TUESDAY, MAY 27, 2014

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.