, in the state of Paran, produce chocolates, powdered juices, and cheeses (including
cream cheese). In Jundia, in the state of So Paulo, the raw materials for jellies are produced; while in
Araguari in Minas Gerais, concentrated drinks and ready-to-drink beverages are made. In Aracati, in the
state of Cear, concentrated juices are manufactured, and in Piracicaba, in the state of So Paulo, sweet
and savoury biscuits are made.
While Brazil is a priority market for Kraft in its medium-term strategic plan, the proportion of the
companys overall sales in the Latin America region remains small. In fact, it does not report the region
as a stand-alone item in its annual results, rather grouping it with the Asia Pacific region. In 2005, the two
regions together generated US$2.82bn, representing a little over 8% of total group revenues. Krafts other
international region, reported in its results as Europe, Middle East and Africa, had revenues of
US$7.99bn, 23% of the total. Overall international revenues in 2005, totalling US$10.82bn, represented
almost 32% of the group total. Revenues in developing economies, removing Europe from the equation,
represent 12% of the total, of which Latin America accounts for approximately half, or 6%.
When looked at from the perspective of y-o-y revenue and profit growth, however, the Latin America and
Asia pacific region increases in importance to the group. While the growth in revenues for Kraft overall
in 2005 was 6% against its 2004 performance, and operating income grew by 3%, in Latin America and
Asia Pacific the respective figures were 9.1% and 29.6%.
Page 68
The Europe, Middle East and Africa region performed better than the group overall, but its 6.3% increase
in revenues and 16.8% increase in operating income were well below Latin America and Asia Pacific. In
fact, with some of its North American business segments showing negative operating income for 2005,
we can expect to see the strategic emphasis shift even more towards Krafts international regions,
especially Latin America and Asia Pacific.
Overall, 2005 proved to be a difficult year for the company, with many shareholders troubled by the
future, particularly in developed markets, where concerns about diet, sugar and fat levels in food and
drink are becoming more widespread. With a large slice of its product portfolio being made up of high
sugar- and fat-content products (biscuits, chocolates, cream cheeses, and snacks), Kraft will need to
manoeuvre quickly to maintain its market share. Not that it has been blind to peoples changing tastes and
preferences, but with negative operating income cropping up in a range of business segments, the pace of
change will likely have to be upped.
Table: Kraft Foods Inc Latest Revenues (US$bn)
Q3 2006
% change
2005
2004
Total revenue
8,256
2.3
34,113
32,168
Gross profit
3,000
0.9
12,268
11,887
Operating profit
1,398
18.2
4,943
4,792
Source: Kraft Foods Inc, Stock reports
More light biscuit and chocolate products, more natural juice lines, more healthy cheeses, and more
whole grain products would all be well received by the market over the next few years. However, more
products will have to be taken out of the market as they become increasingly inappropriate to new tastes
and represent a drag on profits. Indeed, Kraft has announced that, for full-year 2006, it will withdraw 10%
of its entire product portfolio from the US market; in developing markets the speed of withdrawal will be
slower.
Increases in commodity prices have hurt the company most during the past two years; in 2005 alone we
estimate that expenditure on commodities rose by US$800mn. Additionally, Krafts decision to defend its
market shares, in order to sustain the vitality of the categories in which we compete and the shares
thereof, according to Louis Camilleri, Kraft Foods chairman, has eaten into revenues and eroded profit
margins. Assuming this maintain competitiveness at all costs approach continues, Kraft will be forced in
2007 to take a harder look at its cost base and leverage its immense volumes further with suppliers. Its
Page 69
programme of divestments will need to speed up as well, adding to the recent sales of its global
confectionery and Canadian grocery businesses.
One bright spot is that revenue and profit ratios (per dollar invested) from new products, in both 2004 and
2005, grew far faster than those from established products by an average of 50%, in fact, between the
end of 2003 and the end of 2005. Sales of what Kraft terms Health & Wellness products, a range of
nutritional food and beverages, accounted for a full 30% of its entire retail food revenues in the US
(excluding coffee, tea, and pet snacks).
The introduction of the fortified Tang beverage into the Latin American market earlier in 2006 has
generated what the company calls very strong revenues. It plans to follow up this success with regionwide distribution of Crystal Light, Kool-Aid on-the-go beverage sticks, and Oreo wafer sticks.
Meanwhile, its new range of tropical ready-to-drink fruit juices in Brazil, marketed under the brand
Maguary, have been particularly successful. Following the introduction of new flavours, including grape
(uva), peach (melocotn), passion fruit (maracuy) and mango in light and non-light versions sales
have risen by more than 12% in 2006.
Louis Camilleri, Chairman and CEO of Altria, said that this would provide the board with the necessary
time to complete the formal decision making process; and that furthermore it would coincide with the
planned public announcement of Krafts new growth strategy also planned for early 2007 and thus
address the potential overhang created by the tax-free distribution of close to 1.5bn Kraft shares to Altria
shareholders.
Page 70
Almacenes Exito In Latin America

The Colombian MGR market is booming.
We forecast that MGR sales will rise from
their US$5.96bn level in 2005 to US$11.9bn
% Ownership Of Almacenes
Exito
by 2010 a growth of 98.7%. With the

recent improvements in the security
environment across the country, particularly
in the major cities, we feel we can stand
Grupo
Casino France
34.7%
behind such a forecast. President Uribes

Grupo
Empresarial
Antioqueno
(GEA) Colombia
second term has ushered in a level of

optimism unknown since 1949, when
Colombias troubles began.
65.3%
Indeed, the spirit of our forecast is held by

incumbents like Carrefour and Exito, as
much as by the likes of Wal-Mart and
Source: Almacenes Exito
Chilean retail group Cencosud, which are both looking to establish a foothold in the country. Wal-Mart,
although still without a presence in the country, was spotted early in 2006 registering a long list of
products and brands with the health and food regulators in Bogot; and Cencosud appeared as a merger or
partner candidate in a whole host of possible deals in 2006. As such, BMI expects to see other foreign
firms attempt to enter the market in the short-to-medium term.
Almacenes Exito has 100 supermarkets in 35 cities across Colombia, 47 under the Ley banner, 41 under
the Exito name, and 12 under that of Pomona. In addition, the group has six supermarkets in Venezuela
(as part of the Cativen CA group), and similar stores in other Andean countries, including Ecuador and
Peru, are under consideration. In all, it has almost 3,000 providers, the vast majority (86%) of which are
small and medium-sized businesses.
The group is now the leading MGR in Colombia with a 35% market share. It leads its nearest
competitor, Carulla Vivero (19.8% of whose shares it purchased in August 2006), by a revenue margin
of some US$500mn. Indeed, its 2005 sales of almost US$1.5bn are roughly equal to the combined sales
of its two closest competitors, Carulla Vivero and Carrefour. Its y-o-y growth has been impressive lately;
we estimate that its 2006 revenue growth will be close to 22%. In terms of EBITDA, growth in 2006 will
reach almost 30%. Net profits in the first half of 2006 rose by an impressive 83%.
Page 71
Table: Almacenes Exito Latest Results (Colombian pesos, mn)
Item
2005
2006
% increase
2,419,860
2,934,389
21.3
578.761
705.632
21.9
-528.508
-607.691
14.9
178.711
230.223
28.8
Operating profit
49.956
97.941
96.1
Profits before taxes
47.107
78.729
67.1
Net profit
21.514
40.052
86.2
Revenues
Gross profit
Operational costs
EBITDA
Source: Almacenes Exito, BMI
Table: Grupo Casino*: Geographical Breakdown Of Sales
Country
Sales (EURmn)
% of total sales
17,062
59.7
Outside France
5,744
20.2
North America
1,609
5.6
809
2.8
Latin America
1,621
5.7
Asia
1,282
4.5
424
1.5
28,551
100.0
France
Poland
Indian Ocean
Total
* Grupo Casino owns 34.7% of Almacenes Exito. Source: Grupo Casino
Exito puts its record performance in 2006 down to three factors: increased use of its in-store credit card,
Tarjeta Exito; opening of additional stores; and a very active marketing and promotional campaign.
Business success in Colombia, though, is always in stark contrast to some of the countrys other realities:
very aware of the social and economic environment in which it operates high levels of poverty coexist
with an on-going internal war between the government and various armed groups Almacenes Exito has
Page 72
given more resources (and devoted more marketing material) to its charitable foundation, Fundacin
Exito, over the past two years. Together with its largest foreign shareholder (Grupo Casino, which owns
34.7%), funding for the foundation has increased to almost US$2mn in 2006. The monies go towards
hunger relief in the country and to improving facilities and teacher training in schools in socially
vulnerable areas of cities in which the group operates.
In addition, Exito has begun what it calls an employment creation programme, in which it gives jobs
to young Colombians, mostly under 20 years of age, as grocery packers for its customers. Exito pays the
youths health and social security costs and the tips they receive for packing groceries and taking them
out to customers cars or to the taxi rank, constitute their salary. The programme has been commended
by the Ministry of Labour, as being a good way for young people to enter the labour market, learn new
skills and combine study with work.
The group has been putting increased emphasis on its web presence over the past two years, which is now
located at www.virtualexito.com. The emphasis is explained by the fact that the site is used mostly by
Colombians living and working abroad, seeking to purchase groceries and other goods, including
electrical products and furnishings, for family members inside Colombia. The goods are paid for by credit
card and then shipped directly to an address in Colombia. Exito currently offers direct, express (within 3
hours of payment approval) shipment to any address in the three largest cities of Bogot, Medelln and
Cali, and slower shipments (2-5 days) to other parts of the country. The feasibility of offering home
delivery in other countries, beginning with the US, Spain and Venezuela, is under study.
There are an estimated 4mn Colombians based abroad (8.7% of the 46mn population), mostly in North
America, Europe, Venezuela and Ecuador. The remesas, or money transfers, they send back to their
families, usually on a weekly or monthly basis, have come to form an important part of the countrys
national income, as much as 5% almost US$7bn by some estimates.
With its shopping website, Exito seeks to gain a share of this very significant movement of funds between
families and thus be one step ahead of its competitors, who are considering something similar. Indeed,
sending food and other goods to family members in this way may be more cost effective than sending
cash via money exchange houses or high street banks, whose commissions and handling charges can be
high. Consequently, BMI believes this aspect of Exitos business will show strong growth in both the
short- and medium-terms. The service is being heavily marketed both inside and outside Colombia.
Page 73
Exitos three brands in Colombia, Exito, Ley and Pomona, are spread across 20 cities. The Exito and Ley
standard supermarket formats are somewhat similar and compete against one another. The Exito stores
tend to be larger than Ley stores, though the latter have recently introduced a superstore concept in the
three major cities, Bogot, Medelln and Cali. Both brands try to cater for a range of income groups, from
the lower-middle upwards.
Table: Almacenes Exito Store Profile
Stores in Colombia:
Number of outlets
Number of cities
Market share (%)
Exito
41
19
17
Ley
47
28
14
Pomona
12
100
35
35
Total
Stores in Venezuela:
HM Exito
Source: Almacenes Exito, BMI
The Pomona supermarket brand, by comparison, is aimed at middle and upper-middle income groups. Its
store format is smaller than Exito or Ley, and while it stocks many of the same products, it seeks to
differentiate itself by also offering a range of gourmet items. More emphasis is put upon the delicatessen
and upon non-Colombian products; and each store gives a concession to the Colombian premium coffee
provider, Oma. The stores are located in upper-income neighbourhoods of the four largest cities: Bogot,
Medelln, Cali and Barranquilla.
Meanwhile, Exito announced in November 2006 that it will be introducing two new Exito concepts, Exito
Vecino, a neighbourhood store, and Exito Supermercado, a supermarket format.
Exito Vecino focuses on proximity to customers homes, with a product mix adapted to the stores
catchment area. With the Vecino brand, Exito seeks to enter a new area of the market, namely that of
catering to low-income groups. It has long been the case in Latin America that lower-income groups pay
significantly higher prices for food and drink items than higher income groups, mainly due to the
unavailability of MGRs in poorer neighbourhoods. As other MGRs make plans to compete in this new
market segment also, Exito hopes that, with first-mover advantage, it will quickly establish a strong
following.
Page 74
The second concept, Exito Supermercado, is a smaller version of a normal Exito hypermarket. Within
these stores, customers will be able to buy a full range of grocery products as well as health and beauty,
home entertainment and textiles, according to the company. The Supermercado concept also includes a
pharmacy, liquor store and in-store bakery. The first two stores of this type will be piloted in Medelln in
early 2007.
Finally, Exitos remaining interest in Colombia, a 19.8% share of second largest MGR, Carulla Vivero,
may be about to become more significant: rumours abound that it may soon buy up to 77.5% of the
company. The acquisition, assuming it goes ahead, would be financed via a bank loan for up to
US$300mn, a share offering of 24.7mn common shares at US$4.44 a share, as well as its own funds.
Page 75
Company Analysis
Grupo Avipal
Market Position
Company Data
Grupo Avipal is one of Brazils largest chicken exporters, operating two processing
Annual sales volume

US$1,096mn
Established 1959
units in the states of Mato Grosso do Sul and Rio Grande do Sul. Around 180,000
chickens are processed per day, and around 200,000 tonnes of fresh and frozen
chicken are exported each year. The company is active in the areas of animal and
vegetable protein, through its pork, dairy, and grain divisions. Grupo Avipal is Latin
Americas largest producer of long-life milk, processing around 1bn litres of milk a
year. Brands include Elege, Santa Rosa, Dobon and El Vaquero.
Strategy
Building on the strength of its brands, Grupo Avipal follows a strategy of both
domestic and international growth, supported by strict quality controls and the
building of solid relationships with both suppliers and end customers worldwide.
Investment Potential
Grupo Avipal is one of the largest operators in Brazils foodstuff industry, and one of
Latin Americas largest producers of long-life milk. In addition to its domestic
operations, the company is also strong in the export business, with major markets
including the Middle East, Eastern Europe, Russia, Central America, Europe, Japan
and Africa.
Products/Service Launches
In 2007 the company will increase emphasis on the production and marketing of soy
and its derivatives, in response to the surge in global demand. Through its two sites
in the state of Rio Grande do Sul, it aims to increase its total capacity for the daily
milling of soy from 2,300 tonnes per day to 2,500 tonnes per day.
Page 76
Perdigo
Market Position
Perdigo is Brazils second-largest meat processor, focusing on the breeding,
Company Data
Q306 Sales: +8%
production and sale of pork and birds (mainly chicken and turkey). In addition, the
Q306 Meat Volume

Sales: +10.6%
Annual sales volume

US$2.6bn
No. of employees
5,300
Established 1934
company processes frozen pasta, soybeans and their derivatives and distributes
frozen vegetables. Perdigo currently operates 13 industrial units in the south and
midwest of the country, as well as 16 distribution centres and 13 outsourced
distributors. It exports to more than 100 countries and has offices in Europe and the
Middle and Far East.
Strategy
Perdigos core business is directed to chilled and frozen food. The company was a
pioneer in chicken meat exports, and, in 2003, it opened Latin Americas largest
slaughterhouse, the Rio Verde Agroindustrial Complex. Currently, the companys
key focus is on the diversification of the product mix, an increasing of the share of
higher value products, as well as the expansion and improvement of the distribution
network.
During 2006, Perdigo invested heavily in new facilities, investing more than
BRL440mn, 50% more than during 2005. The money is being spent on the new
agro-industrial complex in Mineiros, the expansion of production units in Rio Verde
and Nova Mutum, increases in slaughtering and processing capacities as well as
productivity at the various units, and bolstering the companys sales and logistics
teams. Early 2006 saw the company flush with funds, following record
performances in 2004 and 2005. In fact, during each of the last 10 years,
performance has been impressive, with average annual growth in gross sales of
28%; 14% in volumes of meat sold; 35% in terms of EBITDA; 38% in net income;
and 10% in the number of employees. In Q306 Perdigo concluded a primary share
offering of BRL800mn. It will use the funds to expand its meat and dairy segments,
to include the launching of a range of new products, such as margarines and
butters.
Page 77
Sadia SA
Market Position
capable of producing a combined 1.3mn tonnes of protein-based products including
Company Data
Annual sales volume
US$3,828.3mn
chicken, turkey, pork and beef as well as pasta, margarine and desserts. The
No. of employees
40,600
Established 1944
Operates 12
production plants,
with a capacity of
1.3mn tonnes of
protein-based
products
Commercial offices in
the UK, Italy, the
UAE, Japan, China,
Argentina, Chile and
Uruguay
Sadia is one of Brazils leading meat exporters, operating 12 production plants
company is Brazils largest pork and poultry processor. With upwards of 700
products, it has become one of the countrys leading makers of convenience frozen
foods (including hamburgers, patties, pizzas and ready-to-eat meals) and
processed foods (Frankfurters and sausages). Its products are sold, through its 14
distribution centres, in 70,000 direct points of sale in Brazil and to 200 foreign
distributors around the world.
Strategy
A key feature of Sadias strategy is horizontal integration, with the company
operating breeding farms for poultry and hog grandparent and parent stock,
hatcheries, hog breeding farms, slaughterhouses, processing units and animal feed
production plants. Production is divided between the three business lines:
processed foods, poultry and pork. A further key strategy component is Sadias
international focus, with exports to around 65 countries, which account for half of
total sales. It has increased its number of commercial offices outside Brazil to eight,
including in the UK, Japan, China and Argentina.
Sadias investment focus is both on its international and domestic operations. In
March 2005, the company announced plans to set up its first poultry processing
plants outside Brazil, in order to gain entry to markets that are currently closed to its
exports. The new plants are to focus on higher-value products that also generate
the bulk of earnings in Brazil. Within the country, Sadia continues to expand in Mato
Grosso state, where the company invested in two poultry slaughterhouses in
September 2005. In all, it operates 12 plants in Brazil, producing up to 1.5mn
tonnes of meat products a year.
In March 2006, it was reported that Sadia is considering an investment of US$70mn
into the construction of a meat processing plant in Russia in a joint venture with
Russian meat wholesaler Mitatorg, currently the companys exclusive distributor in
Russia. Production would initially be limited to sausage and other meat products,
and be extended into frozen prefabricated meats, including processed chicken
products.
Page 78
Embotelladora Andina SA
Market Position
Embotelladora Andina is a manufacturer and distributor of soft drinks, including
Coca-Cola, bottled water and lager, with headquarters in Chile. The company is
51% owned by investment group Freire Inversiones and 11% owned by The CocaCola Company. In Brazil, the company operates two plants and 11 production lines
Company Data
Q306 Sales:
US$234.8mn, +13%
9mth Sales:
US$712mn, +13%
9mth Profit:
US$82mn, +25%
2006 Brazil Sales

Growth: +33%
2006 Chile Sales

Growth: +3.2%
2006 Argentina Sales

Growth: +4.1%
Annual sales volume

US$800mn
No. of employees
4,124
Established 1946
Operates two plants

and 11 production
plants in Brazil
through Rio de Janeiro Refrescos Ltda and has a market share of 53%. Brands
manufactured and distributed include Coca-Cola, Fanta, Sprite, Guarana,
Schweppes, Kapo, Burn, Nestea, Kaiser, Heineken and Bonaqua mineral water.
Strategy
A key strategic focus for Embotelladora Andinas Brazilian operations is the
achievement of distribution efficiencies, enabling the company to operate in
geographic zones with high growth potential. Furthermore, strategic decisions focus
on obtaining greater territory coverage, by expanding beyond the largest cities,
redefining formats in the supermarket channel and reinforcing price leadership.
Embotelladora Andina continues to focus on its three markets: Chile, Argentina and
Brazil. Within the respective markets, investments are predominantly channelled
into the further diversification of the brand and format portfolio and, in Argentina and
Brazil in particular, on achieving greater territory coverage. Embotelladora Andina
saw a surge in third-quarter sales in 2006.
Page 79
Companhia Brasileira de Distribuio (CBD)

Market Position
CBD is the largest MGR in Brazil and operates under five different formats, with
almost 600 stores: Po de Acucar and Sendas (supermarkets), CompreBem and
ECON (discount stores), Extra (hypermarkets) and Extra Eletro (electronics and
Company Data
Q306 revenue
US$1.5bn;
growth of 2.5%
Q306 EBITDA
US$85.5mn;
decline of 38%
Q306 loss
US$19.9mn
2005 sales US$5.5bn
No. of employees
63,671
carrying out of a rationalisation plan, identifying best practice and applying it
Established 1948
throughout the companys network. The company will also increase the level of
643 stores located in

12 Brazilian states in
the south-east and
north-east of the
country
10 distribution centres
with a total storage
2
capacity of 316,000m
home appliance stores). Since 1999, CBD has had a strategic partnership with
French retailer Grupo Casino. Casinos initial 27.5% shareholding in the group has
now increased to 37.3% after a transaction completed in July 2005.
Strategy
CBDs current focus is on reducing expenses. This will be achieved through the
shared services across the group. The money received through Casinos increase
of its stake in CBD will be used to pay down debts, reinforce the capital structure
and continue to expand operating activities as the company moves its focus from
growing market share to growing profits. Furthermore, CBD aims to fight its
competition in a tougher way, including price reductions and credit card promotions,
such as 0% financing.
In next four years, CBD plans to invest US$932.8mn in its Brazilian operations, with
40 new hypermarkets and 120 new supermarkets. With this continuing expansion
strategy, the retailer takes advantage of the still significant potential for growing
MGR sales in a vast country, in which areas with low MGR penetration remain
despite the developed nature of the sector. Capital investments for full-year 2006
will reach US$410.4mn, compared to US$345.9mn in 2005. A focus for spending
will be the opening of new stores as well as the maintenance and upgrading of
existing outlets. In 2007 period, CBD plans to open 16-20 new hypermarkets and
40-60 new supermarkets. Investors are supporting the expansion programme,
having driven up the companys share price by 20% since October 2006.
CBD has announced that it will strengthen its efforts to capitalise on fast-growing
sales of non-food products in Brazil, which recorded sales growth of 12.5% in 2005.
In February 2006, CBD was authorised by the Brazilian National Social and
Economic Development Bank (BNDES) to sell PCs, manufactured by Positivo
Informatica, within the framework of the governments programme for the
popularisation of PCs and internet use.
Page 80
Wal-Mart
Market Position
Wal-Mart is ranked third in Brazils MGR sector after CBD and Carrefour. Prior to
the acquisition of the Bompreo chain from Dutch retailer, Ahold, in 2003, Wal-Mart
Company Data
Annual sales volume
US$4.5bn
No. of employees
7,000 (Wal-Mart),
20,000 (Bompreo)
hour stores. The Supercenters, which are hypermarket outlets, are located in the
Established 1994
states of So Paulo, Parana, Minas Gerais and Rio de Janeiro. The Bompreo
Total of 295 outlets
had only a small presence in Brazil, with 25 outlets including 13 Wal-Mart

Supercenters, 10 Sams Club warehouse stores and two Wal-Mart Todo Dias 24-
chain consists of 118 outlets in the north-east of the country, including Hiper
Bompreo hypermarkets, mini-markets, supermarkets, Balaio discount stores and a
small number of Hiper Magazine stores.
Strategy
Wal-Mart has repeatedly expressed interest in further acquisitions and is set to grow
further in Brazil. Investments during 2006 were expected to reach US$329.2mn,
and US$263.3mn was to be dedicated to the opening of the 15 new outlets. The
remaining amount of US$65.8mn was to be spent on remodelling and modernising
the Bompreo supermarket outlets in the north-east of the country. Wal-Mart plans
to spend a record US$385mn to expand its Brazilian operations in 2007. The
company plans to open 28 new stores over the course of 2007. The renovation plan
launched by Wal-Mart in Brazil in 2006 will continue at full steam in 2007. The
company's aim is to renovate all of its 138 stores in Brazil's south by 2009. The total
investment for the scheme will be around BRL270mn (US$123.9mn). The plan
includes re-designed layouts, store fittings and signage. Overall, the company is
planning to launch 28 new stores in Brazil in 2007, including hypermarkets,
supermarkets, cash-and-carries and soft discounters.
Similar to Brazils other leading MGRs, Wal-Mart continues to expand, with a key
focus on entering regions of the country so far dominated by other players. With this
continuing expansion strategy, the retailer takes advantage of the still significant
potential for growing MGR sales in a vast country, in which areas with low MGR
penetration remain despite the developed nature of the sector. Wal-Mart is set to
increase its presence in Brazil by 50% over the next two years, as it seeks to
challenge for the number one MGR spot in Brazil.
Page 81
AmBev
Market Position
AmBev (Companhia de Bebidas das Americas) is the largest brewer in Latin
America. The company has cornered over two-thirds of the beer market and nearly
one-third of the soft drinks market in Brazil. The company produces beer, soft
Company Data
Q306 net profit
US$226mn;
growth of 21.8%
Q306 Latin America

Volume Sales
Growth: +7% (beer:
+4.8%, non-beer:
+12.7%)
share in AmBev.
2005 sales
US$4,814.2mn
Strategy
No. of employees
17,000
Established 1885
drinks, iced tea, isotonic drinks and mineral water. Beer accounts for 80% of
AmBevs income, while 17% of sales are attributed to soft drinks and the remaining
3% to mineral water and malt drinks. In March 2004, Interbrew bought a controlling
AmBevs Brazilian market share increased from 63.2% at the end of 2003 to 68.1%
at the end of 2004 as a result of increased spending on sales and marketing, which
more than doubled to BRL698mn, with the aim to win back market share lost to
competitor, Schincariol, during 2003. During 2005, the company continued with this
strategy of increased marketing and sales spending in order to further increase
market share. In April 2006, the brewer increased its stake in Argentinas largest
brewer Quinsa from 56.7% to 91.2% by paying around US$1.2bn to Beverages
Associates Corp. AmBev expects the transaction to increase synergies between its
own and Quinsas operations throughout the region and, according to company
spokespeople, reflects AmBevs commitment to market growth in Argentina,
Uruguay, Paraguay, Bolivia and Chile. Inbev confirmed in November 2006 that
AmBev is try to purchase the remaining shares it does not yet own in Latin
American unit Quinsa. AmBev indirectly owns approximately 97% of the voting
interest and approximately 91% of the economic interest in Quinsa.
AmBev continues to strengthen its operations in Latin America with further
acquisitions in Peru, Ecuador and Dominica. It already has operations in Argentina,
Venezuela, Uruguay and Paraguay. In further expanding throughout the region, the
company takes advantage of the young and growing population and rising
disposable incomes, providing significant sales potential for its range of brands. On
each of these criteria, Central American markets score highly, particularly
Guatemala, Costa Rica, Honduras and Panama. These will form the platform for
AmBevs next wave of expansion in the region, planned for 2007 and 2008.
AmBev will invest US$75mn to construct a new bottle factory in Campo Grande, Rio
2
de Janeiro. The new installation will comprise 24,000m and will come on stream in
the second half of 2007.
Page 82
BMI Forecast Modelling

How We Generate Our Industry Forecasts
BMIs industry forecasts are generated using the best-practice techniques of time-series modelLing. The
precise form of time-series model we use varies from industry to industry, in each case being determined,
as per standard practice, by the prevailing features of the industry data being examined. For example, data
for some industries may be particularly prone to seasonality, meaning seasonal trends. In other industries,
there may be pronounced non-linearity, whereby large recessions, for example, may occur more
frequently than cyclical booms.
Our approach varies from industry to industry. Common to our analysis of every industry, however, is the
use of vector autoregressions. Vector autogressions allow us to forecast a variable using more than the
variable's own history as explanatory information. For example, when forecasting oil prices, we can
include information about oil consumption, supply and capacity.
When forecasting for some of our industry sub-component variables, however, using a variable's own
history is often the most desirable method of analysis. Such single-variable analysis is called univariate
modeling. We use the most common and versatile form of univariate models: the autoregressive moving
average model (ARMA).
In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data
quality is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a
basis for analysis and forecasting.
It must be remembered that human intervention plays a necessary and desirable part of all our industry
forecasting techniques. Intimate knowledge of the data and industry ensures we spot structural breaks,
anomalous data, turning points and seasonal features where a purely mechanical forecasting process
would not.
Retail Industry
There are a number of principal criteria that drive our forecasts for each retail variable:
Mass Grocery Retail Sales
Figures for MGR sales are based, where possible, on primary government/ministry/trade association
sources and official data. Where these are unavailable, MGR sales forecasts are based on a range of
variables including:
Page 83
company information about past and expected sales and market shares;
likely sales development based upon the future development of population, disposable incomes
and general macroeconomic climate;
political factors (likely changes in legislation affecting the MGR sector).
Food Consumption And Expenditure

Criteria used to aid our forecasts for food consumption and expenditure include:
the growth or otherwise of the population and its disposable incomes, as well as the development
of price indices;
company results and expansion plans;
changes in the industry/new product developments affecting the price level.
Food, Drink And Tobacco Sales

Figures are forecasted by taking into account:
of price indices;
changes in lifestyles/general societal trends;
likely development of product taxation and other government measures, such as anti-smoking
legislation.
Food, Drink And Tobacco Imports And Exports

Forecasted based on the following criteria:
of price indices;
developments in domestic food, drink, and tobacco production;
currency exchange rate developments;
development of bilateral and multilateral trade agreements and negotiations, as well as political
developments affecting trade.
Page 84
Sources
Sources used in retail reports include local statistics offices, central banks, and government departments,
officially released company results and figures, trade associations, multinational organisations, including
the OECD, the FAO, and the World Bank, and international and national news agencies.
Page 85

Food and Drink Brazil

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Published quarterly by BUSINESS MONITOR INTERNATIONAL LTD

2007 Business Monitor International. All rights reserved.

Brazil Food & Drink

Part of BMIs Industry Report & Forecasts Series

Business Monitor International

2007 Business Monitor International.

Brazil Food & Drink Report Q1 2007

Business Monitor International Ltd

Brazil Food & Drink Report Q1 2007

Chapter 2 Retail ...........................................................................................................................................17

Chapter 3 Food And Drink..........................................................................................................................31

Chapter 4 Tobacco ......................................................................................................................................50

Chapter 5 Competitive Landscape ............................................................................................................52

Business Monitor International Ltd

Brazil Food & Drink Report Q1 2007

BMI Forecast Modelling .................................................................................................................................83

Business Monitor International Ltd

Brazil Food & Drink Report Q1 2007

Business Monitor International Ltd

Brazil Food & Drink Report Q1 2007

Business Monitor International Ltd

Brazil Food & Drink Report Q1 2007

Chapter 1 Business Environment

Business Monitor International Ltd

Brazil Food & Drink Report Q1 2007

Business Monitor International Ltd

Brazil Food & Drink Report Q1 2007

Business Monitor International Ltd

Brazil Food & Drink Report Q1 2007

Business Monitor International Ltd

Brazil Food & Drink Report Q1 2007

Business Monitor International Ltd

Brazil Food & Drink Report Q1 2007

Table: Latin America Business Environment Rankings

Business Monitor International Ltd

Brazil Food & Drink Report Q1 2007

Brazils very large market makes it an attractive target for international

Brazil is a major producer and exporter of agricultural commodities, with the

Brazils stock of agricultural machinery is aging and in urgent need of

Income inequality is a major concern, with local consumption patterns

The countrys infrastructure is in need of upgrading, with poor distribution

Business Monitor International Ltd

Brazil Food & Drink Report Q1 2007

Despite significant increases in agricultural production over the past 20

Private-label products are proving increasingly popular, with many retailers

A young, expanding population and rising disposable incomes should result

Moves on the part of chambers of commerce and government trade officials

The increasing value of the real against the US dollar is jeopardising

Economic stability cannot be guaranteed over the longer term. Declining

High interest rates place significant constraints on company investment

Business Monitor International Ltd

Brazil Food & Drink Report Q1 2007

Business Monitor International Ltd

Brazil Food & Drink Report Q1 2007

Table: Economic Activity Historical Data And Forecasts

Nominal GDP (BRLbn)

Nominal GDP (US$bn)

Real GDP growth (%

e/f = BMI estimate/forecast. Source: IBGE, BMI

Business Monitor International Ltd

Brazil Food & Drink Report Q1 2007

Business Monitor International Ltd

Brazil Food & Drink Report Q1 2007

Table: Inflation Versus Minimum Wage Increases In Colombia (%)