Turbulent market conditions in Brazil have been particularly challenging for foodservice operators. The price of raw goods has increased, making it more difficult for operators to afford even basic ingredients, and taxes have spiked to help the government battle an extreme budget deficit. Operators are finding it difficult to stay in business, as more and more restaurants, independent restaurants most of all, are closing. At the same time, high levels of inflation and growing unemployment have caused average disposable income to fall, forcing consumers to reprioritise the goods they spend on.
As the largest foodservice market in Latin America, however, Brazil is seen as a natural target for many global operators looking to expand internationally. While now may not be the best time to enter the market as a new player—it is expected to take two or three years for the economy to stabilise—existing players have adapted in order to remain more relevant to consumers that have largely chosen to trade down to cheaper formats and simpler concepts, and are increasingly attracted to value-oriented deals.
Fortunately, opportunities have emerged for operators that have not only adapted to remain more relevant but have also looked to more niche, underserved corners of the market. E-commerce, for example, is just starting to take off in Brazil, and there is a huge opportunity for foodservice players to drive sales through HDTA channels in order to tap into an emerging and growing demand for digital convenience. While market conditions in Brazil have changed dramatically over the past year, there are opportunities to be had for foodservice operators willing to adapt and address the new needs of consumers that, despite the economy, continue to dine out.
2015 Consumer Foodservice Growth in Brazil by Category: Independents vs Chains
Note: Growth is relative to general market inflation of approximately 10% (shown in red)
Good value for money
Despite the economic slump, there is still a considerable demand for foodservice, especially at lunch, traditionally the most important daypart in Brazilian culture, in urban areas where a majority of middle class consumers continue to work and operate normal routines. Consumers are more price-conscious, however, and are therefore increasingly trading down to cheaper formats. Demand has shifted from more full-service, dine-in formats, to fast food, street stalls and kiosks.
In order to remain relevant to the greatest amount of consumers, foodservice operators have looked to pare down menu items to cut down on costs and offer cheaper meals for consumers with less disposable income. This has naturally boosted sales for large global chains like Burger King, sales of which grew 41% in 2015. Global chains benefit from large, secure supply lines that allow them to keep prices low, and those chains that already have an established market presence, such as Burger King, benefit from widespread brand recognition and the right format to offer products that consumers want. To make a global comparison, similarly, chained fast food is booming in Russia (hyperlink) despite political sanctions that are stifling supply lines.
While consumers are naturally turning to chains, independent outlets that lack this level of brand recognition and financial backing have had a more difficult time keeping prices low and retaining customers. In response, independent operators have experimented with incentives such as food passport schemes that allow consumers to sample different restaurants in a given neighbourhood or city in order to collect rewards and discounts, as well as collective buying schemes that offer discounts to large groups of people.
Independent operators could further incentivise low-income consumers, however, by more widely accepting meal vouchers. It is quite common in Brazil for companies to provide employees with monthly meal vouchers, which are essentially prepaid cards that consumers can use to make food-related purchases. Vouchers are commonly used to purchase groceries at the supermarket, as well as meals from Brazil’s traditional “kilo” restaurants, or self-service cafeterias that attract low-income consumers on the basis of good value and simple, yet filling, meals. Kilo restaurants are also attractive simply because they accept meal vouchers.
But kilo restaurants have suffered as well. Since January, the price of beans, for example, has increased roughly 50%, according to recent reports. The sharp price increase of basic ingredients has particularly hurt low-profit margin restaurants like kilo restaurants, and the effect has been inconsistent offerings that have negatively impacted sales. In order to pick up the slack, independent foodservice operators might attract low-income consumers that have largely grown weary of kilo restaurants if they were to accept the meal vouchers that these consumers rely on.
Expansion through alternative formats
While foodservice operators have largely attracted consumers with value-oriented offerings, others have managed to increase sales through expansion into alternative, more affordable formats. Los Paleteros, for example, a Brazilian chain of ice cream-based goods, in addition to its standard fast food format, has developed several cheaper formats including kiosks and food carts, in order to remain attractive for potential franchisees. According to Globo, a franchisee will have to invest R$435,000 (approx. US$131,778) in order to open a standard Los Paleteros concept store, compared with R$290,000 for a kiosk and R$140,000 for a cart. Creps, a chain of bakery fast food, has franchised food trucks and even food motorbikes in order to cut down on costs.
Cheaper formats are more appealing to potential franchisees, which in turn makes expansion more likely. Pizza Hut, the full-service chain that claims the largest share of pizza consumer foodservice by value in Brazil, was also one of the fastest growing in 2015. Pizza Hut expanded 33% to reach 122 outlets in the market, and grew 45% by value largely due to the success of its Pizza Hut Express format which allows consumers, in a more casual fast food setting, to grab a single slice of pizza on the go, which suits lunchtime consumers looking for a quick and cheap, midday meal.
McDonald’s, in another example, began franchising dessert kiosks in the 1990s in order to attract budget-oriented consumers with products at lower price points than the prices found in the brand’s more traditional fast food outlets, as well as to attract potential franchisees. McDonald’s’ kiosk format grew 19% by value and the company added 68 new kiosks in 2015, retaining the greatest share of chained street stalls and kiosks by value, well ahead of more traditional Brazilian cha
ins. Having developed this approach in Brazil over the long-term, McDonald’s has been able to escape the effects of economic downturn relatively unscathed.
Opportunity in ecommerce
Value offerings and expansion through cheaper formats are examples of how foodservice operators have responded to the new reality of today’s consumers. Adaptation has been critical in order to stay afloat, but despite these challenges, a clear opportunity for growth has emerged as well. Ecommerce is just taking root in Brazil, as more consumers now have access to digital channels and have become used to this new level of convenience.
According to Euromonitor International’s new Digital Consumer system, the percentage of households in Brazil in which one or more residents owns a smartphone jumped from just 16% in 2010 to over 60% in 2015. Increasingly widespread smartphone availability is fuelling growth in digital purchases in Brazil and is largely changing the landscape of traditional retail culture. This has had a substantial impact on foodservice, as the total value of digital purchases in consumer foodservice increased 91% between 2013 and 2015.
2013-2015 Total Consumer Foodservice in Brazil by Value: Online vs Offline Sales
Note: Online foodservice sales still small, but growing
Full-service restaurants, especially those that have experienced a sharp decline in in-store foot traffic, have offset sales declines by tapping into this growing demand for digital convenience by looking to HDTA channels for new avenues of growth. 100% HDTA, tellingly, was the fastest growing foodservice category in 2015, attracting consumers on price as well as convenience. Hellofood, a restaurant delivery service, has taken advantage of this emerging market by working with restaurants to develop and facilitate delivery orders through digital channels. Online ordering and delivery, therefore, have become increasingly attractive outlets for consumers that want to continue to eat restaurant-quality food, but don’t want to pay a premium to dine-in.
Brazil’s economic situation is forcing foodservice operators to adapt in order to appeal to consumers who increasingly need to re-evaluate whether they can afford to dine out. While now may not be the best time for global players to enter the market, there are opportunities for existing foodservice operators to meet an enduring demand, and build a loyal consumer base along the way.