Spain Food and Drink Report Q2 2012

Spain looks set to sink into economic depression as the government pushes ahead with increasinglyaggressive fiscal austerity amid a rapidly deteriorating domestic environment. Even in the case of asignificant improvement in external demand, Spain's chronic uncompetitiveness and labour inflexibilityleaves the country with very little economic potential over the coming years. While not yet in a technicalrecession given the flat growth recorded in Q311, we hold to our view that a rapidly deterioratingmacroeconomic environment in Spain will result in the economy contracting by 2.1% in real GDP termsin 2012.

Headline Industry Data

.. 2012 per capita food consumption = +1.5%; forecast to 2016 = +9.7%

.. 2012 alcoholic drink sales = +1.1%; forecast to 2016 = +9.1%

.. 2012 soft drink sales = +1.8% ; forecast to 2016 = +13.5%

.. 2012 mass grocery retail sales = +2.0%; forecast to 2016 = +12.9%Key Company Trends & DevelopmentsWeak Spanish Market Pushes International Growth – The current weakness of the domestic Spanishmarket is an added incentive for well-capitalised local food producers to focus on international expansionand this is highlighted by two recently announced deals. First, Spanish dairy firm Kaiku announced thepurchase of Tunisia-based CLM-Vitaliat, the country's second largest dairy producer with revenues ofaround EUR70mn. Secondly, Spain's largest food firm Ebro Puleva announced the acquisition of twopasta brands from US-based Strom Products in a deal worth EUR50mn. Spain's weak economicenvironment is likely to put pressure on consumption over our entire five year forecast period and firmswith a stronger international presence are likely to outperform.

Maxima to Launch in Spain – Unconfirmed reports in early 2012 suggest that Lithuanian retailer Maximais about to complete talks on the acquisition of Spanish retailer DinoSol. Reportedly both El Arbol andCarrefour had also been interested in acquiring DinoSol but both have backed out of the race. DinoSol isone of the country‘s leading grocery retailers with projected sales of EUR1.38bn in 2011. Around 75% ofthe group‘s 400 plus stores are in the Canary Islands, operating under the HiperDino, SuperSol andCashDiplo banners.

Key Risk to Outlook

Eurozone Debt Crisis – Risks to the downside for the Spanish economy remain sizeable, as the domesticbanking sector remains highly susceptible to write-downs on foreign assets (specifically Portuguesesovereign debt), particularly in the case of a disorderly default or outright departure from the eurozone. Afurther knock to investor confidence would act to depress economic activity across the region evenfurther, which would prompt us to reassess our Spanish growth forecasts.Fiscal consolidation – The other major risk to the downside regards the government's aggressive push forfiscal consolidation in light of the previous government missing its deficit targets. As we stated above, ifthe new administration applies the fiscal breaks too hard, this could exacerbate an already pronounceddownturn in the domestic sector.