Czech Republic Food and Drink Report Q4 2009

In Q409, the Czech Republic fell to eighth position in BMI's Business Environment Ratings (BER) matrix for 14 key Central and Eastern European (CEE) markets, having been placed third and sixth in the previous two quarters, respectively. Despite the Czech Republic being a relatively mature food and drink market with high per capita levels of both food and drinks consumption, it is expected to post slow growth over the next three years. The key reason for this is the fall-out from the global economic slowdown, with weaknesses in the Czech economy having already filtered through to its mass grocery retail (MGR) sector. Indeed, the country remains on track for a 3.1% contraction of real GDP in 2009, as the collapse of export demand and foreign direct investment (FDI) inflows feeds through to a modest contraction of domestic demand. However, the economy does continue to display resilience in the face of Europe-wide recession, principally thanks to the relatively stable financial system. This should both limit the severity of the GDP contraction, as well as leaving the country well-placed to take advantage of a global economic recovery.

In the short term, however, the situation will remain challenging. In fact, following recent news of consolidation of its local operations, Dutch Heineken is shutting down two of its local breweries, continuing its cost-cutting initiative. As most of the beer majors operating in CEE have found, Heineken's volume sales have also come under pressure since Q408, as profound economic weakness has impacted consumption. In related news, Czech brewer Plzensky Prazdroj, a subsidiary of Anglo-South African brewing giant SABMiller, posted only a marginal increase in its 2008 revenues, as its focus on premium beers failed to pay off in the face of economic difficulties.

Similarly, Belgian brewing behemoth Anheuser-Busch InBev (A-B InBev) is looking to sell its CEE operations, including its Czech subsidiary Pivovary Staropramen. Interest has been expressed by a number of private equity firms, including TPG and KKR, as well as Cinven and Warburg Pincus. The Czech Republic's oldest brewer - Budejovick? 1/2 Me??tansk? 1/2 Pivovar (BMP) - is also reportedly up for sale, although it posted a 4.75% year-on-year (y-o-y) increase in 2008 volume sales. The state-owned Budejovicky Budvar is thought to be leading the pack of brewers interested in acquiring BMP.

Recent developments in the Czech food industry seem to illustrate a more positive situation for larger conglomerates, which are able to capitalise on the weaknesses of smaller local and regional players. To this end, in June 2009, leading Czech food company Ham?(C) - the Czech arm of Icelandic food manufacturer Nordic Partners - bolstered its presence in Hungary by acquiring the canned meat business of Globus. Already present in the market through its domestic subsidiary Ham?(C) Hungaria, the company's move is expected to at least double Ham?(C)'s share of the Hungarian canned meat industry, although more will have to be done if Ham?(C) is to close the gap on the markets leaders.