Russia Food and Drink Report Q4 2011

If Russian consumer stocks were the big outperformers in 2010, easily beating the benchmark RTS, financials and oil & gas with some fantastic gains as the consumer started spending again, then 2011 has been a lot tougher. The RTS Consumer & Retail index is down 23% year-to-date, which compares with a 12% sell-off in the energy-heavy benchmark. After such a spectacular 2010, a pullback and the relative underperformance of consumer stocks was always likely given how expensive some of the big players were starting to look.
Macroeconomically we have been concerned about inflation in Russia for much of 2011 and this has certainly affected consumer spending. Back in May our Europe team lowered their private consumption growth forecast for 2011 to 3.0% from 4.1% in real terms, as the widely anticipated recovery in consumer spending struggled to get off the ground. Disposable income growth only just pushed into positive territory at 0.7% y-o-y in June, after three consecutive months of negative growth, preceded by zero growth in February. Disposable income growth averaged -1.3% y-o-y during the first half of 2011, compared with 5.8% y-o-y growth during the same period in 2010. Higher inflation saw real wage growth underperform during the first six months of the year, growing by an average 2.4% y-o-y, compared with the 4.2% recorded in H110. Retail sales have looked better than these numbers but they often do in these cases, with the industry probably able to pass on some costs to consumers. Encouragingly, inflation has shown signs of easing.
Headline Industry Data .. 2011 per capita food consumption (local currency) = +11.67%; forecast compound annual growth to 2015 = +10.70%
.. 2011 beer volume sales = -2.50%; forecast compound annual growth to 2015 to 2015 = +2.10% .. 2011 mass grocery retail sales (local currency) = +21.99%; forecast compound annual growth to 2015 to 2015 = +26.20%
Key Company Trends Carlsberg Affected By Tougher Conditions In Russia – Carlsberg's Copenhagen-listed shares sold off by nearly 15% in early trading on August 17 2011 after it halved its year-end profit earnings guidance on the back of a worse than expected first-half (to June 2011). Carlsberg now expects underlying profits to increase in the 5-10% range against a previously anticipated 20%. The main factor behind the cut comes from weaker than expected results in Russia, which is hugely relevant to Carlsberg. Russia is the world's fourth largest beer market by volume and the third most profitable in earnings before interest and taxes terms at about US$1.85bn, according to data from Brazil's AmBev. Carlsberg now expects the Russian beer market to decline after previously setting guidance for 2-4% growth.
Western Fast-Food Taking Off In Russia – It was probably always likely to happen. Western fast-food chains are starting to see a lot more room for growth in Russia. Whereas McDonald's was once pretty much the dominant foreign fast-food operator in Russia, the playing field has widened over the past few years with the likes of Burger King coming in quite aggressively. You can see why too. Russia (even Moscow) is still not overly populated with fast-food outlets and even if Russia has traditionally not been as keen on Western brands as a lot of other countries, the convenience and value factor associated with fast-food is still a big draw.
X5 Supermarkets Coming Back Nicely – Whereas soft discount stores have done particularly well over the past two-and-a-half years or so in Russia, the playing field has been a lot tougher for supermarkets – not least because of how important value has been. Things have improved over the past year, with Russia's largest retailer X5 reporting strong supermarket numbers for its Q2 (the three months to June 2011). Likefor- like supermarket sales were up by 18% year-on-year, compared to 9% for soft discounters. Traffic at X5 was up by 9%. However, we believe discount stores are still likely to see the bulk of expansion spending over the rest of 2011. We see much room for growth in the discount space over the next few years. It is especially useful outside of the Central Region, where income is generally lower.

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BMI Industry View . 7
SWOT Analysis 9
Russia Food Industry SWOT 9
Russia Drink Industry SWOT 10
Russia Mass Grocery Retail SWOT .. 11
Business Environment 12
BMI’s Core Global Industry Views .. 12
BMI Core Views .. 19
CEE Food & Drink Business Environment Overview . 20
Table: Emerging Europe Food & Drink Risk/Reward Ratings Q411 - Published July 2011 . 23
Russia’s Food & Drink Risk/Reward Rating 24
Macroeconomic Outlook 25
Table: Russia - Economic Activity . 27
Industry Forecast Scenario 28
Consumer Outlook 28
Food. 29
Total Food Consumption 29
Table: Food Consumption Indicators – Historical Data & Forecasts .. 30
Table: Fish . 30
Table: Snack Foods .. 34
Drink 38
Alcoholic Drinks . 38
Beer .. 38
Table: Russia Beer Value/Volume Sales - Historical Data & Forecasts .. 39
Spirits 39
Table: Russia Spirits Value/Volume Sales - Historical Data & Forecasts .. 40
Wine .. 41
Table: Wine .. 41
Soft Drinks . 42
Table: Fruit Juice Value/Volume Sales – Historical Data & Forecasts 43
Table: Carbonates Value/Volume Sales – Historical Data & Forecasts .. 44
Table: Bottled Water Value/Volume Sales – Historical Data & Forecasts . 45
Hot Drinks . 45
Table: Hot Drinks .. 45
Mass Grocery Retail 46
Table: Russia’s Top 10 Mass Grocery Retailers . 47
Table: MGR Value Sales By Format – Historical Data & Forecasts . 47
Trade .. 48
Table: Food, Drink & Tobacco Trade Indicators (US$mn) – Historical Data & Forecasts .. 48
Food . 49
Key Industry Trends And Developments 49
Western Fast-Food Taking-Off In Russia .. 49
Opportunities For Russian Firms Too . 49
Seafood Firm Russian Sea Group Sales And Prices Up In H1 .. 49
Campbell Soup To Quit Russia And Focus On China .. 50
Market Overview .. 50
Food Processing . 50
Leading Players .. 51
Table: Dairy . 52
Confectionery 56
Table: Chocolate 56
Table: Confectionery 58
Agriculture . 59
Table: Frozen Fruit And Vegetables . 60
Drink 63
Key Industry Trends And Developments 63
Carlsberg Profit Guidance Rocks Share Price, Russia A Problem Right Now .. 63
Vodka Clampdown Continues .. 66
Market Overview .. 67
Alcoholic Drinks . 67
Beer .. 68
Spirits 68
Soft Drinks . 71
Hot Drinks . 73
Mass Grocery Retail .. 75
Key Industry Trends And Developments 75
X5 Supermarkets Coming Back Nicely . 75
Russian Regions To Take On Greater Importance . 76
Market Overview .. 76
Table: Russia’s Top 10 Mass Grocery Retailer .. 76
Leading Retailers 79
Competitive Landscape .. 82
Consumer Share Price Analysis . 82
Key Players .. 87
Table: Key Players in Russia's Food & Drink Sector .. 87
Table: Key Players in Russia's Mass Grocery Retail Industry .. 89
Company Analysis. 91
Food . 91
Kraft Foods 91
Unilever (Inmarko) 93
Cherkizovo . 94
Drink . 95
Heineken . 95
Baltika . 96
Sun InBev 97
Coca-Cola.. 98
PepsiCo .. 99
Mass Grocery Retail 100
Sedmoi Kontinent ..100
X5 Retail 101
Magnit 102
Dixy .103
BMI Food & Drink Methodology 104
Food & Drink Business Environment Ratings ..104
Ratings Methodology .104
Ratings Overview .104
Ratings System 104
Indicators ..104
Table: Limits Of Potential Returns ..105
Table: Risks To Realisation Of Potential Returns .106
Weighting ..107
Table: Weighting ..107
BMI Food & Drink Industry Glossary ..108
Food & Drink .108
Mass Grocery Retail 108
BMI Food & Drink Forecasting & Sourcing .110
How We Generate Our Industry Forecasts ..110
Sourcing .111
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