Brazilian coffee sector could soon become world\'s largest and continues to attract investements

The Brazilian coffee association ABIC has claimed that the country could be the world\'s largest consumer of coffee by 2012. ABIC predicts that consumption will increase by 5% in volume terms in 2011, and has said that if this rate of growth were to continue in 2012 the country would overtake the US to become the biggest coffee consumer.

The Brazilian coffee association ABIC has claimed that the country could be the world's largest consumer of coffee by 2012. ABIC predicts that consumption will increase by 5% in volume terms in 2011, and has said that if this rate of growth were to continue in 2012 the country would overtake the US to become the biggest coffee consumer. This optimistic outlook for the industry chimes with our own forecasts and with recent investment into the sector by leading multinationals including Starbucks and Sara Lee.

Brazil is the largest grower of coffee in the world and the increased popularity of coffee in the country can be attributed to the improved quality of locally processed coffee (ABIC introduced a coffee quality programme in 2004), as well as rising consumer affluence.

According to figures from ABIC, total domestic volume sales of roast/ground coffee have increased by more than 20% between 2004 and 2009, while sales of soluble/instant coffee have increased by 35% (see chart). Despite this strong growth, per capita consumption remains relatively low in comparison with more mature markets such as Argentina, leaving plenty of room for further increases.

As a reflection of this growth, in June 2008 US coffee shop chain Starbucks revealed that its Brazilian stores were currently generating the highest number of sales transactions per store in Latin America. As a consequence of this success Starbucks announced in August 2010 that it was to take full control of its operations in Brazil through the acquisition of local firm Cafés Sereia do Brasil Participações, which owned a 51% stake in the network. Starbucks also revealed that it was planning to expand aggressively in the country. The success of Starbucks highlights the growing demand for higher-value gourmet coffee varieties, and the continuation of this trend should mean that value sales increase at a faster rate than volume sales over the next five years.

The retail sector is also attracting investment and in December 2010 US food group Sara Lee has announced it is to buy Brazilian coffee firm Cafe Damasco for around US$60mn. This acquisition is the firm's second takeover in the Brazilian coffee sector in as many years and will build on its existing strength in the market.

Sara Lee already markets six coffee brands in Brazil and its decision to purchase yet another operator highlights the continued importance of regionality within the Brazilian coffee market. Well-established local preferences mean that no single brand can hold a dominant position across the entire country, and this is unlikely to change in the near future. This makes expansion relatively straightforward, as firms such as Sara Lee can improve their market share simply by acquiring one of many local companies. However, it also means that marketing and packaging costs are multiplied.

Sara Lee has clearly decided that the strong growth potential in the Brazilian coffee sector outweighs any disadvantages, and the sector offers potentially huge returns for firms that can establish a strong position during this consolidation phase.