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Investment Pours Into Northeast Brazil

PepsiCo’s foods division is looking to double its revenue in the next three to four years in Brazil in spite of a recent slowdown in Latin America’s largest economy.


PepsiCo’s plan reflects the belief of many local groups and multinationals that the longer term structural source of economic growth in Brazil, the rise of its lower-middle class, especially in the traditionally poorer northeast, is intact.


“We have been doubling our business in [the richer south of] Brazil every five years and in the northeast every three years,” said Olivier Weber, PepsiCo’s president of South America, Caribbean and Central America foods.


Economists characterise Brazil’s economy as two-speed, with headline growth stalling amid a slowdown in manufacturing and investment but consumption remaining relatively solid.


Record low unemployment and pay rises this year have ensured that consumers, while less exuberant than in the past, are continuing to spend, particularly in the country’s booming northeastern states, which feature a high proportion of so-called C-class lower-middle-income earners.


Itáu BBA, an investment bank, defined the group as people who earn between R$291 (US$141) per month and R$1,250.


“Retailers and consumer goods companies that better understand the minds and hearts of these consumers … will hold an important structural advantage in the Brazilian consumer space,” the bank said in a recent report.


Mr Weber said PepsiCo’s foods division, which sells brands ranging from Ruffles and Doritos chips to Toddynho, a popular chocolate drink, had doubled its business in the country between 2002 and 2006 and again between 2006 and 2010. It hoped to achieve the same again by 2015 or 2016.


This would mean increasing sales from about $2.5bn now to $4bn-$5bn. Brazil is the fifth largest market in the world for PepsiCo foods and accounts for half of its Latin American sales.


He did not say how much the company planned to invest. But he pointed to its acquisition last year of biscuit maker Grupo Mabel, reported to have cost R$800m, which gave PepsiCo access to the world`s second-largest market for crackers in terms of volume of goods sold.


The company was investing in manufacturing plants nearer to its markets in the northeast and centre-west to cater more for differing dietary habits between the various regions of Brazil and to reduce logistics costs.


Mr Weber said the potential of the market was shown by the still low per capita consumption of savoury snacks in Brazil – about 1.2 kilos per person a year, versus 8 in the US and 3.6 kilos in Mexico.


Rio Bravo Investimentos, the Brazilian asset manager founded by former central bank President Gustavo Franco, is seeking to raise as much as 400 million reais ($203 million) for a fund that will invest in companies in the nation’s Northeast region.


“We are hunting for middle-size companies with fast growth,” Chief Investment Officer Paulo Bilyk, who started Rio Bravo with Franco in 2000, said in an interview in Sao Paulo, where the firm is based. “The Northeast is where we found a number of those companies with better quality at an interesting price,” said Bilyk, who helps manage 10 billion reais.


Private-equity firms are targeting the region as growth there outpaces the business hubs of Sao Paulo and Rio de Janeiro. Kinea, Darby Overseas Investments Ltd., Vinci Partners Investimentos Ltda. and Graycliff Partners LP are among firms that have purchased assets in the Northeast.


Kinea, the private-equity and asset-management boutique of Itau Unibanco Holding SA (ITUB4), agreed last year to buy a stake in Grupo Delfin, which has a network of medical diagnostics clinics in the northeast states of Bahia and Rio Grande do Norte. In September, Darby bought part of Dall, a food provider for offshore oil platforms in six northeast states. Vinci Partners and Graycliff also closed deals in the Northeast last year.


Rio Bravo, which has two funds already dedicated to the region, plans to invest in companies with revenue between 80 million reais and 300 million reais, private-equity manager Luiz Borges de Medeiros Neto said in an interview from Recife. The fund will target health-related industries, non-durable consumer goods, specialized retailers and infrastructure services.


Shifting Growth


The Northeast, which includes Maranhao, the country’s poorest state, represented 13.5 percent of Brazil’s gross domestic product in 2010, according to the most recent data available from statistics bureau IBGE. That’s up from 13 percent in 2002. Sao Paulo, Brazil’s richest state, accounted for 33.1 percent in 2010, down from 34.6 percent in 2002, while Rio de Janeiro, the second-richest, declined 0.8 percentage point to 10.8 percent in 2010.


Rio Bravo’s new fund will be managed by its office in Recife, where it has four employees.


Sources: Financial Times & Bloomberg

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