Billionaire Diniz Wants Scrimping Brazilians to Have Luxury Ham

  • BRF hesitant to raise food prices as unemployment climbs
  • Company also facing stiffer competition from JBS at home

Abilio Diniz, the billionaire chairman of Brazil’s biggest processed-food maker, wants to make sure his suffering countrymen can afford top-grade ham this Christmas season.

Diniz’s BRF SA isn’t planning any price increases in its home market at least through December, even with above-target inflation and a weak currency pressuring costs, executives said at a press conference in New York last week.

The move isn’t purely altruistic: With Brazil’s economy heading toward the longest recession since the 1930s and unemployment soaring, Diniz is making a play to hold onto market share amid increasing competition from JBS SA, the world’s largest meat producer. As BRF pours money into marketing its lower-end Perdigao brand, it’s also running TV commercials for its premium Parma ham for the first time. Investors aren’t thrilled with the strategy -- they sent the stock to its biggest drop in seven years on Oct. 30 after the company reported that profit margins in Brazil shrank in the third quarter.

"We are cautious about this move," said Caio Moreira, an analyst at Banco Fator SA in Sao Paulo, who rates the shares hold. "Unless the company is able to increase volumes and dilute rising operating costs, we will see lower margins from now on."

Chief Executive Officer Pedro Faria says sustaining consumer loyalty in the company’s biggest market is an investment to make sure that profit rebounds in the long run, when growth returns to Latin America’s largest economy. BRF wants customers to associate its luxury Sadia brand with success and the economic good times of the recent past, when the size of the economy more than quadrupled in dollar terms in the decade through 2011.

“Especially now in Brazil, people need to feel that,” Faria told a room full of analysts at the New York Palace Hotel last week.

Brazil entered a recession in the second quarter with the lowest consumer and investor confidence levels in history, and economists forecast gross domestic product will shrink 2.8 percent this year and 0.9 percent next. The nation’s currency, the real, has lost almost one-third of its value this year -- the most among major currencies tracked by Bloomberg. That’s helping to exacerbate inflation, which has accelerated to the fastest in 12 years even as the economic slump curtails demand for anything beyond necessities.

In that environment, the company’s sales grew less than analysts forecast in the third quarter as capital expenditures jumped 24 percent from a year earlier. Net income rose by 53 percent to 877 million reais as exports more than offset weak domestic results. 

In Brazil, earnings before interest and taxes fell 45 percent to 226 million reais from the year earlier on higher costs and a slowdown in consumption. Analysts at Bank of America recommended investors sell the shares, citing a “dramatic” decline in domestic profit margins and stepped up competition.

BRF, formed under the name Brasil Foods after Perdigao SA’s acquisition of Sadia SA in 2009, is facing increased competition from JBS in the domestic market as the world’s top raw-meat producer grows its packaged-food business after an acquisition last year. In the first half of 2015, JBS became one of the 17 top advertisers in Brazil through newspaper and television ad campaigns, outspending competitors such as BRF and Nestle SA, according to polling company Ibope Media.

JBS is also holding prices of processed food while seeking to cut costs and improve its distribution and product mix to offset higher costs, according to Gilberto Tomazoni, the chief operating officer. "We would like to have raised prices, but we are not alone in the market," Tomazoni told journalists in Sao Paulo on Thursday.

BRF’s Sadia and Perdigao brands have a combined stake of about 50 percent of the processed-food market in Brazil, according to a company presentation.

BRF shares have lost 13 percent this year as of 4:27 p.m. in Sao Paulo, compared with a 27 percent gain for JBS.

Faria said BRF isn’t sacrificing margins to gain market share and that earnings will rebound. The compression in profitability seen in the third quarter was the result of a one-time charge related to Venezuela and a temporary surge in marketing costs, he said. BRF is using the growing profits from its international business to fund the domestic push.

“The long-term decision was to really go more aggressive in Brazil given the results that we are recording in other markets,” Faria said. “There’s no way to do it without substantial investment.”

The company will raise prices eventually, but “in a granular way, market by market, region by region, channel by channel.”

Diniz defended BRF’s investments at a time of turmoil in Brazil. The country doesn’t have an economic crisis, just a political crisis that’s hampered the government’s ability to push through measures to shore up the budget and restore growth. Once that’s resolved, the economy will heal, he said.

“We are preparing for this company to grow in the crisis and after the crisis,” said the 78-year-old billionaire, who turned his family’s supermarket chain into the country’s biggest retailer before selling it to Casino Guichard-Perrachon SA and buying a stake in French retailer Carrefour SA. “Of course we’re not happy with how the market understands, but we follow in our way, doing the best for the company.”

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