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2015

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

ISSN 1749-2882
Published by:Business Monitor International

Philippines Food & Drink Report


2015
INCLUDES 5-YEAR FORECASTS TO 2018

Part of BMIs 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 ....................................................................................................................................................... 9
Drink .................................................................................................................................................... 11
Mass Grocery Retail ................................................................................................................................ 13

Industry Forecast .............................................................................................................. 15


Consumer Outlook ................................................................................................................................... 15
Food ..................................................................................................................................................... 18
Table: Food Consumption Indicators - Historical Data & Forecasts (Philippines 2011-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Table: Confectionery Value/Volume Sales, Production & Trade - Historical Data & Forecasts (Philippines 2011-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Table: Dairy Volume Sales, Production & Trade - Historical Data & Forecasts (Philippines 2011-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Drink .................................................................................................................................................... 22
Table: Hot Drink Value/Volume Sales, Production & Trade - Historical Data & Forecasts (Philippines 2011-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Table: Soft Drinks Sales, Production & Trade - Historical Data & Forecasts (Philippines 2011-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Table: Alcoholic Drinks Value/Volume Sales, Production & Trade - Historical Data & Forecasts (Philippines 2011-2018) . . . . . . . . . . . . . . . . . . . . . . . . 24

Mass Grocery Retail ................................................................................................................................ 26


Table: Mass Grocery Retail Sales By Format - Historical Data & Forecasts (Philippines 2011-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Table: Sales Breakdown By Retail Format Type . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Trade .................................................................................................................................................... 29
Table: Trade Balance - Historical Data & Forecasts (Philippines 2011-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Macroeconomic Forecasts ............................................................................................... 31


Economic Analysis ................................................................................................................................... 31
Table: Economic Activity (Philippines 2009-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Industry Risk Reward Index ............................................................................................. 35


Asia Pacific - Risk/Reward Index ................................................................................................................ 35
Table: Asia Pacific Food & Drink Risk/Reward Index Q115 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Table: Asia Pacific Food & Drink Risk/Reward Sub-Factor Index Q115 - Selected Countries (scores out of 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

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

Market Overview ............................................................................................................... 42


Food .....................................................................................................................................................
Food Processing ....................................................................................................................................
Agriculture ...........................................................................................................................................
Drink ....................................................................................................................................................
Hot Drinks ............................................................................................................................................
Soft Drinks ............................................................................................................................................
Alcoholic Drinks ....................................................................................................................................
Mass Grocery Retail ................................................................................................................................

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43
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Table: Structure Of Mass Grocery Retail Market By Estimated Number of Outlets (Philippines 2005-2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Table: Mass Grocery Retail Sales By Format (Philippines 2005-2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Table: Mass Grocery Retail Sales By Format (Philippines 2005-2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Table: Table: Estimated Number Of Outlets In 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Industry Trends And Developments ................................................................................ 49


Food .....................................................................................................................................................
Key Industry Trends And Developments ......................................................................................................
Drink ....................................................................................................................................................
Key Industry Trends And Developments ......................................................................................................
Mass Grocery Retail ................................................................................................................................
Key Industry Trends And Developments ......................................................................................................

49
49
56
56
63
63

Competitive Landscape .................................................................................................... 67


Table: Key Players In The Philippine Food Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Table: Key Players In The Philippine Drink Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Table: Key Players In The Philippine Mass Grocery Retail Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

Company Profile ................................................................................................................ 70


LT Group ...............................................................................................................................................
Alaska Milk Corporation ...........................................................................................................................
Universal Robina Corp .............................................................................................................................
San Miguel Brewery .................................................................................................................................
SM Investments .......................................................................................................................................
Philippine Seven Corp ..............................................................................................................................

70
73
76
79
81
83

Global Industry Overview .................................................................................................. 86


Table: Dollar General And Family Dollar Historic Quarterly Same-Store Sales Growth (% Change Y-O-Y) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Table: Selected US And Global Spirits Companies - Historical Financial Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Table: Select US Beverage Companies - Historic Eva Spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Table: Food and Drink Team's Core Views . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96

Demographic Forecast ..................................................................................................... 98


Table: Population Headline Indicators (Philippines 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Table: Key Population Ratios (Philippines 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Table: Urban/Rural Population & Life Expectancy (Philippines 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Table: Population By Age Group (Philippines 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Table: Population By Age Group % (Philippines 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

Glossary ........................................................................................................................... 103


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

Methodology .................................................................................................................... 105


Industry Forecast Methodology ..............................................................................................................
Sector-Specific Methodology ..................................................................................................................
Sources ..............................................................................................................................................
Risk/Reward Index Methodology .............................................................................................................

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Table: Food & Drink Risk/Reward Index Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
Table: 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, Japanbased 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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SWOT Analysis - Continued

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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SWOT Analysis - Continued

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.

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Backed By Youthful Demographics

Source: World Bank, BMI estimate

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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

1,000

widespread inequality, along with slowing


remittance growth, is expected to put a dampener on

y) growth to 2018 coming in lower than to 2012.

2018f

2017f

2016f

2015f

2014f

2013e

2012

2011

lower in the forecast period, with year-on-year (y-o-

2010

We are expecting food consumption growth to trend

2009

consumer purchasing power over the coming years.

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.

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Philippines Food & Drink Report 2015

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

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

Confectionery

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

Chocolate is the largest form of confectionary

2018f

2017f

2
2016f

0
2015f

Gum value sales compound annual growth in local


currency 2013 to 2018: +6.51%.

2.5

2014f

50,000

2013e

Sugar confectionery value sales compound annual


growth in local currency 2013 to 2018: +6.10%.

2012

2011

(2009-2018)

2010

Confectionery

Confectionery value sales compound annual


growth in local currency 2013 to 2018: +5.74%.

2009

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 Nestl exist within the country,

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

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.

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Philippines Food & Drink Report 2015

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 Nestl will remain integral towards supporting sector growth. As a case in point,
Swiss food major Nestl 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. Nestl 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 investments 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

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

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Philippines Food & Drink Report 2015

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

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

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Philippines Food & Drink Report 2015

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

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

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Philippines Food & Drink Report 2015

Soft Drinks

Soft Drinks

Soft drinks value sales compound annual growth


in local currency 2013 to 2018: +7.89%.

(2011-2018)
11

150,000

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

surrounding PepsiCo and The Coca-Cola Company


2018f

2017f

2016f

2015f

2014f

2011

companies will be looking to consolidate their

2013e

7
2012

in the Philippines over the recent years. Both

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.

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

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 promotional 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

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

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Philippines Food & Drink Report 2015

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

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%.

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

2018f

2017f

2016f

2015f

2014f

2013e

5
2012

0
2011

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

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

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

Business Monitor International

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

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Philippines Food & Drink Report 2015

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

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

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Philippines Food & Drink Report 2015

Mass Grocery Retail

Mass grocery retail (MGR) value sales compound


annual growth in local currency 2013 to 2018:
+7.03%.

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%.

Convenience sector value sales compound annual


growth in local currency 2013 to 2018: +7.98%.

Mass Grocery Retail Sales


(2011-2018)
1,000

12

750
10
500
8

sector does not boast the same exciting growth


appeal as that of the other under-developed retail

6
2018f

2017f

2016f

2015f

2014f

0
2013e

regional peers such as Thailand and Malaysia, the

2012

sector is relatively under-developed compared to

250

2011

Although the Philippine organised grocery retail

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

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

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

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Philippines Food & Drink Report 2015

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

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Philippines Food & Drink Report 2015

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

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

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

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Philippines Food & Drink Report 2015

Trade

Export value compound annual growth in US


dollar terms 2013 to 2018 = +6.10%

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%

Trade
(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

10.87%), we forecast that the deficit will grow by

2018f

2017f

2016f

2015f

2014f

2012

2011

2010

2013e

less than we originally forecast for 2014 (at

-2,500
2009

and drink balance of trade deficit growing by a little

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

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

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.

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Philippines Food & Drink Report 2015

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

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

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Philippines Food & Drink Report 2015

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

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Philippines Food & Drink Report 2015

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.

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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

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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

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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

62.0

54.7

57.8

55.0

60.7

58.1

44.2

36.0

52.3

75.7

75.0

76.3

56.8

Singapore

35.7

30.0

41.3

84.0

80.0

88.0

55.0

South
Korea

39.3

38.0

40.7

76.0

80.0

71.9

54.0

Hong Kong

38.8

40.0

37.7

75.2

75.0

75.4

53.4

Indonesia

60.2

60.0

60.3

39.5

25.0

53.9

51.9

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

54.0

64.0

38.3

20.0

56.7

50.7

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 subindex, '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, India 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

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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 Nestl.

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-to-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 Nestl Philippines - in the sector will continue to drive the market
forward.

Nestl 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, Nestl 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

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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

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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

Source: National Sources, BMI

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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

Source: National Sources, BMI

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 Hagen-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
cafs in Vietnam and also operates the Hard Rock Caf 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 Indonesia, Malaysia, the Philippines, Thailand and Vietnam. The 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 format 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. Entenso has been established to operate Puregold's food 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

Sub-Sector

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

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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

Beverages - soft drinks

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

Beverages - soft drinks

7,939

176

Dec-10

55e

na

Zest-O Corporation

Beverages - soft drinks

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

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

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

Fascia

Format

Number
of Outlets

Grand Union
Supermarket Inc

Philippines

650e

15e

Dec-11

South
Supermarkets

Supermarket

Uniwide Holdings

Philippines

217e

5e

Dec-11

Uniwide Sales

Supermarket

Netherlands

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

Shell
Caltex
Puregold Price
Club

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

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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 threaten 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.

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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%

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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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SWOT Analysis - Continued

Threats

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

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

Company Overview

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.

Strategy

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

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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

For year ending December:

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%

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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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SWOT Analysis - Continued

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 Nestl's local bottled water business Nestl 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.

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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%

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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.

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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

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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

For year ending December:

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%

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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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SWOT Analysis - Continued

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 promotional 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.

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Financial Data

For year ending December:

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%

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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.

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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-

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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

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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

2.9

2.9

6.6

Family Dollar

1.5

1.3

4.4

5.1

2.6

Source: Bloomberg, BMI

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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)

Source: Bloomberg, BMI

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

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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

Source: Bloomberg, BMI

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.

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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

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

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

Source: Bloomberg, BMI

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

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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 industry; 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 frontier 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 increase 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.

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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 US and UK.

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

Source: BMI

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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

2050f

2045f

2040f

2035f

2030f

2025f

2020f

2015f

2010

2005

2000

1990

Philippines - Population, mn

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

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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

Business Monitor International

1990

2000

2005

2010

2015f

2020f

2025f

34,643

45,237

51,062

57,001

63,658

70,242

76,356

55.9

58.3

59.5

61.0

62.5

63.6

64.0

27,305

32,413

34,758

36,442

38,143

40,161

42,862

78.8

71.7

68.1

63.9

59.9

57.2

56.1

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Key Population Ratios (Philippines 1990-2025) - Continued

Youth population, total, '000


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

1990

2000

2005

2010

2015f

2020f

2025f

25,358

29,903

31,817

32,970

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

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

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

Population, 5-9 yrs, total, '000

8,399

9,930

10,581

11,266

11,103

11,595

12,077

Population, 10-14 yrs, total, '000

7,508

9,290

9,873

10,524

11,220

11,063

11,560

Population, 15-19 yrs, total, '000

6,611

8,223

9,127

9,701

10,415

11,123

10,990

Population, 20-24 yrs, total, '000

5,856

7,184

7,945

8,828

9,513

10,247

10,993

Population, 25-29 yrs, total, '000

5,140

6,208

6,906

7,645

8,629

9,333

10,103

Population, 30-34 yrs, total, '000

4,416

5,481

5,977

6,656

7,469

8,463

9,195

Population, 35-39 yrs, total, '000

3,752

4,818

5,288

5,771

6,498

7,317

8,326

Population, 40-44 yrs, total, '000

2,636

4,132

4,647

5,105

5,619

6,347

7,175

Population, 45-49 yrs, total, '000

2,136

3,481

3,963

4,462

4,937

5,451

6,180

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

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

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

1990

2000

2005

2010

2015f

2020f

2025f

Population, 50-54 yrs, total, '000

1,723

2,390

3,297

3,758

4,260

4,729

5,240

Population, 55-59 yrs, total, '000

1,386

1,876

2,218

3,069

3,520

4,006

4,466

Population, 60-64 yrs, total, '000

983

1,441

1,690

2,001

2,794

3,220

3,682

Population, 65-69 yrs, total, '000

788

1,068

1,236

1,453

1,736

2,441

2,832

Population, 70-74 yrs, total, '000

548

671

853

993

1,179

1,420

2,014

Population, 75-79 yrs, total, '000

362

446

479

614

725

870

1,059

Population, 80-84 yrs, total, '000

178

221

257

278

364

438

535

Population, 85-89 yrs, total, '000

54

83

90

106

117

157

194

Population, 90-94 yrs, total, '000

11

18

20

22

27

31

43

Population, 95-99 yrs, total, '000

Population, 100+ yrs, total, '000

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

Population, 5-9 yrs, % total

13.56

12.79

12.33

12.06

10.91

10.50

10.13

Population, 10-14 yrs, % total

12.12

11.96

11.51

11.26

11.02

10.02

9.70

Population, 15-19 yrs, % total

10.67

10.59

10.64

10.38

10.23

10.08

9.22

Population, 20-24 yrs, % total

9.45

9.25

9.26

9.45

9.35

9.28

9.22

Population, 25-29 yrs, % total

8.30

8.00

8.05

8.18

8.48

8.45

8.47

Population, 30-34 yrs, % total

7.13

7.06

6.96

7.12

7.34

7.67

7.71

Population, 35-39 yrs, % total

6.06

6.21

6.16

6.18

6.38

6.63

6.98

Population, 40-44 yrs, % total

4.26

5.32

5.42

5.46

5.52

5.75

6.02

Population, 45-49 yrs, % total

3.45

4.48

4.62

4.78

4.85

4.94

5.18

Population, 50-54 yrs, % total

2.78

3.08

3.84

4.02

4.18

4.28

4.40

Population, 55-59 yrs, % total

2.24

2.42

2.58

3.28

3.46

3.63

3.75

Population, 60-64 yrs, % total

1.59

1.86

1.97

2.14

2.74

2.92

3.09

Population, 65-69 yrs, % total

1.27

1.38

1.44

1.56

1.71

2.21

2.38

Population, 70-74 yrs, % total

0.89

0.86

0.99

1.06

1.16

1.29

1.69

Population, 75-79 yrs, % total

0.59

0.57

0.56

0.66

0.71

0.79

0.89

Population, 80-84 yrs, % total

0.29

0.28

0.30

0.30

0.36

0.40

0.45

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

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

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

1990

2000

2005

2010

2015f

2020f

2025f

Population, 85-89 yrs, % total

0.09

0.11

0.11

0.11

0.12

0.14

0.16

Population, 90-94 yrs, % total

0.02

0.02

0.02

0.02

0.03

0.03

0.04

Population, 95-99 yrs, % total

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

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

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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 2,500m 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 300m, 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 500m and 1,500m 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
300m 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 = 0 + 1*(GDP)t + 2*(inflation)t + 3*(lending rate)t + 4* (foreign exchange
rate)t + 5*(government expenditure)t + 6*(food consumption)t-1 + t

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 risks 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. High-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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