Philippines (Food & Drink Report 2015)

2015 www.businessmonitor.com

PHILIPPINES FOOD & DRINK REPORT INCLUDES 5-YEAR FORECASTS TO 2018

Philippines Food & Drink Report 2015 INCLUDES 5-YEAR FORECASTS TO 2018

Part of BMI’s Industry Report & Forecasts Series Published by: Business Monitor International Copy deadline: December 2014

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Philippines Food & Drink Report 2015

CONTENTS BMI Industry View ...................... ...................... ........................................... ..................... ...................... ...................... .. 7 SWOT .................................................................................................................................... 9 Food Food ........................................... ................................................................. ............................................ ............................................ ............................................ .......................................... .................... 9 Drink .. .. .. .. ................................................ ....................................................................... ............................................. ............................................ ............................................ ......................... ... 11 Mass Grocery Retail Grocery Retail .. .. .. .. .. .. . .......................................... ................................................................ ............................................ ............................................ ............................. ....... 13

Industry Forecast Forecast .............................................................................................................. 15 Consumer Outlook Outlook ........................................... ................................................................. ............................................ ............................................. ............................................ ..................... 15 Food ........................... ........... ................................... ......................................... ............................................. ............................................. ............................................ .................................... .............. 18 Table: Food Consumption Consumption Indicators Indicators - His Histo tori rica call Dat Data a & Fore Foreca cast stss (Ph (Phil ilip ippi pine ness 201 20111-20 2018 18)) . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 19 Table: Table: Confe Confection ctionery ery Value/Vo Value/Volume lume Sales, Sales, Produc Production tion & Trade Trade - Histor Historical ical Data & Foreca Forecasts sts (Philippi (Philippines nes 2011-201 2011-2018) 8) .. . . . . . . . . . . . . . . . . . . . . . . . . . 20 Table: Table: Dairy Dairy Volum Volumee Sales, Sales, Produc Productio tion n & Trade Trade - Histor Historica icall Data Data & Forec Forecast astss (Phili (Philipp ppine iness 2011-2 2011-2018 018)) .. . . .. . .. . . .. . . .. . .. . . .. . . .. . . .. . .. . . .. . . . 21

Drink .. .. .. . ..................................................... ........................................................................... ............................................ ............................................. ............................................ ..................... 22 Table: Hot Dr ink ink Value/Volume Sales, Production & Tra & Trade de - Hist Histor oric ical al Dat Data a & For Forec ecas asts ts (Ph (Phil ilip ippi pine ness 2011 2011-2 -201 018) 8) . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 22 Table: Table: Soft Soft Drinks Drinks Sales Sales,, Produc Productio tion n & Trade Trade - Histor Historica icall Data Data & Foreca Forecasts sts (Phili (Philipp ppine iness 2011-2 2011-201 018) 8) . . . .. . . .. . .. . . .. . . .. . .. . . .. . . .. . . .. . .. . . .. . . . 23 Table: Table: Alcoho Alcoholic lic Drinks Drinks Value/Vo Value/Volume lume Sales, Sales, Product Production ion & Trade Trade - Histor Historical ical Data & Forecas Forecasts ts (Philip (Philippines pines 2011-201 2011-2018) 8) .. . . . . . . . . . . . . . . . . . . . . . . 24

Mass Grocer y Retail .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . ............................................ .................................................................. ............................................ ............................. ....... 26 Tabl Table: e: Mas Masss Groc Grocer eryy Reta Retail il Sal Sales es By By Form Format at - His Histo tori rica call Data Data & For Forec ecas asts ts (Ph (Phil ilip ippi pine ness 2011 2011-2 -201 018) 8) .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 27 Table: Sales B Sales Brea reakdo kdown wn By Retail Retail Forma Formatt Type Type . . .. . . .. . .. . . .. . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . 28

Trade .................................................................. ........... ........................................................................... .......................................... ............................................ ........................................ .................. 29 Table: Trade Balance Trade Balance - Historical Historical Data Data & Foreca recast stss (Phi (Phillipp ippines ines 2011-2 11-201 018 8) .. ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... ... .. ... ... ... .. . 30

Macroeconomic Macroec onomic Forecasts Forecasts ............... ........... .................................................................................... ................................................................................ 31 Economic Anal ysis ysis . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . ........................................... ..................................................... .......... 31 Table: Economic Economic Activ Activity (Philippines 2009-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 34

Industry Risk Risk Reward Index ............................................................................................. ............................................................................................. 35 Asia Pacific - Risk/Reward Index .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 35 Tab Table: le: Asia sia Pacif acific ic Food & Drin Drinkk Risk/ isk/R Rewa eward Inde Indexx Q115 115 ... ... ... .. ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... .. 36 Table: Table: Asia Asia Paci Pacific fic Food Food & Drin Drinkk Risk Risk/Re /Rewar ward d SubSub-Fa Facto ctorr Index Index Q115 Q115 - Select Selected ed Countr Countries ies (score (scoress out out of 10) 10) .. . . .. . . .. . .. . . .. . . .. . . .. . .. . . .. . . . 40

Philippines Risk/Reward Risk/Reward Index ...................................................................................................... ............. 41

Market Overvi Overview ew .......................................... .................... ...................... ...................... ...................... ......................... ..................... .... 42 Food Food ........................................... ................................................................. ............................................ ............................................ ............................................ ........................................ .................. 42 Food Processing Processing ............................................ .................................................................. ............................................ ............................. .......................... ..................................... .................. 42 Agriculture ............................. ................................................... ............................................ ............................................ ............................................. ............................................ ..................... 43 Drink .. .. .. .. ................................................ ....................................................................... ............................................. ............................................ ............................................ ......................... ... 44 Hot Drinks . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 44 Soft Soft Drin Drinks ks ............................................. ................................................................... ............................................ ............................................ ............................................ ............................. ....... 44 Alcoholic Drinks Drinks ........................................ .................... ........................................... ............................................. ............................................ ............................................ ......................... ... 45 Mass Grocer y Retail Retail ............................................ .................................................................. ............................................ ............................................ ........................................ .................. 46

© Business Monitor International

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Table: Table: Struct Structure ure Of Mass Mass Groc Grocery ery Retail Retail Market Market By Estima Estimated ted Number Number of Outlet Outletss (Ph (Phili ilippi ppines nes 2005-2 2005-2010 010)) . . .. . .. . . .. . . .. . .. . . .. . . .. . . .. . .. . . .. . . . 47 Tabl Table: e: Mass Mass Groc Grocer eryy Reta Retail il Sale Saless By Form Format at (Phi (Phili lipp ppin ines es 2005 2005-2 -201 010) 0) . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 47 Tabl Table: e: Mass Mass Groc Grocer eryy Reta Retail il Sale Saless By Form Format at (Phi (Phili lipp ppin ines es 2005 2005-2 -201 010) 0) . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 48 Tab Table: le: Tabl Table: e: Estima timate ted d Numb Number er Of Outle utlets ts In 201 2010 .. ... ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... ... .. ... ... ... .. . 48

Industry Trends And Developments Developments ...................... ...................... ...................... .............. 49 Food Food ........................................... ................................................................. ............................................ ............................................ ............................................ ........................................ .................. 49 Key Key Indus Industr tryy Trend Trendss And Dev Devel elop opme ment ntss ...... ......... ........ ........ ........ ......... ........ ........ ........ ........ ......... ........ ..... 49 Drink .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 56 Key Industry Trends Trends And Developme Developments nts ... .. ... ........................................... ................................................................. ............................................ ............................. ....... 56 Mass Grocery Retail Grocery Retail . ........................................... ................................................................. ............................................ ............................................ ........................................ .................. 63 Key Industry Trends And Developments ... ............................................ .................................................................. ............................................. ................................. .......... 63

Competitive Landscape .................................................................................................... 67 Table: Key Players Players In The Philippine Philippine Food Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Table: Key Pla yers In The Philippine Philippine Drin Drink Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 67 Table: Key Pla yers In The Philip pine Mass Grocery Retail Retail Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

Company Profile Profile ................................................................................................................ ................................................................................................................ 70 LT Group .. .. .. .......................................... ................................................................ ........................ ...................... .......................................... ............................................ ............................. ....... 70 Alaska Milk Corporation Corporation .................................................................... ................................................. ......................................... ............................................. ................................. .......... 73 Universal Robina Robina Corp ...................................................................... ............................................. ....................................................... .......... 76 San Miguel Brewery Brewery ....................................................................... ................................................... .......................................... ............................................ .................................... .............. 79 SM Inve Invest stme ment ntss ........ ........ ........ ......... ........ ........ ........ ........ ......... ........ ........ ........ ......... ........ ........ ........ .... 81 Philippine S even e ven Corp Corp .... ......... ........ ........ .......................................... ................................................................ ............................................. ................................. .......... 83

Global Industry Overview .................................................................................................. 86 Table: Dollar General General And Family Dollar Historic Quarterly Same-Store Sales Growth ( % Change Y-O-Y) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 Table: Selected US And And Glo Globa ball Spi Spiri rits ts Comp Compan anie iess - Hist Histor oric ical al Fina Financ ncia iall Ind Indic icat ator orss . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . 93 Tab Table: le: Se Select lect US Bever evera age Co Compan mpanie iess - Histo istori ricc Ev Eva Sp Sprea read .. ... ... .. ... ... ... .. ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... .. 95 Table: Food and and Dri Drink nk Team Team's 's Core Core View Viewss .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . 96

Demographic Demograp hic Forecast ..................................................................................................... ..................................................................................................... 98 Table: Population Population Headline Indica Indicators (P (Philippines 19 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Table: Key Po pulation Ratios Ratios (Philippin (Philippines 19 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Table: Urban /Rural Population Population & Life Expectancy Expectancy (Philippines 1990-2025) ...................................................................... .. 1 00 Table: Population Population By Age Group (Philippines 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Table: Population Population By Age Group % (P (Philippines 19 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

Glossary ........................................................................................................................... ........................................................................................................................... 103 Food & Drink ...................... Drink ............................................ ............................................. ........................... ......................... ............................................ .......................................... ................... 103 103 Mass Grocery Grocery Retail ..................................................................... ................................................ ........................................... ............................................ .................................. ............ 103 103

Methodology .................................................................................................................... 105 Industry Forecast Methodology .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 105 Sector-Specif ic i c Met Metho hodo dolo logy gy ........ ........ ......... ...... ......................................... ................................................................ .......................................... ................... 106 106 Sources ................................ .... ................................................ ........................................... ............................................. ............................................ ............................................ ........................ 106 106 Risk/Reward Index Risk/Reward Index Methodology .. .. .. .. .. .. .. .. .. .. .. .. .. ......................................... ................................................................ .......................................... ................... 107 107


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Tab Table: le: Food ood & Drin Drinkk Risk/ isk/R Reward ward Ind Index Indi Indica cato tors rs .... ... .. ... ... ... .. ... ... ... .. ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... ... ... .. ... . 10 108 Table: We Weighting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109


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BMI Industry View BMI View: While

the Philippine economy continues to expand at a healthy rate and despite its expanding

base of young consumers, we believe that the country offers limited potential in its grocery and food and drink markets. Multinational investment has been slow to penetrate the market, which in itself continues to present numerous challenges to players in the sectors. Issues such as widespread poverty, highly uneven income distribution, under-developed mass grocery retail networks and high levels of unemployment will continue to weigh on the consumer outlook.

Headline Industry Data (local currency) ■

2014 per capita food consumption = +4.68%; compound annual growth rate (CAGR) forecast 2013 to 2018 = +4.46%

■

2014 alcoholic drinks value sales = +7.97%; CAGR growth forecast 2013 to 2018 = +7.03%

■

2014 soft drinks value sales = +7.89%; CAGR growth forecast 2013 to 2018 = +7.89%

■

2014 mass grocery retail sales = +7.39%; CAGR growth forecast 2013 to 2018 = +7.03%

Industry Developments

Del Monte Pacific Enters New Joint Venture And Proposes Share Sale: Philippine food and beverage

company Del Monte Pacific Limited (DMPL) disclosed in December 2014 that it was to enter into a joint venture (JV) with two Europe based companies. The JV will result in the construction of a facility in the Philippines that will preserve the quality and shelf life of fruit and vegetables. Spain based Nice Fruit SL will provide the technology that preserves the nutrients and integrity of the produce handled at the plant. Nice Fruit SL will be the majority stakeholder in the JV with 51% and DMPL will have a 35% stake. UK based Ferville Ltd, while being a minority financial investor, was instrumental to developing the JV and will hold a 14% interest.

Century Pacific Completes Successful IPO: The initial public offering (IPO) of Philippines-based food

company Century Pacific was oversubscribed by 3.5 times the base offering and raised PHP3.2bn in fresh capital, reported the Manila Bulletin in December 2014. The price range for the IPO was originally set at PHP12.50-14.50 (USD0.28-0.32) a share and in the end 230mn shares were sold at PHP13.75 each. The funds generated from the sale will be used for the firm's expansion. The listing was completed on May 6 and later declared the Philippines' 2014 Deal of the Year at the Assets Triple A Awards.


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Pepsi-Cola Products Philippines To Invest PHP650mn In New Facility: US-based food and drink

company PepsiCo's Philippines division, Pepsi-Cola Products Philippines (PCPPI), announced in September 2014 that it was investing PHP650mn (USD14.57mn) to establish a snack food manufacturing facility in the Philippines. The company plans to build a local manufacturing facility, which would allow it to produce, sell and distribute snack foods in the country. 'The snack food investment will allow the company to further build and expand its business and markets venturing into a product line that is complementary to its existing beverage business,' the company said. The firm is planning to implement its snack food facility by H215.

Japanese FamilyMart Adds Franchising To Its Philippine Expansion Plans: In September 2014, Japan-

based FamilyMart confirmed its intention to use franchising packages to accelerate its expansion in the Philippines. The minimum cost of a franchise was set at PHP4mn, with finance packages available through the Bank of the Philippine Islands. The company is also looking to raise capital through an IPO. At the time of writing, there were 65 Family Mart stores in the Philippines and the number was expected that to grow to 100 by the end of 2014. The company has a target of opening a total of 500 stores in the country by 2018.

Philippines Seven Continues Its Expansion Drive: Philippines-based retailer Philippines Seven plans to

double its 2014 spending to open 300 new stores and refurbish another 100 existing stores, Bloomberg reported in August 2014. This follows the major investments in expansion and refurbishment of its store network over the previous two years, which cemented its position as the Philippines' largest conveniencestore chain with more than 1,100 stores.

Emperador Distillers Confirms Whyte And Mackay Acquisition: Emperador Distillers, a Philippines-based

subsidiary of Alliance Global Group, signed an agreement in May 2014 to acquire the UK-based Whyte

and Mackay spirits business from United Spirits for GBP430mn (USD729mn). As part of the acquisition, Emperador will take on a global portfolio of Scotch whisky, malt and grain distilleries and brands that include Dalmore and Tamnavulin. Emperador will also supply United Spirits with an unspecified amount of Scotch whisky over the coming three years.


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SWOT Food SWOT Analysis

Strengths

■

Agricultural output is increasing, with the government and the Development Bank of the Philippines allocating funds to help small and medium-sized processors improve their output levels and production processes.

■

Government trying to reform some of the most vulnerable food processing sectors ahead of implementation of the ASEAN Economic Community.

■

The industry is home to one of the region's leading food and drink conglomerates, San Miguel Corporation (SMC), thus enhancing its reputation considerably and aiding the early establishment of industry best practices.

■

SMC's scale and widespread distribution has helped establish demand for processed foodstuffs in the country; more so than in other similarly developed economies.

Weaknesses

■

The food processing industry suffers from various structural problems including limited domestic input, inefficient post-harvest and storage facilities and inadequate distribution links.

■

Only a limited number of large companies have been able to modernise their production processes, with a significant number of manufacturers still relying on manual processes.

■

Per capita income remains low, and unemployment levels continue to be a major concern, with a large segment of the population unable to afford processed food products.

■

SMC has a huge amount of dominance, since its interests incorporate almost all of the profitable food and beverage sub-sectors. It does, therefore, represent an intimidating competitor.


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SWOT Analysis - Continued

Opportunities

■

Consumption levels are increasing, assisted by rising disposable incomes among middle- and upper-class consumer groups, which should spur growth in the processed food sector.

■

Western influences are strong in the country, ensuring a receptive audience for new Western products and consumption methods.

■

Investment in the country's agribusiness industry is desperately needed and, accordingly, investors in this sector are likely to encounter favourable terms.

■

New initiatives in place to assist small and medium-sized enterprises should improve competitiveness in the food and drink sectors and further stimulate domestic demand.

■

The ongoing development of mass grocery retail in the country will mean improved distribution opportunities for food manufacturers.

■

SMC's diversification into heavy industries could create opportunities for its competitors with the industry giant's focus now firmly elsewhere.

Threats

■

Weaker-than-expected remittance growth amid global economic uncertainty could have a severe impact on sales of non-essential consumer goods products.

■

Slow development of the mass grocery retail network in rural areas to negatively impact both volume and value sales of foodstuffs in general.

■

Most foreign direct investment is likely to be invested in more promising regional markets, such as China, over the Philippines.

■

Implementation of the ASEAN Economic Community will expose the Philippines to heightened competition from food processors in other ASEAN countries.


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Drink

SWOT Analysis

Strengths

■

The country's soft drinks and alcohol sectors are hugely profitable since they are able to capitalise on a young consumer base with a strong interest in Western brands and consumption preferences.

■

■

Alcohol consumption is widespread, and the industry is well established. The industry is home to one of the region's leading food and drink conglomerates, San Miguel Corporation (SMC) and spun-off brewing subsidiary San Miguel Brewery, thus enhancing its reputation considerably and aiding the early establishment of industry best practices.

Weaknesses

■

Only a limited number of large companies have been able to modernise their production processes, with a significant number of manufacturers still relying on manual processes.

■

Per capita income remains low, and unemployment levels continue to be a major concern, with a large segment of the population unable to afford branded food and drink items.

■

SMC enjoys huge dominance, since its interests incorporate almost all of the profitable food and beverage sub-sectors. It does, therefore, represent an intimidating competitor; its share of the beer market stands at 95%.

■

Leaving aside SMC, soft drink competition is fierce with multinational firms Coca-Cola and PepsiCo dominating the sector and continuing to expand aggressively.

Opportunities

■

Consumption levels are increasing, assisted by rising disposable incomes among middle- and upper-class consumer groups and lower interest rates, which should spur growth in the processed food and beverage sectors.

■

Western influences are strong in the country, ensuring a receptive audience for new Western products and consumption methods.

■

A large youthful population adds dynamism to the domestic soft drinks market.


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■

New initiatives in place to assist small and medium enterprises should improve competitiveness in the food and drink sectors and further stimulate domestic demand.

■

The return to growth of the tourism industry provides a useful top-up to domestic sales of soft and alcoholic drinks.

■

The local soft drinks industry is highly dynamic, creating opportunities for growth in innovative categories; for example energy drinks.

■

The ongoing development of mass grocery retail in the country will mean improved distribution opportunities for beverage manufacturers.

Threats

■

Weaker-than-expected remittance growth amid global economic uncertainty could have a severe impact on sales of non-essential consumer goods products.

■

Slow development of the mass grocery retail network in rural areas to negatively impact both volume and value sales of premium beverages in particular.

■

Most foreign direct investment is likely to be invested in more promising regional markets, such as China, over the Philippines.

■

Government proposals to impose a 10% tax on soft drinks would impact negatively on sales.


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Mass Grocery Retail

SWOT Analysis

Strengths

■

Market liberalisation in the retail sector has encouraged domestic and foreign retailers to expand their store networks, with the former expanding to secure their market position before the arrival of any of the major global players.

■

Local operators have proved effective at combining aspects of modern retail with local traditions, tastes and customs, in order to encourage more consumers to make the switch.

■

Metro Manila has proved an effective testing ground for modern retail concepts before they roll out nationwide.

Weaknesses

■

Traditional markets and sari-sari stores still account for around 79% of retail food sales, although their market share is declining.

■

Under-developed distribution infrastructure continues to make supplying retail outlets, particularly with fresh produce, inefficient and often costly.

■

Even allowing for the low prices that result from multinational retail involvement, modern retail formats are often still too expensive to allow full participation.

Opportunities

■

Modern retail formats are chiefly concentrated in Metro Manila and other large urban areas, leaving room for significant expansion into other provinces; a number of retailers have already announced expansion plans.

■

The under-developed hypermarket and convenience sectors allow considerable room for further development, with increased sales of higher-value non-food items in particular a strong opportunity for growth.

■

In the long term, the discount retail sector should flourish in the Philippines, combining the dual demands of modern retail and low prices.

■

Private labelling should prove popular in the country, provided the notion of products as good value, rather than just cheap, can be established.


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■

Innovative added-value in-store products and services should provide a fillip to sales without the need for aggressive new store openings.

Threats

■

Only a handful of modern retailers boast the scale to accommodate rising operating costs internally; for others, higher prices could result in a loss of sales.

■

Limited and sometimes sub-standard food and agricultural production in the country means that retailers must rely on costlier imports for high-end Western goods.

■

The possible entrance of multinational mass grocery retailers would pose a major risk to the market share of existing local players.


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Industry Forecast Consumer Outlook Industry Forecast Scenario

Durable Domestic Economy Philippines - Real GDP By Expenditure, Contribution To Growth (pp)

The Philippine economy continues to perform well and we are forecasting real GDP growth to come in at 6.3% in 2014. However, tighter monetary policy in 2015 is likely to cause real GDP growth to ease to 6.0%.

Private consumption has largely been helped along by solid remittance inflows, which, comprising approximately 10% of GDP, account for a significant portion of household income. While private consumption growth has been retreating in recent quarters we expect it to remain well supported

Source: BMI

by continued robust remittance inflows during 2015. More specifically, we continue to believe that the Filipino consumer will be bolstered by a combination of record low interest rates, low leverage and rising incomes, as well as continued solid remittances from abroad.

Nevertheless, a number of issues will continue to weigh on the performance of the country's food, drink and mass grocery retail market, and also on its political stability. These include widespread poverty, with per capita GDP at around USD2,526 in 2012, highly uneven income distribution and high levels of unemployment. Additionally, the Philippines' rapid population growth means that per capita GDP increases less rapidly than in countries with lower birth rates. Around 54% of the Philippines' population is younger than 25, with a high proportion of young people linked to political instability. The inability to create enough new jobs has led to 'brain drain', with around 10% of the population working abroad, although the remittances remain a substantial contributor to domestic demand.

Despite healthy real GDP growth, the Philippine economy has been struggling to create enough jobs to tame the country's unemployment rate. However, overall unemployment fell to 6.7% in July 2014, an improvement on the 7.3% rate recorded a year earlier. Overall, we believe that the underwhelming jobs


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figures are indicative of the fact that the Philippines' nascent economic boom has yet to translate into sustainable results.

Playing Catch- Up Philippines - Total Population, 15-64 & Total Employed Persons

Source: BMI, NSO

From a longer-term perspective, the biggest draw of the Philippine consumer story is arguably its favourable demographic makeup. The Philippines is home to one of the largest populations in the Asia Pacific region and has a huge youthful consumer base, representing a massive opportunity for consumer goods investors in the country. Rising consumer incomes over the coming years should also translate into greater dynamism in the mass market. In 10 years, GDP per capita in the Philippines is forecast to more than double from around USD2,500 in 2011.


Page 16


Backed By Youthful Demographics

Source: World Bank, BMI estimate


Page 17


Food Food Consumption ■

Food Consumption

Headline food consumption compound annual growth in local currency 2013 to 2018: +6.21%.

(2009-2018)

Per capita food consumption compound annual growth in local currency to 2018: +4.46%.

3,000

10

While we forecast strong real GDP growth to 2018,

2,000

8

1,000

6

■

widespread inequality, along with slowing remittance growth, is expected to put a dampener on consumer purchasing power over the coming years. We are expecting food consumption growth to trend lower in the forecast period, with year-on-year (y-oy) growth to 2018 coming in lower than to 2012.

0 9 0 0 2

0 1 0 2

1 1 0 2

2 1 0 2

e 3 1 0 2

f 4 1 0 2

f 5 1 0 2

f 6 1 0 2

f 7 1 0 2

f 8 1 0 2

4

Food consumption PHPbn (LHS) Food consumption, PHP, % y-o-y (RHS)

Nevertheless, over the medium-to-longer term, sustained economic growth will increase

e/f = BMI estimate/forecast. Source: National Sources, BMI

consumption among middle- and upper-income groups, particularly in the country's growing urban centres, where the continued spread of mass grocery retailers (MGRs) will also help fuel increased food spending. Essential food and beverage items, predominantly cheap, fresh produce, account for the bulk of the diet for most of the population (per capita food consumption remains very low relative to many South East Asian economies). However, a gradual trading up process - and local food manufacturers' efforts to cater for this process - will support consumption growth in value terms.


Page 18


Table: Food Consumption Indicators - Historical Data & Forecasts (Philippines 2011-2018)

Food consumption PHPbn Food consumption, PHP, % y-o-y Food consumption, PHP per capita

2011

2012

2013e

2014f

2015f

2016f

2017f

2018f

1,549.5

1,668.0

1,760.9

1,875.2

2,001.1

2,118.9

2,245.0

2,379.7

9.3

7.6

5.6

6.5

6.7

5.9

5.9

6.0

16,301.5 17,248.0 17,896.8 18,734.3 19,656.2 20,471.0 21,336.2

22,253.8

Food consumption, USDbn

35.8

39.5

41.7

44.1

48.5

52.7

56.6

60.4

Food consumption, USD per capita

376.5

408.7

423.6

440.8

476.5

509.2

537.5

564.9


Confectionery ■

■

■

■

■

Confectionery

Confectionery value sales compound annual growth in local currency 2013 to 2018: +5.74%.

(2009-2018)

Confectionery volume sales compound annual growth 2013 to 2018: +3.02%.

150,000

3.5

Chocolate confectionery value sales compound annual growth in local currency 2013 to 2018: +5.11%.

100,000

3

Sugar confectionery value sales compound annual growth in local currency 2013 to 2018: +6.10%. Gum value sales compound annual growth in local currency 2013 to 2018: +6.51%.

Chocolate is the largest form of confectionary

50,000

2.5

0 9 0 0 2

0 1 0 2

1 1 0 2

2 1 0 2

e 3 1 0 2

f 4 1 0 2

f 5 1 0 2

f 6 1 0 2

f 7 1 0 2

f 8 1 0 2

2

Confectionery sales, tonnes (LHS) Confectionery sales, tonnes, % y-o-y (RHS)

consumed in the Philippines and will likely stay this way for the long term. Multinational firms such as

Hershey's and Nestlé exist within the country,


driving growth through effective marketing schemes. However, we believe that sugar confectionary will rise as a proportion of total consumption, although not substantially. Gum value sales are set to be the sector's outperformer; however, this is coming from a very low base.

Over the longer term, there are four key drivers that will underpin the confectionery sector's growth: ■

Rising Consumer Affluence: With confectionery products typically viewed as indulgence goods, growing incomes over the coming years will clearly serve as a major impetus behind confectionery demand.


Page 19


Rising purchasing power is expected to fuel purchases of higher-value confectionery products such as chocolate, although we stress that price will remain a key purchasing determinant for local consumers given that incomes remain relatively low. ■

■

■

■

Sustained Sector Investments: Investment by industry players such as Universal Robina Corporation (URC), Petra Foods and Nestlé will remain integral towards supporting sector growth. As a case in point, Swiss food major Nestlé invested in a new facility in the Philippines, as it looks to cater to rising demand for its Bear Brand milk and Coffee-mate non-dairy creamer. Nestlé also plans to continue investing in its four existing factories in the Philippines, maintaining a focus on upgrading technology and equipment. Meanwhile, URC continued to expand capacities in its key categories such as biscuits and to venture into new product categories such as packaged cakes. These i nvestments will imbue the sector with greater dynamism to support growth. Growing Health Awareness: As confectionery producers expand their portfolio to include healthier alternatives such as low-fat choices to cater to an increasingly health-conscious consumer base, this will provide another impetus to value sales growth given that these products typically carry higher price tags. Spread Of Mass Grocery Retail: The proliferation of organised grocery retail such as supermarkets and hypermarkets will provide more distribution channels for domestic confectionery producers to reach the end-consumer market. We are expecting the proportional contribution of organised grocery retail to increase from a forecast 21% in 2012 to 27% in 2022. These dynamics are factored into our growth forecast of 5.74%, in compound annual average growth terms, in confectionery value sales to 2018. Notably, the sugar confectionery and gum sub-sectors will be the growth outperformers over our forecast period, thanks to greater sector dynamism.

Table: Confectionery Value/Volume Sales, Production & Trade - Historical Data & Forecasts (Philippines 2011-2018)

2011

2012

2013e

2014f

2015f

2016f

2017f

2018f

Confectionery sales, PHPmn

19,499.50

20,621.52

21,661.14

22,825.22

24,164.69

25,534.57

27,014.86

28,628.96

Confectionery sales, PHP per capita

205.1

213.2

220.1

228.0

237.4

246.7

256.8

267.7

Confectionery sales, USDmn

450.3

488.7

512.7

537.0

585.8

635.2

680.5

726.7

Confectionery sales, tonnes

111,129.0

113,518.3

117,227.5

120,999.2

124,895.4

128,442.1

132,148.5

136,021.8

Chocolate sales, PHPmn

7,669.1

8,058.6

8,417.9

8,815.7

9,274.2

9,744.0

10,250.3

10,801.4

Chocolate sales, USDmn

177.12

190.96

199.24

207.42

224.81

242.39

258.22

274.16

Gum sales, PHPmn

740.92

790.03

835.77

887.57

947.07

1,007.78

1,073.57

1,145.43

Gum sales, PHP per capita

7.8

8.2

8.5

8.9

9.3

9.7

10.2

10.7

Gum sales, USDmn

17.11

18.72

19.78

20.88

22.96

25.07

27.04

29.07



Page 20


Dairy

Per capita dairy consumption levels across Asia have been rising in recent years. In the Philippines, official figures currently put per capita consumption at around 20kg per year, up from 16kg in 2002. Local producers mostly meet domestic demand, although they import most of the materials such as powdered milk required for processing. In fact, in terms of domestic liquid milk consumption, only around 5% is met through local production. Processed dairy products currently account for a small proportion of the total, but factors such as improved refrigeration, logistics and grocery distribution networks will contribute to future growth of the sector's volumes.

According to government figures, dairy products represent the second largest agricultural import, after wheat. In 2010, the Philippines imported some USD600 worth of dairy products, up by 29% y-o-y. Around 80% of imports are accounted for by milk in powdered form. Major importers include New Zealand, the US, Australia and France. The country has around 13 dairy importers/processors, some 26 importers/traders and in the region of 145 dairy producers, which are assisted by the National Dairy Industry.

In recognition of the sector's longer-term potential, especially given the increased demand created through specialist coffee shops and the tourist establishments in general, the Philippines' Department of Agriculture has created a Dairy Development Plant (2008-2030). The demand is also being boosted by the local governments, which run milk feeding programmes for local populations.

Table: Dairy Volume Sales, Production & Trade - Historical Data & Forecasts (Philippines 2011-2018)

2011

2017f

2018f

Processed liquid milk production, tonnes

16,660.6 17,751.3 18,932.1 20,025.7 21,071.1 22,005.8 22,963.4

23,983.9

Processed liquid milk sales, tonnes

63,790.1 65,947.1 67,873.3 69,831.5 71,854.7 73,696.5 75,621.2

77,632.5

Butter sales, tonnes

11,264.5 11,285.0 11,303.2 11,321.8 11,341.0 11,358.5 11,376.8

11,395.9

Cheese production, tonnes Cheese sales, tonnes

1,020.1

2012

1,127.4

2013e

1,289.9

2014f

1,440.3

2015f

1,584.1

2016f

1,712.7

1,844.4

1,984.9

15,578.4 17,142.4 18,539.1 19,959.0 21,426.0 22,761.6 24,157.2

25,615.6



Page 21


Drink Hot Drinks ■

Coffee value sales compound annual growth in local currency 2013 to 2018: +5.94%.

■

Tea value sales compound annual growth in local currency 2013 to 2018: +5.66%.

Both tea and coffee sectors are reasonably mature but have not yet been inundated with the range of premium and healthy brands that have fuelled growth over long periods in other markets in the region. It will most likely be the introduction of such products that will drive growth in these sectors to 2017. However, the industries will suffer adversely from a preference for soft drink consumption in the country and the strength of both the soft drink and alcoholic beverage industries, which will prevent premiumisation fuelling growth of the levels witnessed in other countries.

US coffee giant Starbucks has operated within the country since 1997, yet low incomes across much of the population remain the largest barrier to growth. Currently, there exist around 200 stores, and there exist no significant expansion plans. This is primarily the case for tea and coffee outlets across the country. While there is a trade, most of the population do not earn sufficiently for such luxuries. Rather, growth in both the tea and coffee sector will come from brew-at-home sales from retailers.

Table: Hot Drink Value/Volume Sales, Production & Trade - Historical Data & Forecasts (Philippines 2011-2018)

2011

2012

2013e

2014f

2015f

2016f

2017f

2018f

Coffee sales, PHPmn

29,835.3

31,476.0

33,462.3

35,501.7

37,777.9

39,922.6

42,210.4

44,658.1

Coffee sales, USDmn

689.0

745.9

792.0

835.3

915.8

993.1

1,063.3

1,133.5

7,860.2

8,246.9

8,721.2

9,292.4

9,837.1

10,348.8

10,896.2

11,482.9

82.7

85.3

88.6

92.8

96.6

100.0

103.6

107.4

Tea sales, PHPmn Tea sales, PHP per capita



Page 22


Soft Drinks ■

Soft Drinks

Soft drinks value sales compound annual growth in local currency 2013 to 2018: +7.89%.

(2011-2018) 150,000

11

The Philippine soft drinks industry is, and will remain, one of the country's most dynamic food and

10 100,000

beverage sub-sectors. Levels of investment in the 9

industry remain huge, as does multinational interest, 50,000

both of which have been demonstrated by the events

8

surrounding PepsiCo and The Coca-Cola Company 0

in the Philippines over the recent years. Both

1 1 0 2

companies will be looking to consolidate their

2 1 0 2

e 3 1 0 2

f 4 1 0 2

f 5 1 0 2

f 6 1 0 2

f 7 1 0 2

f 8 1 0 2

7

Soft drink sales, PHPmn (LHS) Soft drink sales, PHP, % y-o-y (RHS)

number one and two positions, ahead of domestic rivals such as Cosmos and Zest-O.


Beyond simple expansion, innovative new product development will be a key sales growth driver. The

leading players are already looking beyond carbonates into higher-value, more innovative product categories to cater to the country's youthful and increasingly affluent consumers, and these launches are being backed up by substantial pr omotional and marketing investments.

We do not publish volume sales data for the Philippine soft drinks market and yet, owing to this innovation and steady premiumisation trend that is in evidence, we would expect our value sales growth forecast to comfortably surpass any volume sales growth outlook.

Table: Soft Drinks Sales, Production & Trade - Historical Data & Forecasts (Philippines 2011-2018)

Soft drink sales, PHPmn Soft drink sales, PHP per capita Soft drink sales, USDmn

2011

2012

2013e

2014f

2015f

2016f

2017f

2018f

55,484.46

60,830.44

65,589.68

70,767.02

76,922.09

82,521.41

89,330.92

95,895.29

583.7

629.0

666.6

707.0

755.6

797.2

849.0

896.8

1,281.4

1,441.5

1,552.4

1,665.1

1,864.7

2,052.8

2,250.4

2,434.0



Page 23


Alcoholic Drinks ■

■

■

■

Alcoholic Drinks

Alcoholic drinks value sales compound annual growth in local currency 2013 to 2018: +7.03%.

(2011-2018)

Alcoholic drinks volume sales compound annual growth 2013 to 2018: +2.98%.

60,000

Beer volume sales compound annual growth 2013 to 2018: +2.61%.

40,000

9

8

7

Wine volume sales compound annual growth 2013 to 2018: +8.74%.

20,000 6

■

Spirits volume sales compound annual growth 2013 to 2018: +3.49%.

0 1 1 0 2

As is the case with the country's soft drinks industry,

2 1 0 2

e 3 1 0 2

f 4 1 0 2

f 5 1 0 2

f 6 1 0 2

f 7 1 0 2

f 8 1 0 2

Alcoholic drink sales, PHPmn (LHS) Alcoholic drink sales, PHP, % y-o-y (RHS)

the Philippine alcoholic drinks industry is dynamic, attractive and high-growth. Alcohol consumption is widespread, and the industry is well established. In


line with domestic income growth, consumers are likely to gradually trade up to more expensive brands and variants, creating a significant opportunity for investors and explaining our expectations for value sales to outperform volume sales.

Beer will continue to dominate alcohol sales in the country by some distance, continuing to account for more than 66% of total volume sales by 2018 in spite of the explosive growth expected for the wine market. Wine will remain the reserve of higher-income consumers only; and yet owing to a very low base, growth is expected to be strong, thanks to the country's sustained economic development. Hikes in taxes on alcoholic drinks are expected to have a marginal impact on volumes.

Table: Alcoholic Drinks Value/Volume Sales, Production & Trade - Historical Data & Forecasts (Philippines 2011-2018)

2011

2012

2013e

2014f

2015f

2016f

2017f

2018f

Alcoholic drinks sales, mn litres

2,225.8

2,272.7

2,349.8

2,426.4

2,504.6

2,574.7

2,646.9

2,721.4

Alcoholic drinks sales, litres per capita

23.4

23.5

23.9

24.2

24.6

24.9

25.2

25.4

26,141.1 27,492.6 29,469.2 31,817.3 34,137.0 36,381.8 38,795.9

41,398.9

Alcoholic drink sales, PHPmn Alcoholic drinks sales, USDmn Beer sales, mn litres


603.7

651.5

697.5

748.6

827.5

905.0

977.3

1,050.8

1,507.9

1,538.1

1,584.8

1,630.5

1,676.8

1,717.9

1,759.7

1,802.5

Page 24

5


Alcoholic Drinks Value/Volume Sales, Production & Trade - Historical Data & Forecasts (Philippines 2011-2018) - Continued

2011

2012

2013e

2014f

2015f

2016f

2017f

2018f

Beer sales, litres per capita

15.9

15.9

16.1

16.3

16.5

16.6

16.7

16.9

Wine sales, mn litres

26.0

28.4

31.6

34.9

38.4

41.5

44.7

48.1

Wine sales, litres per capita

0.3

0.3

0.3

0.3

0.4

0.4

0.4

0.4

Spirits sales, litres per capita

7.3

7.3

7.5

7.6

7.8

7.9

8.0

8.1



Page 25


Mass Grocery Retail ■

■

■

Mass grocery retail (MGR) value sales compound annual growth in local currency 2013 to 2018: +7.03%.

Mass Grocery Retail Sales

Supermarket sector value sales compound annual growth in local currency 2013 to 2018: +6.68%. Hypermarket sector value sales compound annual growth in local currency 2013 to 2018: +9.75%.

(2011-2018) 1,000

12

750 ■

Convenience sector value sales compound annual growth in local currency 2013 to 2018: +7.98%.

10 500 8

Although the Philippine organised grocery retail sector is relatively under-developed compared to regional peers such as Thailand and Malaysia, the sector does not boast the same exciting growth appeal as that of the other under-developed retail

250

0 1 1 0 2

2 1 0 2

e 3 1 0 2

f 4 1 0 2

f 5 1 0 2

f 6 1 0 2

f 7 1 0 2

f 8 1 0 2

6

Total mass grocery retail sales, PHPbn (LHS) Total mass grocery retail sales, PHP, % y-o-y (RHS)

markets in the region owing to the lack of foreign capital in the sector. Nonetheless, sector growth will


remain reasonably strong over our forecast period. In particular, we expect the outperformance of the hypermarket sector to 2018, although the supermarket format will continue to dominate, accounting for over 81% of total MGR sales in 2018.

Remittance is typically viewed as a key pillar supporting domestic demand conditions in the Philippines as around 8mn Filipinos rely heavily on them as a source of income. Given our expectations of slower remittance growth on the back of continued headwinds in the US and the EU, we believe domestic demand conditions are unlikely to hold up strongly in the near term. With consumers watching their purse strings more closely in the near future, we are expecting retail sales year-on-year (y-o-y) growth of less than 8% in 2015.

While the longer-term outlook for the Philippine organised grocery retail sector is more positive than its near-term outlook, we stress that the growth prospects of the Philippine organised grocery retail sector nonetheless pale in comparison with the developing regional retail markets in spite of the sector's underdeveloped nature. Organised retail makes up only 20% of overall grocery retail sales in the Philippines, making it one of the less developed retail sectors in the region. We would attribute this to still low disposable incomes and the fact that large sections of the Philippine population remain beyond the reach of


Page 26


organised retailers in price terms. Furthermore, although the Philippine economy is expanding at a sizeable rate, such growth is not adequate to reduce the jobless rate in the fast- expanding labour market.

Despite its sector immaturity, growth prospects in the Philippine retail sector do not match up to those of the emerging markets, which can be largely attributed to the fact that there is no major multinational involvement in the sector. As has been witnessed elsewhere in the region, the arrival of a cash-rich expansionary multinational typically gives a massive boost to growth both due to that firm's entry and expansion plans and due to the preparatory expansion efforts of existing retailers as they seek to protect their market share ahead of increased competition. Walmart has long been linked with entry to the country and yet this rumour has circulated for some time without ever bearing fruit.

Nonetheless, we are expecting reasonably strong growth in the Philippine retail sector to 2018. We are forecasting total MGR sales to grow at a compound annual average rate of 7.03% to 2018. This outlook is underpinned by sustained income growth and ongoing expansionary efforts of the country's retail players. Market leader SM Investments will continue with its plans to set up 20 new retail outlets annually between 2012 and 2015, and domestic convenience retailer Philippine Seven will maintain its historic pace expansion . These investments will imbue the sector with greater dynamism, in turn bolstering sales growth. Meanwhile, as the increasingly affluent consumers become increasingly familiar with the concept of modern retail in the coming years, they will look to trade up to new varieties which cater better for their new lifestyle needs - namely the need for convenience.

Over our forecast period, the hypermarket retail sector is expected to witness the most robust growth, thanks to continued expansions of SM Investments. With few stores yet established in the country and with each outlet boasting enormous spending power, it will only need the opening of a few more stores to provide a massive boost to sales.

Table: Mass Grocery Retail Sales By Format - Historical Data & Forecasts (Philippines 2011-2018)

Total mass grocery retail sales, PHPbn Total mass grocery retail sales, PHP per capita Total mass grocery retail sales, USDbn

2011

2012

2013e

2014f

2015f

2016f

2017f

2018f

533.5

579.7

620.2

666.1

718.2

767.0

817.6

871.0

5,612.3 5,994.1 6,303.5 6,654.3 7,055.1 7,409.6 7,770.8 8,145.0 12.3

13.7

14.7

15.7

17.4

19.1

20.6

22.1

Supermarket sales, PHPbn

440.3

479.3

510.7

546.2

586.7

624.6

664.0

705.5

Supermarket sales, USDbn

10.2

11.4

12.1

12.9

14.2

15.5

16.7

17.9

Hypermarket sales, PHPbn

31.0

33.9

37.5

41.8

46.4

50.7

55.1

59.7

Hypermarket sales, USDbn

0.7

0.8

0.9

1.0

1.1

1.3

1.4

1.5


Page 27


Mass Grocery Retail Sales By Format - Historical Data & Forecasts (Philippines 2011-2018) - Continued

2011

2012

2013e

2014f

2015f

2016f

2017f

2018f

Convenience store sales, PHPbn

62.1

66.4

72.0

78.1

85.1

91.7

98.5

105.7

Convenience store sales, USDbn

1.4

1.6

1.7

1.8

2.1

2.3

2.5

2.7


Table: Sales Breakdown By Retail Format Type

2012

2022f

Organised/MGR

21

27

Non-organised/Independent

79

73

e/f = BMI estimate/forecast. Source: BMI


Page 28


Trade ■

■

■

Export value compound annual growth in US dollar terms 2013 to 2018 = +6.10%

Trade

Import value compound annual growth in US dollar terms 2013 to 2018 = +8.26% Food & drink balance of trade deficit compound annual growth in US dollar terms 2013 to 2018 = +13.80%

(2009-2018) 7,500

-500

-1,000 5,000 -1,500

In 2015, we expect a return to strong demand from food and drink imports, following better results to

2,500 -2,000

the plus side between 2011 and 2013. With the food and drink balance of trade deficit growing by a little less than we originally forecast for 2014 (at 10.87%), we forecast that the deficit will grow by

0 9 0 0 2

0 1 0 2

1 1 0 2

2 1 0 2

e 3 1 0 2

f 4 1 0 2

f 5 1 0 2

f 6 1 0 2

f 7 1 0 2

f 8 1 0 2

-2,500

Exports of food and drink, USDmn (LHS) Imports of food and drink, USDmn (LHS) Food and drink trade balance USDmn (RHS)

15.80% in 2015.

The Philippines remains a net food importer despite


the fact it is increasing food production capacity. In a government report, the Bureau of Agricultural Statistics revealed that, despite reducing the country's import dependency for some products in 2011, the Philippines continues to import major ingredients such as coffee, garlic and peanuts, as well as livestock and poultry.

A report by the Foreign Agricultural Service of the United States Department of Agriculture indicates that the Philippines was the largest South East Asian market for food and beverages from the US in 2011. Sales of US food and drink shot up 27% year-on-year in the country to USD761mn in 2011.

Owing to inherent problems in the Philippine agricultural sector that prevent food self-sufficiency, food processors in the country rely on imports for raw ingredients. This import dependency pushes up the price of processed food, thus putting it out of the reach of many. Agricultural reforms should gradually improve self-sufficiency; however, over the medium-term a growing food processing industry will negate the potential export benefits of agricultural reform by pushing up demand for food imports.

Our forecasts suggest that the Philippine food and drink trade deficit will get progressively worse to 2018.


Page 29


Table: Trade Balance - Historical Data & Forecasts (Philippines 2011-2018)

2011

2012

2013e

2014f

2015f

2016f

2017f

2018f

Exports of food and drink, USDmn

2,915

3,033

3,014

3,143

3,350

3,570

3,803

4,051

Imports of food and drink, USDmn

4,121

4,055

4,038

4,278

4,665

5,079

5,530

6,006

Food and drink trade balance USDmn

-1,206.6 -1,021.3 -1,024.1 -1,135.4 -1,314.7 -1,508.3 -1,726.6 -1,954.5



Page 30


Macroeconomic Forecasts Economic Analysis BMI View: We

believe that the Philippines will sustain relatively robust growth momentum over the coming

quarters, as we expect stronger investment performance going forward, while private consumption and net export growth should remain robust. We maintain our forecast for real GDP to grow 6.3% in 2014 and 6.0% in 2015.

Chiming with our positive growth outlook, the Philippine economy staged a strong rebound in Q214, with real GDP growth accelerating to 6.4% year-on-year (y-o-y) from the revised 5.6% y-o-y print in the previous quarter. The Q214 headline expansion exceeded Bloomberg consensus estimate of 6.1% and brought real GDP growth to 6.0% in H114. The major thrust behind the real GDP bounce came mainly from a combination of solid growth in private consumption and net exports, which grew by 5.3% y-o-y (which contributed 3.6 percentage points [pp] to the 6.4% headline number) and a massive 176.1% y-o-y (which contributed 4.2pp to the headline figure) respectively.

Sustained Growth On The Cards Philippines - Real GDP, % chg y-o-y & Subcomponents, pp contribution

Source: BMI, NSCB


Page 31


Meanwhile, on the production side, the manufacturing sector was a major growth contributor, racking up growth of 10.8% y-o-y in Q214 from 6.9% in the previous quarter, led by a strong outturn in the food manufacturing sub-sector. While services sector growth slowed to 6.0% in Q214 from 6.8% in Q114, it nevertheless remains supportive of the economy. The smaller agriculture, hunting, forestry and fishing category meanwhile accelerated from 0.9% y-o-y in Q114 to 3.6% y-o-y in Q214, a sign that the devastating impact of Typhoon Yolanda on the sector appears to be waning.

Fervent Foreign Interest Philippines - FDI Inflows, USDmn (LHS) & % chg y-o-y (RHS)

Source: BMI, BSP

* As of end-May 2014

Expecting Stronger Investment Performance

These headline numbers, however, have glossed over the fact that investment has continued to slow. Indeed, gross capital formation (GCF) growth contracted by 2.4% y-o-y in Q214 from 9.5% in Q114, shaving 0.4pp from the 6.4% headline figure. This marks the first contraction since Q212, when GCF growth printed -7.7% y-o-y.


Page 32


That said, we remain optimistic that investment growth will pick up amid still-strong growth in private consumption and exports. We believe that the fall in GCF growth could be due to a drawdown in inventory stocks, which we believe would be a positive for the economy when firms start to expand their production. In addition, the improvement in the country's macroeconomic fundamentals over recent years, owing to fervent efforts by the Aquino administration to implement a slew of economic reforms, has led to strong foreign interest in the archipelago. As shown in the accompanying chart, foreign direct investment (FDI) inflows to the country have been increasing rapidly over recent years. This strong uptrend has also remained intact in the first five months of 2014, with cumulative FDI inflows rising markedly by 33.9% y-o-y to USD2.9bn as compared to the same period in 2013. We also expect the manufacturing sector to provide further impetus for growth. The volume of production index (VoPI) and value of production index (VaPI) for the manufacturing sector have both exhibited an uptrend, a sign of sustainable economic expansion over the coming quarters. Meanwhile, the high capacity utilization rate of more than 80% in the sector could also incentivise firms to start expanding their production capacity.

Stronger Manufacturing Sector Growth Ahead Philippines - VoPI (LHS) & VaPI, % chg y-o-y & 12mma

Source: BMI, Bloomberg

Export Rebound To Gain Momentum

Further informing our constructive outlook for the economy is our projection for export growth to gain further traction going into 2015. The gradual recovery in developed markets, the likely successful


Page 33


application of the European Union (EU) Generalised System of Preference-Plus (GSP+) status and an ongoing diversification of its export base away from an overreliance on electronics shipments should provide strength for the export sector ( see 'Export Recovery To Gain Momentum In 2015", July 22 ). We are forecasting for real export growth to come in at 5.1% in 2014, ahead of an acceleration to 5.4% in 2015.

Strong Remittances Supportive of Private Consumption

In addition, private consumption growth will also be well supported by continued robust remittance inflows. Indeed, remittances increased by 5.8% y-o-y to USD11.4bn in H114. The strong growth seen in the autos sector, with July sales growing by 32.1% y-o-y, further supports our view that private consumption growth will remain strong (see 'Surging Demand Belies Policy Woes", August 21 ).

Risks To Outlook

A salient risk to our positive growth outlook for the economy comes from the potential for an escalation of the country's maritime dispute with China. This raises the prospects of trade sanctions being imposed by Beijing on the Philippines, posing downside risk to our real GDP growth forecast of 6.3% in 2014 and 6.0% in 2015.

Table: Economic Activity (Philippines 2009-2018)

2009

Nominal GDP, USDbn Real GDP growth, % y-o-y GDP per capita, USD Population, mn Unemployment, % of labour force, eop

2010

2011

2012

2013 2014f 2015f 2016f 2017f 2018f

168.8 199.7 224.2 250.4 267.3 287.5 323.4 362.5 400.6 440.9 1.1

7.6

3.6

6.8

7.2

6.3

6.0

5.0

4.9

5.0

1,837 2,137 2,358 2,588 2,716 2,872 3,176 3,501 3,806 4,122 91.9

93.4

95.1

96.7

7.1

7.1

6.4

6.8

98.4 100.1 101.8 103.5 105.2 106.9 6.5

6.5

6.3

6.3

6.2

6.2

f = BMI forecast. Source: National Sources/BMI


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Industry Risk Reward Index Asia Pacific - Risk/Reward Index BMI's Food & Drink Risk/Reward Index assess a market's attractiveness to industry investors in comparison with its peers. The reward part of the rating takes into account market size, current consumption levels, future industry growth prospects (based on our five-year industry forecasts), market fragmentation (with greater fragmentation indicating higher opportunities) and the size of the youth population. Meanwhile, the risk part of the rating takes into account the legislative environment, the level of development of the organised retail sector (with higher development leading to lower risks), as well as relevant aspects of the economic and political environment.

Japan remains in first place in our Q115 Food & Drink Risk/Reward index for Asia, closely followed by China. The two countries lead our ranking with very different risk profiles. Japan maintains its more advantageous risk score thanks to higher food consumption per capita, better distributed wealth, more efficient administration and better infrastructure. Although its reward score has been downgraded over the past quarters due to slowing economic growth and tightening credit conditions, China is still the only growth-positioned market in the top six. In fact, the country has a much better risk profile than many of the emerging markets (EMs) covered in the region, while its reward score is similar to the ones of Pakistan and Indonesia. Positions three to six are filled by comparatively mature and, by extension, well-developed food and drink markets: Australia, Singapore, South Korea and Hong Kong.

Even though our index are designed to be biased towards growth, with the reward component accounting for 60% of the overall score, countries like Indonesia, Vietnam and India (ranked 7th-9th) are not yet in a position to break the mature market (top six) axis, except China. Weak risk scores and the discrepancy in scores between the higher ranked markets and the chasing markets ultimately outweighs the impact of the higher reward scores. Pushing up risk scores would require improvements in areas like mass grocery retail penetration and regulatory environment. Thanks to high per capita GDP and food consumption, Australia and Japan continue to have relatively strong reward profiles compared with the other mature markets, which means it will be difficult for other countries to catch them. However, countries such as Singapore, Hong Kong and South Korea are more at risk from the likes of India, Vietnam and Indonesia in the future.

With the exception of Pakistan, growth opportunities are limited for countries at the bottom of our ranking, which will make it difficult for them to improve their overall Risk/Reward scores. Thailand scores poorly on the industry reward component, due to low GDP per capita and an ageing population. The Philippines and Malaysia are handicapped by lower consolidation prospects compared to their peers with similar


Page 35


income and food consumption levels. In addition, Malaysia's opportunities are constrained by low food consumption compared to the country's income level. Due to low mass grocery retail (MGR) penetration, the risk score does not offset limited room for expansion.

Negative Linear Correlation Apparent Asia Pacific Risk/Reward Index Q115

Source: BMI

Table: Asia Pacific Food & Drink Risk/Reward Index Q115

Risk

Industry Risk

Country Risk

Food & Drink Rating

Ranking

60.7

77.3

80.0

74.5

58.7

1

62.0

54.7

57.8

55.0

60.7

58.1

2

44.2

36.0

52.3

75.7

75.0

76.3

56.8

3

Singapore

35.7

30.0

41.3

84.0

80.0

88.0

55.0

4

South Korea

39.3

38.0

40.7

76.0

80.0

71.9

54.0

5

Hong Kong

38.8

40.0

37.7

75.2

75.0

75.4

53.4

6

Indonesia

60.2

60.0

60.3

39.5

25.0

53.9

51.9

7

Reward

Industry Reward

Country Reward

Japan

46.3

32.0

China

58.3

Australia


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Asia Pacific Food & Drink Risk/Reward Index Q115 - Continued

Risk

Industry Risk

Country Risk

Food & Drink Rating

Ranking

42.0

45.6

30.0

61.2

51.2

8

54.0

64.0

38.3

20.0

56.7

50.7

9

47.7

58.0

37.3

53.1

40.0

66.2

49.8

10

Taiwan

40.3

40.0

40.7

63.5

50.0

76.9

49.6

11

Pakistan

62.2

64.0

60.3

29.8

10.0

49.6

49.2

12

Philippines

49.2

38.0

60.3

45.3

30.0

60.6

47.6

13

Malaysia

43.2

40.0

46.3

53.9

40.0

67.8

47.5

14

Reward

Industry Reward

Country Reward

Vietnam

55.0

68.0

India

59.0

Thailand

Scores out of 100, with 100 highest. The Food & Drink Risk/Reward Rating is the principal rating. It comprises two sub index, 'reward' and 'risk', which have a 60% and 40% weighting respectively. In turn, the 'reward' rating comprises 'industry reward' and 'country reward', which have equal weighting and are based upon growth/size of food/alcohol and soft drinks industry (market) and the broader economic/socio-demographic environment (country). The 'risk' rating comprises 'industry risk' and 'country risk', which both have 20% weightings and are based on a subjective evaluation of industry regulatory and competitive issues (market) and the industry's broader country risk exposure (country), which is based on BMI's proprietary Country Risk Index. Source: BMI

The six factors that make up the reward score in our index are: food consumption per capita, market fragmentation, per capita food consumption (five-year compound annual growth), population size, GDP per capita, and youth population.

The first indicator, food consumption per capita, reflects the existing spending power of the Japanese consumer (the country scores 10 out of 10 on this metric), with South Korea, Australia, Singapore, Hong Kong and Taiwan also achieving high scores. Although these countries show high levels of spending, the performance of other countries is markedly different, pointing to a clear division between regional peers. China, for example, scores only 5, indicating scope for income growth. India has the lowest score of 1 while Pakistan and Vietnam have a score of 2, highlighting even more potential for acceleration despite the current low reward marking.

Our second indicator, market fragmentation, assesses how relatively developed (less fragmented) or underdeveloped (more fragmented) a market is. Whereas the first indicator confers strong scores for high existing spending, the second indicator rewards countries where the long-term scope for growth is the greatest. These are typically markets where there is significant room for growth, innovation and development. Unsurprisingly, Japan, with a highly developed, saturated mass grocery retail (MGR) sector, is comfortably outscored by India, China and almost all the EMs rated.


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The third indicator within the reward breakdown of our index system is per capita food consumption

growth (five-year compound annual growth). Paired with market fragmentation, this is the joint highest weighted indicator within our reward score framework. Since our index are designed to be forward-looking, this indicator is one of the main ways we gauge growth and, in combination with some of the other highweight indicators we look at, informs our preferences for certain markets. Despite lower scores than in previous quarters, countries such as China, I ndia and Vietnam outscore Japan and Australia, demonstrating the future promise of these Asian markets in challenging Japan's lead. One notable high scorer is South Korea, which is forecast to increase per capita food consumption at a similar rate to many emerging markets. Such growth could see the country move higher up the rankings in the near future.

Population size is the fourth indicator, and China and India unsurprisingly score well, as does Japan, with its population of nearly 130mn. Paired with our fifth indicator, GDP per capita, large populations and strong spending power have reinforced Japan's continued dominance in our index this quarter. Though Singapore possesses one of the highest per capita income expenditures and a very good risk score, the limited size of the market means that the country loses ground on this metric.

The final reward indicator, youth population, was introduced as a way to factor in a more comprehensive demographic angle to our index. Here, Pakistan, Vietnam and the Philippines stand out, with high scores rewarding the growth potential associated with young populations and poor scores for Japan and Australia pointing to the restraints that can be presented by ageing populations. Thailand is also handicapped by its ageing population.

The seven factors that make up the risk score are: mass grocery retail (MGR) penetration, regulatory environment, short-term economic risk rating, income distribution, lack of bureaucracy, market orientation, and physical infrastructure.

Our first risk indicator is MGR penetration, which assesses how relatively developed the overall consumer sector is. Very low MGR scores reflect the ongoing predominance of informal retail, comprised of kiosks and markets with weak centralised distribution mechanisms. Many of the more mature and developed markets score well here, including Australia, Singapore and Japan. India, which has very recently initiated efforts to open up its food retailing sector to multinationals, scores very poorly (1/10). Conversely, China is much further along in the development of organised retailing channels when compared with other low scorers such as Vietnam and Malaysia.


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The second factor, regulatory environment, evaluates the complexity of regulations such as labelling and nutrition requirements. It can also be used to gauge the state of the overall business environment. The more developed and mature markets usually score better here, and that is once again the case in Q115, with Pakistan, India and Vietnam scoring poorly, highlighting persisting food regulatory hurdles, particularly for non-domestic producers. Notably, however, China and the Philippines score fairly impressively in this metric, hinting that future growth will be encouraged by both of these countries' strong regulatory environments.

The third factor, short-term economic risk rating, assesses the degree to which the country approximates the ideal of non-inflationary growth with falling unemployment, contained fiscal and external deficits and manageable debt ratios. It is principally the candidates towards the top of our index that do well on this criterion, underlining the link between economic stability and the overall attractiveness of the consumer market. Pakistan's position as the lowest scorer across the region points to continued investor concern, with its score failing to increase over recent quarters. Again, South Korea posts a very favourable rating here.

The fourth factor, income distribution, is measured by the proportion of private consumption accounted for by the middle 60% of earners. Unsurprisingly, countries such as Japan, Singapore and South Korea lead the pack, though developing markets also score relatively well in this regard.

Lack of bureaucracy, our fifth indicator, is a measure of the hurdles that any producer is likely to face in areas such as starting and closing businesses, paying taxes, dealing with licences and registering property. Here India continues to score poorly, with its draconian bureaucracy highlighted in the press regarding multinational grocery retailers. This is paired with our sixth factor, market orientation, which measures how business-orientated an economy is and measures the level of foreign direct investment protectionism, tax rates and the level of government intervention. Another low score for India points to the continued difficulties facing investors looking to enter this market in particular.

Our final risk factor, physical infrastructure, measures the ease and cost of operating in a market from an infrastructure perspective. Some of our favourite regional economies have a lot of work to do here, with the reward profiles of high-growth markets such as China and Indonesia facing poor scores. Paired with factors such as market orientation, regulatory environment and MGR penetration, countries will have to perform well here if they are to challenge the continuing index dominance of Japan.


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Table: Asia Pacific Food & Drink Risk/Reward Sub-Factor Index Q115 - Selected Countries (scores out of 10)

Reward

China

Japan

India

Philippines

Food consumption per capita

5.0

10.0

1.0

3.0

Market fragmentation

8.0

1.0

9.0

5.0

Per capita food consumption, five-year compound annual growth

5.0

2.0

4.0

3.0

Population size

10.0

8.0

10.0

7.0

GDP per capita, US$

4.0

9.0

2.0

2.0

Youth population, %

2.0

2.0

6.0

8.0

MGR penetration

5.0

9.0

1.0

1.0

Regulatory environment

6.0

7.0

3.0

5.0

Short-term economic risk rating

9.0

7.0

6.2

7.4

Income distribution

7.0

9.0

7.0

7.0

Lack of bureaucracy

5.0

8.0

4.2

3.9

Market orientation

4.0

5.6

4.3

6.0

Physical infrastructure

5.5

8.0

6.6

6.1

Risk

Source: BMI


Page 40


Philippines Risk/Reward Index The Philippines remains viewed as one of the least promising food and drink markets in the Asia Pacific region. In fact, neither its risks nor rewards indicators are particularly impressive. We do not envisage the Philippines moving up the rankings in the coming year.

The Philippine market is characterised by low food and drink spending levels, which generally imply lower scope for premiumisation growth, at least in the near-to-medium term. Interestingly, while low consumption levels in developing markets typically translate into massive room for future growth given that consumerism is not as yet entrenched as elsewhere in the developed world, this is not the case in the Philippines. Due to sector crowding and the presence of industry majors such as the San Miguel

Corporation which already dominate a sizeable market share, foreign industry players have found it difficult to make significant headway in the market. This inability to pull in foreign capital has clearly weighed on the growth prospects of the Philippine consumer-facing sectors.

Nonetheless, the Philippine market does have a strong point, which is its enticing demographic profile. The Philippines has one of the largest populations in the region and has a favourable demographic makeup as well. The country's youth population makes up 57% of its overall population, and this should translate into considerable dynamism in the mass market.

The overall food and drink score is further dragged down by its weak risks score. Lacking the pull of foreign capital in its mass grocery retail sector, the organised grocery retail sector remains fairly underdeveloped in the Philippines as compared with other markets such as Singapore and Japan. The absence of a developed organised grocery retail system to facilitate the distribution of consumer goods to the end-consumer market will remain a deterrent to foreign investors. Other factors such as under-developed physical infrastructure and excessive bureaucratic regulations continue to blight the Philippines' investment appeal.


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Market Overview Food Food Processing Agricultural inefficiency has inevitably had a knock-on effect on the country's food-processing industry, which has had to rely increasingly on imported ingredients and packaging materials to meet demand. Only larger companies have been able to modernise and upgrade their facilities, and a significant number of manufacturers, particularly in rural areas, still rely on manual processes.

In spite of these inherent production problems, the food and beverage sectors in the country are increasingly influenced by Western branding and consumption habits. Busy lifestyles, particularly in urban areas where Western influences are at their strongest, have fuelled an interest in packaged and convenience foods spurring on growth in this sector. This trend has no doubt also been helped by the presence of regional industry behemoth San Miguel Corporation (SMC). Its marketing and distribution efforts have substantially increased exposure to branded foodstuffs in the country, causing the sector to develop at a faster pace than that witnessed in other comparable economies.

Again perhaps aided by SMC and its influence on industry best practices in the region, local food manufacturers have focused on developing products that address the issue of inherent consumer price sensitivity but which meet consumer needs. An example of this has been packaging innovations. Manufacturers have introduced smaller pack sizes, which enable consumers to still buy potentially nonessential goods but in small volumes, and are using inexpensive packaging materials, of which the corresponding savings is being passed on to consumers.

SMC operates a number of businesses across a diverse range of products, of which many dominate their respected markets. Monterey Foods Corporation, Philippines' largest pork and beef producer, is a fully integrated in its meat operations, indicating the type of scale SMC holds. SMC is also in a joint venture with The Purefoods-Hormel Company, which accounts for almost two thirds of the processed meat market, leading both the refrigerated and canned goods market. Likewise, Magnola Inc., which manufactures and markets a wide range of dairy products, is by far and away the largest margarine producer in the country. Other companies under SMC's jurisdiction include Magnolia Ice Cream and San Miguel Super Coffeemix Company.

Around the Philippines, distribution and logistics networks are also improving. For example, in October 2012, Philippine food distributor Island Merchants Corporation (IMC) opened a new logistics centre. The


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facility is located on the National Road in Bacolod City. IMC CEO and President Manuel Parroco said that the new logistics centre would increase the company's ability to store and distribute products on behalf of its clients, including Swiss consumer goods company Nestlé.

Agriculture Despite the Philippines' potential as a major agricultural producer, the country suffers from various major structural problems, such as a limited and unstable supply of domestic inputs, resulting in prices that can be higher than world market prices. Despite sustained growth in the country's major agricultural sub-sectors in recent years - the product of continued government efforts - the industry remains blighted by inefficiency or non-existent post-harvest storage facilities and hugely inadequate farm-t o-market support.

The Philippines' government has repeatedly reiterated its commitment to the agricultural sector, both as a means of improving the country's trade balance - the country remains a major importer of many commodities including high-value dairy products - and as a means of improving the financial situation of the rural poor. It is estimated that around 10mn people - just under half of the labour force - are employed in the agricultural sector, and that the industry almost exclusively employs poorer rural workers. By enriching these communities, the government can stimulate the contribution this section of society can make to the economy in general, through increased consumption, and not just through production.

However, government efforts are frequently criticised for failing to address real problems and for instead focusing on popular, but low financial return, crops such as rice. The country's high-value fisheries industry is largely overlooked, despite the contribution it could make to the economy, while certain agricultural crops that use around 90% of land available for harvesting return just 20% to the value of the industry. This inefficiency, coupled with problems concerning the convoluted process of deferring agricultural responsibilities to local government departments, has severely hampered the industry's potential and kept its contribution to GDP below 20%.

Organic Farming

Structural problems at the primary agricultural level have inhibited the potential of added-value sectors such as organic food. However, with more than 500 certified farms already in existence, the sector could be an important contributor to the country's agricultural economy in the future. While harnessing opportunities such as these remains secondary to more pressing problems such as improving rural living standards and agricultural aid allocation, pursuing high-value prospects is just the sort of thing that the government will eventually need to do to transform an under-performing industry into a dynamic one.


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Drink Hot Drinks Hot drinks volumes remain driven by more affluent consumers, who use organised retail. However, higher raw materials and production prices in the past years have had an impact on the shape of the market, with consumers now making more careful purchasing choices. US retailer Starbucks has operated in the region for some time now, yet only has around 160 stores open. Nevertheless, innovation (especially in regards to 'healthier' alternatives), the development of specialty coffee and tea shops and marketing campaigns organised by leading players - including Nestlé Philippines - in the sector will continue to drive the market forward.

Nestlé Philippines is a subsidiary of the Swiss food and beverage conglomerate. The company is especially prominent in coffee and other hot drinks segments in the Philippines. In the tea segment, another multinational, Unilever, is one of the key players, accounting for around a quarter of the retail market. Its leading brand is the affordable Lipton, which covers a variety of teas, from green to herbal.

Soft Drinks Filipinos are among the largest consumers of soft drinks in Asia. Carbonated soft drinks continue to be the most popular sub-segment in the soft drinks sector despite the global increase in health consciousness, which has led to the decline in soft drinks sales in other countries in the region. Bottled water, however, is experiencing strong growth rates, while powdered juice drinks remain popular. Bottled water producers include The Coca-Cola Company, Asia Brewery, Nestlé and Filipinas Water Bottling Company.

The market leader in the Philippine soft drinks sector is Coca-Cola Bottlers Philippines Inc (CCBPI), which used to be a 65:35 joint venture between San Miguel Corporation (SMC) and Coca-Cola but is now wholly owned by Coca-Cola after the two firms fell out over their distribution and marketing strategies. CCBPI operates 23 production facilities throughout the country, producing carbonated soft drinks, sports drinks, juice and bottled water, together with 42 sales offices. The local Pepsi bottler is Pepsi Cola

Products Philippines, a stake in which was recently acquired by South Korea's Lotte Chilsung.

The most popular bottled soft drinks in the Philippines are the international ones - for example Coca-Cola, Pepsi and Sprite. However, many of the brands which retail only in the Philippines, catering for specific tastes and lower budgets are also owned by the multinational players. Coca- Cola owns brands such as Jaz Cola and Lift, and Sarsi through its subsidiary Cosmos Bottling Corp.


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The soft drinks sub-sector in the Philippines is concerned that a proposed government bill to impose a 10% tax on soft drinks had gained further support during 2014. Cited as a pro-health measure, the Beverage Industry Association of the Philippines has warned that not only would the measure fail to solve the nation's obesity concerns but would have economic implications for the industry, which employs around 25,000 people. The measures would also impact negatively on the country's sugar industry, as 60% to 70% of locally produced sugar is used by the Philippine beverage industry.

Alcoholic Drinks As the Philippines' largest food and beverage company, and one of the largest firms in the Asia Pacific region, SMC exerts significant industry influence, affecting local market forces such as price levels and shelf allocation. It is backed by considerable financial resources and an extensive distribution network, not to mention the pure marketing and recognition power of its brand.

Leading spirits producers include the subsidiaries of the country's major conglomerates Lucio Tan and, once again, SMC, which operates Tanduay Distillers and the Ginebra San Miguel units respectively. A similar situation exists in the beer market and the country's top brewers are SMB and Asia Brewery (Lucio Tan), the latter producing Carlsberg under licence as well as its own range of beers such as Manila Beer, Stag, Lone Star and Colt. SMC is the clear market leader, with an approximate 90% market share. Japan's Kirin

Brewery holds a 48% stake in the recently spun-off brewing subsidiary San Miguel Brewery.

Faced with the threat of consumption saturation in the country's beer and spirits markets, the two leading breweries - San Miguel Brewery and Asia Brewery - have committed significant resources to marketing beer and spirits to females. Efforts have included re-branding and promotional campaigns, and San Miguel can claim success, with sales of its San Miguel Light brand, which is aimed at female consumers, exceeding all expectations.

In terms of the distribution of alcoholic drinks, around 75% goes through the off-trade, meaning it is sold through retail outlets as opposed to in bars and restaurants. In spite of price sensitivity in the Philippine economy, the country's alcoholic drinks market appears remarkably buoyant. The beer sector accounts for around two thirds of volume sales, with cheaper standard and economy lagers accounting for 94% of these beer sales.

Wine is a relatively small sub-sector of the alcoholic drinks market, although sales are accelerating rapidly from their low starting point, with light red wine by far the best seller. In comparison with the country's


Page 45


wine and beer segments, the spirits sector is fairly stagnant, with local favourites gin and rum continuing to dominate the market.

Nevertheless, Ginebra San Miguel has attempted to target the country's young market by introducing new flavours of gin. The company has released a new 50% proof sugarcane spirit called Cebu GSM Blue Light, which is believed to be the lightest gin in the market. In April 2012, GSMI also released 35% proof sugarcane alcohol flavours: mojito, apple, brown coffee and lychee.

Mass Grocery Retail In recent years, the development of the Philippine mass grocery retail (MGR) sector has been aided by the passage of the 2002 retail trade liberalisation law, which allowed foreign retailers to operate independently. Since then the number of large-scale modern stores has increased. In response to market liberalisation, domestic operators have started to modernise their outlets and increase the variety of products on offer fearing an onslaught from global multinationals, such as Walmart and Carrefour, as has occurred in other recently liberalised markets in the region.

However, this onslaught has not yet occurred - with the country's retail potential not yet deemed strong enough to offset the economic risks that exist in the eyes of the major multinational retailers. While both of the aforementioned multinationals have been linked with the Philippines in the past, entry does not look likely for some time, especially given Carrefour's and Tesco's scale back from international operations.

Metro Manila presently accounts for more than 50% of the country's total retail sales. However, other regions with urbanised centres are also becoming strong centres for retail activities, particularly as the retail sector in Metro Manila begins to mature and opportunities in the city decrease.

At present, the local sector largely comprises supermarkets and convenience stores, with the first hypermarket having been established in 2001 and since gradually expanded in line with growing familiarity with the concept among Filipino consumers. The sector as a whole continues to expand and modernise in response to consumer demand for convenience, product variety, food safety and quality. This demand is driven in particular by the country's young and upwardly mobile population, who continue to be attracted by Western influences.

While markets and sari-sari stores (small convenience outlets) still account for the vast majority of food sales, their share is declining, albeit slowly, with the expansion of modern MGR chains. Philippine convenience stores mix the characteristics of the traditional sari-sari stores, but offer a wider range of


Page 46


products in a well-lit, air-conditioned and strategic location. They are usually open 24 hours a day, seven days a week. This crossover between traditional forms of shopping and newer, more modern ideas is successful as it appeals not just to the country's youthful population, but also to older shoppers who value this style and are increasingly interested in more hygienic and pleasant surroundings.

In the organised convenience sector, leading players include Philippines Seven - a 7-Eleven franchisee in the Philippines - SM Investments, which operates supermarkets and hypermarkets, and Mini Stop, which is run by the Gokongwei group. Other smaller operators are Caltex Star Mart and Shell Select (both are petrol station stores), and some Mercury Drug outlets, Finds Convenience Stores Inc, which is owned by

Villar. The competition is expected to increase from 2013, with the entry of Japanese FamilyMart, which had established 65 stores in the country by September 2014 and has a target of opening a total of 500 stores there by 2018.

Table: Structure Of Mass Grocery Retail Market By Estimated Number of Outlets (Philippines 2005-2010)

2005

2006

2007

2008

2009

2010

Supermarkets, units

4,600.0

4,675.0

4,750.0

4,780.0

4,790.0

4,830.0

Hypermarkets, units

9.0

10.0

13.0

17.0

19.0

27.0

Convenience stores, units

1,150.0

1,220.0

1,235.0

1,240.0

1,245.0

1,350.0

Total mass retailers, units

5,759.0

5,905.0

5,998.0

6,037.0

6,054.0

6,207.0

Source: National Sources, BMI

Table: Mass Grocery Retail Sales By Format (Philippines 2005-2010)

2005

2006

2007

2008

2009

2010

Supermarket sales, USDbn

4.2

5.2

6.9

7.6

7.5

8.8

Hypermarket sales, USDbn

0.2

0.2

0.4

0.5

0.5

0.6

Convenience store sales, USDbn

0.5

0.7

0.9

1.1

1.1

1.3

Total mass grocery retail sales, USDbn

4.9

6.1

8.1

9.1

9.1

10.6



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Table: Mass Grocery Retail Sales By Format (Philippines 2005-2010)

2005

2006

2007

2008

2009

2010

Supermarket sales, PHPbn

232.3

264.1

316.4

336.8

357.9

394.7

Hypermarket sales, PHPbn

8.7

12.8

16.6

20.9

25.2

26.6

28.0

33.5

42.3

47.5

51.6

57.9

269.0

310.4

375.3

405.3

434.7

479.3

Convenience store sales, PHPbn Total mass grocery retail sales, PHPbn


Table: Table: Estimated Number Of Outlets In 2010

2010

Supermarkets

4,830

Hypermarkets

27

Convenience stores

1,350

Total number of retail stores

6,207

Source: BMI


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Industry Trends And Developments Food Key Industry Trends And Developments Del Monte Pacific Enters New Joint Venture And Proposes Share Sale

Philippine food and beverage company Del Monte Pacific Limited (DMPL) disclosed in December 2014 that it was to enter into a joint venture (JV) with two Europe based companies. The JV will result in the construction of a facility in the Philippines that will preserve the quality and shelf life of fruit and vegetables. Spain based Nice Fruit SL will provide the technology that preserves the nutrients and integrity of the produce handled at the plant. Nice Fruit SL will be the majority stakeholder in the JV with 51% and DMPL will have a 35% stake. UK based Ferville Ltd, while being a minority financial investor, was instrumental to developing the JV and will hold a 14% interest.

In October 2014, it was reported that DMPL was seeking to raise USD360mn by selling preferred shares for debt refinancing, according to a regulatory filing. The company was seeking approval from the Philippines' Securities and Exchange Commission to sell 36mn preferred shares at an indicative price of USD10 each. The company was also offering a dividend rate of between 5.25% and 7% and targets December 8-12 for the offering. Proceeds will be used to refinance a part of the debt that was used to acquire Del Monte Foods Consumer Products (now known as Del Monte Foods Inc (DMFI)) in 2013. That acquisition was completed in February 2014 and funded by USD970mn debt and USD705mn equity.

Century Pacific Completes Successful IPO

The initial public offering (IPO) of Philippines-based food company Century Pacific was oversubscribed by 3.5 times the base offering and raised PHP3.2bn in fresh capital, reported the Manila Bulletin in December 2014. The price range for the IPO was originally set at PHP12.50-14.50 (USD0.28-0.32) a share and in the end 230mn shares were sold at PHP13.75 each. The funds generated from the sale will be used for the firm's expansion. The listing was completed on May 6 and later declared the Philippines' 2014 Deal of the Year at the Assets Triple A Awards.

LT Group Increases Stake In Victorias Milling Company

LT Group announced in August 2014 that it had acquired a further 63.16mn shares in sugar producer Victorias Milling Co (VMC) at PHP5.32 per share. This followed an earlier share acquisition in the sugar


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producer by LT Group in April and brings the company's total stake to 23.5%. This is good news for VMC, as it has been attempting to reduce its debt and improve production facilities in an effort to ensure that it maintains competitiveness after sugar tariffs across the Association of South East Asian Nations are reduced or even removed completely during 2015.

VMC is the main supplier of sugar to LT Group's Tanduay Distillery but also operates across a diverse range of sectors including industrial gasses, packaging and hospitality.

Universal Robina Expands Snack Food Portfolio

Reports in July 2014 stated that Philippine-based snack food and beverage company Universal

Robina (URC) was set to acquire New Zealand snack food maker Griffin's, from Pacific Equity Partners, for USD610mn. The move is expected to help the company expand its product portfolio and enter new markets. URC president Lance Gokongwei said, 'We believe Griffin's is a natural, strategic fit to our existing snack foods portfolio given its strong brand heritage in New Zealand, a country trusted worldwide in having high credibility when it comes to food quality, safety and authenticity' (FoodBev).

This followed the announcement in April 2014 that the company had entered into a 50:50 joint venture (JV) agreement with Japanese snack food company Calbee to produce snack products for the Philippines market. The new entity with an initial paid-in capital of PHP654mn (USD14.56mn) will start operations in 2015. The JV is expected to boost Calbee's presence and increase its market share in the Philippines' market with plans to generate sales of PHP2bn (USD44.55mn) by the end of this decade.

Unilever Divests Royal Pasta To RFM

Anglo-Dutch consumer goods firm Unilever announced in January 2014 the divestment of its Royal pasta brand in the Philippines to local food and beverage company RFM for USD47.8mn. Royal will join the RFM portfolio that already incorporates Fiesta pasta, while it would not include any of the Unilever's units or employees in the Philippines. The deal is expected to boost the company's pasta segment, according to chairman and CEO of Unilever Philippines, Rohit Jawa. The divestment of Royal brand comes as part of the company's global strategy to focus on its core businesses, Jawa added.

Alliance Acquires NZ Salmon Farmer

In December 2012, Alliance Select Foods International Inc. sealed the NZD2.93 acquisition of an 80% of

Akaroa Salmon NZ Ltd., a New Zealand-based salmon marine farmer and processor of fresh and smoked


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salmon. In a disclosure to the Philippine Stock Exchange, the firm said it has signed a share purchase agreement with Akaroa to buy the 80% stake for NZD2.8 million. Alliance will also invest an additional NZD0.13 million as working capital in Akaroa.

The acquisition is being funded by a PHP97.07mn private placement of Alliance shares. The firm sold 60.67mn shares at PHP1.60 per share or a 14.57% premium over the 30-day volume weighted average price from May 17 to July 2 2012. Akaroa is being valued at NZD3.5mn at current exchange rates and Alliance's proposed acquisition is valued at NZD2.18mn. Alliance will also invest NZD100,000 for Akaroa's working capital needs.

Kraft Foods Phl now known as Mondelez Phl

Kraft Foods (Philippines) Inc. has changed its name to Mondelez Philippines Inc. (MPI). Mondelez Philippines is part of Mondelez International, a new company created following the split of Kraft Foods

Limited in October 2012. Mondelez International holds number one or two market share positions in Asia Pacific across several categories, including biscuits and chocolate and with an array of iconic brands such as Oreo biscuits, Cadbury Dairy Milk chocolates, Halls candy, and Tiger Energy biscuits. Asia Pacific currently accounts for 15% of Mondelez International's USD35-billion business, with about three-quarters of its annual revenue generated in the fast-growing biscuits, chocolate and gum and candy categories.

San Miguel Pure Foods plans to sell more shares

San Miguel Corp (SMC) is planning to sell more shares in its food and beverage giant San Miguel Pure Foods Co Inc (SMPF). PAL Holdings Inc, to which SMC is a significant minority, will also sell shares to remain listed in the local bourse. For SMPF, fresh capital from the entry of institutional investors will allow the company to expand its processed meats business. 'I think we can sell more [shares] because a lot of investors are interested in the company,' SMC president and chief operating officer Ramon S Ang told reporters.

However, Ang said SMC wants to retain a controlling interest in all businesses including SMPF, power generation and beer. In November 2012, SMC sold a 15% stake in SMPF to institutional investors for PHP6bn, allowing the food and beverage firm to jack up its public float to roughly 16%, already above the minimum 10% requirement of the local stock exchange. SMC chief finance officer Ferdinand Constantino said proceeds from the sale of existing shares will fund the expansion of the processed meats production plant in Indonesia.


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General Mills Pulls Out Of The Philippines

In July 2012, US food giant General Mills announced that it is pulling out of the Philippines having operated in the market for 12 years. The firm cited the unit's poor performance, with General Mills Philippines stating that it 'can no longer sustain our business in the increasingly challenging environment we face'. The move will see the firm shut its Häagen-Dazs cafes and will also see brands such as Gold Medal, Green Giant, Nature Valley, Pillsbury and Betty Crocker disappear from shelves. This move comes despite General Mills' aim to build its emerging market exposure. It highlights the relative unattractiveness of emerging markets where growth is less dynamic and where consumer demand, at the premium end in particular, has been slower to take hold.

Taiwanese Uni-President To Increase Production Capacity In The Philippines

In February 2012, reports emerged that Taiwanese food producer Uni-President Enterprises plans to increase the production capacity of its existing plants, which mainly produce instant noodles, in Thailand, Indonesia and the Philippines. Although Taiwan represents a strong prospect for premiumisation growth, its mature nature means there are hardly any inspiring opportunities remaining in the longer term, stressing the need for overseas expansions. While China has received the bulk of attention from Uni-President, we have previously highlighted that wider regional expansion will become a growing focus for the company beyond the next two to three years, and its expansion plans clearly chimes well with this view.

McDonald's Versus Jollibee In Fast-Food War

As consumers get richer, an eat-out culture is proliferating quickly across the Philippines. Banking on this trend, domestic fast-food chain Jollibee Foods and US fast-food chain McDonald's have expanded aggressively in the Philippine fast-food sector. Interestingly, Jollibee has made much stronger headway than McDonald's in the country. Jollibee's key competitive strength lies in its localised portfolio, underlining the importance for companies to tailor their growth strategies to cater to the respective needs of their markets rather than employing an all-encompassing strategy.

The dynamics of the Philippine consumer sector work well for fast -food and casual dining. A whole host of fast-food and more upscale casual dining restaurants have opened as richer consumers and a strong eat-out culture have driven growth. Average annual population growth of 1.6% to 2021 is notable for a country that already offers a massive consumer base of some 94.9mn people. More interesting, however, is the age makeup of the population. Around 45% of the country's population is younger than 20. This is forecast to


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drop by 2030 but only to a still attractive 36.7%. The maturation of Philippine's youth population will continue to fuel a dine-out culture over the coming years.

Banking on these positives, Jollibee embarked on an aggressive expansion across the Philippines, spearheading the domestic fast-food sector's growth. As it seeks to diversify its presence in the Philippine food service industry, Jollibee acquired interests in major domestic fast-food chains such as Mang Inasal, Greenwich Pizza, Chowking and BK Titans. Although McDonald's has also expanded quickly across the country, it failed to make strong headway in the market compared with Jollibee.

Jollibee's outperformance is underpinned by its localised product portfolio. Although almost everyone eats meat in the Philippines, McDonald's has found it more difficult to establish mainstream appeal for its product offerings such as the Big Mac. On the other hand, Jollibee's products quickly garnered strong popularity among local consumers, and this can be attributed to its efforts to tailor its product offerings to suit local tastes. For instance, while McDonald's serves pure beef patties, Jollibee serves sweet and spicy burgers, which are stronger-flavoured and cater well to local tastes and preferences. Jollibee also offers local fare such as palabok (vermicelli noodles topped with sauce and fish flakes) and arroz caldo (rice porridge with chicken) and serves their fast-food meals with rice or noodles instead of French fries. This tailored product strategy has unsurprisingly struck a chord with the local consumers.

Clearly, it is important for food companies to tailor their growth strategies according to the respective needs of their markets in order to secure a strong market foothold, particularly in markets characterised by highly localised tastes and preferences. In India, for instance, McDonald's excluded beef offerings from its menu to cater to the vast majority of Hindus, successfully positioning itself in the country.


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Jollibee Banking On Dynamic Asian Growth

Jollibee has big international ambitions. The company, which has 2,338 stores - of which 17.4% are in international markets - aims to increase the proportional contribution of its overseas revenues from a current 20% to 50% within a span of three years. With a strategy of engaging in joint ventures, continued product innovation and competitive pricing, we see a strong cause for optimism in Jollibee's future prospects in Asia.

Jollibee operates the fast-food chains Jollibee, Chowking, Greenwich, Red Ribbon and Mang Inasal across the Philippines and international markets such as China and Vietnam, with overseas sales already making up 20% of its overall revenues. Given the burgeoning potential in emerging Asian economies on the back of dynamics such as rising consumer affluence, strong economic growth and favourable demographics, Jollibee clearly wants to ramp up its presence in these markets to lock in these exciting opportunities. According to Jollibee's CEO Tan Caktiong, the company plans to continue strengthening its presence in Vietnam and China while exploring new markets such as the Middle East.

In H112, Jollibee also began looking to break into the Indonesian market through the expansion of its existing brands. We believe Jollibee's willingness to tailor its product offerings to cater to the localised tastes of the Indonesian consumer should facilitate its expansions across Indonesia. Jollibee currently operates only two Chowking fast-food branches in Indonesia and it plans to introduce its Jollibee chain to the country in the near future. Jollibee also plans to make a foray into the Indian fast-food market through acquisitions, which should speed up its expansion push across the country.

Looking longer term, Jollibee will continue to circle India for potential acquisition opportunities as it plans to make a foray into the market. Jollibee's penchant for acquisitional growth instead of organic growth can probably be linked to the massive size of the Indian market, which means that it will not be particularly easy for Jollibee to build a considerable presence across the market. The company is likely to face distribution and logistical challenges in India, and its plans to pursue acquisitions of local companies should allow it to circumvent these hurdles and expedite its pace of expansions across the country.

Jollibee's growth strategy in Asia is centred on continued product innovation, competitive pricing and expansions through joint ventures:

Joint Ventures: Joint venture is a favourable mode of expansion pursued by Jollibee. In 2010, Jollibee inked joint venture agreements with Hua Xia Harvest and Guangxi Zong Kai Food and Beverage


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Investment Company respectively to form food-processing company Jollibee Foods Processing and acquire a 55% stake in the Chinese fast-food chain San Pin Wang as it looks to build scale across China. More recently, Jollibee has signed a USD25mn joint venture agreement with Viet Thai to acquire 49% and 60% of the latter's operations in Vietnam and Hong Kong respectively. Viet Thai owns 60 Highlands Coffee cafés in Vietnam and also operates the Hard Rock Café outlets in Vietnam and Hong Kong on a franchise basis.

There are clearly strategic benefits to a joint venture, and we believe this mode of expansion will leave Jollibee in a strong position to pursue growth across its overseas markets. A key benefit comes in the form of local expertise. By engaging in joint ventures with established local food players, Jollibee could leverage on their local expertise and knowledge to better target the domestic consumer base. Of course, scale is another advantage offered by joint ventures. Through its joint ventures, Jollibee reaped the benefit of immediate enhanced scale in high-growth markets like China and Vietnam without having to fork out substantial sums of capital as in the case of acquisitions.

Product Innovation: Jollibee's continual product innovation should allow it to strengthen its competitive market position as well. In its latest fiscal year, Jollibee launched new products such as chicken barbecue, new-flavoured fries and the burger steak meal in Vietnam and introduced new products such as orange chicken and hot and spicy noodles in Indonesia, which should enhance its sales opportunities in these markets.

Mass-Market Focus: Jollibee retains a strong focus on competitive pricing, and we believe this should allow it to build a strong foothold in the mass-market segment of the Asian food markets, which is witnessing the strongest dynamism. As a case in point, Jollibee's fast-food meals are priced as low as VND18,000 (USD0.8) in Vietnam. Given that emerging market consumers typically fall within the lower-to middle-income brackets, they are still largely familiarising themselves with the eat-out culture. However, emerging market consumers are getting richer quickly, which is allowing them to spend a lot more money on food. Consumer goods players targeting the mass market should find themselves the biggest winners, in our view.


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Drink Key Industry Trends And Developments Pepsi-Cola Products Philippines To Invest PHP650mn In New Facility

US-based food and drink company PepsiCo's Philippines division, Pepsi-Cola Products Philippines (PCPPI), announced in September 2014 that it was investing PHP650mn (USD14.57mn) to establish a snack food manufacturing facility in the Philippines. The company plans to build a local manufacturing facility, which would allow it to produce, sell and distribute snack foods in the country. 'The snack food investment will allow the company to further build and expand its business and markets venturing into a product line that is complementary to its existing beverage business,' the company said (ABS-CBN News.com). The firm is planning to implement its snack food facility by H215.

Philippine Government Considers Soft Drinks Tax Laws

It was reported in August 2014 that the Philippine Department of Health proposed bill to impose a 10% tax on soft drinks had gained further support. Cited as a pro-health measure, the bill is also being presented as a way to reduce depletion of the country's resources. Dr Cielo Magno of the University of the Philippines' School of Economics said that the imposition of a tax that was greater than 7% would likely see a reduction in the consumption of sweetened soft drinks of around 24%. With regard to resource implications she stated that every half-litre of soft drinks uses between 150 and 300 litres of water in production.

The Beverage Industry Association of the Philippines warned that not only would the proposed measure fail to solve the nation's obesity concerns but would have severe implications for the industry, which employs around 25,000 people. The measures would also impact negatively on the country's sugar industry, as 60% to 70% of locally produced sugar is used by the Philippine beverage industry.

Emperador Distillers Confirms Whyte And Mackay Acquisition

Emperador Distillers, a Philippines-based subsidiary of Alliance Global Group, signed an agreement in May 2014 to acquire the UK-based Whyte and Mackay spirits business from United Spirits for GBP430mn (USD729mn). As part of the acquisition, Emperador will take on a global portfolio of Scotch whisky, malt and grain distilleries and brands that include Dalmore and Tamnavulin. Emperador will also supply United Spirits with an unspecified amount of Scotch whisky over the coming three years.


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Earlier in the year the company inked a deal with another UK-based beverage company, Diageo, to incorporate brands such as Johnnie Walker and Smirnoff into the Philippines. 'The partnership signals the opportunities for growth in the alcohol drinks sector driven by the Philippines' thriving economy and a rapidly growing middle class that is expected to almost double by 2020,' said Emperador (Drink Business Review). However, any details related to the transactions were not disclosed by either company.

Emperador is a sub-premium brandy label and third-largest spirit label, in volume terms, worldwide. These deals are in line with the company's plans to expand its product portfolio.

Coca-Cola FEMSA Continues Philippines Expansion

Coca-Cola FEMSA, the world's biggest bottler of Coca-Cola, is to invest PHP1.2bn (USD32.4mn) into the Philippines in order to boost its manufacturing capabilities within the country. The PHP1.2bn investment is the latest in Coca-Cola FEMSA's expansion drive into the Philippines, with the company acquiring a 51% stake in Coca-Cola Bottlers Philippines in January 2013 for USD688.5mn.

The company's latest investment includes the purchase of part of San Miguel Corp's production facility, which includes a bottling plant for non-alcoholic beverages, as well as a warehouse and additional real estate. Two years ago, Coca-Cola FEMSA completed the construction of a megaplant on the second largest Philippine island of Mindanao. This has since been expanded with the installation of a new bottling line, bringing the company's total number of lines in the region to three. Coca-Cola FEMSA is increasing its pace of expansion within the Philippines and is on track to build five new distribution centres across the country over the next two years.

Cosmos Bottling Corp Exits Stock Exchange

Cosmos Bottling Corporation, a subsidiary of Coca-Cola Bottlers Philippines, is leaving the Philippine bourse seven years after it last traded. In a disclosure to the Philippine Stock Exchange on April 3 2013, Cosmos said its board has agreed to delist its shares. Philippine Bottlers Inc, which is 100%-owned by Coca-Cola Bottlers Philippines, will pick up the shares in a tender offer from April 17 to May 16 2013, the disclosure said. The transaction will cost PHP28.4mn (USD689,650).


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LT Group Raises USD912 Million In Philippines's Largest Equity Sale

Filipino billionaire Lucio Tan's LT Group Inc raised PHP37.72bn (USD912.2mn) in the country's largest ever equity sale, benefiting from a stock market that has boomed just weeks after the country received an investment-grade rating.

The conglomerate's private-placement sale, which was announced in 2012, followed other large share sales in the region in recent months. It attracted strong interest from beyond Asia, sole book runner and lead issue manager UBS AG said, demonstrating investors' appetite for Philippine assets.

The offer was priced at the top end of an indicative range of PHP18 to PHP20.50 a share, and the company exercised an overallotment option to issue a total of 1.84bn shares, UBS said. The sale attracted 11 cornerstone investors and the order book totalled USD3.5bn. UBS said 23% of the funds came from Europe, 36% came from the US, and 41% came from Asia. It did not provide details on the cornerstone investors.

Pepsi-Cola Philippines Expands Into The Powdered Juice Drinks Category

Pepsi-Cola Products Philippines Inc (PCPPI) recently announced its entry into the Powdered Juice Drinks category via its flagship brand Mirinda. Called Mirinda Powder Fun Mix, the new product is an orangeflavoured juice powder that comes in 35gm sachets and 280gm pouches.

According to PCPPI President, Partho Chakrabarti, the powdered juice segment enjoys a healthy singledigit growth annually with only a few major players. 'We are excited at the opportunity to provide variety to our consumers. Though this is our first foray into the powdered juice drinks category, we are confident that Mirinda Powder Fun Mix will be well-received, similar to our product innovations in the past,' Chakrabarti added.

FrieslandCampina Completes Tender Offer For Alaska Milk

Dutch dairy giant Royal FrieslandCampina raised its ownership in Alaska Milk Corp to 97.7% following the completion of its tender offer for the minority shares, paving the way for the local firm's delisting from the Philippine Stock Exchange.

In a disclosure to the Philippine Stock Exchange, Alaska Milk said almost 93% of the company's publicly traded shares were acquired at a price of PHP24 per share during an extended tender offer from April 25


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2013 to June 6 2013. 'About 97% was completed immediately. There's still about one percent, these are lost shares in the documentation. We feel we're over the 90% threshold. Once that's complete then we will proceed with the delisting,' Wilfred Steven Uytengsu, Alaska Milk president and chief executive officer, said in a chance interview.

FrieslandCampina earlier acquired 535.7mn shares held by the Uytengsu family, the founders and controlling shareholders of the local milk maker. This raised its stake in Alaska Milk to 68.9% from the initial 8.1% already held by the Dutch company.

Spirits Sector Consolidation

In February 2012, Ginebra San Miguel acquired all outstanding shares in its rival East Pacific Star

Bottlers Philippines for PHP200mn (USD4.6mn). While Ginebra's acquisition could have been prompted by the reasonably attractive opportunities in the local spirits industry and the prospect of stronger pricing power, we believe a bigger motivation is the growing influx of foreign spirits brands, which would inevitably threaten its market share. By acquiring East Pacific Star, Ginebra is looking to consolidate its market position in the local spirits sector to better contend against intensifying competitive pressures from foreign producers.

Ginebra's acquisition comes closely on the back of a recent ruling by the World Trade Organisation (WTO) that the Philippines will have to level its tax rates between local and imported spirits to comply with the international trade rules. The magnitude of trade barriers in the Philippine spirits market has up until now protected the dominance of domestic spirits producers, and Ginebra would clearly face stronger competitive headwinds from a liberalisation of the country's trade regulations. That said, the lowering of taxes on imported brands should bear only a temporary impact on domestic spirits producers. In the near term, a greater variety of foreign brands could dampen sales opportunities for the domestic producers, but in the long run, domestic players are likely to ramp up product innovation, which should equip them with a stronger capacity to deal with growing foreign competition.

Ginebra commented that 'the acquisition will forge synergies with the company's ongoing operations and provide additional capacity for the contemplated expansion plans of the company', underlining its growth ambitions in the Philippine spirits sector. Ginebra's acquisition of East Pacific Star could have been also partly prompted by its recent subdued financial showing. The company's spirits volumes declined by a massive 34% to reach 19.2mn cases for the nine months to September 2011, marking a sharp contrast with the nine-month financial performance of its sister firm San Miguel Brewery (SMB).


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San Miguel Corporation, the parent company of Ginebra and SMB, attributed the contrasting results to 'soft demand for liquor products'. In our opinion, high price pressures in the Philippine economy are likely to have fuelled the consumer downtrading trend away from higher-value spirits products to lower-value beers as consumers feel a greater squeeze on their purchasing power. By acquiring East Pacific Star, Ginebra is seemingly looking to build a stronger market position in the Philippine spirits sector and bolster its pricing power in order to better hedge against future inflationary pressures. With a stronger competitive position, Ginebra should also find itself better poised to leverage on the positive demand dynamics in the Philippine spirits sector.

WTO's Ruling Has Mixed Implications For Spirits Industry

A ruling by the WTO confirmed that the Philippines' high excise taxes on imported spirits are inconsistent with the organisation's regulation that member states are not allowed to tax imported spirits differently from domestically produced spirits. On the one hand, WTO's ruling could level the playing field between imported and domestically produced spirits in the Philippines, in turn providing the local spirits sector with greater dynamism. On the other hand, the greater influx of foreign brands would inevitably threaten the market share of domestic spirits producers such as Ginebra San Miguel (which has indeed since moved to protect its position by the consolidation of its rival East Pacific Star Bottlers Philippines) and Tanduay

Holdings.

In the Philippines, taxes are applied based on the nature of raw materials used in the production of the respective spirits brands. The country applies a low flat tax on sugar and palm-based spirits, while significantly higher tax rates are applied to spirits produced from non-designated raw materials such as cereals and grapes. As a result, locally produced spirits, which are typically produced from one of the designated raw materials such as cane sugar, are subject to the lower tax rate, while the bulk of imported spirits, which are made from non-designated raw materials, are subject to higher tax rates. Given that member states of the WTO are not allowed to apply different taxes on domestic and imported spirits products, the WTO ruled in favour of the EU and the US, which require the Philippine authorities to level their tax rates between local and imported spirits and comply with the international trade rules. We see mixed implications for the local spirits market from this ruling.

As mentioned, the WTO's ruling could level the playing field between imported and domestically produced spirits in the Philippines, in turn providing the local spirits sector with greater dynamism. According to the European Commission, imported spirits in the Philippines account for only 2% of overall spirits consumption, which is well below the levels of 15% witnessed in other developing markets. This clearly


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underlines the significant trade barriers faced by multinational spirits producers in bringing their foreign brands to the Philippines. Bearing out the difficulties faced by US and European spirits producers in establishing their presence in the Philippines, the value of EU's spirits exports to the country declined from EUR37mn (USD53.0mn) in 2004 to EUR16.5mn (USD23.6mn) in 2010.

From a consumer's perspective, the removal of trade barriers would present positive implications for the Philippine spirits market. By lowering tax rates on imported products, this would encourage a greater influx of foreign brands and widen the variety of spirits brands available to local consumers. With a greater variety of spirits products priced within reach of the average Filipino consumer, this would encourage spirits consumption, suggesting room for further upside in the Philippine spirits market.

Eyeing The Philippine Drinks Potential

US beverage subsidiary CCBPI is optimistic about growth for the business in Mindanao, but is keeping a cautious watch on economic sustainability, according to Topix, citing Sun Star. CCBPI Operations Manager Louie Ytol stated that CCBPI had noted a downturn in the country's economy and would exploit existing facilities to the full, ensuring expansion did not outstrip the community's ability to buy the product.

In fact, CCBPI began expanding its Cebu facility in the Philippines as the first phase of its USD1bn expansion programme in the country, according to The Online Zamboanga Times reports from February 2012. A new bottling line has been added which will grow capacity to supply 40,000 retailers in the region. CCBP employs over 7,000 staff in the Philippines and has already completed significant expansions and upgrades to its facilities and logistics there.

Shortly after, Mexico-based Coca-Cola FEMSA was reported to have entered into a 12-month exclusivity agreement with The Coca-Cola Company (Coke) to evaluate the potential acquisition of the firms bottling operations in the Philippines. Although the companies have stressed that there is no guarantee that the discussions will result in a transaction, it confirms our long-held belief that FEMSA is keen to expand its operations beyond the borders of Latin America.

The statement released by the two firms gives a clear indication of the motivation behind the move, saying that 'both parties believe that KOF [FEMSA]'s expertise and successful track record operating in fragmented markets and emerging economies can be effectively deployed in this territory.' As the world's largest CocaCola bottler with experience across a diverse range of Latin American markets, it is easy to see why the firm would be handpicked by Coke to bolster its penetration in the high-potential Philippines market.


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The Philippine soft drinks industry is, and is set to remain, one of the country's most dynamic food and beverage sub-sectors. The leading players are already looking beyond carbonates into higher-value, more innovative product categories to cater to the country's youthful and increasingly affluent consumers, and these launches are being backed up by substantial promotional and marketing investments.

Japanese brewer Asahi Group Holdings has announced that it intends to extend its operations across Asia through a series of acquisitions. Asahi President Naoki Izumiya said that the company had already identified viable targets in I ndonesia, Malaysia, the Philippines, Thailand and Vietnam. T he Japanese beer market has stalled in recent years as its ageing population has stymied demand, but Asahi still only currently makes 6.6% of its sales from overseas, compared with rival brewer Kirin which makes 23.4%. Asahi has targeted an increase in annual sales by JPY100bn (USD1.3bn) to JPY2-2.5tn (USD0.025-0.032tn) by 2015 with 20-30% attained from overseas revenue.


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Mass Grocery Retail Key Industry Trends And Developments

Waltermart Partnership With SM Group Aids Expansion

Philippine based Waltermart plans to open another three shopping malls in 2015 bringing the retailer's store count to 26, the Philippine Star reported in November 2014. The company also has plans to expand two of its existing malls by the end of 2015. The company has outlets in a number of towns across the country, some of which include supermarkets and cinemas.

In January 2013, SM Group bought into Waltermart in a 50/50 partnership between the two organisations. However, Waltermart retains the management and business of its supermarkets and malls, with SM Group adding financial strength to its expansion plans.

Japanese FamilyMart Adds Franchising To Its Philippine Expansion Plans

In September 2014, Japan-based FamilyMart confirmed its intention to use franchising packages to accelerate its expansion in the Philippines. The minimum cost of a franchise was set at PHP4mn, with finance packages available through the Bank of the Philippine Islands. The company is also looking to raise capital through an initial public offering (IPO). At the time of writing, there were 65 Family Mart stores in the Philippines and the number was expected that to grow to 100 by the end of 2014. The company has a target of opening a total of 500 stores in the country by 2018.

Including Japan, FamilyMart has more than 23,600 stores across eight markets (including the US and China), making it the second largest convenience store group globally. More than 10,000 of its stores are in its overseas markets, with the retailer planning to lift this number to as many as 29,000 by 2020.

In the project, real estate giant Ayala Land Inc is partnering local retailer Rustan's and Japanese conglomerate Itochu (which is the main shareholder in FamilyMart). The FamilyMart network is expected to provide strong competition to the Philippines Seven - a 7-Eleven franchisee in the Philippines - and the other leading convenience player in the country, Mini Stop, which is run by the Gokongwei group.


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Philippines Seven Continues Its Expansion Drive

Philippines-based retailer Philippines Seven plans to double its 2014 spending to open 300 new stores and refurbish another 100 existing stores, Bloomberg reported in August 2014. This follows the major investments in expansion and refurbishment of its store network over the previous two years, which cemented its position as the Philippines' largest convenience-store chain with more than 1,100 stores.

Expansion drives from leading Philippine retailer SM Investments also continues apace and both

Robinsons Retail and Japan-based FamilyMart have aggressive expansion plans - the first planning to expand its network of more than 400 Ministop stores by a further 360 by 2016, and the latter aiming to have 500 Philippine FamilyMart stores by 2018.

As well as expansion, we expect innovation to become an increasingly prevalent feature of retailers' plans. The success of SM Investments' SaveMore discount f ormat already shows that consumers are susceptible to new store formats, and a wider variety of in-store services is also likely to become increasingly common.

Puregold Acquires 49.34% Stake In San Roque

Philippines-based supermarket chain Puregold Price Club's wholly owned subsidiary Entenso

Equities has acquired a 49.34% stake in Manila-based supermarket chain San Roque Supermarkets, which operates stores located in Metro Manila. E ntenso has been established to operate Puregold's f ood retail business, which will be used for joint ventures with third-party entities. Puregold is planning to increase the total number of its stores to more than 200 before end-2013.

Gokongwei unit set for record IPO

The Gokongwei group's retail unit Robinsons Retail Holdings Inc. has obtained the approval of the Securities and Exchange Commission (SEC) to raise as much as PHP42 billion from what may be the largest IPO seen by the local stock market. Robinsons Retail - the country's second largest multiformat retailer - may now offer as many as 484.75mn new primary shares at a maximum price of PHP86.64 a share. The offer consists of up to 461.9mn in base offer and 22.85mn for the overallotment option, according to SEC documents.

At its maximum IPO offer size and price, Robinsons Retail can make history at the local stock market. The largest IPOs (excluding follow-on offerings) completed in the country so far were those conducted by SM


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Investments and budget carrier operator Cebu Air Inc. SM Investments raised PHP28.8bn in 2005, while Cebu Air saw P23.33 billion in 2010. Resorts World Manila operator Travellers International Hotel

Group Inc. earlier obtained approval from the Philippine Stock Exchange to pursue an IPO of about the same size of PHP42bn, but this has been put on hold in light of volatile global market conditions.

Gokongwei Buys 27% Stake In Meralco

The Gokongwei group has struck a deal to buy the remaining 27.1% stake in Manila Electric Co held by the San Miguel group. In separate disclosures to the Philippine Stock Exchange, conglomerates San

Miguel Corp (SMC) and Gokongwei-led JG Summit Holdings Inc. said they have agreed on the transaction subject to closing conditions mutually agreed upon by the parties. None of the terms was disclosed even as the stock market was eager to know how much the block was priced. The SMC group's 27.1% stake in the country's biggest power distributor is valued by the market at PHP83.7bn based on the closing price.

US-Based Capital Group Acquires 5.4% Stake In Puregold

One of the world's biggest fund managers has acquired a stake in Puregold Price Club Inc. In a filing with the Philippine Stock Exchange, the country's second biggest grocery operator said the Capital Group

Companies, through Capital Research and Management Company (CRMC), bought 149.37mn Puregold shares between March 21 2012 and February 13 2013 for an average price of PHP25.7949 apiece.

Capital Group's investment gives it a 5.4% stake in Puregold. 'The shares are not owned by CRMC for its own account but by mutual funds under the discretionary management of CRMC,' Puregold said. The Capital Group, which has 24 offices around the globe and 7,000 associates, is the parent company for several subsidiary companies engaged in investment activities. It is divided into two operational groups represented by CRMC and Capital Group International Inc (CGII). Puregold had said it expects to hit its 200-store target ahead of schedule through organic growth and acquisitions. In January 2013, it completed the acquisition of the owner and operator of the Eunilaine food marts and Grocer E supermarkets for PHP330mn, allowing the listed retailer to widen its customer base and beef up its store network.

Puregold Buys Operator Of Eunilaine, Grocer E Marts

Co-led Puregold Price Club has taken over another retailing peer that operates the Eunilaine foodmarts and Grocer E supermarkets, adding 15 new stores to its fast-growing network. Puregold, the country's second biggest retailer and the most serious challenger to taipan Henry Sy's, announced the acquisition of all the


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outstanding shares of stocks of Company E Corp. This paves the way for its takeover of the four operating Eunilaine foodmarts and 11 operating Grocer E supermarts.

The additional stores are distributed as follows: seven in Metro Manila, six in Rizal and two stores in Cavite. Puregold ended 2012 with 156 stores in operations, consisting of 131 Puregold hypermarkets, supermarkets and extras; 19 Parco supermarkets; and six S & R warehouse membership shopping clubs. Puregold accelerated its expansion with the acquisition of the Parco and S&R chains.

Rustan's Signs Distribution Deal With Casino

In February 2012, Rustan's signed a deal with France-based food retail group Casino, in which Rustan's will exclusively sell Casino's own brand products in the Philippines. Casino said the agreement covers all of the company's own label ranges and will help grow its operations in Asia. We also expect private label products to become more established in the Philippines over the coming years, as consumers become more costconscious.


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Competitive Landscape Competitive Landscape

Key Players

Table: Key Players In The Philippine Food Industry

Company

Sub-Sector

Sales (PHPmn)

Sales (USDmn)

Financial Year End

No of Employees

Year Established

San Miguel Corp

Food & beverages (and heavy industry)

747,720

16,599

Dec-13

14,593

1890

Nestle Philippines Inc

Food & beverages (snack foods, dairy)

111,745e

2,494e

Dec-13

3,500

1911

San Miguel PureFoods

Food - agri & branded consumer

99,773

2,215

Dec-13

3,578

na

Unilever Philippines

Food - mixed branded consumer

17,320e

400e

Dec-11

na

na

Mondelez Philippines (Formerly Kraft Food Philippines)

Food - snack food

10,825e

250e

Dec-11

na

na

RFM Corp

Food - mixed branded consumer

10,240

227

Dec-13

541

na

General Milling Corp*

Food - pasta, flour products, snacks

7,000e

162e

Dec-11

na

1961

Century Pacific Corp

Food - canned food, seafood

19,023

422

Dec-13

na

na

Food - flour products

4,200

99e

Dec-12

na

1962

Food - canned food, seafood

3,764e

84

Dec-13

1,136

2005

Sales (PHPmn)

Sales (USDmn)

Financial Year End

No of Employees

Year Established

Food & beverages (and heavy industry)

747,720

16,599

Dec-13

14,593

1890

Food & beverages (snack foods, dairy)

111,745e

2,494e

Dec-13

3,500

1911

Beverages - alcoholic, beer

75,053

1,666

Dec-13

2,749

2008

Pilmico Foods Corp Alliance Select

e = estimate, na = not available. Source: BMI

Table: Key Players In The Philippine Drink Industry

Company

San Miguel Corp Nestle Philippines Inc San Miguel Brewery

Sub-Sector


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Key Players In The Philippine Drink Industry - Continued

Company

Sub-Sector

Sales (PHPmn)

Sales (USDmn)

Financial Year End

No of Employees

Year Established

Universal Robina Corp

Beverages confectionery & snacks

80,995

1,798

Sep-13

8,938

1954

Coca-Cola Bottlers Philippines Inc

Beverages - soft drinks

21,650e

500e

Dec-11

7,800

1927

Ginebra San Miguel

Beverages - alcoholic, spirits

14,399

320

Dec-13

824

na

Pepsi-Cola Products Philippines


22,462

499

Dec-13

2,560

na

LT Group (Formerly Tanduay Holdings)

Beverages - alcoholic, spirits

55,792

1,239

Dec-13

1,658

1937

Beverages - dairy drinks

11,153e

249e

Dec-13

728

1972

Cosmos Bottling Corp


7,939

176

Dec-10

55e

na

Zest-O Corporation


3,500e

81e

Dec-11

na

1981

Alaska Milk

e = estimate, na = not available. Source: BMI

Table: Key Players In The Philippine Mass Grocery Retail Sector

Parent Company

Country of Origin

Sales (PHPmn)

Sales (USDmn)

Financial year end

SM Investments*

Philippines

253,290

5,623

Dec-13

Suy Sing Commercial Corp

Philippines

21,650e

500e

Dec-11

Fascia

Format

Number of Outlets

241 SM Supermarket

Supermarket

39

SM Hypermarket

Hypermarkets

39

SaveMore

Discount stores

93

WalterMart

Supermarkets

22

The SM Store

Department stores

48

Rustan's Supermarket

Supermarket

22

Shopwise

Hypermarkets

9

Philippine Seven Corp

Philippines

14,134

314

Dec-13

7-Eleven

Convenience Store

1,127

Price Smart

Philippines

4,330e

100e

Dec-11

Price Smart

Cash & Carry

4

Gokongwei Group

Philippines

3,464e

80e

Dec-11

Robinsons Supermarkets

Supermarket

66

Mini Stop

Convenience Store

120


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Key Players In The Philippine Mass Grocery Retail Sector - Continued

Parent Company

Country of Origin

Sales (PHPmn)

Sales (USDmn)

Financial year end

Grand Union Supermarket Inc

Philippines

650e

15e

Uniwide Holdings

Philippines

217e

Netherlands

Shell Caltex Puregold Price Club

Fascia

Format

Number of Outlets

Dec-11

South Supermarkets

Supermarket

8

5e

Dec-11

Uniwide Sales

Supermarket

6

na

na

na

Shell Select

Convenience Store

100e

Australia

na

na

na

Star Mart

Convenience Store

150e

Philippines

73,177

1,624

Dec-13

Puregold Price Club

Supermarket

200e

Puregold Junior

Convenience Store

Puregold Extra

Discount Store

*total group earnings - retail merchandise segment revenue for FY2013 = PHP180,900mn (73.3% of total revenue). e = estimate, na = not available. Source: BMI


Page 69


Company Profile LT Group SWOT Analysis

Strengths

■

Access to a market with a high tolerance of alcohol consumption and relatively high per capita consumption rates translates into reasonably strong growth opportunities.

■

Aggressive expansions have expanded LT Group's domestic reach and put it in a better position to tap into the Philippines' spirits growth.

Weaknesses

■

LT Group competes with Ginebra, which is backed by high-spending behemoth SMC, in the spirits category.

■

Beer accounts for three-quarters of alcoholic drink sales in the country, thus limiting the audience for spirits.

■

Opportunities

■

Spirits typically carry high sales values and are thus prohibitive to many consumers. An increasing number of women in the workforce should boost female spending power, with this a key audience for spirits distributors.

■

LT Group's wide white spirits portfolio should prove popular, with such products typically considered to be healthier and purer than darker varieties

Threats

■

The high value spirits sector could be badly affected by a slower than expected domestic demand outlook, with consumers reducing spending on non-essential, higher-value products.

■

As yet, there has been limited multinational penetration into the Philippines' alcoholic beverages sector. However, as incomes rise, high profile multinationals may enter the market.

■

A recent ruling by the WTO that the Philippines' high excise taxes on imported spirits are inconsistent with WTO's regulation that member states are not allowed to tax imported spirits differently from domestically produced spirits would thr eaten the market share of LT Group.


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Company Overview

LT Group (formerly Tanduay Holdings) engages in the manufacture and sale of liquor products primarily in the Philippines. It has a diversified portfolio including rum, gin, brandy, vodka and whisky. The company also manufactures fodder yeast and distributes related liquids and products. The company has a history of name changes, being known as Asian Pacific Equity Corporation prior to November 1999, and Tanduay Holdings prior to November 2012. In April 2013, LT Group floated on the Philippine Stock Exchange in the country's largest ever equity sale, raising PHP37.72bn (USD912.2mn).

Strategy

LT Group adopts an aggressive growth strategy. The company shops very aggressively for acquisitions, as well as committing funds to the expansion of existing facilities. In February 2013, LT Group acquired five investment management firms as an extensive of its business. In addition, LT Group is constantly looking for means of expanding its consumer base and is therefore considering entering other markets in the region. The importance of geographical diversification is further accentuated by the WTO's recent ruling that the Philippines' high excise taxes on imported spirits are inconsistent with WTO's regulation that member states are not allowed to tax imported spirits differently from domestically produced spirits. The consequential removal of trade barriers would inevitably threaten the market share of LT Group. The magnitude of trade barriers in the Philippine spirits market has protected the dominance of domestic spirits producers, and these companies are at greatest risk from a potential liberalisation of the country's trade regulations. In order to retain healthy earnings growth, which has come under pressure recently from higher commodity costs, the company seeks to acquire immediately profitable partners rather than snapping up bargain companies and rebuilding them. In November 2009, the company issued a PHP5bn retail bond, funds from which went towards expansion and paying down existing debt. In November 2014, LT Group reported that net income for the first nine months of the financial year had fallen y-o-y by 67% to PHP2.5bn. Attributed to the 'the difficult operating environment of our various businesses,' the company's banking and tobacco interests were mainly responsible for the poor performance.


Page 71


Financial Data

For year ending December: ■

■

■

■

■

■

■

2013 sales: PHP55,792mn, growth of 82.5% 2012 sales: PHP30,568mn, growth of 146.3% 2011 sales: PHP12,410mn, growth of 7.9% 2010 sales: PHP11,496.9mn, growth of 12.7% 2009 sales: PHP10,202.2mn, growth of 12.8% 2008 sales: PHP9,049.2mn, growth of 18.3% 2007 sales: PHP9,810.9mn, growth of 48.8%


Page 72


Alaska Milk Corporation SWOT Analysis

Strengths

■

AMC's brands rank first and second among food and beverage companies operating in the Philippines.

■

Product diversity is an important strength, leaving AMC less exposed to demand downturns in single product areas.

■

Thanks to its continued promotional initiatives, Alaska Milk has maintained its position as a market leader in the Philippine liquid canned milk market and strengthened its hold as the second leading brand in the powdered milk category.

■

A trusted local brand, with an emphasis on quality and nutrition, will prove favourable on the back of new regional food safety scares.

■

A move towards premiumisation has provided some cushion from volatile ingredient costs, with margins on these items generally higher.

Weaknesses

■

With diversification into food not yet achieved, AMC is vulnerable to declining demand for dairy, typically perceived as a non-essential item.

■

AMC's commitment to product diversification could jeopardise its focus on the keenly contested dairy sector.

Opportunities

■

Low disposable incomes remain a challenge, yet added-value dairy, such as yoghurt, is a profitable long-term growth channel.

■

Partnerships with established international firms should represent a low-risk, if costly, means of pursuing expansion.

■

Domestic dairy production is low at circa 1% of domestic consumption.


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Threats

■

Softer domestic demand conditions could dent demand for non-essential items, such as dairy.

■

Dairy behemoth Nestlé represents a formidable competitor in the battle for market share.

Company Overview

Strategy

Alaska Milk Corporation (AMC) is one of the country's leading dairy manufacturers. The market leader in liquid canned milk, AMC also enjoys a dominant position in powdered milk as well as a growing presence in value-added dairy categories, such as yoghurts, and in other branded food categories. Its non-dairy coffee creamer business is operated by Alaska Krem-Top. The company is the local distributor for brands including Quaker Oats, Oreo and Cornflakes. Alaska Milk runs strong marketing and promotional campaigns, which have helped lift its sales in the times of flagging consumer confidence levels. In 2012, Dutch dairy cooperative Royal Friesland Campina (RFC) acquired control (98.1%) of the company. Looking ahead, there are three key tenets of Alaska Milk's growth strategy that we believe should place it in a strong position to deliver healthy sales and earnings growth over the longer term. Branding initiatives: Thanks to its continued promotional initiatives, Alaska Milk has maintained its position as a market leader in the Philippine liquid canned milk market and strengthened its hold as the second leading brand in the powdered milk category. By ramping up its branding initiatives, Alaska Milk could facilitate its brand awareness among local consumers and grow its market share in higher-value segments such as the ultra-high temperature (UHT) and ready-to-drink (RTD) markets. Capacity and portfolio expansion: Another priority for Alaska Milk is to continue strengthening its core milk product portfolio and venture into new markets through product innovation. In 2010, for instance, Alaska Milk entered the non-dairy coffee creamer category with the launch of its Alaska Krem-Top Coffee Creamer and in 2014 it launched its first prenatal and infant formula line under RFC's Friso brand. As Alaska Milk continue to plough in capital expenditures into expanding its production capacity and expanding its product portfolio, it should look forward to stronger sales opportunities over the coming years. Ramping distribution: In our opinion, building a wide distribution network is arguably the most integral factor for consumer-facing players to enjoy success in the Philippines and Alaska Milk clearly recognises this importance. Alaska Milk has collaborated with organised grocery retailers in the country to facilitate the distribution of its milk


Page 74


products, ensuring an effective reach across the country. As organised retail spreads across the Philippines in the coming years, this should enhance Alaska Milk's presence in the country. Financial Data


■

■

■

■

2011 sales: PHP11,802.0mn, decrease of 3% 2010 sales: PHP12,162.7mn, growth of 15% 2009 sales: PHP10,580.4mn, growth of 6.2% 2008 sales: PHP9,967.8mn, growth of 9.8% 2007 sales: PHP9,081.8mn, growth of 53.4%


Page 75


Universal Robina Corp SWOT Analysis

Strengths

■

A diverse product portfolio allows URC to offset category declines in one area with an improved performance elsewhere.

■

Geographic diversity has a similar balancing effect, with a poor performance in one market offset by an improved performance elsewhere.

■

A willingness to reinvest, in spite of low profitability, is demonstrative of URC's ambition.

Weaknesses

■

Competing with San Miguel, and increasingly with multinationals, means URC must always operate at a stretch of its resources.

■

Managing an underperforming commodities division could divert funds from URC's core food business.

Opportunities

■

Diversification into beverages and the pursuit of growth in this category should boost sales with this being one of the country's fastest-growing consumer goods categories.

■

Most of URC's categories allow for extensive product innovation, which will be vital in achieving competitive differentiation.

■

Heavy marketing and branding expenditure will appeal to the fast-growing youth market.

■

A commitment to improving distribution should allow URC to broaden its consumer base without the need for considerable investment.

■

Health categories - such as bottled waters and iced teas - represent important longterm growth opportunities, even if returns are currently limited.Proposed JV with Danone will enable URC to diversify and increase the sales of its various beverage products and expand its local market share.

■

Continued expansion into high growth neighbouring countries will grow the business' revenues and profits.


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Threats

■

A disappointing international performance, although not problematic in the short term, could cause problems going forward, particularly if the high potential of China cannot be harnessed.

■

As with reinvestment, volatile ingredient costs have negatively impacted profitability.

Company Overview

Universal Robina Corp (URC) is the food and beverage unit of the JG Summit conglomerate. The branded foods company - the market leader in the snacks, candies and chocolate sub-sectors - also operates throughout the wider region in China, Thailand, Malaysia, Singapore, Vietnam, Indonesia and Hong Kong. The company also has a non-core commodities division and a growing beverage business.

Strategy

URC plans to sustain sales growth in three ways: First, by expanding its distribution network from the current 42,000 outlets; secondly, by continuing to be innovative with new product development; and thirdly, through international expansion. The company has invested heavily in developing and finding successful routes to market for its branded food products. While this has negatively impacted profitability, it is viewed as vital in building market share in the face of increased competition, and the company only plans to commit more resources to advertising and promoting its brands. URC acquired Swiss giant Nestlé's local bottled water business Nestlé Waters in 2007, thus significantly expanding its presence in this fledgling sector, although acquisitions remain a relatively minor part of the company's strategy, with organic expansion favoured. Beyond domestic distribution and new product development, URC intends to continue pursuing international expansion in a bid to lift the contribution of its international division to total sales to 30% from 22.9%. China, Thailand, Malaysia, Singapore, Vietnam, Indonesia and Hong Kong will be key target markets. Last year, URC's capital expenditure was almost 50% of its earnings, with the primary focus of such investment going into the Branded Foods business, primarily in the ASEAN. URC announced in October 2014 that it would enter into a joint venture with Danone, which subject to approval by the boards of both companies would begin commercial operations by 2015.


Page 77


Financial Data

For year ending September: ■

■

■

■

■

■

■

2013 sales: PHP81.0bn, growth of 13.8% 2012 sales: PHP71.2bn, growth of 6.0% 2011 sales: PHP67.2bn, growth of 16.4% 2010 sales: PHP57.7bn, growth of 14.4% 2009 sales: PHP50.5bn, growth of 11% 2008 sales: PHP45.5bn, growth of 20.5% 2007 sales: PHP37.7bn, growth of 7.2%


Page 78


San Miguel Brewery SWOT Analysis

Strengths

■

The backing of a financially powerful parent company that is one of the region's largest conglomerates provides a strong capacity for expansions.

■

A stranglehold over the domestic beer market and equipped with a brand that is globally renowned.

■

Equipped with an extensive and efficient distribution network, covering both the on trade and the off trade.

• Beer accounts for three-quarters of local alcoholic drink sales, representing a massive market for SMB. Weaknesses

■

SMB is unlikely to see its beer market share rise further and consequently domestic investments are generally just for market share preservation.

■

Branded alcoholic drinks do not appeal to the entire population due to price constraints, particularly among lower-income rural groups..

Opportunities

■

The immature markets of Cambodia, Laos and Myanmar represent high growth opportunities for the brewer.

Threats

■

Economic growth will boost sales of beer at the premium end of the market.

■

Economic growth in the country should encourage other brewers to look to the market, leading to enhanced competition, even if SMB's dominance is not realistically under threat.

■

Uncertain commodity costs will remain a threat to profitability.

■

Concerns remain that investment funds from other SMC businesses will be drained to support expansion in heavy industries.


Page 79


Company Overview

San Miguel Corporation (SMC) is the country's largest food and beverage company and one of the largest firms operating in South East Asia. San Miguel Brewery (SMB) is its spun-off and independently listed beer unit, in which Japanese brewing giant Kirin owns a 48% stake. The subsidiary controls 95% of the local beer market via five key brands, while the eponymous San Miguel brand is famous worldwide. San Miguel Brewery has gone from strength to strength in the Philippines market, recording a record set of results for FY2012. Operating income rose by 9% to PHP22.4bn, while the company reached a record level of sales, with revenue increased 5% to PHP75.6bn. In 2012, SMB intensified it initiatives to broaden trade coverage, ensure product availability, and expand emerging segments and sales channels.

Strategy

SMB plans to set up four new additional bottling plants in the Philippines within the next five years and a brewing facility each in Cambodia and Laos. This is in addition to the company's six production facilities located across the Philippines, which serves just under half a million retail units. As the dominant player in the Philippine alcoholic drinks sector, SMB would have to pursue opportunities outside the Philippines to sustain growth. Despite already dominating the beer market in the Philippines, SMB remains one of the most active players in the domestic beer sector and plans to install four new bottling plants across the country to further spread its dominance. According to media reports, each plant, which is estimated to cost around PHP1bn (USD23.1mn), is expected to contribute an additional 22mn cases of beer to SMB's total output. In line with domestic wealth accrual, consumers are likely to gradually trade up to more expensive beer brands and variants, thus creating a strong opportunity for SMB. Although FY2012 saw international volume sales fall, the company's operating income in the segment rose by 57%. Strong performances were posted by operations within Indonesia, Thailand and Hong Kong; however, volume sales fell in Vietnam, with China suffering as well. SMB's only opportunity to achieve meaningful revenue growth will come from international expansion, which the company is implementing with general success.

Financial Data

For year ending December (results for San Miguel Corporation): ■

■

■

■

■

2013 sales: PHP747.7bn, growth of 6.92% 2012 sales: PHP699.4bn, growth of 30.5% 2011 sales: PHP535.8bn, growth of 117.7% 2010 sales: PHP246.1bn, growth of 41.3% 2009 sales: PHP174.2bn


Page 80


SM Investments SWOT Analysis

Strengths

■

As the market leader, SM enjoys a very dominant position and has ensured that its name is synonymous with modern retailing in the country.

■

A multi-format operation allows SM to appeal to a wider range of consumers and cater for more diverse shopping occasions.

■

SM Investments represents a powerful parent, and operational synergies are evident, particularly with regard to real estate

Weaknesses

■

Modern retailing continues to account for only a small proportion of retail sales, with price a major barrier to SM growing its customer base.

Opportunities

■

Expansion opportunities outside of Manila are currently fairly limited.

■

Expanding its store network through its partnership with WalterMart will improve SM's economies of scale and its buying and negotiating power.

■

Should scale increase sufficiently to allow for aggressive purchasing and pricing, the discount offering could represent a viable growth path for SM.

■

Private labelling should prove popular with consumers who are interested in modern retail but still want low prices.

■

Added-value products and services represent cost-effective ways of boosting sales without having to invest in store number expansion.

■

Further expansion of the SaveMore discount channel will enable SM to harness the potential of lower-income groups.

Threats

■

The arrival of multinational competition would place SM's market share under serious strain.

■

Volatile operating costs could threaten profitability, with SM unable to pass these costs on to its price sensitive customers.


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Company Overview

SM Investments acquired its grocery retail interests in 2006. It now operates more than 200 outlets under the fascias SM Supermarket, SM Hypermarket, SaveMore (branded discount stores) and WalterMart. In addition to department stores and shopping mall management, SM Investments also has banking, financial services and real estate and tourism interests.

Strategy

Expansion is currently at the core of SM's retail strategy. The company invested heavily throughout the downturn of late 2008/2009 and in 2010, it doubled its 2009 capital expenditure budget to PHP40.6bn. The company will look to retain its individual subsector leadership positions by gradually increasing its store numbers - discounting appears to have been a particular focus and SM could be looking to leverage its valuable first mover advantage in this area. SM appears to believe that multinational competition in the country will eventually arrive and it wants to have boosted its scale and improved its buying, and thus pricing power, before this happens. In January 2013, SM Group bought into WalterMart, resulting in a 50/50 partnership between the two companies. This has allowed WalterMart to expand its operations, with SM Group financial backing.

Financial Data


■

■

■

■

■

■

■

2013 sales: PHP253.3bn, growth of 13.0% 2012 sales: PHP223.9bn, growth of 12.0% 2011 sales: PHP199.9bn, growth of 13.0% 2010 sales: PHP142.4bn, decline of 3.0% 2009 sales: PHP146.8bn, growth of 10.8% 2008 sales: PHP132.5bn, growth of 18.1% 2007 sales: PHP111.6bn, growth of 37.9% 2006 sales: PHP80.9bn, growth of 63.2%


Page 82


Philippine Seven Corp SWOT Analysis

Strengths

■

Philippine Seven is a clear market leader in the increasingly profitable convenience sector.

■

Being the franchise operator of arguably the world's best-known convenience retail brand gives it a strong foothold in the Philippine convenience retail sector.

■

The early adoption of cutting edge retail technology, such as point-of-sale monitoring, allows for the tracking of fast-changing consumer purchasing habits.

• The company has shown itself willing to close under-performing outlets and to adopt an aggressive approach to expansion. Weaknesses

■

In operating in the convenience retail sector exclusively, price is a greater barrier for Philippine Seven than for other modern retailers.

■

Opportunities

■

Opportunities to boost same-store sales are restricted by limited floor-space. A focus on smaller convenience stores allows the company to expand into otherwise crowded areas.

■

Combining the convenience offering with a fresh and healthy food focus has proved popular throughout Asia and should likewise be so in the Philippines.

■

Expansion into provincial areas, where there is minimal competition, provides a strong opportunity for uncontested brand building


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Threats

■

Expansion has affected group profitability and this could impact on future growth initiatives.

■

With consumers already paying high prices for convenience, the company would most likely be severely hit by slower domestic demand.

■

The threat of multinational retailers entering the market looms large, with convenience possibly a favoured channel for these experienced companies.

■

The entry of Japanese convenience store operator FamilyMart in 2013.

Company Overview

Philippine Seven is the franchise operator of 7-Eleven convenience stores in the country. There are just over 1,120 stores in the Philippines (both self-managed and franchised), making it the market leader by some distance. The company continues to expand both inorganically - acquiring the 35-outlet-strong Bingo chain in 2004 - and organically, via new store openings. It has recently expanded into 'grab-and-go' fastfood business.

Strategy

Philippine Seven has undertaken a rapid expansion of its stores, which stood at below 800 in 2011, but now exceed 1,120. In 2005, it focused on identifying strategic locations for further store openings and in 2006 on increasing its level of pr omotional activity in order to boost same-store sales, as well as opening new outlets, while in 2007, new store openings returned as a priority. Despite continuing to expand throughout the country's economic downturn in late 2008 and 2009, the company's pace of expansion really ramped up again in 2010. Between October 2009 and September 2010, the firm opened 120 new outlets. In addition to expansion, three other elements of the company's strategy are notable. First, it is looking for provincial openings in order to diversify its geography and broaden its consumer base. Secondly, the company has acknowledged the need to expand in a more cost-effective manner, in order to improve its profitability (this could mean a greater emphasis on franchising down the line since this is typically a cost effective means of opening new stores). Finally, it continues to adopt a very active corporate social responsibility programme, the benefits for the company being improved branding opportunities.


Page 84


Financial Data


■

■

■

■

2013 sales: PHP14.1bn, growth of 9.7% 2012 sales: PHP12.9bn, growth of 22.3% 2011 sales: PHP10.5bn, growth of 24.5% 2010 sales: PHP8.5bn, growth of 27.3% 2009 sales: PHP6.6bn, growth of 13.5%


Page 85


Global Industry Overview The July-September third quarter period represented a firm step back from the cautious optimism surrounding the state of the global economy that gathered momentum from the second half of 2013 into the first quarter of 2014 particularly. Declining food prices, deflation or the threat of it in a number of European countries especially and a broad-based sell-off in emerging market assets have dominated headlines over recent weeks. While the eurozone looks particularly weak with France, Italy and Spain standing out, the outlook for food and drink companies across a number of sub-sectors still looks sound in key markets like the US and UK.

Touching on food prices, our agribusiness and wider commodities team expect grains prices to continue declining over Q414 before finding a base towards the end of the year, following heavy selling action in the third quarter.

Food Prices To Continue Decline S&P GSCI Grains Index

Source: Bloomberg, BMI


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Deflation A Monumental Challenge For Retailers Especially

Deflation weighed heavily on a number of European food retailers in Q314. We noted that Spain's discount food retail sector, led by Dia, would not recover until the consumer price index broke out of the deflationary territory it entered over recent months. Dia is one of the best managed food retailers in Western Europe in the attractive discount format; however deflation is especially troublesome for retailers as it leads to lower sales. Therefore the near-12% sell-off in its shares since the start of September 2014 does not present a sector-strategy opportunity yet.

The consumer price index (CPI) in Spain has been in a downward spiral for more than two years (see 'PreCrisis Growth Levels Unlikely' August 5 2014) . For food retailers, the pressure on sales in a deflationary

environment is typically fiercer than it is on the overall cost structure with the end-result typically being downward pressure on margins.

Dia performed very well in the 2011-2013 period particularly in Spain despite a really tough environment for consumer spending. Its shares were one of the best performing on the IBEX 35 index. Dia's low prices and well structured (and positioned) stores were a winner. Its market share grew consistently as discount retailing became more established.

However, this took place largely at a time when there was just enough inflation to allow Dia to really make the most of its business model; consumer price inflation averaged 1.8% year-on-year between 2011 and 2013 according to our data, which is shown in the table below. To compound matters, as well as the macroeconomic headwinds affecting most eurozone economies, the ongoing success of discounters, particularly Aldi and Lidl, in key markets like the UK has put pressure on food companies to lower their prices. Dia is better positioned to ride the wave of deflation given its historic ability to cut costs; however, until the headline CPI begins to pick up it is going to be tough trading.


Page 87


Moving Further Into Deflationary Territory Spain - Consumer Price Index, % chg y-o-y

Source: INE, BMI

We also noted that food price deflation was weighing heavily on the discounter Biedronka - Poland's leading retailer and owned by Portugal's Jeronimo Martins. Same-store sales at Biedronka in the first two quarters of 2014 averaged a 1.2% decline; this compared with growth of more than 10% for the best part of the period during 2010-2013, where we note the historical growth numbers we have for real private consumption growth were similar to our outlook for the period for 2015-2018. However, based largely on our view that inflation would pick up in Poland from 2015 onwards we argued that Poland represented the best opportunity in food retail from the big three Central and Eastern European consumer economies - a list that includes Russia and Turkey (see 'Poland Discount Retail Better Investment Opportunity Than Russia & Turkey' in our online service ).

Perhaps the most discussed global food retailer in Q314 was the UK's Tesco; it has been struggling to turn around its UK business for the best part of three years. We noted that the total amount spent in UK food retail stores fell for the first time in July 2014 since monthly record-keeping began in 1989; this is a direct consequence of how discounters like Aldi and Lidl have upset the applecart with their high-volume, low-


Page 88


price models, taking market share away from legacy retailers like Tesco and forcing them into price war terrain that they are loathe to go into.

Food retailers have little choice in this environment, as abstaining from up giving up margin will lead to more market share losses. We expect price wars to remain the dominant theme in UK retailing through our forecast period to 2018; ultimately, the level of success that Tesco and its UK legacy rivals WM Morrison and Sainsbury will have in arresting declining market share will to a large extent depend on how much more food shopping they are able to move online and how well they are able to balance market share and margin from the ongoing price war. The level of industry competition is underlined by the presence of price deflation in food retailing at a time when headline inflation is forecast to increase by 2% in 2014. So although the deflation in UK food retailing is difference in structure to that in Poland and Spain the end result is the same; UK retailers are facing unprecedented challenges.

Strengthening Pound and Dollar Impact

The strengthening pound and dollar in 2014 against emerging market currencies, particularly in Q314, has been bad news for multinational food and drink companies with extensive international exposure as it is making their foreign currency sales less valuable when converted into their presentational currencies.

Diageo and SABMiller have been particularly affected in the beverages space, as has Unilever with its extensive fast-moving consumer goods portfolio. Back in mid-2013 the main foreign exchange concern came from weakening emerging market currencies as the threat of the US tapering its quantitative easing programme saw emerging market assets sell off, so it has been more than a year of currency related headwinds.

Consolidation In Global Food and Drink

We expect mergers and acquisitions (M&A) activity to gather pace over the coming quarters in global food and drink as more companies look to consolidate having focused primarily on growing organically and cutting costs since 2008. One industry that has the potential to throw up one of the biggest deals in global M&A is beer.

It is looking increasingly likely that AB InBev (ABI) will look to acquire SABMiller (SAB) over the next one to two years with a bid that would value it at more than USD100bn. Our view over the past two to three years, as the potential for this tie-up has generated increasingly more interest from the analyst community and markets, has been that a deal was unlikely on account of the level of financing that would be required and the regulatory hurdles that would have to be overcome, with SABMiller's strong positions in China and


Page 89


the US particularly likely to require divesting. We now believe that a deal is likely over the next one to two years, at an estimated 60% likelihood.

The improved odds reflect the excellent progress ABI has made in reducing the level of leverage on its balance sheet, the need for it to alter the dynamics of its business to an extent to have more exposure to Africa and parts of Latin America in particular, and finally a much improved outlook for the global economy.

ABI is phenomenally profitable. By way of comparison, in its last financial year to December 31 2013, its operating margin was 68% higher than SAB's and 168% higher than the more Europe-focused Heineken's; these two companies represent its core peer group. The driving factor behind this level of margin outperformance is ABI's dominant market position in the US and Brazil, where the structure of the beer industry works very much in its favour. However, ABI grows more slowly than SAB and has a number of geographic gaps - we note that it has almost no presence in Africa.

Another industry that looks likely to consolidate further is discount retailing in the US - a format that is dominated by dollar stores. Our dollar store consolidation view began to play out over Q314. We argued in June 2014 that consolidation in the US deep-discount space was inevitable over the next 1-2 years, as without it the industry would lose more ground to the recovering mid-range format in particular (see 'Consolidation In Discount Space Would Suit Family Dollar And Dollar General,' June 10 2014). The view is playing out following the announcement on July 28 2014 that Dollar Tree would acquire Family Dollar for USD8.5bn in a deal that would have combined the second and third biggest dollar stores to create a new market leader. However, following the bid Dollar General entered the fray with a bid for Family Dollar; no final agreement has been reached.

Table: Dollar General And Family Dollar Historic Quarterly Same-Store Sales Growth (% Change Y-O-Y)

31/05/2014

31/03/2014

31/12/2013

30/09/2013

30/06/2013

31/03/2013

31/12/2012

Dollar General

-1.8

-3.8

-2.8

0

2.9

2.9

6.6

Family Dollar

1.5

1.3

4.4

5.1

2.6

3

4



Page 90


Scotch Exports Slowing As Bourbon View Plays Out

Export sales of American bourbon whiskey have outperformed Scotch so far in 2014, in line with our view. We expect this to continue over the rest of the year and into 2015, as Scotch battles weakness in China particularly following the government clampdown on luxury spirits.

Scotch as an industry should benefit from the stability brought upon by the No vote since the referendum was a major source of uncertainty, particularly with regard to the impact Scottish independence would have had on the pound.

According to the Scotch Whisky Association (SWA), export sales were down 11% year-on-year (y-o-y) to GBP1.77bn in the six month period to June 2014. The US is the biggest export market for Scotch globally and it did not fare well either, possibly due in part to the ongoing boom in bourbon. Bourbon has been at the forefront of the latest wave of consolidation in global alcohol in 2014, highlighted by Japan's Suntory buying the US bourbon producer Beam earlier in 2014 for USD16bn in the biggest ever spirits deal by value.


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Bourbon Prospects Being Priced In Brown Forman, AB InBev, Boston Beer Company & BMI Alcohol Index (31-12-13=100)


The other major producer in the US is Brown Forman (BF), owner of the Jack Daniel's brand. The rising export potential of the category, the renewed popularity of spirits in the US (helped along by an improving economy), and the potential for BF to be targeted for an acquisition are factors that are largely priced into its share price and explain why the latter has performed particularly well since February 2014, as the above chart illustrates.

On the export front, bourbon can accomplish so much more. It is growing from a much lower base than scotch in terms of its export value: about USD1.5bn in 2013 (compared with about GBP4.3bn for scotch according to the SWA), according to the US's Distilled Spirits Council. Exports are also much more focused on developed markets, with key markets including Japan, Germany and the UK. Having made far fewer inroads into China than scotch and Irish whisky, bourbon is much less exposed to China's crackdown.

Whiskey and Craft Beer Leading US Alcohol

On a thematic level, craft beer and bourbon/American whiskey will continue to outperform in the US alcohol sector over our forecast period to 2018. The success of craft beer, driven to a large extent by apathy


Page 92


towards tired mainstream beer brands, has contributed to the renaissance American whiskey has enjoyed since around 2010. This trend has been highlighted by the acquisition of Beam by Japan's Suntory for USD16bn (largest deal ever in spirits) earlier in 2014.

We have touched on the success of craft beer frequently over the past few years (see 'Craft Beer Boom Generates Unique Challenges', May 16 2014) ; this article focuses on bourbon/American whiskey. In

addition to Beam, Brown-Forman is the other major player in the bourbon/American whiskey category, with Jack Daniel's its most recognised brand.

Key factors driving the success of bourbon and American whiskey include: ■

■

Returning cocktail culture among young Americans. White spirits such as vodka are relatively less popular than before. Whiskey companies have had more success with growing areas of the overall alcohol market including women and America's large Hispanic population. Market leaders have successfully leveraged off ubiquitous American whiskey brands like Beam and Jack Daniel's (Brown-Forman) by pushing through innovative new drinks and flavours. As the success of craft beer has shown against an overall decline in the amount of beer Americans are consuming each year, successful innovation and authenticity are being rewarded.

Table: Selected US And Global Spirits Companies - Historical Financial Indicators

Operating Profit Margin, %

Economic Value Added Spread, % (ROIC-WACC)

Sustainable Growth Rate, %

FY0

FY1

FY2

FY0

FY1

FY2

FY0

Brown-Forman

32.5

31.5

28.9

8.4

11.8

2.6

23.3

Beam Suntory

26.3

24.7

22.4

-0.8

-1.1

-2.6

4.5

Pernod Ricard

26

25.7

25

0.3

-1

3.1

6.9

29.9

29.7

29

6.7

7.7

5.9

20.1

Diageo


The table illustrates the level of success US spirits companies have had over the past few years. BrownForman's operating margin is higher than that of the extremely successful leader in global spirits Diageo. This to a large extent can be attributed to the strength of Brown-Forman's brands and its position within an attractive wider industry structure for US whiskey. As a less mature company than Diageo, Brown-Forman retains a greater proportion of the earnings it generates to be re-invested, which suggests it still has a lot of room for growth.


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The economic value added spread is used to gauge the level of residual income a company is able to generate above the minimum level required to cover the cost of capital. For our purposes we use this measure to pick out outperforming companies within wider themes that we like, such as US whiskey in this case. Brown-Forman is among the most profitable major spirits companies in the world by this measure.

Bottled water, juices and energy drinks will be outperformers in global soft drinks.

Battling declining volumes in its core carbonated drinks business, The Coca-Cola Company (Coke) has been behind PepsiCo (Pepsi) in addressing the weakening industry structure; Pepsi has a leg-up on Coke with its successful snacks business. We expect per capita carbonated drinks sales in the US to decline to 147 litres over our five-year forecast period to 2018; this compares with about 160 litres in 2013 and, going back further, nearly 200 litres in 2004.

Coke took a major step towards addressing its lack of growth in the US in Q314 moving to acquire a 16.7% stake worth USD2.15bn in US-based energy drinks company Monster Beverages. This represented an excellent strategic move given the ongoing decline of the carbonated soft drinks market in the US.

Monster has been the absolute standout compared with some of the other major US drinks firms in terms of the excess value it has been creating for its shareholders. This reflects its dominant position and the strength of the industry in which it operates (energy drinks). Energy drinks have been a clear outperformer in the US over the past five or so years, and Monster has only been getting stronger. We see a lot more room for growth in US energy drinks, and Monster continues to be the best-positioned company. Historical precedent suggests that Coke will ultimately move to bid for full control of Monster, having previously taken stakes in well-placed companies such as Zico coconut water before taking full control.

For all its international strength, the US still accounts for more than 45% of Coke's business, and this is not growing. Putting more growth into its US business with more direct exposure to energy drinks via Monster is a major development.


Page 94


Table: Select US Beverage Companies - Historic Eva Spread

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

The Coca-Cola Company

3.1

5.3

-0.4

7.8

9.8

9

12

13.9

10.2

PepsiCo

7.3

7.6

14.9

-1.3

18

8.4

17.9

15.7

9.5

Monster Beverage Corp

25

51.5

22.2

19

29.6

0.6

17.1

23.8

33.3

Sodastream

4.6

6.2

-0.2

8

9.7

0.2

n/a

n/a

n/a

Keurig Green Mountain Inc

3.8

3.7

2.2

2.6

-3.5

-5.2

-2.2

6.7

2.5

28.5

14.2

n/a

n/a

3.3

-3.3

n/a

n/a

n/a

Starbucks Corp


Local Companies Challenging MNCs In Emerging and Frontier Markets

As many frontier economies continue to grow rapidly many companies are profiting, including locally based ones. Within soft drinks for example in a number of African countries there are increasingly more conglomerates pursuing the industry - attracted by the excellent returns multinational companies have been generating.

Using Tanzania as an example, booming demand for carbonated drinks in Tanzania has increased competition in a market that has traditionally been dominated by The Coca-Cola Company's (Coke)'s main brands. Tanzania was once one PepsiCo's strongest businesses in Africa from the mid-1970s to the mid-1990s before a major investment push by Coke in the 1990's saw it take control. An intriguing trend that has surfaced recently and one that will gain more traction involves local players emerging as offshoots of local conglomerates and gaining ground with their lower priced competing products.

Several family-owned businesses have recently introduced their sodas to the market. Coke's biggest local competitor so far in Tanzania has been the Bakhresa Group (one of East Africa's leading conglomerates), which has launched its Azam Cola recently. Bakhresa's soft drinks are often cheaper than more mainstream products and the company's plastic bottle packaging (instead of glass for traditional Coca-Cola bottles) has also taken off strongly in recent months.

MeTL, a family conglomerate that sells everything from sugar and spaghetti to fuel and pens, is also set to expand its beverage portfolio in Tanzania. Mo Cola, named after Mohammed Dewji, chief executive of


Page 95


MeTL, will most likely undercut Coca-Cola's prices. The majority of the population spends about 80% of their budget on food and drink, which will support growth in the value soft drinks segment.

Table: Food and Drink Team's Core Views

Short-Term Outlook ■

Grain prices to continue declining over the fourth quarter of 2014 before finding a base by the end of the year.

■

Consumer sentiment in the eurozone area to remain particularly weak with the exception of the UK.

■

■

Deflation across a number of European economies, including Spain and Poland, to particularly affect food retailing across all formats - including discounting. Strengthening US dollar and British pound to affect sales and earnings at UK/US-based multinational companies with heavy emerging markets exposure.

Long-Term Outlook ■

■

■

■

Consolidation activity to pick up across the global food and drink i ndustry; organic growth and cost-cutting have been the key area of focus since 2008. Companies with strong emerging market exposure will largely continue to outperform in sales growth despite nearterm weakness, although the best opportunities may now be beyond the BRIC countries. Multinationals will increasingly pursue opportunities in f rontier markets. Competition from locally based food and drink brands to intensify as industry players and conglomerates challenge established global companies.

■

Traceability will become increasingly important, particularly in Western Europe following the 2013 horse meat scandal.

■

Discount retailing will continue to outperform supermarkets and hypermarkets across much of Europe.

■

■

■

■

■

Emerging market-based industry players and private equity firms will increasingly pursue developed market investments for the purposes of diversification and access to stellar brands. Private equity interest in food and drink companies in frontier regions such as Sub-Saharan Africa will increase. Hypermarkets will underperform in developed markets, where convenience, discount and online retailing are the strongest opportunities. Conversely, hypermarkets remain a great opportunity in less-developed retail markets, particularly adjacent to shopping centres/malls. Investment in innovation will i ncrease as producers seek differentiation; emphasis will be placed on protecting innovations.

■

Companies will divest brands that are perceived to be at risk from private label substitution.

■

Bottled water, juices and energy drinks will be outperformers in global soft drinks.

■

Government legislation will play an increasing role in marginalising unhealthy food and beverage products.

■

Governments will increasingly pursue alcohol as an effective means of raising revenue through higher taxes.


Page 96


Food and Drink Team's Core Views - Continued ■

Bourbon whiskey to outperform Scotch whisky in global export growth; Scotch particularly affected by China's clampdown on gift giving.

■

Functional foods and energy drinks will provide considerable opportunities globally.

■

Food safety concerns will increasingly affect food and drink spending, particularly in China.

■

Craft beer will outperform mainstream beer in many developed beer markets such as the U S and UK.

■

Consolidation will continue to take place in the global alcohol industry, particularly in Asia.

Source: BMI


Page 97


Demographic Forecast Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting model. Not only is the total population of a country a key variable in consumer demand, but an understanding of the demographic profile is essential to understanding issues ranging from future population trends to productivity growth and government spending requirements.

The accompanying charts detail the population pyramid for 2015, the change in the structure of the population between 2015 and 2050 and the total population between 1990 and 2050. The tables show indicators from all of these charts, in addition to key metrics such as population ratios, the urban/rural split and life expectancy.

Population (1990-2050) 200

150

100

50

0 0 9 9 1

0 0 0 2

5 0 0 2

0 1 0 2

f 5 1 0 2

f 0 2 0 2

f 5 2 0 2

f 0 3 0 2

f 5 3 0 2

f 0 4 0 2

f 5 4 0 2

f 0 5 0 2

Philippines - Population, mn

f = BMI forecast. Source: World Bank, UN, BMI


Page 98


Philippines Population Pyramid 2015 (LHS) & 2015 Versus 2050 (RHS)

Source: World Bank, UN, BMI

Table: Population Headline Indicators (Philippines 1990-2025)

1990

2000

2005

2010

2015f

2020f

2025f

61,948

77,651

85,821

93,444

101,802

110,403

119,219

na

2.1

1.9

1.7

1.7

1.6

1.5

Population, total, male, '000

31,293

39,108

43,132

46,845

50,972

55,189

59,481

Population, total, female, '000

30,655

38,543

42,688

46,598

50,829

55,214

59,737

Population ratio, male/female

1.02

1.01

1.01

1.01

1.00

1.00

1.00

Population, total, '000 Population, % y-o-y

na = not available; f = BMI forecast. Source: World Bank, UN, BMI

Table: Key Population Ratios (Philippines 1990-2025)

Active population, total, '000 Active population, % of total population Dependent population, total, '000 Dependent ratio, % of total working age


1990

34,643 55.9

2000

2005

2010

45,237 51,062

57,001

58.3

59.5

61.0

27,305 32,413 34,758 36,442 78.8

71.7

68.1

63.9

2015f

2020f

2025f

63,658 70,242

76,356

62.5

63.6

64.0

38,143 40,161

42,862

59.9

57.2

56.1

Page 99


Key Population Ratios (Philippines 1990-2025) - Continued

1990

Youth population, total, '000

2000

2005

2010

25,358 29,903 31,817 32,970

Youth population, % of total working age Pensionable population, '000 Pensionable population, % of total working age

2015f

2020f

2025f

33,988 34,796

36,177

73.2

66.1

62.3

57.8

53.4

49.5

47.4

1,946

2,510

2,941

3,471

4,154

5,364

6,685

5.6

5.5

5.8

6.1

6.5

7.6

8.8


Table: Urban/Rural Population & Life Expectancy (Philippines 1990-2025)

1990

Urban population, '000 Urban population, % of total Rural population, '000

2020f

2025f

30,100.9 37,265.1 41,222.5 45,458.8 50,734.4 56,963.9

64,257.9

48.6

2000

48.0

2005

48.0

2010

48.6

2015f

49.8

51.6

53.9

31,847.8 40,386.7 44,598.7 47,985.5 51,068.3 53,439.8

54,961.2

Rural population, % of total

51.4

52.0

52.0

51.4

50.2

48.4

46.1

Life expectancy at birth, male, years

62.5

63.7

64.3

64.9

65.6

66.4

67.0

Life expectancy at birth, female, years

68.0

70.0

70.9

71.7

72.6

73.4

74.2

Life expectancy at birth, average, years

65.2

66.8

67.5

68.2

69.0

69.8

70.5

1990

2000

2005

2010

2015f

2020f

2025f

Population, 0-4 yrs, total, '000

9,450

10,681

11,362

11,180

11,664

12,138

12,539


8,399

9,930

10,581

11,266

11,103

11,595

12,077


7,508

9,290

9,873

10,524

11,220

11,063

11,560


6,611

8,223

9,127

9,701

10,415

11,123

10,990


5,856

7,184

7,945

8,828

9,513

10,247

10,993


5,140

6,208

6,906

7,645

8,629

9,333

10,103


4,416

5,481

5,977

6,656

7,469

8,463

9,195


3,752

4,818

5,288

5,771

6,498

7,317

8,326


2,636

4,132

4,647

5,105

5,619

6,347

7,175


2,136

3,481

3,963

4,462

4,937

5,451

6,180


Table: Population By Age Group (Philippines 1990-2025)


Page 100


Population By Age Group (Philippines 1990-2025) - Continued

1990

2000

2005

2010

2015f

2020f

2025f


1,723

2,390

3,297

3,758

4,260

4,729

5,240


1,386

1,876

2,218

3,069

3,520

4,006

4,466


983

1,441

1,690

2,001

2,794

3,220

3,682


788

1,068

1,236

1,453

1,736

2,441

2,832


548

671

853

993

1,179

1,420

2,014


362

446

479

614

725

870

1,059


178

221

257

278

364

438

535


54

83

90

106

117

157

194


11

18

20

22

27

31

43


1

1

2

2

3

3

4

Population, 100+ yrs, total, '000

0

0

0

0

0

0

0

1990

2000

2005

2010

2015f

2020f

2025f

Population, 0-4 yrs, % total

15.25

13.76

13.24

11.96

11.46

10.99

10.52


13.56

12.79

12.33

12.06

10.91

10.50

10.13


12.12

11.96

11.51

11.26

11.02

10.02

9.70


10.67

10.59

10.64

10.38

10.23

10.08

9.22


9.45

9.25

9.26

9.45

9.35

9.28

9.22


8.30

8.00

8.05

8.18

8.48

8.45

8.47


7.13

7.06

6.96

7.12

7.34

7.67

7.71


6.06

6.21

6.16

6.18

6.38

6.63

6.98


4.26

5.32

5.42

5.46

5.52

5.75

6.02


3.45

4.48

4.62

4.78

4.85

4.94

5.18


2.78

3.08

3.84

4.02

4.18

4.28

4.40


2.24

2.42

2.58

3.28

3.46

3.63

3.75


1.59

1.86

1.97

2.14

2.74

2.92

3.09


1.27

1.38

1.44

1.56

1.71

2.21

2.38


0.89

0.86

0.99

1.06

1.16

1.29

1.69


0.59

0.57

0.56

0.66

0.71

0.79

0.89


0.29

0.28

0.30

0.30

0.36

0.40

0.45


Table: Population By Age Group % (Philippines 1990-2025)


Page 101


Population By Age Group % (Philippines 1990-2025) - Continued

1990

2000

2005

2010

2015f

2020f

2025f


0.09

0.11

0.11

0.11

0.12

0.14

0.16


0.02

0.02

0.02

0.02

0.03

0.03

0.04


0.00

0.00

0.00

0.00

0.00

0.00

0.00

Population, 100+ yrs, % total

0.00

0.00

0.00

0.00

0.00

0.00

0.00



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Glossary Food & Drink Food Consumption: All four food consumption indicators (food consumption in local currency, food consumption in US dollar terms, per capita food consumption and food consumption as a percentage of GDP) relate to off-trade food and non-alcoholic drinks consumption, unless stated in the relevant table/ section.

Off-trade: Relates to an item consumed away from the premises on which it was purchased. For example, a bottle of water bought in a supermarket would count as off-trade, while a bottle of water purchased as part of a meal in a restaurant would count as on-trade.

Canned Food: Relates to the sale of food products preserved by canning. This is inclusive of canned meat and fish, canned ready meals, canned desserts and canned fruits and vegetables. Volume sales are measured in thousand tonnes as opposed to on a unit basis to allow for cross-market comparisons.

Confectionery: Refers to retail sales of chocolate, sugar confectionery and gum products. Chocolate sales include chocolate bars and boxed chocolates; gum sales incorporate both bubble gum and chewing gum; and sugar confectionery sales include hard-boiled sweets, mints, jellies and medicated sweets.

Trade: In the majority of BMI's Food & Drink reports, we use the UN Standard International Trade Classification, using categories Food and Live Animals, Beverages and Tobacco, Animal and Vegetable Oils, Fats and Waxes and Oil-seeds and Oleaginous Fruits. Where an alternative classification is used due to data availability, this is clearly stated.

Drinks Sales: Soft drink sales (including carbonates, fruit juices, energy drinks, bottled water, functional beverages and ready-to-drink tea and coffee), alcoholic drink sales (including beer, wine and spirits) and tea and coffee sales (excluding ready-to-drink tea and coffee products that are incorporated under BMI's soft drinks banner) are all off-trade only, unless stated.

Mass Grocery Retail Mass Grocery Retail: BMI classifies mass grocery retail (MGR) as organised retail, performed by companies with a network of modern grocery retail stores and modern distribution networks. MGR differs from independent or traditional retail, which relates to informal, independent-owned grocery stores or traditional market retailing. MGR incorporates hypermarket, supermarket, convenience and discount retailing, and in unique cases cooperative retailing. Where supermarkets are independently owned and not classified as MGR, BMI will state so clearly within the relevant report.


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Hypermarket: BMI classifies hypermarkets as retail outlets selling both groceries and a large range of general merchandise goods (non-food items) and typically more than 2,500m² in size. Traditionally only found on the outskirts of town centres, hypermarkets are increasingly appearing in urban locations.

Supermarket: Supermarkets are the original and still most globally prevalent form of self-service grocery retail outlet. BMI classifies supermarkets as more than 300m², up to the size of a hypermarket. The typical supermarket carries both fresh and processed food and will stock a range of non-food items, most commonly household and beauty goods. The average supermarket will increasingly offer some added-value services, such as dry cleaning or in-store ATMs.

Discount Stores: Although most commonly between 500m² and 1,500m² in size, and thus of the same classification as supermarkets, discount stores will typically have a smaller floor space than their supermarket counterparts. Other distinguishing features include the prevalence of low-priced and private label goods, an absence of added-value services, often called a no-frills environment, and a high product turnover rate.

Convenience Stores: BMI's classification of convenience stores includes small outlets typically less than 300m² in size, with long opening hours and located in high footfall areas. These stores mainly sell fastmoving food and drink products (such as confectionery, beverages and snack foods) and non-food items, typically stocking only two or three brand choices per item and often carrying higher prices than other forms of grocery store.

Cooperatives: BMI classifies cooperatives as retail stores that are independently owned but club together to form buying groups under a cooperative arrangement, trading under the same banner, although each is privately owned. The arrangement is similar to a franchise system, although all profits are returned to members. The term is becoming more archaic, with fewer cooperatives remaining that conform to this model. Most cooperative groups now have a more centralised management structure, operate more like normal supermarkets, and are thus classified as such in BMI's reports.


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Methodology Industry Forecast Methodology BMI's industry forecasts are generated using the best-practice techniques of time-series modelling and causal/econometric modelling. The precise form of model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined.

Common to our analysis of every industry is the use of vector autoregressions. Vector autoregressions allow us to forecast a variable using more than the variable's own history as explanatory information. For example, when forecasting oil prices, we can include information about oil consumption, supply and capacity.

When forecasting for some of our industry sub-component variables, however, using a variable's own history is often the most desirable method of analysis. Such single-variable analysis is called univariate modelling. We use the most common and versatile form of univariate models: the autoregressive moving average model (ARMA). In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a basis for analysis and forecasting.

BMI mainly uses ordinary least squares estimators. In order to avoid relying on subjective views and encourage the use of objective views, BMI uses a 'general-to-specific' method. BMI mainly uses a linear model, but simple non-linear models, such as the log-linear model, are used when necessary. During periods of 'industry shock', for example when poor weather conditions impede agricultural output, dummy variables are used to determine the level of impact.

Effective forecasting depends on appropriately selected regression models. BMI selects the best model according to various different criteria and tests, including but not exclusive to: ■

R2 tests explanatory power; adjusted R2 takes degree of freedom into account

■

Testing the directional movement and magnitude of coefficients

■

Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value)

■

All results are assessed to alleviate issues related to auto-correlation and multi-collinearity


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BMI uses the selected best model to perform forecasting.

Human intervention plays a necessary and desirable role in all of BMI's industry forecasting. Experience, expertise and knowledge of industry data and trends ensure that analysts spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not.

Sector-Specific Methodology Within the Food & Drink industry, issues that might result in human intervention might include but are not exclusive to: ■

Significant company expansion plans;

■

New product development that might influence pricing levels;

■

Dramatic changes in local production levels;

■

Product taxation;

■

The regulatory environment and specific areas of legislation;

■

Changes in lifestyles and general societal trends;

■

The formation of bilateral and multilateral trading agreements and negotiations;

■

Political factors influencing trade;

■

The development of the industry in neighbouring markets that are potential competitors for foreign direct investment.

Example Of Food Consumption Model

(Food Consumption)t = β0 + β1*(GDP)t + β2*(inflation)t + β3*(lending rate)t + β4* (foreign exchange rate)t + β5*(government expenditure)t + β6*(food consumption)t-1 + εt

Sources BMI uses the following sources in the compilation of data, developments and analysis for its range of Food & Drink reports: national statistics offices; local industry governing-bodies and associations; local trade associations; central banks; government departments, particularly trade, agricultural and commerce ministries; officially released information and financial results from local and multinational companies; cross-referenced information from local and international news agencies and trade press outlets; figures from global organisations, such as the WTO, the World Health Organization (WHO), the UN Food and


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Agricultural Organization (FAO) and the Organisation for Economic Co-operation and Development (OECD).

Risk/Reward Index Methodology BMI's Risk/Reward Index (RRI) provides a comparative regional ranking system evaluating the ease of doing business and the industry-specific opportunities and limitations for potential investors in a given market. The RRI system divides into two distinct areas:

Rewards: Evaluation

of sector's size and growth potential in each state, and also broader industry/state

characteristics that may inhibit its development. This is further broken down into two sub categories: ■

Industry Rewards: This is an industry-specific category taking into account current industry size and growth forecasts, the openness of market to new entrants and foreign investors, to provide an overall score for potential returns for investors.

• Country Rewards: this is a country-specific category, and the score factors in favourable political and economic conditions for the industry. Risks:

Evaluation of industry-specific dangers and those emanating from the state's political/economic

profile that call into question the likelihood of expected returns being realised over the assessed time period. This is further broken down into two sub categories: ■

Industry Risks: This is an industry-specific category whose score covers potential operational ri sks to investors, regulatory issues inhibiting the industry, and the relative maturity of a market.

• Country Risks: This is a country-specific category in which political and economic instability, unfavourable legislation and a poor overall business environment are evaluated to provide an overall score. We take a weighted average, combining industry and country risks, or industry and country rewards. These two results in turn provide an overall Risk/Reward Index, which is used to create our regional ranking system for the risks and rewards of involvement in a specific industry in a particular country.

For each category and sub-category, each state is scored out of 100 (100 being the best), with the overall index a weighted average of the total score. Importantly, as most of the countries and territories evaluated are considered by BMI to be 'emerging markets', our index is revised on a quarterly basis. This ensures that the index draws on the latest information and data across our broad range of sources, and the expertise of our analysts.

In constructing these indices, the following indicators have been used. Almost all indicators are objectively based.


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Table: Food & Drink Risk/Reward Index Indicators

Rewards Industry rewards

Food and drink consumption per capita, US$

Indicator denotes overall breadth of market. Wealthier markets score higher.

Per capita food consumption growth, fiveyear compound annual growth, %

Lead Food & Drink growth indicator. Scores based on compound annual growth over our five-year forecast period.

Market fragmentation

Subjective score reflecting how relatively developed the industry is. Higher score reflects a more fragmented industry.

Country rewards

Population size, mn

Indicator denotes size of market.

GDP per capita, US$

Proxy for wealth. Size of population is important but needs to be considered in relation to spending power. Hi gh-income states receive better scores than low-income states.

Youth population, %

0>15%, % of total working age population. Younger populations are generally considered to be more desirable.

Risks Industry risks

Mass grocery retail penetration, %

The proportional contribution of the organised food retailing sector; higher scores reflect better developed routes to consumers and more efficient internal trade systems.

Regulatory environment

Subjective score based on the industry-specific regulatory environment and the presence of potentially restrictive legislation.

Country risks

Short-term economic growth

Score from BMI's Country Risk Index (CRI). It evaluates likely growth trajectory over a two-year forecast period, based on BMI's forecasts and projections of business and consumer confidence.

Income distribution

Middle 60% of population, % of total spending. Higher score is an indicator of incomes being spread more equitably.

Lack of bureaucracy

From CRI. It evaluates the risks to business posed by official bureaucracy, the broader legal framework and corruption.

Market orientation

Subjective score from CRI to denote predictability of openness to foreign investment and trade.

Physical infrastructure

From CRI. Poor power/water/transport infrastructure act as bottlenecks to sector development

Source: BMI


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Weighting: Given the number of indicators/datasets used, it would be inappropriate to give all subcomponents equal weight. Consequently, the following weights have been adopted:

Table: Weighting

Component

Weighting

Rewards

60%

- Industry rewards

30%

- Country rewards

30%

Risks

40%

- Industry risks

20%

- Country risks

20%

Source: BMI


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Philippines (Food & Drink Report 2015)

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