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DAVID E. BELL NATALIE KINDRED
Brasil Foods
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As he entered his São Paulo, Brazil, office on the morning of July 14, 2011, Brasil Foods CEO José Antonio do Prado Fay (pronounced “Fie”) took a deep breath, letting the events of the previous day sink in. After two years in regulatory limbo, Brazil’s antitrust authority had finally approved the combination of Sadia and Perdigão, two of Brazil’s largest food producers and best-known food brands, paving the way for Brasil Foods (BRF)—the name of the combined firm—to begin operating as one entity. With 110,000 employees and net sales of R$22.7a billion in 2010, BRF sold some 3,000 products, including poultry, pork, beef, processed meats, dairy, margarine, pastas, frozen dishes and vegetables, and other processed products. The company controlled 9% of the global protein trade and had a 60% to 80% market share in several processed food categories in Brazil.1
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Fay was about to present to his employees an ambitious goal for the hours-old company: to double BRF’s sales in five years, to R$50 billion, through domestic and international expansion. Domestically, BRF would focus on maintaining its retail share (within the bounds of the antitrust ruling) and gaining share in the fast-growing foodservice sector. Internationally, the company would seek to transform from an exporter into a multinational modeled after Nestlé, to be achieved by building units or acquiring companies with strong brands in emerging markets.
No
Fay believed BRF had unmatched operational know-how—the ability to manage the complex, interdependent stream of ingredients needed to create its diverse portfolio of products—along with a deep understanding of consumers and brands. However, he recognized that BRF was very much a Brazilian firm, with expertise specific to the domestic market. To build BRF into a multinational, Fay needed a global team that understood local conditions in foreign markets. He also needed to decide where to expand first. Latin America, the Middle East, Africa, and Asia were all attractive, but each entailed tradeoffs. Another concern was the integration of Sadia and Perdigão employees. The two firms had a tense history as industry rivals; their combination was analogous to a merger—virtually unimaginable—of U.S. rivals Coca-Cola and Pepsi. Dealing with potentially divisive allegiances could be difficult.
Do
At a time when firms in mature markets were struggling to find ways to grow, BRF management’s chief concern was failing to capitalize on the vast opportunities it faced. The sense that victory was theirs to lose created an intense, if exhilarating, type of pressure. “We have the basis to grow. We know what to do. The question is how to do it,” said Fay. “If we don’t double sales in five years,” he added, “then we must’ve done something very, very wrong.” a R$ is the symbol for the Brazilian currency, the real. On July 1, 2011, R$1 = US$0.635 or €0.438.
________________________________________________________________________________________________________________ Professor David E. Bell and Research Associate Natalie Kindred, Global Research Group, prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2011, 2012 President and Fellows of HarvardCollege. To order copies or request permission to reproduce materials, call 1-800-5457685, write Harvard Business School Publishing, Boston, MA02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
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Booming Brazil
Brazil’s economy expanded 7.5% in 2010, its fastest pace in 24 years.2 A rapidly growing middle class fueled domestic demand, harnessing its purchasing power—real personal disposable income increased an average of 5.8% from 2007 to 20103—to buy cars, flat-screen televisions, washing machines, vacations, and meals at restaurants.4 Investment was strong, reflected in a 22% rise in capital spending in 2010.5 In what The New York Times called a “gold rush mind-set,” foreign workers of all income levels were flocking to Brazil; its foreign work permits spiked 144% from 2006 to 2010.6 In Brazil’s top cities, signs of growing wealth abounded: prices for office space in exclusive neighborhoods exceeded those in New York City,7 and demand for helicopter transport, a way to bypass traffic gridlock, had made São Paulo the helicopter capital of the world.8
Agricultural Transformation
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Brazil still had significant problems. Experts worried about the economy overheating, citing inflation above 6%. The strong currency threatened to undermine manufacturing and export competitiveness and curtail tourism; $6.00 Big Macs and $35 martinis took a toll on vacation budgets.9 (Exhibit 1 shows a currency chart.) Poor infrastructure, corruption, regulatory red tape, and other factors raised the cost of doing business. Despite low unemployment and the migration of millions out of poverty, stark income inequality persisted, fueling social tension and crime. Yet, societal ills notwithstanding, there was a sense in Brazil that the country’s long-anticipated ascendance to worldwide prominence was, in 2011, finally being realized.
No
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Brazil’s economic story was closely linked to its agriculture sector. A net food importer as late as the 1980s, Brazil had embraced agronomic science and innovation—through its national agricultural research institution, Embrapa (Empresa Brasileira de Pesquisa Agropecuária)—to find ways to leverage its huge land base and water supply for food production.10 The results were profound. In roughly three decades, Brazil transformed its vast savannah (cerrado), naturally nutrient-poor and unfit for farming, into the source of 70% of its farm output.11 Exports were diversified beyond traditional tropical products (e.g., coffee, orange juice) to soybeans, sugar, and meat. 12 Embrapa reengineered an African grass to create a new variety with yields far exceeding those of native cerrado grass, enabling the creation of vast pastureland to support large beef herds.13 Meanwhile, increased grain output was used to expand poultry production. Multiplying these measures’ economic impact were Brazil’s privatization and deregulation reforms, which laid the structural groundwork for an extended period of high investment and growth (see Exhibit 2).14 From 1996 to 2006 alone, the total value of Brazil’s crops increased 365%.15 By 2010, Brazil had become a world-leading food exporter (alongside Argentina, Australia, Canada, the European Union, and the U.S.) and the first major exporter in a tropical region.16 The country was first or second in poultry, sugar cane, ethanol, and soybean exports, and it housed the world’s second-largest cattle herd.17
Do
Brazil still had significant room to expand food production: it had the world’s largest renewable water supply and was only using 50 million hectares (ha) of its 300-400 million ha of potentially arable land.18 There was no shortage of customers, either: by one estimate, meat output alone would have to double from 2010 to 2050 to satisfy worldwide demand.19 As global population growth raised the specter of severe food shortages in the coming decades, Brazil would play a central role—both as a food supplier to the world, and as an example of innovation’s potential to improve food production. “The world is facing a slow-motion food crisis now,” said The Economist in 2010. “It should learn from Brazil.”20
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Brasil Foods History Perdigão
Perdigão (“partridge” in Portuguese) originated in 1934 as a grocery store founded by Italian immigrants in the remote southern state of Santa Catarina, Brazil. By the 1960s, it had become a vertically integrated producer of pork and chicken, raising its own livestock and operating animal feed, slaughtering, and processing facilities, as well as a distribution subsidiary. In the 1970s and 1980s, it diversified into soy, canned vegetables, beef, and other meat products (e.g., salami).21 Perdigão was one of the first Brazilian food companies to use automated processing equipment for poultry. It was also an early poultry exporter—first to Saudi Arabia and later to Japan and Europe.
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Financial troubles in the early 1990s led Perdigão’s founders’ families to sell their controlling stake to a pool of pension funds. Under new professional management, Perdigão restructured, divested noncore operations, modernized its facilities, and moved into higher-margin, value-added products (e.g., frozen and ready-made meals). It also began producing dairy, beef, and margarine products. By 2008, Perdigão had 59,000 employees and gross sales of R$13.2 billion (62% domestic and 38% exports). Listed on BOVESPA, Brazil’s stock exchange, the company had a market value of USD3.9 billion.
Sadia
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Sadia (“healthy” in Portuguese), also founded in Santa Catarina, originated in the 1940s as a processor and seller of grain and pork products. In the following decades, it expanded its commercial operations and entered the poultry market. It also grew its presence in Brazil’s beef market and began producing branded processed and frozen meats. By the 1980s, Sadia was exporting frozen chicken to the Middle East and pork and beef to the U.S. and Europe. It was also focused on Asia, where rising income and increased protein consumption mirrored market trends in Brazil.22 By 1990, Sadia had grown to comprise more than 20 companies and had a portfolio of value-added offerings, including frozen and ready-to-eat meals and other processed foods.23
No
In 2008, Sadia’s revenues totaled R$12.2 billion (58% domestic and 42% exports). Listed on BOVESPA, Sadia had a market value of USD2.4 billion. With about 47,750 employees, the company was known for its expertise in branding and marketing.
Partnership and Rivalry
Do
Despite being fierce competitors, in April 2001 Sadia and Perdigão formed a joint venture, called Brazilian Food Trading, for exporting to Africa, the Caribbean, and Russia.24 Although the partnership generated decent returns, it ended in 2002, with Perdigão buying Sadia’s stake. One publication reported that the disintegration had stemmed from a dispute over how to navigate the Russian market.25 Another simply attributed the breakup to “incompatible philosophies.” 26 Tensions were further stoked four years later, when Sadia launched and failed in a hostile takeover bid for Perdigão.27 “This uncertainty created an emotional rollercoaster,” noted one employee. He added: “I’ve never seen companies that hated each other as much as Perdigão and Sadia.”
The Merger and Antitrust Hurdles Sadia’s urgent need for a buyer in 2009 resulted from wrong-way currency hedges made by members of its financial team. The bets backfired when the real slumped more than 30% amid the 3 This document is authorized for use only by Cristian-Aurelian Popescu at University Politehnica of Bucharest until October 2013. Copying or posting is an infringement of copyright.
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global financial turmoil of 2008.28 In the second half of the year, Sadia recorded more than R$3 billion in derivatives-related expenses, leading to the first annual loss in its 65-year history. Although the business was healthy operationally, its financial problems forced it to seek a buyer.
“We certainly never planned that we would buy Sadia,” said Fay, then CEO of Perdigão. At the time, Perdigão had been considering other acquisitions, but “Sadia was much preferred,” Fay said. “First, it didn’t need a turnaround. It is rare to be able to buy a company like Sadia that doesn’t have a management or operational problem. Second, it was a branded company.” Merger talks were announced in March 2009 and finalized in June. The deal—a share swap that gave Perdigão and Sadia shareholders 68% and 32%, respectively, of the new entity (BRF)—was enabled by large credit lines extended by the Brazilian state development bank.29
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However, BRF hit a roadblock when the Administrative Council for Economic Defense (CADE), Brazil’s antitrust agency, opposed the deal based on fears it would stifle domestic competition and drive food inflation. In many grocery stores, Sadia and Perdigão products dominated the meat, dairy, and refrigerated food aisles. Thus, CADE’s position seemed largely intuitive—yet it was the government itself that had brokered the merger. This circumstance was not unusual: by statute, CADE could not preemptively stop deals; it could only unravel them after the fact, and its efforts often fell short.30 A 2007 study found that since the 1990s, when Brazil began liberalizing its economy, the market share of the top four firms in most sectors had actually increased.31 One explanation was government policies that effectively promoted industrial concentration. The creation of domestic conglomerates in strategic sectors (e.g., food, commodities) had been a policy goal of President Lula da Silva, who served from 2002 until being succeeded by Dilma Rousseff in 2011.32 To serve this goal, the government had coordinated several mergersb designed to give domestic firms the scale needed to compete internationally.33
No
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Given the government’s initial support, CADE’s resistance caught BRF’s management off guard. While BRF’s export businesses, which posed no threat to the domestic market, were able to integrate, most of Perdigão’s and Sadia’s domestic businesses could not. Thus, for two long years, much of BRF operated in merger purgatory. “We’ve had a plan in place with a line down the middle: things to do before antitrust approval and things to do after,” said Fay. Operating as a together-but-separate company could be both disruptive and awkward. At the São Paulo high-rise buildings that served as BRF’s headquarters, Sadia and Perdigão employees worked on separate floors but passed each other in halls and elevators, knowing that their fate—teammates or rivals?—was still an open question.
Do
The ruling As late as June 2011, a negative ruling from CADE seemed likely. Early that month, one CADE official announced he would vote against the merger, arguing, “Seldom do you see in our antitrust reviews such a deal that embeds such a huge probability of bringing about negative consequences to consumers.”34 His action caused a selloff of BRF shares, prompting the remaining CADE officials to suspend casting their votes in order to assess the potential market impact of a negative ruling. Widely covered in Brazilian media, the drawn-out CADE saga focused the public’s attention on the debate between domestic antitrust concerns and the desire to create so-called national champions—firms large enough to effectively compete on a global scale. Another BRF argument was that efficiencies from the merger would lead to lower domestic prices, not higher.
b The roots of this practice dated to the 1990s, when the government mobilized state-owned pension funds and public banks to
fund the privatization of state-run enterprises. Consequently, state entities were key stockholders in many large firms, including BRF. “Too little, too late,” The Economist, July 9, 2011, via Factiva, accessed July 2011.
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Finally, on July 13, CADE approved the merger. The ruling required BRF to divest or suspend assets accounting for about 13% of its revenues.35 It had to sell several factories, slaughterhouses, poultry farms, and distribution centers, and 12 (relatively minor) food brands, in addition to suspending sales of certain Perdigão-brand products for three to five years.36 Most or all of the divested assets would be sold to a single buyer, thereby creating an effective competitor. After the ruling, BRF shares on BOVESPA rose 9.8%.37 “The reason for this,” explained Augusto Ribeiro, planning and control director, “is that we were able to keep both the Perdigão and Sadia brands. We might have lost a good portion of our production capacity, but it is the strength of these brands that drives our value.” The conclusion of the CADE ordeal left the BRF executive team elated, but exhausted. Noted one executive on the day after the announcement: “Physically, I am dead. You cannot imagine the stress of the last two months here. You cannot imagine.”
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The Combined Company: Brasil Foods
The combination of Perdigão and Sadia created Brazil’s second-largest employer and third-largest exporter, trailing only the top oil and mining firms. With 2010 net sales of R$22.7 billion and EBITDA of R$2.6 billion, BRF was the world’s largest poultry exporter and second-largest meat exporter. (See Exhibit 3 for BRF’s logo, Exhibits 4 and 5 for financials, and Exhibit 6 for a stock chart.) In Brazil, where BRF’s distribution network reached 98% of the population, the company had a 57% share of frozen processed foods and 55% share of chilled processed foods, making it the unequivocal leader in both categories.38
Production and Supply Chain
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Production In 2010, BRF slaughtered 1.6 billion chickens and turkeys and 10.5 million pigs and beef cattle. It acquired its primary production inputs (grains, hogs, poultry, beef cattle, and milk) from an integrated network of 20,000 producers located within 100 kilometers (km) of its industrial plants. These producers—smallholders and midsized farmers—were required to enter an exclusive agreement with BRF and to adhere to stringent safety and quality standards. In turn, the company supplied them with animal feed and technical knowhow, along with a guaranteed sales outlet.
No
Located across 60 industrial sites, BRF operated 42 units for slaughtering and processing pork, beef, and poultry; 14 units focused on dairy products; 1 unit for soybean products; 2 for margarine production; and 1 for production of pizzas, pastas, desserts, and other processed products (see Exhibit 7 for locations). The distribution of farms and slaughtering units throughout Brazil helped hedge against the risk of trade bans due to safety problems with products from a particular region. BRF also operated three industrial plants outside of Brazil: a dairy plant in Argentina and Plusfood (BRF’s international division, acquired by Perdigão in 2007) plants in the U.K. and the Netherlands. In 2010, the company invested roughly R$1.1 billion to expand and modernize its productive capacity.
Do
Supply chain Using a fleet of 9,000 trucks, BRF delivered feed for 6.5 million chickens and 40,000 hogs per day to its producers, and transported animals to the slaughterhouses, raw material to processing plants, and final products to customers. “We are the only Brazilian company with a nationwide distribution network for chilled and frozen products, working from more than 70 distribution centers,” explained Luiz Henrique Lissoni, VP supply chain. BRF made 500,000 monthly deliveries to some 150,000 food retailers. It rarely used wholesale distributors, instead selling directly to retailers or to their distribution centers. The three nationwide food retailers (Companhia Brasileira De Distribuição (CBD), Carrefour, and Wal-Mart) and about 30 regional retailers accounted for 5 This document is authorized for use only by Cristian-Aurelian Popescu at University Politehnica of Bucharest until October 2013. Copying or posting is an infringement of copyright.
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roughly 50% of the retail market. The rest was highly fragmented and consisted of mom-and-pop stores with one to four checkout counters. “We evolved as a direct distributor because historically other wholesalers and distributors didn’t have the refrigerated logistical capacity we needed, so we had to do it ourselves,” explained Jose Cabral, VP commercial retail. Customers placed an average of three orders per month, and were visited by BRF distribution and sales personnel approximately once per week. An order placed before 5:00 p.m. would be fulfilled by 6:00 a.m. the following day.
Lissoni explained:
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BRF employed a sophisticated information technology (IT) system to constantly study the market and adapt accordingly. During deliveries, BRF personnel accessed the system through a handheld device, into which they entered a retailer’s sales and inventory data. When retailers placed an order through the system, BRFs salespeople were obliged to enter competitors’ prices for equivalent products. BRF then used this data to inform and adjust its product mix and pricing strategies.
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The operations strategy is a blend of own and outsourced assets, ensuring great operational flexibility, and this strategy is supported by development programs for operators. Operating a very complex value chain also demands that BRF conducts powerful and complex systems of planning and execution monitoring. Some of the systems are developed exclusively for the company ensuring world-class performance. More than 200,000 SKUs are negotiated daily by the procurement division, and international procurement offices will soon be in place in Asia, Europe and Southeast Asia assuring a competitive advantage on operating costs. Another strategic initiative supporting the process of globalization is the intelligence logistics division that designs and implements logistics processes, facilities and equipment across all operating logistics units.
Managing complexity BRF’s supply and production chain was a finely tuned machine designed to optimize resource use across its 3,000 products. Explained Cabral:
No
The production process for a pig that dies today began months ago through the genetics given to its grandmother. Once born, we give the pig to certain integrated partners who raise it for a specific period of time, and then it goes to other partners who fatten it up. Meanwhile, all of the food, medicine, and controls are provided by BRF. We repeat this process for chicken and beef to create some 3,000 SKUs. We must ensure continuous flow and control of animals to all the integrated producers. Then, once we kill the animal, we use every bit of it. Every piece of our portfolio depends on the other pieces. We need to produce the products and get them to customers quickly. Most of our products have a very short shelf life and many customers won’t accept a product that has surpassed more than a third of its shelf life. Added another BRF executive:
Do
In this industry, we disassemble something to produce something else. The mix of product cannot fluctuate too much. The implication of a new product must be planned well ahead with an understanding of our own capacity, because it all comes from within. For example, if we sell chicken wings to one customer, we need to find another customer for the breast and legs.
Another example was Sadia’s Premiata frozen pizza with chicken, which required protein-, grain-, and vegetable-based ingredients, each with different lead times and handling requirements. Supplying chicken breast for the pizza’s topping required coordination with products using chicken
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thighs, livers, etc. The system required meticulous planning, which Fay called “the central word in our business.”
To underscore the complexity of their system, the BRF team contrasted it with Unilever’s. Noted one executive: “BRF is a brand company that builds products from scratch. We have more risk and more upfront investment and planning. We cannot make one more sausage next month if I didn’t make an extra pig two months ago, whereas Unilever can just assemble stuff from elsewhere, make it into a shampoo, brand it, and sell it.” Added another: “When Unilever makes a deodorant, it buys the alcohol, powder, etc., combines them, puts them in a plastic container, and has a product with a three-year shelf life.”
Products and Markets
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Domestic With products priced in both the mid-market and premium segments and catering to children, adolescents, and adults, BRF provided products for nearly every eating occasion. BRF’s meat products, for example, ranged from value-added processed foods (e.g., frozen breaded chicken nuggets and mini hamburgers) to raw meat cuts and whole chickens. Dairy products included chilled yogurts and unrefrigerated (ultra-high temperature) milk,c among others. Other products included frozen vegetables, value-added desserts (e.g., frozen pies) and pastas (e.g., frozen lasagna). Its products were sold in virtually all established food retailers, frequently occupying a large share of shelf space in their respective categories (see Figure A for market shares). In domestic retail, all BRF products were branded. A market survey rated Perdigão and Sadia the most valuable brands in Brazil’s food sector. “If you go to a store and they don’t have Perdigão or Sadia products, the place is probably questionable. The brands sort of legitimize the establishment,” said one BRF manager. Sadia products were priced moderately higher than Perdigão products. For example, Sadia frozen pizzas in a São Paulo Wal-Mart sold for R$7.50 and Perdigão pizzas for R$5.90. BRF also marketed numerous other brands, such as Miss Daisy frozen desserts and Batavo, a line of dairy products.
No
BRF was Brazil’s leading player in foodservice, a growing market (15% per year compared to 7.5% in retail) with a presence in every major urban center (87% of Brazil’s population of 203 million lived in urban areas).39 BRF sold and distributed unbranded products to its foodservice customers, which included Brazil’s largest foodservice chains and franchises (e.g., McDonald’s, Burger King, and dozens of smaller chains). But 50% of foodservice was still “informal”—cash based—whose operators bought from cash-and-carry stores.
Do
Domestic sales in 2010 totaled R$13.5 billion, including R$9.5 billion in processed foods. Processed protein was only 8% of Brazilian protein consumption, compared to 53% in the U.S. and 30% in Mexico. (See Exhibits 8-10 for sales and market share data and Exhibit 11 for BRF product categories.)
c Ultra-high temperature (UHT) milk was processed to destroy bacteria and could be stored unrefrigerated until opened. Its
shelf life was roughly six months.
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Figure A
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BRF Domestic Market Shares (% of market by category), 2010 Specialty Meat
Frozen Meat
Pastas
Pizzas
Dairy Products
Margarines
Perdigão Sadia
26% 29%
31% 38%
32% 50%
35% 43%
11% --
15% 47%
BRF
55%
69%
82%
78%
11%
62%
Source: Company documents.
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Note: Table reflects market shares prior to the CADE decision, which resulted in lower shares in some cases.
Figure B
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International Unlike its domestic retail operations, BRF had been able to combine Sadia’s and Perdigão’s exporting operations before the CADE decision, and had already reaped many of the resulting synergies. The company operated 24 commercial offices outside Brazil, and its products and brands were present in more than 140 countries. (See Figure B for exports by region.) All of its exports were frozen. Most export revenues (R$9.2 billion in 2010, or 40% of total revenues) came from sales of unprocessed meat, of which 30% to 50% was branded (depending on the market and the retail channel). Key export brands included Sadia, positioned as a premium line with innovative, value-added products, and Perdix (Perdigão’s easier-to-pronounce international brand), positioned as a quality, mid-market line. (These largely mirrored the brands’ domestic attributes.) BRF also sold locally relevant products, such as its Halal line for Middle Eastern consumers, which competed with indigenous brands. The company did not have its own distribution systems in export markets, except for in Argentina, Chile, and parts of the Middle East, and therefore lacked direct relationships with retailers. In other markets, distribution was mainly to high-scale distributors, with some global accounts in foodservice and in smaller volumes to retail chains. BRF Exports by Region (% of BRF net sales from exports), 2010
Middle East
Europe
Eurasia
Other Countries
20.9%
19.0%
11.3%
16.9%
No
31.9%
Far East
Source: Company documents.
The Vision
Do
BRF’s strategic plan, titled “BRF 2015,” called for doubling the firm’s revenues between 2011 and 2015, to roughly R$50 billion. Fay saw the additional revenue arising from three more-or-less equal parts: organic growth in domestic and export sales, and through foreign acquisition. The expansion would be financed through retained earnings and better utilizing leverage. The domestic vision was two-pronged. In retail, BRF would focus on strengthening brand loyalty and preserving its existing market share (growth of which was restricted by the CADE ruling). Given the retail restrictions, the bigger domestic opportunity was foodservice, a fast-growing market as more Brazilians dined out. BRF’s nationwide distribution network and product profile, centered on staples such as milk, meats, and margarine, positioned it well to serve this channel. However, the 8 This document is authorized for use only by Cristian-Aurelian Popescu at University Politehnica of Bucharest until October 2013. Copying or posting is an infringement of copyright.
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company had to ensure that foodservice sales did not “leak into the retail channel” (i.e., foodservice customers selling BRF products into the retail market) and cause a violation of the CADE ruling.
Internationally, “BRF 2015” called for BRF to build the foundation of a multinational presence, with the ultimate goal of having production, distribution, and branding operations in Africa, Asia, the Middle East, and Latin America. In these emerging markets, BRF sought to move down the value chain and closer to the consumer, thereby building brand loyalty and capturing more value from each product sold. A critical step was to acquire companies with distribution capabilities in order to build direct relationships with retailers. Ideally, BRF’s acquisition targets would also have strong consumer brands, allowing it to learn about the local market while giving it a direct channel to cultivate consumer relationships.
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“BRF 2015” entailed three phases. In phase one (2011-2012), BRF would complete its post-merger integration, consolidate its domestic foothold, and advance its global presence through acquisitions and strategic partnerships. Phase two (2013-2014) would continue the internationalization effort with a focus on building a global company culture, both through development of existing personnel and recruitment of new talent; acquisitions would help bring in new expertise. In phase three (2015 and beyond), BRF would become a world-class multinational such as Nestlé or Unilever. BRF’s management envisioned setting up manufacturing plants around the globe and building a portfolio of brands which consumers viewed not as Brazilian, but as native to their local market.
The Domestic Opportunity Consumer Habits and Trends
No
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A mix of demographic, socioeconomic, and cultural trends were opening opportunities for frozen/chilled and processed foods in Brazil. Industrialized food products had become more common relatively recently—a byproduct of the country’s rapid economic growth. With more people moving into cities, entering the workforce, and raising their incomes, time and convenience were increasingly important considerations in food purchasing decisions. A study in São Paulo found that people spent just 15 minutes on average cooking a meal.40 “Convenience products have become much more appealing and substantial in terms of product mix,” noted a BRF marketing executive. “Frozen dinners aren’t rocket science to produce, but there was not a market for them in Brazil in 2000.” With incomes rising and millions of Brazilians entering the middle class—a trend projected to continue—spending on food in Brazil was forecast to grow from R$316 billion in 2009 to R$567 billion in 2015.41 In addition to processed and ready-to-eat foods, the foodservice category would benefit from these demographic trends. Already, spending on food away from home had risen from 24.1% of personal expenditures in 2002-2003 to 31.1% in 2008-2009.
Do
The largest meal for most Brazilians was eaten midday, so their evening meal was typically lighter; meat and cheese sandwiches were a common choice. 42 Other frozen and chilled foods such as chicken nuggets, hot dogs, and pizzas were popular with all consumers, especially children. 43 Meats in particular were an important element of the Brazilian diet—in traditional cuisine, at barbeques, and as quick meals. By 2015, poultry consumption was projected to rise 22% (to 9.8 million tons), pork 14% (to 2.9 million tons), and beef 11% (to 8.4 million tons). 44 In response, food companies were rolling out more premium meat products, especially deli meats and sausages.45 Although demand for dairy products had traditionally been low, growth was expected as personal incomes rose and the domestic dairy industry’s expansion afforded consumers easier access to its products.46 9 This document is authorized for use only by Cristian-Aurelian Popescu at University Politehnica of Bucharest until October 2013. Copying or posting is an infringement of copyright.
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Brands were important to the Brazilian consumer; private-label products had seen little traction. “Most major stores carry private label but it doesn’t add up to 5% of the product selection,” noted a BRF executive. He added that even lower-income consumers were focused on brands: “When you don’t have a lot of money, you must make good buying decisions. You can’t afford to make mistakes. So in Brazil, brands matter a lot. Consumers trust and are loyal to their favorite brands.”
The Frozen and Chilled Processed Food Industry
op yo
Brazil’s food and beverage processing industry generated revenues of R$291.6 billion in 2009 (R$246.6 billion from food). While exports were growing, domestic demand accounted for some 77% of revenue, generated primarily through food retailers, i.e., supermarkets and grocery stores.47 Frozen and chilled processed foods accounted for only a slice of the total food industry, with expected 2010 sales of R$3.7 billion and R$2 billion, respectively.48 (See Exhibits 12 and 13 for sales.) Among BRF’s top domestic competitors were Marfrig in chilled and frozen foods and JBS in beef products (see Appendix A for more on competitors). Large multinationals held only small market shares in Brazil (about 3% of frozen food sales in 2009), while international retailers such as Carrefour and Wal-Mart competed by offering store-brand products, accounting for 0.9% and 0.3% of frozen processed food sales, respectively, in 2009.49
The International Opportunity
tC
With BRF’s domestic growth restricted, Fay and his management team looked for international opportunities to sell protein-based and processed products, especially in developing countries with large and growing middle classes. Instead of simply exporting commodities and low-value-added goods to foreign customers, BRF wanted to move down the value chain by establishing local manufacturing, distribution, and marketing operations in international markets. The company would use Brazil as a major source of raw materials, but it also wanted to establish regional supply hubs.
No
As they considered markets for expansion, the BRF team agreed on several criteria: the target countries should face limits in their own food supply; be open to Brazilian exports so that BRF could use Brazil as a supply hub; and have sufficient sanitary conditions (or the potential to create them) in order to protect food safety and ensure that nearby markets would accept exports. They recognized that, unlike in Brazil, BRF would not be able to control its entire supply chain—at least not in the near term. However, an environment which BRF could cultivate as a supply hub was preferred. An established cold chain would be ideal, but was not essential; BRF could focus on shelf-stable products and consider building its own cold chain capability, as it had in Brazil. Moreover, the team believed BRF’s experience in Brazil’s rural north, where the cold chain was less developed, could hold lessons about distribution and product mix that could apply to rural regions in other markets.
Do
The company was also attuned to dietary trends in emerging markets. Per capita meat consumption in Brazil, the U.S., and Europe far outpaced that of Africa and most other developing regions. This posed a challenge but also an opportunity to leverage BRF’s marketing expertise to mold consumption habits. Additionally, low meat consumption was likely due, at least in part, to unsafe or small-scale production systems. “With the right systems in place, there is reason to believe that consumption of protein in emerging areas will grow significantly in the next 50 years, and BRF should be positioned to capitalize,” noted Leopoldo Saboya, VP finance, administration, and investor relations. If BRF targeted Africa, it would initially use Dubai as its base for accessing North Africa. The country of South Africa would be its base for Sub-Saharan markets. Some of the natural issues 10 This document is authorized for use only by Cristian-Aurelian Popescu at University Politehnica of Bucharest until October 2013. Copying or posting is an infringement of copyright.
[email protected] or 617.783.7860.
512-013
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inhibiting agricultural development in Africa were similar to those that plagued Brazil before the 1980s, suggesting that the innovations that transformed Brazil’s agriculture sector could be transferred to Africa.50 However, BRF was concerned that its lowest-possible price points could still be too high for most African consumers.
In the Middle East, BRF could pursue opportunities in Iraq, Kuwait, and Iran. In markets such as Saudi Arabia and United Arab Emirates, BRF had a long history, an established distribution network, and strong brand recognition. However, dietary restrictions could narrow the spectrum of products BRF could sell, and social and political volatility created a heightened operating risk.
op yo
Due to its proximity and cultural similarities, Latin America was a natural expansion choice, and BRF already had a presence in Argentina. Especially attractive was Mexico, a growing market with a large middle class, through which Brazilian exports could reach the U.S. However, Brazil lacked the cultural synergies with Mexico that it had with some other Latin countries. Moreover, food demand and opportunity was perhaps stronger in overseas emerging markets.
The opportunity in Asia, notably China and India, respectively the world’s first and second most populous countries, was potentially massive. Demographic and consumption trends were similar to Brazil, creating a growing market for processed and convenience foods. Many observers predicted China’s food needs would soon compel its government to seek major partnerships with food producers that had the scale necessary to serve the Chinese market. (See Appendix B for extended descriptions of selected markets.) BRF believed that by 2020, China would need to import a kilo of meat per capita per year, but not fresh. As one executive put it, “China and India can’t afford fresh.”
“We Want to Be Those Guys”
No
tC
Nestlé was not the only company mentioned by executives as a possible role model for BRF. Danone, ConAgra (because of their success in food) and Hyundai and LG (because of their ability to break through as global brands) were also cited—but not their fellow Brazilian food giant JBS. “JBS has an entirely different strategy,” explained Curt Zimmermann, chief information officer. “They are opportunistic and diversify a lot. They buy standalone companies that they don’t always integrate. Their approach to internationalization is to be present in several markets, but not necessarily using the same operational platforms and strategies. In contrast, we want to grow our global footprint by extending our existing assets—our processes, business model, brands, expertise—to other locations. And we’re only focused on food,” he added.
Do
Fay and his team believed the quality of BRF’s people, and their ability to work together, would ultimately determine their success. The first hurdle was integrating Sadia and Perdigão employees— a challenge for which there was no quick fix. One executive explained: “The combination of Sadia and Perdigão can’t be modeled. We can put systems in place for all of our procurement and distribution processes, we can model many things, but we can’t do this for merging two rivals.” Added Gilberto Orsato, head of human resources, “People from Sadia are proud to be from Sadia; the same is true with Perdigão. We need to align our vision and create the same pride under one company.” The other key personnel issue was building a globally capable team. Noted Orsato: The biggest challenge in HR is to get people who really think globally, who understand different markets and can execute based on that understanding. It can be difficult to even relate to people in new markets—even markets in distant parts of Brazil. So when we expand
11 This document is authorized for use only by Cristian-Aurelian Popescu at University Politehnica of Bucharest until October 2013. Copying or posting is an infringement of copyright.
[email protected] or 617.783.7860.
Brasil Foods
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internationally, we don’t want to just impose the Brazilian or the BRF way on local markets. We will need to have a management team that combines Brazilians who can relate to the parent company with local people who understand the local market.
In order to achieve their goal of doubling revenues by 2015, the BRF team next needed to focus on an international geography, weigh their options for expansion—e.g., greenfield development or acquisitions; if the latter, what type?—and build a team capable of executing the vision. At the same time, they needed to tend to the domestic market: stay attuned to consumer trends, strengthen brand loyalty, capitalize on foodservice growth, and expand within the limits of CADE’s rules.
Do
No
tC
op yo
Fay was conscious of these issues as he finalized his speech. As he prepared to deliver it via videoconference to BRF’s 110,000 employees, members of his executive team stopped by his office to share words of encouragement. Referring to BRF’s potential to succeed internationally, Cabral noted: “We have the science, the tools, to manage just about anything. It can’t get any more complicated than it is here.” Saboya shared his optimism: “If you travel the world, you don’t find companies like ours with the same scale and portfolio and margins. When we see this, we gain confidence in adapting our processes and business.” He paused, then added: “Yet there is one question I’m always asking myself: Why aren’t there any major international companies in our business—in chilled and frozen processed foods? There is no clear answer, but we strongly believe that BRF has all of the capabilities to be that company.” Was it because the opportunity was not quite ripe and BRF’s strategy was flawed? Or had no company, until BRF, been capable of pursuing it?
12 This document is authorized for use only by Cristian-Aurelian Popescu at University Politehnica of Bucharest until October 2013. Copying or posting is an infringement of copyright.
[email protected] or 617.783.7860.
Exhibit 1
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R$ per $US and Real Effective Exchange Rate, a 1990-2011b
3.5
120.0
3.0
100.0
2.5
80.0
2.0
60.0
1.5
40.0
1.0 Exchange rate LCU:US$ (av) 0.5
Real effective exchange rate
0.0
op yo
0.0
20.0
Real Effective Exchange Rate
Exchange Rate (real:US dollar avg)
rP os t
Brasil Foods
Source: Compiled by casewriter via Economist Intelligence Unit, accessed September 2011. a Real Effective Exchange Rate is a trade-weighted basket of currencies converted to an index (1997=100) and adjusted for
relative price movements. b 2011 rates are estimates.
Exhibit 2
Brazil Inward Direct Investment (US$ billions) and Real GDP Growth (%), 1985-2010
50 40 30
20
No
10
tC
Inward direct investment (US$)
GDP (% real change per annum)
8 6
4 2 0
-2 -4
-6
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
0
10 GDP (% real change per annum)
Inward Direct Investment (US$ billions)
60
Source: Compiled by casewriter via Economist Intelligence Unit, accessed September 2011.
BRF Logo
Do
Exhibit 3
Source: Company documents.
13 This document is authorized for use only by Cristian-Aurelian Popescu at University Politehnica of Bucharest until October 2013. Copying or posting is an infringement of copyright.
[email protected] or 617.783.7860.
Brasil Foods
Exhibit 4
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BRF Consolidated Income Statement, 2009 and 2010 a (R$ thousands) 2010 22,681,253 (16,951,152) 5,730,101
2009 15,905,776 (12,728,866) 3,176,910
(3,523,073) (332,882) (393,901) 4,335 1,484,580 (1,363,317) 880,191
(2,577,052) (222,221) (302,798) 2,511 77,350 (1,262,566) 1,525,055
1,001,454 (130,551) (65,907) 804,996
339,839 (80,232) (141,016) 118,591
804,106 890
123,015 (4,424)
tC
op yo
Net sales Cost of sales Gross profit Operating income (expenses) Sales General and administrative Other operating income (expenses) Equity interest in income of subsidiaries Operating Income Financial expenses Financial income Income before taxes and participation of non-controlling shareholders Income and social contribution taxes (expense) Deferred income and social contribution taxes (expense) Net income Attributable to: BRF shareholders Non-controlling shareholders Average outstanding shares at the end of the year (thousands) - Basic Earnings per share - basic Average outstanding shares at the end of the year (thousands) - Diluted Earnings per share - diluted
870,887,093 0.92
604,119,958 0.20
875,538,749 0.92
606,044,378 0.20
Source: Company documents.
Do
No
a Fiscal year-end December 31.
14 This document is authorized for use only by Cristian-Aurelian Popescu at University Politehnica of Bucharest until October 2013. Copying or posting is an infringement of copyright.
[email protected] or 617.783.7860.
Exhibit 5
512-013
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Brasil Foods
BRF Consolidated Balance Sheet, 2009 and 2010a (R$ thousands)
Assets
2010
2009
2,310,643 863,806 2,565,029 2,135,809 900,681 695,892 62,245 98,596 219,429 9,852,130
1,898,240 2,345,529 2,140,701 2,255,497 865,527 745,591 47,891 27,586 351,377 10,677,939
377,653 6,950 93,136 767,407 2,487,612 234,085 377,684 223,301 17,494 9,066,831 4,247,264 17,899,417
676,681 12,808 92,620 653,074 2,426,412 135,885 391,192 149,167 17,200 8,874,186 4,276,463 17,705,688
2,227,713 2,059,196 387,358 210,832 193,098 111,345 82,164 65,138 349,540 5,686,384
3,200,562 2,089 1,905,368 341,134 183,635 92,629 75,445 87,088 91,349 379,931 6,359,230
4,975,226 64,175 1,053,740 1,635,677 274,498 1,265 424,064 8,428,645
5,853,459 5,951 940,259 1,456,425 249,728 522,916 9,028,738
12,460,471 69,353 1,064,688 (739) 35,194 13,628,967 7,551 13,636,518 27,751,547
12,461,756 62,767 727,688 (186,131) (27,587) (47,555) 12,990,938 4,721 12,995,659 28,383,627
Do
No
tC
op yo
Current assets Cash and cash equivalents Marketable securities Trade accounts receivable, net Interest on shareholders' equity receivable Inventories Biological assets Recoverable taxes Assets held for sale Other financial assets Other current assets Total current assets Non-current assets Marketable securities Trade accounts receivable, net Credit notes Recoverable taxes Deferred income tax Judicial deposits Biological assets Receivables from related parties Other current assets Investments Property, plant and equipment Intangible assets Total noncurrent assets Liabilities Current liabilities Short-term debt Debentures Trade accounts payable Payroll and related charges Tax payable Interest on shareholder's equity Management and employees profit sharing Debts with related companies Other financial liabilities Provision for tax, civil and labor Other liabilities with related parties Other current liabilities Total current liabilities Non-current liabilities Long-term debt Social and tax payables Provision for tax, civil and labor Deferred income tax Other liabilities with related parties Employee benefit plan Share based payments Other non-current liabilities Total noncurrent liabilities Shareholder's equity Capital Capital reserves Profit reserves Retained earnings (losses) Treasury shares Other comprehensive income Parent company shareholders' equity Non-controlling interest Shareholders' equity Total liabilities and shareholders' equity
Source: Company documents. a Fiscal year-end December 31.
15 This document is authorized for use only by Cristian-Aurelian Popescu at University Politehnica of Bucharest until October 2013. Copying or posting is an infringement of copyright.
[email protected] or 617.783.7860.
Brasil Foods
Exhibit 6
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BRF Weekly Stock Price (R$), January 2010-July 2011 (ending July 11)
35
30
Brazilian Reais
25 20 15 10
5 0
op yo
-5
Source: Compiled by casewriter via Capital IQ, accessed July 2011.
BRF Industrial Units and Distribution Centers in Brazil (represents pre-merger approval)
No
tC
Exhibit 7
#
Distribution centers:
#
Do
Industrial units:
Source: Company documents.
16 This document is authorized for use only by Cristian-Aurelian Popescu at University Politehnica of Bucharest until October 2013. Copying or posting is an infringement of copyright.
[email protected] or 617.783.7860.
Exhibit 8
512-013
rP os t
Brasil Foods
BRF Net Sales by Product Category (% of net sales), 2010
Processed Products
Poultry
Pork/Beef
Other Processed
Milk
Dairy Products
Other
37.2%
30.4%
10.6%
9.3%
7.0%
3.2%
2.4%
Source: Company documents.
op yo
Exhibit 9 Selected Company Shares of Brazil’s Frozen Processed Food Market, 2005-2009 (% of retail value) Company
Totalsa
tC
BRF Sadia Perdigão Laticinios Condessa Ltda DaGranja Agroindustrial Ltda Bonduelle do Brasil Comercial Ltda Seara Alimentos SA Carrefour Comercio e Industria Ltda McCain do Brasil Alimentos Ltda JBS SA General Mills do Brasil Ltda
2005
2006
2007
2008
31.0 23.0
28.6 22.9
30.6 22.2
31.6 22.9
2.1 1.7 1.3 0.5 1.0 4.2
2.0 1.6 1.4 0.6 0.9 0.3 3.8
1.8 1.8 1.3 0.9 0.7 0.7 3.7
1.8 1.5 1.3 0.8 0.7 0.7 3.2
100
100
100
100
2009 57.4
2.3 1.8 1.5 1.0 0.9 0.7 0.6
100
Source: Adapted from “Frozen Processed Food—Brazil,” Euromonitor International, September 2010, pp. 5-6, www.euromonitor.com, accessed August 2011.
Do
No
a Company shares will not add to total due to omission of selected companies.
17 This document is authorized for use only by Cristian-Aurelian Popescu at University Politehnica of Bucharest until October 2013. Copying or posting is an infringement of copyright.
[email protected] or 617.783.7860.
Brasil Foods
Exhibit 10
BRF Domestic, Export, and Total Sales by Category, 2009-2010 Thousand Tons 2010 2009
Sales
% Ch.
DOMESTIC MARKET: 1,837 400 255 145 1,437 1,075 873 202 455 389 3,756
1,722 340 216 124 1,382 1,001 793 208 402 454 3,580
7 17 18 16 4 7 10 (3) 13 (14) 5
2,094 62
1,993 62
2,278 1,922 1,640 282 357 3 -3 18 6 2,306
2,147 1,818 1,529 289 329 4 2 2 18 8 2,177
378 38
348 38
Meats In natura Poultry Pork/beef Elaborated/processed (meats) Dairy products Milk Dairy products/juice/others Other processed Soybean products/others Total
4,115 2,322 1,895 427 1,793 1,078 873 205 473 395 6,062
Processed % Total Sales
2,472 41
Processed % Total Sales
EXPORTS:
Processed % Total Sales
No
TOTAL SALES:
tC
Meats In natura Poultry Pork/beef Elaborated/processed (meats) Dairy products Milk Dairy products/juice/others Other processed Soybean products/others Total
R$ Million 2010 2009
% Ch.
8,668 1,930 1,039 891 6,738 2,292 1,585 707 2,026 529 13,515
7,844 1,306 760 546 6,538 2,139 1,437 702 1,612 551 12,148
10 48 37 63 3 7 10 1 26 (4) 11
5
9,472 60
8,853 58
7
6 6 7 (2) 8 (28) (92) 45 4 (30) 6
9,051 7,361 5,847 1,515 1,690 20 1 19 91 4 9,166
8,618 6,923 5,532 1,391 1,695 22 12 10 120 29 8,789
5 6 6 9 -(10) (92) 96 (24) (85) 4
8
1,799 40
1,825 42
(1)
3,869 2,158 1,745 413 1,711 1,005 795 210 420 462 5,757
6 8 9 3 5 7 10 (3) 13 (15) 5
17,719 9,291 6,886 2,406 8,428 2,311 1,585 726 2,117 533 22,681
16,463 8,229 6,292 1,937 8,234 2,161 1,450 711 1,732 580 20,937
8 13 9 24 2 7 9 2 22 (8) 8
2,341 41
6
11,271 50
10,677 51
6
op yo
Meats In natura Poultry Pork/beef Elaborated/processed (meats) Dairy products Milk Dairy products/juice/others Other processed Soybean products/others Total
Do
rP os t
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Source: Company documents.
18 This document is authorized for use only by Cristian-Aurelian Popescu at University Politehnica of Bucharest until October 2013. Copying or posting is an infringement of copyright.
[email protected] or 617.783.7860.
BRF Product Categories in Domestic and Export Markets
Do
No
tC
op yo
Exhibit 11
512-013
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Brasil Foods
Source: Company documents.
19 This document is authorized for use only by Cristian-Aurelian Popescu at University Politehnica of Bucharest until October 2013. Copying or posting is an infringement of copyright.
[email protected] or 617.783.7860.
Brasil Foods
Sales of Selected Frozen Processed Foods in Brazil, 2006-2011a (R$ millions)
Ready meals Pizza Poultry Red Meat Vegetables Bakery Potatoes Desserts Fish and seafood Totalb
2006
2007
2008
419.7 462.3 511.2 472.1 263.0 199.0 108.2 49.5 37.4
485.3 529.0 541.6 498.1 282.9 198.8 110.5 56.1 28.3
595.3 562.0 588.5 543.3 282.1 200.8 134.0 64.7 32.3
2,568.1
2009 671.6 673.9 640.9 525.3 325.9 215.0 143.1 73.3 38.5
2010
2011
759.9 751.4 690.7 549.5 354.6 231.4 153.5 82.0 42.9
836.7 809.2 721.5 576.8 368.4 237.3 164.6 86.1 46.1
op yo
Exhibit 12
rP os t
512-013
2,767.8
3,040.9
3,347.8
3,658.0
3,889.2
Source: Adapted and compiled from “Frozen Processed Food—Brazil,” Euromonitor International, September 2010, pp. 3, 8, www.euromonitor.com, accessed August 2011. a 2011 data is estimated.
b The numbers in the table do not add to the total due to rounding and omission of some categories.
Exhibit 13
Sales of Selected Chilled Processed Foods in Brazil, 2006-2011a (R$ millions) 2007
tC
2006 Meat Pasta Pizza Salads
2009
2010
2011
1,284.4 208.6 76.9 6.5
1,435.2 231.6 80.3 9.4
1,472.0 264.6 85.1 13.4
1,544.1 284.1 88.1 17.0
1,629.7 313.8 91.2 22.4
1,723.3 311.8 93.5 29.7
1,576.4
1,756.5
1,835.1
1,933.3
2,057.1
2,158.3
No
Totalsb
2008
Source: Adapted and compiled from “Chilled Processed Food—Brazil,” Euromonitor International, September 2010, pp. 2-3, 6, www.euromonitor.com, accessed August 2011. a 2011 data is estimated.
Do
b The numbers in the table do not add to the total due to rounding.
20 This document is authorized for use only by Cristian-Aurelian Popescu at University Politehnica of Bucharest until October 2013. Copying or posting is an infringement of copyright.
[email protected] or 617.783.7860.
Appendix A
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Selected BRF Competitors
Tyson Foods, Inc.
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In 2010, U.S.-based Tyson Foods, which ranked 93rd on the Fortune 500, recorded $28.4 billion in sales and $780 million in net income. The company, employing 115,000 workers, was a global leader in meat products and value-added meat-based processed foods. Beef accounted for about 40% of Tyson sales, chicken for 34%, pork for 16%, and prepared foods for 10%. In a given week, Tyson processed 41 million chickens, 393,000 heads of pork, and 139,000 heads of cattle. Tyson exported to more than 100 countries, with total export sales of $3.2 billion in 2010. The company’s major export markets were Canada, Central America, China, the EU, Japan, Mexico, the Middle East, Russia, South Korea, and Taiwan. In 2010, Tyson had a total debt-to-equity ratio of 49.1%.
JBS S.A.
tC
One of Tyson’s largest competitors in meat processing, Brazil-based JBS had sales of R$55.1 billion and net income of R$196 milliona in 2010. JBS was a world-leading beef producer and exporter, and employed over 128,000 people globally. The company had a daily slaughtering capacity of over 86,000 cattle, 7.9 million birds, 50,000 hogs, and 24,000 sheep. Unlike Tyson, which had mainly grown organically, JBS became a major global processor of beef, pork, poultry, and lamb through acquisitions. Beef accounted for 64% of JBS revenues, chicken for 22%, and pork for 9% (the rest came from other products). A 2009 deal to buy Pilgrim’s Pride, a U.S. poultry producer, made JBS the second-largest poultry processor in the world. In 2011, JBS had 140 production facilities across the globe, including major operations in China, Mexico, Russia, Paraguay, and Uruguay. JBS exported to Africa, Mexico, and the Middle East, but the majority of revenues came from the U.S. and Australia (73%) and South America (24%). In 2010, JBS had a total debt-to-equity ratio of 106%.
Marfrig Alimentos S.A.
No
Brazil-based Marfrig Alimentos had net sales of R$15.9 billion and net income of R$146.1 million in 2010. With 90,000 employees and 22 regional distribution centers, the company serviced markets in 140 countries. Marfrig’s daily processing capacity could support 31,700 cattle, 10,400 hogs, 12,900 sheep, 50,000 turkeys and 3.7 million chickens. Beef accounted for roughly 31% of Marfrig’s 2010 net revenues, poultry and pork for 30%, processed and prepared food for 28%, and other foods for about 12%. In its drive to expand internationally, Marfrig pursued an acquisitive strategy. From 2006 to 2010, it purchased meat processing facilities in Argentina, Brazil, the U.K., Uruguay, and the U.S. The company had a large commercial presence in Australia, China, France, Malaysia, the Middle East, New Zealand, Thailand, South Korea, the U.S., and the U.K. In 2010, Marfrig earned 62% of total revenue in the domestic market and 38% from exports and international holdings. Europe was its largest export market. In 2010, Marfrig had a total debt-to-equity ratio of 325.9%b.
Do
Source: Tyson Foods, October 2, 2010 10-K (Springdale: Tyson Foods, 2010), http://phx.corporate-ir.net/External. File?item=UGFyZW50SUQ9NDA3ODk3fENoaWxkSUQ9NDE3NDE4fFR5cGU9MQ==&t=1; Thomson ONE Banker; Tyson Foods, Inc. Profile, Hoover’s Inc., www.hoovers.com; JBS SA 2010 Annual Report (Sao Paulo: JBS SA, 2010), http://mrm.comunique-se.com.br/arq/148/arq_148_219637.pdf; JBS S.A. Profile, Hoover’s Inc., www.hoovers.com; JBS website; Marfrig Alimentos 2010 Management Report, pp. 5-6, http://ir.marfrig.com.br/eng/ downloads/demonstracoes/RADM_ENG_2010_VFINAL.pdf; Marfrig Group website, http://ir.marfrig.com.br/eng/ grupomarfrig/perfil.asp; Marfrig Alimentos 2010 Management Report; all accessed September-October 2011. a Figure does not include non-reoccurring expenses and a fee paid to debenture holders in 2010. b Equity does not include $R2.5 billion of debentures convertible into shares.
21 This document is authorized for use only by Cristian-Aurelian Popescu at University Politehnica of Bucharest until October 2013. Copying or posting is an infringement of copyright.
[email protected] or 617.783.7860.
Brasil Foods
Appendix B
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Frozen and Chilled Processed Food Sales in Selected Emerging Markets
China
op yo
In 2010, Chinese consumers purchased 2.1 million tons of frozen processed foods with a sales value of about RMB 37 billion.a Frozen processed meat products (including seafood) accounted for roughly RMB 19 billion in sales, or 52% of total frozen processed food sales. Miscellaneous products (e.g., frozen dumplings and filled buns) comprised another 30% of category sales. Sales of frozen poultry amounted to RMB 9.5 billion, seafood to RMB 6.3 billion, and red meat (primarily mutton), RMB 3.4 billion (409,200 tons, 251,800 tons, and 94,400 tons by weight, respectively). The most popular frozen processed poultry products were chicken wings (30% of category sales) and chicken nuggets (22.5%). In chilled processed foods, which had 2010 sales of about RMB 74 billion (close to 2 million tons), meat products (e.g., sausages and ham) dominated, with sales of RMB 73.3 billion (1.9 million tons). Chilled ready meals generated RMB 988 million in sales (43,200 tons). China’s frozen processed foods market share was fragmented among a large number of firms. According to Euromonitor, only four firms held individual market shares above 3%. China’s top 15 firms collectively held about 40% of the frozen processed food market. The only foreign firm in this group of 15 was General Mills, which held a 2.7% market share in frozen processed foods. Domestic companies likewise dominated the chilled processed food market. China’s Shineway Group held 15.2% of this market; the next 12 companies held less than 12% combined.
tC
Like its manufacturers, China’s cold chain infrastructure was fragmented. In 2008, only 15% of perishable products were transported by refrigerated vehicles, compared to 90% in developed economies. China’s cold storage facilities covered about 25% of perishable output, compared to 80% to 90% in developed countries. Approximately 90% of meat products and 80% of aquatic products in China were managed without cold chain logistics. One survey found 96% of Chinese consumers were “very concerned” about food safety. They therefore chose supermarkets and hypermarkets rather than traditional wet markets as the source of 70% of their chilled foods and 92% of frozen food purchases.
No
It was estimated that China would require $100 billion in cold chain infrastructure over the decade ending 2019. Absent sufficient infrastructure, value growth in frozen processed food sales would be constrained to a projected 9.6% compound annual growth rate (CAGR) from 2010 to 2015. Chilled processed foods sales had a forecast CAGR of 12.4% from 2011 to 2016.
India
Do
In 2010, Indians purchased 14,740 tons of frozen processed foods with a sales value of 2.5 billion rupees (Rs).b Poultry, red meat, and seafood accounted for about Rs 1 billion, or 41% of total frozen processed foods sales. Vegetables accounted for Rs 1.1 billion, nearly 44% of total frozen processed foods sales. Within the meat category, sales of poultry amounted to Rs 429 million, seafood to Rs 384 million, and red meat to Rs 193 million (1,763 tons, 1,031 tons, and 690 tons, respectively). While frozen processed food consumption remained low in India, chilled processed foods had even less traction, due to lower availability and higher prices than frozen processed and fresh foods. With the exception of the 4.2% share held by Canada-based frozen potato producer McCain Foods, India’s leading frozen processed food companies were all locally domiciled. The three leading companies included Mother Dairy Fruit and Vegetable (20.8% share of retail sales), Al Kabeer Exports (16.5%), and Venky’s India (10.9%). Another six firms held a collective 30% market share.
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Sales (by value) of frozen processed foods were expected to accelerate from 2010 to 2015 at 11.6% CAGR. Poultry sales were expected to grow at a CAGR of 11.4%, red meat at 9.6%, and seafood at 8.8% over the period. However, India’s insufficient cold chain infrastructure was likely to be an obstacle to achieving this level of growth. As much as 30% of India’s fresh produce was lost due to lack of cold chain infrastructure. Consumers’ need for microwaves and ovens to prepare frozen and chilled foods was another factor limiting growth.
South Africa
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In South Africa in 2010, retail consumers purchased 102,000 tons of frozen processed food with a sales value of 4.2 billion Rand (R).c Red meat, fish, and poultry comprised 21% of the total weight sold, and R1.1 billion, or 27% of the total value sold. Frozen processed fish and seafood had sales of R674 million, poultry R281 million, and red meat R181 million (12,000 tons, 5,900 tons, and 4,200 tons respectively). Other leading categories of frozen processed foods included vegetables (sales of R820 million) and ready meals (R965 million). Protein products dominated the chilled processed food category, which had 2010 sales of R8.6 billion (roughly 17% seafood and 63% other meat, mainly pork products) and 96,000 tons by weight (12% seafood and 64% other meat). Chilled processed foods were generally perceived as fresher and therefore commanded a higher unit price than frozen foods.
Leading frozen processed food companies selling in South Africa included McCain Foods (primarily potatoes; Canada-based), with a 21.8% market share, Irvin & Johnson (primarily meat, South Africa-based) with a 14.7% share, and Woolworths Holdings (South Africa-based retailer, at 10.1%). Eight additional companies collectively held another 30% of the market. In chilled processed foods, South Africa’s Tiger Brands led with 31% market share, followed by Woolworths Holdings (19%) and Eskort Bacon Cooperative Ltd. (17%).
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South Africa’s cold chain infrastructure was among Africa’s best, and included processing and storage facilities for products qualified for export to the EU, though the domestic standard of processing, storage, and distribution often did not match EU or U.S. levels. For example, higher than normal processing temperatures stressed chilling and freezing facilities and lowered overall quality, safety, and efficiency.
No
CAGR in South Africa’s frozen processed food sales (by value) over the 2005-2010 period was 9.6%. Sales growth was expected to slow over the 2010-2015 period, however, to a CAGR of 1%, with poultry showing the strongest growth (1.9%) among protein categories. Growth patterns for chilled processed foods were similar, at 9.1% CAGR from 2006 to 2011 and a forecast drop to 2.6% CAGR from 2011 to 2016.
Iran
Do
Iranian consumers purchased over 63,270 tons of frozen processed foods in 2010, with sales approaching 6.5 trillion Iranian Rials (IRR).d Iranian demand for frozen or chilled processed food products was largely driven by frozen meats and seafood; other categories such as frozen or chilled fruits and vegetables had minimal demand. Of total 2010 frozen processed food sales, nearly IRR5.2 trillion was from red meat, followed by ready meals at IRR522 billion. Fish and seafood was over IRR434 billion, poultry IRR238 billion, and vegetables IRR65 billion. Popular frozen processed food items included breaded fish and chicken products, as well as both red meat and poultry burgers. Sales for chilled processed foods exceeded those of frozen processed foods in 2010, at IRR6.7 trillion, despite selling just over half as much volume as frozen foods, at 37,800 tons. Here, too, processed meats dominated, accounting for all 37,800 tons of chilled processed food sales identified by Euromonitor. 23 This document is authorized for use only by Cristian-Aurelian Popescu at University Politehnica of Bucharest until October 2013. Copying or posting is an infringement of copyright.
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Iranian consumers hesitated to accept frozen and chilled products partially because fresh foods were easy to buy (with most Iranian families shopping daily rather than weekly), inexpensive, and better suited to local tastes, as most meals were cooked daily from fresh ingredients. In addition, frozen and chilled products were not frequently carried by neighborhood stores or markets, and advertising for such products was poor. A lack of adequate transportation and storage also hampered widespread access to frozen or chilled foods. This was most pronounced in Iran’s fruit and vegetable industry, where, according to one report, such items, “are generally transported using vans, trucks, and on occasion, refrigerated vehicles.”
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Iran’s frozen processed food market was largely dominated by domestic companies and was highly concentrated, with five firms accounting for well over 80% of total 2009 sales. International companies were slowly creeping in—Carrefour entered Iran in 2009—but the national government made conditions favorable for domestic producers in an effort tailored to, according to Euromonitor, “reducing dependence on foreign commerce as part of its self-sufficiency programme.” In spite of these challenges, sales of frozen and chilled foods were on the rise. While just over 28,000 tons of frozen processed red meat was sold in Iran in 2005, that number grew to 44,000 tons by 2010, and was forecast to exceed 70,000 tons by 2015. Total sales (by value) of frozen processed foods were expected to grow at a CAGR of 8% from 2010 to 2015, while chilled processed foods had a forecast sales CAGR of 9% over the same period. Leading this climb, according to Euromonitor, was “a move towards Western lifestyles, including eating habits, especially amongst the affluent younger generation.”
No
tC
Source: Euromonitor International, “Frozen Processed Food—China,” September 2010, pp. 3-10 and “Chilled Processed Food in China,” October 2011, pp. 3-10; Zhiyong Pei, “China’s Cold Chain Logistics—The View from Beijing,” U.S. Department of Agriculture Foreign Agricultural Service GAIN Report CH9405, March 30, 2009, pp. 3-5, www.fas.usda.gov/gainfiles/200903/146347650.pdf; Euromonitor International, “Frozen Processed Food—India,” September 2010, pp. 4-8 and “Chilled Processed Food in India,” December 2011, pp. 2-3; “India Cold Chain Industry Still in Cold Storage,” CommodityOnline, December 25, 2010, www.commodityonline.com/news/India-cold-chainindustry-still-in-cold-storage-34961-3-1.html; Luisa Cheshire, “India Seeks to Improve Cold-Chain Infrastructure,” Fruitnet.com, June 21, 2011, www.fruitnet.com/content.aspx?cid=11051; Euromonitor International, “Frozen Processed Food—South Africa,” October 2010, pp. 3-10 and “Chilled Processed Food in South Africa,” November 2011, pp. 3-10; World Food Logistics Organization, “The Integrated Cold Chain in Southern Africa: Assessment Report and Recommendations,” (Alexandria, Virginia: World Food Logistics Organization, 2005), pp. 16-17, www.lsuagcenter.com/NR/rdonlyres/40087E79-3249-4CE8-B66A-9DFB313CA515/27743/SouthernAfrica AssessmentReportTheIntegratedColdCha.pdf; Euromonitor International, “Frozen Processed Food—Iran,” November 2010, pp. 1-6 and “Chilled Processed Food—Iran,” November 2010, pp. 1-3; Dr. Reza Moghaddasi, Mehrbanian Elaheh, and Shervin Shariati, “Islamic Republic of Iran,” pp. 164-168 in Postharvest Management of Fruits and Vegetables in the Asia-Pacific Region, the Food and Agriculture Organization of the United Nations, and the Asian Productivity Association, 2006, http://www.apo-tokyo.org/00e-books/AG-18_PostHarvest/AG-18_PostHarvest.pdf, p. 166; all accessed August-October 2011. Conversions from www.oanda.com. a The average Yuan Renminbi : US$ exchange rate for 2010 was 6.8 : 1. b The average Rupee : US$ exchange rate for 2010 was 45.7 : 1. c The average Rand : US$ exchange rate for 2010 was 7.3 : 1.
Do
d The average Rial : US$ exchange rate for 2010 was 9,922.7 : 1.
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Endnotes 1
“BRF—Brasil Foods SA,” via Hoovers, Inc., www.hoovers.com, accessed September 2011.
2 Luciana Lopez and Silvio Cascione, “Brazil economy surges in 2010; growth seen cooling,” Reuters website, March 3, 2010, http://www.reuters.com/article/2011/03/03/us-brazil-economy-idUSTRE7222QZ20110303, accessed October 2011. 3 Average calculated by casewriter using data from Economist Intelligence Unit, Country Data, accessed September 2011. 4
5
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Lopez and Cascione, “Brazil economy surges in 2010; growth seen cooling;” and “For Brazil, It’s Finally Tomorrow,” The Wall Street Journal online, March 29, 2010, http://online.wsj.com/article/ SB10001424052748704743404575127913634823670.html, accessed October 2011. Lopez and Cascione, “Brazil economy surges in 2010; growth seen cooling.”
6 Simon Romero, “Foreigners Follow Money to Booming Brazil, Land of $35 Martini,” New York Times, August 12, 2011, http://www.nytimes.com/2011/08/13/world/americas/13brazil.html?_r=1&ref=brazil, accessed October 2011. 7
Romero, ”Foreigners Follow Money to Booming Brazil, Land of $35 Martini.”
8 Tom Phillips, “High above Sao Paulo’s choked streets, the rich cruise a new highway,” The Guardian, June 19, 2008, http://www.guardian.co.uk/world/2008/jun/20/brazil, accessed October 2011. 9
Romero, “”Foreigners Follow Money to Booming Brazil, Land of $35 Martini.”
10
11
Ibid.
12
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“The Miracle of the Cerrado,” The Economist, August 26, 2010, http://www.economist.com/node/ 16886442, accessed August 2011.
“Agricultural Policy Reform in Brazil,” Organisation for Economic Co-operations and Development Policy Brief, October 2005, OECD website, http://www.oecd.org/dataoecd/3/52/35543248.pdf, accessed October 2011. 13
“The Miracle of the Cerrado,” The Economist.
14
“Agricultural Policy Reform in Brazil,” Organisation for Economic Co-operations and Development Policy
No
Brief. 15
“The Miracle of the Cerrado,” The Economist.
16
“How to feed the world,” The Economist, August 26, 2010, http://www.economist.com/node/16889019, accessed October 2011. “The Miracle of the Cerrado,” The Economist.
18
Ibid.
19
Ibid.
20
Ibid.
Do
17
21 “Perdigão SA,” Funding Universe, http://www.fundinguniverse.com/company-histories/Perdigão-SACompany-History.html, accessed September 2011. 22
“Sadia SA,” Funding Universe, http://www.fundinguniverse.com/company-histories/Sadia-SACompany-History.html, accessed September 2011. 23
Ibid. 25
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“Sadia and Perdigão end partnership,” Gazeta Mercantil, October 30, 2002, via Factiva, accessed August
2011.
25 “Sadia, Perdigão to Undo International Joint Venture,” AE Brazil, September 24, 2002, via Factiva, accessed August 2011. 26
“Marriage broken between Sadia and Perdigão,” Gazeta Mercantil, October 30, 2002, via Factiva, accessed September 2011. 27
“Brazil Perdigão Shareholders Reject New Sadia Bid,” Dow Jones International News, July 21, 2006, via Factiva, accessed September 2011.
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28 Carlos Caminada, “Brazilian Poultry Processor Perdigão Takes Over Sadia (UPDATE 5),” Bloomberg.com, May 29, 2009, http://www.bloomberg.com/apps/news?pid=newsarchive&sid=akV4uxmad.dE&refer=news, accessed September 2011. 29
Caminada, “Brazilian Poultry Processor Perdigão Takes Over Sadia (UPDATE 5);” and “UPDATE 2-Brasil Foods merger in doubt, shares fall,” Reuters, June 8, 2011, http://www.reuters.com/article/2011/06/ 08/brasilfoods-idUSN0826741820110608, accessed September 2011. 30
“Too little, too late,” The Economist, July 9, 2011, via Factiva, accessed July 2011.
31
Ibid.
32
“UPDATE 2-Brasil Foods merger in doubt, shares fall,” Reuters.
33
“Too little, too late,” The Economist.
34
“UPDATE 2-Brasil Foods merger in doubt, shares fall,” Reuters.
35
36
Ibid.
37
Ibid.
38
tC
Paulo Winterstein, “BRF Brasil Foods Deal Passes with Restrictions,” The Wall Street Journal online, July 14, 2011, via Factiva, accessed July 2011.
No
“Frozen Processed Food—Brazil,” Euromonitor International, September 2010, p. 5, www.euromonitor.com, accessed August 2011; and “Chilled Processed Food—Brazil,” Euromonitor International, September 2010, p. 4, www.euromonitor.com, accessed August 2011. 39 “The World Factbook: Brazil,” Central Intelligence Agency, https://www.cia.gov/library/publications/ the-world-factbook/geos/br.html, accessed July 2011. 40
Katty Corrente, Agricultural Assistant, and Fred Giles, Director, Agricultural Trade Office, Sao Paulo, “Brazil. Food Processing Ingredients,” United States Department of Agriculture, Global Agricultural Information Network, December 14, 2010, http://gain.fas.usda.gov/Recent%20GAIN%20Publications/ Food%20Processing%20Ingredients_Sao%20Paulo%20ATO_Brazil_12-14-2010.pdf, accessed August 2011. 41
Do
“Brazil Agribusiness Report Q2 2011,” Business Monitor International, March 2011, ABI/INFORM via ProQuest, p. 67, accessed August 2011. 42
“Chilled Processed Food—Brazil,” www.euromonitor.com, accessed August 2011.
Euromonitor
International,
September
2010,
p.
1,
43 “Frozen Processed Food—Brazil,” www.euromonitor.com, accessed August 2011
Euromonitor
International,
September
2010,
p.
1,
44
“Brazil Agribusiness Report Q2 2011,” Business Monitor International, March 2011, ABI/INFORM via ProQuest, pp. 14-15 accessed August 2011. 26 This document is authorized for use only by Cristian-Aurelian Popescu at University Politehnica of Bucharest until October 2013. Copying or posting is an infringement of copyright.
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45
“Chilled Processed Food—Brazil,” Euromonitor International, September 2010, p. 1.
46
“Brazil Agribusiness Report Q2 2011,” Business Monitor International, March 2011, p. 33.
47
Corrente, “Brazil. Food Processing Ingredients.”
48 “Frozen Processed Food—Brazil,” Euromonitor International, September 2010, p. 1; and “Chilled Processed Food—Brazil,” Euromonitor International, September 2010, p. 1.
“Frozen Processed Food—Brazil,” Euromonitor International, September 2010, pp. 1-2, 5-6.
50
“The Miracle of the Cerrado,” The Economist.
Do
No
tC
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49
27 This document is authorized for use only by Cristian-Aurelian Popescu at University Politehnica of Bucharest until October 2013. Copying or posting is an infringement of copyright.
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