Coca-Cola In Brazil: Global Events And Energy Drinks Could Drive Growth (Part 2)

by Trefis Team
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Brazil is the third largest international market for The Coca-Cola Company (NYSE:KO) behind Mexico and China, accounting for around 7% of the company’s worldwide volumes in 2013. Revival in economic activity and increasing disposable incomes are expected to propel growth in the country’s liquid refreshment beverage (LRB) market in the coming years – where Coca-Cola already holds a 27% market share by our estimates. However, apart from riding the wave of increasing LRB market size in Brazil, we also expect Coca-Cola to improve its market share going forward. In the previous article, we discussed how unlike the U.S. and Mexico, sales of carbonated soft drinks (CSD) in Brazil could continue to rise, and how Coca-Cola could benefit from its sponsorship of the upcoming global sporting events. In this article, we elaborate on the growth potential of the country’s energy drinks market, and Coca-Cola’s bid to compete with Red Bull and other companies to nab the majority of this growth.

Coca-Cola sold volumes of around 2.921 billion gallons in Brazil in 2012, up 5.6% from 2.765 billion gallons in the previous year. In 2013, the figure declined by 2% due to negative consumer sentiment amid weak economic conditions. But as the GDP growth rate is expected to pick up this year, we expect the growing middle class and increasing disposable incomes to boost demand for cold beverages. [1] In addition, Brazil will draw large crowds from all over the world during the 2014 FIFA World Cup in June and the 2016 Summer Olympics, which will provide further opportunities to spur beverage sales. We estimate a $41.2 price for Coca-Cola, which is around 7% above the current market price.

See our full analysis for Coca-Cola

Energy Drinks In Brazil Are On A Rise

The energy drinks segment is expected to outpace the growth of Brazil’s overall LRB market through 2017. As compared to the CAGR of 6% for the latter, energy drinks are expected to grow by over 25% annually in terms of volume during this period. [2] According to our estimates, energy drinks account for less than 1% of the soft drinks market presently, unlike the mature CSD category which constitutes more than half of the overall market volumes in Brazil. Low penetration at present means that there is a large growth potential in energy drinks in the next few years. In fact, Brazil is expected to outrun every other country in terms of volume growth in this segment through 2017. [3]

Red Bull Dominates Energy Drinks For Now

Red Bull is the market leader in energy drinks in Brazil, with around 40% market share in off-trade channels. The company’s volumes in the country rose by a whopping 250% during 2008-2012 due to its attractive packaging, successful strategy of targeting young adults and innovative marketing campaigns. Red Bull sponsors the Brazilian football team “Red Bull Brasil” and is also one of the sponsors for the 2014 FIFA World Cup. To further its ambitions in Brazil, the company opened its first manufacturing facility in the country in 2012. As Red Bull’s energy drinks are more expensive than its competitors in this category, production in Brazil itself will help the company evade import taxes and lower its prices. However, despite somewhat lowered prices, Red Bull will still be more expensive than other energy drinks, and could lose some of its market share in the coming years.

Coca-Cola’s Burn Could Threaten Red Bull’s Lead

What works for Coca-Cola’s energy drink “Burn” in Brazil is its price point advantage and Coca-Cola’s strong distribution channels. Burn is around 40% less expensive than Red Bull in the country and ranks second in the energy drink category, with 17% market share in off-trade channels. While Red Bull is a premium energy drink, Burn looks to leverage the large middle class base in Brazil to boost sales. The country’s middle class accounted for almost half the population in 2013, up from 37% in 2003. [4] Apart from gaining from lower prices, Coca-Cola has also looked to compete with Red Bull on the marketing and advertising front by targeting high-energy sports activities, in order to garner considerable popularity. Coca-Cola announced its sponsorship of the Formula 1 team Lotus in 2012, and also sponsors teams/personalities in skateboarding and snowboarding. Due to Burn’s lower price, extensive distribution channels and aggressive marketing campaigns, we expect Coca-Cola to gain market share in Brazil’s energy drinks segment in the coming years.

Potential Upside For Coca-Cola

Energy drink volumes in Brazil are expected to grow by 58 million gallons from 2012 to 2017. If Coca-Cola’s Burn manages to improve its market share to 25% by the end of the forecast period, the company could sell volumes of 22 million gallons by 2017 in Brazil, which is a massive 340% increase from the volumes sold in 2012.

However, this estimate could be somewhat offset due to rising market competition. Seeing how energy drinks in Brazil is a booming market, companies such as Horizonte and Bebidas Chiamulera debuted their energy drinks Badboy Power Drink and Orbit respectively, at considerably lower prices in 1 liter PET bottles. In addition, Anheuser-Busch also launched its energy drink Fusion in Brazil in 2011, and also distributes the popular Monster energy drink in the country. Just like Coca-Cola and Red Bull, Anheuser-Busch also has strong distribution channels due to its established beer business in the region. This is why Fusion might be able to nab some of the market share from both Coca-Cola and Red Bull in the energy drinks segment in the coming years.

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Notes:
  1. Brazil GDP annual growth rate“, tradingeconomics.com []
  2. Brazil-soft drinks“, September 2013, datamonitor.com []
  3. Red Bull gmbh in soft drinks (world)“, April 2013, euromonitor.com []
  4. Brazil’s middle class grows to nearly 50% of the population“, March 2014, laht.com []
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