Brazil’s Indomitable Domestic Market

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Features

By Kelly R. Stein

Twenty-five years ago not many Brazilians brewed coffee at home and what little they did drink was often instant coffee. Per capita consumption in a country that single-handedly supplies a third of the world’s coffee was 2.3 kilos—among the lowest in the world.

Domestic consumption was 8.2 million 60-kilo bags of coffee in 1990, about one third of the tonnage harvested that year.

Quotas and price controls ended in 1989 and during the free market period that followed Brazil doubled its production. More amazing is the fact that domestic coffee consumption has tripled during the last six years, according to the Brazilian Coffee Industry Association (ABIC). Brazil harvested an average 22.6 million bags a year under market controls. Since 1990 that average has increased to 35.7 million bags and in recent years production has topped 50 million bags.

Last year domestic consumption totaled 20.3 million bags, growing 1.64% compared to the previous year despite a difficult economy. Was it magic? No, experts say, it was teamwork along the entire length of the supply chain.

In 1990 the government outlined a strategy to stimulate consumption by targeting consumers who had not developed the daily habit. Market researchers suggested both the home and the institutional market segments were ripe for growth and mobilized the coffee supply chain. Producers, roasters, soluble manufacturers, distributors, retailers, restaurants, coffee shops, offices, industrial kitchens, hotels, and hospitals were encouraged to promote a coffee routine.

Media responded favorably to an effective public relations campaign while industry-sponsored events and trade fairs communicated the benefits and tasty aspects of coffee.

Growth was slow at the onset, but annual consumption in Brazil grew steadily to 14 million 60-kilo bags by 2002, according to the P&A International Marketing report. Per capita consumption rose from 2.3 kilos to almost 5 kilos per person by 2014, as domestic consumption exceeded 20 million bags.

“This long lasting initiative began with a group of 28 leading roasters, who financed an in-depth study of coffee consumption habits and a profile of the coffee consumer. This resulted in two lines of action to revert the scenario: consumers and institutional,” according to a report directed by Carlos Henrique Jorge Brando, P&A’s c.e.o.

Domestic consumption was 4.89 kilos per person last year, exceeding the same measure in Italy and France. Coffee drinkers in Brazil still trail the US, Finland, Denmark, and Norway where consumption can reach 13 kilos per capita, but the pace has accelerated and Brazil will soon be the largest coffee market by volume in world.

The whole program was orchestrated by the ABIC with positive results inspiring other coffee growing countries, such as Colombia. The Toma Café Program, for example, led by Federation National de Cafeteros (FNC) shows how Brazilian strategies helped increase consumption in the Colombian domestic market in the last five years.

Brando was personally involved coordinating studies and helping devise strategies for Toma Café,” he said. Brado is credited with coming up with Brazil’s new slogan reflecting the country’s status as a coffee drinking land: “Brazil. Coffee Nation.”

Created in 1973, ABIC continues to administer action plans that integrate the production sector, retail outlets and consumers. The association supervises six different projects: Purity Seal, Coffee Quality Program, Sustainable Coffees of Brazil, Quality Coffee Circuit, and Coffee in Schools. “With better products it has become easier to promote coffee in the domestic market,” explains ABIC executive director Nathan Herszkowicz.

Consumer profile

Single-serve, specialty coffee, pour-over, and unconventional brewing methods are new developments in Brazil that appeal to fashionable youth. The consumer profile in urban areas has changed in the last few years. Elements of exclusivity and quality are mandatory for young consumers between 15 and 35 years of age. All this modernism and new gadgets, however, didn’t substitute for classic roasted and ground coffee.

According to a Scantrak retail market report conducted by Nielsen and ordered by ABIC, sales of instant coffee and roasted and ground coffee still account for more than 90% of the domestic market. Traditional methods of consumption remain strongly rooted in the local habits in most states of Brazil, except the south and southeast regions.

A preference for roasted and ground coffee keeps the market stable in these areas with no appreciable growth or decline.

Brewed coffee was the norm in Guilherme Cury’s São Paulo home where it was common for even children enjoy a cup or two daily though childhood. “My early memories of drinking coffee date to when I was 10 years old,” says Cury.

Restaurant manager Leandro Mereguito started even earlier. “I remember having coffee with milk when I was five years old,” he says. Children continue to drink coffee with no ill effects. Their health is great and studies show that drinking coffee can improve their concentration and success at school.

Instant coffee, cappuccinos, latte, and specialty capsules leads ascending markets, with 50% growth expectation in the next few years. This information explains why Dolce Gusto (a Nestlé brand) and TRES (from the Brazilian enterprise Três Corações Group) together invested more than $12 million in multi beverage single-serve technology in Brazil.

This is reflected in the coffee routine of young consumers like Mereguito. His taste for coffee changed over time and he became a little more demanding. “In the morning, I prepare my coffee with my Italian coffee machine because I like its intensity to wake me up. After lunch, however, I drink Nespresso. It is almost a dessert for me,” he explains. Cury also likes capsules. “I changed my habits and now I can tell that I am a little picky. I chose carefully the beans that I will consume and I do not add sugar or milk,” he says.

ABIC commissioned Nielsen’s to update their understanding of domestic consumers. This research, made in 2014, highlights several interesting facts:

• Coffee is part of the daily routine in 98.2% of Brazilian homes where consumers drink coffee at least twice a day;

• These consumers spend an average of $2 (R$7.80) per month on coffee and they purchase approximately 10.3 kilos of coffee per year;

• Supermarkets are the biggest suppliers for these families and discounts and low prices are primary drivers for the majority of consumers;

• Sustainability and traceability are not issues for most of Brazilian coffee drinkers;

• 55% of people drink their coffee in cups and 20% drink their coffee in mugs;

• While a majority prefers the traditional brewing method (paper or fabric filter), instant coffee wins more space in the market.

• When talking about capsules the numbers are contrasting. Penetration of single-serve machines is 0.6% but these households spend an average $13 (R$53) per month on coffee. Among affluent households single-serve and electrical coffee machines are near the top of their wish list.

“I brew coffee every day,” said publisher and blogger, Monica Wagner. “I love when the delicious smell is in the house. It comforts me because it reminds of my mom’s house. Later then, I usually have an espresso during the afternoon.”

Single-serve market 

Considering the country as a whole, single-serve and filter pods are not very popular. Household penetration is less than 1% but consumption in capsules increased by 46.5% between 2012 and 2013. They are a big hit among the high and middle classes, where the buying power is greater. These consumers are open for new experiences associated with glamour and exclusive products and brands. Nespresso (Nestlé’s single-serve espresso brand and Nescafe Dulce Gusto) built an empire the past 10 years. Once technology patents expired, the company was forced to share the market with local and international manufacturers.

TRES, Dolce Gusto, Delta Q, Illy, Saeco, Pilão Senseo, Krups, and Delonghi are investing huge amounts of money in marketing rival products for the home.

“The secret to making money in this market is not just having great coffee in the capsules. The key point is offer and distribute lots of machines that can extract the coffee. With no or few machines in the market, no coffee is made,” explains Eliana Relvas the food engineer and coffee consultant for the supermarket Pão de Açúcar Group.

Anticipating this demand, lots of small and medium coffee growers are investing in capsules. Usually they contract with private label manufacturers like Kaffa Café Brasil to roast and put their coffee in capsules compatible with Nespresso technology. How long will this continue? Nestlé’s is always seeking find ways to get an exclusive technology to prevent the competition from supplying coffee for use in their machines.

For this specific market–pods and single-serve–the state of São Paulo and South region have great potential to grow in a short term, even if the country is facing a technical recession.

Two new capsule factories

Together, Tres Corações Group and Dolce Gusto (Nestlé) are investing approximately $100 million in new capsule factories in Brazil. With local production, capsules are more sustainable (avoiding trips abroad with the green coffee and returning the final product). Development of the local manufacturing also benefits the local economy and employment.

Coincidently (or not), both companies chose the same city to start the build their first facilities: Montes Claros located in the north region of Minas Gerais state. According to the Três Corações executive manager, Jefferson Deywis, $21 million (R$85 million) was invested to meet the high demand for their multi beverage machine TRES. While under construction the company teamed with an Italian manufacturer Cafittaly to produce three single-serve machines for the home and a foodservice model.

The 3 Corações Group began the first phase of construction in 2015 with capsules available during the second quarter of 2016.

The 100,000 sq. ft. (9,750 m2) Dolce Gusto factory also located in Montes Carlos is scheduled to open in December 2015. The company invested $74 million (R$200 million) in construction and will hire 90 workers to operate the plant with an additional thousand indirect jobs. According to Nestlé’s executives, supplying the domestic market is the main goal, but capsules will be exported to other Latin American countries such as Argentina, Uruguay, and Paraguay.

Brazil is one of the fastest growing markets for capsules due in part to the convenience of instant coffee.

“Capsule growth is not limited to developed markets,”observes Ross Colbert, managing director and global strategist for beverages at Rabobank. “It is not a great leap from decent quality instant to convert to pods or capsules. The common driver is convenience which bodes well for future growth of pods and capsules in developing markets,” he said.

Innovation in brewing systems will continue to attract consumers, he said.

Colbert cited a joint Brazilian venture between Whirlpool Corp. and AmBev who teamed up to introduce the Brastemp B-Blend, a capsule machine capable of producing 24 different beverages.