BMI View: We forecast real private consumption growth at 1.3% in Brazil, down from 1.5% in 2014 and which compares to 1.5% in 2014 and 2.6% in 2013, on the back of anaemic GDP growth. A less favourable external environment in light of an ongoing slowdown in Chinese growth, a poor domestic business environment and lack of export competitiveness pose significant headwinds to growth. Although we previously argued that Brazil was in the early stages of an economic policy shift with the appointment of an investor friendly Finance Minister Joaquim Levy, we expect investor pessimism to rise, on the back of the economic recession, high inflation, currency weaknesses and the potential for delay in fiscal reforms Food and retail consumption is likely to outperform among the country's private consumption items and we project generally strong sales growth for the main companies in the sector. We also believe that a moderation in input prices (grains) could help margins for these companies to recover in the coming months.
Headline Industry Data (local currency)
2015 per capita food consumption = +7.4% y-o-y; forecast compound annual growth rate (CAGR) to 2019 = +7.1%.
2015 alcoholic drink sales = +7.4% y-o-y; forecast CAGR to 2019 = +7.2%.
2015 soft drink sales = +7.6% y-o-y; forecast CAGR to 2019= +7.8%.
2015 mass grocery retail sales = +8.5% y-o-y; forecast CAGR to 2019 = +7.6%.
Key Company Trends
Lactalis Gains Approval For Brasil Foods Dairy Purchase: In April 2015, French dairy company Lactalis received approval to buy the dairy units of Brazilian food producer Brasil Foods (BRF) for USD594mn, reports Reuters. Antitrust regulator General Superintendence of Administrative Council for Economic Defense (CADE)'s has confirmed its approval for the deal. The acquisition will be carried out through Lactalis' Brazilian subsidiary Parmalat. Lactalis will buy BRF's dairy facilities in Brazil and its Batavo and Elege brands. Upon completion of the deal, Lactalis' market share will be below 10% in most of the segments in the Brazilian market where it is present, the regulator said, reports FBR.
AmBev Medium-Long Term Outlook Still Bright : The Brazilian beer industry is dominated by AmBev - a hugely profitable subsidiary of multinational AB InBev. AmBev can leverage off its strong market share in beer in Brazil as well as its growing investment into soft drinks across Latin America, where it is a key PepsiCo franchise bottler. The company's operating margin has regularly exceeded 40% over recent years, which by way of comparison is more than 2.5x greater than European brewers like Heineken and Carlsberg.
CBD & Carrefour Well Positioned In Tough Environment: In spite of a weak consumer outlook, the Brazilian mass grocery retail (MGR) sector will continue to offer robust growth opportunities and to attract investment. The structure of the MGR sector will continue to benefit leading retailers Companhia Brasileira de Distribuicao (CBD) and Carrefour Brazil, thanks to their strong local expertise and substantial investment in the country. Over the past few years, CBD and Carrefour have experienced rapid growth in Brazil. In FY14 (ending in December 2014), Carrefour reported organic growth of 8.0% in the country.
Key Risks To Outlook
The risks to our 2015 and 2016 real GDP growth forecasts lie primarily to the downside. The Petrobras corruption scandal continues to unfold, and could have a more substantial negative impact on headline real GDP growth than we currently anticipate. Should the company cut its capital expenditure programme more heavily than we expect, this would pose downside risks to our real fixed investment forecasts. Moreover, the corruption investigation could drag on for several quarters, forcing companies to stop work on projects while individuals are indicted and the tendering processes are examined. Overall, these factors could see Brazilian real GDP growth contract more significantly than we currently expect in 2015 and also underperform our expectations for 2016.