Hungary Food and Drink Report Q2 2008

Testing times are ahead for Hungary, with prospects of a sharp drop in external demand, in addition to ongoing fiscal tightening measures, threatening to undermine overall macroeconomic stability in the medium term. Inevitably, this will have a major effect on the food and drink industry, especially given the importance of premiumisation in driving growth. The sharp slowdown in economic activity in the US and across the eurozone will weigh heavily on Hungary's economy, and rising prospects of a more pronounced slowdown in external demand in present new challenges in 2008.

With Hungary's regional competitiveness increasingly waning amid eleven-year low real GDP growth data and low levels of direct investment into the economy, we believe that there may be growing pressure on the government to resume spending programmes towards the latter part of 2008. A reflection of this decreasing regional competitiveness is the reports that were circulating in the press at the end of 2007 that UK retailer Tesco's Hungarian operations are planning on cutting some 3,000 jobs. Although the company has denied these reports, speculation is still continuing regarding Tesco's intentions for the country. Although Tesco has demonstrated its dedication to the Hungarian market in the past, a struggling economy and disappointing results in 2006 have led to speculation that Tesco may be reconsidering its strategy for its international operations, and may shift its focus to more lucrative markets eastward.

Although such economic difficulties come as bad news for the industry as a whole, these periods of economic downturn do present opportunities, particularly for discount stores. This difficult economic situation, which we have been highlighting for some time now, could well be why German discounter Aldi has decided to finally make its market entry, with plans to open its first Hungarian store in April of this year. Although Aldi had originally planned to enter the market in 2006, it decided to postpone its market entry due to market saturation. However, Aldi's plans to enter Hungary underline that as markets mature and reach certain income levels, economic problems may in fact brighten the picture for discounters as they attract more cost-conscious shoppers away from other types of store.

Overall, the more modern retail formats, particularly hypermarkets and discount stores, have proven highly effective and popular with Hungarian consumers. BMI is currently forecasting that total mass grocery retail (MGR) sales will continue to expand, reaching US$25.14bn by 2012. The main engines for this growth will be hypermarkets, with growth of over 178.3% between 2007 and 2012. Discount stores will also benefit from continued price-conscious shopping habits with an increase of 83% between 2007 and 2012. But if this economic downturn continues in the long term, then we will amend our discount sales forecasts upwards accordingly.