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Q2 2012 www.businessmonitor.com VietnaM agribusiness Report INCLUDES BMI'S FORECASTS ISSN 1759-1740 Published by Business Monitor International Ltd VIETNAM AGRIBUSINESS REPORT Q2 2012 INCLUDES 5-YEAR FORECASTS TO 2016 Part of BMI's Industry Report & Forecasts Series Published by: Business Monitor International Copy deadline: March 2012 Business Monitor International 85 Queen Victoria Street London EC4V 4AB UK Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@businessmonitor.com Web: http://www.businessmonitor.com © 2012 Business Monitor International All rights reserved All information contained in this publication is copyrighted in the name of Business Monitor International, and as such no part of this publication may be reproduced, repackaged, redistributed, resold in whole or in any part, or used in any form or by any means graphic, electronic or mechanical, including photocopying, recording, taping, or by information storage or retrieval, or by any other means, without the express written consent of the publisher DISCLAIMER All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained Vietnam Agribusiness Report Q2 2012 © Business Monitor International Ltd Page Vietnam Agribusiness Report Q2 2012 CONTENTS BMI Industry View SWOT Analysis Vietnam Agriculture SWOT Vietnam Political SWOT Vietnam Economic SWOT Vietnam Business Environment SWOT 10 Supply Demand Analysis 11 Vietnam Dairy Outlook 11 Table: Vietnam Milk Production & Consumption,2011-2016 11 Table: Vietnam Butter Production & Consumption,2011-2016 12 Table: Vietnam Cheese Production & Consumption,2011-2016 12 Table: Vietnam Whole Milk Powder Production & Consumption,2011-2016 12 Table: Vietnam Milk Production & Consumption,2008-2012 13 Table: Vietnam Butter Production & Consumption,2008-2012 13 Table: Vietnam Cheese Production & Consumption,2008-2012 13 Table: Vietnam Whole Milk Powder Production & Consumption,2008-2012 14 Vietnam Livestock Outlook 15 Table: Vietnam Poultry Production & Consumption,2011-2016 15 Table: Vietnam Pork Production & Consumption,2011-2016 16 Table: Vietnam Beef & Veal Production & Consumption,2011-2016 16 Table: Vietnam Poultry Production & Consumption, 2008-2012 19 Table: Vietnam Pork Production & Consumption,2008-2012 19 Table: Vietnam Beef & Veal Production & Consumption,2008-2012 20 Vietnam Coffee Outlook 21 Table: Vietnam Coffee Production & Consumption,2011-2016 22 Table: Vietnam Coffee Production & Consumption,2008-2012 24 Vietnam Grains Outlook 25 Table: Vietnam Corn Production & Consumption,2011-2016 25 Table: Vietnam Corn Production & Consumption,2088-2012 27 Vietnam Rice Outlook 28 Table: Vietnam Rice Production & Consumption,2011-2016 29 Table: Vietnam Rice Production & Consumption,2008-2012 31 Commodity Price Analysis 32 Monthly Grains Update 32 Corn: Topped Out 32 Rice: Ample Supply 33 Soybean: Supply Risks 34 Wheat: Regaining Poise 35 Monthly Softs Update 36 Cocoa 36 Coffee 37 Palm Oil 38 Sugar 39 Industry Forecast 40 Food 40 Food 43 © Business Monitor International Ltd Page Vietnam Agribusiness Report Q2 2012 Food Consumption 43 Table: Food Consumption Indicators -Historical Data & Forecasts 44 Canned Food 45 Table: Canned Food Value/Volume Sales-Historical Data & Forecasts 45 Confectionery 46 Table : Confectionery 47 Mass Grocery Retail 48 Table: Mass Grocery Retail Indicators Value Sales By Format -Historical Data & Forecasts,2010-2016 50 Trade 50 Table: Trade Indicators -Historical Data & Forecasts,2010-2016 51 Economic Outlook 52 Table: Vietnam - Economic Activity 54 Country Snapshot: Vietnam Demographic Data 55 Section 1: Population 55 Table: Demographic Indicators, 2005-2030 55 Table: Rural/Urban Breakdown, 2005-2030 56 Section 2: Education And Healthcare 56 Table: Education, 2002-2005 56 Table: Vital Statistics, 2005-2030 56 Section 3: Labour Market And Spending Power 57 Table: Employment Indicators, 1999-2004 57 Table: Consumer Expenditure, 2000-2012 (US$) 57 Global Food & Drink View 58 Food & Drink Roundup Q112: Core Views 58 Table: Core Views 69 BMI Forecast Modelling 70 How We Generate Our Industry Forecasts 70 © Business Monitor International Ltd Page Vietnam Agribusiness Report Q2 2012 BMI Industry View BMI View: The agriculture industry (including forestry and aquaculture) contributes more than 20% of Vietnam's GDP and employs almost half its population The central bank in early February 2012 cut the compulsory reserve level for banks with large agriculture lending by 20% between February to July, and we believe this is a step in the right direction in terms of easing the tight credit situation in the country This development is likely to ensure a steady flow of credit to farmers and traders alike, keeping production and export prospects up for the likes of coffee, rice and livestock Key Forecasts Rice production growth to 2016: 12.8% to 29.7mn tonnes Increased urbanisation, increased ownership of Western goods and the ongoing spread of modern, organised retail will all prove supportive of strong dairy consumption growth, even if the forecast higher global dairy prices limit the growth outlook to some extent Coffee production growth to 2015/16: 36.1% to 25.5mn bags Work on replacing trees, many of which are more than 20 years old, will improve disease resistance and thus yields in the long term Another growth driver will be export opportunities, given that Vietnam is also the world's largest exporter of robusta coffee Pork production growth to 2015/16: 13.1% to 2.22mn Consumption growth will outpace production, and the country will therefore remain reliant on pork imports to satisfy demand 2012 real GDP Growth: 6.8% (down from 5.9% in 2011; predicted to average 6.7% over 20112016) 2012 consumer price index: 9.2% y-o-y (lower than 18.6% in 2011; predicted to average 5.8% over 2011-2016) 2012 central bank policy rate: 11.0% y-o-y (lower than 15.0% in 2011; predicted to average 8.2% over 2011-2016) Industry Outlook We believe that Vietnam will catch up with Thailand in terms of rice export volumes this year This is mainly due to the impact of the new Thai government's rice intervention programme, which is expected to keep Thai rice exports uncompetitive relative to other Asian exporters in the near term In fact, the US Department of Agriculture (USDA) estimates that exports from the three top exporters - Thailand, Vietnam and India - will converge at 6.5mn tonnes each in 2011/12 © Business Monitor International Ltd Page Vietnam Agribusiness Report Q2 2012 The Vietnam central bank in early February 2012 decided to cut the compulsory reserve level for banks with large agriculture lending by 20% between February to July We believe that this will significantly loosen the tight credit conditions in the country, which may have limited the ability of exporters to buy coffee beans for stockpiling purposes and ensure a steady supply of exports prior to that By allowing more credit to the agriculture sector, this will very likely allow the market to be well supplied with beans for export A local feed company has shown promising development in a sector in which foreign firms such as Cargill and CP Foods traditionally dominate, possibly signalling a change in trend in this industry In February 2012, the Hong Ha Nutrition Joint Stock Co, a privately owned Vietnamese animal feed company, inaugurated an animal production line in its newly acquired hectare factory in Dong Van Industrial Zone in Duy Tien District, in the northern Ha Nam Province The factory is expected to raise its capacity to 400,000 tonnes annually, nearly 10 times its capacity of 48,000 tonnes seven years ago This has come on the back of the VND150bn (US$7.1mn) invested last year © Business Monitor International Ltd Page Vietnam Agribusiness Report Q2 2012 SWOT Analysis Vietnam Agriculture SWOT Strengths Weaknesses Opportunities Threats Since the opening up of the economy in 1986, allowing more private involvement in agriculture, yields have improved dramatically and look set to continue doing so over our forecast period to 2013 Vietnam's fast-growing population of more than 80mn provides a large market for agro-food products With BMI forecasting Vietnamese GDP per capita to grow rapidly over our forecast period to 2015, consumers will have more money to spend on food, spurring growth in agricultural production Much of Vietnam's agriculture is based on small-scale farms with poor yields in comparison to more developed international competitors Transportation and production infrastructure is often poor, making getting crops to market difficult and negatively affecting quality Since the opening up of the economy in 1986, allowing more private involvement in agriculture, yields have improved dramatically and look set to continue doing so over our forecast period to 2013 Vietnam's fast-growing population of more than 80mn provides a large market for agro-food products With BMI forecasting Vietnamese GDP per capita to grow rapidly over our forecast period to 2015, consumers will have more money to spend on food, spurring growth in agricultural production Poor knowledge of good farming practices and hygiene standards leaves Vietnamese agriculture open to disease outbreaks of the kind that have plagued the livestock industry in recent years The rising population and increasing industrialisation of the economy will increase competition for land use, curtailing the area available for expansion of agriculture © Business Monitor International Ltd Page Vietnam Agribusiness Report Q2 2012 Vietnam Political SWOT Strengths Weaknesses Opportunities Threats The Communist Party of Vietnam remains committed to market-oriented reforms and we not expect major shifts in policy direction over the next five years The one-party system is generally conducive to short-term political stability Relations with the US have witnessed a marked improvement, and Washington sees Hanoi as a potential geopolitical ally in South East Asia Corruption among government officials poses a major threat to the legitimacy of the ruling Communist Party There is increasing (albeit still limited) public dissatisfaction with the leadership's tight control over political dissent The government recognises the threat corruption poses to its legitimacy, and has acted to clamp down on graft among party officials Vietnam has allowed legislators to become more vocal in criticising government policies This is opening up opportunities for more checks and balances within the oneparty system Macroeconomic instabilities in 2012 are likely to weigh on public acceptance of the one-party system, and street demonstrations to protest economic conditions could develop into a full-on challenge of undemocractic rule Although strong domestic control will ensure little change to Vietnam's political scene in the next few years, over the longer term, the one-party-state will probably be unsustainable Relations with China have deteriorated over recent years due to Beijing's more assertive stance over disputed islands in the South China Sea and domestic criticism of a large Chinese investment into a bauxite mining project in the central highlands, which could potentially cause wide-scale environmental damage © Business Monitor International Ltd Page Vietnam Agribusiness Report Q2 2012 Vietnam Economic SWOT Strengths Weaknesses Opportunities Threats Vietnam has been one of the fastest-growing economies in Asia in recent years, with GDP growth averaging 7.1% annually between 2000 and 2011 The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 58% in 1993 to 9.5% in 2010 Vietnam still suffers from substantial trade, current account and fiscal deficits, leaving the economy vulnerable to global economic uncertainties in 2012 The fiscal deficit is dominated by substantial spending on social subsidies that could be difficult to withdraw The heavily-managed and weak currency reduces incentives to improve quality of exports, and also keeps import costs high, contributing to inflationary pressures WTO membership has given Vietnam access to both foreign markets and capital, while making Vietnamese enterprises stronger through increased competition The government will in spite of the current macroeconomic woes, continue to move forward with market reforms, including privatisation of state-owned enterprises, and liberalising the banking sector Urbanisation will continue to be a long-term growth driver The UN forecasts the urban population rising from 29% of the population to more than 50% by the early 2040s Inflation and deficit concerns have caused some investors to re-assess their hitherto upbeat view of Vietnam If the government focuses too much on stimulating growth and fails to root out inflationary pressure, it risks prolonging macroeconomic instability, which could lead to a potential crisis Prolonged macroeconomic instability could prompt the authorities to put reforms on hold as they struggle to stabilise the economy © Business Monitor International Ltd Page Vietnam Agribusiness Report Q2 2012 However, in line with one of BMI's near-term core views that commodity prices will continue to moderate and pose less of a threat to consumer goods producers and retailers, we are already witnessing gradual improvements in the earnings performances of some of the major F&D players Both Conagra and General Mills registered an improvement in the second quarter ending November 27 Conagra's operating profit for this period was up by 2.8%, thanks to the strength of its commercial food business, while General Mills' operating profit fell by a slightly less rapid rate, coming in 12.9% lower We think this pattern of gradual improvement is set to continue over the coming months Our Commodities team forecasts additional relief for producers Fundamentally, the global agriculture market remains better supplied than it was during the 2008 food crisis, implying lower risks of food price inflation occurring as a result of supply shortages Secondly, government policies aimed at protecting the end consumer from food price appreciation, such as releasing government stocks, will continue to mitigate the impact of higher food prices Lastly, a global economic slowdown is likely to depress demand and taken together these factors mean we are forecasting lower average prices for most agricultural commodities during 2012 (see table) US Consumer Improving, Demand Remains Sluggish In Australia And Japan US, Japan And Australia Private Consumption Growth, local currency, % chg y-o-y f = BMI forecast Source: ABS, Cabinet Office, BEA Domestic Demand Uncertainties Abound In Developed Markets Meanwhile, we maintain our expectations of a subdued demand environment in developed markets such as Australia and Japan The Australian consumer will continue to face troubles that will hamper its consumption and we expect growth in private consumption to slow, coming in at 1.5% in 2012 and 1.7% in 2013 (see chart) As interest rates rise and debt repayments grow, a larger proportion of disposable income will be used to repay debt, forcing households to cut back on consumption goods With the announcement of job cuts by a number of financial institutions and manufacturers, a poor employment © Business Monitor International Ltd Page 59 Vietnam Agribusiness Report Q2 2012 outlook is likely to put a further drag on private consumption activity as consumers look to save more for the uncertainties that lie ahead In Japan, the temporary boost to private consumption witnessed in the aftermath of the Tohoku disaster has already given way to structural weakness Faced with domestic demand pressures, Asahi witnessed a decline of 4.7% in its domestic alcoholic drinks sales in FY2011 Similarly, Sapporo and Kirin reported a decline of 4.0% and 9.5% respectively in their domestic alcoholic drinks sales for the year ending December 2011 With weak asset prices placing pressure on consumer purchasing power, we believe the Japanese consumer will maintain a conservative stance over the coming quarters, although factors such as a strong currency and low unemployment should provide some support to domestic demand While consumer goods producers will continue to face demand headwinds in Australia and Japan in the coming quarters, the near-term future for the US consumer is certainly looking brighter than before Although a full recovery of the US housing market could take several years to play out and will be marred by volatility, we believe recovery could start to accelerate over the coming months from extremely depressed levels Moreover, with unemployment edging down towards 8% and initial jobless claims continuing to decline, the trend in labour market metrics is slowly improving These dynamics are typically positive for both sentiment and purchasing power Improving Demand Climate In US Prompts Loosening Of Purse Strings While the value theme will remain well-entrenched across the developed world in the near future, particularly in markets such as Japan and Australia, there are signs that an improvement in consumer confidence is fuelling a gradual shift of consumption away from the private label and discount retail sectors in the US US private label specialist TreeHouse Foods has been forced to issue a profit warning after registering a drop in volumes during the fourth quarter of 2011 The firm reported that its volumes in December fell by 8%, and this major sales decline during the important festive period potentially points to a wider movement away from the private label sector amid improving domestic demand conditions The latest results posted by US discount retailer Family Dollar also fit with our view that the discount retail format's rate of growth could be set to gradually decline as the US economic situation improves Family Dollar registered total sales growth of 7.6% for its fiscal first quarter (ending November 26 2011), but comparable-store sales growth came in at a more muted 4.1%, which compares unfavourably with its Q110 like-for-like sales growth of 6.9% © Business Monitor International Ltd Page 60 Vietnam Agribusiness Report Q2 2012 Casino Outperforming Tesco And Carrefour Selected MGR Companies Share Price (Rebased 14/3/2011) Source: Bloomberg EM-Oriented Companies To Perform Strongly Bearing out one of our core views that companies with a strong emerging market (EM) profile will continue to outperform, France-based retailer Casino posted solid results for 2011 - a year when rivals Tesco, Carrefour and Walmart struggled to make much headway Of the major retailers based in developed markets it is Casino rather than Walmart or Tesco that has greatest exposure to EMs For the 12 months to the end of December 2011, Casino registered an 18.2% increase in sales, while net incomes increased by 6.6% This robust sales showing was thanks to changes in its consolidation scope, with the company buying up Carrefour's operations in Thailand, upping its stake in Brazil's CBD and benefitting from the merger of CBD with local electronics good specialist Casas Bahia Casino's well-balanced portfolio has helped its share price outperform most of its global rivals since the beginning of 2009 and its strong EM base, combined with a steady domestic operation, suggests that this outperformance could be set to continue (see chart) © Business Monitor International Ltd Page 61 Vietnam Agribusiness Report Q2 2012 The importance of building a strong EM business, particularly European Firms In Front Revenues From Emerging Markets (%) when demand in the developed world remains sluggish, is further underlined by the underperformance of US food firms to their European counterparts US food firms are generally less exposed to EMs than their European peers (see chart) This has meant on average they have underperformed over the last five years in terms of organic revenue growth Source: Nestle, Investor Relations, BMI Estimates However, the major US food producers are already looking to address their weakness in this regard and have been largely ramping up their expansions in the EMs through mergers and acquisitions (M&A) First, we have Kellogg announcing the purchase of Pringles from Proctor & Gamble (P&G) for US$2.7bn Kellogg has always been in a bit of a tricky situation because cereal is not a common option in key EMs such as China and India, while future growth is also hampered by high levels of lactose intolerance in many major EMs On this front, Kellogg's acquisition of popular snack brand Pringles should allow it to circumnavigate the unique consumer preferences in the EMs, facilitating its expansionary ambitions A second move is General Mills' reported acquisition of Brazil-based Yoki in a deal worth US$1.2bn We estimate that General Mills only derives 10% of its revenues from EMs, but with this single acquisition (which has yet to be officially confirmed) this would rise to 13.5%, showing how quickly things can change if firms are willing to invest Other US companies that are keen to be making these types of acquisitions are Heinz, Campbell Soup, Hershey and Sara Lee All will be anxious to increase their EM exposure and will be currently sizing up which markets and categories offer the best opportunities For Heinz and Hershey, the route to international growth looks relatively straightforward Heinz has already found success for its core condiment portfolio in markets such as Russia and Mexico, and looks like it has a portfolio that is well suited to EM expansion In contrast, Campbell Soup has struggled in EMs, with packaged soup having failed to find a receptive market in countries where homemade soup is often a cheap and tasty staple The firm may therefore need to copy Kellogg's example and branch out into a new category if it is to benefit from the EM opportunity © Business Monitor International Ltd Page 62 Vietnam Agribusiness Report Q2 2012 The opportunities on offer in EMs may be difficult to exploit for some consumer-facing companies Global consumer goods players Nestlé and Danone are overhauling their business models in China amid intensifying domestic competition Chinese dairy companies Mengniu and Yili, for instance, are looking to capture a greater market among the country's middle classes by continually innovating and introducing more upmarket products While better product quality and a stronger brand appeal were typically viewed as the competitive strengths of foreign consumer players such as Danone, domestic companies are quickly playing catch up in these regards Faced with the rapid emergence of competition from domestic players, Nestlé plans to shut down one of its three ice cream factories in China so as to channel more resources into building a stronger foothold in the higher-end market segments Nestlé aims to boost sales through distribution channels such as hotels and restaurants Danone, meanwhile, is suspending production at its Shanghai yogurt plant as part of its restructuring strategy to focus on premium brands in China In the retail space, Walmart is facing a tough predicament in China as well The loss of valuable brand control and the risks of having one's brands mismanaged under a franchising model have been cited as some of the major drawbacks of expanding through this operating model, and these problems have clearly caught up with Walmart Walmart has been punished 21 times in the city since 2006 for alleged violations such as mislabeling products, false advertising and selling products that were already past their expiry dates Although Walmart prides itself on offering quality grocery products at low prices, it has struggled to achieve price leadership against the more cost-effective traditional retailers and has arguably not lived up to its assurance of providing quality products Moreover, by positioning itself as a low-end retailer, Walmart is seemingly striking the wrong chord with its main clientele, which is the middle class Therefore, we stress the importance for consumer-facing companies to get their strategies and positioning right in order to really enjoy success in the developing world For Nestlé and Danone, we believe it would make strategic sense for them to focus on improving their product quality and further leverage on their global brand appeal in China, particularly amid dampened consumer confidence in domestically-produced goods For Walmart, it would probably better by positioning itself at the higher-end of the Chinese retail market as well as provide sales-related incentives to keep its objectives aligned with its franchisees' From Emerging To Frontier While EMs will continue to hold immense appeal to the global F&D players, the flurry of expansionary activities across the frontier markets is likely to heat up over the coming years as well Netherlands-based brewer Heineken boosted its stake in Haitian brewer Brasserie Nationale D'Haiti (Brana) from 22.5% to 95%, which fits with our core view that major multinationals will increasingly look for frontier market investments as the opportunities within traditional EMs become scarcer as competition increases As another case in point, confectionery producer Mars has started construction of a new chocolate facility in Saudi Arabia The move reflects growing demand for confectionery products in Middle East, where Mars already operates one facility, in Dubai, producing Mars, Galaxy and Snickers Meanwhile, Cereal © Business Monitor International Ltd Page 63 Vietnam Agribusiness Report Q2 2012 Partners Worldwide, a joint venture between food giants Nestlé and General Mills, has opened a new cereal factory in Turkey The facility required an investment of TRY85mn and will supply cereal products to the Turkish market as well as 14 other countries across the Middle East and North Africa The decision to use the country as a launch pad to the wider region fits with Turkey's rapidly improving business environment and private sector mentality, and we would expect more companies to use the country as a base to expand their reach into the high potential markets across the Middle East and North Africa Pursuing Innovation To Improve Differentiation Another of BMI's longer-term core views is the ramping up of product innovation among F&D companies as they seek differentiation and further market share gains US coffee giant Starbucks looks set to roll out its new coffee capsule products across Europe, which are recently launched in the US, in a move that will see it attempt to gain share from Nestlé However, BMI believes this move may take a while to make a meaningful contribution to Starbucks' results, with the firm facing an uphill battle in tempting consumers away from Nestlé's ubiquitous Nespresso format The company also plans to increase the customers' exposure to Starbucks products in Europe, with the Financial Times reporting that the firm is exploring ways to sell Starbucks coffee through vending machines and on trains and aeroplanes In the US, ruling out the prospect of stronger growth through store expansions, the ramping up of its product offerings is arguably the most viable strategic option available for Starbucks to secure its domestic growth prospects Starbucks' plans to move into the US alcoholic drinks sector clearly underscore the importance of product diversification in its growth strategy However, we are cautiously optimistic about this strategy On the one hand, expansions into alcoholic drinks should prove supportive of higher margins for Starbucks On the other hand, given that the positioning of Starbucks as a premium coffee giant is already well-entrenched among local consumers, it could potentially lose some of its core customers who are looking to indulge themselves in the 'Starbucks coffee experience' Trans-Asian soft drinks manufacturer Fraser and Neave (F&N) is also looking to hop on the innovation bandwagon to lock in its future prospects F&N plans to invest more heavily in research and development to create new products such as its recently-launched carbonated soft drink Clearly Citrus to compensate the potential loss of revenues as a result of the termination of its bottling agreement with The Coca-Cola Company Burgeoning Global Appetite For Functional Foods Fuelled by growing health awareness and rising consumer affluence, consumers across the global markets are quickly developing a bigger appetite for functional food products In a bid to tap into the functional food potential, Nestlé and Danone are reportedly looking to acquire baby formula producer Wyeth, which is valued at around US$10bn An acquisition of Wyeth would represent a chance to gain control of a slew © Business Monitor International Ltd Page 64 Vietnam Agribusiness Report Q2 2012 of well-known infant formula brands that could expedite their expansions in the fast-growing baby formula market While PepsiCo is gradually calibrating its portfolio away from soft drinks and salty snacks, we have questioned whether PepsiCo's starting position puts it in a strong position to capture the opportunities in healthy categories It is PepsiCo's move into the dairy sector that is perhaps the most transformational for the group PepsiCo's ambitions in this sector were underlined by the purchase of Russia's Wimm-BillDann (WBD) and the establishment of a joint venture in 2009 with Saudi Arabia's Almarai The response to PepsiCo's strategy of expanding in the diary sector has been less than enthusiastic among investors, which fits with our analysis Consumers in every part of the world are sometimes willing to put health concerns to one side and indulge themselves In emerging markets these types of indulgent purchases are likely to rise in line with increased affluence and offset any downwards pressure from increased health-consciousness PepsiCo's existing portfolio is well tailored to meet this growing demand and an attempt to reshape its business is likely to require significant funds that could be better spent in ensuring that it is capable of meeting the growing demand for 'fun-for-you' products in emerging markets PepsiCo seems to want to transform itself into Danone and the fear that it is steaming off in a new direction and not playing to its strengths may be partly behind its recent underperformance Coca-Cola And PepsiCo Spearheading Diversification Away From Carbonates A notable trend that we have observed in the global F&D space is the continued diversification among beverage producers away from carbonated drinks Over the past quarter, Coca-Cola and PepsiCo were some of the bigger names that have been spearheading this trend, particularly in EMs Coca-Cola India, the local subsidiary of Coca-Cola, is forming an independent business division to lift its stake in the expanding non-carbonates market, which will be responsible for the innovation, sale and distribution of juices, energy drinks and powdered drinks With their sights set firmly on the opportunities provided by a growing health awareness trend in India, PepsiCo and domestic drinks producer Tata Global Beverages plan to ramp up their product portfolio of functional beverages through their local joint venture NourishCo NourishCo will be introducing a new range of functional drinks over the next 18-24 months and it aims to generate overall revenues of INR7bn (US$141.8mn) Although the low purchasing power of Indian consumers means that the lower-value carbonates are likely to remain the beverage of choice for most consumers, rising incomes and an emerging trend of health awareness are fuelling demand for non-carbonates such as fruit juices and energy drinks, and companies such as Coca-Cola and PepsiCo are likely to accelerate their portfolio expansion initiatives to capitalise on this opportunity © Business Monitor International Ltd Page 65 Vietnam Agribusiness Report Q2 2012 Consolidation To Drive M&A Activity Consolidation will remain apace in the global F&D space as companies seek greater efficiencies by improving their domestic scale Interestingly, this trend has been largely fuelled by M&A rather than organic growth, which can be linked to the benefits of reaping immediate scale through inorganic expansions Russian-based vodka producer Russian Standard has made an offer to Poland-based Central European Distribution Corp (CEDC) that could see it take a 32.99% stake in the business A combination between Russian Standard and CEDC would create a regional spirits giant, combining Russian Standard's strength in the premium end of the market with CEDC's strength in the economy and mid-price sectors Meanwhile, soft drink firm Coca-Cola FEMSA continues to drive consolidation within Mexico's soft drink sector, announcing that it is to purchase the drinks arm of Mexican group Fomento Queretano The deal is worth MXN6.6bn (including MXN1.2bn of Queretano's debt) and represents FEMSA's third major acquisition in Mexico's soft drink sector in 2011 FEMSA revealed that its recent acquisitions in Mexico will increase its Mexican volumes and revenues by 30%, representing a substantial increase in the firm's exposure to the market As Mexico's largest bottler, FEMSA cannot take its eye off the ball here, and we see this consolidation as a sensible strategy given the weakness of the market However, over the longer term we think FEMSA will remain primarily focused on international growth; the structure of the acquisition (based on shares rather than cash) would support our view that the firm is preparing for major acquisitions outside of its domestic market Further bearing out the consolidation trend in the global F&D markets, Swedish confectionery producers Cloetta and Leaf International have announced plans to merge their operations The combined portfolio will see Cloetta's strength in chocolate confectionery complimented by Leaf's strong position in the pastilles, gum and sugar confectionery categories, with brands including Cloetta, Läkerol, Malaco, Red Band and Chewits We believe it will be in the sugar confectionery area that the combined firm will seek to drive expansion, with the popular Cloetta brand used to back a number of sugar confectionery products currently in the Leaf stable The merger would also create a firm with scale to expand internationally, with the business already having a sizeable base in both Netherlands and Italy © Business Monitor International Ltd Page 66 Vietnam Agribusiness Report Q2 2012 AB InBev And SABMiller Have Massive Financial Power To Flaunt Selected Brewers Market Capitalisation, US$mn (LHS) & Debt-To-EBITDA Ratio (RHS) Y= last financial year, Y-1 = the previous financial year and so on Source: Bloomberg, investor relations More recently, the sale of Chinese brewer Kingway Brewery's beer assets, which represents an enticing opportunity for multinational and domestic brewers to consolidate a stronger presence in the Chinese beer market, has unsurprisingly stirred massive interest among domestic and foreign brewers alike China Resources Snow Breweries (CR Snow), Beijing Yanjing Brewery and Anheuser-Busch InBev (AB InBev) are reportedly among the frontrunners to make the acquisition While AB InBev's massive financial scale could give it a slight edge over CR Snow, we believe that the latter has its fair chance of success in acquiring Kingway's brewery assets Through the sale of its non-core assets, as well as fiscal prudence and strong earnings growth on the back of cost cutting at the acquired Anheuser-Busch business, AB InBev's total debt-to-EBITDA ratio has been cut down from a five-year high of 7.8 to 3.2 in its last financial year, implying that it now has a stronger financial capacity for deals (see chart) However, we acknowledge that CR Snow has the backing of its parent company SABMiller, which is also a financial colossus, and certainly has plenty of scope to carry out the acquisition While Beijing Yanjing Brewery is also in the running, we believe that its smaller financial clout probably places it in a weaker position to contend against the financially powerful AB InBev and CR Snow for the acquisition Private Equity Companies Attracted To Unfashionable Categories We have introduced a new core view this quarter: private equity (PE) firms to develop a stronger interest in unfashionable F&D categories Two newly announced deals have highlighted PE's attraction to relatively unfashionable parts of the food sector In the US, PE firm Centre Partners announced the acquisition of frozen food manufacturer Bellisio Foods while in Europe PE firm Manfield Partners announced the acquisition of two canned food units from Japanese conglomerate Mitsui & Co BMI has previously highlighted the sector's interest in parts of the industry that are largely stagnant, or even © Business Monitor International Ltd Page 67 Vietnam Agribusiness Report Q2 2012 in decline, with the PE industry attracted by the relatively low valuations and potential for restoring growth through investment in marketing and innovation These PE firms saw a chance to reinvigorate a category that had declined, partly due to a lack of investment, while being able to pick up major brands for relatively affordable prices Innovations in the frozen food sector have since been stepped up, with improvements in taste and convenience filtering through the sector Canned food is also a sector in decline in many developed markets but looks increasingly like a sector in demand by PE firms The canned food units acquired by Manfield Partners include canned and tinned seafood, fruit and vegetables in the UK and the Netherlands, with combined revenues of around GBP75mn Another canned food producer in the hands of PE owners is US-based Bumble Bee Foods, formerly owned by Centre Partners but now in the hands of Lion Capital The PE firms currently investing in these categories will of course be thinking of their eventual exit strategy Given the lack of interest from major brand builders, these exits have previously been primarily through the sale to another PE fund However, we expect more deals to take the form of an IPO A well run, steadily expanding food business will always attract defensive investors and the international scale of companies such Birds Eye Iglo and Findus will certainly make them suitable for a wide variety of European funds However, nobody wants to invest in a shrinking category and to ensure that they generate a return on the investment these firms will have to continue investing in innovation in a bid to win back consumers that have moved away from the frozen and canned sectors © Business Monitor International Ltd Page 68 Vietnam Agribusiness Report Q2 2012 Table: Core Views Short-term Outlook Raw material prices will trend lower in 2012 and become less of a threat to both producers and retailers Developed markets still feeling the pinch with economic weakness and political uncertainty weighing on spending Tentative signs of improvement in US consumer market The value theme is still very important across the developed world with price consciousness inherent Long-term Outlook Companies with strong Emerging Market exposure will continue to outperform Multinationals will increasingly pursue frontier market investments Investment in innovation will increase as producers seek differentiation; emphasis will be placed on protecting innovations Some consumer goods manufacturers will continue to leave sectors under threat from private labels while others will calibrate their portfolios toward private labels to capitalise on their growing demand Government legislation will play an increasing role in marginalising unhealthy food and beverage products Premiumisation will re-emerge as a key driving force behind revenue growth Demand for convenience in retail and food will continue to grow Functional foods will provide considerable opportunities in developed markets in particular Consolidation will continue as producers seek greater efficiencies Beverage companies will continue to invest in diversification away from carbonated beverages and into healthier sub-sectors Private Equity companies will continue to be attracted to unfashionable categories Source: BMI © Business Monitor International Ltd Page 69 Vietnam Agribusiness Report Q2 2012 BMI Forecast Modelling How We Generate Our Industry Forecasts 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 BMI mainly uses OLS estimators and 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 poor weather conditions impeding 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 BMI uses the selected best model to perform forecasting It must be remembered that human intervention plays a necessary and desirable role in all of BMI’s industry forecasting Experience, expertise and knowledge of industry data and trends ensures that analysts spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not Within the Agribusiness industry, this intervention might include, but is not exclusive to, technology development that might influence future output levels (for example greater use of biotechnology), dramatic changes in local production levels due to public or private sector investment, the regulatory environment and specific areas of legislation, such as import and export tariffs and farm subsidies, changes in lifestyles and general societal trends, the formation of bilateral and multilateral trading agreements and political factors The following two examples show the demand (consumption) and the supply (production) of rice Note: the explanatory variables for both of them are quite similar, but the underlying economic theory is different Example of Rice Consumption Model: © Business Monitor International Ltd Page 70 Vietnam Agribusiness Report Q2 2012 (Rice Consumption)t = β0 + β1*(Real Private Consumption per capita)t + β2*(Inflation)t + β3*(Real Lending Rate)t + β4*(Population)t + β5*(Government Expenditure)t + β6*(Food Consumption)t-1 + εt Where: β are parameters for this function Real Private Consumption per capita has a positive relationship with Rice Consumption, if rice is a normal good in a particular country If rice is an inferior good in a country, the relationship is negative So the sign of β1 is determined by a specific product within a specific country When Inflation is high, people with rational expectations will consume ‘today’ rather than wait for ‘tomorrow’s high price to come Higher rice demand in Year t due to higher inflation in that year leads to an assumed positive sign of β2 The relationship between Real Lending Rate and Rice Consumption is expected to be negative When real lending rates increase, disposable incomes, especially for those with mortgage burdens etc, will decrease So the sign of β3 is expected to be negative Of course, other things being equal, growth in rice consumption can also be caused by growth in population Consequently, positive sign of β4 is expected Government Expenditure typically causes total disposable incomes to rise So the sign of β5 is expected to be positive Human behaviour has a trend: A high level of food consumption in previous years means there is very likely to be a high level of food consumption the next year So the positive sign of β6 is expected ε is the error/residual term Example of Rice Production Model: (Rice Production)t = β0 + β1*(Real GDP per capita)t + β2*(Inflation)t + β3*(Real Lending Rate)t + β4*(Rural Population)t + β5*(Government Expenditure)t + β6*(Food Production)t-1 + εt Where: The same as above, the relationship between Real GDP per capita and rice production depends on whether rice is normal or inferior good in that country If high inflation is caused by food prices increasing, farmers will be more profitable Then they will supply more agricultural product (e.g rice) to increase their marginal (extra) profit, although this is tempered by the rising cost of other inputs in line with inflation There is a global move towards corporate farming, away from small holdings, in order to achieve greater agricultural productivity Corporate farming means more investment in the modes of © Business Monitor International Ltd Page 71 Vietnam Agribusiness Report Q2 2012 production i.e agricultural machinery Higher real lending rates discourage investment, which in turn reduce production BMI assumes only the rural population has a positive effect on agricultural product supply With supportive government policy, other things being equal, rice production is expected to go up Government Expenditure is likely to play some role in supporting agribusiness Again, previous food production positively affects this year’s prediction y affects this year’s prediction © Business Monitor International Ltd Page 72 Reproduced with permission of the copyright owner Further reproduction prohibited without permission [...]... Monitor International Ltd Page 11 Vietnam Agribusiness Report Q2 2012 Table: Vietnam Butter Production & Consumption,2011-2016 Butter Consumption, '000 tonnes e 1 2011 2012 2013 2014 2015 2016 12.8 14.4 16.2 18.1 20.3 22.5 f 1 Notes: BMI estimates BMI forecasts Sources: FAPRI, BMI Table: Vietnam Cheese Production & Consumption,2011-2016 Cheese Consumption, '000 tonnes e 2011 2012 2013 2014 2015 2016 5.3... years © Business Monitor International Ltd Page 18 Vietnam Agribusiness Report Q2 2012 Increasing Domestic Feed Production Vietnam - Imports Of Soybean, Soymeal & Corn Feed, 000 tonnes Source: USDA, BMI Table: Vietnam Poultry Production & Consumption, 2008 -2012 Poultry Production, '000 tonnes 1 Poultry Consumption, '000 tonnes f 1 1 2008 2009 2010 2011 2012 350.0 340.0 350.0 350.0 350.0 561.0 541.0 641.0... Sources: USDA Table: Vietnam Pork Production & Consumption,2008 -2012 Pork Production, '000 tonnes 1 Pork Consumption, '000 tonnes f 1 1 2008 2009 2010 2011 2012 1,850.0 1,910.0 1,930.0 1,960.0 1,960.0 1,880.0 1,936.0 1,940.0 1,990.0 1,990.0 1 1 Notes: BMI forecasts Sources: USDA Sources: USDA Sources: USDA © Business Monitor International Ltd Page 19 Vietnam Agribusiness Report Q2 2012 Table: Vietnam Beef... Business Monitor International Ltd Page 23 Vietnam Agribusiness Report Q2 2012 Table: Vietnam Coffee Production & Consumption,2008 -2012 Coffee Production, '000 60kg bags 1 Coffee Consumption, '000 60kg bags f 2 2008 2009 2010 2011 2012 18,000.0 16,980.0 18,500.0 18,735.0 20,200.0 850.0 950.0 1,200.0 1,325.0 1,475.0 1 2 Notes: BMI forecasts Sources: USDA, Vietnam Coffee and Cocoa Association USDA Risks... Page 28 Vietnam Agribusiness Report Q2 2012 Table: Vietnam Rice Production & Consumption,2011-2016 Rice Production, '000 tonnes 1 Rice Consumption, '000 tonnes f 1 2011 2012 2013 2014 2015 2016 26,300.0 26,150.0 26,744.9 27,603.7 28,628.0 29,652.4 19,400.0 19,750.0 20,287.9 20,841.0 21,408.2 21,989.6 1 Notes: BMI forecasts Sources: USDA Usurping Thailand's Rice Throne In 2012 We believe that Vietnam. .. International Ltd Page 30 Vietnam Agribusiness Report Q2 2012 Table: Vietnam Rice Production & Consumption,2008 -2012 Rice Production, '000 tonnes 1 Rice Consumption, '000 tonnes f 1 1 2008 2009 2010 2011 2012 24,375.0 24,393.0 24,993.4 26,300.0 26,150.0 19,400.0 19,000.0 19,150.0 19,400.0 19,750.0 1 Notes: BMI forecasts Sources: USDA Sources: USDA Risks To Outlook There are upside risks to our Vietnamese rice.. .Vietnam Agribusiness Report Q2 2012 Vietnam Business Environment SWOT Strengths Weaknesses Opportunities Threats Vietnam has a large, skilled and low-cost workforce, that has made the country attractive to foreign investors Vietnam' s location - its proximity to China and South East Asia, and its good sea... upside risks to our forecasts © Business Monitor International Ltd Page 20 Vietnam Agribusiness Report Q2 2012 Vietnam Coffee Outlook BMI Supply View: Vietnam' s coffee sector has grown significantly over the last 20 years, with yields doubling and the area planted expanding from 42,000 hectares (ha) to more than 509,000 ha Vietnam is the world's biggest producer of robusta coffee, with more than 95%... as it places the dairy industry at risk of a similar scandal at home, which would further tarnish the image of dairy products in Vietnam © Business Monitor International Ltd Page 14 Vietnam Agribusiness Report Q2 2012 Vietnam Livestock Outlook BMI Supply View: Within the Vietnamese livestock industry, pig farming is by far the most significant sector, with pork production comprising about two-thirds... Imports Of Soybean, Soymeal & Corn Feed, 000 tonnes Source: USDA, BMI © Business Monitor International Ltd Page 26 Vietnam Agribusiness Report Q2 2012 Table: Vietnam Corn Production & Consumption,2088 -2012 Corn Production, '000 tonnes 1 Corn Consumption, '000 tonnes f 1 1 2008 2009 2010 2011 2012 4,600.0 4,432.0 4,607.0 5,000.0 5,400.0 5,200.0 5,400.0 6,100.0 6,100.0 6,600.0 1 Notes: BMI forecasts Sources: ... Page 24 Vietnam Agribusiness Report Q2 2012 Vietnam Grains Outlook BMI Supply View: Vietnamese corn production is forecast to reach 5.4mn tonnes in 2011/12, an 8.0% year-on-year (y-o-y) expansion... completeness of any information hereto contained Vietnam Agribusiness Report Q2 2012 © Business Monitor International Ltd Page Vietnam Agribusiness Report Q2 2012 CONTENTS BMI Industry View ... three top exporters - Thailand, Vietnam and India - will converge at 6.5mn tonnes each in 2011/12 © Business Monitor International Ltd Page Vietnam Agribusiness Report Q2 2012 The Vietnam central
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