By Luciana Magalhaes
SAO PAULO--Brazil's drugstore sector has become attractive for
mergers and acquisitions, thanks to increasing demand from the
nation's growing middle class.
With a population of almost 200 million residents, Brazil this
year is projected to rack up $55 billion in sales of toothpaste,
shampoo and similar items, according to data provided by
PricewaterhouseCoopers. That would power it past Japan to become
the world's second-largest market for hygiene and beauty products,
behind the U.S.
U.S.-based CVS Caremark Corp. (CVS) last year bought Drogaria
Onofre, then Brazil's eighth-largest drugstore chain, and is
reported by local news media to be hunting for bigger targets. The
Rhode Island company's 2013 deal was part of a wave of
consolidation in recent years that included the merger of Drogasil
and Droga Raia to create the country's largest local chain of
drugstores in 2011.
"Everyone is looking for a bride in this market," said Jorge
Inafuco, a manager at PwC Brasil focused on retail and consumer
goods.
Brazil's market is also growing fast. Sales of hygiene and
beauty products have been expanding by 15% a year, or three times
the global average, PwC said.
In addition, the market is still dominated by mom-and-pop
drugstores, leaving plenty opportunity for big players. According
to PwC, Brazil's five-largest drugstore companies have a combined
market share of 30%, compared with the U.S. where the three major
retail drugstores have a 62% market share.
CVS Caremark recently held talks with Brazil's second-largest
drugstore chain Drogarias Pacheco Sao Paulo, according to a person
familiar with the talks. Known as DPSP, the Brazilian chain has 843
stores and 5.47 billion Brazilian reais ($2.44 billion) in net
revenue in 2013.
CVS offered around $2 billion, but DPSP rejected that offer,
seeking $2.7 billion, the person said. It is unclear whether
negotiations will progress. Both CVS and DPSP declined to
comment.
CVS bought Drogaria Onofre in February 2013. A person familiar
with the transaction said at that time that CVS paid around $300
million for an 80% stake in the 44-store chain. A 2011 merger
between Drogasil and Raia created Raia Drogasil, now Brazil's No. 1
chain. That same year, Pacheco and Drogaria Sao Paulo joined to
become DPSP, the second-largest chain.
Also in 2011, CVS's U.S. rival, Walgreen Corp. (WAG), reportedly
was scouting Brazil for deals. Walgreens declined to comment for
this article.
Despite the nation's size and fast growth, "coming to Brazil is
not for amateurs," said Mr. Inafuco of PwC, citing the country's
complicated tax code, lots of red tape and high labor and other
costs.
But firms that stay long enough to master the difficulties can
find rewards, he said. "For the large multinational's that have
been here for a long time, Brazil usually ends up being their third
or fourth largest operation globally," he said.
Write to Luciana Magalhaes at luciana.magalhaes@dowjones.com
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