Strong northeaster: multinationals see growth in a forgotten slice of Brazil, despite lower incomes and great distances.

Sometimes, there's an emerging market inside ... an emerging market. Northeastern Brazil's economy, at least the high end of it, is hot. Posh resorts and golf clubs are going up along sunny coastline, boosting tourism. But that's not the whole story. Demand for ordinary consumer products in this oft-for-gotten segment of the continent-sized country is booming, too.

U.S. cola giant Pepsi invested US$8 million on a new production facility in Recife. The company expects the plant to help double annual Brazilian sales to $1 billion in just five years. Johnson & Johnson and Ford are also expecting business to grow in the northeast, and they are not letting nettlesome logistics issues or sheer distances get in the way. "We currently have a small market share of around 13% in the region, against 47% nationwide," says Olivier Weber, Pepsi's head of Brazilian operations in Silo Paulo, speaking of the company's snack brand Elma Chips. "There is a lot of room to grow."

Northeastern Brazil is home to 50 million of Brazil's 180 million. While purchasing power is lower, Brazilians in the region eat the most low-cost food and buy more hygiene products, according to Pepsi. As Brazil's general economy has gained steam over the last few years, many manufacturers have been tweaking their business models on the hope that people in the region will buy even more as the economy grows.

Nevertheless, the region is far away from the traditional southern distribution centers near major cities like Silo Paulo. Despite the challenges, companies are overhauling their distribution networks. For Pepsi, that meant building the plant near the port of Suape, 50 kilometers from Recife, the capital of Pernambuco state. "We need to be closer to consumer centers," says Weber. "Our products do not travel easily." Traditionally, Pepsi has supplied its products to Pernambuco from a distribution center in Minas Gerais, 2,000 kilometers away. Now, Pepsi has taken matters in its own hands and distributes its products directly to supermarkets and other outlets in the region's big cities.

For Pepsi, cutting distribution costs in order to lower prices has been key to improving sales, especially in an area where household incomes aren't high. "Sometimes products ended up being more expensive in the northeast where the purchasing power is lower than elsewhere. This did not make a lot of sense," says Weber.

While investments in Brazil's northeast are small as far as Pepsi is concerned, they may well have a wider impact. "If regionalization succeeds, we will set up similar mini plants elsewhere, because they are more flexible," Weber says.

Klemer Bezerra, a grocery-store owner in Recife, thinks Pepsi did the right thing in adopting direct-store delivery. "Previously, we were not well served by the [independent] distributor. We used to have items missing on the shelves and the sales representative would not turn up for ages," says Bezerra, who has managed his K. Bezerra Santana supermarket for 10 years. Better distribution has allowed him to cut prices. "Instead of selling bags of potato chips for 70 cents, we sold them at 50 cents," he says. Lower prices have brought in the customers and as a result, sales of smaller and cheaper food items have tripled, says Bezerra.

While direct-store delivery has cost some independent distributors their contracts, Pepsi says it has boosted other partnerships to deliver its products in the region. Leonardo Chalita is one of those partners. He is the owner of Distribuidora de Alimentos Marfim, which generates 60% of its business with Pepsi by distributing products in the Recife metropolitan region. The new Pepsi plant in Suape may help, and the U.S. company has said it might also open a distribution center near the plant. Currently, Chalita gets his Pepsi products trucked in along a 230-kilometer, four-hour journey from the city of Jaboatao dos Guararapes in Pernambuco state to Magoas state. If that distribution center and the plant in Suape consolidate, Chalita would cut sales taxes to 1% from 5% by eliminating interstate travel. "If I could sell goods from here, it would be really good," he says. "It would be better for us--the sooner the better."

Others may follow Pepsi's lead. The northeast also has been the fastest-growing region in Brazil over the past year for U.S. pharmaceutical and personal-hygiene giant Johnson & Johnson. The company has been in the country for eight decades but has rediscovered the northeastern market only recently. Like Pepsi, Johnson & Johnson managers find that improving distribution and, in turn, cutting prices eventually leads to higher sales since lower prices let in retailers who were not before selling the products.

"We substituted distributors who were not able to service small stores, and we launched more popular products and cut prices from 10% to 15% in some product lines," says Fabio Cornibert, Johnson & Johnson's financial director. "As a result, our sales in the northeast soared three times faster than in the rest of the company, and the number of points of sale also tripled." For instance, improving distribution allowed the company to launch a cheaper version of one of its flagship products, Sempre Livre, a feminine-hygiene product, The product is now distributed to 34,000 outlets in the region, as opposed to 15,000 before just two years ago. At the time, Johnson & Johson's market share was almost 50% lower in the northeast than in any other region, The company says the gap has been rapidly closing.

New option. U.K. consumer-products giant Unilever is also revamping its regional operations. It recently signed a $10 million contract with Brazilian mining giant Companhia Vale de Rio Doce (CVRD), which operates its own, large logistics division. Unilever has opened a new distribution center in Camagari, near Salvador, the capital of Bahia state. To strengthen its operations in the region and lower prices, Unilever will ship its products on a railroad operated by CVRD between Campinas, in Sao Paulo state, to the northeast. "This is a new option for the consumer-goods sector, which has always been dependent on road haulage," says Mauro Dias, commercial director for the logistics arm of CVRD.

Even industrial companies have set their sites on the northeast. U.S. automobile maker Ford built a plant in Camagari, in Bahia state, three years ago. Since then, the company has cut shipping costs at the port of Salvador and for railway transportation by bringing in engines made at the Taubate plant, in southeastern Brazil between Rio and Sao Paulo. The company saved $1 million in 2004. "The Brazilian economy has been growing. Our brand has reached a vigorous performance and we have felt a significantly stronger growth in the northeast than in other regions," says Jorge Cheat, Ford's sales manager in Sao Bernardo do Campo, near Sao Paulo.

THIERRY OGLER * SAO PAULO

MUNCHIES MARKET

Latin America is Pepsi's largest market for its snack
products, like chips, after North America.

Asia/Pacific                       10%
Europe/Africa/Middle East          34%
Latin America                      56%

SOURCE: PepsiCo

Note: Table made from pie chart.