While Argentina is in crisis, Mexico is booming, and it would be a mistake to assume it’s all doom and gloom for Latin American dairy markets. Health drives the market despite disputes over legitimate claims, while the fragmented sector offers huge scope for new entrants, reports Euromonitor.
Brazil is the largest dairy products consumer in Latin America, closely followed by Mexico. Combined, the two countries generated nearly 60% of US dollar dairy sales in the region in 2002. Argentina, previously the third largest dairy market, now generates less than 7% of sales, compared to 17% in 2001, due to the devaluation of the peso.
The single most popular dairy product is cheese, worth nearly a third of total dairy sales, although milk in all its forms (fresh, powdered, speciality, and so on) generates nearly 50%. Fresh/pasteurised milk is the largest product, despite infrastructure and distribution issues, although powdered and long-life versions combined make up 45% of total milk sales due to their greater convenience. Products such as chilled desserts and fromage frais/quark have yet to make a significant impact in the region.
Health issues drive the market
Across the region key growth drivers in dairy were issues related to health, while difficult economic climates in a number of countries have led to an extremely price sensitive market. Historically both Argentineans and Brazilians are extremely body-conscious and this trend has started to move to Mexico and other countries as well. Low fat, enriched and functional products are all finding their way onto the market, albeit with varying degrees of success as the majority of these products are targeted at a very limited consumer group.
Fat reduced milks are on the increase, with the proportion of fresh/pasteurised milk that is semi-skimmed or fat free increasing from 17% in 1998 to 24% in 2002. This is despite the higher price of these products making them less popular as economic conditions worsen. Functional products have also continued to show growth.
Fermented dairy drinks such as Yakult (Yakult Honsha) and Chamyto (Nestlé) grew 8.5% in 2002 US dollar terms, largely due to their popularity in Brazil and Colombia. In Mexico market leader Yakult of Japan has adopted door-to-door sales and promoted relationships with doctors to increase penetration, while Swiss rival Nestlé has targeted children and young mothers.
Enriched products, on the other hand, have had mixed receptions across the region. In Brazil enriched milks made their first appearance in 1999, although their high relative costs prevents mainstream uptake. Moreover, consumer awareness of the nutritional benefits enriched milk can provide remains low.
In addition, health claims made by manufacturers for milk enriched with Omega-3 fatty acids were disputed by the Ministério da Saúde (Ministry of Health), which insisted that these products were withdrawn from the market. Manufacturers had to run lengthy laboratory tests to obtain official approval for their health claims before they could be re-launched. Conversely, powdered milk enriched with Omega 3 has revived the Argentinean powdered milk sector, while in Mexico vitamin-enriched milks are on the increase.
Yoghurt sales are dynamic
While still a relatively small sector, worth just 11% of total dairy sales in 2002, yoghurt has consistently proved its dynamism across the globe, and Latin America is no exception. Aside from semi-skimmed milk, yoghurt was the only other sector to see value growth over the 1998-2002 period. Yoghurt is also forecast to be one of the most dynamic sectors over the next five years, with just under 4% US dollar growth overall disguising strong increases in flavoured, fruited and drinking yoghurts as preferences shift.
In Brazil sales of yoghurt are supported by a culture concerned with physical appearance, and the product benefits from its healthy image. New product development by larger manufacturers is expected to galvanise yoghurt sales, particularly of light and fat-free varieties. This is in contrast to markets such as the US where luxury indulgence products are as much of a growth driver as functionality.
In Mexico yoghurt sales are still price-led with bulk and private label offerings popular. However, health concerns are increasingly an issue, particularly among middle and upper middle income groups who are more open to international influences and fashions. Young women are keen yoghurt consumers, using the product as a meal substitute as part of a weight regime.
Drinking and fruited yoghurts are the most popular varieties in Latin America, while probiotic products are as yet largely unknown. Despite the eagerness with which the region embraces healthy products, the higher unit price of such products hinders development in the current economic climate, although solid marketing campaigns are likely to prove successful in higher income areas.
Argentina impacts regional trends
Once the wealthiest country in Latin America, Argentina used to be a trendsetter for the entire region with strong European influences and the peso’s parity with the US dollar. However, worsening economic conditions and political unrest hit the international news at the start of 2002 when bank accounts were frozen and cash withdrawals limited, while the peso dropped to a quarter of its value. Argentineans used to be at the forefront of developments in enriched and functional milks, as well as the largest regional consumers of soymilk. Now, however, consumers have not only opted for less expensive products, particularly private label products, they are also consuming less.
The sectors most affected are likely to be the most dispensable, including dairy desserts, flavoured milk drinks, soymilk, and coffee whiteners. Soymilk is particularly affected by the peso’s devaluation as it is typically sold in waxed carton packaging, which is imported and represents a significant part of the product’s cost, making it too expensive for the average consumer. UHT milk has also become too expensive, with powder milk picking up the difference.
In the face of severe price sensitivity and lower disposable incomes, manufacturers are faced with a much reduced consumer base for value-added products and increasing private label competition. As a result, leading local companies, such as Mastellone (Danone), Sancor or Milkaut, have launched B Brands and increased the volume of private label work as a means to maintain revenue. Other tactics included re-packaging and re-branding existing products, as well as introducing mini and multi-pack sizes as a means of defraying price competition and consumption declines.
A positive outlook for Mexico
The crisis in Argentina is affecting neighbouring countries such as Uruguay, where in August 2002 banks also froze withdrawals, and other Latin American countries such as Brazil are suffering from more limited recessions. However, the regional picture is not all doom and gloom. In Mexico, already the second largest dairy consumer in the region, innovation and consumption in the market is poised to take off, only requiring targeted infrastructure investment to make a real difference. Mexicans are currently crying out for innovation in products, presentation and packaging in a fragmented and regionally focused dairy market with no single company holding more than 11% value share in 2002, while artisanal production remains high.
Increases in disposable income of more than 80% between 1997 and 2001 have triggered demand for more sophisticated products. Consequently the market is ripe for consolidation while Mexico’s inclusion in NAFTA means imports from North America remain price competitive. Largely as a result of strong forecasts for Mexico, the Latin American dairy industry is set to increase nearly 11% between 2002 and 2007 in constant US dollar terms, while Brazil, Chile and Colombia can also expect positive growth.
Euromonitor Profile: Groupe Danone
Euromonitor Profile: Nestlé SA