RUNNING HEAD: BRASIL FOODS

Case Study; Brasil Foods (BRF)

Jared Allen (100806329)

Jessica Chan (100888395)

Shinho Choi (100841196)

Adrienne Choung (100905689)

Eden Hughes (100791996)

George Brown College

Professor Gary Hoyer HOST 4113

February 7, 2017
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Introduction

BRF, formerly Brasil Foods, is a Brazilian food conglomerate that was created as

a new entity after the acquisition of Sadia by Perdigo. For over 70 years the company

has been producing animal proteins, processed foods, margarines, pastas, and frozen

pizzas. Its first production plant was located in Videira, Santa Catarina. The company was

listed by Forbes magazine in both 2012 and 2013 as being among the 100 most

innovative companies, ranking at 39th in the world. It has been a publicly traded company

since 1980, listed on the Novo Mercado segment of the So Paulo Stock Exchange and

the New York Stock Exchange. BRF has been included in the worlds leading

sustainability indexes. These indexes support the connection between social and

environmental practices, market reputation and business performance. As of 2005, BRF

has been a component in the Corporate Sustainability Index of the So Paulo Stock

Exchange, the only food company to be included ("OUR HISTORY", 2017).

Negotiations for the merger between Sadia and Perdigo first began in 2008 and

were led by CEO Jos Antonio do Prado Fay. Originally, the merger was first brokered by

the Brazilian government but later on the Administrative Council for Economic Defense

(CADE), Brazils antitrust agency, opposed the deal due to fears that it would hinder

domestic competition and drive up food inflation. Eventually the merger was approved by

the CADE on July 13, 2011 after the government imposed a series of restrictions that

reduced the size of the company (Bell & Kindred, 2012).

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1. What emerging markets (2) should BF pursue first and why?

As mentioned in the case study, BRFs domestic growth was restricted. As such

Fay and his management team should pursue international markets, focusing on

developing countries with large and growing middle classes. The first two emerging

markets BRF should pursue are Latin America and Asia. As Brazil shares many cultural

similarities with several Latin American countries, expanding in this region is an

attractive choice for the company and would be considered a natural progression. Further

strengthening its case to expand in Latin America, is their already developed presence in

Argentina. In this region, Mexico shows the most promise as a growing market for BRF

as they have a large middle class and could later on be used as an avenue through which

BRFs products could reach the U.S (Bell & Kindred, 2012). According to a report from

Mexicos National Institute of Statistics and Geography, as much as 39.2% of the

countrys total population is considered middle class (Flannery, 2013). Those falling

under this classification in Mexico can typically be defined by their product consumption,

which often includes purchases like a new refrigerator and a car, both products which

make it easier for the Mexican consumer to purchase BRF products (Hardy, 2012).

Traditionally, fresh food held high importance in the Mexican diet, but with more women

holding post-secondary degrees, entering the workforce and spending less time at home,

packaged and processed food is experiencing higher growth than fresh food, making it a

prime market for BRF to enter. Mexican citizens of all income segments are allocating
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less time for buying, preparing, and cooking food, especially in urban areas. Whole meals

are being replaced with products that are easy and quick to prepare. Packaged and ready-

to-eat meals offer price conscious and convenient options for the Mexican consumer and

are becoming widely available in different retail outlets across the country. Due to socio-

economic shifts, younger consumers especially couples with dual incomes but no kids,

are becoming an important segment in the Mexican market ("Consumer Profile -

Mexico", 2017). This segment has the disposable income to afford to pay for convenience

and could prove to be a booming market for BRF.

The second market BRF should consider expanding into is Asia, specifically

China. It is one of the worlds most populous countries, thus BRFs opportunities in

China are potentially massive. It shares similar demographics and consumption trends

with the market in Brazil, thus there is a high demand for processed and convenience

food (Bell & Kindred, 2012). When examining China, they are the second-fasted growing

F&B market in Asia with an average annual growth rate of 30% between 2009 and 2013.

While grains and vegetables remain the most consumed food products in China, their

consumption has declined since 1990. In contrast, meat and poultry products, grew in

popularity between 1990 and 2012, making it the perfect timing for BRF to enter the

Chinese market. Foreign trade and food imports have increased greatly with the rise of

household disposable income and food safety scandals. Incidents such as the 2008 tainted

milk scandal and the 2013 discovery of 15,000 dead farm animals in the Huangpu River

has severely undermined Chinese consumers trust and confidence in domestic food

production processes and health standards (Sector Report: The Food & Beverage Market

in China, 2015).
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The biggest hurdle BRF faces if they were to enter the Chinese market, is the

countrys insufficient cold chain infrastructure. Currently, their cold chain system is

rudimentary with a number of key food processing enterprises having to create systems

for their own products. While there is ongoing development, Chinas cold chain is still

highly fragmented -- with few companies having reach outside their home cities. The

Olympics in Beijing and the World Expo in Shanghai both helped expedite development,

the governments efforts were focused solely on first-tier cities (Pei, 2009). If BRF were

to enter the Chinese market, they may have to focus on shelf-stable products and build

their own cold chain capability. Thankfully, they already have experience doing this in

the rural north of Brazil and thus can draw lessons from it, hopefully increasing their

chances of success (Bell & Kindred, 2012).

2. What benefits and drawbacks result from the merger of Perdigo and Sadia?

Since Sadia and Perdigo were Brazils largest food producers and most well-

known food brands, the merger of Perdigo and Sadia was very beneficial. As a result of

the merger, in 2010, BRF became Brazils second-largest employer; the worlds largest

poultry exporter and second-largest meat exporter. Its net sales increased to R$22.7

billion and earnings before interest, tax, depreciation and amortization (EBITDA) to

R$2.6 billion. Also after the merger, BRF then occupied 57% of the frozen processed

foods and 55% of the chilled processed foods market in Brazil. In addition to this, when

Sadia was acquired by Perdigo, it did not require a turnaround nor was there a

management or operational problem which is a rare occurrence (Bell & Kindred, 2012).
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On the other hand, there were various drawbacks from the merger. Often when

two rival companies merge together, it is difficult to combine both groups to make one

united and cohesive team. Since both Sadia and Perdigo had their own corporate culture,

when BRF was created, the company had to create harmony in terms of their visions and

develop collective pride under one company. One of the biggest hurdles experienced by

BRF due to the merger was Brazils anti-trust agency, the Administrative Council for

Economic Defence (CADE), opposing the deal despite the government itself brokering

the merger. The merger created fears of stifled domestic competition and increased food

inflation costs. In much of Brazils grocery stores, the two companies dominated the

meat, dairy, and refrigerated food shelves. As a result of this opposition, much of BRF

operated in merger purgatory. While BRFs export business was able to integrate, much

of Perdigos and Sadias domestic business was unable to. Employees of each company

were forced to work together yet separate at the same time. Eventually the CADE

approved of the merger but drawbacks still continued to occur. BRF was forced to sell

several factories, slaughterhouses, poultry farms, distribution centres, and 12 food brands.

In addition to this, they were forced to suspend sales of specific Perdigo-brand products

for three to five years. As most of the assets were sold to a single buyer, an effective

competitor was created (Bell & Kindred, 2012).

3. Should they acquire a local partner for this market and why?

It would be an excellent opportunity for BRF to acquire a local partner in this

market. In the 2010 alone, Brazils economy expanded by 7.5%. This economic boom

was driven by a growing middle class that powered domestic demand. Income and

population within the middle class was rising causing a change in consumers purchasing
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decisions. Preferences of consumers in Brazils middle class shifted towards convenience

products as more and more individuals started to enter the workforce (Bell & Kindred,

2012). This is important to note when analyzing purchasing habits of consumers in

Brazil. As more and more individuals enter the workforce, the culture of making

homemade meals with multiple ingredients will become less common. To capitalize on

this trend, it would be advantageous for BRF to acquire a local partner for their frozen

food line-up. By acquiring local partners, BRF could create an economy of scale in

frozen meal production while offering premium frozen food items at an inflated price.

Due to the increase in working individuals, BRF would be able to exploit this market

sector with limited risk of price sensitivity.

4. Why does vertical integration matter for BF? How does it affect domestic and

international expansion?

Vertical integration is important for corporations looking to make their supply

chain and production more productive and efficient (The Economist, 2009), and BRF is

no different. Using the example from the section above, vertical integration will aid in

domestic expansion by allowing BRF to grow economies of scale across all domestically

produced products while giving the company more control of inputs and the channels by

which they are sold. Essentially, domestic vertical integration will be beneficial, as it will

allow BRF to reach more markets with more products across Brazil. In terms of

international expansion, vertical integration should be considered a long-term objective

for BRF. Challenges associated with vertically integrating in foreign markets can be

maintaining product quality, supply chain efficiency as well as streamlining best practices
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in all departments in every market. Once BRF has established proper processes

domestically, international expansion should be considered.

5. How feasible is the companys growth plan of achieving approximately $5 billion

in revenue from each of: domestic growth, export growth, and from international
acquisitions?
List the pros and cons. (Be detailed)

BRF has already seen great success in growing their business in the domestic

market and in regards to exporting their goods as well as acquiring other food service

businesses. Thus, it is safe to say that each individual aspect of business growth has a

unique strategy involved with it in order to make it reach these proposed levels of

revenue. Below is a list of pros and cons to help determine whether these goals are

attainable.

Pros:

Between 1996 and 2006, the total value of Brazils crops increased 365% through

scientific agriculture innovation. Exports were diversified beyond traditional tropical

products (e.g., coffee, orange juice) to soybeans, sugar and meat.

Brazil still has significant room to expand food production: it had the worlds largest

renewable water supply and was only using 50 million hectares of its potential 300-400

million hectares available. (Bell & Kindred, 2012)

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Policies brought in by former President Lula da Silva focused on creating

domestic conglomerates in strategic sectors like food commodities. The government

coordinated several mergers designed to give domestic firms the scale needed to compete

internationally. (Bell & Kindred, 2012)

By merging two of Brazils largest food distributors and becoming BRF, the

company was able to integrate vertically and obtain more technologies and the logistical

capacity they needed to operate on a global scale and still maintain their quality control.

With the average income in Brazil still rising and millions of people entering the middle

class with more disposable income, Brazilians have showed a strong trend of increasing

their spending on food and their expenditures have been projected to grow from R$316

billion in 2009 to R$567 billion in 2015. (Bell & Kindred, 2012)

Cons:

Having to manage the complexity of production and supply chains internationally

adds to the difficulty of keeping consistent quality control. This is especially so when

considering entering emerging markets like China, who have demanding government

regulations that could result in the loss of large profit margins.

Also entering markets with international competitors means that BRF must choose

carefully when acquiring new brands, as they must have strong established consumer

relationships.

In addition, BRF must find countries that have a limited food supply, are open to

Brazilian exports while being close in proximity in order for easy logistics. Sanitary
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conditions must be up to the companys standards or there must be the potential to

improve upon them in order to ensure food safety and that nearby markets will accept the

exported goods.

6. What strategic plans would you put in place and why?

BRFs goal of having production, distribution, and branding operations in Africa,

Asia, the Middle East, and Latin America are due to the desire for the company to move

down the value chain and interact with customers on a new level. By engaging with

customers, the company can begin to understand their buyers on a new level and create

brand loyalty.

BRFs 2015 goal of doubling their revenue requires the following steps to be taken (Bell
& Kindred, 2012):

1) The crucial initial step of facilitating the post-merger integration among

employees, processes and practices. BRF needs to strengthen and combine its

domestic foothold with the leverage of the merger. There are not many local

competitors that can compete with the sheer product volume and diversity. In the

first step, the company will also be required to advance its global presence

through acquisitions and strategic partnerships with facilities that will provide a

gateway and local knowledge of current products.

2) The second step of the process will involve the continual internationalization

efforts on enhancing the brand. Now with the tools to focus on building a global

company, a culture will need to be created to add to the brand image and

reputation. This can be accomplished through the development and training of

existing personnel with new and innovative knowledge and practices. The
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recruitment of new talent is important to add new and creative strategies and

visions for the company.

3) BRF to become a world-class multinational such as Nestle or Unilever

Suggested Business Strategy

Our suggested strategy focusses on core values of the company to encourage the increase

of growth, diversifying the sales and reducing costs through more innovative and efficient

practices throughout the supply chain. The above-mentioned steps toward BRFs goal can

only be achieved if the areas mentioned below are met:

Expand distribution in domestic markets. The already strong local distribution

market needs to be further expanded through additional acquisitions. The two

companies have built relationships and efficient practices for sourcing raw

materials, processing and transporting the products around the country, but further

work needs to be done. The distribution network will require improvements and

changes to meet the new needs of the expanded company.

Focus on service and customer needs. Now more than ever the company will

need to maintain and exceed the consumer expectations of its products. The needs

and trends of the consumer change constantly, and the products need to evolve

accordingly. Constant innovation and creativity with new products will be

essential in meeting the new needs of customers.

Brand differentiation. The company will now need to create a relationship with

consumers to create trust and a brand image. BRF as a brand will be one of the

most important assets of the company. From packaging, advertising and quality

assurance the image of quality will be associated with the brand. The brand image
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will not only carry locally, but will be used as a global identity of quality and

service.

Operate efficiently with low costs.

The company is at an advantage with the low cost and abundant availability of

many of its raw materials. Along with its efficient operating processes, the

company can compete on an international level. The vertical integration within

the company allows for quality and cost assurances throughout production and

delivery. By maintaining the standard, the company is at an ultimate advantage

compared to other companies.

7. Is BRF better equipped for exporting food or expertise? What would it benefit

more from?

Following the merger of Sadia and Perdigo, the company is equipped with the

capability to compete in exporting food with the international companies. In comparison

to the United States, Brazil has transportation systems that are better outfitted to get the

inputs to ports for export (Leach, 2011). With the largest renewable water supply and

hundreds of millions of potential arable lands, the country shows great potential as a key

exporting source (Bell & Kindred, 2012). With the combination of abundant quality

resources and the innovative production processes, BRF is in a good position to continue

venturing out to international markets.

Exporting goods will help with resolving the companys issues with restricted

domestic growth. By considering markets with low food supply and high demands for

protein-based or processed products, BRFs assorted product profile would be welcomed.

Exporting goods would allow the company to maintain control of the supply chain, as
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long as the entire production process is completed within the country. Introducing BRF

products into international markets will greatly help in exposure of the brand and the

quality behind it.

Conclusion

BRF, while a food conglomerate, thanks to the merger of Sadia with Perdigo,

must look to international expansion in order to address their ongoing issue with

restricted domestic growth. Mexico and China, are the two emerging markets that would

give BRF the most favourable outcome(s) at this time. Both markets are similar in

characteristics to Brazils, and while there are various hurdles to address in order to

ensure the new ventures would be successful, BRF already has the experience necessary

in order to resolve the them.

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