Downturn in Asia Spoiled Appetite For Chicken From Brazil's Sadia
By MATT MOFFETT
Staff Reporter of THE WALL STREET JOURNAL
SAO PAULO, Brazil -- A quarter of a century ago, a family-run Brazilian
food company named Sadia SA launched an improbable foray into the
international poultry market. Mario Fontana, a nephew of the company's
founder, trekked throughout the Middle East, from souks to supermarkets,
peddling broilers out of a picnic cooler. "We had faith that our chicken
would be well-received even in the most distant lands," says Mr. Fontana.
"Chicken is the food of the working class all over the world."
That conviction was borne out as Sadia grew into Latin America's largest
poultry and meat producer, with sales of $3 billion and customers in 50
nations. Sadia refrigerator trucks rumble over the Argentine pampa, and its
barbecue restaurant serves up fryers a few blocks from Beijing's Gate of
Heavenly Peace.
But now, the great 1990s emerging-markets crash has burst like a
thunderstorm over Sadia's global broiler bash. While the financial debacle
is most often measured in tumbling stock prices or collapsing currencies,
another barometer is Sadia's increasing difficulty finding markets for its
breasts, drumsticks and gizzards.
Economic Woes
Sadia's troubles started last year shortly after Thailand devalued the baht,
triggering a tidal wave of economic distress. Sadia found itself getting
squeezed out of a stagnating Asian poultry market by Thai producers using
their weakened currency to undercut competitors. Undaunted, Sadia
redirected shipments to the Middle East. But tumbling oil prices and fiercer
competition crimped sales in once-solid markets like Saudi Arabia and
Kuwait. In a bind, Sadia counted on the Russian bear to gobble up its
birds. Sadia had a boatload of broilers steaming toward St. Petersburg
when the ruble collapsed. "Unlike some other poultry producers, we, at
least, will get paid," says Luiz Fernando Furlan, Sadia's president, taking
some solace in the company's letters of credit.
That may be Sadia's only consolation. For the currency panic that ravaged
other emerging economies has come home to roost in Brazil, the world's
third-largest poultry market. Since 1994, when Brazilian President
Fernando Henrique Cardoso vanquished the country's chronic inflation by
introducing a new dollar-pegged currency, the real, chicken consumption
here has increased nearly 50%. Mr. Cardoso is expected to win a second
term in presidential elections Sunday in large part because the rock-solid
real made it possible for Brazilians to eat something more substantial than
rice and beans.
Even as Brazilians seem set to give Mr. Cardoso a vote of confidence,
dark clouds are gathering over the "Brazilian Miracle." In the two months
since the collapse of the ruble, edgy investors have taken $30 billion out of
Brazil. But Mr. Cardoso refuses to devalue the real. To induce Brazilians
to shun the safety of dollars and keep their savings in reals, the government
has pushed up Brazil's already-high interest rates to an asphyxiating 40%.
Through the Floor
After four years in which hefty local chicken stocks prevented Sadia from
imposing price increases, the interest-rate crunch and the global chicken
glut are combining to drive the price of Brazilian birds right through the
floor. In the past month, the price of fryers dropped about 10% on the
local market. "It's very, very difficult making money selling chicken in
Brazil under these circumstances," says Roberto Banfi, Sadia's sales
director.
One thing helping to keep Brazilian prices from cratering is the pervasive
fear the exchange crisis will get even worse. Some shoppers have been
forced to substitute chicken for beef, says Mr. Banfi, because more
ranchers have been holding cattle off the market. Until they are convinced
the real will remain intact, Brazilian cattlemen would prefer a hard asset to
wobbly currency.
Poultry producers, for their part, find themselves stuck between a rock
and a hard place: the slow strangulation of the interest-rate wringer on one
hand, against the specter of devaluation and jarring economic collapse on
the other. Some companies are throwing in the towel. One leading
Brazilian producer recently sold out to a French company, and two others
are up for sale.
Sadia, which counts on chicken to provide one-third of overall revenue
and the overwhelming bulk of its approximately $350 million in export
earnings, is fighting on. During the year's first half, Sadia managed to keep
its overall export income stable, though in some markets it had to ship
greater volumes at lower prices. One advantage Sadia has is that the
prices of the grains used as feed have been weak.
Not the Big Leagues
The trouble now is that there are ever-fewer markets untouched by the
global crisis, and they are a long way from the economic big leagues. Cuba
might take on some Brazilian birds. Lacking foreign exchange, however,
Fidel Castro's government may have to barter Cuban-made vaccines to
guarantee payment. And before Singapore and Brunei, which have
significant Islamic populations, will come anywhere near Brazilian poultry,
a Moslem cleric must travel here to verify slaughtering lines are pointed
toward Mecca.
Back at corporate headquarters, meanwhile, Sadia has mercilessly cut
costs, divesting its big soybean division, unloading half of its processing
plants and slashing its work force by one-third to 22,500. Sadia is also
boldly launching more higher-margin frozen-food entrees, from pizza to
tagliatelle al mare. "We are trying to redefine ourselves more broadly as a
food maker, rather than just a poultry and meat company," says Mr.
Furlan.
In much of the time since Sadia was founded 54 years ago, Brazil's
chronic economic disorder made it all but impossible for Sadia to nurture
its business. From 1980 through 1994, Brazil introduced six different
currencies, creating a dizzying cycle of boom and bust. When one new
currency temporarily subdued inflation and ignited domestic consumption,
poultry producers were barred by the government from shipping any birds
abroad. But within months, both the new currency and the local buying
boom had collapsed.
Finally in 1994, everything fell into place for Sadia: Brazil stabilized its
economy with the real, at the precise moment the global economy was
enjoying a big upturn. Sadia's sales leapt 70% in the first year of the new
currency and then held on to those gains. Brazil was on such firm
economic footing that Sadia took a heretofore unthinkable step: It began
stamping prices on products right at the factory.
Chicken, Not Hot Dogs
For working-class Brazilians, Sadia chicken has come to be an everyday
emblem of stability. Before the real, the only animal protein that Neuza
Siqueira served her five children was hot dogs. "We forgot what chicken
tasted like until the real," says Mrs. Siqueira, who now buys a bird nearly
every day. Mrs. Siqueira, who works as a maid, thinks the healthier diet is
responsible for her teenage son's move up from the reserves to the first
team in his amateur soccer league.
It was Sadia's position as a global poultry player that left it vulnerable
when Thailand announced its fateful currency devaluation in July of last
year.
Almost at once, Thailand fell into recession, drying up poultry demand.
Trying to make the devaluation work for it, Charoen Pokphand Group, a
huge Thai conglomerate, began unloading cut-rate birds in Sadia's biggest
Asian market: Japan. Poultry buyers "now import more chicken from
Thailand and less from Brazil because of the weaker baht and the stronger
Brazilian currency," says Koichi Nishihara, a spokesman for Nippon Meat
Packers Inc., a big meat processor.
Things got worse when Japan, earlier in the decade the world's leading
chicken importer, slid into recession itself. With Asian export volume
down 15% this year, Sadia scaled back its Tokyo sales office to a
one-man operation.
'National-Security Issue'
Unfazed by the Asian setback, Sadia planned on working harder in the
Middle East, its original overseas market. "You always find very
dependable poultry customers near oil wells," says Mr. Fontana. Trouble
is, the Asian crisis also has reduced world demand for crude, sending
prices to 10-year lows at one point. Saudi Arabia, the world's fifth-largest
chicken importer, imposed a tough austerity program that pinched food
consumption. With foreign exchange drying up, Arab kingdoms feverishly
accelerated programs to promote self-sufficiency in chicken production.
"Poultry has suddenly become a national-security issue in the Middle
East," says Claudio Martins, head of the Brazilian poultry exporters
association. Sadia's Middle East export volumes have fallen 5%.
That left Russia as one of Sadia's last potential growth markets. Though its
150 million consumers were alluring, that market was a minefield.
Sadia's biggest barrier in Russia was stiff competition from U.S.
producers. Beginning in the Bush administration, U.S. processors
swamped Russia with low-priced leg quarters, which came to be known
as "Bush legs." By last year, 40% of all U.S. poultry exports went to
Russia.
When Sadia and other Brazilian companies began trying to step up
Russian exports, U.S. producers girded for a showdown. But then the
ruble devaluation threw poultry markets into a tizzy. Some U.S. and
European exporters have had cargo ships docked in Russian ports for
weeks awaiting payment from cash-strapped wholesalers. The question
nagging Sadia and other producers: If the Russians can't come up with the
money, will U.S. producers dump those birds on world markets, further
depressing prices?
Inaccessible U.S.
It's an important issue for Sadia. The dollar income from exports is
precious at a time when Brazil's own currency is under attack. Every bird
Sadia sells abroad is one less that has to be funneled back into the
saturated domestic market.
The vast U.S. market, though, is all but inaccessible due to a strong
national industry and strict sanitary barriers. Import quotas limit Sadia's
presence in Europe. China, where Sadia opened a barbecue restaurant as
a gesture of goodwill, won't take Brazilian birds until the two countries sign
a bilateral sanitary accord. Argentina has been a strong performer, but
Brazil's own economic problems are threatening to drag down its
neighbor.
Things have gotten so desperate that there is a fierce war for market share
going on in the Dominican Republic, a tiny and impoverished economy, but
a blessedly stable one.
Sadia hopes it sells enough birds somewhere until its new heat-and-eat
products begin to pick up the slack. Last month, at Latin America's largest
supermarket convention in Rio de Janeiro, Sadia unveiled some frozen
casseroles and pasta dishes it is counting on to compensate for the
dwindling chicken margins. Though such convenience foods are affordable
only for the wealthiest 20% of Brazilians, Sadia executives insist they aren't
luxuries. "In hard economic times, more women enter the work force and
give up cooking," says Mr. Banfi. "And who will have money for a maid?"
Francisco Seabra, a buyer for the provincial Brazilian supermarket chain
DMA, says that if the real holds together in the coming weeks, his stores
would be prepared to add freezer space to accommodate the new Sadia
products. If the currency collapses, though, DMA will probably revamp
product-display space in a different fashion. "We would increase the area
for rice and beans," Mr. Seabra says.
-- Miho Inada in Tokyo contributed to this article. |
