Corporate_Strategy_Deep_Diagnostics_1

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Case Study and Sample Slides Pet Product Market in Brazil

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Pet Product Market in Brazil Client • The client is a leading pet specialty retailer in the US , aspiring to expand to other geographies

Client Ask • The client required SGS to assess the market attractiveness of key pet markets such as Brazil, Canada and Mexico w.r.t. – Market size and potential of pet food, and allied products and services – Status of organized pet retail in terms of its segments, CAGR over years, distribution channels and so on. – Demand side analysis i.e. consumer trends and buying behavior – Competitive landscape including identifying major players in the pet retail market, their respective networks, products offered etc. – Regulations

Sutherland’s Solution • Analyzed the potential of the pet care market including segmentation by pet food, products , services and vet care, most attractive cities in terms of high demand, store formats, type of households in terms of income segment and brand-wise share • Assessment of consumer buying behavior e.g. spending patterns, purchase frequency, preferred products, etc. • Analysis of important parameters like Store footfall, average ticket size, preferred brands, spending on food vs. non-food, buying frequency • Detailed analysis of key pet care market, detailing out top three cities with macroeconomic, demographic, lifestyle, retail spending, pet ownership and key pet spending indicators

• Benefits to the Client • While the overall market potential for pet products and increase in pet humanization trends made the market looked positive, high level of informal market and consumer preferences for near-by local pet shops due to convenience rendered the market unattractive in the short-to-medium term • Important benefits gained by the Client included key insights into the functioning of the pet retail market, identifying important favorable customer behavior trends, strategic high demand locations and detailed description of regulatory requirements © 2012 Sutherland Global Services Inc., All rights reserved. Privileged and confidential information of Sutherland Global Services Inc.

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Pet retailing strategy needs to focus on the Class C household which accounts for ~60% of pets in Brazil Pet Population in Million by Income Segments

11.6

48.5

Class A / B

10.1

Class C

Class D

Ownership of dogs in class A/B population is about 50%

Ownership of dogs in class C population is about 60%

Ownership of dogs in class D population is about 55%

Pet humanization trend is very strong amongst the top strata

Class C, forming the middle class of Brazil, maintain small pets which are convenient to maintain in space crunched urban areas

Class D is the lower middle class of Brazil

Rich people treat their dogs like children; and some fine restaurants are happy to have them as customers

Class A customers typically buy accessories from brands such as Louis Vuitton, Gucci and Hermes

Class C customers typically buy packaged pet food and are known to switch over from private label products to branded products

13.1

Class D pet owners usually buy private label pet food or feed them with homemade food and leftovers

=83.3 Mn

Class E •

Ownership of dogs in class E population is the same as class D at about 55%

Class E constitutes the poor sections of the population

These consumers feed only homemade food and leftovers to their pets

These consumers are price sensitive and do not mind switching brands for attractive discounts

Source: Euromonitor, SGS Estimates, PetFoodIndustry.com

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Consumers are price-sensitive w.r.t pet product purchases; economy brands dominate pet food demand but a clear preference for MNC brands exists

Share of Top Brands by Retail Sales (2009)

Share of Top Brands by Retail Sales (2009)

14

R$ Billion

10 7.7

8 6

4.9

5.6

8.1

8.9

9.5

10.1

10.7

11.4

23.8

12.0 CAGR 6%

6.4

4 2

CAGR 13%

0

~72% of Retail Sales Top Pet Food Companies

12

18.1

8.5

8.0

6.2

3.4

2.1

1.7

2.3

2.1

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Dog & Cat Food Other Pet Food

12.9

Pet food market by brand classification (2009)

Economy 65%

Permium 8% Super Premium 4%

Top Pet Food Brands

~39% of Retail Sales Standard 23%

6.5 4.8

3.8

3.5

2.6

Source: Euromonitor, SGS Estimates, ANFAL Pet, PetFoodIndustry.com

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Pet care market has seen significant growth in services and accessories segment; pet food and vet care market is growing at a steady rate Retail Pet Care And Services

Key Observations

CAGR- 16.2%

The pet retail market is dominated by sales of pet food which constitutes about ~65% of sector total

The pet food market is dominated by Mars and Nestle who together accounts for 40% of the overall food market

Presence of around 100 pet food manufactures in the country, ~45 enrolled in the pet food association

Share of pet food in overall retail sales value has declined over time as demand for services has increased significantly; nonetheless, the food sector has been growing at a decent rate of nearly 13%

Services such as grooming, training and day-care have increasingly became quite popular in urban centers such as Sao Paulo; since 2007, the services segment has grown by nearly 47%

Pet food revenues have registered robust growth led by resilient end product prices and increasing customer shift to premium food

Pet retail market is expected to continue on its double-digit growth trajectory led by greater adoption of packaged food and rising income of middle-class

Overall pet care market has been growing with at a CAGR of 16.2% and expected to grow by 17% over the next three years

(in R$ billion)

$6.4

$7.3

$8.4

$10.6 $11.5

$13.5

100%

CAGR: 10.7%

90%

CAGR: 32%

80%

CAGR: 30%

70% 60% 50%

CAGR: 12.6%

40% 30% 20% 10% 0% 2005

2006

2007

2008

2009

Pet Food

Services

Equipment & Accessories

Vet Medicine

2010

Source: Euromonitor, Pet South America, Interviews

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Pet products and services are sold through a variety of channels • •

Pet Shops Pet Store

• •

• • •

Neighbourhood pet-shops are the most important channel for pet retailing in Brazil Pet shops is a highly fragmented channel with more than 10,000 operating units accounting for over 50% of the total operating units providing pet care products and services in Brazil Pet shops or neighborhood pet stores, can range between 3000-5000 ft2 in size and stock about 1000 SKUs Popularity of this channel is attributed to convenience coupled with provision of personalized services at these shops

Agro-resellers, who have traditionally focused on the sale of farm supplies are now shifting to selling pet products While these agro-resellers offer pet food, accessories and veterinary services; they do not offer additional services such as bath and grooming, day care and hotel/night stay There are around 7,000 agro product resellers based in malls or having shops at city outskirts and constitute ~10% of all pet care operating units

Agro Resellers • • •

Pet superstores are large specialty stores with area ranging between 15,000-20,000 ft2 and are situated in prime locations such as malls or central business districts These stores are dedicated to selling only pet products and services and offer private label products as well but are more popular for pet accessories than pet food due to limited variety of pet food brands available They contribute ~7% in the operating units and MNCs are increasingly using this format to gain share in pet food market

Pet Superstores • •

Supermarkets

• •

Supermarkets are large stores with area around 30,000-35,000 ft2 located in prime areas in urban centers and are at the forefront of distribution strategies for leading players / brands These superstores stock around 20,000 SKUs and key feature is the discounts and promotional schemes they offer due to economies of scale which helps to price products competitively They offer pet food & accessories but no related services and have ~ 12% share in the pet care operating units

Online pet food retailing is an emerging format in Brazil and currently, constitutes only a small share ~ 2% in the pet care operating units This format offers the convenience of shopping from home but provides only pet food and accessories and cannot offer other pet related services such as day care, batch and grooming etc. Most of the leading retailers are sensing traction in this space and thus, have set up their online store

• • • •

Vet clinics provide veterinary services along with pet merchandise & bath and grooming facility and constitute ~ 20% of the pet care operating units These clinics are around 1,500 - 2,000 ft2 in area and are located all across large and small cities Offering vet care along with pet food and products is the value proposition of these clinics A few superstores have built a vet care unit within the store to provide all services under one roof

Online Retailers

Veterinary Clinics Source: Sutherland Research

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Pet population is concentrated in the South East and Southern regions of Brazil Pet Population in Million by Region

5.7

5.8

North

12.5

23.4

Central West

=83.3 Mn

35.9

South

North East

South East

Lowest pet density

Contributes ~12% of the Brazilian GDP

Almost isolated from the rest of the country

Contributes ~12% of the Brazilian GDP

Contributes ~8% of the Brazilian GDP

Contributes ~58% of the Brazilian GDP

Mainly savanna-like climate and vegetation

Houses ~27% of total population

Most populous region in the country

Houses over 6% of total population

High standard of living, with the best social indicators of the country and has a strong presence of immigrants

Has three most important national metropolitan regions: Sao Paulo, Rio de Janeiro and Belo Horizonte

Vegetation dominant region and contains the Amazon Rainforest

Source: ANFAL-PET

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Sao Paulo and Rio De Janiero appear the most attractive market for entry, from a size-perspective Brazil: R$ 13.5 Billion Pet Market Households

Population

GDP

Pet Care Market

‘000

Million

R$ Billion

R$ Million

São Paulo

3,928

11.0

357.1

6,210

Rio de Janeiro

2,407

6.2

154.8

1,080

Curitiba

634

1.8

43.3

597

Belo Horizonte

846

2.4

42.2

529

Brasília

856

2.6

117.6

527

Porto Alegre

574

1.4

36.8

507

Salvador

962

2.9

29.7

391

Fortaleza

78

2.5

28.4

374

Campinas

388

1.1

29.4

338

Recife

515

1.5

22.5

296

Manaus

515

1.7

38.1

269

São Luís

305

1.0

14.7

194

Maceió

313

0.9

9.1

121

Natal

271

0.8

8.7

114

Florianópolis

194

0.4

8.1

112

Belém

424

1.4

15.3

108

João Pessoa

242

0.7

7.7

101

Teresina

252

0.8

7.5

99

Aracaju

197

0.5

6.9

92

Goiânia

483

1.3

19.5

87

Others

NA

NA

NA

1,355

Brazil Geography by Major Cities Capital

Source: SGS Computation Model, Primary Research

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Sao Paulo is the most populous city in the southern hemisphere & 10th richest in the world Macroeconomic and Demographics Indicators GDP

359.4 bn Contribution to Brazil GDP: 11.8%

Highest amongst all cities in Brazil

Key Observations • •

Population

Population Break-up

Area

Households

Employment

Average Monthly Income (AMI) Income Distribution (Basis AMI)

11.2 mn Share in Brazil population: 5.8%

Most populous in Brazil

0-19: 31.3% 30-59: 41.3% 20-29: 15.9% 60 or older: 11.5%

Employable population: 57.2%

1,523 Km2 Share in Brazil area: 0.018%

3.9 mn Share in Brazil: 5.8%

4.2 mn Share in Brazil employment:12.7%

R$1,358 Growing at approx. 4% y-o-y <800:37.7% 1,600-3,200: 18.5% 800-1,600: 26.0% 3,200: 17.8%

Largest city in Brazil

• •

Highest in Brazil

Share in employment is higher than share in population (5.8%)

Higher than Brazil’s average of R$919

Sao Paulo’s nominal GDP increased at a CAGR of 11% during 20022007, in line with Brazil’s GDP growth during this period City of Sao Paulo has undergone significant economic changes, from being a traditional manufacturing-based city to a service-oriented one. The services sector currently comprises 65% of its GDP According to PWC report, Sao Paulo is the 10th richest city in the world and is expected to climb to the 6th spot by 2025 City of Sao Paulo has a population of more than 11 million, making it the most populous city in the southern hemisphere. The population grew at a CAGR of 0.59% during 2000-2010 Due to the concentration of wealth and population, the city has become a prime target market for Western countries It is regarded as the commercial hub of the country, with 63 % of the international companies operating in Brazil have their head offices in Sao Paulo city More than 500,000 affluent families reside in the city of Sao Paulo (38% of the Brazilian total) 95% of the population is urban, with women constituting 51% and white people 57% Unemployment rate has been witnessing a declining trend and was 13.9% in 2007 as compared to 17.9% in 2002 The number of households has grown at a CAGR of 3.2% during 2000-2010. Around 60% of these households have 3-5 people

~ 62.3% population over AMI of R$800

Source: IBGE, News Articles

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All 31 prefectures in the city have monthly income higher than Brazil’s avg; a mix of prefectures is considered for analyzing location attractiveness

City of Sao Paulo’s Regional Break-up by Average Monthly Income 30 17 25

29

18

3 9 1

6

10

AMI

Population

Region

AMI

1 – Butanta

2,764

2 – Ipiranga

Population

384,069

17 – Santana

1,435

304,062

2,197

429,299

18 - Vila Maria

1,435

287,886

3 – Lapa

2,764

255,185

19 - São Mateus

937

436,329

4 - Vila Prudente

1,352

520,670

20 - Jaçanã

1,435

276,628

5 - Vila Mariana

2,197

294,627

21 – Mooca

1,352

286,598

6 – Pinheiros

2,764

233,563

22 - São Miguel

937

410,514

7 – Penha

1,352

476,489

23 - Itaim Paulista

937

399,140

928

672,901

24 - Cidade Ademar

928

402,713

1,789

328,597

25 - Casa Verde

1,177

313,026

928

578,857

26 – Aricanduva

1,352

258,203

1,177

442,722

27 – Guaianases

937

291,193

12 - M´Boi Mirim

928

544,446

28 - Cidade Tiradentes

937

242,077

13 – Itaquera

937

525,337

29 - Ermelino Matarazzo

937

210,709

1,177

148,226

928

148,239

20

14

11

Region

16

12

5

7

21

26

4 2

22

23

13

27 28

19

15

Up to R$1,200

24

R$1,200 – 1,500

8

31

R$1,500– 2,000

8 - Capela do Socorro

Over R$2,000

9 – Se

Ranks reflect prefecture’s monthly income (1 being the highest) and have been arrived at by multiplying prefecture’s average monthly income and its population

10 - Campo Limpo 11 – Pirituba

Five regions are selected, with at least one from each income slab based on population and affordable income level to provide a suitable mix

14 – Freguesia

1,177

416,743

30 – Perus

Butanta – Highest AMI, Moderate population

15 – Jabaquara

2,197

213,862

31 - Parelheiros

Ipiranga – Second-highest AMI, High population

16 - Santo Amaro

2,197

207,421

Vila Prudente/Sapopemba – Moderate AMI, High population

Se – Moderate AMI, Moderate population

Capela do Socorro – Low AMI, Highest population

Source: Sutherland Research

© 2012 Sutherland Global Services Inc., All rights reserved. Privileged and confidential information of Sutherland Global Services Inc.

AMI = Refers to Average Monthly Income per household

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