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Posted May 2015

The lure of numbers

Brazil’s beer market | In the business world there is a cruel joke about Brazil: it’s the country of the future - always has been, always will be. The only thing of which we can be certain is that the future cannot be known, and that any prediction is at best a gamble. Then why did foreign brewers fall for Brazil’s luridly tempting projections?

Ever watched the surrealist Orwellian film “Brazil” by Terry Gilliam (1985)? No? But you will surely know its theme song. It’s one of the most famous Brazilian songs, written by Ary Barroso in 1939. For the benefit of those who don’t know the tune, it’s actually entitled “Aquarela do Brasil” and it goes like this…Bra-zil, lala la lala la la laaaaaaaa / Lala la lala la la laaaaaaaa /

Lala la lala la la laaaaaaaa laaa-laaaaaaaa, / laaa-laaaaaaaa laaa-laaaaaaaa, Braaa-zil. The song has been covered by practically everybody in the world of music, most recently by the rapper Pitbull, Jennifer Lopez and the Brazilian singer Claudia Leitte as “We Are One (Ole Ola)”, which became the official 2014 FIFA World Cup anthem.

Whatever “Aquarela do Brasil” means to Brazilians, for us in the rest of the world the song has always chimed with our longing to elope to that far-far land where life is not a scramble and a struggle, but people can roam freely with furry bunnies in a perfect Teletubby la-la land (viz the end of the film “Brazil”). It may have been pure escapism – think of all those Hollywood films, where characters who had robbed a bank or sold war secrets to the enemy had to make a runner to Brazil -, but aren’t dreams and longing the stuff of popular music?

The sentiments expressed in the song, I’d argue, have also long shaped our general impressions about the Brazilian market for beer. I know it’s a steep claim to make. However, what do we in the rest of the world really know about the Brazilian beer market, except that it’s huge, growing and obscenely profitable?

Brazil, a country of about 200 million people, is the largest economy in Latin America. With volume sales of 141 million hl beer in 2014, it is also the largest beer market in Latin America and the third largest market worldwide, behind China and the United States. Brazil’s jaw-dropping rise to a big beer nation did not happen overnight or out of the blue. The country’s GDP per person has been growing at an average annual rate of 1.7 percent since 1990, thus closing the gap with high-income countries, The Economist says. Given the strong correlation between GDP growth and beer consumption, this explains why beer consumption has shot up to 68 litres per capita in 2014 from 39 litres in 1990 – an output bonanza of 83 million hl in merely 25 years.

 

Supersize and super lucre

As to Brazil’s beers, actually they are really nothing much to write home about. According to Webb & Beaumont’s Atlas Mundial de la Cerveza (2013), they are typically clear and flavourless, always served cold and mass produced. Most likely, consumers will pick one of the three leading domestic brands, which are AmBev’s Skol (an estimated 30 percent of the market), AmBev’s Brahma (16 percent) or Kirin’s Nova Schin (12 percent). This means that three brands alone command … hang on I am counting … 58 percent of volume sales. Incredible. Or perhaps not. The mean thought has crossed my mind that Brazil would have been the envy of the Soviet Union’s bureaucrats in Central Planning. In the now derelict communist heaven on earth consumers had to make do with only a few beer brands, whereas in in Brazil they only seem to want a few brands. See what clever marketing can do? Making people desire what they would get in any case. In the 19th century a Mr Friedrich Engels would have called this “false consciousness”. Today it’s touted as “consumer choice”.

Now if Brazil’s mainstay beers cannot overwhelm the outside observer, unless he grabs a beer by one of Brazil’s 300 or so microbrewers, what else can? The short answer is: Brazil’s market forecasts. A recent study, which was published by the American Association of Wine Economists on the beer industry in Latin America (AAWE working paper no 177, May 2015) argues that “the market is highly concentrated”. Using the Herfindahl-Hirschman Index (HHI), which quantifies market concentration, Brazil scored 4518, which indicates, yep, “highly concentrated”. I would not have brought in the HHI if I did not like the sound of Herfindahl-Hirschman so much (American pronunciation, please). In Brazil’s case any dude could have arrived at this conclusion by just looking at market shares. The stock market-listed AmBev, in which AB-InBev hold a majority stake, control a whopping 68 percent and enjoy a big lead over second-ranked Kirin.

Another well-known correlation is between market shares, economies of scale and profitability. Enjoying such a huge lead over their competition, it’s no surprise that AmBev generate an eye-popping near-50 percent EBIT margin. Mention this figure to any brewer in Europe and you will kill the conversation, if not more. How often have I heard stories of Old World guys crying into their beers after some boisterous muscle-bound Brazilian had told them: “You have to try harder … (implying “if you want to play in our league”).” To play in their league you obviously need to have billion dollar brands, or what they call “Focus Brands”, which they prioritize because of their scale advantages and greater growth potential. In Brazil AmBev have four: the beer brands Skol, Brahma, Antarctica and Guarana, a soft drink. I ask you: how hard is it to be so profitable if selling beer is like bottling tap water and charging good money for it? Besides, which Old Word brewer enjoys a market environment, where positive demographics and income development will push up beer consumption, where competition is almost insignificant and no one has heard the word “hipster”, let alone has to contend with the whims of fickle buyers?

The rest of this report is exclusive to subscribers to Brauwelt International. Read on


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