Category crunch: Brazilian biscuit firms look to M&A, NPD to drive growth
In part two of just-food's Category crunch on Brazil's biscuit sector, Paula Krizanovic argues that, with volumes slowing, acquisitions and product innovation will be key ways for local and multinational players to drive growth in a competitive market.
The last 12 months has seen large investments in Brazil's biscuit sector. Kraft Foods has expanded production and last month PepsCo marked its entry into the industry with the acquisition of local manufacturer Mabel.
However, there is speculation that more acquisitions could be on the cards. According to reports, the Brazilian biscuits industry could see another major deal in the sector: the sale of the fourth-largest manufacturer, Marilan.
Although Marilan has not confirmed nor denied its intention of selling, local financial newspaper Valor Económico, as well as sources from the sector, claim that PepsiCo could be in the running for the business. US agribusiness giant Bunge, US soup maker Campbell Soup Co. and Brazil's largest biscuits maker, M. Dias Branco, are also said to be interested in Marilan, which has a strong position in important Brazilian states such as São Paulo and Minas Gerais. Marilan produces over 300 tonnes of biscuits a day and exports to over 50 countries.
The high level of growth seen in Brazil's biscuit market during the Noughties is showing signs of easing and acquisitions could be a way of gaining market share quickly in the years ahead.
In 2010, Euromonitor estimates that the value of biscuit sales in Brazil increased by 7% to BRL11.5bn. Volumes were up 2%. In 2011, sales in value terms are expected to again rise by 7% but volume growth is forecast to slow year-on-year to 1%.
Some believe volumes could even fall in 2012. "The biscuits category is almost stable regarding volume growth and we even foresee a small drop of between 2% and 3% for next year," Rodrigo Peçanha, biscuits and baked goods marketing director at Argentinian firm Arcor's Brazilian unit, told just-food.
Arcor is present in the Brazilian market through brands like Aymoré and Triunfo, which are developed in a joint venture with Danone. The Argentinian firm owns 51% of a biscuits venture, which operates in Argentina, Brazil and Chile, with Danone holding the remaining 49%).
Peçanha estimates that, in value terms, biscuit sales in Brazil will increase by 5%. The discrepancy between volume and value growth is due to increasing commodity costs, he says. Biscuit manufacturers have reduced the size of their packaging due to cost increases "especially in commodities such as fat, sugar – which in Brazil is being used more and more for biofuels production – and oil", Peçanha says.
He adds: "In this context, some producers reacted by reducing the weight of packages to sustain prices that are accessible to the average Brazilian."
On the other hand, smaller packets respond to a consumer trend favouring smaller portions in all categories. "Ten years ago, Brazilians bought everything in large family packages, similar to American consumers. Now, media and society pressure to measure one's food intake and to look for healthy alternatives, has changed the face of this category," Peçanha says.
With volume growth low, sources agree that organic growth with a steady consumer base would be very difficult, leaving two options for companies who want a bigger bite of the biscuit business: acquisitions or product innovation.
PepsiCo's acquisition of Mabel marked the US food and drink giant's entry in Brazil's biscuit market. The report linking PepsiCo to Marilan could be due to the Mabel deal - the US company has clearly demonstrated an appetite for Brazil's biscuit sector. However, if Marilan or other local biscuit manufacturers do come up for sale, expect there to be fierce competition to buy the assets.
Between 2005 and 2009, market leader M. Dias Branco increased its share of Brazil's biscuit market from 11% to 14.1% in part due to its 2008 acquisition of local biscuit maker Industrias de Alimentos Bomgosto.
However, M. Dias Branco insists its business structure alone will keep it ahead of its rivals. "The company is the national leader essentially due to a business model that has a portfolio nourished by renowned brands, to its own distribution system with national coverage and to a vertically-integrated production model with strategically located facilities that allow us to have a large organic growth potential with little need to invest," Álvaro de Paula, M. Dias Branco's investments director, tells just-food.
M. Dias Branco owns 12 industrial facilities and 24 distribution centres in Brazil, being one of the few local companies in this market with strong national distribution and brand awareness.
Innovation is another way to drive sales growth, although of course, in many ways, it is more of an uncertain strategy than simply buying a business.
According to Euromonitor, many producers in Brazil are developing healthier products. "With modest volume growth, key manufacturers invest in health and wellness products, a key trend in terms of new product developments within biscuits," Euromonitor says. The consultancy firm cites examples such as Nestle's Passatempo Júnior, which has added calcium and zinc. Kraft has also launched its international biscuit brand Belvita in Brazil.
Other manufacturers are looking at different consumer trends. "M Dias Branco is aware of this trend and it is working on trans-fat free and low-calorie products," de Paula says. "However, it has to be recognized that the trend towards indulgence and practicality are still more relevant in the Brazilian market."
Arcor has a similar position. "Currently, healthy alternatives in the biscuits category represent about 3% of the business, because Brazilian consumers still prioritise pleasure and indulgence in their purchases," Peçanha says.
Peçanha argues that healthier biscuits can be successful if manufacturers focus on taste.
"The only chance of developing true healthier biscuit options in the Brazilian market is by building a link between these differential proposition and pleasure," he says. "We aim to activate this category by launching a new line of products in January from Arcor Argentina's Bagley portfolio, which are true healthy option although they are also viewed as tasty."
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