Croatia Food and Drink Report Q4 2009

In BMI's Q409 Business Environment Ratings (BER) matrix, Croatia is placed seventh, sandwiched between the much larger Poland and the Czech Republic, out of the 14 key regional markets in Central and Eastern Europe (CEE). Croatia has continued to improve its position since the start of the year, having previously been ninth and second-last. While the country's overall score is negatively impacted by low per capita food consumption, due to modest income and GDP per capita, it receives maximum points for alcohol consumption per head of population. However, Croatia's small population remains one of the major barriers to investment, as does the price-sensitivity of Croatian consumers. Such factors, coupled with the challenging economic conditions and already flagging retail sales, will translate into a modest 3.27% growth of food values in the 2008-2013 period, to HRK13.09bn (US$2.26bn) as measured in local currency terms.

The falling consumer confidence is already resulting in negative news from the industry. Leading Croatiabased wine producer Kutjevo reported a 52.4% year-on-year (y-o-y) fall in net profit for FY08, exacerbated by the fact that most of its revenues are achieved domestically. However, the company should have the long-term strength to benefit from the Croatian accession into the EU - expected in the coming couple of years - and the resulting rise in exports. Still, other food and drinks majors are looking to exit the country. To this end, Belgian brewing behemoth Anheuser-Busch InBev (A-B InBev) is reportedly selling its CEE operations, including its prominent Croatian Zagrebacka pivovara (ZAPI) arm.

Nevertheless, the economic crisis is providing expansion opportunities for stronger food and drink - as well as mass grocery retail (MGR) - industry players. In terms of acquisitions, ? 1/2 ito Osijek announced that it would bid for the purchase of the agricultural firm PPK Valpovo, which has been facing bankruptcy. Other companies are expanding organically; for example, leading domestic meat processors Koka (poultry) and Vindom (turkey), both of which are subsidiaries of Vindija, one of Croatia's leading food processing companies, recently inaugurated two new plants, one in the domestic and one in the neighbouring Serbian market.

Consolidation is also taking place in the Croatian MGR market. The struggling cash-and-carry operator Getro is up for sale, with interested parties including Mercator, Metro and Kaufland, now that Agrokor has pulled out, due to the high asking price for the retailer. Although Agrokor's supermarket business Konzum continues to expand in neighbouring Bosnia and Herzegovina, Agrokor itself is reportedly facing difficulties in the domestic market. Its drugstore chain Kozmo is rumoured to be likely prey for the larger Drogerie Markt (DM), although the recent lifting by the Constitutional Court of Croatia of the ban on Sunday trading should provide a much-needed respite for all Croatian MGR operators. The freedom to open their stores on Sunday will, however, be dampened by the news that the Croatian economy posted a hefty contraction during the first quarter of 2009. While some recovery is expected from late 2010, the Q109 figures support our forecast for a full-year GDP contraction of 3.21%.