Coca-Cola Set To Enter The Coffee Market In Brazil

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Brazil is one of the most important markets for The Coca-Cola Company (NYSE:KO). Brazil is also in deep recession. Coca-Cola’s volume sales declined 4% year-over-year in the country last year, and by 5% through the first half of this year. Falling beverage consumption in Brazil is a byproduct of weak economic conditions — falling disposable incomes and low customer confidence, buoyed by high interest rates, debt, and inflation.

KO Q&A 13

However, things might start looking up for Coca-Cola in Brazil in the third quarter, especially due to the higher marketing activity during the Olympic games taking place right now in Rio. Coca-Cola is sponsoring this global event, which attracts a large number of tourists. Coca-Cola already boasts a strong brand appeal in Brazil, and increased marketing and promotional activities centered on the Olympics could have attracted more consumers for its soft drinks in Q3, especially tourists. Coca-Cola believes in expanding its consumer base through experiential marketing, which aims at creating an emotional connect with customers. Positive consumer perception is crucial for Coca-Cola, as it faces headwinds in the carbonated soft drinks (CSD) category due to the unhealthy tag associated with these drinks. Considering that Brazil forms as much as 7% of the company’s net volume, getting a boost in Q3 will help spur the beverage giant’s overall results.

Coca-Cola has now set its eyes on the coffee industry in Brazil, which is the largest producer and exporter of coffee in the world and the second largest consumer of coffee, behind the U.S. The company will begin selling packaged arabica coffee beans in the country this year, and later spread the distribution to the rest of the country starting in 2017, through a local tea brand it owns called Leão. Coca-Cola has already entered the fluid milk market in the U.S. through its brand Fairlife, and now plans to enter the coffee segment, which will bring in incremental sales in Brazil. Coffee is expected to grow at a CAGR of 6% through the end of the decade in Brazil, at constant 2015 prices, reaching over $7 billion in 2020. In retail volume terms, sales are expected to grow at a CAGR of 3% through 2020. [1]

What could work for Coca-Cola in Brazil is that this coffee brand will be a premium offering. The company plans to offer blends made exclusively from arabica, which are premium beans. Although Brazil is the world’s largest producer of arabica coffee, these beans are mainly exported and rarely accessed by domestic customers. Economic inequality in Brazil is one of the highest in the world. High interest and inflation rates and tight credit availability don’t tend to adversely impact the more affluent individuals, and this could be one of the reasons why premium products could grow at a rapid pace in the economy that is otherwise struggling. Coca-Cola’s premium coffee would not only bring in incremental sales, but also be accretive to margins in the long term.

This development also comes at the right time, when a drought across robusta plantations in Brazil this year has raised prices for this type of coffee that’s typically the cheapest. In some cases, robusta beans are now more expensive than arabica. The price difference between robusta and arabica beans has narrowed and this aligns with Coca-Cola’s strategy of introducing its premium brand of coffee. This is because Brazilian consumers typically consider price as the most important factor in buying coffee, while giving lower preference to flavor. The cheaper robusta coffee would have been a strong competition to Coca-Cola’s arabica coffee. Robusta is usually preferred due to its cheap prices, which outweighs its weakness as a bitter-tasting coffee. Arabica, on the other hand, has a smooth flavor and is preferred for high-end drinks. Because of the higher prices of robusta, suppliers are set to switch to more arabica usage in the near term. Thus, Coca-Cola will face less competition from robusta coffee, which could have been a very stiff competition due to its traditionally lower price points.

Brazil is going through tough times economically, but Coca-Cola’s strategy in the country of emphasizing affordable packages and higher activation during the Olympics could help boost volume sales in the second half of the year. In addition, Café Leão coffee is expected to add meaningful sales starting next year.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Coca-Cola

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Notes:
  1. Coffee in Brazil, euromonitor.com []
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