We operate in the food service industry in Brazil, with international operations in Puerto Rico, Dominican Republic, Panama, Colombia and Mexico. The food service market is highly fragmented with few professionally managed chains. The food service sector includes the distribution and/or preparation of meals for out-of-home consumption and can be divided into two main segments:

• Public and contract services: includes meals served in facilities such as public hospitals, schools and prisons as well as catering services. Businesses in this segment usually operate with very low profit margins, and represent approximately 26.0% of the total food service industry in Brazil according to ABIA;
• Retail food services: includes food services provided directly to the public through retail food stores located on streets, in shopping malls or in other public locations. This segment accounts for 74.0% of the total food service industry in Brazil according to ABIA and can be divided into the following subsegments:
  • Restaurants: include casual dining, upper casual and fine dining restaurants, representing 23.0% of the food service industry in Brazil according to ABIA;
  • Quick casual dining: includes bars, snacks and bakeries, representing 39.0% of the food service industry in Brazil according to ABIA; and
  • Fast food chains: representing 12.0% of the food service industry in Brazil according to ABIA.

There is insufficient industry-wide data to measure the size of the food service industry by the amount of sales to final consumers. An approach utilized by industry consultants is to estimate the market size using the official figures from the ABIA of the sales of food and beverages to the food service sector. According to ABIA these sales in Brazil reached R$64.4 billion in total revenues in 2009 and the expected growth in sales in 2010, compared to 2009, is 14.9%.

According to ECD, the average cost of food and beverages sold by the food service industry in Brazil accounted for 35.0% of the industries’ total revenues in 2008, thus implying total sales of more than R$160.0 billion for that year.

We operate in the retail food service industry and are positioned to compete primarily in the quick casual and casual dining restaurants segments, as described above. Utilizing the same methodology discussed in the prior paragraph, ECD has estimated the size of the retail food services segment in Brazil, which encompasses the fast food, quick casual and casual dining sub-segments, at R$118.0 billion. Although we may face competition in a particular market sub-segment, country or region, we believe we are the only company in Brazil with such a diversified mix of sub-segments and dining concepts.

The concept of the quick casual and casual dining restaurant chain has expanded significantly in major Brazilian urban centers. With the growth of consumers’ purchasing power and the demand for out-of-home food services created by new family and work dynamics, the quick casual and casual dining segment has grown significantly.

Quick casual and casual dining stores are commonly located in high traffic locations and in places with limited food service options, such as motorway service plazas, airports, shopping malls, train stations, business centers, galleries, service malls, hospitals and on the street.

We believe that the high level of fragmentation, the presence of many family-owned businesses and the operational informality currently found in the sector presents us with significant opportunities for consolidation and for the professionalization of the industry’s operations. We believe that the economies of scale achieved by restaurant chains will lead to high profitability. Advantages enjoyed by restaurant chains include common business models, standardized store formats, menus and processes, greater bargaining power with suppliers, shopping mall operators and credit card operators, cross-selling of brands and operating efficiencies from unified administrative, production, warehousing and logistics platforms.

Independent restaurant chains operating in the casual dining sub-segment achieved one of the highest annual growth rates between 2006 and 2008 in the food services industry. According to industry associations, independent chains grew 20.8% in 2007 and 17.5% in 2008 in terms of sales.

Due to both a positive macroeconomic environment and favorable cultural trends, the Brazilian food service industry has grown significantly during the last several years. Based on ABIA and IBGE information, the food service industry in Brazil has grown 5.4 times faster than the Brazilian GDP from 2002 to 2009. This compares favorably to the growth rate of the food retail industry, which comprises the sale of food and beverage to be consumed at home.

Food service expenditures in Brazil have also been growing relative to total food expenditures (both food retail and food service expenditures), with increases in food service expenditures as a share of total food expenditures from 24.0% in 2003 to 31.1% in 2009. Consequently, for every three dollars spent on food, almost one dollar was spent in restaurants, bars, or other places outside of the home. This increase in food service expenditures has been driven primarily by demand for lunch, dinner and snacks consumed out-of-home.

In addition to the strong historical growth of the market, we believe that the food service industry in Brazil has the potential for significant future expansion. According to ECD, food service expenditures in Brazil represented 24.0% of the total food expenditures in Brazil in 2003.

Furthermore, food service expenditures for the Brazilian population are expected to grow to between 28.6% and 30.1% of the total family income budget to be used for food and meal expenses by 2012.

Additionally, our main operations are located in the Brazilian states with the highest food expenditure levels, representing more than 74.0% of the country’s total food expenditures.

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