Required Report - public distribution

**Date:** 4/6/2004

**GAIN Report Number:** BR4003

**Brazil**

**Food Processing Ingredients Sector**

**Annual**

**2004**

**Approved by:**

![](media/image1.wmf)Ronald P. Verdonk

U.S. AGRICULTURAL TRADE OFFICER

**Prepared by:**

Marcos R. Hirata

**Report Highlights:**

Brazil offers good opportunities for U.S. suppliers to the processed
foods sector. The Brazilian food processing industry went through
positive structural changes during the 1990s. Today, local manufacturers
produce an expanding array of value-added products. Concurrently, demand
for high quality ingredients has increased. U.S. companies interested in
exporting ingredients or products should dedicate time and effort to
know who the top processors are in order to penetrate the market and
understand local needs.

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Sao Paulo \[BR3\]

\[BR\]

**I. MARKET SUMMARY**

Brazil, like other developing economies, is vulnerable to exchange rate
oscillations, and large foreign capital inflows and outflows put intense
pressure on the exchange rate. If investors lose confidence, the flows
register a downward trend, depreciating the local currency, which leads
investors to limit lending, therefore, the cost of money increases. For
the foreseeable future, Brazil will continue to rely, in part, on
foreign investment. For now, the Brazilian economic and political
outlook is moderately optimistic. Brazil's new President, Luiz Inacio
Lula da Silva (a.k.a. Lula) who assumed office in January 2003 has
maintained the economic policies of his more centrist predecessor,
Fernando Henrique Cardoso. In addition, President Lula has shown
determination to press forward with reforms in the Brazilian Congress,
including an effort to simplify and lessen an extremely burdensome tax
regime.

The slowdown in economic growth in 2002 and actual decrease in 2003 was
in part due to uncertainties with the new government, impacting the
exchange rate and the official interest rate - SELIC - which equalizes
interest rates applied in the local market. The depreciation of the
local currency had a strong impact on Brazil's imports. The dollar in
2002 started trading at US\$1=R\$2.29 while by December 2002 the
exchange rate reached US\$1=R\$3.70. The SELIC climbed from 19 percent
to 25 percent in the same year. As the comfort level with the Lula
Administration increased in the course of 2003, the Real strengthened,
closing the year at about R\$2.90 equivalent to 1 US Dollar. The
interest rate also became slightly more attractive over this period and
had dipped to 17% by year's end.

**A. Economic Indicators**

  --------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
                                    **1998**   **1999**   **2000**   **2001**   **2002**   **2003**

  Population (million)              165.7      167.9      170.1      172.1      174.7      177.3

  GDP (US\$ billion)                787.6      530.9      595.5      504.2      457.1      537.3

  GDP Growth (%)                    0.1        0.9        4.0        1.5        1.5        -0.2

  Inflation (%) (IPCA/IBGE)         1.7        8.9        6.0        7.7        12.5       9.3

  Average Exchange Rate (R\$/US\$)  1.16       1.81       1.83       2.35       2.96       2.93

  Total Exports (US\$ billion)      51.1       48.1       55.0       58.2       60.4       73.1

  Total Imports (US\$ billion)      57.5       49.2       55.7       55.6       47.2       48.3
  --------------------------------- ---------- ---------- ---------- ---------- ---------- ----------

Source:

\- Brazilian Ministry of Development, Industry and Commerce
(MDIC)/Secretariat of Foreign Trade (SECEX) trade databases (1998-2002)

\- Brazilian Institute of Geography and Statistics (IBGE) (1998-2002)

\- Brazilian Central Bank trade data

Despite a trying economic period, the Brazilian food industry
demonstrated positive performance. In 2003, industry revenues amounted
to R\$157.8 billion (R\$2.93/US\$1), which represented 10 percent of the
national GDP. The domestic food processing industry supplied an
increasing share of Brazilian demand (accounted for an ever greater
percentage of foods consumed domestically) in the 1990s. Following trade
liberalization in the mid-1990\'s, the sector invested heavily in
technology. Additionally, concurrent increased foreign competition led
to a sharp rise in productivity, product diversity and general quality,
stimulating sector expansion. Dynamism, combined with a solid structure,
enabled the food processing industry to overcome recent and current
economic challenges. According to trade analysts, the food processing
industry is forecast to achieve 2.5 to 3 percent growth (nominal values)
in 2004.

**Food Distribution in 2002 (US\$ billion)**

Source: ABIA, IBGE, SECEX

**B. Food Processing Sector Trade Balance (US\$ billion)**

  --------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
                                    **1998**   **1999**   **2000**   **2001**   **2002**   **2003**

  Production                        74.0       51.0       74.6       47.7       44.1       53.9

  Exports (processed foods)         8.7        8.6        7.7        10.1       10.6       13.9

  Imports (processed foods)         2.2        1.6        1.4        1.1        1.2        1.1

  Domestic Consumption              67.5       44.0       68.3       38.7       34.7       41.1
  --------------------------------- ---------- ---------- ---------- ---------- ---------- ----------

Source:

\- Brazilian Food Processors' Association (ABIA)

In 2003, according to the latest report of the Ministry of Labor and
Employment (MTE), the Brazilian food industry was comprised of 39,700
legally established companies, employing approximately 970,000 workers.
The food sector focuses basically on the domestic market, which accounts
for almost 90 percent of revenues. The sector is composed mostly of
small and medium sized companies. Approximately 86 percent of food
processors are small companies (1 to 19 employees).

According to the Brazilian Food Industry Association (ABIA), food
processing plants are located predominantly in the following states:

\- Large size companies (over 500 employees): São Paulo, Rio Grande do
Sul, Santa Catarina, Pernambuco, Alagoas, Minas Gerais, Paraná and
Ceará.

\- Mid size companies (from 100-499 employees): São Paulo, Rio Grande do
Sul, Minas Gerais, Paraná, Rio de Janeiro, Pernambuco, Goiás, Santa
Catarina, Mato Grosso do Sul, Mato Grosso, Ceará and Bahia.

\- Small size companies (from 20-99 employees): São Paulo, Minas Gerais,
Rio Grande do Sul, Paraná, Rio de Janeiro, Santa Catarina, Goiás, Bahia,
Pernambuco and Ceará.

![](media/image2.wmf)

**C. Advantages and Challenges to be faced by U.S. Exporters in Brazil**

  ------------------------------- ---------------------------------------
  **Advantages**                  **Challenges**

  The U.S. already has a high     Exchange rate, tariff and freight cost
  value-added industry developed  negatively affect imports. U.S. freight
  while Brazilian companies are   cost is significantly more expensive
  developing to address emerging  than shipping from Europe.
  needs.                          

  U.S. suppliers are seen by      U.S. exporters may enter the market
  local food processors as a      through 3 different segments \--
  reliable source, in terms of    ingredients, consumer value-added
  volume, standards and quality.  products (own brands) and exclusive
                                  distribution contracts (exporter
                                  brand).

  The organic processing industry The domestic market for organics is
  in the U.S. offers a wide range still limited but is getting more
  of products.                    attention, mainly focused on the fresh
                                  fruit/vegetables segment. The organic
                                  processed segment is still largely
                                  nonexistent.

  The U.S. food industry market   U.S. suppliers should strive to
  is a reference for the local    maintain a constant presence in the
  industry                        market to communicate with potential
                                  buyers and build long-term
                                  relationships, thereby influencing
                                  industry development.

  Import procedures are becoming  U.S. exporters' reluctance, especially
  more transparent since they are for parallel goods, to provide
  electronically monitored.       documentation as requested by Brazilian
                                  importers.
  ------------------------------- ---------------------------------------

# II. ROAD MAP FOR MARKET ENTRY

## A. Entry Strategy

To evaluate whether there is an opportunity for a product in the
Brazilian market, U.S. exporters should initially contact ATO Brazil to
get insights on best prospects and a market overview. As a primary
strategy, U.S. exporters should consider participating in major trade
shows, which can offer a great opportunity to meet potential Brazilian
buyers. The distribution of samples is also recommended. The Brazilian
food sector constantly looks to the American market for new trends and
new products. U.S. companies can benefit from providing up-to-date
information on their products to distribute. Success depends on having
continuous contact with importers, the food industry and even retailers
to build business relationships.

U.S. companies entering the Brazilian market need the support of a
strong distribution network with local storage, allowing for small lot
purchases, and a good technical and sales support staff. There are only
a few brokers and agents that carry inventories. There could be
significant benefits in approaching companies already present in the
food ingredient, wholesale and/or retail sectors. Most of those
companies are experienced with imported products and have access to the
large and small key players in the food industry. Once a company enters
the market, regular availability of product is crucial to consolidate
market position.

## B. Market Structure

The Brazilian food processing industry distribution system serves all
different channels: hotel, restaurant and institutional (HRI), retail,
wholesale and other food processing companies. Negotiations with
wholesalers and distributors may include semi-exclusive contracts with
limitations on geographic areas covered and/or restrictions on product
lines available to a company's competitors. Retail segment purchases are
made directly from food processing companies or from wholesalers.
Domestic wholesalers, distributors and retailers supply the HRI sector,
but the number of food processor creating specific departments to market
to the food service sector is increasing.

## C. Company Profile

In 2001, the Brazilian Supermarket Association (ABRAS) published a study
conducted by A.C. Nielsen during the April 2000-April 2001 period. The
results identify the top food and beverage brands at retail level
(market share evaluated in value) as follows. Review of the results may
give U.S. exporters directions on potential contacts.

  ---------------------- ---------------- ----------------- ----------------
  **PRODUCT CATEGORY**   **TOP 3 BRANDS**                   

                         **1 ^st^**       **2^nd^**         **3^rd^**

  BEER                   Skol             Brahma            Kaiser

  BOLOGNA                Bolognella       Marba             Confianca

  BOTTLED TEA            Lipton           Mate Leao         Parmalat

  BOUILLON CUBES         Knorr            Maggi             Arisco

  BREAD                  Wickbold         Panco             Seven Boys

  CAKE                   Bauducco         Ana Maria         Panco

  CANNED SARDINE         Coqueiro         Gomes da Costa    Rubi

  CANNED TUNA            Coqueiro         Gomes da Costa    CPC

  CAPPUCCINO             3 Coracoes       Puccino           Nescafe
                                                            Cappuccino

  CEREALS                Kellogg's        Nestle            Nescau

  CHEESE (specialties)   Vigor            Teixeira          Campo Lindo

  CHEESE (natural)       Danubio          Frescatino        Keijobom

  CHEESE (requeijão)     Pocos de Calda   Itambe            Nestle

  CHOCOLATE (powder)     Nescau           Toddy             Nesquik

  CHOCOLATE              Especialidades   Garoto            Grandes Sucessos

  CHOCOLATE (bar)        Prestigio        Chokito           Nescau

  CHOCOLATE (tablets)    Garoto           Classic           Laka

  COCONUT MILK           Sococo           Ducoco            Serigy

  COFFEE                 Pilao            Melitta           Do Ponto

  CONDENSED MILK         Moca             Gloria            Mococa

  CONDIMENT              Sazon            Arisco            Maggi

  CONFECTIONERY          Halls            Tic-Tac           Garoto

  COOKIE                 Passa Tempo      Trakinas          Bauducco

  CRAKER                 Aymore           Fortaleza         Tostines

  CREAM CHEESE           Polenghi         Danubio           

  DAIRY CREAM            Nestle           Gloria            Parmalat

  DESSERTS               Chandelle        Danette           Nestle
  (refrigerated)                                            

  ENERGETIC DRINKS       Red Bull         Flash Power       Flying Horse

  FLAVORED MILK          Toddynho         Nescau            Parmalat

  FOOD SUPLEMENTS        Mucilon          Farinha Lactea    Maizena

  FRUIT DRINK MIXES      Tang             Frisco            Clight

  GUM                    Trident          Bubballo          Adams

  HAM                    Sadia            Perdigão          Seara

  HAMBURGER MEAT         Sadia            Perdigão          Seara
  (frozen)                                                  

  ICE-CREAM              Kibon            Yopa              Tazza D'oro

  INSTANT COFFEE         Nescafe Tradição Nescafe Matinal   Instantaneo

  INSTANT NODDLES        Nissin           Monica            Maggi

  ISOTONIC DRINKS        Gatorade         Marathon          Taffman-E

  JELLO/PUDDING/FLAN     Royal            Oetker            Sol

  JUICE                  Del Valle        Santal            Tampico

  JUICE (concentrated)   Maguary          Dafruta           Jal

  KETCHUP                Pic              Arisco            Etti

  LINGUICA               Perdigão         Sadia             Seara

  MAYONNAISE             Hellmann's       Gourmet           Maionegg's

  MARGARINE              Qualy            Doriana           Delicia

  MARMALADE              Cica             Predilecta        Etti

  MILK (aseptic)         Parmalat         Elege             Lider

  MINERAL WATER          Minalba          Crystal           Indaia

  MIX/DOUGHS             Sol              Oetker            Wilma

  OLIVE OIL              Gallo            Carbonel Esp.     Andorinha

  PASTA (dry)            Basilar          Adria             Petybon

  PASTA (frozen)         Sadia            Frescarini        Apreciatta

  PETIT SUISSE           Danoninho        Chambinho         Batavinho

  POWDERED MILK (spec.)  Alsoy/Nan Soy    Nan H.A.          Mom

  POWDERED MILK          Ninho            Itambe            Molico

  PRESERVED VEGETABLES   Quero            Etti              Jurema

  RICE                   Tio João         Camil             Prato Fino

  SAUSAGE                Sadia            Perdigão          Seara

  SNACK FOOD             Ruffle's         Chee-tos          Yoki

  SODAS                  Coca-Cola        Antarctica        Fanta

  SOUPS                  Maggi            Knorr             Arisco

  SUGAR                  Uniao            Da Barra          Nova America

  SWEETENER (liquid)     Zero Cal         Finn              Assugrin

  SWEETENER (powder)     Finn             Zero Cal          Gold

  TEA                    Matte Leao       Leao              Oetker

  TOMATO PASTE           Elefante         Quero             Arisco

  TOMATO SAUCE           Cica             Pomarola          Marinara

  TOMATO (pieces)        Pomarola         Salsaretti        Tarantella

  TOMATO PUREE           Quero            Pomodoro          Tomato

  VINEGAR                Castelo          Toscano           Minhoto

  WAFER                  Bauducco         Danone            São Luiz

  WHEAT FLOUR            Dona Benta       Sol               Nita

  WINES                  Almaden          Marcus James      Chateau Duvalier

  YOGURT                 Danone           Nestle            Paulista
  ---------------------- ---------------- ----------------- ----------------

Source: ABRAS/A.C. Nielsen

Exame magazine, one of Brazil's most respected business magazines, in
their 2003 annual list of top 500 largest Brazilian companies in sales,
ranked the following food and beverage companies:

+-----+-----+-----------------------+-----------+------------+-------+
| **  | **  | **Company**           | *         | **2002     | **Gro |
| 200 | 200 |                       | *Sector** | Sales**    | wth** |
| 2** | 1** |                       |           |            |       |
|     |     |                       |           | **(US\$    |       |
|     |     |                       |           | million)** |       |
+-----+-----+-----------------------+-----------+------------+-------+
| 5   | 11  | AMBEV                 | Beverage  | 5,329.8    | N/A   |
+-----+-----+-----------------------+-----------+------------+-------+
| 11  | 14  | Carrefour             | Retail    | 4,044.9    | 6.9   |
+-----+-----+-----------------------+-----------+------------+-------+
| 13  | 12  | Pão de Açúcar         | Retail    | 3,837.5    | -1.2  |
+-----+-----+-----------------------+-----------+------------+-------+
| 16  | 23  | Bunge Alimentos       | Food      | 3,158.1    | N/A   |
|     |     |                       | Industry  |            |       |
+-----+-----+-----------------------+-----------+------------+-------+
| 21  | 25  | Nestlé                | Food      | 2,762.7    | 9.2   |
|     |     |                       | Industry  |            |       |
+-----+-----+-----------------------+-----------+------------+-------+
| 22  | 32  | Cargill               | Food      | 2,709.1    | 35.0  |
|     |     |                       | Industry  |            |       |
+-----+-----+-----------------------+-----------+------------+-------+
| 26  | 19  | Unilever              | Food      | 2,456.9    | -19.5 |
|     |     |                       | Industry  |            |       |
+-----+-----+-----------------------+-----------+------------+-------+
| 28  | 24  | Souza Cruz            | Tobacco   | 2,375.9    | -6.6  |
+-----+-----+-----------------------+-----------+------------+-------+
| 37  | 41  | Sadia                 | Food      | 1,760.4    | 9.0   |
|     |     |                       | Industry  |            |       |
+-----+-----+-----------------------+-----------+------------+-------+
| 44  | 43  | Copersucar            | Sugar     | 1,550.5    | -1.6  |
+-----+-----+-----------------------+-----------+------------+-------+
| 51  | 54  | Perdigão              | Food      | 1,336.2    | 6.3   |
|     |     |                       | Industry  |            |       |
+-----+-----+-----------------------+-----------+------------+-------+
| 54  | 45  | Sonae                 | Retail    | 1,156.5    | -21.8 |
+-----+-----+-----------------------+-----------+------------+-------+
| 58  | 58  | Makro                 | Wholesale | 1,127.2    | 3.1   |
+-----+-----+-----------------------+-----------+------------+-------+

Source: Exame magazine, 2003

## D. Sector Trends

According to food industry executives, in 2004, the industry will slow
the launch of new products and investment in new plants, even though
they are expecting expanded demand for higher-value products.

Due to a favorable exchange rate, export sales have become a priority
for the food industry. Nevertheless, in recent years, ready-to-eat (or
heat-n-eat), frozen products and functional foods have been in the
spotlight, as reported by ABIA. Assuming a better economic environment
in 2004, the industry will still look for ways to add value for
consumers, in terms of more convenience, time saving, shelf life, taste
and health.

According to ABIA, the categories' participation on the food production
in 2002 vs. 2001 is:

![](media/image3.wmf)

# III. COMPETITION

Since the initial 1999 devaluation, the quantity and value of imported
food products have decreased significantly. At the same time, locally
produced items, due to the expansion of food industry capacity, have
replaced imported products. According to post contacts, the Brazilian
food and beverage industry will continue importing ingredients, but
these ingredients will be increasingly \"tailor made". Brazilian
processors do not manufacture all necessary ingredients and are
dependent on ingredients from foreign sources, especially for food
additives such as coloring, flavoring, vitamins, etc.

Exporters of ingredients include MERCOSUL countries, Chile, the U.S.,
and Europe. While the market clearly presents good chances to expand, it
is difficult to penetrate. U.S. exporters need to exercise perseverance
and have good representation in Brazil. Price-wise, U.S. suppliers are
at a disadvantage to members of the MERCOSUL countries due to duty free
tariffs the latter enjoy. European countries represent another challenge
for U.S. companies due to established contacts and lower freight costs.
Also, there's a local perception that European suppliers better
understand Brazilian buyers.

Despite economic turbulence, U.S. exports of agricultural products to
Brazil, taken as a whole, registered an increase in value of 16.67% in
2003 over 2002:

\- Bulk Products 57.34%

\- Intermediate Products -7.34%

\- Consumer-Oriented Products -27.34%

\- Forest Products 14.26%

\- Fish & Seafood 35.74%

# IV. Best Product Prospect

## A. Products present in the market which have good sales potential

Based on 2003 trade data provided by the U.S. Bureau of The Census, U.S.
items that demonstrated the best sales growth compared to 2002 were the
following:

+-----------------------------------+-----------------------------------+
| Bulk Products                     | Consumer-Oriented Products        |
|                                   |                                   |
| \- Rice 1,132.70%                 | \- Red Meats 138.62%              |
|                                   |                                   |
| \- Cotton 185.75%                 | \- Eggs & Products 25.89%         |
|                                   |                                   |
| \- Pulses 40.32%                  | \- Fresh Fruit 112.53%            |
|                                   |                                   |
| Intermediate Products             | \- Fresh Vegetables 207.83%       |
|                                   |                                   |
| \- Soybean Meal 2,305.90%         | \- Tree Nuts 115.83%              |
|                                   |                                   |
| \- Soybean Oil 116.13%            | \- Wine & Beer 11.73%             |
|                                   |                                   |
| \- Feeds & Fodders 35.32%         |                                   |
+-----------------------------------+-----------------------------------+
| Fish & Seafood Products           | Forest Products                   |
|                                   |                                   |
| \- Roe & Urchin 75.80%            | \- Logs and Chips 77.47%          |
|                                   |                                   |
|                                   | \- Hardwood Lumber 81.21%         |
+-----------------------------------+-----------------------------------+

**B. Products not present in the market in significant quantity but
which have good sales potential**

The local food industry has not fully explored segments such as: foods
for food service channels, ready-to-eat (or heat-n-eat), convenience
foods, all-natural, organic processed food, specialty foods and
semi-baked. Products with good sales potential are those that fit the
demand of a consumer with higher expectations because the target
consumer base has become more restricted to high-end buyers.

## C. Products not present in the market because they face significant barriers

Except for poultry meat products and beef products (temporarily excluded
because of the one case of BSE in the U.S.), products of animal origin
(pork, seafood, and dairy) are allowed into the Brazilian market if
products originate from U.S. federally inspected plants, and after
approval of the Brazilian Animal Products Origin Inspection Service
(DIPOA). Unprocessed products of plant origin (fruits, seeds, grains)
can be exported to Brazil after a pest risk analysis of the product is
completed by the Brazilian Plant Health and Inspection Service (DDIV),
and if accompanied by USDA/APHIS/PPQ phytosanitary certificate.

For additional information on regulations regarding imports of
agricultural and food products from the United States, please check our
latest \"Food and Agricultural Import Regulations and Standards\"
(FAIRS), report number BR3608, dated July 22, 2003 at the USDA/FAS home
page, www.fas.usda.gov.

# V. Key Contacts and Further Information

If you have any question or comments regarding this report or need
assistance exporting processed food products to Brazil, please do not
hesitate to contact:

**U.S. Agricultural Trade Office** **Office of Agricultural Affairs**

U.S. Consulate General U.S. Embassy

Rua Henri Dunant, 700 Av. das Nações, lote 03

04709-110 São Paulo, SP, Brazil 70403-900 Brasília, DF, Brazil

Phone: (55-11) 5186-7400 Phone: (55-61) 312-7101

Fax: (55-11) 5186-7499 Fax: (55-61) 312-7659

E-mail: atosaopaulo@usda.gov E-mail: agbrasilia@usda.gov

Home Page: www.usdabrazil.org.br Home Page: www.usdabrazil.org.br

Other information sources include:

**Brazilian Supermarket Association Brazilian Food Processors'
Association**

**(ABRAS) (ABIA)**

Av. Diogenes Ribeiro de Lima, 2872 Av. Brigadeiro Faria Lima, 1478 - 11°
and.

05083-901 São Paulo, SP, Brazil 01451-913 Sao Paulo, SP, Brazil

Phone: (55-11) 3838-4500 Phone: (55-11) 3030-1353

Fax: (55-11) 3837-9933 Fax: (55-11) 3814-6688

E-mail: info@abrasnet.com.br E-mail: abia@uol.com.br

Home Page: www.abrasnet.com.br Home Page: www.abia.org.br