How to go small for big growth opportunities in Brazil’s consumer markets

By Mariana Castiglioni, Rafael Garcia Meunier, Rogério Hirose, Silvana Lee, Thais Rios and Fábio Stul
How to go small for big growth opportunities in Brazil’s consumer markets

Despite lackluster results in the Brazilian economy over the past decade, McKinsey analysis sees the country poised for significant near-term and long-term improvement.

On the face of it, Brazil’s economic outlook appears tepid. After all, the country’s surge in gross domestic product and consumer spending between 2005 and 2010 was followed by a surprisingly sharp decrease. Triggered by a reverse in capital flows that hit most emerging markets (Exhibit 1), this downturn certainly presents daunting challenges to Brazil’s consumer packaged goods sector in the short run.

PreviewImage_Exhibit_1

But there is more to the story. Despite the country's overall reduced growth, there are structural and strategic factors giving rise to a positive outlook for Brazilian consumer markets. Even amid minimal overall growth, CPG companies have a near-term opportunity to leverage important granular pockets of growth. In the long run, from now through 2024, we expect consumer-goods spending to grow at a compound annual rate (CAGR) of 1 to 3 percent, reaching total additional sales of BRL 813 billion by the end of 2024 (Exhibit 2). This growth is being fueled by three defining and unchanged characteristics of the nation’s economy.

PreviewImage_Exhibit_2

1. Demographic bonus: In 2020, Brazil will arrive at an historic peak in terms of the percentage of its population at the productive age (defined as 15 to 64). This age cohort will represent almost 71 percent of the population and be larger than the number of dependents (children and elderly) in the population—a demographic bonus that will help drive consumption.

2. Middle-class growth: Brazil is already a middle-class economy, and this becomes truer every year. Between 2000 and 2014, 25 million Brazilian households ascended from the lower classes to the middle class, thanks to the creation of new jobs, government social programs, and easier access to credit. Growth in this all-important socioeconomic class is an important consumption driver.

3. Consumer spending as a share of GDP: Private consumption remains the major driver of Brazil’s economy, much more so than in other emerging economies. In China, for example, consumer spending made up only 36 percent of GDP in 2014, as compared to Brazil’s 63 percent.

Growth pockets in Brazil

While this mid to long-term outlook is encouraging, there are also compelling pockets of opportunity in the here and now—specific micromarkets that are defined by region, state, microregion, city, and category. Brazil’s sheer size and diversity mean huge differences in terms of earning power and consumer preferences throughout the nation. Thus, the growth story is not broad-based but an extremely granular one. ow do companies find and harness these nuggets of scattered growth? The answer lies in doing a deep-dive analysis in order to understand each micromarket’s future growth patterns.

Using our CityNav Brazil database and analytical tool, we have created forecasts of consumer spending growth in 58 CPG categories across 5,500 cities. Brazil’s southeast region, for instance, will remain the nation’s biggest consumption hub from now through 2024, yet it is the northeast that will experience the fastest rates of growth in consumer spending (although its relative pace compared to the rest of the country has slowed). The nation’s countryside is also a growth engine, accelerating 30 percent faster than state capitals in the coming decade. This is likely due to companies’ investments in new plants in rural areas, the growth of important agricultural segments such as soy and cattle, and improvements in infrastructure such as roads.

Instead of state capitals themselves, companies should concentrate on the areas surrounding them (Exhibit 3). The reason? These regions are less developed, yet their proximity to the capitals generates considerable economic activity, helping them become an extension of the cities. Many people with jobs in these cities move to the surrounding areas to take advantage of lower real estate prices. Collectively, these growth belts (which range from 75 to 200 kilometers from their nearest state capital) will experience consumer-spending increases nearly equivalent to those in Rio de Janeiro and São Paulo combined.

PreviewImage_Exhibit_3

Meanwhile, midsize cities (those with 20,000 to 500,000 inhabitants) will account for more than 50 percent of total consumer-spending growth in Brazil, with the top 500 claiming about 40 percent of the total. Those with higher concentrations of low-income populations will grow roughly 25 percent faster than average, as incomes will rise most rapidly for consumers in the lower socioeconomic classes. In addition, cities with more young adults will grow about 15 percent faster, since their populations will include more people of productive age. Spending growth will vary considerably across product categories as well. In fact, the difference between the lowest and highest expected growth in a particular category across different states in Brazil could be greater than 50 percent.

Using granular analysis to capture growth opportunities

To capture these granular growth opportunities, industry players need to understand where exactly the increased demand for their particular products will come from over the next decade. Such an analysis gives companies visibility into a broader range of growth rates than a national average can, thus generating more useful insights. Without this, companies will have difficulty crafting the right growth strategies and making informed investment decisions.

First, CPG executives need to answer several strategic questions about “where to play.” These include:

  • How will demand for different consumer-goods categories evolve in different Brazilian cities in the next 10 years?
  • Where will the most promising growth pockets be, and how should my company prioritize them?
  • What is our current positioning in the categories and geographical markets where we compete, and how can we best strengthen our positioning there?
  • Which markets in which we don’t currently compete might be worth entering because they will see brisk growth and have a manageable competitive landscape?

After resolving such questions, companies can craft and execute strategies for capitalizing on forthcoming growth opportunities in specific micromarkets within Brazil. This helps firms determine how to allocate precious resources such as marketing spending; how to make smarter labor decisions (including how many salespeople to hire and where to deploy them); and how to decide where to locate manufacturing facilities, stores, and logistics centers.

In fact, such analysis can change the dynamics of the CPG game. Our research shows that companies that reallocate resources toward the best future opportunities faster and more aggressively than their peers tend to outperform their peers. The reason: Their resource-allocation decisions are forward-looking rather than based only on historical data.

Sustaining performance

Once companies have executed strategies for capturing growth opportunities, it is critical to monitor outcomes and make midcourse corrections as needed in order to sustain performance. One company, for instance, encountered difficulties while trying to define sales targets and incentives for its sales force in key regions. The development of these targets was being distorted by the company’s considerable sales at national retailers, which weren’t being captured by regional market-share data. To solve the problem, the company developed a toolkit that identified sales made to every nationwide retailer in each city, based on the retailers’ footprint and format size. As a result of this effort, the company was able to more easily isolate the effect of national retailers that had a presence in its regional markets, and thus more accurately measure—and more effectively manage—the true performance of its regional sales forces.

PreviewImage_Exhibit_4

In the next 10 years, the name of the CPG game in Brazil will be granularity. Companies that arm themselves with a granular understanding of how demand for different product categories will evolve in the nation’s micromarkets will be best positioned to achieve near term growth, as well as capitalize on an uptick in Brazil’s GDP growth coming further down the road. Progressive companies are already taking action to map out Brazil’s future’s opportunity landscape, setting the stage for pulling—and staying—ahead of their rivals.

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