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Two approaches to a difficult Brazilian industry.

The Roast & Ground industry in Brazil is as diverse as the country itself. For a generation, it was tightly controlled from cost (green coffee) and price (sales price) standpoints. Under the regime of the IBC (Brazilian Coffee Institute) from 1958 to 1975, roasters could buy a uniform quality green coffee at subsidized prices. Unfortunately, the quality of the coffee was as low as the prices. When the IBC disappeared in 1975, price controls remained, which meant that quality began to vary although price did not. With this article, Frederick Lockwood discusses two successful business strategies that worked in a controlled market and have continued to succeed in the free market.

Cafe Uniao is the largest roaster in Brazil, among the top 10 or so in the world, which roasts roughly 70,000 (60 kilo) bags per month. Cafe do Ponto is a medium sized roaster, probably number three in Brazil, roasting roughly 21,000 (60 kilo) bags per month. Uniao relies mostly on price and sophisticated production techniques, while Ponto utilizes quality and agility.

Uniao began its growth when it was bought by Copersucar in 1973. Copersucar is the largest sugar manufacturer, brand, and distributor in Brazil. Copersucar also bought Hills Brothers in the U.S. in 1976 and sold it to Nestle in 1983 when unrelated problems arose.

Brazilians, especially poor Brazilians, like a lot of sugar in their coffee. This symbiotic relationship has allowed Uniao to discount one product and to sell an attractive package deal. The result has been growth from 20,000 to 70,000 bags. Uniao's current market share is approximately 11% nationally and 36% in Sao Paulo State.

The emphasis of Uniao has been on price and economies of scale. The company has nine Lilla roasters (5 have 12 minute roasts, 4 have 20 minute roasts) that can roast up to 86,000 bags per month. That sort of overcapacity is normal in Brazil because demand can vary dramatically when price corrections are anticipated. Inflation is currently running at 1% per day (April 1993), so corrections (which are set and timed by the companies) can be dramatic.

Uniao's plant is largely automated, and will be more so once a zoning variance is granted to build a green coffee silo and bulk receiving station.

Uniao has been successful in the Brazilian market because it has access to large amounts of money, has a symbiotic relationship with another company product, and because the management was able to capitalize on those opportunities under both controlled and free markets.

Cafe do Ponto was founded in 1950 by the Goncalves and Sato families in a then outlying area of Sao Paulo. The company grew with the city, and in 1957 Ponto moved farther out to a larger site. That year, there was a free market, and volume doubled to 1,500 bags per month.

In 1958, the IBC was formed and much flexibility was lost. However, Ponto continued to grow, as did the surrounding area, which became a fashionable neighborhood. Ponto benefited from frequent free publicity when newspaper articles were written about influential peoples' smoky neighbor.

In 1970, the company began it lists of "firsts." It was the first to buy Lilla's newly designed roaster, which was an original design. Ponto's was the first installation anywhere. (That design is now Lilla standard one and there are installations on all continents with the exception of Africa.) In 1971, Ponto installed the first FFS machine in Brazil. Because of price controls, this coffee sold at the same price as the competition, who continued to pack in paper bags. In 1972, Ponto was the first to install an afterburner, which solved the smoke problem. In 1973 the company was the first to use export quality in the local market (at the same price as consumer). That same year it started a widespread and successful sampling campaign at circuses and in neighborhoods where distribution was about to begin.

The programs and products were successful, and by 1977 Ponto had outgrown its site and moved to a distant suburb of Sao Paulo, and by 1981 volume had reached 29,000 bags per month. Shortly thereafter Uniao began eating into Ponto's market share, and in 1985 the government allowed new roasteries to be established. Many of the new operators avoided various taxes, which gave them a tremendous price advantage, and Ponto' s volume fell to 21,000 bags per month, where it stabilized.

Ponto looked to other markets and began exporting Roast & Ground coffee in 1988 to the U.S., Canada, Portugal, China, Japan, and Russia. It is sold as "Cafe do Ponto" except in Canada where it is sold under private label.

The 1980's were stagnant times at best for all the law abiding roasters in Brazil. Government policy changed frequently, especially regarding energy. Roasters had to change from oil to electricity to wood and back to oil. The market was opened to new roasteries, many of whom avoided all taxes, both direct and indirect, which gave them a devastating price advantage. Many roasteries went under or shrunk radically. Uniao and Ponto stagnated or shrunk slowly, and the per capita consumption began to decline along with quality and promotion.

The 1990's have seen a reduction of intrusive government policies, giving roasters room to maneuver. Uniao has continued to streamline its operation, and Ponto has successfully launched new products. It now owns 14 coffee shops and has 150 franchisees, mostly in Sao Paulo state. The stores primarily sell liquid coffee, but in its own stores it is selling whole bean coffee, flavored coffee, single origin from within Brazil coffee (by region, e.g. Sul de Minas, Mogiana, etc.), and high quality coffee from other origins, specifically Kenya, Costa Rica, and Columbia. Ponto is also selling espresso under the brand of "Cafeterie" in its stores, other retail outlets, and institutionally.

Cafe do Ponto grew because it supplied the best product possible and introduced new products in a quasi-monopolistic system. The company constantly looked for new opportunities, which often called for innovation, despite constraints imposed by the government. When the market was freed from cost and price controls, Ponto could capitalize on the situation because it always had a free market approach.
COPYRIGHT 1993 Lockwood Trade Journal Co., Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Title Annotation:roast and ground coffee industry
Author:Lockwood, Frederick A.
Publication:Tea & Coffee Trade Journal
Date:May 1, 1993
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Next Article:Deciphering the Brazilian coffee market.

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