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Q3 2012www.businessmonitor.com

food & drink report

iSSn 1749-2920published by Business Monitor international Ltd.

SAUdi ArABiAINCLUDES BMI'S FORECASTS

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SAUDI ARABIA FOOD & DRINK REPORT Q3 2012 INCLUDES 5-YEAR FORECASTS TO 2016

Part of BMI’s Industry Survey & Forecasts Series

Published by: Business Monitor International

Copy deadline: May 2012

Saudi Arabia Food And Drink Report Q3 2012

© Business Monitor International Ltd Page 2



CONTENTS

BMI Industry View ............................................................................................................................................ 5

SWOT Analysis ................................................................................................................................................ 7

Saudi Arabia Food Industry SWOT........................................................................................................................................................................ 7 Saudi Arabia Drink Industry SWOT ....................................................................................................................................................................... 8 Saudi Arabia Mass Grocery Retail Industry SWOT ............................................................................................................................................... 9

Business Environment .................................................................................................................................. 10

BMI’s Core Global Industry Views ........................................................................................................................................................................... 10 Table: BMI’s Core Views ..................................................................................................................................................................................... 20

Middle East Food & Drink Risk/Reward Ratings ..................................................................................................................................................... 21 Table: MENA Risk/Reward Ratings Subcategories, Q312 (scores out of 10) ....................................................................................................... 21 Table: MENA Food & Drink Risk/Reward Ratings, Q312 ................................................................................................................................... 25

Saudi Arabia Food & Drink Business Environment Rating ...................................................................................................................................... 26 Macroeconomic Outlook ........................................................................................................................................................................................... 27

Table: Saudi Arabia – Economic Activity ............................................................................................................................................................ 33

Industry Forecast Scenario .......................................................................................................................... 34

Consumer Outlook .................................................................................................................................................................................................... 34 Food .......................................................................................................................................................................................................................... 36

Food Consumption ............................................................................................................................................................................................... 36 Table: Food Consumption Indicators – Historical Data & Forecasts ................................................................................................................. 37 Confectionery ....................................................................................................................................................................................................... 37 Table: Confectionery Value Sales – Historical Data & Forecasts ....................................................................................................................... 38

Drinks ....................................................................................................................................................................................................................... 38 Soft Drinks ........................................................................................................................................................................................................... 38 Table: Soft Drinks Value Sales – Historical Data & Forecasts ........................................................................................................................... 39 Alcoholic Drinks .................................................................................................................................................................................................. 40 Hot Drinks ........................................................................................................................................................................................................... 40 Table: Hot Drinks Value Sales – Historical Data & Forecasts ............................................................................................................................ 41

Mass Grocery Retail ................................................................................................................................................................................................. 42 Table: Mass Grocery Retail Sales – Historical Data & Forecasts ....................................................................................................................... 43 Table: Mass Grocery Retail Sales By Format ...................................................................................................................................................... 43

Trade ......................................................................................................................................................................................................................... 44 Table: Trade Indicators – Historical Data & Forecasts ...................................................................................................................................... 44

Food ................................................................................................................................................................ 45

Key Gulf Region Industry Trends And Developments ............................................................................................................................................... 45 Almarai Investing In Diversification .................................................................................................................................................................... 45 New Products And Frontier Markets ................................................................................................................................................................... 46 Growing Investment Interest From Multinational Corporations .......................................................................................................................... 46 Growing Popularity Of Eating Out ...................................................................................................................................................................... 47

Market Overview ....................................................................................................................................................................................................... 48 Food Processing .................................................................................................................................................................................................. 48 Dairy Processing ................................................................................................................................................................................................. 49 Agriculture ........................................................................................................................................................................................................... 50 Halal .................................................................................................................................................................................................................... 51



Drink ................................................................................................................................................................ 52

Key Gulf Region Industry Trends And Developments ............................................................................................................................................... 52 Bottled Water Sector Growing in Importance ...................................................................................................................................................... 52 Frontier Market Investment Strengthening .......................................................................................................................................................... 52 Carbonates Shake-Up .......................................................................................................................................................................................... 53 Diversifying Away From Carbonates ................................................................................................................................................................... 53

Market Overview ....................................................................................................................................................................................................... 54 Soft Drinks ........................................................................................................................................................................................................... 54 Hot Drinks ........................................................................................................................................................................................................... 55 Alcoholic Drinks .................................................................................................................................................................................................. 55

Mass Grocery Retail ...................................................................................................................................... 56

Key Gulf Region Industry Trends And Developments ............................................................................................................................................... 56 Foreign Retailers Looking At Saudi Arabia ......................................................................................................................................................... 56 Frontier Market Investment ................................................................................................................................................................................. 56 Growing Investment Into Modern Convenience Retailing .................................................................................................................................... 57

Market Overview ....................................................................................................................................................................................................... 58 Table: Mass Grocery Retail Sector Structure – Estimated Sales Value By Format (US$bn) ............................................................................... 58 Table: Mass Grocery Retail Sector Structure – Estimated Sales Value By Format (US$bn) ............................................................................... 59 Table: Mass Grocery Retail Sector Structure – Estimated Sales Value By Format (SARbn) ............................................................................... 59 Table: Mass Grocery Retail Sector Structure – Estimated Sales Value By Format (SARbn) ............................................................................... 59

Competitive Landscape ................................................................................................................................ 60

Table: Key Players in Saudi Arabia's Food & Drink Sector ................................................................................................................................ 60 Table: Key Players in Saudi Arabia's Mass Grocery Retail Sector ...................................................................................................................... 61

Company Monitor .......................................................................................................................................... 62

Food .......................................................................................................................................................................................................................... 62 Al Safi-Danone ..................................................................................................................................................................................................... 62 Saudi Dairy & Foodstuff Company (SADAFCO) ................................................................................................................................................. 64 Almarai ................................................................................................................................................................................................................ 65 Al Rabie Saudi Foods ........................................................................................................................................................................................... 66

Drink ......................................................................................................................................................................................................................... 67 Aujan.................................................................................................................................................................................................................... 67

Mass Grocery Retail ................................................................................................................................................................................................. 69 Savola Group – Al Azizia Panda .......................................................................................................................................................................... 69 Carrefour MAF – Saudi Arabia ........................................................................................................................................................................... 71

BMI Methodology ........................................................................................................................................... 72

Risk/Reward Ratings Methodology ............................................................................................................. 72

Table: Rewards .................................................................................................................................................................................................... 72 Table: Risks ......................................................................................................................................................................................................... 73

Weighting .................................................................................................................................................................................................................. 73 Table: Weighting.................................................................................................................................................................................................. 73

BMI Food & Drink Industry Glossary ........................................................................................................... 74

Food & Drink............................................................................................................................................................................................................ 74 Mass Grocery Retail ................................................................................................................................................................................................. 74

BMI Food & Drink Forecasting & Sourcing ................................................................................................. 76

How We Generate Our Industry Forecasts ............................................................................................................................................................... 76 Sourcing ............................................................................................................................................................................................................... 77



BMI Industry View

Our outlook for the Saudi Arabian consumer sector remains bright, in line with the latest economic

indicators. The Saudi Arabian economy is currently firing on all cylinders, as high oil prices, heavy

government spending and buoyant consumer confidence continue to drive growth. Consumers in Saudi

Arabia are benefitting from heavy government spending and easy monetary policy, and our outlook for

household consumption remains upbeat. Across the board, consumption-related data paint a positive

picture. Moreover, leading indicator data also remain broadly encouraging. The YouGov consumer

confidence index is close to four-year highs. Government consumption will also remain a major driver

throughout the year. It has long been our view that the political tension stirred up by the Arab Spring

would lead to a sustained increase in public spending on healthcare, education and other social services,

as a means placating the population. We have revised up our forecast for real GDP growth in 2012 from

4.6% to 5.3%, though we still expect growth to slow next year as the impact of government spending

begins to fade.

Headline Industry Data

2012 per capita food consumption growth in local currency = 9.0%; forecast growth 2011-2016

= 40.0%

2012 confectionary value sales growth = 12.0%; forecast growth to 2016 = 46.5%

2012 mass grocery retail sales growth = 11.7%; forecast growth to 2016 = 66.6%

Key Company Trends

Fast Food Attracting More Investments: The fast food sector in Saudi Arabia is continuing to grow in

importance and is forecast to be worth around US$4.5bn by 2015. In May 2012 American burger chain

Burger King opened their 65th and largest-yet Saudi restaurant in Riyadh. The Burger King brand is

managed by HANA International, a subsidiary of Olayan Financing Company in the Middle East and

North Africa. The company has said that Saudi Arabia is a key growth market, and that it will continue to

be a focal point for their investment strategy in the Middle East.

Drinks Tax Ahead?

In May 2012 it was reported that the GCC states are considering a 50% tax on beverages and cigarettes to

control consumption. At a meeting of health ministers held in Saudi Arabia, the tax was discussed,

pointing out that soft drinks prices in the region are far lower than in most other parts of the world, and



that the consumption of these drinks is a key factor in the spread of diabetes among children. If such a tax

were to be implemented, it would have a major impact on the sale of soft drinks throughout the region.

Key Risks To Outlook

Given the extent to which our forecasts rely on heavy government spending, and by extension elevated oil

prices, a sharper-than-expected downturn in the global economy, if it was to translate into a substantial

decline in oil prices, would pose significant downside risks to our forecasts for Saudi Arabia's fiscal and

current account position, though it remains highly unlikely that either account will fall into the red in the

near term.

A more pressing concern is the potential for a sharp acceleration of inflation. With the economy

experiencing a prolonged period of robust growth amid loose monetary and fiscal policy, there is a

significant risk that upside price pressures could pick up rapidly in the medium term, putting pressure on

consumer spending. While we expect consumer price inflation to remain relatively subdued in 2012 as

global commodity prices moderate and spending on subsidies stays high, over the medium term inflation

is a problem that is likely to come increasingly into focus.



SWOT Analysis

Saudi Arabia Food Industry SWOT

Strengths Saudi Arabia boasts the Gulf region’s largest dairy industry.

With a youthful population of more than 28mn, which is increasingly susceptible to Western consumer trends, Saudi Arabia is a good regional point of entry for investors seeking long-term volume growth.

Like the rest of its Gulf peers, Saudi Arabia is home to a vast expatriate population able to consume high-value packaged and processed foods.

Saudi Arabia is a member of the Gulf Cooperation Council common market and provides a lower-cost export base than some neighbouring countries.

The Middle East and North Africa political crisis has possibly made Saudi Arabia seem more secure as an investment destination relative to some other countries in the region.

Weaknesses Saudi consumers are more price conscious than those in the UAE, Kuwait or Qatar.

Saudi Arabia has a saturated dairy industry with little room for new dairy manufacturers to enter.

The private sector’s dependence on expatriate labour is a burden for potential investors.

Food manufacturers are highly dependent on imports for ingredients due to the country’s severe agricultural shortcomings.

Opportunities Demand for processed and packaged goods among Saudi consumers is set to continue increasing as tastes and preferences evolve and lifestyles become busier.

Long-term opportunities for premiumisation remain across all segments of the food industry.

Rising health consciousness has significantly increased opportunities for food producers that are able to introduce ‘healthy’ or ‘light’ options.

Demand for organic foods is steadily increasing.

Threats Demand for higher-value foods fell in 2009, and, despite recent improvements, consumer confidence remains way off pre-2009 highs.

Poverty levels remain quite high despite the country’s oil wealth and generous government handouts.



Saudi Arabia Drink Industry SWOT

Strengths Led by the carbonates, bottled water and fruit juice segments, per capita soft drink consumption is high.

Tea and coffee consumption is high.

Saudi consumers are increasingly brand loyal and interested in new and innovative products.

The Middle East and North Africa political crisis has possibly made Saudi Arabia seem more secure as an investment destination relative to some other countries in the region.

Weaknesses Saudi Arabia has no formal alcoholic drinks industry.

The carbonates soft drinks segment is beginning to mature.

Despite the country’s oil wealth, significant pockets of poverty remain. This affects the rate at which the majority of consumers can trade up to higher-value drinks.

The tea and coffee sub-sectors are already fairly mature, which restricts market entry potential.

Opportunities The soft drinks industry is expected to register promising value and volume sales growth.

Major upside potential remains in the bottled water and fruit juice segments.

Demand for energy drinks is expected to continue strengthening as the soft drinks industry diversifies and health consciousness continues to rise.

Non-alcoholic malt-based drink makers could take advantage of the ban on alcoholic drinks.

Alternative teas, such as herbal and fruit tea, have proved to be very popular, indicating strong growth opportunities through product innovation.

Threats Popular boycotts, particularly of Western brands, can be very damaging, as a country’s politics can severely influence consumption in the Middle East.

Demand for higher-value drinks fell in 2009, and, despite recent improvements, consumer confidence remains way off pre-2009 highs.



Saudi Arabia Mass Grocery Retail Industry SWOT

Strengths Saudi Arabia’s organised grocery retail sector is the Gulf region’s largest by value.

The hypermarket segment is particularly well established.

Saudi Arabia has the Gulf region’s largest population.

High disposable incomes among a proportion of the population have created an aspirational consumer base interested in premium products.

The Middle East and North Africa political crisis has possibly made Saudi Arabia seem even more secure as an investment destination relative to some other countries in the region.

Weaknesses The entry of hard discounters is highly unlikely as consumers continue to associate discounted goods with poor quality.

The convenience segment remains underdeveloped.

The severe constraints on women’s public participation inhibit their ability as a demographic to maximise their consumer spending power.

With women being prevented from driving, out-of-town hypermarkets and malls are beyond their reach unless they have access to a driver.

Opportunities Non-organised retail and independent outlets still account for nearly half of total sales, which is strong evidence that significant scope remains for the penetration of organised grocery retailing.

Room for store launches across both the high-value hypermarket and supermarket segments still exists.

Mass grocery retail outlets are clustered around major cities, and a number of secondary towns remain underserviced.

Over the longer term, the underdeveloped convenience store segment could be boosted by the development of community stores, which would allow retailers to target more specific geographical locations.

More effective marketing by retailers could boost demand for private label goods, which are currently restricted by misplaced concerns over quality.

Threats Demand for higher-value goods fell in 2009, and, despite recent improvements, consumer confidence remains way off pre-2009 highs.

Poverty levels remain quite high despite the country’s oil wealth and generous government handouts.



Business Environment

BMI’s Core Global Industry Views

The global food and drink (F&D) markets are facing mixed headwinds in the short term. A continued

moderation in food price pressure, as well as an improving demand climate in the US, should provide a

much-needed reprieve to global F&D producers and exporters. However, we continue to see domestic

demand uncertainties in the majority of developed F&D markets such as Japan, Australia and Europe,

which will present a host of demand challenges to local consumer-facing firms.

Over the longer term, the key themes of geographical and product diversification, such as diversification

away from emerging markets to frontier markets, will continue to feature strongly in the growth strategies

of global F&D companies.

Food Inflation Less Of An Issue In 2012

Food Price Pressure To Wane In 2012

Commodity Prices

f = BMI forecast. Source: Bloomberg, BMI

Food inflation was a major theme that largely dictated the earnings performances of F&D companies in

2011. The latest results from US food producers Conagra and General Mills continue to point to the

difficulty that firms are having in passing on increased commodity costs at a time when the consumer

sector remains weak. For the six months through to November 27, Conagra registered an 8.8% increase in

revenue but net income was down by 26% and operating incomes fell by 2.2%, with profits at its

consumer food business off by 6.9%. For the same period, General Mills registered a 13.7% increase in

sales but a 21.5% drop in its net income and a 14.4% decline in its operating profit. Both firms partly

attributed the drop in operating income to rising commodity costs.



However, in line with one of BMI’s short-term core views that commodity prices will continue to

moderate and pose less of a threat to consumer goods producers and retailers, there have already been

gradual improvements in the earnings performances of some of the major F&D players. Both Conagra

and General Mills registered an improvement in their second quarter ending on November 27. Conagra’s

operating profit for this period was up by 2.8%, thanks to the strength of its commercial food business,

while General Mills’ operating profit fell by a slightly less rapid rate, coming in 12.9% lower.

We think this pattern of gradual improvement is set to continue over the coming months. Our

Commodities team forecasts additional relief for producers. Fundamentally, the global agriculture market

remains better supplied than it was during the 2008 food crisis, implying lower risks of food price

inflation occurring as a result of supply shortages. Secondly, government policies aimed at protecting the

end consumer from food price appreciation, such as releasing government stocks, will continue to

mitigate the impact of higher food prices. Lastly, a global economic slowdown is likely to depress

demand and taken together these factors mean we forecast lower average prices for most agricultural

commodities during 2012 (see table).

Domestic Demand Uncertainties Abound In Developed Markets

US Consumer Improving, Demand Sluggish In Australia And Japan

US, Japan And Australia Private Consumption Growth In Local Currency, % chg y-o-y

f = BMI forecast. Source: Australian Bureau of Statistics, Japanese Cabinet Office, US Bureau of Economic Analysis

We maintain our expectation of a subdued demand environment in developed markets such as Australia

and Japan. The Australian consumer will continue to face troubles that will hamper its consumption and

we expect growth in private consumption to slow, coming in at 1.5% in 2012 and 1.7% in 2013 (see



chart). As interest rates rise and debt repayments grow, a larger proportion of disposable income will be

used to repay debt, forcing households to cut back on the consumption of goods. With the announcement

of job cuts by a number of financial institutions and manufacturers, a poor employment outlook is likely

to put a further drag on private consumption activity as consumers look to save more for the uncertain

times ahead.

In Japan, the temporary boost to private consumption in the aftermath of the Tōhoku earthquake and

tsunami has already given way to structural weakness. Faced with domestic demand pressure, Asahi

experienced a decline of 4.7% in its domestic alcoholic drinks sales in FY2011. Similarly, Sapporo and

Kirin reported declines of 4.0% and 9.5% respectively in their domestic alcoholic drinks sales for the 12

months ending in December 2011. With weak asset prices putting pressure on consumer purchasing

power, we believe the Japanese consumer will maintain a conservative stance over the coming quarters,

though factors such as a strong currency and low unemployment should provide some support to domestic

demand.

While consumer goods producers will continue to face demand headwinds in Australia and Japan in the

coming quarters, the short-term future for the US consumer is looking brighter. Although a full recovery

of the US housing market could take several years to play out and will be marred by volatility, we believe

the recovery could start to accelerate over the coming months from extremely depressed levels. With

unemployment edging down towards 8% and initial jobless claims continuing to decline, the trend in

labour market metrics is slowly improving. These dynamics are typically positive for sentiment and

purchasing power.

Improving Demand Climate In US Prompts Loosening Of Purse Strings

While the value theme will remain well entrenched across the developed world in the near future,

particularly in markets such as Japan and Australia, there are signs that an improvement in consumer

confidence is fuelling a gradual shift of consumption away from the private label and discount retail

sectors in the US. US private label specialist TreeHouse Foods has been forced to issue a profit warning

after registering a drop in volumes during the fourth quarter of 2011. The firm reported that its volumes in

December fell by 8% and this major sales decline during the important festive period potentially points to

a wider movement away from the private label sector amid improving domestic demand conditions. The

latest results posted by US discount retailer Family Dollar also fit with our view that the discount retail

format’s rate of growth could be set to gradually decline as the US economic situation improves. Family

Dollar registered total sales growth of 7.6% for its fiscal first quarter (ending November 26 2011), but

comparable-store sales growth came in at a more muted 4.1%, which compares unfavourably with its

Q110 like-for-like sales growth of 6.9%.



EM-Oriented Companies To Perform Strongly

Casino Outperforming Tesco And Carrefour

Selected MGR Companies Share Prices (rebased 14/3/2011)

Source: Bloomberg

Bearing out one of our core views that companies with a strong emerging markets (EMs) profile will

continue to outperform, France-based retailer Casino posted solid results for 2011, when rivals Tesco,

Carrefour and Walmart struggled to make much headway. Of the major retailers based in developed

markets, it is Casino rather than Walmart or Tesco that has greatest exposure to EMs. For 2011, Casino

registered an 18.2% year-on-year (y-o-y) increase in sales, while net income increased by 6.6%. This

robust sales showing was thanks to changes in its consolidation scope, with the company buying up

Carrefour’s operations in Thailand, upping its stake in Brazil’s CBD and benefiting from the merger of

CBD with local electronics good specialist Casas Bahia. Casino’s well-balanced portfolio has helped its

share price outperform most of its global rivals since the beginning of 2009 and its strong EM base,

combined with a steady domestic operation, suggests that this outperformance could be set to continue

(see chart above).

The importance of building a strong EM business, particularly when demand in the developed world

remains sluggish, is further underlined by the underperformance of US food firms compared to their

European counterparts. US food firms are generally less exposed to EMs than their European peers (see

chart below). This has meant that on average they have underperformed over the last five years in terms

of organic revenue growth.



However, the major US food

producers are already looking to

address their weakness in this

regard and have been largely

ramping up their expansions in

the EMs through mergers and

acquisitions (M&A). Kellogg

announced the purchase of

Pringles from Proctor &

Gamble (P&G) for US$2.7bn.

Kellogg has always been in a bit

of a tricky situation because

cereal is not a common option in

key EMs such as China and

India, while future growth is also

hampered by high levels of

lactose intolerance in many

major EMs. On this front,

Kellogg’s acquisition of popular snack brand Pringles should allow it to circumnavigate the unique

consumer preferences in the EMs, facilitating its expansionary ambitions. A second move is General

Mills’ reported acquisition of Brazil-based Yoki in a deal worth US$1.2bn. We estimate that General

Mills only derives 10% of its revenues from EMs, but with this acquisition, which has yet to be officially

confirmed, this would rise to 13.5%, showing how quickly things can change if firms are willing to

invest. Other US companies that are keen to be making these types of acquisitions are Heinz, Campbell

Soup, Hershey and Sara Lee. All will be anxious to increase their EM exposure and will be sizing up

which markets and categories offer the best opportunities.

For Heinz and Hershey, the route to international growth looks relatively straightforward. Heinz has

already found success for its core condiment portfolio in markets such as Russia and Mexico, and looks

like it has a portfolio that is well suited to EM expansion. In contrast, Campbell Soup has struggled in

EMs, with packaged soup having failed to find a receptive market in countries where homemade soup is

often a cheap staple. The firm may therefore need to copy Kellogg’s example and branch out into a new

category if it is to benefit from the EM opportunity.

The opportunities on offer in EMs may be difficult to exploit for some consumer-facing companies.

Global consumer goods players Nestlé and Danone are overhauling their business models in China amid

intensifying domestic competition. Chinese dairy companies Mengniu and Yili, for example, are looking

to capture a greater market among the country’s middle classes by innovating and introducing more

upmarket products. While better product quality and stronger brand appeal were typically viewed as the

European Firms In Front

Revenues From Emerging Markets (%)

Source: Nestlé, investor relations, BMI



competitive strengths of foreign consumer players such as Danone, domestic companies are quickly

catching up.

Faced with the rapid emergence of competition from domestic players, Nestlé plans to shut down one of

its three ice cream factories in China so it can channel more resources into building a stronger foothold in

the higher-end market segments. Nestlé aims to boost sales through distribution channels such as hotels

and restaurants. Danone, meanwhile, is suspending production at its Shanghai yogurt plant as part of its

restructuring strategy to focus on its premium brands in China.

In the retail space, Walmart is facing a tough predicament in China as well. The loss of valuable brand

control and the risk of having brands mismanaged under a franchising model have been cited as some of

the major drawbacks of expanding through this operating model, and these problems have caught up with

Walmart. Walmart has been punished 21 times in Chongqing since 2006 for alleged violations such as

mislabelling products, false advertising and selling products that were already past their expiry dates.

Although Walmart prides itself on offering quality grocery products at low prices, it has struggled to

achieve price leadership against the more cost-effective traditional retailers and has arguably not lived up

to its assurance of providing quality products. Moreover, by positioning itself as a low-end retailer,

Walmart is seemingly striking the wrong chord with its main clientele, which is middle class.

Therefore, we stress the importance for consumer-facing companies to get their strategies and positioning

right in order to really enjoy success in the developing world. For Nestlé and Danone, we believe it would

make strategic sense for them to focus on improving their product quality and further leverage on their

global brand appeal in China, particularly amid dampened consumer confidence in domestically produced

goods. For Walmart, it would probably do better by positioning itself at the higher-end of the Chinese

retail market, as well as providing sales-related incentives to keep its objectives aligned with its

franchisees.

From Emerging To Frontier

While EMs will continue to hold immense appeal to the global F&D players, the flurry of expansionary

activity across the frontier markets is likely to heat up over the coming years as well. Netherlands-based

brewer Heineken boosted its stake in Haitian brewer Brasserie Nationale D’Haiti (Brana) from 22.5%

to 95%, which fits with our core view that major multinationals will increasingly look for frontier market

investments as the opportunities in traditional EMs become scarcer as competition increases. As another

case in point, confectionery producer Mars has started construction of a chocolate facility in Saudi

Arabia. This reflects growing demand for confectionery products in the Middle East, where Mars already

operates a facility in Dubai producing Mars, Galaxy and Snickers bars. Cereal Partners Worldwide, a

joint venture between Nestlé and General Mills, has opened a new factory in Turkey.



The facility required investment of TRY85mn and will supply cereal products to the Turkish market and

14 other countries in the Middle East and North Africa (MENA). The decision to use the country as a

launch pad to the wider region fits with Turkey’s rapidly improving business environment and private

sector mentality. We expect more companies to use the country as a base to expand their reach into the

high-potential markets across MENA.

Pursuing Innovation To Improve Differentiation

Another of BMI’s longer-term core views is the ramping up of product innovation among F&D

companies as they seek differentiation and further market share gains. US coffee giant Starbucks looks

set to roll out its new coffee capsule products across Europe, which have already been launched in the

US, to attempt to gain market share from Nestlé. However, BMI believes this may take a while to make a

meaningful contribution to Starbucks’ results, with the firm facing an uphill battle in tempting consumers

away from Nestlé’s ubiquitous Nespresso format. The company also plans to increase customers’

exposure to Starbucks products in Europe, with the Financial Times reporting that the firm is exploring

ways to sell Starbucks coffee through vending machines and on trains and aeroplanes.

In the US, ruling out the prospect of stronger growth through store expansions, the ramping up of its

product offerings is arguably the most viable strategic option available for Starbucks to secure its

domestic growth prospects. Starbucks’ plans to move into the US alcoholic drinks sector underscore the

importance of product diversification in its growth strategy. However, we are only cautiously optimistic

about this strategy. On the one hand, expansion into alcoholic drinks should support higher margins for

Starbucks. On the other, given that the positioning of Starbucks as a premium coffee giant is already well

entrenched among local consumers, it could potentially lose some of its core customers who are looking

for the ‘Starbucks coffee experience’.

Trans-Asian soft drinks manufacturer Fraser and Neave (F&N) is also looking to get on the innovation

bandwagon to lock in its future prospects. F&N plans to invest more heavily in research and development

to create new products such as its recently launched carbonated soft drink Clearly Citrus to compensate

the potential loss of revenue as a result of the termination of its bottling agreement with The Coca-Cola

Company.

Burgeoning Global Appetite For Functional Foods

Fuelled by growing health awareness and rising consumer affluence, consumers across the global markets

are quickly developing a bigger appetite for functional food products. In a bid to tap into the functional

food potential, Nestlé and Danone are reportedly looking to acquire baby formula producer Wyeth, which

is valued at around US$10bn. The acquisition of Wyeth would present a chance to gain control of a

number of well-known infant formula brands that could expedite their expansion in the fast-growing baby

formula market.



While PepsiCo is gradually calibrating its portfolio away from soft drinks and salty snacks, we have

questioned whether PepsiCo’s starting position puts it in a strong place to capture the opportunities in

healthy categories. It is PepsiCo’s move into the dairy sector that is perhaps the most transformational for

the group. The company’s ambitions in this sector were underlined by the purchase of Russia’s Wimm-

Bill-Dann (WBD) and setting up a joint venture in 2009 with Saudi Arabia’s Almarai.

The response to PepsiCo’s strategy of expanding in the diary sector has been less than enthusiastic among

investors, which fits with our analysis. Consumers worldwide are sometimes willing to put health

concerns aside and indulge themselves. In emerging markets these types of purchases are likely to rise in

line with increased affluence and offset downward pressure from increased health-consciousness.

PepsiCo’s existing portfolio is well tailored to meet this growing demand and an attempt to reshape its

business is likely to require significant funds that could be better spent ensuring it is capable of meeting

the growing demand for ‘fun-for-you’ products in emerging markets. PepsiCo seems to want to transform

itself into Danone and the fear that it is steaming off in a new direction and not playing to its strengths

may be partly behind its recent underperformance.

Coca-Cola And PepsiCo Spearheading Diversification Away From Carbonates

A notable trend in global F&D is the continued diversification among beverage producers away from

carbonated drinks. Over the past quarter, Coca-Cola and PepsiCo were some of the bigger names

spearheading this trend, particularly in EMs. Coca-Cola India is forming an independent business

division to raise its stake in the expanding non-carbonates market, which will be responsible for the

innovation, sale and distribution of juices, energy drinks and powdered drinks. With their sights set firmly

on the opportunities provided by a growing health awareness trend in India, PepsiCo and domestic drinks

producer Tata Global Beverages plan to increase their product portfolio of functional beverages through

their joint venture NourishCo. NourishCo will introduce a new range of functional drinks over the next

18-24 months and it aims to generate overall revenue of INR7bn (US$141.8mn).

Although the low purchasing power of Indian consumers means that the lower-value carbonates are likely

to remain the beverage of choice for most consumers, rising income and an emerging health awareness

trend are fuelling demand for non-carbonates such as fruit juices and energy drinks. Companies such as

Coca-Cola and PepsiCo are likely to accelerate their portfolio expansion initiatives to capitalise on this

opportunity.

Consolidation To Drive M&A Activity

Consolidation will continue rapidly in the global F&D space as companies seek greater efficiencies by

improving their domestic scale. Interestingly, this trend has been largely fuelled by M&A rather than

organic growth, which can be linked to the benefits of achieving immediate scale through inorganic

expansion.



Russian-based vodka producer Russian Standard made an offer to Poland-based Central European

Distribution Corp (CEDC) that could see it take a 32.99% stake in the business. A combination between

Russian Standard and CEDC would create a regional spirits giant, combining Russian Standard’s strength

at the premium end of the market with CEDC’s strength in the economy and mid-price sectors.

Coca-Cola FEMSA continues to drive consolidation in Mexico’s soft drink sector, with the purchase the

drinks arm of Mexican group Fomento Queretano. The deal is worth MXN6.6bn (including MXN1.2bn

of Queretano’s debt) and was FEMSA’s third major acquisition in Mexico’s soft drink sector in 2011.

FEMSA said its acquisitions in Mexico will increase its volumes and revenues by 30%, a substantial

increase in the firm’s exposure to the market. As Mexico’s largest bottler, FEMSA cannot take its eye off

the ball here and we see this consolidation as a sensible strategy given the weakness of the market.

However, over the longer term we think FEMSA will remain primarily focused on international growth;

the structure of the acquisition (based on shares rather than cash) supports our view that the firm is

preparing for major acquisitions outside its domestic market.

Further bearing out the consolidation trend in the global F&D markets, Swedish confectionery producers

Cloetta and Leaf International have announced plans to merge their operations. The combined portfolio

will see Cloetta’s strength in chocolate confectionery complemented by Leaf’s strong position in the

pastilles, gum and sugar confectionery categories, with brands including Cloetta, Läkerol, Malaco, Red

Band and Chewits. We believe it will be in the sugar confectionery area that the combined firm will seek

to drive expansion, with the popular Cloetta brand used to back a number of sugar confectionery products

in the Leaf stable. The merger will also create a firm with the scale to expand internationally, with the

business already having a sizeable base in both Netherlands and Italy.

AB InBev And SABMiller Have Massive Financial Power

Selected Brewers Market Capitalisation, US$mn (LHS) And Debt-To-EBITDA Ratios (RHS)

Y= last financial year, Y-1 = the previous financial year, etc. Source: Bloomberg, investor relations



More recently, the sale of Chinese brewer Kingway Brewery’s beer assets, which represents an exciting

opportunity for multinational and domestic brewers to consolidate a stronger presence in the Chinese beer

market, has unsurprisingly stirred massive interest among domestic and foreign brewers. China

Resources Snow Breweries (CR Snow), Beijing Yanjing Brewery and Anheuser-Busch InBev (AB

InBev) are reportedly among the frontrunners to make the acquisition. While AB InBev’s massive

financial scale could give it a slight edge over CR Snow, we believe the latter has a good chance of

success in acquiring Kingway’s brewery assets. Through the sale of its non-core assets, as well as fiscal

prudence and strong earnings growth on the back of cost cutting at the acquired Anheuser-Busch

business, AB InBev’s total debt-to-EBITDA ratio has been cut from a five-year high of 7.8 to 3.2 in its

last financial year, implying that it now has a stronger financial capacity for deals (see chart). However,

CR Snow has the backing of its parent company SABMiller, which is also a financial colossus and

certainly has plenty of scope to carry out the acquisition. While Beijing Yanjing Brewery is also in the

running, we believe its smaller financial clout probably places it in a weaker position against the

financially powerful AB InBev and CR Snow.

Private Equity Companies Attracted To Unfashionable Categories

We have introduced a new core view this quarter: private equity (PE) firms will develop a stronger

interest in unfashionable F&D categories. Two deals have highlighted PE’s attraction to relatively

unfashionable parts of the food sector. In the US, Centre Partners announced the acquisition of frozen

food manufacturer Bellisio Foods, while in Europe Manfield Partners acquired two canned food units

from Japanese conglomerate Mitsui & Co. BMI has previously highlighted the sector’s interest in parts

of the industry that are largely stagnant, or even in decline, with the PE industry attracted by the relatively

low valuations and the potential for restoring growth through investment in marketing and innovation.

These PE firms saw a chance to reinvigorate categories that had declined, partly due to a lack of

investment, while being able to pick up major brands for relatively affordable prices. Innovations in the

frozen food sector have since been stepped up, with improvements in taste and convenience filtering

through the sector. Canned food is also a sector in decline in many developed markets but looks

increasingly like an industry in demand by PE firms. The canned food units acquired by Manfield

Partners include seafood, fruit and vegetables in the UK and the Netherlands, with combined revenues of

around GBP75mn. Another canned food producer in the hands of PE owners is US-based Bumble Bee

Foods, formerly owned by Centre Partners but now owned by Lion Capital.

The PE firms investing in these categories will of course be thinking of their eventual exit strategies.

Given the lack of interest from major brand builders, these exits have been primarily through the sale to

another PE fund in the past. However, we expect more deals to take the form of IPOs. A well-run,

steadily expanding food business will always attract defensive investors and the international scale of

companies such Birds Eye Iglo and Findus will certainly make them suitable for a wide variety of

European funds. However, nobody wants to invest in a shrinking category and to ensure that they



generate a return on the investment these firms will have to continue investing in innovation to win back

consumers that have moved away from the frozen and canned sectors.

Table: BMI’s Core Views

Short-term outlook

Raw material prices will trend lower in 2012 and become less of a threat to producers and retailers.

Developed markets still feeling the pinch with economic weakness and political uncertainty weighing on spending. Tentative signs of improvement in US consumer market.

The value theme is still very important across the developed world, with price consciousness inherent.

Long-term outlook

Companies with strong EM exposure will continue to outperform.

Multinationals will increasingly pursue frontier market investments.

Investment in innovation will increase as producers seek differentiation. Emphasis will be placed on protecting innovations.

Some consumer goods manufacturers will continue to leave sectors under threat from private labels, while others will calibrate their portfolios toward private labels to capitalise on their growing demand.

Government legislation will play an increasing role in marginalising unhealthy food and drink products.

Premiumisation will re-emerge as a key driving force behind revenue growth.

Demand for convenience in retail and food will continue to grow.

Functional foods will provide considerable opportunities in developed markets in particular.

Consolidation will continue as producers seek greater efficiencies.

Beverage companies will continue to invest in diversification away from carbonated beverages and into healthier subsectors.

PE companies will continue to be attracted to unfashionable categories.

Source: BMI



Middle East Food & Drink Risk/Reward Ratings

BMI’s Risk/Reward Ratings Highlight Most Attractive MENA Food & Drink Markets

BMI’s Middle East and North Africa (MENA) Risk/Reward Ratings (RRRs) assess a market’s

attractiveness to industry investors in comparison with its peers. The rewards part of the rating takes into

account market size, current consumption levels, future industry growth prospects (based on our five-year

industry forecasts), market fragmentation (with greater fragmentation indicating higher opportunities) and

the size of the youth population. The risks part takes into account the legislative environment, the level of

development of the organised retail sector (with higher development leading to lower risks), as well as

relevant aspects of the economic and political environment.

The table below outlines the subcategories that make up each rating and the scores for each market in the

MENA region. The six factors that make up the rewards rating are food consumption per capita, market

fragmentation, per capita food consumption (five-year compound annual growth), population size, GDP

per capita and youth population.

Table: MENA Risk/Reward Ratings Subcategories, Q312 (scores out of 10)

Saudi

Arabia Israel Egypt UAE Qatar Kuwait Oman Bahrain Libya Tunisia Morocco

Rewards

Food consumption per capita 10 10 4 8 9 8 10 9 9 4 2

Market fragmentation 7 1 9 5 4 4 7 2 8 7 7

Per capita food consumption five-year CAGR 4 4 9 3 3 2 3 4 4 5 3

Population size 4 2 7 2 1 1 1 1 2 3 4

GDP per capita, US$ 7 8 2 10 10 10 7 6 5 2 2

Youth population % 6 6 7 3 3 5 5 3 6 4 5

Risks

MGR penetration 5 7 2 6 5 5 3 5 1 1 2

Regulatory environment 6 8 2 7 6 5 4 7 1 5 5

Short term economic risk rating 8 8 5 6 7 7 7 6 5 4 6



Table: MENA Risk/Reward Ratings Subcategories, Q312 (scores out of 10)

Saudi

Arabia Israel Egypt UAE Qatar Kuwait Oman Bahrain Libya Tunisia Morocco

Income distribution 7 9 7 1 7 7 7 7 7 7 7

Lack of bureaucracy 6 6 4 6 7 6 6 7 4 5 4

Market orientation 6 7 4 6 6 7 4 7 2 5 5

Physical infrastructure 3 7 5 7 5 3 2 5 3 5 3

The Food & Drink Risk/Reward Rating is the principal rating. It comprises two sub-ratings, rewards and risks, which have 60% and 40% weightings respectively. Source: BMI

MENA encompasses a wide range of disparate markets and the table shows there is wide disparity in the

first of these factors, food consumption per capita, with spending very high across most of the Middle

East but low across most of North Africa. Oil wealth means consumers across the Middle East already

spend a significant amount on food. However, this also means the potential for growth is perhaps lower

than in lower-spending countries.

For the second factor, market fragmentation, scores are generally fairly high across the region, indicating

low levels of concentration and the relative ease for a new entrant to come in and quickly capture market

share. On this factor Israel and Bahrain are viewed less favourably, with high levels of concentration in

certain sectors. The North African countries, Oman and Saudi Arabia are viewed more favourably as

these markets are less developed and have significant room for new players in a large number of sectors.

Third, the scores for per capita food consumption (five-year compound annual growth) in MENA are

relatively muted in comparison with the global average. In most Middle Eastern markets spending is

already high, leaving limited room for growth. In many North African countries, while spending is low,

relatively muted economic forecasts mean spending is not expected to increase at the rapid rates seen in

some other emerging markets. The major standout country in the region is Egypt, which is perhaps the

most interesting economy in our RRRs, with the prospect of very strong growth as long as the transition

towards multi-party democracy is successful.



For the fourth factor, population

size, Egypt is again the standout

market, followed by Saudi

Arabia, Morocco and Tunisia.

The rewards scores of other

markets in the region are

hampered by the limited size of

the overall market due to their

smaller populations.

The fifth category, GDP per

capita, is again quite variable,

with a close correlation to the

food consumption per capita. It

is the Middle Eastern countries

that score well in this area,

although Libya’s relatively high

GDP per capita is also a boost to

its rewards rating and to some

extent sets it apart from other North African countries.

This can be attributed to oil wealth and is perhaps a sign of the consumer potential on offer if the

transition towards democracy is successful and the country’s significant natural resources are divided

more equitably. The final factor in the rewards part of the table is youth population. Egypt is yet again

seen most favourably, followed by Saudi Arabia, Libya and Israel. In contrast, the UAE, Qatar and

Bahrain score relatively poorly.

The seven factors that make up the risks rating are MGR penetration, regulatory environment, short-term

economic risk rating, income distribution, lack of bureaucracy, market orientation and physical

infrastructure.

MGR penetration measures the extent to which food retailing is controlled by large, organised retailers.

High penetration is seen as positive from a risk perspective as it eases the distribution of goods and

simplifies the supply process. On a regional basis, MGR penetration is low, with only Israel boasting a

very well developed MGR network. In the Middle East there has been some level of development, with

Saudi Arabia, the UAE, Qatar, Kuwait and Bahrain all attracting some investment in this sector.

However, in North Africa the industry is still in the very early stages of development, with only a handful

of MGR outlets present in each country, which is an impediment to the development of an advanced food

and drink sector.

Saudi Arabia First, Morocco Last

MENA Food & Drink RRRs, Q312

Scores out of 100, with 100 highest. The Food & Drink Risk/Reward Rating is the principal rating. It comprises two sub-ratings, rewards and risks, which have 60% and 40% weightings respectively. Source: BMI



Regulatory environment evaluates the complexity of factors such as labelling and nutrition requirements.

There is limited regional differentiation and all markets in MENA are viewed relatively favourably from

this perspective. Israel is viewed as the easiest market to navigate in this respect, while Libya is seen as

the most challenging, though much of this can be attributed to hangover from the Qadhafi regime and

could quickly change over the coming months and years.

The third category, short-term economic risk rating, assesses the degree to which the country

approximates the ideal of non-inflationary growth with falling unemployment, contained fiscal and

external deficits and manageable debt ratios. Most Middle Eastern countries score well in this rating,

thanks to a stable track record of growth and a positive growth outlook. Across North Africa the picture is

more mixed, with significant risks inherent in the economies of Egypt, Libya and Tunisia, where the

economic policies of current and future administrations are harder to predict.

The fourth factor, income distribution, is measured by the proportion of private consumption accounted

for by the middle 60% of earners and scores across the region are fairly high, despite the inherent

inequality in many of the economies that are highly dependent on oil. The administrations in each of these

markets recognise that wealth must be distributed to prevent social unrest and they have been fairly

successful in ensuring that the population benefits from the country’s natural oil wealth.

Fifthly, lack of bureaucracy, is a measure of the hurdles that a producer is likely to face in areas such as

starting and closing businesses, paying taxes, dealing with licences and registering property. Scores are

generally average across MENA, with Qatar and Bahrain viewed most favourably and Egypt, Libya and

Morocco still having much to do to be easy places for new entrants to set up shop and for existing players

to expand.

The sixth factor, market orientation, is a measure of how business orientated an economy is, and measures

the level of foreign direct investment protectionism, tax rates and the level of government intervention.

Israel, Kuwait and Bahrain score the highest, while the markets of North Africa are again seen as having

work to do. Libya has the lowest score for the market orientation component, though this could also

change following the overthrow of the Qadhafi regime and the election of an administration that is more

open to foreign investment.

The final risk category, physical infrastructure, measures the ease and cost of operating in a market from

an infrastructure perspective. Infrastructure in Israel and the UAE is seen as relatively well advanced,

though in the rest of the Middle East it is only moderately developed. In North Africa and a number of

Middle Eastern markets, including Kuwait, Oman and Saudi Arabia, the level of infrastructure is seen as a

major additional risk factor and these countries would benefit enormously from increased investment in

this area. This would help to reduce costs for incumbent operators and ease access to more remote areas,

helping to realise the potential of the region’s consumer sector.



Table: MENA Food & Drink Risk/Reward Ratings, Q312

Rewards Risks

Rewards Industry Rewards

Country Rewards Risks

Industry Risks

Country Risks

Food & Drink RRR Rank

Saudi Arabia 59.7 64.0 55.3 57.8 55.0 60.6 58.9 1

Israel 45.3 40.0 50.7 74.2 75.0 73.4 56.9 2

Egypt 68.3 80.0 56.7 36.1 20.0 52.2 55.4 3

UAE 46.5 48.0 45.0 58.7 65.0 52.4 51.4 4

Qatar 43.7 46.0 41.3 58.6 55.0 62.3 49.7 5

Kuwait 44.3 40.0 48.7 54.5 50.0 59.0 48.4 6

Oman 50.3 60.0 40.7 42.6 35.0 50.2 47.2 7

Bahrain 36.3 42.0 30.7 61.9 60.0 63.8 46.6 8

Libya 54.3 66.0 42.7 25.4 10.0 40.8 42.8 9=

Tunisia 43.5 56.0 31.0 41.8 30.0 53.6 42.8 9=

Morocco 41.2 44.0 38.3 42.9 35.0 50.7 41.8 11

Scores out of 100, with 100 highest. The Food & Drink RRR is the principal rating. It comprises two sub-ratings, rewards and risks, which have 60% and 40% weightings respectively. Source: BMI



Saudi Arabia Food & Drink Business Environment Rating

Saudi Arabia remains at the top of our risk/rewards ratings for the Middle East and North Africa region.

The country’s main competitive edge continues to be its relatively huge population, which accounts for

around two-thirds of the overall Gulf population. The current ratings system places a greater emphasis on

which markets offer the best growth opportunities, rather than which is the most developed. While Saudi

consumers are currently not as high-spending as their Gulf peers in the UAE or Qatar, the market

nevertheless offers better long-term growth, with a decent score for food consumption growth.

Furthermore, not only is the population large, but it is also young, with around half of the population

younger than 25, according to UN estimates.

Saudi Arabia also benefits from a fairly good business environment, even if it is a riskier place to do

business than countries such as the UAE or Bahrain. The new ratings also give greater weight to market

fragmentation, a subjective indicator that assesses how relatively developed a market is. Here Saudi

Arabia receives a score of 7 out of 10, reflecting a fairly developed consumer market. The country’s mass

grocery retail industry is also fairly well developed, allowing companies to get their goods to consumers

more efficiently than in other regional markets. Add to all of this the country’s strong short-term

economic outlook and it’s easy to see why Saudi Arabia has maintained its lead position in our ratings.



Macroeconomic Outlook

Loose Policy Driving Growth

BMI View: We retain our sanguine outlook on Saudi Arabia's growth prospects in 2012. Heavy

government spending, coupled with loose monetary policy, will keep domestic consumption and fixed

investment growing healthily through the year, though we expect the net export position to worsen as oil

production slows.

Macro Strategy: Saudi Arabia's growth outlook remains broadly positive. Throughout 2011, robust

growth was spurred by loose fiscal and monetary policy, and we expect these conditions to persist this

year. With memories of the Arab Spring still lingering, the government is unlikely to risk stirring up

domestic discontent by tightening policy, while still-elevated global oil prices will leave Riyadh with

plenty of room to manoeuvre on the fiscal front. Although oil production is likely to slow as supply from

Libya and Iraq comes back on line, leading to a moderate decline in the net export position, overall we

expect the healthy outlook for domestic consumption and fixed investment to continue driving strong

growth in the medium term.

We forecast real GDP growth of 4.6% in 2012 and 4.1% in 2013, down from an estimated 6.8% last year.

Our projection leaves us above Bloomberg consensus – a survey of research houses and investment

banks – which sees growth coming in at 3.8%. Moreover, we highlight that the risks to our outlook are

relatively minimal, with the potential for a sharp uptick in inflation representing the most substantial

threat to the economy in 2012.

Expenditure Breakdown

Private Expenditure Outlook: We see household consumption holding up well in 2012, pencilling in

real growth of 5.0% through the year. The main driver of this expansion will continue to be government

spending, with public sector wages, social benefits and food and fuel subsidies all having been hiked

substantially in the past year, and unlikely to be reined in while the Arab Spring continues to occupy the

minds of policymakers. Loose fiscal policy has spurred consumer spending, an effect that has been

reflected in a host of leading indicator data showing a strong performance by the domestic private sector.



A Downtick, But Confidence Still High Saudi Arabia – Dun & Bradstreet Business Optimism Index

Source: BMI, Dun & Bradstreet

The HSBC/SABB Purchasing Managers' Index stood at 60.0 in January (a reading above 50 signals

growth in the non-oil sector), a six-month high. In addition, while the non-hydrocarbon component of the

Dun & Bradsteet Business Optimism Index – a survey of confidence among local businesses – took a

slight leg down in Q112, coming in at 54 (against 60 in Q411), but remains the highest reading among the

countries surveyed in the Gulf.



Recovery Well Underway Saudi Arabia – Commercial Bank Lending & Broad Money Supply (M2), % ch. y-o-y

Source: BMI, SAMA

This robust outlook will be further bolstered by loose monetary conditions. Given the riyal's peg to the

dollar, dovish policy at the US Federal Reserve – which has made clear its intention to keep rates low

until 2014 – has forced the Saudi Arabian Monetary Agency to keep its benchmark rate on hold at 2.00%

or risk an inflow of 'hot money'. Easy credit has led to a rapid expansion of the money supply – broad

money supply growth came in at 15.4% y-o-y in December, compared with 9.3% in December 2010 – as

well as a sharp pickup up in commercial bank lending, which grew by 10.2% y-o-y in December, up from

6.0% the previous year. While these conditions pose a medium-term inflation risk, in the nearer term they

are likely to act as a further stimulus for consumer spending and domestic business activity.

Public Expenditure Outlook: For largely the same reason as we expect government spending on wages

and benefits to remain elevated, we see Riyadh keeping public consumption high in 2012. Heavy

spending on social services is part of a strategy to shore up public support (see our online service,

January 4, 'No Let-Up In Spending In 2012'), and we have pencilled in growth of 6.0% in public

consumption accordingly.



No Secret To Their Success Saudi Arabia – Components of GDP By Output, 2011

Source: BMI, SAMA

The recently-announced 2012 budget is instructive in this regard. The budget outlined plans for a

substantial nominal increase in social spending, including a 13.0% increase on the allocation for

'education and training', a 26.0% rise for 'health and social affairs' and a 19.0% increase for 'municipality

services'. Though not disclosed in the budget, we also anticipate a further ramping up of spending on

defence and security, with several large contracts having been signed in recent years. It is important to

bear in mind that these figures are measured against the budgeted allocations in 2011 rather than actual

spending (which was considerably higher), and there is generally a wide disparity between budgeted and

actual expenditure. Nevertheless, Riyadh's intention to keep fiscal policy expansionary is clear, and will

serve to further stimulate the economy throughout the year.

Fixed Investment Outlook: Our view on the prospects for fixed investment in 2012 is similarly bullish.

Riyadh's 2012 budget has a heavy focus on capital spending, signalling the government's intention to

persist with its ongoing drive to improve the country's transport, energy and social services infrastructure.

The budget allocates SAR169.0bn to 'education and training' – up 13.0% on the 2011 budget – an

increase that will be used to fund the construction of 742 new schools and 40 new colleges, as well as to

complete work on almost 3,000 ongoing projects.



Growth Slowing, But Still Strong Saudi Arabia – Nominal GDP & Real GDP, % ch. y-o-y

Source: BMI, SAMA

The prospects for the residential sector are also bright. As part of its 2011 stimulus package, the

government allocated SAR250.0bn to the construction of 500,000 housing units in an effort to alleviate

the sector's chronic supply deficit. Our infrastructure research teams notes that the signs have so far been

encouraging that the government is committed to this pledge (see our online service, January 23, '2012

Budget Reinforces Bullish Stance On Building'), contributing to our forecast for a 10.0% expansion of

gross fixed capital formation this year.

Net Exports Outlook: In terms of growth, our outlook for exports is less constructive. With global oil

markets having been disrupted by the Libyan conflict and other supply constraints, Saudi Arabia

responded by ramping up its own production, a decision we estimate to have led to a 5.2% increase in

total exports in 2011. As Libyan and Iraqi production comes back on stream this year, Riyadh is likely to

rein in production to some extent, and we forecast total exports to fall by 0.4%.



Not Much Room To Keep Ramping Up Production Saudi Arabia – Monthly Oil Production

Source: BMI, International Energy Agency

On the other hand, with domestic consumption and fixed investment on the rise – and the domestic

private sector unable to meet local demand – total imports are likely to continue growing robustly this

year. We pencil in growth of 6.0%, leading to a 15.7% worsening in the country's real net export position.

That said, in nominal terms, we stress that net exports remain comfortably in the black (to the tune of

SAR670.0bn in 2011), and will continue to facilitate an expansionary fiscal policy for the foreseeable

future.

Inflation The Major Risk


prices, any sharp downtick in global energy demand would present a substantial risk to the country's

growth outlook. However, with Brent crude trading at over US$110/bbl throughout January, concerns

over supply in Iran and elsewhere persisting, and positive economic data coming out of the United States,

for the time being this risk looks remote.

A more pressing concern is the potential for a sharp acceleration of inflation. With the economy

experiencing a prolonged period of robust growth combined with loose monetary and fiscal policy, there

is a significant risk that upside price pressures could pick up rapidly in the medium term, putting pressure

on consumer spending. While we expect consumer price inflation to remain relatively subdued in 2012, as

global commodity prices moderate and spending on subsidies stays high, over the medium term inflation

is a problem that is likely to come increasingly into focus.



Table: Saudi Arabia – Economic Activity

2011e 2012f 2013f 2014f 2015f 2016f

Nominal GDP, SARbn 1 2,163.1 2,312.9 2,466.5 2,619.8 2,765.3 2,898.7

Nominal GDP, US$bn 1 576.8 616.8 657.7 698.6 737.4 773.0

Real GDP growth, % change y-o-y 1 6.8 4.6 4.1 3.7 3.5 3.0

GDP per capita, US$ 1 20,539 21,486 22,433 23,342 24,147 24,818

Population, mn 2 28.1 28.7 29.3 29.9 30.5 31.1

Unemployment, % of labour force, eop 1 7.0 7.0 7.0 7.0 7.0 7.0

Notes: e BMI estimates. f BMI forecasts. Sources: 1 SAMA, BMI Forecasts. 2 World Bank/UN/BMI.



Industry Forecast Scenario

Consumer Outlook

Our outlook on Saudi Arabia’s consumer sector is very positive, in line with our broader economic

outlook for the country. The Saudi Arabian economy is currently firing on all cylinders, as high oil prices,

heavy government spending and buoyant consumer confidence continue to drive growth. Our positive

outlook for the country has been reaffirmed by a host of leading indicators, with credit growth, business

sentiment and PMI data all pointing to a robust expansion across the economy. We continue to forecast

healthy growth in household and government consumption, as well as fixed investment and imports,

though export growth will lag behind as oil production nears capacity.

Consumers in Saudi Arabia are benefitting from heavy government spending and easy monetary policy,

and our outlook for household consumption remains upbeat. Across the board, consumption-related data

paint a positive picture. Moreover, leading indicator data also remain broadly encouraging. The YouGov

consumer confidence index is close to four-year highs. Government consumption will also remain a major

driver throughout the year. It has long been our view that the political tension stirred up by the Arab

Spring would lead to a sustained increase in public spending on healthcare, education and other social

services, as a means placating the population. While highly publicised announcements of new spending

programmes throughout 2011 reaffirmed this view, there was nevertheless a risk that much of the funding

for these projects would fail to materialise.

These concerns have been firmly allayed in recent months, with several large-scale healthcare projects

having been initiated since the beginning of the year, and construction on a US$20bn programme to build

16 new university campuses as well as over 100 colleges beginning in April. Such projects will keep

government spending elevated for the foreseeable future. With memories of the Arab Spring still

lingering, the government is unlikely to risk stirring up domestic discontent by tightening policy, and

still-elevated global oil prices will leave Riyadh with plenty of room to manoeuvre on the fiscal front.

Another key strength of the Saudi market is the sheer size of the local population. Saudi Arabia’s

population constitutes about two-thirds of the total Gulf population, which will provide significant long-

term growth opportunities for the consumer sector. Furthermore, the population is rapidly expanding, and

the UN estimates that around half of Saudis are younger than 25.While Saudi Arabia’s tastes and

preferences are generally very much in line with the wider region, the population effect and the fact that

income per head in Saudi Arabia remains relatively low compared to the UAE, Qatar and Kuwait suggest

there is a lot more room for growth.

Like the rest of the Gulf region, Saudi Arabia experienced an explosion in consumer spending over the

past decade as bourgeoning global energy demand allowed the country to fill its coffers and caused



income (especially at the top end of the scale) to surge. As Saudi consumers had a lot more money to

spend, they became a prime target for expensive Western retail names as they ploughed into the country,

with retail space growing enormously.

It is the middle class that largely drives domestic demand growth in Saudi Arabia. While inequality and

unemployment remain concerns, it is the mass market that will have to provide much of the momentum in

consumer spending growth over the near term. With about half of food retail sales accounted for by

organised players, it will probably be the middle class that drives this higher over the next few years, as

private consumption becomes a more important contributor to economic growth. The planned overhaul of

the Saudi home finance market should also encourage greater mortgage lending, which in the long term

should have a strong knock-on effect on private consumption.

The size of the domestic market in Saudi Arabia dictates that quite a few of its largest consumer

companies have developed more scale than many of their regional counterparts over recent years. The

largest companies, such as Almarai, are increasingly looking beyond Saudi Arabia and the Gulf

Cooperation Council (GCC) region for growth, even if Saudi Arabia’s size suggests the need to do this is

less pressing than for companies with greater exposure to the higher-income but smaller GCC economies.

Domestically, big companies are increasingly willing to leverage off their main business to invest in non-

core areas and open up new growth areas. In doing so, they are looking to take advantage of the market’s

size and rising incomes. Domestic demand in Saudi Arabia hinges much less on expatriate spending than

in the UAE, Qatar and Kuwait. Expatriates make up about 20% of the Saudi population, compared with

an estimated 80% in the UAE. While a large, free-spending expatriate population can significantly boost

private consumption when the economic conditions are supportive, the strength of the contribution

depends on the country’s ability to retain high-spending non-nationals.

We expect household consumption to hold up well in 2012, pencilling in real growth of 5.0% through the

year. The main driver of this expansion will continue to be government spending, with public sector

wages, social benefits and food and fuel subsidies all having been hiked substantially in the past year and

unlikely to be reined in while the Arab Spring continues to occupy the minds of policymakers. Loose

fiscal policy has spurred consumer spending, an effect that has been reflected in a host of leading

indicator data showing a strong performance by the domestic private sector. This robust outlook will be

further bolstered by loose monetary conditions; credit growth, one of our favourite leading indicators for

economic activity, is also looking positive.

Over the long term, our forecasts show that the authorities will be able to sustain their ‘iron grip’, at least

financially, over the next 10 years. We expect oil production to continue to expand, albeit slowly, fuelling

growth and ongoing asset accumulation. This would mean the government could afford to maintain high

levels of security spending and keep the population in the luxury to which it has become accustomed



through public sector jobs, subsidies and benefits in the near-to-medium term. That said, the

government’s financial commitments rose substantially in 2011, posing challenges to the long-term

sustainability of such policies.

Risks To Outlook

The climate of unrest in the Middle East and North Africa region is by no means over, and we caution

that political risks pose a threat to Saudi Arabia’s long-term economic potential. The government has

done little so far to engage in meaningful political reform and has taken an increasingly hard line against

dissent. The lack of willingness to address political and structural economic imbalances indicates that

stability over the long term will be difficult to achieve. A period of instability would not only likely affect

foreign direct investment inflows, but possibly also the country’s ability to export oil.


prices, a sharper-than-expected downturn in the global economy, if it was to translate into a substantial

decline in oil prices, would pose significant downside risks to our forecasts for Saudi Arabia's fiscal and

current account position, though it remains highly unlikely that either account will fall into the red in the

near term.

Food

Food Consumption

Our outlook for food consumption growth in Saudi Arabia remains strong, fuelled by strong economic

and population growth over our forecast period, as well as continued strong investment in the food

processing sector, particularly key segments such as dairy. Between 2011 and 2016 we are forecast that

food consumption will grow by an enviable 55.3% to reach a value of SAR245.5bn, outperforming other

regional markets. Over the same period, per capita food consumption is forecast to grow by an impressive

40.0% to reach a value of US$2,104.

Recently-released leading indicator data have reaffirmed our positive outlook on the Saudi Arabian

economy, as loose monetary and fiscal policy continue to drive growth on almost all fronts. We have

revised up our forecast for real GDP growth in 2012 from 4.6% to 5.3%, though we still expect growth to

slow next year as the impact of government spending begins to fade. Consumers in Saudi Arabia are

benefitting from heavy government spending and easy monetary policy, and our outlook for household

consumption remains upbeat. We expect government spending on wages and benefits to remain elevated,

as we see Riyadh keeping public consumption high in 2012. Heavy spending on social services is part of

a strategy to shore up public support, and we are accordingly forecasting growth of 6.0% in public

consumption.



Table: Food Consumption Indicators – Historical Data & Forecasts

2009 2010 2011e 2012f 2013f 2014f 2015f 2016f

Food consumption (US$bn) 36.17 38.73 42.21 47.02 51.33 55.84 60.50 65.54

Food consumption (SARbn) 135.44 145.05 158.06 176.09 192.21 209.11 226.59 245.46

Per capita food consumption (US$) 1,349.0 1,411.1 1,502.9 1,638.0 1,750.6 1,865.7 1,981.2 2,104.4

Per capita food consumption (SAR) 5,052 5,284 5,629 6,134 6,556 6,987 7,420 7,881

Total food consumption growth (y-o-y) 16.55 7.09 8.97 11.40 9.16 8.79 8.35 8.33

Per capita food consumption growth (y-o-y) 13.75 4.60 6.51 8.99 6.87 6.58 6.20 6.21

e/f = BMI estimate/forecast; na = not available/applicable. Source: Ministry of Economy and Planning, Central Department of Statistics, Saudi Arabian Monetary Agency, Company Information, Trade Press, BMI

With a population that is expected to exceed 30mn by 2016, Saudi Arabia is the only market in the Gulf

region that can realistically provide investors with long-term volume growth potential. It is also much less

reliant on attracting expatriates to maintain the size of the consumer base compared with markets such as

the UAE. For this reason, premiumisation is unlikely to be as important a driver of food consumption

growth as it is in other regional markets like the UAE.

The ongoing development of organised retail channels should also contribute to food consumption growth

over the long term. The growth of organised retailing will continue to strengthen internal trade systems,

which will contribute to lower overheads and cost savings that can be passed on to consumers.

Confectionery

The confection industry is one of the most important sub-sectors in the Saudi Arabian food and drink

sector, and will continue to experience strong growth over our forecast period. The premiumisation trend

will continue to be the main driver of growth in the sector, with sales forecast to grow by a strong 46.5%

between 2011 and 2016 to reach a value of SAR1,343mn. Other major factors will be the large and young

population, with around half of the population currently younger than 25, according to UN estimates.

Furthermore, this sub-sector is continuing in attract considerable investment by both local and

international players. For example, confectionery producer Mars has recently started construction of a

new chocolate facility in Saudi Arabia.



Although segmented industry data is not available, BMI expects growth to be fairly well spread across

the sugar confectionery, chocolate and gum segments. Taking into account that Saudi consumers are

fairly price sensitive compared to most of the regional peers, products at the low end of the price range

are likely to remain particularly popular.

Table: Confectionery Value Sales – Historical Data & Forecasts

2009 2010 2011 2012f 2013f 2014f 2015f 2016f

Confectionery sales (SARmn) 730.86 875.61 916.55 1,026.18 1,098.65 1,175.98 1,256.71 1,343.09

Confectionery sales growth, SAR, (y-o-y) 0.01 0.66 0.75 0.64 0.68 0.56 0.53 0.60

Confectionery sales (US$mn) 195.2 233.8 244.7 274.0 293.4 314.0 335.6 358.6


Drinks

Soft Drinks

With the hot and arid climate and the total ban on the sales of alcoholic drinks, it should come as no

surprise that the soft drinks sector is Saudi Arabia’s most dynamic. Soft drinks sales are expected to

continue to experience strong growth in Saudi Arabia over our forecast period, increasing by 52.6% in

local currency value terms to 2016. Not surprisingly owing to the size of its population, Saudi Arabia’s

soft drinks industry is comfortably the region’s largest in volume and value terms.

In per capita terms, consumption of soft drinks, which by our definition includes bottled water,

carbonates, juices and functional drinks (energy drinks), increased from 168 litres in 2002 to nearly 240

litres in 2010. In value terms, the size of the industry grew from US$3.3bn to US$5.2bn over the period,

with bottled water and carbonates making up about 80% of sales. Saudi consumers are brand loyal and

increasingly interested in new and innovative products, a factor that is increasing demand for non-core

soft drinks segments such as energy drinks, which are expected to experience strong growth, although

from a relatively low base. Fruit juices are expected to perform particularly well over the forecast period,

thoroughly outperforming the established carbonates segment in particular.

The carbonates segment is the most mature and is expected to register the lowest growth rate at 33.1% to

2016, reflecting that most of the growth opportunities in the segment have already been tapped. However,



rising health consciousness does provide some opportunities and will support the growth of low-calorie

carbonate drinks. In our view, established brands are likely to continue growing, albeit modestly.

Boosted by the lack of adequate drinkable water, the bottled water segment will continue to grow strongly

over the forecast period, with sales forecast to rise by 47.3% in value terms. This growth is being largely

led by investments into product strengthening by leading players and an emphasis on the size of bottles.

Emerging sub-segments such as flavoured water should also register strong growth from a low base, as

consumers continue pursuing new and innovative drinks.

The most widely consumed drink variety by value sales – the fruit juice segment – is expected to continue

on a strong growth trajectory to 2016, with sales forecast to grow by 49.8% With the sector continuing to

benefit from expected investment in new product development by leading players, strengthening health

consciousness will also have a positive effect as consumers move away from sugary artificial fruit juices

to higher juice content and higher value juices.

In line with rising regional demand for functional drinks, strengthening demand for higher-value energy

drinks is the logical consequence of developments in healthier beverage sub-sectors, such as bottled water

and fruit juices.

Other factors driving soft drink growth include the ongoing rapid development of organised retail.

According to industry estimates, off-trade sales of soft drinks through retail channels account for 80% of

total volume sales, with supermarket and hypermarkets accounting for around 36% of soft drink sales,

while independent food stores accounted for approximately 22%.

Table: Soft Drinks Value Sales – Historical Data & Forecasts

2009 2010 2011e 2012f 2013f 2014f 2015f 2016f

Carbonated drink sales (SARmn) 8,606 8,790 9,320 9,874 10,489 11,098 11,724 12,404

Bottled water sales (SARmn) 8,769 9,436 10,342 11,225 12,200 13,176 14,167 15,236

Juice sales (SARmn) 7,189 7,816 8,612 9,385 10,241 11,094 11,964 12,905

Soft drinks sales (SARmn) 29,868 32,246 35,139 37,989 41,146 44,289 48,535 52,008

Total soft drink sales growth, SAR, (y-o-y) 8.79 7.96 8.97 8.11 8.31 7.64 9.59 7.16

Carbonated drink sales (US$mn) 2,298.1 2,347.2 2,488.8 2,636.6 2,800.8 2,963.4 3,130.7 3,312.2

Bottled water sales (US$mn) 2,341 2,520 2,761 2,997 3,258 3,518 3,783 4,068

Juice sales (US$mn) 1,920 2,087 2,300 2,506 2,735 2,962 3,195 3,446



Table: Soft Drinks Value Sales – Historical Data & Forecasts

2009 2010 2011e 2012f 2013f 2014f 2015f 2016f

Energy drink sales (SARmn) 5,304.8 6,203.5 6,864.8 7,504.9 8,215.0 8,921.1 9,643.5 10,426.3

Soft drinks sales (SARmn) 29,868 32,246 35,139 37,989 41,146 44,289 48,535 52,008

Total soft drink sales growth, SAR, (y-o-y) 8.79 7.96 8.97 8.11 8.31 7.64 9.59 7.16

Carbonated drink sales (US$mn) 2,298.1 2,347.2 2,488.8 2,636.6 2,800.8 2,963.4 3,130.7 3,312.2

NB Category sales are estimated based on contribution to industry total and forecast changes to industry total. Contribution estimate is based on the listed sources. Source: International Bottled Water Association, Company information, Trade press, BMI

Alcoholic Drinks

Saudi Arabia has some of the Gulf region’s most severe alcoholic drinks restrictions. Saudi law does not

tolerate the consumption or distribution of alcoholic drinks to any extent, meaning that alcoholic drinks

are not sold in hotels or restaurants. However, there is a demand and illegal channels do exist, and there

are opportunities for producers of non-alcoholic beers and malt-based beverages.

Hot Drinks

Traditional tea and coffee are both very popular and widely consumed in Saudi Arabia. While tea is the

more popular drink, coffee sales are expected to outperform tea sales in terms of growth to 2016. Between

2011 and 2016, tea sales are forecast to grow by 43.0% in local currency value terms, while coffee sales

are forecast to post value growth of 77.7%. Premiumisation will be an important growth driver as

consumers switch over to packaged tea and coffee drinks.

Ongoing on-trade strength, underlined by the rising prominence of Western-style coffee shops, will

continue to positively affect wider coffee sales as the industry becomes more segmented and as

disposable incomes rise over the long term.

Meanwhile, growth in tea is expected to be largely driven by product development, with the wider

penetration of fruit teas and functional teas playing an increasingly important role in driving growth.



Table: Hot Drinks Value Sales – Historical Data & Forecasts

2009 2010 2011e 2012f 2013f 2014f 2015f 2016f

Coffee sales (SARmn) 873 946 1,012 1,164 1,292 1,447 1,606 1,798

Coffee sales (US$mn) 233.1 252.5 270.2 310.7 344.9 386.3 428.8 480.2

Tea sales (SARmn) 566.9 593.2 615.3 672.9 711.9 764.6 819.5 880.0

Tea sales (US$mn) 151.4 158.4 164.3 179.7 190.1 204.2 218.8 235.0




Mass Grocery Retail

Saudi Arabia’s mass grocery retail (MGR) sector is expected to continue to experience strong growth to

2016, in line with the country’s strong economic outlook and the ongoing development of the food and

drink sector. Between 2011 and 2016 we are forecasting growth of 66.6% in the country’s MGR sector.

Over the forecast period, ongoing store launches across the core hypermarket and supermarket segments

will continue to support the structural transition from informal to formal retailing. Hypermarket sales will

continue to dominate the sector, with sales through this format expected to grow by 64.5% over our

forecast period. Meanwhile, sales through the important supermarket sector are forecast to grow by 60.0%

to 2016. The emerging discount and convenience store sectors are forecast to experience very strong

growth of 90.0% and 95.2% respectively, but from a much lower base. While they will continue to

account for a far lower percentage of overall sales, these store formats will become increasingly important

in coming years as retailers look to penetrate more residential areas and consumers increasingly demand

more convenience.

Led by the hypermarket segment, total MGR sales increased considerably during the kingdom’s oil-

fuelled economic boom between 2002 and 2008. Over this period, MGR sales increased by 65.36%, and

with independent outlets still accounting for about 50% of grocery sales, the industry has some way to go

before it reaches maturity.

Driving our enviable growth forecast for the sector will be the country’s strong economic and

demographic outlook. With a rapidly growing population of about 28mn, Saudi Arabia is a young market

and accounts for close to a third of the Gulf’s consumer base. Its size provides an unmatched regional

long-term growth outlook. Organized retail currently accounts for only about 52% of consolidated

grocery sales. As this percentage is tied to the strong demographic picture, and owing to the fact that

disposable incomes are expected to grow strongly over the coming years, we see MGR’s proportional

contribution rising to around 73% by 2020.

Another major driving factor will be continued investments in the sector by leading industry players, and

we expect domestic retailers to lead the formalisation process. Underlining the strength of the leading

Saudi players (especially in hypermarkets), the Gulf region’s two leading hypermarket retailers

Carrefour MAF and EMKE-owned Lulu currently play second fiddle. We believe that market leader

Panda, owned by Savola, is best placed to continue driving the formalisation process. Having pursued

strong non-organic investments over the past few years, it will most likely pursue a strategy of organic

growth in coming years. Meanwhile, multi-segment retailer Al-Othaim is also strongly positioned. Al-

Othaim’s 42 Saudi stores are spread across the convenience, hypermarket and convenience store

segments. We expect all three segments to grow considerably over the forecast period to 2016.



Table: Mass Grocery Retail Sales – Historical Data & Forecasts

2009 2010 2011e 2012f 2013f 2014f 2015f 2016f

Supermarkets (SARbn) 26.60 29.82 33.27 36.86 40.83 44.77 48.83 53.23

Hypermarkets (SARbn) 40.925 44.244 49.763 55.530 61.933 68.271 74.796 81.876

Co-ops (SARbn) 1.575 1.769 1.968 2.188 2.434 2.677 2.926 3.198

Discount stores (SARbn) 2.414 2.808 3.235 3.694 4.196 4.788 5.437 6.145

Convenience stores (SARbn) 6.99 7.93 9.06 10.43 12.00 13.77 15.67 17.68

Total mass grocery retail sector (SARbn) 78.503 86.572 97.292 108.702 121.398 134.280 147.659 162.128

Total mass grocery retail sector growth, SAR, (y-o-y) 20.850 10.279 12.382 11.728 11.680 10.612 9.963 9.799

Supermarkets (US$bn) 7.103 7.962 8.884 9.841 10.904 11.956 13.039 14.214

Hypermarkets (US$bn) 10.928 11.814 13.288 14.828 16.537 18.230 19.972 21.863

Co-ops (US$bn) 0.421 0.472 0.525 0.584 0.650 0.715 0.781 0.854

Discount stores (US$bn) 0.645 0.750 0.864 0.987 1.120 1.278 1.452 1.641

Convenience stores (US$bn) 1.866 2.118 2.418 2.786 3.204 3.677 4.184 4.721

Total mass grocery retail sector (US$bn) 20.962 23.117 25.979 29.026 32.416 35.856 39.428 43.292


Table: Mass Grocery Retail Sales By Format

2010 2020f

Organised/MGR 52 73

Non-organised/Independent 48 27

f = forecast. Source: BMI



Trade

Unlike its Gulf peers, Saudi Arabia has a large landmass and a major agricultural sector. Nevertheless, as

is the case with its Gulf peers, it is still heavily reliant on food and drink imports in order to meet the

needs of its large and growing population, particularly following major cuts in subsidies to the country’s

agricultural sector. Indeed, Saudi Arabia runs the region’s largest food and drink trade deficit, which is

not surprising given the size of the market relative to the rest of the region. In recent years, the country

has been actively pursuing land deals abroad to make up for domestic shortfalls and to somewhat shield

itself from further food price spikes.

Over our forecast period to 2016, exports are forecast to decline marginally by 1.4%, while imports are

forecast to grow by 38.0%, with the net result a food and drink trade balance that will grow increasingly

negative by 47.3%.

Table: Trade Indicators – Historical Data & Forecasts

2009 2010 2011e 2012f 2013f 2014f 2015f 2016f

Exports (food, drink & tobacco) (US$mn) 1,327 1,803 2,513 2,599 2,533 2,525 2,520 2,479

Imports (food, drink & tobacco) (US$mn) 12,283 12,962 13,120 14,242 15,221 16,145 17,163 18,102

Balance (US$mn) -10,955 -11,159 -10,607 -

11,643 -12,688 -13,621 -14,643 -15,623




Food

Key Gulf Region Industry Trends And Developments

Almarai Investing In Diversification

We have highlighted Saudi Arabia’s Almarai as the star performer in the Gulf food and drink universe

over the past few years. It has a very strong dairy business and made positive efforts to diversify both in

terms of geography and business categories. The company has reported full-year 2011 net income of

SAR1.14bn (US$304mn), an 11.4% y-o-y decline from 2010’s net income of SAR1.28bn (US$340mn),

which was 17.0% higher than in 2009. However, full-year 2011 sales reached SAR7.95bn (US$2.1bn), a

14.7% increase over 2010; the company attributed the drop in net income to the impairment of its

investment in the Kuwaiti telecommunications company Zain.

With Saudi Arabia looking to address food security issues, Almarai has announced that it will buy

Argentine farm operator Fondomonte for US$83mn. The deal is expected to strengthen Almarai’s supply

chain, and we believe similar deals could be forthcoming as the company looks to cater to rising demand

at home. Fondomonte operates three farms in Argentina which produce a range of commodities including

maize and wheat.

In 2011, Almarai revealed plans to invest about US$1.1bn in developing its poultry business, which in its

FY10 contributed a modest 2.5% to overall sales. Until it acquired Saudi Arabia’s leading poultry

company Hail Agricultural Development Company for about SAR950mn (US$253mn) in 2009,

Almarai did not have a poultry business. Its plan to invest such a large sum indicates to us that in addition

to expanding its geographic footprint, the company is also focused on diversification in the large Saudi

Arabian market.

Indeed, Almarai continues to rapidly establish itself as one of the Gulf’s most ambitious and innovative

food and drinks players. Having set up the acquisition-hungry International Dairy and Juice Limited

joint venture with PepsiCo in 2009, Almarai has also partnered with US baby food company Mead

Johnson. In May 2012 the company announced that it would soon start producing baby food locally, and

that it has now completed the construction of a new factory in Al Kharj.

In aligning itself with Western companies with strong tactical synergies, Almarai continues to distinguish

itself from its traditionally more conservative regional dairy rivals. With Saudi Arabia accounting for

nearly 70% of group sales in FY09, frontier markets such as Egypt are increasingly important to

Almarai’s growth strategy. By 2015, Almarai is aiming to double its annual sales, and we think its core

units will be integral to realising this ambition.



New Products And Frontier Markets

Leveraging the strong and established positions in their core business areas, the Gulf region’s largest food

and drink companies are increasingly pursuing diversification, both in terms of geography and entering

new business units.

In addition to the aforementioned Saudi Arabia-based dairy firm Almarai, the sugar, edible oils and mass

grocery retail giant Savola Group is diversifying from a position of strength in Saudi Arabia. According

to Chief Executive Sami Baroum, the firm is increasingly turning its attention to frontier African markets

such as Egypt and Sudan.

Although it is present in edible oils, Savola does not have a presence in Sudan’s sugar sector. While we

expect Egypt to take precedence, not least because Savola already has a presence in the country’s sugar

sector, any decision to invest in Sudan would fall in line with the capacity-strengthening initiative.

Growing Investment Interest From Multinational Corporations

In addition to Gulf companies, multinational corporations operating in the Gulf region have been seeking

expansion into the wider MENA region. New Zealand dairy giant Fonterra has been among the most

active. In line with a comment made in 2009, when the company said that it saw the Gulf region as a key

growth area, Fonterra has completed the full takeover of the outstanding 51% stake in its Saudi joint

venture partner Saudi New Zealand Dairy Products Company from Saudi Dairy and Foodstuff

Company (SADAFCO). The deal is believed to have been worth about SAR120mn (US$32mn).

SADAFCO announced strong FY12 results on March 31st, 2012 posting a 17.7% year-on-year rise in

revenues to SAR1.3bn and a 17.2% increase in net income to SAR.151.8mn. The company has continued

to improve operating margins in FY12 as margins grew again to 11.5%, compared to 11.0% in FY11 and

5.6% in 2008.

In March 2010, it was announced that Swiss food and drink giant Nestlé planned to launch a new plant in

Dubai, at the site that used to house its Regional Microbiological Laboratory. In December of that year,

the new US$136mn facility was opened. Specialising in making the Kit Kat brand of chocolate biscuits as

well as producing Nido powder milk and Pure Life bottled water, the new plant has an annual production

capacity of 100,000 tonnes. Nestlé will also use the new plant as its Middle East headquarters. In 2011

Nestlé announced that it plans to double its Middle Eastern sales by 2017 through new investments. The

company said that it plans to invest US$400mn over three years in the Middle East, with plans to double

sales from US$1.4bn in 2009 to US$3.3bn by 2017.

Most recently, in February 2012 it was announced that confectionery producer Mars has started

construction of a new chocolate facility in Saudi Arabia. The plant will begin production in 2014, but the



development of the project is set to take 10 years and cost US$210mn. The plant will employ 400 people

when it begins operations and initially will produce the firm’s Galaxy and Galaxy Jewel brands. The

move reflects growing demand for confectionery products in Middle East, where Mars already operates

one facility, in Dubai, producing Mars, Galaxy and Snickers.

Growing Popularity Of Eating Out

While traditional foods and eating habits still dominate, there is a major shift taking place in Saudi

Arabia’s food sector as consumption habits change. Eating out on a regular basis, as opposed to just on

special occasions, is becoming increasingly popular, with fast-food also growing in popularity.

Accordingly, many companies have been increasing their investments in the Saudi market, which is both

in response to and feeding this trend. The fast food sector in Saudi Arabia is forecast to be worth around

US$4.5bn by 2015.

Casual dining and fast-food restaurants have become increasingly popular across the Gulf region over the

past decade. A host of these restaurants have sprung up as richer consumers and a strong eat-out culture

drives growth. The dynamics of the consumer sectors in Saudi Arabia works well for casual dining and

fast-food. With a complete ban on the sale of alcoholic drinks, these restaurants serve as excellent family-

friendly locations. There is strong demand for competitively priced Western-priced food with a family

atmosphere.

In October 2010, US casual dining chain operator Darden Restaurants announced plans to embark on a

major expansion in the Middle East through a development agreement with Kuwait’s Americana Group,

the country’s leading food company. Darden, which runs the Red Lobster, Olive Garden and

LongHorn Steakhouse chains, will work with Americana to develop at least 60 restaurants in Kuwait,

Bahrain, Qatar, Saudi Arabia, the UAE, Egypt and Lebanon over five years. Darden CEO Clarence Otis

stated that his company is interested in expanding in the Middle East region not only because it is a

growing market, but also because it has shown a strong affinity for US dining brands. He went on to say

that Darden chose to work with Americana owing to its operational experience and local market

knowledge, as Americana operates more than 1,200 restaurants throughout the Middle East, working with

KFC, Pizza Hut, Krispy Kreme and others.

This was followed by an announcement in late December 2010 by the Americana Group that it had

renewed its development agreement with US- based TGI Friday’s to continue expanding operations

throughout the Middle East region. According to the agreement, Americana will open 30 new TGI

Friday’s restaurants in the region over five years. Americana currently owns and operates 36 TGI

Friday’s; its operational territory encompasses Bahrain, Egypt, Jordan, Kuwait, Lebanon, Oman, Qatar,

Saudi Arabia, Syria and the UAE. More recently, in October 2011, US based pizza restaurant chain Pizza

Fusion, a Samir Group brand, opened a new branch in Jeddah, Saudi Arabia. It is Pizza Fusion’s

fifth outlet in Jeddah. In May 2012 American burger chain Burger King opened their 65th and largest yet



restaurant in Riyadh. The Burger King brand is managed by HANA International, a subsidiary of Olayan

Financing Company in the Middle East and North Africa. The company has said that Saudi Arabia is a

key growth market, and that it will continue to be a focal point for their investment strategy in the Middle

East. Snack Chains Growing in Popularity

American-style snack chains also are becoming very popular in Saudi Arabia. In late 2011, American

company Baskin-Robbins, a subsidiary of Dunkin’ Brands, announced that it would pursue further

expansions throughout the Middle East region. The company currently has a presence in Saudi Arabia,

Bahrain, Qatar, UAE and Kuwait. Baskin-Robbins has more than 4,000 international outlets, with a

massive presence in developing markets. The Middle Eastern market is particularly important to the

company; owing to the year-round hot climate and the prevalence of unhealthy eating habits, there is a

continuous high demand for ice cream. Baskin-Robbins plans to open 25 new stores in the Middle East by

2013.

In Q411 US fast-food restaurateur Dairy Queen opened its first stores in Riyadh, with plans to have a

total of four stores in the Saudi Arabian capital by the end of 2012, including the country’s first DQ Grill

& Chill at the Dove Plaza, which opened in March 2012. DQ Grill & Chill outlets offer an extended menu

with breakfast, sandwiches, burgers and desserts. Meanwhile, US firm Magnolia Bakery has also

announced plans to open six new stores in the Middle East in 2012. Magnolia co-owner Steve Abrams

revealed that the bakery had received interest from all over the world but planned to concentrate its future

commercial strategy upon emerging markets such as Lebanon, Saudi Arabia and Kuwait.

Also in late 2011, US-based frozen dessert chain Tasti D-lite announced that it will be expanding in the

Middle East via a franchising agreement. Al-Himmah International Limited reached an agreement to

expand the chain in six countries in the region – Bahrain, Kuwait, Qatar, Saudi Arabia, Lebanon and

Jordan, with the first stores expected to be opened in Saudi Arabia in Q212 and plans to open 30 stores

over the next five years. The Himmah group of companies, with a background in construction, hospitality,

logistics and infrastructure projects, has a newly formed food division for this expansion project.

Market Overview

Food Processing

The Saudi Arabian food-processing sector has developed at a considerable pace over the past decade. The

government currently supports the industry by providing attractive financing and subsidies on selected

equipment, and through the imposition of high tariffs on imports that compete with locally produced

equivalents. These include meat and poultry, table eggs, infant nutritional foods, sugar and macaroni.

However, the government did reduce customs tariffs on a number of basic food products in 2008 in

response to high rates of inflation.



Fuelled by the kingdom’s economic boom through to 2008, significant growth has taken place across a

number of food segments. The meat-processing, dairy and confectionery segments have attracted

particular attention. Increased investment by multinational food companies, the continued development of

the domestic food processing industry and the continued expansion of Saudi Arabia’s mass grocery retail

industry are contributing to the gradual shift towards more Western consumption habits.

Dairy Processing

Saudi Arabia’s bustling dairy industry has been at the forefront of the food industry’s expansion and

continues to grow rapidly. Higher incomes, the increasing use of white goods, growing consumer interest

in healthy eating and the continued emergence of major domestic manufacturers have seen the sector

emerge as a major economic contributor over the past decade.

Saudi Arabia’s dairy industry is comfortably the Gulf region’s most competitive, and the country’s main

dairy companies have invested heavily in vertically integrating their operations. The industry is led by the

increasingly ambitious Almarai, the region’s largest dairy company by market value. Almarai’s core

competitive advantage is the company’s highly developed distribution network. While the broader Middle

East region accounted for much of Almarai’s capital expenditure in 2009, it certainly did not neglect its

core markets. Not afraid to enter new business segments, Almarai leveraged the strength of core business

units by entering into the poultry and infant formula segments organically and inorganically. In July 2009,

Almarai closed a deal for one of Saudi Arabia’s leading poultry processors, Hail Agricultural

Development Company, for about SAR1bn. It also entered the infant formula industry organically. More

recently, the company purchased 12,000 hectares of farmland in Argentina through farm operator

Fondomonte in order to beef up its supply chain.

In the past, the fresh food industry in the country has suffered due to the inefficient transportation of

produce from the point of production. Through a joint venture with the soft drinks giant PepsiCo, Almarai

has been expanding beyond the Gulf region and into the wider Middle East through acquisitions. In

addition to Almarai, other prominent players in the dairy industry include Al Safi Danone and

SADAFCO.

Furthermore, improved production practices have been matched by improvements in the standards of

imported cattle, helping transform Saudi Arabia from a dairy importer to a fast-growing dairy exporter.

While the export market remains an important source of revenue for the industry, domestic demand for

dairy remains the primary driver of industry growth. The characteristics of the industry enable it to appeal

to health-conscious Saudi consumers, while economic growth has had a positive impact on the ability of

the average consumer to purchase, and have the means of storing, dairy produce. Per capita annual dairy

consumption in Saudi Arabia currently stands at about 54kg – a rate far higher than is typical in most

emerging markets.



The bulk of dairy consumed in Saudi Arabia is consumed in primary forms, with 38% of dairy demand

accounted for by liquid milk, and 30% accounted for by laban (a regional variety of yoghurt). More

profitable secondary dairy products, such as cheese, remain emerging categories in Saudi Arabia; given

the financial protection currently afforded to the industry, this is not a problem. However, as government

subsidies are reduced, the price – rather than just the quantity – of goods sold will become of increasing

importance to manufacturers.

Agriculture

The Saudi government is placing a growing importance on the country’s agricultural sector. However,

agriculture contributes very little to the local economy in comparison to the industry and service sectors.

The weak farming sector accounts for just 3.1% of total GDP and employs less than 10% of the total

population. An estimated 1% of the kingdom’s land is suitable for farming. However, local processing

capabilities are fairly developed, and value-added production is made possible once raw materials have

been imported from abroad.

In socioeconomic terms, the agricultural sector is crucial to the Saudi economy, as it provides

employment for the significant segment of the population that has little formal education. The majority of

agricultural production in Saudi Arabia is in the north of the country, in areas such as Qasim, Hail and

Wadi. The leading crops include wheat, watermelon, dates and tomatoes.

Wheat production has collapsed since the government changed its support policy at the end of 2007 in a

bid to preserve water resources. The Saudi government will reduce state wheat purchases from local

farmers by 12.5% on an annual basis until 2016 (by which time it expects to be totally import dependent).

We see a plummeting trend in line with the reduction of state support to the end of our outlook period to

2016.

Saudi Arabia is the Gulf region’s largest exporter of dates (average yearly output is 830,000 tonnes). Milk

and butter are among the kingdom’s most notable dairy products, and it also can count on relatively

buoyant poultry production.

Nevertheless, like most other countries in the region, Saudi Arabia cannot meet its growing population’s

food needs and is therefore reliant on imports. According to BMI research, Saudi Arabia imports more

than US$14.2bn worth of food and beverage products each year. With its growing population now around

28mn, this makes it by far the largest importer of such products in the Middle East region, resulting in an

enormous negative trade balance for the food and drink sector. With agriculture using 90% of Saudi

Arabia’s already minimal water supply, critics are sceptical about the need for expansion when this will

make only a marginally more significant contribution to exports.



Over the review period, Saudi Arabia’s agricultural production has remained fairly stable, thanks in part

to the subsidies that were in place. Moving forward, the sector looks likely to expand, and this will remain

a key government focus – despite objections by critics. However, over the long term, significant

advancements are not expected, with geographic and climatic limitations too severe for the proposed level

of government investment to overcome. In 2007, Saudi Arabia’s agriculture minister announced

government plans to introduce organic crops to the country, and called for the establishment of a national

commission on organic farming. As of 2011, there were only three organic farms in Saudi Arabia,

representing 0.01% of total agricultural land.

Meanwhile, the kingdom has actively sought to enter into long-term lease agreement with a number of

African countries for agricultural lands. The country’s Agricultural Minister is encouraging companies to

invest in farms in Africa it looks to secure supplies of food imports to replace phased out local

production. In 2011 Saudi Star Agricultural Development announced plans to invest US$2.5bn by 2020 in

the development of a rice-farming project on 10,000 hectares of land on lease for 60 years, with plans to

rent a further 290,000 hectares from the government.

Halal

The importance of the halal food industry is continuing to grow in the Middle East, with Saudi Arabia

hosting the first international conference on Halal food in February 2012 in Riyadh. The long-term

outlook for the halal food industry is captured by the fact that world’s Muslim population represents close

to 25% of global population, at more than 1.6bn. As investment into the industry increases, competition

among producers will intensify, which will lead to a rise in the output of halal products.

While Middle Eastern consumers traditionally prefer fresh meat, health and hygiene scares have been a

major driver of changing consumer habits and have ultimately benefited the packaged-meat industry.

Meat and halal products are now being imported from many countries, including Australia, New Zealand,

Ireland, Brazil, Canada and the US. In fact, most distributors of halal products are not from Muslim

countries, with many international producers having recognised the potential in the market.

Although it is Malaysia that has taken the lead in developing and modernising this sector, regional

producers have increased production and are slowly reducing the Gulf region’s import dependence.

Companies such as UAE-based Al Islami Foods have started to assume the regional mantle.



Drink


Bottled Water Sector Growing in Importance

In line with its product and geographic expansion plans, Abu Dhabi state-backed food and beverage

producer Agthia Group acquired Turkish spring water producer Pelit Su in early 2012. The acquisition

will provide Agthia with an existing manufacturing plant that is equipped with three bottling lines as well

as additional space for future capacity expansion. With this acquisition, Agthia has clearly underlined the

growing significance of its bottled water division as a growth pillar, and Pelit Su’s established spring

water brands should facilitate Agthia’s expansions beyond Turkey and the UAE.

The bottled water segment is notably one of Agthia’s fastest-growing divisions. Driven by strong volume

gains and higher product prices, Agthia witnessed an impressive growth of 28.5% in its bottled water

sales for the year ending December 2010, comfortably outperforming other business divisions. It is not

surprising, therefore, to find that the bottled water segment has a growing presence on Agthia’s

expansionary agenda, and the company’s acquisition of Pelit Su certainly represents a major step forward

in making bottled water a more significant growth driver.

Agthia’s acquisition of Pelit Su also complements its geographic diversification push. The company’s

geographic footprint currently spans across the UAE, Oman, Bahrain, Qatar, Kuwait and Saudi Arabia,

and it could leverage on its acquisition of Pelit Su as a platform to launch a deeper push across the

broader Gulf Cooperation Council (GCC) region as well as facilitate its forays into other regions.

Frontier Market Investment Strengthening

Gulf-based soft drinks companies are increasingly pursuing frontier market investment, with Egypt,

Jordan and recently Iraq among the most favoured markets. In January 2010, Saudi Arabia’s Aujan

Industries announced that it would invest US$100mn in Iraq that year. Steady economic liberalisation –

discounting the hydrocarbon sector, foreign firms are allowed 100% ownership – in the post Saddam

Hussein-era is allowing the country to attract a steady supply of non-hydrocarbon foreign investment.

Egypt’s position as the key Middle East and North Africa (MENA) frontier market has been reinforced

over the past year. PepsiCo announced in November 2009 that it would invest US$100mn in Egypt in

2010. Although it did not specifically mention which segments it would target, in addition to core

carbonate growth, it did target the dairy (possibly fruit juices, too) segment through its International

Dairy and Juice Limited joint venture with Almarai.



Carbonates Shake-Up

After largely holding prices steady for more than 20 years, the Gulf-based bottlers of PepsiCo and The

Coca-Cola Company (TCCC) raised the prices of their core carbonate brands across the region in 2010

on the back of rising raw material costs that have been placing significant pressure on margins. Across

many of their emerging markets, the prices of PepsiCo and TCCC’s core brands have historically not

increased in line with inflation, which has allowed TCCC in particular to build significant brand equity in

some of the world’s poorest countries. Rising costs of key inputs such as sugar and flavouring as well as

higher labour expenses are thought to have driven the price spike. In early 2011, Zawya reported that both

TCCC and PepsiCo were again raising their prices on the back of ongoing price increases for sugar and

other manufacturing materials.This followed a similar move in Saudi Arabia in December 2009. Earlier in

June 2009, PepsiCo announced plans to shift its Gulf headquarters to a new manufacturing facility in

Jeddah – Saudi Arabia’s second largest city. PepsiCo has invested around SAR1bn (US$266.7mn) in the

development, its largest in the Middle East and Africa region. BMI highlights that the Gulf region is

particularly important to PepsiCo – being one of the few regions where it outperforms TCCC.

However, it looked like things could be shifting when in late 2011 Coca-Cola announced that it had

acquired a 50% equity stake in soft drinks company Aujan. The deal is worth US$980mn and will allow

Aujan to pursue its international expansion plans for brands including Barbican and Rani, as well as

building upon the regional success of its Vimto brand. Aujan Chairman Sheikh Adel Aujan said that the

partnership would combine Aujan’s regional knowhow with Coca-Cola’s international experience. Coca-

Cola will also acquire 49% of Aujan’s bottling and distribution company, under which aegis Vimto will

remain. The deal is expected to be completed during H112, and will help Coca-Cola make headway in

one of the few markets in which its rival PepsiCo leads. The deal represents the largest-ever investment

by a multinational firm in the Middle’s East’s fast-moving consumer goods sector and follows Coca-

Cola’s announcement that it plans to invest US$5bn in the MENA region over the next 10 years.

In May 2012 it was reported that the GCC states are considering a 50% tax on beverages and cigarettes to

control consumption. At a meeting of health ministers held in Saudi Arabia, the tax was discussed,

pointing out that soft drinks prices in the region are far lower than in most other parts of the world, and

that the consumption of these drinks is a key factor in the spread of diabetes among children. If such a tax

were to be implemented, it would have a major impact on the sale of soft drinks throughout the region.

Diversifying Away From Carbonates

Gulf-based soft drinks companies have stepped up their pursuit of diversification. Reacting to shifting

demand dynamics (the Gulf’s soft drinks industry is increasingly segmented) and the natural evolvement

of the soft drinks industry out of core carbonates, companies have been looking to launch new products

within the bottled water and fruit juice segments. In April 2010, PepsiCo’s UAE-based franchise bottler



and distributor Dubai Refreshments Company (DRC) announced that it was in discussion to strengthen

its non-carbonate portfolio.

While we see increasing health consciousness continuing to firm up demand for diet varieties of

established carbonate brands, particularly Mountain Dew – DRC’s best-selling brand after Pepsi – BMI

believes growing demand for variety potentially provides even greater upside. In addition to

strengthening demand for lower-sugar soft drinks, consumers are increasingly interested in products

outside the core categories of carbonates and, to some extent, fruit juices, which are very popular in Saudi

Arabia with a relatively high per capita annual consumption of 50 litres.

Across the Gulf region (particularly the UAE), consumer tastes and preferences have evolved

considerably over the past decade, with widespread disposable income strengthening at the forefront of

the evolution. Although the downturn in 2009 somewhat stifled demand for higher-value industry

segments like functional drinks and ready-to-drink teas, there remains strong scope for long-term growth.

Innovation and product development within bottled water has largely continued, with investment into new

segments such as flavoured water gathering pace. In addition to outright investment in new products,

investment into the outperforming bulk water category has continued to gather pace across the Gulf.

Market Overview

Soft Drinks

Saudi Arabia’s soft drinks industry is increasingly competitive across all segments. Competition within

the carbonates, juices and bottled water sub-sectors is particularly fierce, leading to frequent new product

developments and launches supported by significant marketing and promotional spending.

PepsiCo’s core brands (bottled by the National Bottling Company in Saudi Arabia) continue to

dominate the Saudi carbonates market, accounting for more than 70% of volume sales. Coca-Cola’s

unfamiliar second-place position in Saudi Arabia, and indeed much of the Middle East region, has

traditionally owed much to regional perceptions and strong geopolitical influences. Although Saudi

Arabia is one of the few notable emerging markets in which Coca-Cola is not a leader, it has progressed

promisingly over the past two decades, having previously been absent from the market. In 2009, PepsiCo

announced plans to shift its Gulf headquarters to a new manufacturing facility in Jeddah – Saudi Arabia’s

second largest city. PepsiCo has invested around SAR1bn (US$266.7mn) in the development, its largest

in the Middle East and Africa region. However, this balance of power could soon shift given Coca-Cola’s

acquisition of a 50% equity stake in UAE soft drinks company Aujan Industries in late 2011 and its

US$5bn of investment plans for across the Middle East.



Saudi Arabia is also the Gulf region’s largest bottled water market, with a number of prominent domestic

producers accounting for the majority of sales. Leading the domestic contingent is Makkah Water –

owner of the Safa and Mozn brands. UAE-based Masafi is also a major producer of bottled water in the

region and has recently launched a range of premium juices that are being processed and bottled at its

plant in the UAE. Leading players in fruit juices include Almarai, The National Fruit Juice Company

and Al Rabi Saudi Food Company.

Other market entrants into the juice sub-sector include dairy companies Al Safi Danone and SADAFCO.

Meanwhile, Zamzam Cola has entered the carbonates sub-sector, Red Bull is active in energy drinks,

and Nestlé Water and Coca-Cola are making inroads into bottled water. Red Bull leads the emerging

energy drink market ahead of PepsiCo’s Pepsi X brand.

Hot Drinks

Saudi Arabia’s hot drinks sector is very mature. Major players within the country’s hot drinks sector

include local manufacturers Tea Factory and AMS Baeshen & Co, and global major Nestlé. The teabag

market is dominated by Unilever’s Lipton Tea brand. Lipton has been available in the Gulf since the

1960s and is particularly popular. Its ability to innovate and cater to developing consumer preferences

sets it apart from its competitors. Lipton produces a variety of black and green teas from its regional

manufacturing headquarters in Dubai. Its Jebel Ali-based facility is the second largest teabag factory in

the world with a production capacity of around 5bn tea bags per annum.

Lipton has also steadily introduced a range of fruit teas. Across the Gulf Cooperation Council, Lipton has

a market share in excess of 70%. A steady rise in health consciousness is set to boost tea sales.

Alcoholic Drinks

Alcohol is banned in Saudi Arabia under Islamic law, and punishments for drinking alcohol are strictly

applied. Despite this, Saudi Arabia’s large expatriate community and Western military personnel serving

in the country are still able to obtain alcohol that is home-brewed or through various routes operating out

of neighbouring Gulf states. This is a point of conflict in the country, with Saudi nationals believing that

by encouraging smuggling, Westerners are not showing respect for Saudi lifestyles and religion.



Mass Grocery Retail


Foreign Retailers Looking At Saudi Arabia

With the pace of formalisation in the Gulf region’s food retail sector having picked up strongly over the

last 10 or so years, significant investment has been directed towards big-box-style hypermarkets. This has

been led by companies such as Carrefour MAF (Carrefour’s regional business), EMKE-

owned Lulu and, particularly in Saudi Arabia, Savola-owned Panda. Discount stores, by contrast, have

attracted much less investment.

However, attention is shifting to formats beyond hypermarkets. Turkey’s leading discounter BİM

Birlesik Magazalar (BIM), a company whose long-term growth prospects we view positively, remains

interested in entering Saudi Arabia. BIM had been in negotiations with Savola about the possible

establishment of discount stores in Saudi Arabia, although no deal was struck. BIM has a relatively strong

presence in Morocco but has not yet established itself in the Gulf region.

Our retail numbers for 2011 indicate that discount stores made up just 3.3% of the nearly US$26bn Saudi

market. By contrast, hypermarkets accounted for more than half of total sales. With organised food retail

sales currently accounting for around 50% of overall sales, a lot of people still do their food shopping at

informal stores and markets.

Frontier Market Investment

With some of the region’s leading mass grocery retailers (MGRs) having established a fairly strong

footprint across the Gulf, many have been stepping up investment into frontier Middle East and North

African (MENA) markets over the past year. Carrefour MAF has been driving this trend. In April 2010, it

was reported that the company was set to be the first multinational retailer to invest in Iraq since the war.

The first store was launched in September 2010. With 37 stores across the MENA region, Carrefour MAF

is the region’s leading hypermarket operator and the only retailer with a strong presence outside of the

Gulf.

Iran has also been targeted, with Carrefour’s regional partner Majid Al Futtaim Group (MAF) leading

the way. In October 2009, it was reported that MAF was set to step up investment into Iran without its

regional affiliate Carrefour, and the company launched a hypermarket under the Hyperstar banner without

Carrefour’s name. The France-based MGR behemoth was believed to have pulled the plug on entering the

promising market, underlining the fact that although the path appears clear for UAE-based MAF, full-

scale entry into Iran remains a difficult undertaking for large Western companies.



In July 2011, it was reported that MAF is eyeing US$1bn in three-year and five-year loans for expansion.

MAF plans to launch a chain of hypermarkets throughout Pakistan based on Carrefour’s model. The firm

is looking to expand its presence in Pakistan following the success of its first retail hypermarket,

Hyperstar, in Lahore in 2009. MAF also plans to spend US$3.5bn for expansion in Egypt, Lebanon, Syria

and the UAE. However, the recent political instability in Egypt and Syria has curtailed the company’s

expansion for these two markets. In October 2011 the company announced that it is planning on opening

outlets in northern Iraq and Lebanon in 2012.

Egypt is also attracting greater investment interest. In June 2009, Saudi Arabia’s second largest retailer

Al-Othaim announced plans to enter the Egyptian market by 2010, although this expansion has not yet

taken place. In April 2012 Al-Othaim announced that rising costs have lead to lower profits. Net income

in the first quarter dropped to SAR33.9mn, a 7.2% y-o-y decline as the MGR operator was unable to fully

pass on higher food prices to its customers. If this drop in profits continues, this could have a serious

impact on the retailer’s expansion plans.

Arguably the region’s most dynamic market, Egypt is attracting much greater interest from non-regional

multinationals, and this is reflected in the MGR sector. In October 2009, Metro Group announced plans

to launch 12 outlets in Egypt by 2012 under its Makro banner. However, the country’s recently political

volatility will no doubt have a major impact on all expansion plans.

Growing Investment Into Modern Convenience Retailing

The hypermarket segment has largely led significant development in organised retail channels over the

past decade in the Gulf region. Typically attached or adjacent to malls, hypermarkets flush with a variety

of value-added services are immensely popular across the MENA region. The supermarket segment has

also played an important role in the fast-paced transition from the largely market-based, independent

grocer-dominated landscape to one where organised retail contributes to more than 50% of grocery sales

in some markets (such as the UAE).

As the most developed MGR market in the Gulf, the UAE is unsurprisingly leading the way in the

emergence of modern convenience retail channels, as the market reacts to strengthening consumer

demand for alternatives to the tried-and-tested hypermarket and supermarket mall-attached model. 24

Seven, government-backed Aswaaq and EMKE-owned Lulu are just a few of the retailers firming up

investment into convenience retailing.

In September 2011, France-based food retailer Casino’s Middle East business announced plans for a pan-

Gulf region expansion that will include 30 stores, with the majority being smaller convenience-type

stores. The majority of the stores will open in Bahrain, Kuwait and the UAE, its key Gulf markets, with



plans to also enter Qatar and Oman. Casino is planning on embarking on this aggressive expansion plan

since the financial crisis brought down real estate prices throughout the region.

Market Overview

With the independent sector still accounting for around 50% of grocery sales in Saudi Arabia, significant

room for expansion exists. The rate of MGR penetration in Saudi Arabia has lagged behind Gulf states

such as the UAE, where the size of the market is much smaller and the spending power of most of the

population much higher.

Having attracted considerable investment over the boom years to 2008, Saudi Arabia’s MGR industry

continued to gradually consolidate in 2009 with market leader Panda (owned by Savola) continuing to

pursue significant organic and non-organic expansion. In October 2009, Savola completed the acquisition

of the Géant supermarket banner owned by Saudi-based FAG. The absorption of Géant has increased

Panda’s market share to about 8% – underlining the fragmented state of the market. With non-organic

growth avenues all but extinguished, Panda focused on organic store growth in 2010 and 2011.

Carrefour MAF is a leading hypermarket operator with nine outlets – making Saudi Arabia its largest

regional market. Carrefour MAF’s buying power allows it to keep prices reasonably low and affordable,

which is particularly important in Saudi Arabia, a country that by Gulf standards remains a relatively low-

income market.

Other prominent players in organised retail include the hypermarket operator Al-Othaim and the

hypermarket/supermarket-focused Bin Dawood.

Table: Mass Grocery Retail Sector Structure – Estimated Sales Value By Format (US$bn)

2005 2006 2007 2008 2009 2010

Supermarkets 3.65 4.04 5.16 5.90 7.10 7.96

Hypermarkets 5.21 6.06 7.90 9.02 10.93 11.25

Co-ops 0.21 0.24 0.30 0.35 0.42 0.47

Discount stores 0.42 0.48 0.46 0.52 0.64 0.75

Convenience stores 0.94 1.07 1.37 1.56 1.87 2.12

Total mass retailers 10.43 11.88 15.18 17.35 20.96 22.55

Source: Central Department of Statistics, BMI



Table: Mass Grocery Retail Sector Structure – Estimated Sales Value By Format (US$bn)

2011e 2012f 2013f 2014f 2015f 2016f

Supermarkets 8.88 9.84 10.90 11.96 13.04 14.21

Hypermarkets 13.29 14.83 16.54 18.23 19.97 21.86

Co-ops 0.53 0.58 0.65 0.71 0.78 0.85

Discount stores 0.86 0.99 1.12 1.28 1.45 1.64




Table: Mass Grocery Retail Sector Structure – Estimated Sales Value By Format (SARbn)

2011e 2012f 2013f 2014f 2015f 2016f

Supermarkets 33.27 36.86 40.83 44.77 48.83 53.23

Hypermarkets 49.76 55.53 61.93 68.27 74.80 81.88

Coops 1.97 2.19 2.43 2.68 2.93 3.20

Discount stores 3.23 3.69 4.20 4.79 5.44 6.14




Table: Mass Grocery Retail Sector Structure – Estimated Sales Value By Format (SARbn)

2005 2006 2007 2008 2009 2010

Supermarkets 13.67 15.13 19.33 22.09 26.60 29.82

Hypermarkets 19.53 22.69 29.57 33.78 40.93 42.12

Coops 0.78 0.89 1.14 1.30 1.57 1.77

Discount stores 1.56 1.78 1.71 1.95 2.41 2.81






Competitive Landscape

Table: Key Players in Saudi Arabia's Food & Drink Sector

Company Country Of

Origin Sub-sector Sales

SARmn Sales

US$mn Fiscal

Y/E Number Of Employees

Year Established

Savola Group Saudi

Arabia

Food – Edible Oil, Dairy, Sugar,

Mass Grocery Retail 25196 6718

Dec-11 6000+ 1979

Almarai Company Saudi

Arabia Food – Dairy,

Fruit Juice 7951 2120 Dec-

11 4000+ 1976

Unilever NAME UK Food & Beverage na 950e* na na 1950

Aujan Industries Saudi

Arabia Beverage – Soft

Drinks na 850 na 2500 (e) 1905

Al Rabie Saudi Foods Co.

Saudi Arabia Beverages na 350e na 1,200 1980

Al Safi Dairy (Danone)

Saudi Arabia Food – Dairy na 275e na 2000 (e) 1979

Saudi Dairy and Foodstuff Company (SADAFCO)

Saudi Arabia

Food & Beverages 1335.7 356.2

Mar-12 950 1976

Hail Agricultural Development Co (HADCO)**

Saudi Arabia

Agribusiness & Food na na na 1500+ 1982

Arab Supply & Trade Corporation

Saudi Arabia Agribusiness na na a 5000+ na

Arabian Agricultural Services Co (ARASCO)

Saudi Arabia Agribusiness na na na 1800 1983

Zamzam Group Saudi

Arabia Beverage – Carbonates na na na 7,780 na

National Bottling Company (PepsiCo)

Saudi Arabia

Beverage – Carbonates na na na 1,500 na

Coca Cola Bottling Company of Saudi Arabia USA

Beverage – Carbonates na na na na na

Makkah Water Saudi

Arabia Beverage –

Bottled Water na na na na na

Nestlé Middle East Switzerland

Food & Beverages na na na 4000 1997

na = not available; e = BMI estimate; *includes Middle East Sales; **HADCO was acquired by Almarai in July 2009. Source: Company Results, Trade Press, BMI



Table: Key Players in Saudi Arabia's Mass Grocery Retail Sector

Company Country of

Origin Sales

SARmn Sales

US$mn Fiscal

Y/E Fascia Format No of

Outlets Year

established No of

employees

Al Azizia Panda United (Savola)

Saudi Arabia na 2110e

Dec-11 113 1979 15,000 (e)

Al-Azizia

Panda Supermarket 65

Hyper Panda Hypermarket 17

Geant Supermarket 12

Giant

Stores* Hypermarket /Supermarket 19

Universal Marketing

Saudi Arabia na 530e na Al Othaim Hypermarket 76 1981 7000

Carrefour MAF France/UAE na 500e na

Carrefour MAF Hypermarket 9 1995 6,000

Farm Superstores

Saudi Arabia na 60e na

Farm Superstores Supermarket 15 na 1000

Al Raya Supermarkets

Saudi Arabia na na na Al Raya na 14 1992 1000+

Bin Dawood Saudi

Arabia na na na 21 1984 na

na Bin

Danwood Supermarket /Hypermarket 13

Danube Hypermarket 8

Tamimi & Fouad Food Co

Saudi Arabia na na na Safeway na 13 1990 na

Al Sadhan Trading Co

Saudi Arabia na na na Al Sadhan Hypermarket 7 2004 450

na = not available; e = BMI estimate; *Giant Stores are in the process of being converted to the Al-Azizia Panda and Hyper Panda fascias. Source: Company Results, Trade Press, BMI



Company Monitor

Food

Al Safi-Danone

Company Overview Al Safi-Danone was established in 1998 as a joint venture between French dairy giant

Danone and Al Safi, which was then the world’s largest integrated dairy farm in terms of

capacity, with 7,500 hectares of land and 32,000 cows. The main product range covers milk,

yoghurt and fresh cream. Al Safi-Danone’s products include Danette, Danao, Al Safi, Activia,

Actimel, Rashaka, Safio and Danino. These products are distributed by a fleet of more than

450 refrigerated trucks to more than 30,000 retail outlets across Saudi Arabia via 35

distribution depots. The company holds an approximate 30% share of the fresh-dairy sector

and has a processing capacity of around 600,000 litres of milk per day. Al Safi-Danone also

exports its products to 10 neighbouring countries including the UAE, Qatar, Kuwait, Oman,

Jordan, Iraq, Syria, Lebanon and Yemen.

Strengths Al Safi-Danone is one of the Gulf’s largest dairy companies.

Al Safi-Danone benefits from Group Danone’s training centres and programs.

The company is present in the rapidly growing fruit juice and dessert segments.

The company benefits from a wide product portfolio.

Al Safi-Danone benefits from a strong regional export business.

Weaknesses Al Safi-Danone will need to keep investing in production processes, portfolio and marketing as competition stiffens.

The Saudi dairy market is fiercely competitive.

Opportunities Demand for dairy products is growing both in Saudi Arabia and the wider Middle East region.

Rising health consciousness is likely to increase demand for the company’s laban and yoghurt products, as well as for its functional value-added products such as the Activia and Actimel range.

Threats Although Saudi Arabia has the largest market in the Gulf region, food consumption growth is not forecast to be dynamic; thereby limiting long-term domestic volume gains.

Unfavourable shifts in dairy prices could affect the company.

Rival Almarai has been investing heavily in expansions.



Strategy Al Safi-Danone’s growth strategy has been to expand its scope in terms of its markets and

product range. The Al Safi Danone product range includes fresh and UHT milk, laban,

yoghurt, cream, flavoured milk, juice and milk mixes, flavoured cream cheese for children,

and dessert products. The company has been steadily increasing its range of value-added

and higher margin products, as well as their products aimed at children. The company has

been riding the wave of growing health consciousness in the region by introducing functional

and fortified products, such as Activia and Actimel, which have both been very popular, as

well as the Rashaka range of healthy skimmed dairy products.

The company has also invested in importing new technologies and international methods to

achieve better returns, with a focus on its distribution network in its markets. Al Safi-Danone

has also been looking to increase its exports to regional markets with less-developed dairy

sectors. With the largest integrated dairy farm in the world, Al Safi-Danone decided to create

an international company for dairy farming called Al Safi International as a part of its growth

strategy. The company aspires to become a leader in the dairy farming sector with plans to

construct large cow farms in various emerging markets and leverage the knowledge from

their Saudi operations, offering top quality milk with complete source control. Al Safi-Danone

then plans to sell the milk to leading processors in the countries in which they operate,

offering knowledge transfer to the local industry and increasing the demand from local

consumers.

The company will need to continue investing in its marketing and advertising campaigns as it

continues to enter new markets and introduce new products into its portfolio.

Company Data Estimated annual sales: US$275mn

Processing capacity of around 600,000 litres of milk per day



Saudi Dairy & Foodstuff Company (SADAFCO)

Company Overview Established in 1976 in Jeddah, SADAFCO began production in 1977. The original focus was

on dairy products, and through a series of acquisitions over the following years, the

company has now expanded its product range. Through a joint venture with Saudi New

Zealand Milk Products, it now produces cheese; and through the acquisition of Sara Snack

Foods Factory in 1995, it entered the snack food market. In 2005, the company launched an

initial public offering and is now listed on the Saudi Stock Exchange.

Strengths Through organic and acquisition-led growth, SADAFCO has established itself as one of the market leaders in a number of dairy sub-sectors, including fresh milk and ice cream.

SADAFCO’s tomato paste brand leads the domestic market.

The company benefits from strong brand recognition.

Weaknesses SADAFCO’s affiliation with a Danish company caused a damaging boycott of its products in 2006 after religious cartoons were published in Denmark.

The company must continue to invest in product portfolio enhancements and distributional efficiencies as sector-wide competition intensifies.

Opportunities We expect steady growth in dairy demand in Saudi Arabia and the wider Middle East region.

SADAFCO’s fruit juice business should benefit from forecast growth in the soft drinks industry.

The country’s snack foods sector is experiencing strong growth.

Threats Saudi Arabia’s dairy industry is the most competitive in the Gulf region.

Unfavourable shifts in dairy prices could affect the company.

Rival dairy company Almarai has been investing heavily in expansions.

Strategy Historically, SADAFCO has pursued growth through a series of acquisitions and joint ventures. In 2006 the company went through a major restructuring to achieve more efficient operations. The majority stake taken by New Zealand dairy giant Fonterra in 2009 has pushed SADAFCO to quickly improve its operational efficiency compared to its main competitor Almarai. SADAFCO is playing catch up and more than doubled its operating margins between 2006 and 2012 and was able to reach 65.0% of Almarai's margins by 2011. This was achieved through the introduction of more value-added products, such as triangular cheese, compared to the company's traditional strongholds, long-life milk and tomato paste. Also, Fonterra's expertise has helped to boost SADAFCO's production yields and resulted in greater economies of scale.

Looking ahead, SADAFCO will look to maintain its dominant position in Saudi Arabia, while also increasing geographical diversification in the region. The company has a well-established sales and distribution network which enables it to maintain a strong brand in its domestic market. SADAFCO has been investing heavily in distributing its milk products to school children and public awareness campaigns regarding the health benefits of dairy products. The company will also continue to invest heavily in advertising and marketing as it continues to launch new and value-added products.

The company now exports its products to a number of countries, including other Gulf states, Djibouti, Egypt, Jordan, Lebanon, Iran, Sudan, Syria and Pakistan, and has established subsidiaries in the UAE, Qatar, Bahrain and Jordan, where it markets its products through external distributors and agents. These regional markets will continue to be important growth engines for the company moving forward.

Company Data Sales year-ending March 2012: SAR1.335.7bn (US$356.2mn)

Established: 1976



Almarai

Company Overview

Saudi Arabia-based Almarai is the largest dairy company in the Gulf by market value. Almarai became a publicly listed company in 2005 and soon began acquiring smaller Saudi dairy companies to integrate into its business. It now has a total production capacity of 1.8mn litres of milk per day. It is a vertically integrated organisation that covers all supply chain activities ranging from dairy farming and food processing to marketing, sales and distribution. In February 2009, Almarai entered into a joint venture with PepsiCo to form International Dairy and Juice Limited, a company focused on acquisitions across the wider Middle East region. It manufactures and trades bakery products through Western Bakeries Company Limited and Modern Food Industries Limited under the brand names L’usine and 7 Days respectively.

Strengths The largest Gulf dairy company by market value.

Almarai has been diversifying through acquisitions both in terms of geography and business categories.

Almarai’s first-rate and hands-on distributional system is unmatched regionally.

Sales and earnings performance were not overly affected by the 2009 downturn.

Joint venture with PepsiCo has significantly raised its international profile.

Almarai has reported strong financials in recent quarters.

Weaknesses Restrictions imposed by the Saudi government make it difficult for foreign investors to own equity in Almarai.

Although recent expansion into the infant formula industry is a promising undertaking, it has little experience in this industry.

Opportunities Demand for dairy products is increasing both in the Gulf and in less-developed wider Middle East regions.

Outperforming fruit juice unit is expected to continue growing sharply.

By expanding its operations further afield, Almarai is in a good position to benefit from strong growth in other emerging markets.

Almarai entered the promising poultry industry through the July 2009 acquisition of Hail Agricultural Development Company, a top-five producer in the country.

Threats The Saudi dairy market is highly competitive, with all companies present needing to continue investing.

Unfavourable moves in dairy prices could affect the company.

Profits have been threatened by higher operating costs.

Strategy Almarai’s growth strategy has been to diversify its business rapidly and take advantage of its financial leverage by investing in new product categories. The company has also been looking for growth by expanding into regional markets. Almarai boosted its investment budget to SAR6bn (US$1.6bn) for five years through to 2013, up from a previous five-year budget of SAR4.7bn. New product categories have been important for the company, and in 2011 Almarai revealed plans to invest about US$1.1bn in developing its poultry business, which in its FY10 contributed a modest 2.5% to overall sales. Until it acquired Saudi Arabia’s leading poultry company Hail Agricultural Development Company for about SAR950mn (US$253mn) in 2009, Almarai did not have a poultry business.

In late 2011 Almarai made a big step towards addressing food security issues with the announcement that it has agreed to buy the Argentine farm operator Fondomonte for US$83mn. The deal is expected to beef up Almarai’s supply chain, and we believe more deals like this could be on the cards as the company looks to cater to rising demand at home. Fondomonte’s farms in Argentina produce a range of commodities including maize and wheat.

In May 2012 Almarai announced that it would start producing infant formula following the construction of a new factory in Al Kharj. Almarai entered a joint venture with a US-based nutrition company Mead Johnson, International Pediatric Nutrition Co (IPNC).

Additionally, Almarai has also been investing in its drinks business, having raised its stake in its joint venture with PepsiCo from 48% to 52%, and has also increased its shareholding in International Dairy and Juice (IDJ) through an additional equity contribution by US$22.4mn.

Almarai has been willing to leverage off its main business to invest in non-core areas to open up new growth areas. In doing so, it is looking to take advantage of the Saudi market's size and rising incomes.

Company Data Sales year ending December 2011: SAR7.95bn (US$2.12bn)

Established in 1976



Al Rabie Saudi Foods

Company Overview Al Rabie Saudi Foods Co Ltd produces a range of food and drink products and is the largest juice

manufacturer in the Middle East. As well as a wide variety of juices, the company also produces

dairy products, iced coffee, chocolate drinks, tomato paste, chickpeas and soya products.

Established in 1980 as the Saudi Irish Dairy Company, the company changed its name in 1983.

The company also has branches in Bahrain. Popular brands include Al Rabie and Awal Qatfa.

Strengths Al Rabie is the established market leader in the lucrative fruit juice division.

Operating presence across a diverse range of food and drink segments.

Strategic emphasis on health and well-being is a promising long-term strategy.

Weaknesses The sharp pace at which consumer preferences are evolving within the sector means the company must invest to retain its leadership position in the market, particularly as regional competition increases.

Opportunities Fruit juice consumption is forecast to experience strong growth both in Saudi Arabia and regionally.

Rising health consciousness should boost demand for low-calorie juice drinks.

Opportunities for more segmented product portfolio.

Threats The juice and dairy segments are highly competitive, with a number of domestic and regional companies increasing volumes and investment into value-added product portfolio enhancers.

Strategy Al Rabie has been looking to expand more in regional markets while at the same time also

investing in upgrading its production facilities. In 2008, Al Rabie announced a major expansion

plan to boost its presence across both its domestic and export markets. Investing in the

strengthening of its regional distribution network, the company is looking to solidify its market

leadership in the core businesses of juices, nectars and still drinks as a means of achieving both

short- and long-term growth. Al Rabie said that it will intensify its marketing campaign and

promote its products in various channels including schools, hotels and other catering institutions.

In particular, it will target the UAE, which is one of the region’s most attractive soft drink markets,

as it looks to strengthen its regional footprint.

The company has also recently been highlighting the safety of its products by participating in the

First Arab Conference on Food Safety and Hygiene. In late 2011 the company announced that it

has invested US$53.3mn in order expand its plant and increase productivity in its domestic

market, including the adoption of advanced technologies for manufacturing juices and ready

foods.

In April 2012 Al Rabie signed a US$2.5mn agreement with Swedish company Tetra Pak, a leader

in food processing and packaging solutions, to install the world’s first high speed Tetra Prisma

Aseptic 200 Sq filling line. The new high speed machine technology can package 24,000 juice

cartons per hour.

Al Rabie has also been investing into public education campaigns regarding the health benefits of

some of its key product groups, such as soya based foods. Social responsibility programs are

also a key element of the company’s marketing and growth strategy.

Company Data Estimated annual sales: US$350mn

Established: 1980

Warehouses: 22



Drink

Aujan

Company Overview Established in 1905, Aujan is the largest privately owned beverage company in the Gulf

Cooperation Council region. The company’s brands include RAMI, Barbican and Vimto, and it

is also the regional distributor for a number of recognisable confectionery products, including

Wrigley’s chewing gum and the Cadbury chocolate range. Aujan has operations in 15 regional

locations, with a presence in 50 countries and over 2,500 employees. In late 2011, US drink

giant Coca-Cola acquired a 50% stake in Aujan for US$980mn.

Strengths Aujan is one of the soft drinks industry’s leaders, producing a number of popular brands.

Aujan has experienced strong growth in recent years and has successfully met its ‘555’ growth strategy: to grow turnover to US$500mn with its five main brands over a period of five years.

Aujan has established a strong management, manufacturing and distribution infrastructure on which it can expand, and is committed to technological advancement in each of those areas.

Weaknesses The company’s planned expansions, both in the Gulf region and further afield, require significant investment, especially as consumer preferences and expectations evolve rapidly.

Opportunities Coca-Cola’s investment will allow Aujan to pursue its international expansion plans for brands including Barbican and Rani, as well as building upon the regional success of its Vimto brand.

Aujan’s partnership with energy drinks manufacturer Base is a wise strategic move in a country with a fast-growing youthful market, as it will allow the company to diversify its portfolio to capture a greater share of this emerging functional drinks segment.

Investment into re-emerging Iraq will open up access to the large and underdeveloped soft drinks market.

A ban on alcoholic drinks in Saudi Arabia and many of its neighbouring countries means that soft drinks sales are forecast to experience strong growth.

Iran is an increasingly important market for Aujan, and the country’s large population provides it ample opportunities for growth.

Threats Aujan faces strong competition from a number of local and international players in the soft drinks sector.

Aujan could suffer from anti-American sentiments due to its partnership with Coca-Cola.



Strategy Aujan’s strategy for growth has been to focus on its five key brands, which include Rani,

Vimto and Barbican, as a means of increasing revenues. In recent years Aujan has started to

look further afield for growth, and has been eyeing regional markets as a means of

expansion. Specifically, Aujan is aiming to have its brands available in 100 countries within

two years. The company is also looking at additional production facilities in Iraq and North

Africa, most likely Egypt.

In late 2011 Coca-Cola announced that it had acquired a 50% equity stake in the soft drinks

company. The deal is worth US$980mn and represents the largest-ever investment by a

multinational firm in the Middle’s East’s fast-moving consumer goods sector. The deal with

Coca-Cola will allow Aujan to pursue its international expansion plans for brands including

Barbican and Rani, as well as building upon the regional success of its Vimto brand. Aujan

Chairman Sheikh Adel Aujan said that the partnership would combine Aujan’s regional

knowhow with Coca-Cola’s international experience. Coca-Cola will also acquire 49% of

Aujan’s bottling and distribution company, under which aegis Vimto will remain. The deal with

Coca-Cola will also allow Aujan to expand its markets and will help finance two more factories

in the region. Aujan has stated that it expects to achieve US$1bn (Dh3.67bn) of sales in 2012.

Company Data 2011 annual sales: US$850mn

Established: 1905



Mass Grocery Retail

Savola Group – Al Azizia Panda

Company Overview Panda was established in 1978 and expanded throughout the 1980s. In 1994 Panda merged

with Azizia to form the largest food retail chain in Saudi Arabia. It became part of the Savola

Group in 1998. The company has since established itself as the country’s leading retailer. In

2008, Savola acquired an 80% stake in the Giant Stores chain from domestic company AK Al

Muhaidib and Sons Group to become one of the region’s biggest retailers with a combined

turnover of more than US$1bn. It is Saudi Arabia’s only national supermarket chain, operating

more than 113 outlets. In 2004, it launched its first hypermarket under the HyperPanda

banner.

Strengths Saudi Arabia’s leading mass grocery retailer with estimated market share of around 8%. Acquired the retail operations of the Giant Store and Géant chains from two of its rivals. Having a real estate arm gives Savola major advantage as it will help in obtaining prime

pieces of real estate for the construction of new hypermarkets at reasonable prices and ahead of the competition.

Weaknesses Savola currently only operates one store outside Saudi Arabia in Dubai. Consumer spending power across the entire population in Saudi Arabia is fairly low by

Gulf standards, with access to mass grocery retailers fairly uneven across the country. There is little room left for non-organic growth in Saudi Arabia.

Opportunities Significant scope for organic growth remains across both the hypermarket and supermarket segments.

Panda has managed to establish a successful private range, the popularity of which is expected to grow as consumers slowly warm to what is a relatively new addition to the country’s mass grocery retailer framework.

Expansion opportunities exist across the wider Middle East region and North Africa through both the Panda and Giant Stores banners.

Threats Panda’s hypermarket business faces strong competition from Carrefour MAF. The 2009 downturn particularly affected the high-spending expatriate population.

Strategy Having established market domination in the Gulf’s biggest market, both geographically and in

terms of population, Panda’s ultimate aim is to be the leading retailer in the Middle East,

taking on both Carrefour and EMKE. Domestically, it intends to adopt an aggressive store-

opening strategy to maintain its market leadership while retaining profitability. Panda has

determined that the hypermarket format will be its main driver of growth, and its parent

company Savola’s establishment of an independent real-estate company should assist it in its

aim. Savola’s real estate arm, which is part of a wider bid for diversification, will help in

obtaining prime pieces of real estate for the construction of new hypermarkets at reasonable

prices and ahead of the competition. However, the company will also continue to pursue

expansions in the important.

Internationally, the company opened its first hypermarket in the UAE in Dubai in 2006 under

the HyperPanda banner, and has plans to eventually expand throughout the GCC region,

although no dates have yet been revealed.

In late 2011 the company acquired the Saudi assets of Casino-Geant stores from Fawaz

Abdulaziz Alhokair & Co as a part of its expansion plans.



Company Data Al Azizia Panda sales year ending December 2011: US$2.1bne

Employees: 6,000+



Carrefour MAF – Saudi Arabia

Company Overview

French retailer Carrefour operates a network of 13 hypermarkets in Saudi Arabia. In the Saudi market,

Carrefour is a joint venture between the Al-Olayan Group and the Majid Al-Futtaim Group. Carrefour has been

present in the Middle East region since 1995 when it established its first hypermarket in the UAE, and

operates regionally through its joint venture with MAF Investments, a subsidiary of Dubai-based Majid Al-

Futtaim Group, in which Carrefour holds a minority 25% interest.

Strengths The joint venture benefits from Carrefour’s international pedigree and Majid Al-Futtaim’s regional brand equity.

Considerable buying power allows it to keep prices reasonably low.

Carrefour has raised the bar in terms of variety and quantity of goods it sells.

Weaknesses Carrefour will need to continue investing to gain further market share from Panda in the hypermarket segment.

Attached to large malls, most Carrefour MAF outlets largely do not cater to convenience-seeking consumers.

Opportunities Significant scope for store launches within the hypermarket segment remains.

The recent drop in urban real estate prices has presented new expansion opportunities for the retailer.

MAF has plans to expand into the high-potential Pakistani market and is planning to launch hypermarkets throughout Pakistan based on French retailer Carrefour’s model.

The economic downturn and impact on consumer confidence has created opportunities for Carrefour’s private label products.

Threats Carrefour’s main rival Panda is expanding rapidly.

International retailers are keen to expand in the Saudi MGR market.

Strategy Carrefour’s strategy for the Middle East region has been to drive modernisation and create demand for its brand, rather than delay entry until modernisation occurs. The company has tapped into a small but constantly expanding middle class, which has been enough to sustain it. As this middle class – and the demand for Western goods – has grown, Carrefour has been able to expand its store network. As competition throughout the region continues to increase, Carrefour will continue to pursue an aggressive expansion policy both in the markets in which it is already present, and in less developed regional markets.

In the Saudi market, Carrefour MAF plans to launch more than 20 stores over the next 10 years in the face of growing competition. Carrefour is likely to continue diversifying its in-store offerings, introducing new smaller stores formats, a wider variety of international products, and providing features such as toy corners and games areas in order to set itself apart from local rivals. The UAE will also continue to be an important market for the retailer as it will steadily open new stores across the country. Carrefour MAF is likely to continue diversifying its in-store offerings, introducing new smaller stores formats, a wider variety of international products, and providing features such as toy corners and games areas in order to set itself apart from local rivals who lack the floor space required to accommodate such features.

In late 2010, MAF announced plans to launch a chain of hypermarkets throughout Pakistan based on Carrefour’s model. The firm aims to expand its presence in Pakistan following the success of its first retail hypermarket, Hyperstar, in Lahore in 2009. In July 2011 it was reported that MAF was eyeing US$1bn in three-year and five-year loans for expansion, although it deferred a plan for the sale of five-year bonds on the back of below-expected price bids, according to Group Treasurer Daniele Vecchi.

MAF plans to spend US$3.5bn for expansion in Egypt, Lebanon, Syria and the UAE. However, the recent political instability in Egypt and Syria has curtailed the company’s expansion for these two markets. In October 2011 the company announced that it is planning on opening outlets in northern Iraq and Lebanon in 2012. The company also has rebranded 16 of its Carrefour Express stores to Carrefour Market supermarkets, featuring fresh quality produce, low prices and convenience.

Company Data Estimated annual Saudi Arabian sales; US$500mn

Estimated employees: 6,000



BMI Methodology

Risk/Reward Ratings Methodology

BMI’s approach in assessing the risk/reward balance for food and drink industry investors globally is

twofold. First, we identify factors, in terms of current industry/country trends and forecast

industry/country growth, which represent opportunities to would-be investors. Second, we identify

country and industry-specific traits that pose or could pose operational risks to would-be investors.

Ratings System: Conceptually, the ratings system divides into two distinct areas:

Rewards: evaluation of sector’s size and growth potential in each country. This section also includes a

strong demographic aspect with a focus on both the size and age distribution (younger being better) of

populations.

Risks: evaluation of industry-specific risks and those emanating from the country’s political/economic

profile that call into question the likelihood of anticipated returns being realised over the assessed time

period.

Indicators: The following indicators have been used.

Table: Rewards

Industry Rewards

Food and drink consumption per capita, US$ Indicator denotes overall breadth of market. Wealthier markets score higher.

Per-capita food consumption growth, five-year compound annual growth %

Lead Food & Drink growth indicator. Scores based on compound annual growth over our five-year forecast period.

Market Fragmentation Subjective score reflecting how relatively developed the industry is. Higher score reflects a more fragmented industry.

Country Rewards

Population size (mn) Indicator denotes size of market.

GDP per capita, US$ Proxy for wealth. Size of population is important, but needs to be considered in relation to spending power. High income states receive better scores than low income states.

Youth Population (%) 0>15%, % of total working age population. Younger populations are generally considered to be more desirable.

NB See Business Environment section for regional and country-specific ratings explanations. Source: BMI



Table: Risks

Industry risks

Mass Grocery Retail (MGR) Penetration, %

The proportional contribution of the organised food retailing sector, higher scores reflect better developed routes to consumers and more efficient internal trade systems.

Regulatory environment Subjective rating based on the industry-specific regulatory environment and the presence of potentially restrictive legislation. Low scores reflect a regulatory environment.

Country risks

Short-term economic growth

Rating from BMI’s CRR. It evaluates likely growth trajectory over two-year forecast period, based on BMI’s forecasts and projections of business and consumer confidence.

Income Distribution Middle 60% of population, % of total spending. Higher score is an indicator of incomes being spread more equitably.

Lack of Bureaucracy From CRR. It evaluates the risks to business posed by official bureaucracy, the broader legal framework and corruption.

Market orientation Subjective rating from CRR to denote predictability of openness to foreign investment and trade.

Physical infrastructure From CRR. Poor power/water/transport infrastructure act as bottlenecks to sector development.

NB See Business Environment section for regional and country-specific ratings explanations. Source: BMI

Weighting

Table: Weighting

Component Weighting

Rewards 60%

- Industry Rewards 30%

- Country Rewards 30%

Risks 40%

- Industry Risks 20%

- Country Risks 20%

See Business Environment section of report for regional and country-specific ratings explanation



BMI Food & Drink Industry Glossary

Food & Drink

Food Consumption: All four food consumption indicators (food consumption in local currency, food

consumption in US dollar terms, per capita food consumption and food consumption as a % of GDP)

relate to off-trade food and non-alcoholic drinks consumption, unless stated in the relevant table/section.

Off-trade: Relates to an item consumed away from the premises on which it was purchased. For

example, a bottle of water bought in a supermarket would count as off-trade, while a bottle of water

purchased as part of a meal in a restaurant would count as on-trade.

Canned Food: Relates to the sale of food products preserved by canning; inclusive of canned meat and

fish, canned ready meals, canned desserts and canned fruits and vegetables. Volume sales are measured in

thousand tonnes as opposed to on a unit basis to allow for cross-market comparisons.

Confectionery: Refers to retail sales of chocolate, sugar confectionery and gum products. Chocolate sales

include chocolate bars and boxed chocolates; gum sales incorporate both bubble gum and chewing gum;

and sugar confectionery sales include hard boiled sweets, mints, jellies and medicated sweets.

Trade: In the majority of BMI’s Food & Drink reports, we use the United Nations Standard International

Trade Classification, using categories Food and Live Animals, Beverages and Tobacco, Animal and

Vegetable Oils, Fats and Waxes and Oil-seeds and Oleaginous Fruits. Where an alternative classification

is used due to data availability, this is clearly stated in the relevant report.

Drinks Sales: Soft drink sales (including carbonates, fruit juices, energy drinks, bottled water, functional

beverages and ready-to-drink tea and coffee), alcoholic drink sales (including beer, wine and spirits) and

tea and coffee sales (excluding ready-to-drink tea and coffee products which are incorporated under

BMI’s soft drinks banner) are all off-trade only, unless stated in the relevant table/section.

Mass Grocery Retail

Mass Grocery Retail: BMI classifies mass grocery retail (MGR) as organised retail, performed by

companies with a network of modern grocery retail stores and modern distribution networks. MGR differs

from independent or traditional retail, which relates to informal, independent-owned grocery stores or

traditional market retailing. MGR incorporates hypermarket, supermarket, convenience and discount

retailing, and in unique cases cooperative retailing. Where supermarkets are independently-owned and not

classified as MGR, BMI will state so clearly within the relevant report.



Hypermarket: BMI classifies hypermarkets as retail outlets selling both groceries and a large range of

general merchandise goods (non-food items) and typically over 2,500m² in size. Traditionally only found

on the outskirts of town centres, hypermarkets are increasingly appearing in urban locations.

Supermarket: Supermarkets are the original and still most globally-prevalent form of self-service

grocery retail outlet. BMI classifies supermarkets as over 300m², up to the size of a hypermarket. The

typical supermarket carries both fresh and processed food items and will stock a range of non-food items,

most commonly household and beauty goods. In addition, the average supermarket will increasingly offer

customers some added-value services, such as dry cleaning or in-store ATMs, etc.

Discount stores: Although most commonly between 500m² and 1,500m² in size, and thus of the same

classification as supermarkets, discount stores will typically have a smaller floor-space than their

supermarket counterparts. Other distinguishing features include the prevalence of low-priced and private

label goods, an absence of added-value services – often called a no-frills environment – and a high

product turnover rate.

Convenience stores: BMI’s classification of convenience stores includes small outlets typically below

300m² in size, with long opening hours and located in high footfall areas. These stores mainly sell fast-

moving food and drink products (such as confectionery, beverages and snack foods) and non-food items,

typically stocking only two or three brand choices per item and often carrying higher prices than other

forms of grocery store.

Cooperatives: BMI classifies cooperatives as retail stores which are independently owned but club

together to form buying groups, under a cooperative arrangement, trading under the same banner,

although each is privately owned. The arrangement is similar to a franchise system, although all profits

are returned to members. The term is becoming more archaic with fewer cooperatives remaining that

conform to this model. Most cooperative groups now have a more centralised management structure,

operate more like normal supermarkets, and are thus classified as such within BMI’s reports



BMI Food & Drink Forecasting & Sourcing

How We Generate Our Industry Forecasts

BMI’s industry forecasts are generated using the best-practice techniques of time-series modelling and

causal/econometric modelling. The precise form of model we use varies from industry to industry, in each

case being determined, as per standard practice, by the prevailing features of the industry data being

examined. BMI mainly uses OLS estimators and in order to avoid relying on subjective views and

encourage the use of objective views, BMI uses a ‘general-to-specific’ method. BMI mainly uses a linear

model, but simple non-linear models, such as the log-linear model, are used when necessary. During

periods of ‘industry shock’, for example a deep industry recession, dummy variables are used to

determine the level of impact.

Effective forecasting depends on appropriately-selected regression models. BMI selects the best model

according to various different criteria and tests, including, but not exclusive to:

R2 tests explanatory power; Adjusted R2 takes degree of freedom into account

Testing the directional movement and magnitude of coefficients

Hypothesis testing to ensure co-efficients are significant (normally t-test and/or P-value)

All results are assessed to alleviate issues related to auto-correlation and multi-co-linearity

BMI uses the selected best model to perform forecasting.

It must be remembered that human intervention plays a necessary and desirable role in all of BMI’s

industry forecasting. Experience, expertise and knowledge of industry data and trends ensures that

analysts spot structural breaks, anomalous data, turning points and seasonal features where a purely

mechanical forecasting process would not.

Within the Food & Drink industry, this intervention might include, but is not exclusive to: significant

company expansion plans; new product development that might influence pricing levels; dramatic

changes in local production levels; product taxation; the regulatory environment and specific areas of

legislation; changes in lifestyles and general societal trends; the formation of bilateral and multilateral

trading agreements and negotiations; political factors influencing trade; and the development of the

industry in neighbouring markets that are potential competitors for foreign direct investment.



Example of Food Consumption Model:

(Food Consumption)t = β0 + β1*(GDP)t + β2*(Inflation)t + β3*(Lending Rate)t + β4* (Foreign Exchange

Rate)t + β5*(Government Expenditure)t + β6*(Food Consumption)t-1 + εt

Sourcing

BMI uses the following sources in the compilation of data, developments and analysis for its range of

Food & Drink reports: national statistics offices; local industry governing-bodies and associations; local

trade associations; central banks; government departments, particularly trade, agricultural and commerce

ministries; officially-released information and financial results from local and multinational companies;

cross-referenced information from local and international news agencies and trade press outlets; figures

from global organisations, such as the World Trade Organisation (WTO), the World Health Organisation

(WHO), the United Nations Food and Agricultural Organisation (FAO) and the Organisation for

Economic Co-operation and Development (OECD).

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