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Philippines Food & Drink Report

Dec 15 2015 Philippines Food & Drink Annual
BMI Industry View - Philippines - 2016

Dec 11 2015 Philippines BMI Industry View Food & Drink
BMI View: Sustained private consumption growth, combined with a young and sizeable
consumer base, will drive sales of food and drink throughout our forecast period to 2019.
Nonetheless, operational challenges, combined with the huge dominance of San Miguel
Corporation, continue to hold back foreign investment, thereby hampering sector dynamism.
Headline Industry Data (local currency)
2015food consumption (local currency) growth: +4.9%; compound annual growth

rate (CAGR), 2014to 2019= +5.8%.
2015alcoholic drinks sales (local currency) growth = +5.8%; CAGR to 2019= +6.5%.
2015soft drinks sales (local currency) growth = +8.6%; CAGR to 2019= +7.7%.
2015mass grocery retail sales (local currency) growth = +6.6%; CAGR to 2019=
+6.5%.
SWOT - Food - Philippines - 2016

Dec 11 2015 Philippines SWOT Food
SWOT ANALYSIS

Strengths The government is 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), and spun-off brewing subsidiary San Miguel Brewery, thus
enhancing its reputation considerably and aiding the early establishment of industry best
practices.
The country's soft drink 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.
In the food retail sector, local operators have proved very effective at combining aspects of
modern retail with local traditions, tastes and customs in order to encourage more
consumers to make the switch.
Weaknesses The food processing industry suffers from various structural problems including limited
domestic input, inefficient post-harvest and storage facilities and inadequate distribution
links.
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.
Traditional outlets still account for around 75% of food retail sales, and under-developed
distribution infrastructure continues to make supplying retail outlets inefficient and often
costly.
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.

The ongoing development of mass grocery retail in the country will mean improved
distribution opportunities for food manufacturers.
The under-developed hypermarket and convenience store formats allow considerable room
for further development, with increased sales of higher-value non-food items a strong
opportunity for growth.
Threats Slow development of the mass grocery retail network in rural areas negatively impacts 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 competitionfrom food processors in other ASEAN countries.
The government's proposal to impose a 10% excise tax on sugary drinks would put the sector
at threat.
Industry Forecast - Consumer Outlook - Philippines - 2016

Dec 11 2015 Philippines Industry Forecast Food & Drink
Enter the body here

BMI View: Consumer-oriented industries will benefit from a young and sizeable consumer
base in the country, alongside rapid private consumption growth. Nonetheless, low income
levels combined with operational challenges will continue to weigh on investment.
Latest Updates:
Private final consumption growth in 2015: +6.0%; in 2016: +5.7%.
No change in forecasts since Q4 2015.
Inflationary pressures will remain limited in 2016.
Structural Trends
We hold a positive consumer outlook for the Philippines in 2016, with strong domestic
demand remaining a major driver of economy. Our Asia Country Risk team forecasts
private final consumption to grow by 5.7% in 2016, slightly down from 6.0% in 2015. This
represents a contribution of 3.9bps to real GDP growth in 2016. In particular, consumers
will be supported by strong remittance inflows, which rose 4.1% to USD18.4bn for the
first nine months of 2015. Consumption will also be supported by higher fiscal spending
amid the 2016 elections, signalling the government's intentions to boost expenditures.
Strong Domestic Demand Will Support Economic Growth

Philippines - Quarterly Real GDP, % chg y-o-y & Subcomponents, pp contribution
Source: BMI, NSCB
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, as we forecast spending per household to increase from USD9,134
in 2014 to USD11,689 in 2019.
Despite these positive consumer dynamics, several challenges continue to impact our
consumer outlook for the Philippines, and will hamper the development of the food,
drink and mass grocery retail sectors. First, poverty remains widespread in the country,
therefore limiting access to modern forms of consumption. We estimate that more than
half of Filipino consumers fell into the USD1,000-5,000 income bracket in 2014. Given
that more than 70% of households are composed of four people or more, it means that
disposable incomes remain limited. Second, despite strong economic growth in the
country, job creation has lagged behind, which will continue to weigh on consumer
spending. Third, several operational obstacles remain for fast-moving consumer goods
(FMCG) companies. The geographic composition of the Philippines, as a country
comprising a range of islands across a large area, combined with weak transport
infrastructure, poses significant challenges to the distribution of food and drink
products.
Industry Forecast - Food - Philippines - 2016

BMI View: Rising

incomes throughout
Food Consumption
our forecast period (2010-2019)
to 2019 will drive
food consumption in
the Philippines, and
creates
premiumisation
opportunities
targeting the upper-
middle class
population.
Nonetheless,
widespread
inequality means
that a majority of
consumers will
remain price-
conscious in their
e/f = BMI estimate/forecast. Source: National Sources, BMI
purchases of food
and drink products.
Latest Updates:
Food consumption (local currency) growth in 2015: +4.9%; compound annual growth
rate (CAGR), 2014 to 2019: +5.8%.
Strong outlook for the sugar confectionery and gum segments.
While we forecast strong real GDP growth to 2019, widespread inequalityisexpected to

put a dampener on consumer purchasing power over the coming years. We are
expecting food consumption growth to trend lower in the forecast period.
Nevertheless, over the medium-to-longer term, sustained economic growth will

increase 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.
FOOD CONSUMPTION INDICATORS - HISTORICAL DATA & FORECASTS (PHILIPPINES 2012-2019)
2012 2013e 2014e 2015f 2016f 2017f 2018f 2019f
Food consumption PHPbn 1,668.0 1,752.7 1,845.9 1,936.8 2,039.8 2,166.4 2,302.1 2,447.6
Food consumption, PHP per capita 17,371.9 17,963.1 18,619.5 19,233.7 19,949.6 20,871.7 21,854.1 22,899.3
Food consumption, USD per capita 411.7 415.8 421.3 418.2 417.8 434.9 458.8 483.2
Food consumption, USDbn 39.5 40.6 41.8 42.1 42.7 45.1 48.3 51.6
Food consumption, PHP, % y-o-y 7.6 5.1 5.3 4.9 5.3 6.2 6.3 6.3
Confectionery
Confectionery
Chocolate is the
(2010-2019)
largest form of
confectionary
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,
driving growth
through effective
marketing schemes.
However, we
believe that sugar
confectionary will
rise as a proportion e/f = BMI estimate/forecast. Source: National Sources, BMI
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. 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

RobinaCorporation (URC), Petra Foods and Nestlwill 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 formalisation of the food retail sector will
provide more distribution channels for domestic confectionery producers to reach
the end-consumer market.
These dynamics are factored into our CAGR of 5.7% for confectionery sales (in local
currency terms) over 2014-19. Notably, the sugar confectionery and gum sub-sectors
will be the growth outperformers over our forecast period, thanks to greater sector
dynamism.
CONFECTIONERY VALUE/VOLUME SALES, PRODUCTION & TRADE - HISTORICAL DATA & FORECASTS
(PHILIPPINES 2012-2019)
2012 2013e 2014e 2015f 2016f 2017f 2018f 2019f
Confectionery sales, 20,621.52 21,602.99 22,624.40 23,849.24 25,059.64 26,443.40 28,048.51 29,804.12
PHPmn
Confectionery sales, PHP 214.8 221.4 228.2 236.8 245.1 254.8 266.3 278.8
per capita
Confectionery sales, 488.7 500.1 511.9 518.5 524.8 551.0 588.9 628.9
USDmn
Confectionery sales, 113,518.3 117,347.4 121,196.4 125,702.1 130,241.2 134,282.3 138,516.2 142,953.3
tonnes
Chocolate sales, PHPmn 8,058.6 8,398.3 8,748.5 9,175.0 9,589.6 10,059.6 10,607.7 11,206.2
Chocolate sales, USDmn 190.96 194.40 197.93 199.47 200.82 209.61 222.70 236.45
Gum sales, PHPmn 790.03 833.15 878.46 931.89 985.62 1,047.58 1,119.03 1,197.30
Gum sales, PHP per capita 8.2 8.5 8.9 9.3 9.6 10.1 10.6 11.2
Gum sales, USDmn 18.72 19.29 19.87 20.26 20.64 21.83 23.49 25.26
Dairy
Per capita dairy consumption levels across Asia have been rising in recent years. While
consumption of dairy products remains low in the Philippines, we expect strong growth
over the coming years. Given this consumption potential, the government has
developed ambitious plans to boost production under the National Dairy Development
Plan. While the country's competitiveness in the powdered milk segment remains low,
the government believes that it can boost production in the fresh milk category.
Under the plan, milk production is targeted to reach 153.86mn litres (158,430 tonnes) in
2019/20 and then 647.83mn litres (667,100 tonnes) by 2029/30. While we expect strong
growth in dairy production from its current low base, we do not believe these targets
are realistic. Unless there is significant consolidation in the industry and more
investment is poured in, we believe that the existence of small-scale farmers will
hamper significant growth in the sector.
DAIRY VOLUME SALES, PRODUCTION & TRADE - HISTORICAL DATA & FORECASTS (PHILIPPINES 2014-
2019)
2014e 2015f 2016f 2017f 2018f 2019f
Processed liquid milk production, tonnes 20,097.4 21,209.5 22,433.7 23,710.7 25,054.5 26,491.5
Processed liquid milk sales, tonnes 69,933.9 72,274.4 74,631.3 76,729.2 78,927.8 81,232.0
Butter sales, tonnes 11,322.8 11,345.0 11,367.4 11,387.3 11,408.2 11,430.0
Cheese production, tonnes 1,450.2 1,603.2 1,771.6 1,947.3 2,132.1 2,329.8
Cheese sales, tonnes 20,033.3 21,730.4 23,439.4 24,960.6 26,554.8 28,225.6

Industry Forecast - Drink - Philippines - 2016
BMI View: The Philippines' drink industry will experience solid growth throughout our
forecast period to 2019. Both the alcoholic drinks and soft drinks segments will benefit from
the large and young consumer base, alongside sustained levels of investment.
Latest Updates:
Alcoholic drinks sales (local currency) growth in 2015: +5.8%; compound annual
growth rate (CAGR), 2014 to 2019: +6.5%.
Soft drinks sales (local currency) growth in 2015: +8.6%; CAGR to 2019: +7.7%.
Structural Trends - Hot Drinks
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 2019. 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.
HOT DRINK VALUE/VOLUME SALES, PRODUCTION & TRADE - HISTORICAL DATA & FORECASTS
(PHILIPPINES 2014-2019)
2014e 2015f 2016f 2017f 2018f 2019f
Coffee sales, PHPmn 34,962.6 36,677.5 38,524.1 40,772.9 43,238.6 45,883.8

Coffee sales, USDmn 791.0 797.4 806.7 849.6 907.8 968.2
Tea sales, PHPmn 9,161.6 9,563.5 10,004.3 10,545.8 11,137.0 11,772.2
Tea sales, PHP per capita 92.4 95.0 97.8 101.6 105.7 110.1
Structural Trends - Soft Drinks
The Philippine soft drinks industry is, and will remain, one of the country's most
dynamic food and beverage sub-sectors. Levels of investment in the industry remain
huge, as does multinational interest, both of which have been demonstrated by the
events surrounding PepsiCo and The Coca-Cola Company in the Philippines over the
recent years. Both companies will be looking to consolidate their number one and two
positions, ahead of domestic rivals such as Cosmos and Zest-O.
Beyond simple expansion, innovative new product development will be a key sales
growth driver. The leading players are already looking beyond carbonates into higher-
value, more innovative product categories to cater to the country's youthful and
increasingly affluent consumers, and these launches are being backed up by substantial
promotional and marketing investments.
Soft Drinks
(2012-2019)
SOFT DRINKS SALES, PRODUCTION & TRADE (PHILIPPINES 2014-2019)
2014e 2015f 2016f 2017f 2018f 2019f
Soft drink sales, PHPmn 69,762.09 75,738.57 80,439.92 86,530.97 93,079.27 101,147.19
Soft drink sales, PHP per capita 703.7 752.1 786.7 833.7 883.6 946.3
Soft drink sales, USDmn 1,578.3 1,646.6 1,684.5 1,803.0 1,954.2 2,134.2
Structural Trends -
Alcoholic Drinks
Alcoholic Drinks
(2012-2019)
As is the case with
the country's soft
drinks industry, the
Philippine alcoholic
drinks industry is
dynamic, attractive
and high-growth.
Alcohol
consumption is
widespread, and
the industry is well
established. In line
with domestic
income growth,
consumers are
likely to gradually
trade up to more e/f = BMI estimate/forecast. Source: National Sources, BMI
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 2019 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.
ALCOHOLIC DRINKS VALUE/VOLUME SALES, PRODUCTION & TRADE - HISTORICAL DATA &
FORECASTS (PHILIPPINES 2014-2019)
2014e 2015f 2016f 2017f 2018f 2019f
Alcoholic drinks sales, mn litres 2,430.4 2,521.6 2,610.8 2,688.4 2,769.2 2,852.7
Alcoholic drinks sales, litres per capita 24.5 25.0 25.5 25.9 26.3 26.7
Alcoholic drink sales, PHPmn 31,348.6 33,168.8 35,138.4 37,505.4 40,112.9 42,932.3
Alcoholic drinks sales, USDmn 709.2 721.1 735.8 781.5 842.2 905.9
Beer sales, litres per capita 16.5 16.8 17.0 17.2 17.4 17.6
Beer Sales, mn litres 1,632.9 1,687.2 1,739.2 1,783.8 1,829.9 1,877.0
Wine sales, litres per capita 0.4 0.4 0.4 0.4 0.5 0.5
Wine Sales, mn litres 35.1 39.1 43.0 46.6 50.3 54.2
Spirits sales, litres per capita 7.7 7.9 8.1 8.3 8.4 8.6
Industry Forecast - Mass Grocery Retail - Philippines - 2016

BMI View: The

Philippines' mass
Mass Grocery Retail Sales
grocery retail sector (2012-2019)
will expand at a solid
pace throughout our
forecast period to
2019, driven by rising
incomes and low
base effects.
Nonetheless, given
the low level of
sector development,
growth will lag
compared with other
emerging markets in
the region, especially
due to the lack of
foreign capital.
Latest Updates: e/f = BMI estimate/forecast. Source: National Sources, BMI
Mass grocery
retail (MGR)
sales (local
currency) in 2015: +6.6%; compound annual growth (CAGR), 2014 to 2019: +6.5%.
Hypermarket format will outperform throughout our forecast period.
Structural Trends
Although the Philippine organised grocery retail sector is relatively under-developed
compared to regional peers such as Thailand and Malaysia, the sector does not boast
the same exciting growth appeal as that of the other under-developed retail markets in
the region owing to the lack of foreign capital in the sector. Nonetheless, sector growth
will remain reasonably strong over our forecast period. In particular, we expect the
outperformance of the hypermarket sector to 2019, although the supermarket format
will continue to dominate, currently accounting for more than 80% of total MGR sales.
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 under-developed nature.
Organised retail makes up around 25% 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 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.
Nonetheless, we are expecting reasonably strong growth in the Philippine retail sector
to 2019. We are forecasting total MGR sales to grow at a compound annual average rate
of 6.6% to 2019. This outlook is underpinned by sustained income growth and ongoing
expansionary efforts of the country's retail players. Market leader SM Investments and
domestic convenience retailer Philippine Sevenwill continue to expand at a rapid pace.
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.
MASS GROCERY RETAIL SALES BY FORMAT - HISTORICAL DATA & FORECASTS (PHILIPPINES 2014-
2019)
2014e 2015f 2016f 2017f 2018f 2019f
Hypermarket sales, PHPbn 40.8 44.1 47.9 52.3 57.0 62.0

Supermarket sales, PHPbn 535.6 569.4 600.5 636.9 679.0 723.5
Total mass grocery retail sales, PHP per capita 6,583.1 6,911.9 7,199.8 7,546.3 7,949.1 8,368.7
Total mass grocery retail sales, USDbn 14.8 15.1 15.4 16.3 17.6 18.9
Total mass grocery retail sales, PHPbn 652.6 696.0 736.2 783.3 837.4 894.5
Supermarket sales, USDbn 12.1 12.4 12.6 13.3 14.3 15.3
Convenience store sales, PHPbn 76.3 82.5 87.9 94.1 101.3 109.0
Convenience store sales, USDbn 1.7 1.8 1.8 2.0 2.1 2.3
Hypermarket sales, USDbn 0.9 1.0 1.0 1.1 1.2 1.3

SALES BREAKDOWN BY RETAIL FORMAT TYPE
2012 2022f
Organised/MGR 21 27
Non-organised/Independent 79 73
e/f = BMI estimate/forecast. Source: BMI
Economic Analysis - Slight Growth Downgrade Despite Underlying

Strength
Sep 29 2015 Philippines Economic Analysis Economic Activity
BMI View: We are slightly downgrading our real GDP growth forecast for 2015 to 5.7%, from
6.0% previously, owing to growing external headwinds. Meanwhile, we are retaining our 2016
real GDP growth forecast at 6.0%, as the Philippines will remain a regional outperformer on
the back of domestic resilience. That said, political risks stemming from 2016 general
elections might pose downside risks to our constructive stance on the Philippine economy.
The Philippine economy should remain on a sound footing over the coming quarters
amid external headwinds that are currently undermining export performance. In
particular, continued resilience seen in the domestic economy and a potential uptick in
fiscal spending as election season approaches in May 2016 will help to cushion the
economy against the ongoing slide in exports. That said, we have incrementally
downgraded our 2015 real GDP growth to 5.7%, from 6.0% previously, following a slower
than expected H115.
Export Headwinds A Drag On Growth

Philippines - Real GDP, % chg y-o-y & Subcomponents, pp contribution
Source: BMI, NSCB
Domestic Investment Activity Firming Up
A continued pick-up in private sector investment activity looks particularly compelling

over the coming quarters. Indeed, although foreign direct investment (FDI) inflows have
been slowing, possibly owing to a wait-and-see approach by overseas investors ahead of
the 2016 general elections in the Philippines, gross capital formation growth has been
picking up in recent months, suggesting that private domestic investors are picking up
the slack. According to the latest data from the National Statistical Coordination Board
(NSCB), gross capital formation accelerated to 11.6% y-o-y and 17.4% in Q115 and Q215,
respectively, from 3.0% in Q414.
The improving business environment on the back of President Benigno Aquino III's
political and economic reform policies has certainly made investing more conducive for
domestic businesses. Moreover, with the credit-to-GDP ratio standing at just 40.5% as of
the end of December 2014, the country is not highly leveraged, implying that there is
room for domestic investment activity to grow. Import growth has also accelerated
despite ongoing peso weakness, coming in at 12.7% y-o-y in Q215 from 8.7% in the
previous quarter, reflecting strong underlying investment demand in the country and
signalling for a continued expansion in gross capital formation.
Catalysts To Faster Investment Growth
There are also several catalysts to more rapid investment growth. A continuation of
Aquino's positive reform policies following the upcoming general elections in 2016
would bolster investor confidence, which could subsequently spur rapid increases in FDI
inflows over the coming years. Moreover, we believe the Philippine peso is unlikely to
experience major weakness amid the deteriorating regional economic growth outlook,
which should help to sustain investor confidence towards the country (see Gradual Peso
Weakness Amid External Headwinds, 14 September).
Domestic Consumption To Remain Strong
At the same time, private consumption growth should remain resilient on the back of
continued strong remittance inflows. Based on the official data from the central bank,
remittances rose by 5.6% y-o-y to USD12.1bn in H115. In addition, fiscal spending looks
set to increase, as elections are coming soon and as a PHP3.0trn (USD64.1bn) budget for
2016 has been proposed, signalling government intentions to boost expenditure over
the coming quarters. An acceleration of infrastructure projects under the public-private
partnership (PPP) scheme as President Aquino nears the end of his single six-year term
in May 2016 should also provide further impetus for spending growth. While fiscal
spending has been lacklustre since the start of the year, there are already incipient
signs of an uptick in government consumption.
Two Key Risks To Economic Growth
While we hold a largely positive outlook for the Philippine economy for 2015 and 2016,
there are two key risks to our constructive stance. Lacklustre economic conditions in
the region, particularly in Japan and China, which are the first and third largest export
destinations for the Philippines, respectively, will undermine Philippine outbound
shipments. Philippine exports have been poor in 2015, posting in the red for six out of
the first seven months of the year. Additionally, the Philippine economy will face a
threat from a possible lack of policy continuity following the upcoming general elections
in 2016.
Economic Structure
Private Consumption: We forecast private consumption's share of GDP to decline

gradually from 72.5% in 2014 to 67.2% by 2024, as we expect a rise in savings for
investment purposes. That said, rising incomes and greater access to credit will mean
private consumption growth will remain relatively robust.
Government Consumption: We forecast government consumption as a share of GDP

to remain largely stable at around 9.0-10.0% over our forecast period from 2015 to 2024,
owing to ongoing efforts by the Philippine government to keep spending in check and
maintain a sustainable fiscal and debt profile.
Fixed Investment: Ongoing economic and business environment reforms, such as the
anti-corruption drive, have made the Philippines conducive for investment. We
therefore expect greater private sector investment over the coming years. Accordingly,
we forecast gross capital formation as a share of GDP to rise from 19.7% in 2014 to
29.2% by 2024.
Net Exports: Philippine exports will face growing regional competition. Firm domestic
demand conditions will therefore likely result in imports continuing to outstrip exports.
Accordingly, we forecast net exports as a share of GDP to decline steadily over our
forecast period from 2015 to 2024.
ECONOMIC ACTIVITY (PHILIPPINES 2010-2019)
2010 2011 2012 2013 2014 2015f 2016f 2017f 2018f 2019f
Nominal GDP, USDbn 199.7 224.2 250.4 267.3 285.8 296.2 310.6 340.2 377.3 417.6
Real GDP growth, % y-o-y 7.6 3.6 6.8 7.2 6.1 5.7 6.0 5.9 5.8 5.9
GDP per capita, USD 2,137 2,358 2,588 2,716 2,855 2,909 3,000 3,233 3,528 3,842
Population, mn 93.0 94.5 96.0 97.6 99.1 100.7 102.3 103.8 105.3 106.9
Unemployment, % of labour force, eop 7.1 6.4 6.8 6.5 6.0 6.3 6.3 6.2 6.2 6.1
f = BMI forecast. Source: BMI, NSCB
Industry Risk/Reward Index - Japan & Australia Overtaking China

As Outlook Deteriorates
Oct 5 2015 Asia Industry Risk/Reward Index Food & Drink
BMI'sFood & Drink Risk/Reward Index assesses a market's attractiveness to industry

investors in comparison to its peers. The reward part of the index 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 index 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.
Since the last iteration of our Asia Food & Drink Risk/Reward index, Japan and Australia
have overtaken China at the top of our index. China's risk score has slightly deteriorated
over the past few quarters as the economy's growth is slowing down. On the other
hand, Japan and Australia continue to benefit from very strong risk profiles and high
food consumption per capita. This reflects a stable performance of developed markets
(DMs) across the region, while many emerging markets (EMs) have been impacted by an
economic slowdown like China, or currency depreciation like Indonesia. China
remains the only growth-structured market in the top eight of the Index. In fact, the
country has a much better risk profile than many of the EMs covered in the region,
while its reward score is similar to the ones of Pakistan, India and Indonesia.
Our top-three is followed by five other DMs, namely New Zealand, Taiwan, Singapore,
South Korea and Hong Kong. These markets have in common strong risk scores, as they
all benefit from sophisticated retail structures on the industry risk side, and from an
investor-friendly business environment on the country risk side. Nonetheless, small
populations and weak growth ahead will prevent most developed markets from
climbing up in our index.
On the other hand, even though our index is designed to be biased towards growth,
with the reward component accounting for 60% of the overall score, countries like
Indonesia, India and Vietnam (respectively ranked 10th, 11th and 12th) are not yet in a
position to break the mature market axis. Weak risk scores and the discrepancy in
scores between the higher-ranked markets and the chasing markets ultimately
outweigh the impact of the higher reward scores. Pushing up risk scores would require
improvements in areas like mass grocery retail penetration and regulatory
environment. India is the only EM which has improved its overall risk/reward score
since Q415 thanks to positive steps to improve the country's regulatory framework. On
the other hand, Indonesia dropped from the 7th to the 10th position, as the
depreciation of the rupiah has impacted food consumption levels in US dollar terms.
Asian DMs Benefiting From Strong Risk Profiles

Asia Pacific Risk/Reward Index Q116
Source: BMI
ASIA PACIFIC FOOD & DRINK RISK/REWARD INDEX Q116
Reward Industry Country Risk Industry Country Food & Drink Ranking
Reward Reward Risk Risk Score
Japan 45.0 32.0 58.0 79.6 85.0 74.1 58.8 1
Australia 44.2 36.0 52.3 80.2 85.0 75.4 58.6 2
China 58.3 62.0 54.7 57.0 55.0 59.0 57.8 3
New 37.3 36.0 38.7 85.0 85.0 85.0 56.4 4
Zealand
Taiwan 40.3 40.0 40.7 78.1 80.0 76.3 55.5 5
Singapore 35.7 30.0 41.3 81.7 80.0 83.4 54.1 6
South 39.3 38.0 40.7 75.4 80.0 70.9 53.8 7
Korea
Hong Kong 38.8 40.0 37.7 75.7 75.0 76.3 53.6 8
Thailand 46.7 56.0 37.3 63.0 60.0 66.0 53.2 9
Indonesia 57.3 58.0 56.7 44.3 35.0 53.6 52.1 10
India 59.0 54.0 64.0 41.4 25.0 57.9 52.0 11
Vietnam 55.0 68.0 42.0 47.2 35.0 59.4 51.9 12
Pakistan 62.2 64.0 60.3 30.4 10.0 50.9 49.5 13
Malaysia 38.8 34.0 43.7 64.0 60.0 68.1 48.9 14
Philippines 47.3 38.0 56.7 50.6 40.0 61.3 48.7 15
Scores out of 100, with 100 highest. The Food & Drink Risk/Reward Index is the principal Score. It comprises two sub-
index, 'reward' and 'risk', which have a 60% and 40% weighting respectively. In turn, the 'reward' score 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' score
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 score.
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.
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 high-
weight 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 score, 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.
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 Q415, 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 score, 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 scorehere.
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.
Industry Risk/Reward Index - Philippines - 2016

Dec 11 2015 Philippines Industry Risk/Reward Index Food & Drink
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.
Market Overview - Food - Philippines - 2016

Dec 11 2015 Philippines Market Overview Food & Drink
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 non-essential 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 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 companyNestl.
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.
Market Overview - Drink - Philippines - 2016

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 is jointly owned by Coca-Cola FEMSA, Coke's leading bottler in
Mexico, and The Coca-Cola Company. 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.
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.
Despite the rapid growth of soft drinks consumption, the industry is at risk of new
excise taxes. In November, a bill aiming to impose an excise tax on non-alcoholic
beverages with added sugar and/or caloric/non-caloric sweetener was passed. If
enacted, it will impose a PHP40 (USD0.22) tax on every litre sold, which poses significant
threats to the sector.
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 wine and beer segments, the spirits sector is
fairly stagnant, with local favourites gin and rum continuing to dominate the market.
Market Overview - Mass Grocery Retail - Philippines - 2016

Despite the liberalisation of foreign direct investment in the retail sector in the 2000s,
foreign capital in the Philippines' food retail sector remains limited. 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
recentlyliberalised 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. In addition, the strong market power of leading domestic
retailers has also acted as a deterrent for foreign actors. The country's fragmented
geography requires adapted distribution systems, which favours actors with strong
local knowledge. For instance, Puregold Price Club does not operate with a centralised
distribution system. Instead, hypermarkets serve as distribution hubs for smaller
stores, which we view as a positive move considering the fragmented geography of the
country and traffic congestion in Manila.Therefore, we believe that foreign investment
will be limited to regional retailers, especially through partnerships with local players. In
early 2015, Dairy Farms increased its stake in Philippines retailer Rustan to 66%.
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,
while the hypermarket concept has been introduced later but has become increasingly
popular 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 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.
Leading retailers include SM Investments, which operates hypermarkets,

supermarkets and convenience stores in partnership with Alfamart, Puregold Price
Club and Robinsons. In the organised convenience sector, leading players include
Philippines Seven - a 7-Eleven franchisee in the Philippines andMini 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.
MASS GROCERY RETAIL SALES BY FORMAT (PHILIPPINES 2006-2015)
2006 2007 2008 2009 2010 2011 2012 2013e 2014e 2015f
Supermarket sales, USDbn 5.2 6.9 7.6 7.5 8.8 10.2 11.4 11.7 12.1 12.4
Hypermarket sales, USDbn 0.2 0.4 0.5 0.5 0.6 0.7 0.8 0.9 0.9 1.0
Convenience store sales, USDbn 0.7 0.9 1.1 1.1 1.3 1.4 1.6 1.7 1.7 1.8
Total mass grocery retail sales, USDbn 6.1 8.1 9.1 9.1 10.6 12.3 13.7 14.3 14.8 15.1
Source: National Sources, BMI
MASS GROCERY RETAIL SALES BY FORMAT (PHILIPPINES 2006-2015)
2006 2007 2008 2009 2010 2011 2012 2013e 2014e 2015f
Hypermarket sales, PHPbn 12.8 16.6 20.9 25.2 26.6 31.0 33.9 37.2 40.8 44.1
Total mass grocery retail sales, PHPbn 310.4 375.3 405.3 434.7 479.3 533.5 579.7 616.2 652.6 696.0
Supermarket sales, PHPbn 264.1 316.4 336.8 357.9 394.7 440.3 479.3 507.6 535.6 569.4
Convenience store sales, PHPbn 33.5 42.3 47.5 51.6 57.9 62.1 66.4 71.5 76.3 82.5
Source: National Sources, BMI
Competitive Landscape - Philippines - 2016

Dec 11 2015 Philippines Competitive Landscape Food & Drink
Competitive Landscape
Key Players
KEY PLAYERS IN THE PHILIPPINE FOOD INDUSTRY
Company Sub-Sector Sales Sales Financial No of Year

(PHPmn) (USDmn) Year End Employees Established
San Miguel Corp Food & beverages 782,434 17,629 Dec-14 18,538 1890
(and heavy industry)
Nestle Philippines Inc Food & beverages 111,745e 2,494e Dec-13 3,500 1911
(snack foods, dairy)
San Miguel PureFoods Food - agri & branded 103,000 2,320 Dec-14 3,223 na
consumer
Unilever Philippines Food - mixed branded 17,320e 400e Dec-11 na na
consumer
Mondelez Philippines Food - snack food 10,825e 250e Dec-11 na na
(Formerly Kraft Food
Philippines)
RFM Corp Food - mixed branded 11,010 248 Dec-14 454 na
consumer
General Milling Corp* Food - pasta, flour 7,000e 162e Dec-11 na 1961
products, snacks
Century Pacific Corp Food - canned food, 20,473 461 Dec-14 na na
seafood
Pilmico Foods Corp Food - flour products 4,200 99e Dec-12 na 1962
Alliance Select Food - canned food, na 81 Dec-14 2,361 2005
seafood
e = estimate, na = not available. Source: BMI

KEY PLAYERS IN THE PHILIPPINE DRINK INDUSTRY
Company Sub-Sector Sales Sales Financial No of Year

(PHPmn) (USDmn) Year End Employees Established
San Miguel Corp Food & beverages (and 782,434 17,629 Dec-14 18,538 1890
heavy industry)
Nestle Philippines Inc Food & beverages (snack 111,745e 2,494e Dec-13 3,500 1911
foods, dairy)
San Miguel Brewery Beverages - alcoholic, 75,053 1,666 Dec-13 2,749 2008
beer
Universal Robina Corp Beverages - 92,376 2,095 Sep-14 11,623 1954
confectionery & snacks
Coca-Cola Bottlers Beverages - soft drinks 21,650e 500e Dec-11 7,800 1927
Philippines Inc
Ginebra San Miguel Beverages - alcoholic, 14,921 336 Dec-14 879 na
spirits
Pepsi-Cola Products Beverages - soft drinks 29,807 672 Dec-14 12,671 na
Philippines
LT Group (Formerly Beverages - alcoholic, 52,154 1,175 Dec-14 12,671 1937
Tanduay Holdings) spirits
Alaska Milk 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
e = estimate, na = not available.Source: BMI
KEY PLAYERS IN THE PHILIPPINE MASS GROCERY RETAIL SECTOR
Parent Company Country of Sales Sales Financial Fascia Format Number

Origin (PHPmn) (USDmn) year end of Outlets
SM Investments* Philippines 275,700 6,211 Dec-14 269
SM Supermarket 40
Supermarket
SM Hypermarkets 42
Hypermarket
SaveMore Discount 113
stores
WalterMart Supermarkets 24
The SM Store Department 50
stores
Suy Sing Philippines 21,650e 500e Dec-11 Rustan's Supermarket 22
Commercial Corp Supermarket
Shopwise Hypermarkets 9
Philippine Seven Philippines 19,309 435 Dec-14 7-Eleven Convenience 1,282
Corp Store
Price Smart Philippines 4,330e 100e Dec-11 Price Smart Cash & Carry 4
Gokongwei Group Philippines 3,464e 80e Dec-11 Robinsons Supermarket 66
Supermarkets
Mini Stop Convenience 120
Store
Grand Union Philippines 650e 15e Dec-11 South Supermarket 8
Supermarket Inc Supermarkets
Uniwide Holdings Philippines 217e 5e Dec-11 Uniwide Sales Supermarket 6
Shell Netherlands na na na Shell Select Convenience 100e
Store
Caltex Australia na na na Star Mart Convenience 150e
Store
Puregold Price Philippines 84,700 1,908 Dec-14 Puregold Price Supermarket 200e
Club Club
Puregold Junior Convenience
Store
Puregold Extra Discount
Store
*total group earnings - retail merchandise segment revenue for FY2013 = PHP180,900mn (73.3% of total revenue). e =
estimate, na = not available. Source: BMI
Company Profile - Alaska Milk Corporation - 2016
Dec 11 2015 Philippines Company Profile Food & Drink
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.
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 Alaska Milk Corporation (AMC) is one of the country's leading dairy manufacturers. The
Overview 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. Itsnon-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 FrieslandCampina (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 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%
Company Profile - LT Group - 2016

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 expandedLT 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.
Spirits typically carry high sales values and are thus prohibitive to many consumers.
Opportunities 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.
Company LT Group (formerly Tanduay Holdings) engages in the manufacture and sale of liquor
Overview 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.
2014 sales: PHP52,154, growth of -6.6%
2013 sales: PHP55,792mn, growth of 82.5%
Operational Data Enter the operational data text here (bullet list)
Company Profile - Philippine Seven Corp - 2016

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 to boost same-store sales are restricted by limited floor-space.
Opportunities 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.

Report Contents
Expansion into provincial areas, where there is minimal competition, provides a strong
opportunity for uncontested brand building
BMI Industry View -
Threats Expansion has affected group profitability and this could impact on future growth initiatives.
Philippines - 2016
With consumers already paying high prices for convenience, the company would most likely
SWOT - Food -
be severely hit by slower domestic demand.
Philippines - 2016
The threat of multinational retailers entering the market looms large, with convenience
Industry Forecast - possibly a favoured channel for these experienced companies.
Consumer Outlook - The entry of Japanese convenience store operator FamilyMart in 2013.
Philippines - 2016
Industry Forecast -
Food - Philippines -
Company Philippine Seven is the franchise operator of 7-Eleven convenience stores in the country.
2016
Overview There are just over 1,120 stores in the Philippines (both self-managed and franchised),
Industry Forecast - 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
Drink - Philippines - store openings. It has recently expanded into 'grab-and-go' fast-food business.
2016
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.
2014 sales: PHP19,309, growth of 36.7%
2013 sales: PHP14.1bn, growth of 9.7%
2010 sales: PHP8.5bn, growth of 27.3%.
Company Profile - San Miguel Brewery - 2016

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.
Economic growth will boost sales of beer at the premium end of the market.
Threats 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.
Concerns remain that investment funds from other SMC businesses will be drained to
support expansion in heavy industries.

Company San Miguel Corporation (SMC) is the country's largest food and beverage company and one of
Overview 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.
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.
Financial Data For year ending December (results for San Miguel Corporation):
2010 sales: PHP246.1bn, growth of 41.3%.
Company Profile - SM Investments - 2016

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.
Expansion opportunities outside of Manila are currently fairly limited.
Opportunities 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.
Company SM Investments acquired its grocery retail interests in 2006. It now operates more than 200
Overview outletsunder the fascias SMSupermarket, 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 sub-sector
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.
2014 sales: PHP275,700, growth of 8.8%
2010 sales: PHP142.4bn, decline of 3.0%
Company Profile - Universal Robina Corp - 2016

Company Profile - Universal Robina Corp - 2016
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 long-term
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.
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 Universal Robina Corp (URC) is the food and beverage unit of the JG Summit conglomerate.
Overview 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.
Financial Data For year ending September:
Global Industry Overview - Food & Drink Global Industry

Overview - Q315
Oct 12 2015 Global Global Industry Overview Food & Drink
Theconsolidation theme remained firmly intact over the July-September period as AB

InBev declared its intention to buy SABMiller - if it closes over the coming weeks and
months the acquisition cost will likely exceed USD100bn, which would probably make it
the biggest deal anywhere globally in 2015. Globally, the eurozone consumer continues
to look marginally stronger than it did at the beginning of 2015, with deflationary
pressures easing in countries such as Spain. However, the US and the UK will continue
to lead developed world opportunities. Touching on food prices, our Agribusiness and
wider Commodities teams expect global agricultural prices to broadly trade sideways
over Q4.
Food Prices Expected To Range Trade Over Next Two-Three Month

S&P GSCI Agricultural Index
Source: Bloomberg, BMI
Nearing AB InBev SABMiller Deal The End Game In Beer
We noted on October 7 2015 that SABMiller appeared likely to reject a third bid from AB
InBev (ABI) - valuing its equity at GBP68bn - however we do still expect a deal to be
struck, be it all-cash or some cash and equity in AB InBev. Africa and Latin America are
the two regions of most interest to AB InBev from the SABMiller stable. Operating
margins are high, with a number of monopolies present, and the outlook for long-term
growth remains strong despite near term weakness in a number of emerging
economies.
ABI is phenomenally profitable. By way of comparison, in its last financial year to
December 31 2014, its operating margin was 68% higher than SAB's (year to March 2015)
and 126% 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. Africa is one of the main reasons why ABI wants to buy SABMiller.
Where SAB has numerous market leading positions in fast growing global beer markets
ranging from Colombia to Tanzania, ABI is dominant in three of the biggest and most
profitable beer markets in the world: Brazil, Mexico and the US. It is also increasingly
well positioned in Asia. However, it cannot afford to ignore Africa going forward, and a
company of SABMiller's size is the only acquisition target left that is big enough to
materially impact ABI's growth prospects. Between them, Africa and Latin America
make up more than 60% of SAB's profit pool.
Global Implications Of Megabrew

AB InBev (LHS) & SABMiller (RHS) - EBITDA Per Region - Last Available Financial Year
Consolidation Theme Continued: Soft Drinks To Figure
Soft drinks are another area where consolidation will pick up, albeit on a much smaller
scale than we are seeing with ABI and SABMiller. We published an article in October
2015 looking at why The Coca-Cola Company's (Coke's) operating margins were much
higher than most of its franchise bottlers
At the highest level, Coke's business model has historically been built around selling its
concentrate to its franchise bottlers around the world. Rather than owning bottlers,
Coke has preferred to take equity stakes between 20-50% - thereby exerting significant
influence and accounting for its proportional share of income through the equity
method.
This strategy to a large extent explains why Coke's operating margins are typically much
higher than those of its main franchise bottlers, including the likes of Coca-Cola FEMSA
(Mexico focused), Coca-ColaIcekek (Turkey and Central Asia focused) and Coca-Cola
Enterprises (Western Europe). Under this method, only the proportional share of
earnings is included in the income statement of Coke and crucially there is no impact on
sales revenues - the effect is to provide a major boost to operating margins.
Coke has of course invested and often times outright acquired a number of brands over
the years including Innocent in the UK, and more recently Monster Beverages and
Keurig Green Mountain in the US, as part of a wider diversification push beyond core
carbonates - an industry that has been in steady decline for a number of years now in
the US.
We expectM&A activity in Coke's bottling system in Latin America will pick up over the
next two years. We argued in September 2015 that slow growth in key markets will push
bottlers to consolidate in order to achieve economies of scale, while pressure will also
come from Coke itself, which is putting pressure on its bottlers to consolidate.
While Latin America has traditionally been a profitable region for Coca-Cola and its
bottlers, growth has been sluggish in recent quarters as consumers have shifted away
from carbonates and various key regional markets have faced economic slowdowns.
Due to declining consumption of carbonated soft drinks (CSD) in key regions, including
the US, Latin America and Western Europe, Coca-Cola has pushed for refranchising and
consolidation among its bottlers. Larger bottlers have greater financial capacity to
advertise Coca-Cola products and negotiate with distributors. This trend has already
materialised in East and Southern Africa, with the creation of Coca-Cola Beverages
Africa in December 2014, and in Western Europe (see 'Bottler Merger To Address Declining
Sales And Supply Chain Consolidation', July 31).
The leading bottlers in the region, namely Mexican Coca-Cola FEMSA and Arca
Continental, will drive this consolidation trend. The Mexican carbonated soft drinks
market grew at a tremendous pace until the introduction of a tax on sugary drinks in
January 2014 (see 'Challenging CSD Market To Affect Coca-Cola's Bottlers', March 23). Since
then, Coca-Cola FEMSA and Arca have reported stagnating sales in the country, and are
increasingly looking for alternative drivers of growth. In our view, opportunities for
organic expansion in the region are limited, with high per capita consumption of CSD
across many countries and the presence of other Coca-Cola bottlers.
However, we believe that Coca-Cola FEMSA and Arca will pursue inorganic expansion, by
targeting smaller regional bottlers. Over the last decade, smaller bottlers have been
gradually acquired by Coca-Cola FEMSA and Arca, as illustrated in the chart below. Coca-
Cola FEMSA and Arca both have moderate levels of debt relative to their EBITDA,
standing at 1.9x for Coca-Cola FEMSA and 0.5x for Arca. With no acquisitions between
them in 2014 and slowing growth in core markets, we expect a major deal to occur in
the segment over the next two years.
The main targets will be Chilean bottlers Embotelladora Andina and Embenor. While
the Chilean soft drinks sector is already mature and offers limited growth prospects,
Embotelladora Andina is a key bottler in Brazil, and also operates in Argentina, which
has one of the highest per capita consumption levels of CSD in the region, at an
estimated 129 litres in 2014. Meanwhile, Bolivia accounts for around 40% of Embenor's
annual sales.
Supply Chain Companies Figuring Too
Following a wave of consolidation in beverage manufacturing over the past ten years,
more supply chain industries, such as can manufacturing, will aim to consolidate in
order to improve their relative bargaining power and generate revenue and cost
synergies.
The Porter Five Forces framework is used by strategists to identity where the balance of
power lies between manufacturers, customers and suppliers as part of their industry
analysis. Two of the five tenets of the framework - the bargaining power of suppliers
and buyers - often play a key role in driving M&A activity as suppliers and
manufacturers attempt to tilt the balance of power in their favour, which can enhance
profitability.
When key customers have been consolidating over a period of time - in this case beer
and soft drinks manufacturers - it is inevitable that the supply chain will look to do
likewise. Cans are a very important part of the supply chain for beverage
manufacturers, particularly in Europe and North America where a greater proportion of
beverage products are consumed in can form (glass is still more prevalent in many
emerging markets).
We noted in July 2015 that the pending acquisition of UK-based Rexam by US company
Ball, worth GBP4.3bn, could potentially have a major impact on the industry. The
combined companies would control around two-thirds of European production,
according to The European Commission. Regulators across the world are currently
investigating the deal and it seems highly unlikely that it will get the go-ahead without
significant disposals across Europe, the US and potentially Brazil.
Another important factor driving consolidation in beverage manufacturing and its

supply chain is the mature profile of beer and carbonated soft drinks. On a per capita
basis beer sales and carbonated soda sales are either in decline or growing only
modestly.
Consolidation becomes more attractive when industries mature. From the perspective
of the major can producers, greater scale, potential manufacturing synergies and
perhaps some more clout in negotiating contracts with the drinks manufacturers could
increase profit potential in mature markets. There is also a major emerging markets
angle to the Rexam-Ball deal, as between them the two companies are very strong in a
number of key markets, including Brazil, India and China, where the outlook for volume
growth across soft drinks and beer is much brighter.
Spain: The Emerging Eurozone Opportunity
We noted in August 2015 that Spain provides the strongest long-term food retailing
opportunity out of the major eurozone economies. A stronger consumer spending
outlook to 2019, a relatively under-consolidated retail industry structure and anecdotal
momentum for value and convenience underpin the view that the discount format is
best positioned.
The Spanish economy is improving - our Europe team expects consumer spending
growth in Spain to outperform the other major eurozone economies of Italy, France and
Germany over our 2019 forecast period, although serious structural problems remain
(see 'Growth Masks Underlying Weaknesses', July 30).
As the spending outlook for Spain's economy improves (helped greatly by much lower
energy prices), which will push up inflation (deflation was a major issue in 2014), a key
beneficiary will be food retailing. Within that, the discount format will fare particularly
well, led by Distribuidora Inter de Alimentacion (Dia) and, to a lesser extent, Lidl. With
annual sales of about EUR10bn, Dia is the world's third largest hard discounter behind
Germany's Aldi and Lidl; Spain accounts for about 55% of its total sales. Deflation is
particularly troublesome for retailers, as it lowers the average cost of a basket of
groceries in an industry where profit margins are already wafer thin (5-6% range at the
top end).
We arrive at this positive view of Spain's grocery retail outlook based on some wider
industry themes that are applicable across all major eurozone economies: the growing
power of discounters, the presence of well-managed companies in the space (Dia) and
anecdotal evidence using search engine trends. There are also idiosyncrasies in Spanish
retail, namely the unusually fragmented structure of the food retail sector, as the
Herfindahl-Hirschman Index (HHI) calculation below illustrates.
The Porter Five Forces framework that we deploy below provides a snapshot view of an
industry and can be used to identify areas where value is gained or lost as firms (in this
case retailers), customers and buyers jockey for power and, ultimately, higher absolute
profits and margins.
Porter's Five Forces: Spanish Food Retail Industry
1. Threat of new entrants

Degree: Medium
The formal retail sector remains fairly fragmented compared to other Western
European markets. Only Mercadona has more than a 10% market share. According
to Kantar Worldpanel, the top ten retail chains accounted for 53% of the market in
2014. The relative strength of the Spanish consumer story could see foreign
investment into retail pick up.
2. Bargaining power of suppliers
Degree: Medium
Suppliers (manufacturers) have more bargaining power in Spain that in more

consolidated retail markets, where there are more retailers with 10%-plus market
shares.
To improve their bargaining power some retailers have teamed up to improve their
hand.
3. Bargaining power of buyers
Degree: Low
The end consumers are the customers. At a company level, buyers have a lot of
power as they can switch around in search of deals. At the industry level, which we
are looking at here, they do not hold much power as organised retailers are
dominant and are supplying essential products - food and drink.
4. Threat of substitutes
Degree: Low
If we consider non-chain neighbourhood shops as the main substitute for organised

retail then the informal channel has continued to lose market share over recent
years. The rapid take-up of private label products has brought unit costs down,
while discounters like Dia have combined low price with convenience by targeting
neighbourhoods. The threat of substitutes for organised retail will only weaken,
with neighbourhood stores retaining the niche space by focusing on quality.
5. Degree of competitive rivalry
Degree: Medium
With only one retailer with a 10%-plus market share, rivalry presents itself across all
formats. Supermarkets are the dominant format by a large distance, but
discounters can grow their share considerably given the currently low overall share
the format has. Competitive rivalry will increase going forward as the Spanish
economy improves.
Dia will probably be the most aggressive expander over our 2019 forecast period. It is
one of the best-managed major food retailers in Western Europe - its return on invested
capital to weighted average cost of capital ratio in the year to December 2013 was 1.3,
which was on a par with Poland-focused Jeronimo Martins and far in excess of
Carrefour and Tesco. A ratio above 1 indicates that the company is creating excess
value above the cost of capital in the projects it takes on.
As a format, discount is still much smaller than supermarkets. The gap should narrow
by a few percentage points over the next few years, as Dia and Lidl expand. This will
make it harder for Lidl and Aldi to make the same impression in Spain as they have in
the UK, in our opinion. The two German discounters are expert 'disrupters', in that they
enter well-established developed retail markets and upset the status-quo; however, in
Spain, they face a formidable rival in Dia.
Finally, labour and household structure data comparing the four big eurozone
economies further supports the view that the discount format is best positioned in
Spain. The Spanish population is highly urbanised, with more than 80% of people living
in cities, which supports the discount model as it ties together price and convenience
with stores pitched in urban centres. Also, the unemployment rate remains stubbornly
high compared with the rates in Italy, Germany and France, which will continue to
provide ammunition for the discount format, as value remains so important; private
label penetration of grocery shelves will therefore increase.
SELECTED MARKETS - SELECTED MACROECONOMIC INDICATORS - HISTORICAL AND FORECAST
Geography 2010 2011 2012 2013 2014 2015f 2016f 2017f 2018f 2019f
Germany Real GDP growth, % y-o-y 4.1 3.7 0.4 0.3 1.6 1.8 1.9 1.7 1.3 1.3
Germany Consumer price inflation, % y-o-y, 1.2 2.5 2.8 1.6 0.8 0.4 1.3 1.5 1.5 1.5
ave
Germany Private final consumption, real 0.4 1.3 0.9 0.6 0.9 2.0 2.1 1.8 1.7 1.7
growth % y-o-y
France Real GDP growth, % y-o-y 2.0 2.1 0.2 0.7 0.2 1.1 1.4 1.4 1.5 1.6
France Consumer price inflation, % y-o-y, 1.3 2.1 1.9 1.0 0.4 0.4 0.8 1.2 1.5 1.7
ave
France Private final consumption, real 1.7 0.4 -0.3 0.4 0.6 1.8 1.7 1.4 1.5 1.5
growth % y-o-y
Spain Real GDP growth, % y-o-y 0.0 -0.6 -2.1 -1.2 1.4 2.7 2.4 2.0 2.0 1.8
Spain Consumer price inflation, % y-o-y, 2.1 3.0 2.4 1.5 -0.2 -0.7 0.9 1.5 1.8 2.3
ave
Spain Private final consumption, real 0.3 -2.0 -2.9 -2.3 2.4 3.5 2.8 2.3 2.0 3.0
growth % y-o-y
Italy Real GDP growth, % y-o-y 1.7 0.6 -2.8 -1.7 -0.4 0.7 1.1 0.9 0.8 0.7
Italy Consumer price inflation, % y-o-y, 1.6 2.9 3.3 1.3 0.2 -0.2 0.8 1.4 1.8 1.7
ave
Italy Private final consumption, real 1.3 0.0 -3.9 -2.9 0.3 0.5 0.8 0.8 0.8 0.6
growth % y-o-y
Source: e/f = estimate/forecast. Source: National Sources, BMI
Africa: Consumer Focus - The Food & Drink Angle
Over the Q3 period, BMI's consumer team published a series of articles examining the
state of the African consumer (see 'The African Consumer: 'Bright Stars vs Damp Squibs,'
September 9). From a food and drink perspective, we published two articles comparing
the relative levels of opportunity and profitability for incumbents and potentials in the
beer and formal food retailing industries.
In beer, we argued that the industry would keep its place on the 'main table' of winning
consumer narratives. Excellent profit margins driven by industry structure dynamics
that firmly work in favour of the manufacturers will particularly drive opportunities
across a two-tier strategy focused on 1) premiumisation and 2) low-cost offerings across
the EAC region, Cote d'Ivoire and Nigeria.
Where SAB has numerous market leading positions in fast growing global beer markets
ranging from Colombia to Tanzania, ABI is dominant in three of the biggest and most
profitable beer markets in the world: Brazil, Mexico and the US. It is also increasingly
well positioned in Asia. However, it cannot afford to ignore Africa going forward, and a
company of SABMiller's size is the only acquisition target left that is big enough to
materially impact ABI's growth prospects. Between them, Africa and Latin America
make up more than 60% of SAB's profit pool.
In beer manufacturing, there are markets like Tanzania that are dominated by
SABMiller (owned Tanzania Breweries), meaning the industry structure works firmly in
its favour (ably supported by the pace at which the economy is growing). In others like
Uganda, you have more competition and idiosyncratic industry factors, such as the
targeting of lower income consumers by producing low-cost beer, pitched as a safe
substitute for the informal beer that still is still so ubiquitous across so much of
Southern, Eastern and Western Africa.
Even though per capita consumption of commercial beer is less than 15 litres across
most of the continent, the real level of beer consumption is much higher. Historically,
most multinationals have adopted a premiumisation approach by targeting incremental
volume growth and generating value through relatively high price points - this is most
aptly illustrated by Nigeria. Premiumisation and an industry structure that favours
incumbents provide the raw material for outstanding operating margins, well in excess
of 20% in most cases.
What is absent in Africa are markets where three or four manufacturers are competing,
which is far more common in parts of Asia and Latin America. More competition is good
for consumers and leads to faster volume growth, but is less positive for margins.
The lack of real competition has played a key part in making premiumisation the go-to
strategy for most manufacturers. Given relatively high operating costs across so many
African markets (fuelling generators being high among them), the economics of beer
have been best served by premiumisation, which in large part explains why per capita
consumption of commercial beer has not grown as quickly as might have been
expected.
AB InBev In A Different League, African Margins Much Frothier Tha

Carlsberg and Heineken
Selected African & Global Beer Manufacturers - Trailing 12M Operating Margin (%)
Alcohol Companies Turning To Women
Encouraging female consumption of beer will provide alternative drivers of growth for
leading brewers in Western Europe, the US and Latin America, as women are under-
represented among beer drinkers. Successful strategies for companies to widen their
female audience include more inclusive marketing campaigns, especially for premium
brands, and investing in safer bar environments in Latin America.
As global brewers look for alternative drivers of growth, we see strong opportunities in
encouraging female beer consumption across developed and emerging markets.
Leading beer companies are facing the challenge of stagnating top-line sales, due to
poor industry fundamentals in developed economies on the one hand and a growth
slowdown in key emerging markets on the other. Due to rising health consciousness,
consumers in Western Europe and North America are limiting their alcohol
consumption.
With the exception of the UK, we forecast per capita consumption of alcoholic drinks to
steadily decline or stagnate in key developed markets over the next five years (see chart
below). In the US and UK, beer drinkers are shifting towards craft beer, which poses
additional challenges to beer majors. In parallel, the economic slowdown in key
emerging markets is weighing down on growth prospects. This is particularly the case in
Latin America, which has traditionally been profitable for ABI and SABMiller.
Need To Address Lower Alcohol Consumption

Selected Markets - Beer Sales (Litres Per Capita) - Historical and Forecast
e/f = estimate/forecast. Source: National Sources, BMI
In our view, encouraging the consumption of beer among women will provide growth
opportunities for beer majors. Females traditionally consume less alcohol than males.
In developed markets, the gap between the genders is narrowing, although this is partly
driven by men drinking less. The success of craft beer among young women in the US is
an illustration of this potential. According to the Brewers Association, women aged 21-
34 account for about 15% of craft beer consumption in the US, while they make up only
10% of the total population. This shows the opportunities available by targeting women
when marketing premium beer brands.
Similarly, we see a lot of potential for beer majors to expand their reach in Latin
America by targeting women. According to data gathered by SABMiller, less than 25% of
beer consumed across Latin America is done so by women. Nonetheless, with female
participation in the labour force gradually increasing in the region - and women showing
greater economic independence - we view strong opportunities to increase beer
consumption among this demographic.
Emerging Markets Profit Margin Power
Profit margins in key industries such as beer and carbonated soft drinks are likely to
remain higher in emerging markets, where monopolies are generally more prevalent
than in developed markets. Monopolistic market share fuels bargaining and pricing
power. The Latin American beer sector offers a case in point. A number of key markets
will remain highly profitable over our forecast period to 2019, although we expect sales
growth to be slower than in Asia or Africa.
The three largest beer markets in Latin America - Brazil, Mexico and Colombia - share
favourable market structures for incumbents, translating into high margins. The
Brazilian and Colombian markets are dominated by a single strong player. In Brazil,
Ambev - a subsidiary of ABI - controls about 70% of the market. Meanwhile, in
Colombia, SABMiller enjoys a quasi-monopoly, accounting for more than 95% of sales.
In Mexico, despite the strong presence of two global brewers - ABI (following its
acquisition of Grupo Modelo) and Heineken - the degree of competition is still
moderate. Combined with the limited bargaining power of customers and suppliers, the
Mexican beer market is also highly profitable (see 'Improving Consumption Outlook To
Drive Premium Beer Expansion', February 13). As a result, the Latin America business units
of beer majors tend to drive margins up.
Food Retail Not As Attractive, Yet
It is important to distinguish food and particularly beverage manufacturing from food

retailing. The economics of food retailing across Africa, with the exception of a few
markets, are not nearly as developed. Food retailing is structurally a much lower-margin
business (typically 5-6% operating margins at best) and relies heavily on the strength of
local and regional manufacturing, as well as local logistics and real estate.
We argued that traditional outlets would continue to dominate the food retail sector in
Africa over our forecast period to 2019, despite the rapid expansion of mass grocery
retail driven by high investment levels. Foreign retailers are still cautious when entering
African markets - due to the required high levels of fixed assets and operating risks -
and modern forms of consumption remain inaccessible to large segments of the
population. Targeting higher-income households, especially in West Africa, offers the
greatest opportunities.
Despite ongoing formalisation, traditional outlets will remain the dominant grocery
retail format over our forecast period and beyond. First, as MGR sales are growing from
a low base - accounting for no more than 5% of total food retail sales in countries like
Nigeria and Cote d'Ivoire - it will take some time for the formal sector to catch up with
traditional corner stores. Second, while South African and global retailers are
increasingly targeting key opportunities like Nigeria, Cote d'Ivoire or the East African
Community (EAC), the pace of store openings remains relatively cautious, as retailers try
to find the best way to make organised retail work in the region.
This can be explained by the high level of fixed assets required in retail and the poor
utilities and transportation networks in many countries - making it difficult to transport
and distribute goods. Anecdotally, it can take up to 117 days for Shoprite's stocks to
reach stores in Nigeria. Combined with low margins in the sector - usually between 3%
and 6% for operating margins, which is much lower than in processed food or drinks -
profitability can be hard to achieve, further explaining the cautious approach. Third,
formal retail will remain inaccessible to large segments of the population. By 2019, we
estimate that more than 40% of Kenyan households and just below 70% of Ghanaian
households will have net income below USD1,000, limiting access to modern forms of
consumption.
Infant Formula Provides Margin And Growth
Infant formula will remain one of the most attractive sectors within the global food and
drink industry, especially in emerging markets. Asia will be the most attractive region
for infant formula producers, driven by a combination of large consumer bases, rising
disposable incomes and women entering the labour force.
Globally, infant formula stands out as the most attractive sub-component of the wider
packaged foods industry, based on its profitability and growth profile. We highlight
some key reasons why below:
Margin profile: Unlike the other major food sub-categories, such as processed foods,
canned foods, pasta, soup and others, infant formula brands are generally far less
substitutable due to the nature of the product. A good deal of spending goes into
marketing brands and developing reputations for quality so higher price points can
be charged, which pushes up gross margins beyond those that other areas of food
manufacturing can generally reach.
Exposure to emerging markets: Birth rates are much higher in emerging markets and
key ones like China, Brazil and Russia have been huge markets for infant formula
manufacturers like Mead Johnson for some time. It derives most of its sales from
growth markets.
Growth outlook: Given how well suited this industry is to the emerging market
consumer story, there is much more growth expected over the longterm compared
with other, less dynamic areas within the wider packaged food market.
Mead Johnson is the leading global pure-play infant formula company. Other key
players include Nestl and Danone. Over the next five years, we believe that emerging
Asia will be the most attractive region for infant food manufacturers. First, countries
such as Indonesia and the Philippines offer sizeable and young consumer bases. For
instance, the Philippines had an estimated population of 100.1mn in 2014, with children
below four years of age accounting for 11.5% of the total. Second, as disposable
incomes rise over the next five years, infant formula products will become more
affordable and sales will expand rapidly, especially considering that infant formula is
already very popular in those countries. For instance, Indonesia is already Danone's
second-largest market globally for baby food. Therefore, as GDP per capita rises from
USD3,441 in 2014 to USD5,537 in 2019, infant formula sales will accelerate. Third, higher
female participation in the labour market will also drive infant food sales.
Rising Wages A Major Threat To Weakened Industries
We noted in July 2015 that the introduction of a GBP9 minimum wage in the UK over the
next five years will disproportionately impact the on-trade alcoholic drinks industry, as
wages make up a much higher proportion of operating costs per pint of beer sold at a
pub compared to a formal retail outlet.
Earlier in June we highlighted some of the structural issues facing the UK pub industry
(see 'Why Some Pubs Might Sell More Coffee Than Beer,' June 9) using JD Wetherspoon
(Wetherspoons) successful positioning in breakfast as a case study. Battling a
fundamental shift towards off-trade drinking that has accelerated since the global
financial crisis of 2008 and the smoking ban that took effect a year earlier, the pub
industry has been in a state of decline.
Larger chain-pubs like Wetherspoons have adapted particularly well to the new reality
of a smaller industry. Wetherspoons has been able to increase its market share and
diversify successfully, allowing it to grow in a declining market. The pub industry faces
another major challenge in its efforts to re-address the balance of power switch
towards off-trade, as the UK government has announced plans to introduce a GBP9 per
hour minimum wage over the next five years.
Labour costs account for a much higher proportion of the total cost involved in selling a
pint of beer at a pub compared to a formal retail outlet. Going forward, the impact will
be much more severe on the already struggling small pub industry, with larger chains
like Wetherspoons much better positioned to cope, particularly as newer business lines
like breakfast are faring so well.
Developed World Food Retailing: A New Era Of Targeted Capex
We have argued over the course of 2015 that the greatest food retail opportunities in
developed markets will be in convenience and e-commerce. Leading global retailers will
maintain moderate levels of capital expenditure over the coming years. While Walmart
and Carrefour will focus their spending on e-commerce and improved services, Tesco
will continue to cut capital expenditure, reflecting excessive store expansion in the past.
Over our forecast period to 2019, demand for convenience will drive growth in the MGR
sectors of developed economies. Hypermarkets will underperform, while the greatest
opportunities will be concentrated in the convenience and discount formats, as well as
in online retail (see 'Food & Drink Global Industry Overview - Q115', April 15). Therefore,
leading retailers such as Walmart, Tesco and Carrefour are stepping up to diversify their
operations and reduce their bias towards the hypermarket format.
Combined with changes in the structure of the MGR sector, market saturation has
translated into lower capital expenditures (as a proportion of sales) over the past five to
ten years. Since 2008, leading global retailers have cut their capital expenditures due to
tough macroeconomic conditions in their home markets.This phenomenon was
particularly salient for Tesco, as the so-called 'space race' in UK retail led to rapid store
expansion in the 2000s and often led to unprofitable decisions (see 'Tesco: Worst Past,
But Weak Recovery Ahead', April 24).
Over the next few years, we expect capital expenditures/sales ratios to remain
moderate for global food retailers, with capital expenditures more targeted at
improving in-store services and e-commerce systems, rather than expanding store
counts as seen previously. Nonetheless, we expect a diverging path between Carrefour
and Walmart on the one hand and Tesco on the other. Carrefour and Walmart have
addressed issues in their domestic markets, where sales have now started to recover.
Carrefour will increase its capital expenditures from EUR2.4bn in 2014 to EUR2.5-2.6bn
in 2015, focusing on renovating existing stores and improving in-store services, while
Walmart will increase its investment in e-commerce. On the other hand, Tesco will
continue to cut its capital expenditures, reflecting past excesses in the UK retail sector
and the need to cut spending to offer lower prices to consumers.
The Manufacturers Side: Australia Case Study
Australia's food retailing industry is dominated by two players. Coles (owned by

Westfarmers) and Woolworthstogether account for about 80% of the organised food
retail market, making Australia's one of the most concentrated food retail markets in
the developed world. We computed Australia's estimated Herfindahl-Hirschman Index
(HHI) score (see the table below), alongside the UK and the USA, in order to illustrate this
point. Such is the extent of the duopoly that, according to local news reports, for every
Australian dollar spent in food retail, AUD0.80 goes to either Coles, Woolworths or one
of their affiliates.
In a developed market like Australia, where the vast majority of food sold is in formal
stores, food and drink manufacturers prefer a much less consolidated market. The
sheer size and reach of Coles and Woolworths gives them significant power in the
negotiating of contracts. Large manufacturers have limited bargaining power, as they
cannot afford to have their products not sold by either.
Over recent years, the private label category has grown significantly and has been
increasingly targeted by the Australian retailers, putting further gross margin pressure
on many food manufacturers. They have had to compete against a tide of growing
interest in private label and value products, illustrated by the success of Aldi, which is
now very close to being the third-biggest retailer in Australia by market share, at about
7%.
In 2011, global food manufacturer Heinz (before it was bought by 3G Capital and
subsequently merged with Kraft Foods in 2015) publically criticised the structure of the
Australian retail market and said it was a very difficult environment for suppliers.
Although spending levels are high on a per capita basis, the relatively small size of the
consumer market (population of 23mn) and the structure of the retail market will
continue to temper Australia's appeal for global manufacturers.
AUSTRALIA, UK AND USA ESTIMATED HERFINDAHL-HIRSCHMAN INDEX SCORES - FOOD RETAIL
INDUSTRY
Australia 2689
UK 1128
USA 962
Note. Herfindahl-Hirschman Index is used to assess the level of concentration in an industry. It is calculated by adding
the squares of the market shares of the top eight companies in a particular industry. 1000-1800 = moderately
concentrated and > 1,800 = highly concentrated. Source: Trade Press, BMI.
Tapping Into Convenience: UAE Case Study
We argued in September 2015 that convenience stores would outperform within the
UAE's MGR sector over our forecast period to 2019. In an expanding market with strong
medium-term growth prospects, convenience is becoming an increasingly important
driver of growth in the wider food retail sector.
The organised food retail sector has historically been dominated by hypermarkets,
often positioned adjacent to large shopping centres. In 2014, hypermarkets accounted
for about two-thirds of total MGR sales. Although hypermarkets are expected to
maintain their dominant position in the next five years, their overall share of the MGR
market is forecast to decline to below 65% by 2019.
In recent years, there has been rising demand from local customers for more
convenience-led retail, especially in Dubai and Abu Dhabi. Compared with hypermarkets
within large shopping centres, convenience stores tend to be less crowded, providing
customers with a more pleasant shopping experience.
They also offer greater proximity, as they are anchored in local residential areas. For
instance, retailer Majid Al-Futtaim, which owns the regional franchise for Carrefour,
initially built up its network of hypermarkets in the UAE within large shopping centres,
but has more recently switched its focus to convenience stores.
We also expect opportunities to arise with the development of community shopping

centres, as a response to the demand for proximity. Located in residential areas,
community shopping centres are organised around smaller-format food retailers.
UAE FOOD RETAIL SALES BY FORMAT - HISTORICAL & FORECAST
2010 2011 2012 2013 2014 2015f 2016f 2017f 2018f 2019f
Convenience store sales, USDbn 0.2 0.2 0.3 0.3 0.3 0.4 0.5 0.6 0.7 0.8
Hypermarket sales, USDbn 3.3 3.5 3.7 3.9 4.2 4.6 5.1 5.6 6.0 6.4
Supermarket sales, USDbn 1.4 1.5 1.5 1.6 1.8 2.0 2.2 2.5 2.8 3.2
Total mass grocery retail sales, USDbn 4.8 5.2 5.4 5.9 6.4 7.0 7.8 8.6 9.5 10.4
e/f = estimate/forecast. Source: National Sources, BMI
Japan: Shifting Demographics To Influence Consumer Preferences
We noted in September 2015 that shifting demographics would influence consumer

tastes in Japan. While a declining population will weigh on food and drink volume sales,
segments such as convenience stores or functional drinks will benefit from Japan's
ageing population. Adapting packaging and marketing to older consumers will also be
essential.
We expect ageing populations across developed markets to have a long-term impact on

consumer preferences. On the back of falling birth rates and healthier populations, this
trend is affecting most countries in Western Europe and developed Asia. Japan is
particularly affected by this demographic trend, with an estimated 26.3% of its
population above the age of 65 in 2014. This trend will intensify over the coming
decades. By 2050, we forecast that 36.3% of the Japanese population will be above 65,
while 51.3% will fall into the 15-64 age bracket (against 61.4% in 2014).
As a whole, we expect these demographic dynamics to have a negative impact on the
food and drink sector. The Japanese population has shrunk for the past few years, after
reaching a high of 127.3mn between 2007 and 2011. We forecast the population to
decline below 110mn by 2050. Combined with the weak growth outlook of the Japanese
economy, this factor will weigh on food and drink volume growth, while the overall
industry will experience limited value growth over the next five years. We forecast total
food consumption to grow by a compound annual growth rate of 0.2% over 2014-2019,
which equals to per capita growth of 0.5%. Reflecting this weak growth outlook, leading
food companies are focusing on expanding their overseas operations, in order to find
alternative growth drivers.
However, we still see solid growth opportunities in some sub-segments, or by adapting

products and marketing to older consumers. Globally, older people are getting richer
and healthier, and Japan is no exception. According to Help Age's 2015 Global Age Watch
Index, Japanese ranks eighth globally in terms of quality of life of the elderly. Targeting
the 65-plus age group will therefore provide niche opportunities for food and drink
companies. We highlight below a few key segments.
Convenience stores: While the outlook for the Japanese mass grocery retail sector is
subdued (see 'Home Market Offers Few Comforts For Retailers', June 29), the
convenience segment will be the relative outperformer. In particular, we expect
older consumers to favour this format, driven by a preference for proximity and
accessibility. In addition, older consumers tend to shop more often to buy a small
number of goods, rather than longer and less frequent trips to hypermarkets.
Functional drinks: Japan already has a well-established functional drinks market, and
we expect this segment to benefit from rising demand for medicinal or vitamins-
enriched drinks among the elderly.
In addition, food and drink companies seeking to target older consumers will need to
adapt packaging and marketing to attract this age group. Older consumers often do not
recognise themselves in advertising campaigns; they feel that marketing focuses on
younger consumers, or pictures older people negatively. We also see opportunities for
food manufacturers to adapt their packaging, for instance by offering products that are
easier to open.
South Africa: When Domestic Companies Hold Their Own
South Africa will offer an array of opportunities for the fast food sector over the next
five years, driven mainly by a strong eat-out culture. Foreign fast food companies will
intensify their efforts to expand in the country, while domestic players will remain as
competitive as ever.
South Africa will be the most attractive market for food services across Sub-Saharan
Africa, on the back of a regionally high urbanisation rate and large middle class. The
industry is already very well developed with a number of local chains, a strong eat-out
culture and high meat consumption driving opportunities for fast food. In South Africa,
fast food chains are popular among wealthy individuals and among the growing middle
class.
Foreign fast food companies will continue to expand quickly in South Africa during the
next five years. In addition to being a fast-growing market, South Africa is often the first
step towards broader expansion in Sub-Saharan Africa. Yum! Brands (owner of KFC and
Pizza Hut) is already well established in the country, with more than 700 KFC
restaurants. Following KFC's success, Yum! Brands re-opened its first Pizza Hut outlet on
September 18 2014, after six years of absence. Since its first store opened in May 2013,
Burger King has also expanded quickly in South Africa, and plans to operate 100
restaurants by 2015.
South Africa has a strong eat-out culture and the domestic fast food segment is very
well developed. Domestic players, such as Famous Brands (FB) and Spur, have
performed well over the past few years. FB's sales grew at a compound annual rate of
12.8% over 2009-2014, with Spur's sales increasing at a rate of 18.9% over 2009-2013. FB
owns more than 1,900 restaurants in South Africa, including Steers (burgers) and
Debonairs (pizzas). The popularity of Steers (more than 500 restaurants) has
constrained the expansion of McDonald's in the country.
FOOD AND DRINK CORE VIEWS - Q315 ROUNDUP
Short-Term Outlook
Grain prices to trade sideways over the Q415 period.
Consumer sentiment in the eurozone area to remain particularly weak with the exception of the UK and to
some extent Spain. US to remain a developed world outperformer.
Deflation to ease across a number of European economies, including Spain and Poland. This will particularly
affect food retailing across all formats - including discounting.
Long-Term Outlook
Intense consolidated activity to continue across the global food and drink industry; organic growth and cost-
cutting have been the key area of focus since 2008. Manufacturers and retailers will look for deal synergies
and greater market power as they look for a leg up on one another.
Companies with strong emerging market exposure will largely continue to outperform in underlining sales
growth (stripping out foreign exchange impact of weak emerging market currencies), although the best
opportunities may now be beyond the BRIC countries.
Legacy packaged food and drink brands (such as Coca-Cola and a number of mainstream beer brands)
underperforming as Millennial consumers reshape consumption patterns; instead, relatively new, niche
categories performing better (craft beer, fast casual)
Profit margins in key industries such as beer and carbonated soft drinks likely to remain higher in emerging
markets as monopolies are generally more prevalent than in developed markets. Monopolistic market share
fuels bargaining and pricing power.
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.
Infant formula will be one of the most attractive categories in food manufacturing due to its margin profile
and potential for growth in emerging markets where birth rates are generally high and incomes are rising.
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.
Intensifying competition in food retail in developed markets will lead to an era of lower profit margins and
more targeted capital expenditure investment.
Emerging market-based industry players and private equity firms will increasingly pursue developed market
investments for the purposes of diversification, access to stellar brands and potentially the transfer of
technology as well.
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.
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 and increasingly
in other key emerging economies like India.
Craft beer will outperform mainstream beer in many developed beer markets such as the US and UK.
Source:BMI
Demographic Forecast - Demographic Outlook 2016

Sep 21 2015 Philippines Demographic Forecast Economy
Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting

model. Not only isthe 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 productivitygrowth 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)
f = BMI forecast. Source: World Bank, UN, BMI

Philippines Population Pyramid
2015 (LHS) & 2015 Versus 2050 (RHS)
Source: World Bank, UN, BMI
POPULATION HEADLINE INDICATORS (PHILIPPINES 1990-2025)
1990 2000 2005 2010 2015f 2020f 2025f
Population, total, '000 61,947 77,932 86,141 93,038 100,699 108,435 116,151
Population, % y-o-y na 2.2 1.8 1.5 1.6 1.4 1.3
Population, total, male, '000 31,292 39,249 43,293 47,059 50,812 54,578 58,308
Population, total, female, '000 30,654 38,683 42,848 45,979 49,886 53,856 57,843
Population ratio, male/female 1.02 1.01 1.01 1.02 1.02 1.01 1.01
na = not available; f = BMI forecast. Source: World Bank, UN, BMI
KEY POPULATION RATIOS (PHILIPPINES 1990-2025)
1990 2000 2005 2010 2015f 2020f 2025f
Active population, total, '000 34,640 45,414 51,235 57,903 63,915 69,513 74,935
Active population, % of total population 55.9 58.3 59.5 62.2 63.5 64.1 64.5
Dependent population, total, '000 27,307 32,517 34,906 35,135 36,783 38,921 41,215
Dependent ratio, % of total working age 78.8 71.6 68.1 60.7 57.6 56.0 55.0
Youth population, total, '000 25,360 30,001 31,957 31,270 32,171 33,363 34,386
Youth population, % of total working age 73.2 66.1 62.4 54.0 50.3 48.0 45.9
Pensionable population, '000 1,946 2,516 2,948 3,864 4,611 5,558 6,828
Pensionable population, % of total working age 5.6 5.5 5.8 6.7 7.2 8.0 9.1
URBAN/RURAL POPULATION & LIFE EXPECTANCY (PHILIPPINES 1990-2025)
1990 2000 2005 2010 2015f 2020f 2025f
Urban population, '000 30,100.2 37,372.4 40,144.5 42,104.8 44,683.3 47,993.7 52,170.6
Urban population, % of total 48.6 48.0 46.6 45.3 44.4 44.3 44.9
Rural population, '000 31,847.1 40,559.8 45,996.9 50,934.1 56,016.1 60,442.1 63,980.8
Rural population, % of total 51.4 52.0 53.4 54.7 55.6 55.7 55.1
Life expectancy at birth, male, years 62.6 63.7 64.1 64.5 65.0 65.7 66.3
Life expectancy at birth, female, years 68.1 69.8 70.5 71.2 71.9 72.7 73.5
Life expectancy at birth, average, years 65.3 66.7 67.2 67.7 68.3 69.1 69.7

POPULATION BY AGE GROUP (PHILIPPINES 1990-2025)
1990 2000 2005 2010 2015f 2020f 2025f
Population, 0-4 yrs, total, '000 9,450 10,738 11,408 10,730 11,254 11,568 11,732
Population, 60-64 yrs, total, '000 983 1,444 1,693 2,262 2,708 3,338 3,861
Population, 65-69 yrs, total, '000 788 1,070 1,239 1,507 1,953 2,351 2,916
Population, 70-74 yrs, total, '000 548 672 855 1,162 1,216 1,589 1,925
Population, 75-79 yrs, total, '000 362 447 480 721 845 892 1,177
Population, 80-84 yrs, total, '000 178 221 257 341 424 505 541
Population, 100+ yrs, total, '000 0 0 0 0 0 0 0
POPULATION BY AGE GROUP % (PHILIPPINES 1990-2025)
1990 2000 2005 2010 2015f 2020f 2025f
Population, 0-4 yrs, % total 15.25 13.78 13.24 11.53 11.18 10.67 10.10
Population, 100+ yrs, % total 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Glossary - Glossary
Jan 4 2013 Global Glossary Food & Drink
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 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 drinks sales (including carbonates, fruit juices, energy drinks, bottled
water, functional beverages and ready-to-drink tea and coffee), alcoholic drinks 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.
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
2,500sq m in size. Traditionally only found on the outskirts of towns, 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 300sq m, 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 500sq m and 1,500sq m 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 300sq m in size, with long opening hours and located in high footfall
areas. These stores mainly sell fast-moving 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.
Methodology - Methodology
Oct 23 2014 Global Methodology Food & Drink
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
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 thatcould 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 World Trade Organization
(WTO), the World Health Organization (WHO), the UN Food and 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, and the openness of the 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 calls 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.
FOOD & DRINK RISK/REWARD INDEX INDICATORS
Rewards
Industry rewards
Food and drink consumption Indicator denotes overall breadth of market. Wealthier markets score higher.
per capita, USD
Per capita food consumption Lead Food & Drink growth indicator. Scores based on compound annual growth
growth, five-yearcompound over our five-year forecast period.
annual growth, %
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, USD 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, % The size of the 0-15 age group as a percentage of the total working age
population. Younger populations are generally considered to be more desirable.

Risks
Industry risks
Mass grocery retail The proportional contribution of the organised food retailing sector; higher
penetration, % 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 as % 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
Weighting: Given the number of indicators/datasets used, it would be inappropriate to

give all sub-components equal weight. Consequently, the following weights have been
adopted:
WEIGHTING
Component Weighting
Rewards 60%
- Industry rewards 30%
- Country rewards 30%
Risks 40%
- Industry risks 20%
- Country risks 20%
Source: BMI
2016 Business Monitor International Ltd. All rights reserved.

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You are here: Home Reports Reports Philippines Food & Drink Report

Philippines Food & Drink Report

BMI Industry View - Philippines - 2016

Headline Industry Data (local currency)

2015food consumption (local currency) growth: +4.9%; compound annual growth

SWOT - Food - Philippines - 2016

ahead of implementation of the ASEAN Economic Community.

consumers to make the switch.

products and consumption methods.

Implementation of the ASEAN Economic Community will expose the Philippines to

Industry Forecast - Consumer Outlook - Philippines - 2016

Enter the body here

Private final consumption growth in 2015: +6.0%; in 2016: +5.7%.

No change in forecasts since Q4 2015.

Inflationary pressures will remain limited in 2016.

Strong Domestic Demand Will Support Economic Growth

Source: BMI, NSCB

Industry Forecast - Food - Philippines - 2016

BMI View: Rising

Strong outlook for the sugar confectionery and gum segments.

While we forecast strong real GDP growth to 2019, widespread inequalityisexpected to

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

2012 2013e 2014e 2015f 2016f 2017f 2018f 2019f

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

Rising Consumer Affluence: With confectionery products typically viewed as

Sustained Sector Investments: Investment by industry players such as Universal

2012 2013e 2014e 2015f 2016f 2017f 2018f 2019f

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

2014e 2015f 2016f 2017f 2018f 2019f

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

Structural Trends - Hot Drinks

2014e 2015f 2016f 2017f 2018f 2019f

Coffee sales, PHPmn 34,962.6 36,677.5 38,524.1 40,772.9 43,238.6 45,883.8

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

Structural Trends - Soft Drinks

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

SOFT DRINKS SALES, PRODUCTION & TRADE (PHILIPPINES 2014-2019)

2014e 2015f 2016f 2017f 2018f 2019f

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

2014e 2015f 2016f 2017f 2018f 2019f

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

Industry Forecast - Mass Grocery Retail - Philippines - 2016

BMI View: The

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

Hypermarket format will outperform throughout our forecast period.

2014e 2015f 2016f 2017f 2018f 2019f

Hypermarket sales, PHPbn 40.8 44.1 47.9 52.3 57.0 62.0

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

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

Economic Analysis - Slight Growth Downgrade Despite Underlying

Export Headwinds A Drag On Growth

Source: BMI, NSCB

Domestic Investment Activity Firming Up

A continued pick-up in private sector investment activity looks particularly compelling

Catalysts To Faster Investment Growth

Domestic Consumption To Remain Strong

Two Key Risks To Economic Growth

Private Consumption: We forecast private consumption's share of GDP to decline

Government Consumption: We forecast government consumption as a share of GDP

ECONOMIC ACTIVITY (PHILIPPINES 2010-2019)

f = BMI forecast. Source: BMI, NSCB

Industry Risk/Reward Index - Japan & Australia Overtaking China

BMI'sFood & Drink Risk/Reward Index assesses a market's attractiveness to industry