Australia Food and Drink Report Q3

We expect a poorer performance from the Australian economy in 2012, and are downgrading our growth forecast to 0.8% on the back of lower domestic demand and weaker offsetting factors. Although 2011 has been a relatively smooth sailing year, our view of a hard landing in China and a collapse in the domestic housing bubble mean that there will be very few supporting factors for the Australian economy in 2012.

Although in the short term domestic demand will continue to be weak, more moderate growth is forecast for Australia’s food industry over the medium term driven by rising consumer confidence and healthy population growth.

Headline Industry Data

2012 per capita food consumption = +0.8%; forecast to 2016 = +5.5%.

2012 soft drinks sales = +2.5%; forecast to 2016 = +10.5%.

2012 alcoholic drinks sales = +1.5%; forecast to 2016 = +9.7%.

2012 mass grocery retail sales = +3.3%; forecast to 2016 = +18.1%. Key Industry Trends CCA Could Lean on Indonesia – Australian soft drinks producer Coca-Cola Amatil (CCA) recently reported growth of 6.9% and 19.0% in its sales revenues and net profits respectively for the year ending December 2011. While CCA continues to face earnings pressure in its major markets of Australia and New Zealand, it has been able to offset these pressures with a stronger showing in Indonesia. In the near term, Indonesia should continue to lend strong support to bolster CCA's headline growth. Despite the near-term uncertainties in Australia, it remains a key growth pillar to CCA, and the company's plans to expand its footprint beyond the domestic soft drinks sector should help it secure sustainable growth in the longer term.

Costco Outlines Expansion Plans – In spring 2012, US warehouse retailer Costco outlined plans to open two more stores in Australia in 2013 after higher-than-expected sales since its first outlet opened in the country in 2009. The retailer currently operates three stores in Australia. Although coy about its exact financial performance Costco has said ‘that both sales and membership have exceeded our expectations.

We see a lot of opportunity here with our model and look forward to opening throughout Australia.’ Risks To Outlook Growth in exports is at risk with a slowdown in China, given that on average 27% of total exports are bought by the Chinese. If we include exports to other countries which equally have huge exposures to China, the figure rises to 47%, up from just 32% in 2000. With a large proportion of Australian exports reliant on the continual growth in Chinese infrastructure, export growth is likely to continue to fall.

Indeed, the external environment continues to weaken, with the slowdown in the Chinese economy threatening to blow out hopes of greater export demand. In addition, the government faces the risk of a widening fiscal gap if an Australian property slump falls into a recession. We highlight that a sharp fall in residential home prices would place immense strain on mortgage-laden Australian banks.