Initial Impacts of Covid-19 on the Brazilian Consumer

- A large part of the country remains in social isolation mode, with no clarity as to when and how such measures will be relaxed or lifted. São Paulo state is signalling a continuation of the quarantine period until at least April 22.

- On April 13, Santa Catarina became the first state to announce the reopening of some retailers, with restrictions remaining on schools and shopping malls.

- Supermarkets and pharmacies reported higher sales in March and early April nationally, with Cielo, an electronic payments company, reporting an increase of 3% in March and an increase of 4.7% in the first week of April, compared to the same period in 2019.

- Cielo also showed that sales in the services sector contracted by 45% in March in Brazil, while durable goods declined by 33%. For the first week of April, services declined by 73% and tourism tumbled by 91%.

- Elo, another electronic payments group, reported a sharp contraction of 65% in sales at bars and restaurants in the last week of March, while Cielo indicated that sales at bars and restaurants contracted by 71% in the first week of April.

- Online sales are set to expand significantly this year, with supermarkets reporting an increase of 80% in March, according to a report by ABComm.

Foodservice Losses Will Have a Huge Impact on Food and Beverages in 2020

With social distancing measures in place across Brazil, the impact of the pandemic on consumption of food and beverages will be very significant in Q1 and Q2 and will potentially have lasting impacts on consumption levels, depending on how much unemployment increases and on the severity of the upcoming recession. While Rabobank expects a contraction in GDP of around 2% for 2020, other institutions like The World Bank see a 5% drop in economic output, which would take the economy’s size back to 2010 levels. Sebrae, a private agency that supports small- and medium-sized companies, reported that up to 600,000 small businesses had closed permanently or temporarily by early April, which could mean that nine million jobs are at risk. By March 26, almost all of the country had some restrictions on restaurants and bars, which remain in place as of mid-April (see Table 1).

Dairy Consumption: Liquid Milk and Mozzarella Gain as Value Added Falls

Companies are reporting several changes in sales dynamics after three weeks of quarantines. For instance, dairy companies have seen a spike in basic products like mozzarella and prato cheeses (a yellow semi-hard cheese similar to Gouda) and UHT milk, as consumers significantly increased their purchases of staple goods in anticipation of the social isolation measures. More expensive product lines, like yogurts, desserts, and imported cheeses, have declined sharply in recent weeks. This indicates that consumers are being more careful when making their purchases at points of sale, and this seems to be happening in other sectors too, as consumers trade down from more expensive brands and categories into staples and affordable alternatives. On the other hand, sales of products to foodservice outlets have declined between 70% and 90%, according to companies interviewed by Rabobank, as restaurants limit most of their business to deliveries and limit their own stocks to a minimum. Imports of dairy products are down 30% thus far in 2020, while exports advanced by 16%, in part as a consequence of a stronger USD. A smaller trade deficit will help balance slower domestic demand of dairy products and provide some stability to the sector.

Poultry Favored Over Beef as Consumers Trade Down

The animal protein sector is facing significant challenges too. According to IBGE (Brazilian Institute of Geography and Statistics), beef slaughter rates declined by around 50% in March, compared to the same month in 2019. Domestic consumption is contracting at a rapid rate, and, as a consequence, major processors are closing some of their plants temporarily. Poultry sales are performing better than beef, with consumers looking for affordability. Pork exports to China have seen no impacts, which is helping that sector maintain steady production.

Beverage Sales Hit Hard by Declining Foodservice Sales

As expected, the foodservice channel is suffering the most during the social isolation period, with sales collapsing in most outlets as mandatory orders for closing bars and restaurants continue into April. Some restaurants are seeing a significant increase in food delivery, but according to Abrasel (Brazilian Association of Bars and Restaurants), this represents just 6% to 8% of revenues for restaurants in normal times. It is likely that this percentage will increase significantly during the pandemic, but it will not be enough to compensate lost sales in a significant way. According to Euromonitor, foodservice sales accounted for 69% of beer sales, 41% of spirits, 37% of meat consumption, 10% of dairy sales, and 20% of soft drinks sales in 2019 (see Figure 1).

Outlook for the Brazilian Consumer in 2020

- Brazilian consumers are experiencing unprecedented stress levels in April 2020, with a rapid decline in income, higher unemployment, and fear of Covid-19 shaping their spending behavior.

- The first key point to project is when the economy will reopen and whether consumers will start behaving in the same way as they did before March. For now, the base case scenario is a sharp contraction in Q2, followed by a return to growth in Q3 and Q4 that will enable consumption to recover for most key sectors.

- However, this projection can change rapidly. First, because health problems are still unresolved, and second, because consumers are unlikely to go out and spend in foodservice locations in the same way as long as there are virus cases present and no vaccine or proven treatments.

- Beer and spirits are likely to be hardest hit by the foodservice contraction. But other sectors, like animal protein, will also be impacted.

- One of the lessons from the 2015-16 recession was that consumers traded down to more affordable alternatives. This could benefit poultry over beef, local beer versus imported brands, and domestic cheese versus imported.

- Delivery platforms, like Rappi and iFood, are clear winners of this crisis and will further increase their share of sales in food and beverages as a channel. This is likely to be a permanent gain, as consumers will likely be less willing to go out to public places even as the worst of the epidemic ends.

- Restaurants will need to adapt to a new reality, in which deliveries make up an even bigger share of their overall sales. More investments into specialized kitchens for deliveries are also likely. While the Brazilian congress has now approved a support measure of BRL 600/month for three months for workers with no formal jobs, which is around 60% of the monthly minimum wage, many consumers will cut purchases to the absolute essential whether they have formal or informal jobs.

- Companies will need to continuously adapt to a rapidly changing consumer landscape in Brazil, with no clear indication yet of when life will return to anything close to normal for most. Online sales are thriving and will accelerate the growth of e-commerce in 2020. Companies that have invested in platforms and direct distribution will emerge stronger.

- Despite a hard 2020 ahead, consumer spending could start to recover gradually in the second half and into 2021, as long as health issues become more controlled. However, if unemployment increases very significantly, the recovery could be very slow and gradual, as seen after the 2015-2016 recession, when consumer spending saw a prolonged period of declines, even after the end of the economic crisis.