Bulgaria Food and Drink Report Q4 2009

In BMI's Q409 Business Environment Ratings (BER) for the 14 major markets of Central and Eastern Europe (CEE), Bulgaria slightly improved its position in relation to the previous quarter, when it was ranked last. The challenging economic environment - with the economy contracting by 3.5% year-onyear (y-o-y) during Q109 and unemployment levels rising - is the key factor responsible for Bulgaria's low ranking, even though the other markets have also suffered a downgrade in their scores as a result of tightening consumer spending levels. In the coming quarters, modest population size (of some 7mn and declining) and some of the lowest food and beverage prices (by European standards) will conspire to keep Bulgaria among the bottom half of the table. Even though we forecast a 13.43% growth in its food and drink expenditure through to 2013, as measured in local currency, most of this will be achieved in the latter parts of the forecast period. In fact, we have further revised downwards our 2009 real GDP forecast, to -5.3%, down from the previous -3.1%, with overall retail and industrial sales dropping by 9.3% and 20.7%, respectively, in April 2009.

Consequently, the ground for the expansion of mass grocery retail (MGR) operators offering discount and private-label products is fertile. In the past few months, local sources reported that German retailer Rewe was investing EUR100mn in the creation of Penny Markt discount stores in the country, with Belgian Delhaize also planning on opening stores in Bulgaria, despite denying such a move in October 2008.

Slovenian Mercator, which has a strong private-label line, is expected to open two outlets in Bulgaria by the end of the year, all of which will have a marked impact on both food and beverage values and volumes consumption and the dynamism and competition of Bulgaria's MGR sector.

In the meantime, the country's food and drinks industry seems to be feeling the economic pinch. In July 2009, the national soft drinks association data revealed that the sales of non-alcoholic beverages in the country dropped by 4.9% y-o-y in H109. Alcoholic drinks have also not experienced stellar performance, although Belgian brewing behemoth Anheuser-Busch InBev (A-B InBev) is expected not to sell its Bulgarian operations. The brewer is reportedly looking for interested parties that would buy its CEE operations, spanning Croatia, the Czech Republic, Hungary, Montenegro, Romania and Serbia, with Bulgaria possibly to be spared, given the recently announced plans to invest about EUR15mn on a new bottling line in its Kamentiza subsidiary.

Although the CEE region accounted for close to 14% of AB InBev's revenue in FY08, its contribution to EBIDTA (earnings before interest, depreciation, taxes and amortisation) was underwhelming, at just over 7%. Conditions for brewers have steadily worsened in 2009 - severe economic stress has forced a sharp alteration in consumer spending, which continues to profoundly affect the non-essential beverage category. What is more, with populations declining or remaining flat in many of the region's markets, the long-term demographic outlook does not favour brewers, particularly those that are not market leaders.