Thailand Food and Drink Report Q1 2013

Despite short-term economic weakness owing to sluggish export demand and growing problemssurrounding the rice mortgage scheme, we remain optimistic about the medium- as well as longer-termdevelopment of Thailand's food and drinks market. Thailand has a young and fast-growing population,receptive to new products and tastes, which offers dynamic opportunities in the mass grocery retailmarket. Overall growth will be supported by expanding economy.

Headline Industry Data (local currency)

2013 food consumption value growth = +6.40%; compound annual growth rate (CAGR) forecast to 2017 = +6.21

% 2013 soft drinks value sales growth = +6.8%; CAGR forecast to 2017 = +7.48

% 2013 alcoholic drinks value sales growth = +5.57%; CAGR forecast to 2017 = +5.33

% 2013 mass grocery retail sales growth = +5.96%; CAGR forecast to 2017 = +6.41

%Key Industry Trends

Thai Company Wraps Us PepsiCo Deal and Launches First Cola Drink - In November 2012, Thailandbeverage company Serm Suk announced the launch of its first cola drink. The company, which recentlyterminated its long-running agreement with US beverage manufacturer PepsiCo, expects to register salesof THB8bn (US$260mn) from carbonated drinks in 2013. The new product, 'est', will eventually beavailable in a variety of flavours including lemon and lime. For its part, Pepsi has reaffirmed itscommitment to Thailand by announcing investment in two new production plants, bringing its investmentin the country since 2000 to over US$2.9bn.

Taxes on Spirits Increase - In September 2012, the Thai government introduced new taxes onspirits, namely a bump in the taxation of white distilled spirits and blended distilled spirits whencalculated by volume, and an increase in the taxation of brandy when calculated by sale value. Theincreases are relatively minor in terms of the additional cost per bottle. However, they signal that thegovernment is currently willing to look to the alcohol sector for tax revenues, with the increases(alongside increased tax on cigarettes) expected to raise THB13bn each year.

Carlsberg Signs a Joint Venture (JV) Agreement with Thai Singha - In October 2012, Danish brewinggiant Carlsberg established a JV with Thai brewer Singha. The new venture will promote Carlsberg'spremium brands, such as Kronenbourg and Tuborg in Thailand, while Carlsberg will sell Singha's beeroutside of Thailand, with a focus on Europe. The move suggests that Carlsberg finally feels at a stagewith its European operations that it is ready to look at expanding its Asian business, which has been puton something of a back burner as the firm wrestled to contend with declining sales in Russia.

Risks to Forecasts

Rice Mortgage Scheme Threatens GDP Growth: The Puea Thai Party's rice mortgage scheme -introduced in 2011 - is expected to contribute to a widening fiscal deficit in 2012. Furthermore, we seeincreasing risks that the present rice policy could have longer-term implications for the agriculturalindustry by diverting resources away from investment in technology aimed at raising crop yields andoverall productivity. In fact, according to a report published by the Thailand Development ResearchInstitute, rice exports have plummeted by an estimated 44% year-on-year (y-o-y) from 5.5mn tonnes atthe beginning of 2012 to just 3.0mn tonnes in June 2012, which will clearly impact the country's overallGDP development and thus also consumer confidence levels. The scheme effectively sets a floor on riceprices and guarantees a premium for rice produced by local farmers.