A competitive business
July 01, 1996
by Teresa Acklin
Deregulation brings transition in Brazilian milling, baking industries
Flour milling and bread baking in Brazil is undergoing a rapid concentration, with a small number of companies accounting for a growing market share, according to an ongoing study for Brazil's Institute of Applied Economics (I.P.E.A.).
A summary of the Institute's study was published in the June 18 issue of Gazetti Mercantil, a leading daily financial newspaper in Brazil. The study provides a glimpse of the very competitive flour, bakery and pasta business. An informal translation of major parts of the Gazetti Mercantil article was provided in a recent report by the U.S. Department of Agriculture's agricultural counselor in Brasilia.
Changes in the Brazilian grain-based foods industry started in September 1990 with government deregulation of the flour milling business. Part of that action included relinquishing the government's role through the Bank of Brazil's wheat office (Cetrin) as buyer of domestic wheat and the sole supplier of imported wheat, the report said.
Meanwhile, Brazil's wholesale baking business is being concentrated into the hands of large multinational firms that started buying out domestic operations in 1993.
"This change is taking place in a widely dispersed sector traditionally dominated by family owned and managed firms," the report said.
The I.P.E.A. study concludes that a large number of the small and medium flour mills are confronting financial difficulties and are being acquired or leased by larger milling groups. Examples are the acquisitions by Santista Foods (controlled by the Bunge Group) of Dallas Pena Branca Group, which is the third-largest milling group.
This tendency is expected to continue, according to the I.P.E.A. study. The increase in world wheat prices restricts access to wheat to those companies with a large import capacity and favors the expanding concentration by the milling industry. High wheat prices increase import costs and lead to the formation of buying pools among millers so they can buy larger tonnages at one time (vessels of 25,000 tonnes).
The concentration trend is reinforced by questions of scale, import volume, ability to respond to demands for higher quality flour, improved profitability and the struggle for greater market share. Wheat milling is not a high margin business, a situation that jettisons the small mills who wish to restructure in an environment where the investment in equipment and technology is only profitable for larger scale production units.
The minimum size profitable mill is one with a daily capacity of 200 to 250 tonnes, which has become a relevant factor during the post-deregulation period. The study notes another trend, and that is vertical integration between milling companies and the producers of pasta, cookies and crackers and pizza.
This process involves a permanent relationship between flour mills and the food manufacturing industry with the goal of researching prices and producing speciality flours for each customer and for each final use.
The study also suggests that the greatest impact of deregulation was on domestic wheat production. It brought about a loss in price and credit incentives as well as the end of a guaranteed market with the Bank of Brazil. This resulted in a deterioration in cultural practices and reduced use of inputs leading to a sharp decline in production.
With the creation of the Mercosul trading bloc, Brazilian wheat farmers are faced with even greater challenges as the country's major wheat supplier, Argentina, is able to focus on its customers' (the Brazilian flour millers) specific requirements with a guarantee of duty-free entry. This puts more pressure on Brazilian wheat farmers, who not only are at a comparative disadvantage, but must concentrate more on producing higher quality wheat needed by Brazilian millers.
EFFECTS ON BAKING
. The deregulation of the flour market, which ended price controls, permitted a redefinition of the criteria in the selection of flour and started new standards of quality for the cookie, cracker and pasta industries.
This sector has been most active of all food industries in launching new products in the past three years; the strategy has been to widen the market by developing new products rather than lowering prices. The traditional products such as "marie" cookies, cream crackers and saltines are considered "commodities" as they require less technology in their production.
The most "sophisticated" products, including sandwich cookies, represent a higher return, and thus the industry has given them more attention. The average price for sandwich cookies increased after deregulation throughout the entire country. Nonetheless, the market for these products increased 35% during the past five years.
But prices of traditional products, which are made primarily with flour and water, have fallen. These cookies and crackers are composed of a larger percentage of flour, and apparently the price relationship is not highly correlated with flour prices.
The diversification in the types of cookie and cracker products has required companies to modernize their production lines, which has come about because of the more open economy and access to imported equipment and know-how. The multinational companies are at an advantage compared to domestic companies in terms of their product distribution networks, access to external capital, marketing and technology.
The acquisition by Nestle of the Brazilian company Confianga, which has the Tostines brand, and the joint ownership by the French company Danone in Aymori and Campineira, holders of the Triunfo and Ritz brands, are examples of the transformation taking place in the cracker and cookie sector.
Four brands of sliced loaf bread represent 75% of the domestic market for bread produced by wholesale bakery companies. The Pullman and Plus Vita brands were acquired by Santista Foods in 1989 and 1995; Seven Boys is Panco's brand; and Wickbold is the fourth leading brand. This market is more concentrated than cookies and crackers in spite of being of a regional structure due to perishability.
The segmentation of the pan bread market has stimulated a diversification towards more higher value sophisticated products. This was possible after deregulation, which allowed mills to produce different types of flour. At the end of the 1980s, Plus Vita produced only three types of pan bread; currently, it has seven types, along with 10 other breads and rolls, for snacks and cakes. Although it is a modest line of products compared with other countries, Brazilian wholesale bakeries today produce about 50 types of bakery products.
The 1991 deregulation that did away with price controls on bread has not resulted in lower prices. Between 1990 and 1994, prices of french-style bread increased 60% and pan bread increased an average of 45%. Both increased greater than flour prices, indicating an increase in margins.
The I.P.E.A. study concluded that the increased pan bread prices were largely due to the small number of brands dominating the market. Per capita consumption of pan bread in Brazil averages less than 3 kilograms per year.