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Brazilian Coffee Market: Steady Growth Amidst Economic Crisis

10/4/2018
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Brazil still faces residual effects from one of the worst economic crises in decades. Unemployment rates peaked around 13% and available incomes have been severely damaged. While a considerable number of fast-moving consumer goods continue to shrink, the Brazilian coffee category remains resilient, registering a 3.2% increase in total volume sales in 2017, according to Euromonitor International.

Coffee has a 98% penetration in Brazilian households and this steady growth reflects not only the cultural importance of coffee in the country, but also how much the industry succeeded in responding to new consumption behaviours. These two forces helped Brazil remain the largest coffee consumer in the world since surpassing the USA in 2014, according to Euromonitor International.

While the category showed positive performance, the economic crisis and related effects undeniably influenced demand. At the beginning of 2017, Euromonitor International projected both pessimistic and optimistic scenarios based on its Industry Forecast Model (IFM) methodology – a statistical tool that combines qualitative insights from players across the production chain and quantitative results from industry performance. In the pessimistic scenario, assuming socio-demographic and macroeconomic factors deteriorate, coffee sales were expected to increase by only 2.5% in total volume terms in 2017. In the optimistic scenario, on the other hand, factoring in signs of economic recovery, the category was predicted to grow by 3.7%. In this sense, the 2.7% closed-year results for 2017 indicated that category performance was much closer to the pessimistic forecasts.

Standard fresh ground coffee is not immune to current market context

Standard fresh ground coffee accounted for 80% of Brazil’s coffee total volume sales in 2017. Brazilians prefer this type of coffee due to the population’s habit of using a home-made filtering process as well as being the cheapest option. In 2017, roast and ground coffee grew by 3% in total volume terms, maintaining the average growth from 2012-2017. Among the drivers of this weak performance, product price had the most negative impact, increasing by 9% current value terms in 2017, forcing some consumers to reduce purchase frequency or downgrade to cheaper brands.

Unit price increases, however, is not enough to stop consumers from drinking coffee. Aspects like Brazilians' cultural preference for this coffee type along with its wide availability in many channels and increasing varieties, ranging from premium to economy options, contributed to the positive growth. These are considered “soft drivers” in Euromonitor International’s IFM analysis, which are uncontrollable and unpredictable effects on the market. Between 2017-2022, standard fresh ground coffee is expected to grow at an average annual rate of 3% in total volume terms. This growth largely relies on the impact of soft drivers, such as consumers' interest in different coffee blends, greater availability of brands occupying all price bands, increasing variety in pack types and sizes for different consumption occasions, among other factors. Although GDP recovery should also have a positive impact of 0.7% growth in total volume sales over this period, it is clear this coffee type is a category highly dependent on the industry’s capacity of quickly responding to changes in consumer behaviour.

Fresh ground coffee pods need a little push from manufacturers to keep flying high

Coffee pods accounted for less than 1% of Brazil’s total volume sales of coffee in 2017. Nevertheless, these products are relevant for manufacturers due to their higher profit margins. In 2017, pods volume increased by 12%, which was half the most pessimistic growth projection at the end of 2016.

As with standard fresh coffee, this deceleration was driven in part by product price, contributing a 0.7% decrease in total volume sales. In 2017, the average retail unit price per pods kilogramme increased by 17% in current terms, way above the general inflation rate. Premiumisation and the launch of innovative blends and limited editions caused this significant price increase. As this format is not Brazilians' preferred type, demand is much more sensitive to price increases. Soft drivers, on the other hand, maintained a significant positive impact on the category's performance. For example, coffee pods are seen as a status symbol in Brazil and It is considered stylish to have a pod machine at home for social occasions, even though it is not the “everyday” coffee.

Another relevant soft driver refers to many manufacturers offering aggressive promotions like "pay for a machine and get its value back in free pods". Although this might encourage the purchase of machines and pods, consumers do not replace the coffee pods once they use up the free ones. This helps explain the significant deceleration in pods’ volume, while sales of machines increase. The entrance of the leading fresh ground coffee brands, like Pilão and Melitta, in pods should contribute to future growth, encouraging loyal consumers to try pods.

Economic scenario will influence, but not define future demand for coffee in Brazil

Much has been said about how the poor economic scenario will influence demand for consumer goods in Brazil. It is true that financial uncertainty and reduced disposable incomes force consumers to re-think some purchases, but, according to Euromonitor International's IFM analysis, new consumer behaviours and how the industry responds to them are still the key success factors.

While product price, GDP, habit persistence and demographic factors can contribute to shifting demand toward more optimistic or pessimistic scenarios, ultimately what defines future trends relies more on understanding why consumers are looking for specific products and how their interest can be leveraged. Companies that clearly understand their customers and quickly respond to their demands are much more likely to succeed in an unstable scenario – even with well-developed markets like coffee in Brazil.

 

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