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Prospects for Down Market Shift in Retail Tissue and Hygiene as Brazil’s Economy Implodes

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By: Rob Walker

Brazilian President Dilma Rousseff, leader of the world’s seventh biggest economy, was in Uruguay last week to sign a deal to build a wind power plant. In a bizarre moment, she cancelled a dinner with ministerial colleagues and instead went shopping in a local supermarket. It was no media stunt. Rousseff needed to stock up on staples.

She is not alone. Millions of fellow Brazilians are stocking up on everything from rice to toilet paper to fend off a sharp rise in inflation, which is running at over 7% on an annualised basis, well above the government’s target of 4.5%. Barely a week goes by without Brazil’s economic situation worsening. The Central Bank now expects GDP to contract 1% this year. Meanwhile, real wages are falling and the local currency is in a tailspin, closing last week at its lowest rate against the US dollar in eleven years.

Brazil, keep in mind, is the fourth biggest retail tissue and hygiene market in the world, in value terms, and the third biggest for toilet paper. Over the last decade, it has become a linchpin of emerging market growth for the like of Kimberly-Clark and Procter & Gamble, both of which have tapped successfully into the country’s rapidly growing middle class population. The good times have now stalled, however, and the strategic implications for the industry’s leading players can be far-reaching.

Growth in bulk packaging

As the economy stutters, so growing numbers of Brazilians are opting to shop less but to buy in bigger volume. Hypermarkets and cash-&-carry stores (known as atacarejos) are at the forefront of this trend, especially in the northeast region and São Paulo state. Such stores are typically in out-of-town locations where land is cheap. But, growth in car ownership, a legacy of Brazil’s economic boom, means that millions of households are able to shop in them.

Toilet paper, nappies/diapers and sanitary protection are all potential targets of bulk shopping. On a price per unit basis, a pack of 216 nappies/diapers costs around half as much as a pack of 20 in a local store, for example. It is a hugely attractive saving for cash-strapped families, especially as prices are climbing month on month. As a result, we believe that high yield packaging is set to emerge as a key industry battleground over the rest of the year.

Surge in down trade activity

Arguably, the most significant implication of the economic slowdown is growth in down-trade activity. This is a big deal for the toilet paper category, especially, as Brazil is currently the biggest market in the world for luxury brands, both in volume and value terms. Last year, spending on luxury toilet paper totaled U$1.7 billion compared with US$1.4 billion in the United States, for example.

For Brazil’s new middle class, luxury toilet paper is a relatively pain-free trade-down option. It is important to keep in mind that millions of Brazilians have grown used to luxury items like smart phones, broadband Internet-enabled computers and satellite TVs.  Many are desperate to hang onto these prestige items. But, as spending power tightens, something has to give. Cue a de-premiumisation shift in household staples like toilet paper.

Local brands could seize the initiative

Brazil has a strong tradition of local brands in retail tissue and hygiene, spearheaded by the portfolios of Hypermarcas and Santher. They face a challenging environment too, but their lower production costs could be an advantage over global brands in an increasingly price-sensitive market.

For one thing, the rapid depreciation of the Real currency means that the cost of imports and imported raw materials is going up by the month. So far this year, the Real has lost around 12% of its US dollar value, making it the world’s worst performing major currency, after Ukraine’s Hryvnia.

Private label could also get a boost. Brazilians have long been rather sniffy about private label, mainly because it is regarded as a low quality product. Brazil’s middle class is highly aspirational, after all. For many, private label simply did not pass muster. Perceptions are changing, however, in part driven by economic necessity and in part because supermarket brands have raised their game. Last year, private label accounted for 1.3% of Brazil’s retail tissue and hygiene market, its highest share ever. But, there is plenty of room for growth as consumers hunt down the best value deals.

Consumer confidence hits new low

Brazil recently hiked interest rates to 12.75%, a six year high. This ought to curb inflation, but it could also push Brazil deeper into recession. On top of the economic pressures, there are rifts opening up in the upper tiers of the government (perhaps that is why the President went shopping rather than go to dinner with colleagues?). Indeed, it has been the gloomiest first quarter in Brazil, economically and politically, for many years.

The biggest losers are the consumers, not least the new middle class. Having grown used to the trappings of a sophisticated retail culture, and an all-round better standard of living, millions are now bracing themselves for a rocky ride. The economy has been struggling for a couple of years, but consumer confidence managed to rise above it, give or take the occasional street protest. The difference now is that confidence – both in the government and in the wider economy – has run thin. The upshot is that more and more consumers are reining in spending. Retail tissue and hygiene brands need to plan accordingly.

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