Russia Food and Drink Report Q3 2012

Ongoing disinflation, low unemployment and relatively low household leverage suggest that domestic demand conditions in Russia will remain relatively sanguine in 2012. There is plenty of investment continuing to take place across sectors such as food retailing, which bodes well for the consumer sector.

Headline Industry Data

2012 per capita food consumption (local currency) = +10.2%; forecast compound annual growth rate (CAGR) to 2016 = +10.5%

2012 beer volume sales = 2.8%; forecast CAGR to 2016 = +2.9%

2012 mass grocery retail sales (local currency) = +24.4%; forecast CAGR to 2016 = +28% Key Company Trends Sector Investments Intensifying: French canned and frozen food producer Bonduelle has agreed a deal to purchase the Russian and Commonwealth of Independent States (CIS) assets of fellow French food producer CECAB for an undisclosed price. The deal includes the D’Auacy and Globus canned food brands, as well as a 6,000-hectare cooperative and a factory in the town of Timachevsk, Russia. The acquisition comes shortly after Bonduelle agreed a deal to ramp up its Brazilian exposure and suggests the firm is currently keen to expand its emerging market reach. US ice cream firm Baskin Robbins’ outlet network in Russia and the CIS has grown to 230. The firm has increased the number of outlets by 100 since the beginning of 2009, expanding into 13 new cities. It has stores in 81 Russian cities, though most of the cafés are in Moscow.

Mitigating Subdued Same-Store Sales With Store Expansions: Russian food retailer Dixy posted a 59.1% year-on-year (y-o-y) rise in sales, to RUB102.2bn (US$3.36bn), in FY11 (ended December 2011).

The rise was attributed to the recent acquisition of smaller rival Victoria Group by the retailer in June 2011. Like-for-like sales grew by 6.3% y-o-y during the year, and Dixy launched 255 new outlets in the country. Although X5 reported a 32% growth in its overall sales for the year ending December 2011, the retailer’s like-for-like sales in Q411 declined by 2% in local currency terms, bearing out the faltering strength of domestic demand. While we have a cautious near-term domestic demand outlook in Russia, we believe X5’s discount retail strength and continued store expansions will allow it to weather the macroeconomic headwinds relatively well.

Key Risks To Outlook Our core forecasts for Russian growth in the near future rest on several key assumptions, such as a relatively smooth return to the presidency for Putin following the March 4 election, the Bank of Russia opting for further interest rate cuts, and the eurozone holding together. However, the risks of any of these assumptions not playing out in their entirety are high and would have profound repercussions for Russia’s near-term growth outlook and, by extension, domestic demand. Politically speaking, key challenges that need to be addressed include institutional weakness, managing demographic decline, combating an ongoing insurgency in the North Caucasus and planning for an uncertain geopolitical environment. Should inflationary pressures start to creep up, though not our core scenario, this could tie the central bank’s hands and even force renewed policy tightening, which will put a greater strain on consumer purchasing power.