Venezuela Food and Drink Report Q3 2011

In our view Venezuela's economic recovery from its two-year recession will be shaky, as we expect positive real GDP growth to be accompanied by chronic inflation, more nationalisations and stagnant oil production. Given that these factors are likely to weigh on private consumption. we believe that the majority of economic expansion will be fuelled by higher oil prices and the resulting uptick in petroleumrelated activity. That said, the recent increase in oil prices should have a positive impact on private consumption, particularly as the state will be able to fund an increasing volume of direct transfers.
Private consumption also stands to benefit from a gradual decline in inflation over the coming years. Indeed, even though inflation will remain elevated, given that it is such a politically sensitive issue, we believe that Chávez will be particularly aggressive with his subsidies and price caps in order to rein in the headline figure in the run-up to the presidential election in 2012.
Key Forecasts
?? 2011 per capita food consumption (US$) = +7.5%; forecast to 2015 = -36.2%
?? 2011 alcoholic drink sales (US$) = +4.4%; forecast to 2015 = -32.4%
?? 2011 soft drink sales (US$) = +2%; forecast to 2015 = -42.2%
?? 2011 mass grocery retail sales (US$) = +3.9%; forecast to 2015 = -38.7%
Key Company Trends And Developments
Currency Devaluation Increases Risk of Food Appropriations – In line with our expectations, the Venezuelan government devalued the bolívar at the start of 2011 by unifying the 'essential goods' rate of VEF2.6000/US$ with the higher 'non-essential' VEF4.3000/US$ rate. This has implications for the food and drink sector, weaker currency potentially putting more pressure on margins, with producers no longer able to import raw materials at the 'essential goods' rate and the possibility of higher inflation putting further pressure on the government to take control of production through appropriations.
Mercal Expanding – With local production flailing, the government is taking a greater role in food distribution to ensure demand is met. This is being largely orchestrated by state-owned retail chain Mission Mercal. Huge subsidies mean that Mission Mercal is able to offer food to the country’s poorer regions at substantial discounts on the market price. In autumn 2010, Venezuelan President Hugo Chávez announced that the domestic population had saved roughly VEB21bn since 2003 due to the prices provided by Mercal. The number of Mercal outlets nationwide has reached 16,000, with the network distributing 10mn tonnes of food on an annual basis.
Key Risks To Outlook
Shift in oil prices –The risk to our outlook also depends on the trajectory of global oil prices. On the one hand, higher-than-expected prices in 2011 and beyond could provide a significant boost to the state's coffers, increase the supply of dollars in the economy and stimulate private consumption. On the other hand, while not our core scenario, lower-than-expected prices could do the opposite, and could even drag the economy back into recession again. Elsewhere, we see political risks in the run-up to the election as a major risk to our outlook. While it is too early to determine exactly what will unfold in Venezuela over the next couple of years, we caution that the scope for political unrest could still derail this fragile economic recovery.
Inflationary unrest – With one of the highest rates of inflation in the world, we expect worker strikes within the private sector to be a persistent feature of Venezuela's landscape in the medium term. The recent strikes at both Coca-Cola FEMSA and Heinz plants highlight this negative aspect of the country's risk profile. While we are a forecasting improvement in the rate of inflation, we believe the rapid pace of price rises will still be enough to fuel a considerable amount of worker discontent over the coming year.

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BMI Industry View 7
SWOT Analysis 9
Venezuela Food Industry SWOT 9
Venezuela Drink Industry SWOT 10
Venezuela Mass Grocery Retail Industry SWOT 11
Business Environment Ratings 12
BMI’s Core Global Industry Views 12
Table: BMI Food & Drink Core Views 17
Latin America Risk/Reward Ratings 18
Table: Latin America Food & Drink Business Environment Ratings, Q311 20
Venezuela’s Business Environment Rating 21
Macroeconomic Outlook 21
Table: Venezuela – Economic Activity 25
Industry Forecast Scenario 26
Consumer Outlook 26
Food 28
Total Food Consumption 28
Table: Venezuela Food Consumption Indicators - Historical Data & Forecasts 28
Canned Food 29
Table: Canned Food Value/Volume Sales – Historical Data & Forecasts 29
Confectionery 30
Table: Confectionery Value/Volume Sales - Historical Data & Forecasts 31
Drink 32
Alcoholic Drinks 32
Table: Alcoholic Drink Value/Volume Sales - Historical Data & Forecasts 33
Soft Drinks 34
Table: Soft Drink Value Sales –Historical Data & Forecasts 35
Hot Drinks 35
Table: Hot Drink Value Sales - Historical Data & Forecasts 36
Mass Grocery Retail 36
Table: Venezuela Mass Grocery Retail - Value Sales by Format - Historical Data & Forecasts 37
Table: Sales Breakdown by Retail Format Type 37
Trade 38
Table: Food & Drink Trade Balance – Historical Data & Forecasts 39
Food 40
Key Company Trends And Developments 40
Currency Devaluation Increases Risk Of Food Appropriations 40
Dairy Sector Attracts Investment But BMI Cautious 41
Nationalisation Of Bottler Has Implications For Empresas Polar 41
Market Overview 42
Food Production 42
Confectionery 43
Agriculture 43
Dairy 44
Meat 44
Seafood 45
Drink 46
Key Company Trends And Developments 46
FEMSA Strike Highlights Burdens Of High Inflation 46
AmBev Seeks Additional Scale In Difficult Venezuela Market 47
Attack on Alcohol 47
Coffee Sector Nationalised 47
Market Overview 49
Alcoholic Drinks 49
Soft Drinks 49
Hot Drinks 50
Mass Grocery Retail 52
Key Company Trends And Developments 52
Competition From Mercal 52
Nationalisation Of Exito 52
Market Overview 53
Leading Retailers 53
Table: Structure Of Venezuela's Mass Grocery Retail Market By Estimated Numbers Of Outlets 54
Table: Structure Of Venezuela's Mass Grocery Retail Market – Sales Value By Format (US$bn) 55
Table: Average Annual Value Sales By Unit Per Format (2009) 55
Competitive Landscape 56
Table: Key Players In Venezuela's Food Sector 56
Table: Key Players In Venezuela's Drink Sector 57
Table: Key Players In Venezuela's Mass Grocery Retail Sector 58
Company Analysis 59
Food 59
Alimentos Heinz CA 59
Cargill de Venezuela 60
Empresas Polar 61
Drink 63
Pernod Ricard Venezuela 63
Coca-Cola FEMSA 64
Diageo de Venezuela 66
Mass Grocery Retail 67
Mercal CA 67
Makro Venezuela 68
BMI Food & Drink Methodology 69
Food & Drink Business Environment Ratings 69
Table: Rewards 70
Table: Risks 71
Weighting 71
Table: Weighting 72
BMI Food & Drink Industry Glossary 73
Food & Drink 73
Mass Grocery Retail 73
BMI Food & Drink Forecasting & Sourcing 75
How We Generate Our Industry Forecasts 75
Sourcing 76
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