Brazil is one of the largest markets for The Coca-Cola Company (NYSE:KO), accounting for around 7% of the beverage giant’s worldwide volumes. The country’s liquid refreshment beverage (LRB) market was worth nearly $43 billion in 2013, with volumes of over 11.3 billion gallons.  According to our estimates, Coca-Cola has close to 27% market share in the Brazilian beverage industry. Due to positive signs of a revival in economic activity and increased disposable incomes, this market is expected to further grow at a CAGR of 6% to over $54 billion by 2017. If Coca-Cola manages to maintain its share in Brazil’s beverage market, it could generate an incremental ~$3 billion in annual retail sales from the country by 2017, assuming no foreign exchange impacts. However, due to its stronghold in carbonated soft drinks (CSD) and potential growth opportunities in the booming energy drinks segment, the company could in fact further improve its market share in the long run.
We estimate a $41.2 price for Coca-Cola, which is around 7% above the current market price.
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Unlike U.S. And Mexico, CSDs In Brazil Could Grow
Brazil is the third largest CSD market in the world behind the U.S. and Mexico. Owing to health concerns related to large amounts of calories in sugary drinks and artificial sweeteners in the diet versions, consumers in the domestic market are slowly shifting their beverage preferences to healthier alternatives. As a result, CSDs declined for the ninth consecutive year in the U.S. in 2013, and could continue to face headwinds in the wake of possible soda taxes. The states of California and Illinois have already proposed taxes on sugary drinks which, if passed, would almost double the price of a 24-pack soda case. On the other hand, Mexico has also strengthened its resolve against widespread obesity and diabetes in the nation by imposing a one-peso-per-liter (around 7.6 cents) tax on CSDs. With traditional colas and other carbonates expected to face resistance in both the U.S. and Mexico, Coca-Cola might look to gain from Brazil and its promising growth potential.
Although Brazil is one of the largest international markets for the company, the country ranks outside the top ten in the list of nations with highest per capita consumption of Coca-Cola’s soft drink offerings. Compared to Mexico’s massive per capita consumption rate of 46.5 gallons, Brazil only posted a small figure of 15 gallons in 2012.  Brazil’s economy is expected to improve this year, after witnessing a GDP growth of 2.3% last year, twice as much as that of Mexico.  Given the low per capita consumption rate of beverages and increasing disposable incomes, there is an opportunity for Coca-Cola and its peers to further their ambitions in Brazil in the coming years.
Coca-Cola’s Event Sponsorship Could Drive Soft Drink Sales
What gives Coca-Cola an edge over its competitors PepsiCo (NYSE:PEP) and Dr Pepper Snapple (NYSE:DPS) in Brazil is that the company is one of the biggest sponsors of the 2014 FIFA World Cup and the 2016 Summer Olympics to be held in the country. These global events with large crowds flocking from all over the world could increase demand for cold beverages in the country. Coca-Cola is estimated to have spent around $31 million over the last four years solely for the purpose of the football World Cup.  Increased marketing and promotional activities could help the company attract more consumers for its soft drinks. Coca-Cola also aims to boost sales of the sports drink brand Powerade by teaming up with the popular football player Andrés Iniesta, who scored the winning goal in the previous World Cup. Coca-Cola is already in the middle of its $7.6 billion investment in Brazil from 2012-2016, and boasts a strong brand recognition and extensive distribution channels.
The company’s volumes in Brazil grew by 5.6% year-on-year in 2012, despite the flat volume growth in the country’s overall CSD category, which forms more than half of its LRB market. Volumes in CSDs had remained flat due to an increase in the rate of tax on industrialized products (IPI) for the manufacture of soft drinks, which caused soda prices to rise and consequently hurt demand for CSDs.  But in 2013, CSDs are estimated to have grown by 2-3% and are expected to continue growing, bolstered by subsequent reduction of the tax rate on fruit-flavored soft drinks. Growth in CSDs along with sponsorship of the football World Cup are expected to boost sales of Coca-Cola’s CSDs and its overall soft drink portfolio in Brazil this year.Notes:
- “Brazil-soft drinks“, September 2013, datamonitor.com [↩]
- “Coca-Cola per capita consumption rate“ [↩]
- “Brazil economy ends 2013 on an upbeat note, boosting Rousseff“, February 2014, reuters.com [↩]
- “World cup fever! making sponsorship work“, February 2014, rwconnect.esomar.org [↩]
- “With ipi, sale of soda goes up to 3%“, May 2013, datamark.com [↩]