Germany Food and Drink Report Q3 2012

Since the arrival of Mario Draghi at the ECB in autumn 2011, the long-standing dominance of the Bundesbank appears to have faded in favour of a more accommodative approach. This could mean that Germans will increasingly need to contend with a more inflationary outlook, which bodes ill for a household sector in which as much as 17.1% of disposable income is saved, while the equivalent of 5.1% of GDP is being lent out to the rest of the world in the form of Germany's current account surplus. We therefore do not rule out a gradual shift in cultural perceptions of maintaining high savings, should loose monetary policy from the ECB persist, and barring a break-up of the European Monetary Union (EMU) – not our core scenario – German households may increasingly feel compelled to step up their spending habits.

Headline Industry Data (local currency)

2012 per capita food consumption = +2.5%; forecast to 2016 = +15.5%

2012 alcoholic drink sales = 0.8%; forecast to 2016 = +3.6%

2012 soft drink sales = +2.8%; forecast to 2016 = +15.6%

2012 mass grocery retail sales = +4.5%; forecast to 2016 = +28.4% Key Company Trends Henkell Positions For Sparkling Growth With Cava Acquistion: In March 2012, privately owned German wine and spirit producer Henkell & Co. Sektkellerei KG announced the acquisition of Spanish Cava producer Cavas Hill for an undisclosed price. Henkell's existing focus on sparkling wine means the move into Cava represents a close fit with its current portfolio. While overall sales for the non-champagne sparkling wine sector are not compiled, the results from individual producers suggest the sector has grown strongly over the past three years thanks to increased demand for affordable sparkling wine.

German Beer Exports Have Huge Potential: As a country with such a renowned brewing heritage, BMI has long believed that German producers have been slow to capitalise on the tremendous export opportunities for German beer. With the exception of Beck's, which has achieved worldwide distribution, there are few German brands that have achieved global recognition. However, a decline in the domestic market means that more producers are having to look abroad for growth and the latest results from Paulaner, which announced export growth of 40% in 2011, suggest that there is pent up demand for traditional German beer.

Key Risks To Outlook Eurozone Uncertainty: We caution that a sharper deceleration of the global economy and an escalation of the eurozone sovereign debt crisis – potentially resulting in a disorderly default by Greece or the collapse of a major financial institution in Europe – would present substantial downside risks to our growth forecast.

Export Competitiveness: A deteriorating global economic outlook and the prospect of major fiscal austerity across Europe in the near-to-medium term could see German exports underperform our current projections. This is a particular risk in light of signs of slowing demand in emerging market economies, such as India and China, upon which German exporters have grown increasingly reliant in recent years.