HK Food & Drink Report PDF

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Q1 2013
HONG KONG
FOOD & DRINK REPORT

INCLUDES BMI'S FORECASTS
ISSN 1749-2726
Published by Business Monitor International Ltd.
HONG KONG FOOD & DRINK REPORT 2013

INCLUDES 5-YEAR FORECASTS TO 2017
Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International Copy Deadline: October 2012
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Hong Kong Food & Drink Report 2013
Business Monitor International Ltd
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CONTENTS
BMI Industry View ............................................................................................................................................ 7 SWOT Analysis ................................................................................................................................................. 9
Hong Kong Food Industry SWOT .......................................................................................................................................................................... 9 Hong Kong Drink Industry SWOT ....................................................................................................................................................................... 10 Hong Kong Mass Grocery Retail Industry SWOT................................................................................................................................................ 12
Business Environment .................................................................................................................................. 13

BMIs Core Global Industry Views ........................................................................................................................................................................... 13 Table: Core Views ............................................................................................................................................................................................... 21 Asia Pacific Food & Drink Risk/Reward Ratings ..................................................................................................................................................... 22 Table: Food & Drink Risk/Reward Sub-Factor Ratings, Q113 (score out of 10)................................................................................................. 23 Table: Asia Pacific Food & Drink Risk/Reward Ratings, Q113 .......................................................................................................................... 26 Hong Kongs Food & Drink Risk/Reward Rating ..................................................................................................................................................... 27 Macroeconomic Outlook ........................................................................................................................................................................................... 29 Table: Economic Activity ..................................................................................................................................................................................... 31
Industry Forecast Scenario ........................................................................................................................... 33

Consumer Outlook .................................................................................................................................................................................................... 33 Food.......................................................................................................................................................................................................................... 37 Food Consumption............................................................................................................................................................................................... 37 Table: Food Consumption Indications Historical Data & Forecasts................................................................................................................ 38 Canned Food ....................................................................................................................................................................................................... 38 Table: Canned Food Value/Volume Sales Historical Data & Forecasts .......................................................................................................... 39 Confectionery....................................................................................................................................................................................................... 39 Table: Confectionery Value/Volume Sales Historical Data & Forecasts.......................................................................................................... 40 Meat ..................................................................................................................................................................................................................... 41 Table: Meat ......................................................................................................................................................................................................... 41 Pasta .................................................................................................................................................................................................................... 42 Table: Pasta......................................................................................................................................................................................................... 42 Frozen Food ........................................................................................................................................................................................................ 43 Table: Frozen Food ............................................................................................................................................................................................. 45 Dairy.................................................................................................................................................................................................................... 46 Table: Dairy ........................................................................................................................................................................................................ 47 Drink......................................................................................................................................................................................................................... 49 Alcoholic Drinks .................................................................................................................................................................................................. 49 Table: Alcoholic Drinks Value/Volume Sales Historical Data & Forecasts ..................................................................................................... 50 Soft Drinks ........................................................................................................................................................................................................... 51 Table: Soft Drinks Value/Volume Sales Historical Data & Forecasts .............................................................................................................. 52 Hot Drinks ........................................................................................................................................................................................................... 53 Table: Hot Drinks Value Sales Historical Data & Forecasts............................................................................................................................ 53 Trade ........................................................................................................................................................................................................................ 54 Table: Food & Drink Trade Indicators Historical Data & Forecasts............................................................................................................... 55 Mass Grocery Retail ................................................................................................................................................................................................. 55 Table: Mass Grocery Retail Sales Historical Data & Forecasts....................................................................................................................... 59 Table: Sales Breakdown by Retail Format Type .................................................................................................................................................. 59
Food ................................................................................................................................................................. 60
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Industry Trends And Developments .......................................................................................................................................................................... 60 Lindt & Sprngli Plans To Consolidate Its Hong Kong Unit ............................................................................................................................... 60 Hong Kongs Chain Loses Out As Walmart To Deal Directly With Factories ..................................................................................................... 60 Market Overview ...................................................................................................................................................................................................... 61 Food Production .................................................................................................................................................................................................. 61
Drink ................................................................................................................................................................ 62
Industry Trends And Developments .......................................................................................................................................................................... 62 Hong Kong-Listed Brewer Up For Sale ............................................................................................................................................................... 62 UKs Whisky Distiller Opens New Office In Hong Kong ..................................................................................................................................... 62 Wine Remains Dynamic ....................................................................................................................................................................................... 62 Innovation Still Crucial........................................................................................................................................................................................ 63 Market Overview ...................................................................................................................................................................................................... 64 Alcoholic Drinks .................................................................................................................................................................................................. 64 Soft Drinks ........................................................................................................................................................................................................... 64 Hot Drinks ........................................................................................................................................................................................................... 64
Mass Grocery Retail ....................................................................................................................................... 65

Industry Trends And Developments .......................................................................................................................................................................... 65 Dairy Farm International Post Strong H112 Results ........................................................................................................................................... 65 Intensifying Competitive Pressures Could Undermine Uny's Growth Potential................................................................................................... 66 Premium Interest ................................................................................................................................................................................................. 67 Morrisons Opens Office in Hong Kong................................................................................................................................................................ 67 Market Overview ...................................................................................................................................................................................................... 69 Table: Structure Of Mass Grocery Retail Market By Estimated Number of Outlets ............................................................................................ 70 Table: Structure Of Mass Grocery Retail Market Sales (HKDmn) By Format ................................................................................................. 70 Table: Structure Of Mass Grocery Retail Market Sales (US$mn) By Format ................................................................................................... 70 Table: Average Sales Per Outlet By Format 2012 ............................................................................................................................................ 71
Competitive Landscape ................................................................................................................................. 72

Key Players ............................................................................................................................................................................................................... 72 Table: Key Players In Hong Kong's Food Sector ................................................................................................................................................ 72 Table: Key Players In Hong Kong's Drink Sector................................................................................................................................................ 72 Table: Key Players In Hong Kong's Mass Grocery Retail Sector ........................................................................................................................ 73
Company Monitor ........................................................................................................................................... 75

Food.......................................................................................................................................................................................................................... 75 Golden Resources Development .......................................................................................................................................................................... 75 Drink......................................................................................................................................................................................................................... 77 Tsit Wing.............................................................................................................................................................................................................. 77 San Miguel Hong Kong........................................................................................................................................................................................ 80 Vitasoy International ........................................................................................................................................................................................... 82 Mass Grocery Retail ................................................................................................................................................................................................. 86 Dairy Farm International .................................................................................................................................................................................... 86 AS Watson............................................................................................................................................................................................................ 88
Demographic Outlook .................................................................................................................................... 89

Table: Hong Kong's Population By Age Group, 1990-2020 ('000) ...................................................................................................................... 90 Table: Hong Kong's Population By Age Group, 1990-2020 (% of total) ............................................................................................................. 91 Table: Hong Kong's Key Population Ratios, 1990-2020...................................................................................................................................... 92 Table: Hong Kong's Rural And Urban Population, 1990-2020 ........................................................................................................................... 92
Risk/Reward Ratings Methodology .............................................................................................................. 93
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Table: Rewards .................................................................................................................................................................................................... 93 Table: Risks ......................................................................................................................................................................................................... 94 Weighting............................................................................................................................................................................................................. 94 Table: Weighting ................................................................................................................................................................................................. 94
BMI Food & Drink Industry Glossary ........................................................................................................... 95

Food & Drink ...................................................................................................................................................................................................... 95 Mass Grocery Retail ............................................................................................................................................................................................ 95
BMI Food & Drink Forecasting & Sourcing ................................................................................................. 97

How We Generate Our Industry Forecasts ............................................................................................................................................................... 97 Sourcing............................................................................................................................................................................................................... 98
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BMI Industry View

BMI View: Hong Kong is one of Asia Pacific's smallest consumer markets, with its population standing at just over the 7mn mark. Therefore, from a demographic standpoint, there are few attractions for consumer industry investors. Additionally, we expect the reversal in Hong Kong's booming property market to weigh on consumer purchasing power and curtail spending on higher value consumer goods. Generally speaking, most food and drink segments are highly mature, although consumers remain interested in novelty and convenience, which still provides opportunities for food and drink companies.
Headline Industry Data (local currency)
2013 per capita food consumption growth = +2.10%; forecast compound annual growth rate (CAGR) to 2017 = +1.88%

2013 alcoholic drinks sales growth = +5.10%; forecast CAGR to 2017 = +4.42%
2013 soft drinks sales growth = +5.88%; forecast CAGR to 2017 = +4.57%
2013 mass grocery retail sales growth = +5.93%; forecast CAGR to 2017 = +5.04%
Key Trends And Developments Dairy Farm International Post Strong H112 Results: Hong Kong-based retail company Dairy Farm International posted strong results for the first half of its financial year. The company's sales for the sixmonth period ended June 30 2012 increased by 10% to US$5.5bn compared to H111, while its underlying profit was up 12% to US$243mn. Dairy Farm's strong results were driven by some small acquisitions it made during the six months, including a 70% share in a Cambodia-based supermarket chain and a 50% stake in Philippines-based retailer Rustan's.
Hong Kong-Listed Brewer Up for Sale: In February 2012, Chinese brewers expressed interest in acquiring the beer assets of Kingway Brewery, which is listed in Hong Kong. Potential buyers included Tsingtao, Beijing Yanjing Brewery (which had emerged as a front runner, but abandoned the plan over price disagreements), Guangzhou Zhujiang Brewery, as well as CR Snow, which is a joint venture between China Resources Enterprise and SABMiller. In September 2012, Kingway was reportedly still in talks with potential partners. The company is mulling a sale of all or part of its business as it struggles to generate profits amid a highly competitive environment.
Risks To Outlook Political Risks: While we believe Hong Kong will remain at or near the top of our political risk ratings
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table over the next decade, a number of risks could lead to rising political instability. The sluggish pace of democratic reforms will continue to cause anger among pro-democracy supporters, and there is the potential for large-scale public protests. A lack of affordable housing and rising income inequality also could pose threats to social stability.
Economic Risks: While a high degree of financial stability helps to counterbalance Hong Kong's longterm economic weaknesses, namely its high dependence on trade and over-reliance on the export of manufactured goods, Hong Kong is at risk of a larger-than-expected decline in the domestic property market that would result in a sharp fall in domestic consumer confidence and spending. A sharper-thananticipated cooling of the Chinese economy as tighter credit conditions start to take effect could also weigh on domestic consumer sentiment given the key trading relationship between the two countries.
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SWOT Analysis
Hong Kong Food Industry SWOT
Strengths

Changing diets and lifestyles are increasing demand for higher-value convenience foods. Hong Kong is a substantial re-exporter of processed foods to mainland China. High disposable incomes ensure consumer susceptibility to premium and innovative food and beverage items. Hong Kongs limited natural resources mean it is heavily dependent on imports of raw materials and food; this is a particular weakness during this period of volatile global food prices. The market is relatively mature, providing few opportunities for growth. Domestic food production remains low and there is little prospect for growth as factories are increasingly being relocated to mainland China. Sales of packaged food and healthy products have increased due to increasing consumer consciousness about food safety and hygiene following various regional health scares. Hong Kongs population is susceptible to new, innovative and premium product launches, particularly in the countrys profitable soft drinks sector. The Closer Economic Partnership Arrangement (CEPA) agreement offers an opportunity to boost imports to the mainland. Hong Kong continues to serve as an Asian profit centre for producers, meaning that investment should remain even as manufacturers seek out higher-growth opportunities. A slowdown in Chinas booming economy could have serious consequences for Hong Kongs food and drink industry, which is intrinsically linked to China in terms of both trade and attracting general regional investment. A worse than expected property market slowdown could dampen domestic demand for higher value food and beverage items in the coming quarters. Hong Kongs higher labour and manufacturing costs are likely to result in an increasing number of companies transferring production to mainland China, leading to a rise in unemployment, which will adversely affect consumer spending levels.
Weaknesses

Opportunities

Threats

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Hong Kong Drink Industry SWOT
Strengths

Wide acceptance of alcohol consumption maximises Hong Kongs alcoholic drinks industrys otherwise small customer base. High disposable incomes ensure consumer susceptibility to premium and innovative food and beverage items. A dynamic tourism industry further strengthens sales of both alcoholic and soft drinks. Hong Kongs limited natural resources mean it is heavily dependent on imports of raw materials and food; this is a particular weakness during this period of volatile global commodity prices. The countrys alcohol industry has suffered from the attractive investment and growth opportunity that China represents. The market is relatively mature, providing few opportunities for growth. While alcohol consumption is widely accepted, relatively high prices do limit industry participation for some. Hong Kongs population, encouraged by rising employment and disposable incomes, is susceptible to new, innovative and premium product launches, particularly in the countrys profitable soft drinks sector. The CEPA agreement offers an opportunity to boost imports to the mainland. Hong Kong continues to serve as an Asian profit centre for producers, meaning that investment levels should remain high even as manufacturers seek out higher-growth opportunities. Energy drinks, popular among young, aspirational consumers, are a high growth channel, while perceived healthy soft drinks, such as juices, should benefit from rising global health consciousness. The removal of excise duties on beer and wine improved Hong Kongs appeal as a regional alcohol trading hub. The relatively small wine sector represents a significant growth opportunity, in terms of domestic sales, but more significantly in terms of regional exports. A slowdown in Chinas booming economy could have serious consequences for Hong Kongs food and drink industry, which is intrinsically linked to China in terms of both trade and attracting general regional investment. A worse than expected property market slowdown could dampen domestic demand for higher value food and beverage items in the coming quarters. Weak global economic growth, particularly in higher-travelling developed markets, could once again harm the global tourism industry, with perceived expensive destinations likely to suffer particularly; this could hurt beverage sales. Hong Kongs higher labour and manufacturing costs are likely to result in an increasing number of companies transferring production to mainland China, leading to a rise in unemployment, which will adversely affect consumer
Weaknesses

Opportunities

Threats

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spending levels.
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Hong Kong Mass Grocery Retail Industry SWOT
Strengths
Wet markets will continue to lose market share to the advantage of supermarkets and other modern retail formats as the latter continue to replicate traditional shopping experiences, but with the additional benefits of convenient opening hours and a hygienic environment. Per capita consumer spending is high, which ensures a certain level of retail spending, regardless of the price conscious nature of consumers. Affluent, but still aspirational consumers ensure a widespread audience for innovative retail formats and innovative in-store offerings and services. Strong competition in the MGR sector forces companies to offer almost permanent discounts, with these costs usually passed onto suppliers. The market is relatively mature, providing few real opportunities for growth. Hong Kongs geography limits the potential of the profitable hypermarket sector, which has been the most typical avenue for success by multinationals in neighbouring Asian markets. Private label products should continue to experience strong growth, with consumers attracted to their price benefits. Likewise, discounting is expected to continue to enjoy growth as consumers shed negative perceptions of low prices and instead focus on the improved value on offer. Consumers in Hong Kong are interested in the value-added services that retailers are increasingly offering in order to attract more customers; new ideas of this nature are likely to prove effective in boosting market share. Capitalising on emotive consumer concepts such as organic retailing and green retailing represents an effective means of building customer loyalty. Rising operating costs could jeopardise retail margins, with profits already squeezed by the need to offer competitive low prices. A worse than expected property market slowdown could dampen domestic demand for higher value food and beverage items. As investment shifts to the mainland, there is a risk that the development of Hong Kongs MGR sector will slow and innovation will stagnate, although consumer spending remains attractive enough to ensure that not all retailers completely shift focus.

Weaknesses

Opportunities

Threats

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Business Environment
BMIs Core Global Industry Views
The events of the last quarter have generally continued to support our core short- and long-term views. The principal exception has been the performance of commodity prices. In June, we suggested that an easing of commodity prices was likely to continue, thanks to global economic weakness and decent stocks-to-use ratios in major commodity categories. However, this assessment had to be swiftly revised as the US suffered its worst drought in 50 years, leading to massive production forecast downgrades for corn and soybean.
This has led to a spike in prices across all grain categories (see chart). We do not expect further upward pressure for the rest of the year, but we do expect prices to remain elevated as Southern Hemisphere crops fail to compensate for crop losses in the Northern Hemisphere. This has already started to have an impact on margins for food firms and will very likely continue to have an impact on results into 2013, with the consumer environment across most developed markets still too weak to accommodate major price increases without a subsequent reduction in volumes.
Spike In Prices Select Grains Price Rebased (1 June 2012 = 100)
Source: BMI, Bloomberg
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Emerging Market Expansion
To offset developed market weakness, major food firms have been investing in emerging market assets, and this trend featured heavily again during the last quarter. In general, US firms lag behind their European counterparts with respect to emerging market exposure, and it is notable that in recent months, US firms have been doing much of the running in an effort to close this gap.
US confectionery producer Hershey has announced that it is to take full control of its Indian operations by buying out its joint venture partners. The firm will purchase the 43% stake in Godrej Hershey, currently owned by local firm Godrej Industries, along with a 6% stake from a number of smaller shareholders. The move follows speculation that Hershey was looking to restructure the business to take greater advantage of the dynamic Indian market that the joint venture failed to fully exploit. Hershey's decision to instead to buy out its joint venture partners suggests that the firm will use the existing business as a platform to kick-start the distribution of its own brands. It may also see potential in confectionery brands Nutrine and Maha Lacto, and beverage brands Jumpin and Sofit, which will be included in the purchase.
Also in the last quarter, US-based spice and seasonings producer McCormick & Co agreed to buy Chinese firm Wuhan Asia-Pacific Condiments (WAPC) for CNY900mn (US$141.5mn). In 2011, McCormick announced its target to generate 12% of its revenue from emerging markets by 2015, which compares with 9% currently, and to achieve this aim, the firm has recently stepped up its focus on acquisitions. WAPC is focused on making chicken stock/bouillon and owns the DaQiao and ChuShiLe brands, which have a strong position in central China. The firm has annual sales of CNY730mn and registered sales growth of 25% on average between 2007 and 2011, highlighting the attractiveness of the seasonings sector in China and across other emerging markets.
Meanwhile, US food giant General Mills has said that it is looking for acquisitions in India to cement its exposure to the world's most attractive emerging markets. In an interview with the Financial Times, the firm's CFO suggested that exposure to the Indian market would complement its strong growth in China and improved position in Brazil following the acquisition this year of Yoki.
BMI has regularly suggested that Campbell Soup Company's portfolio is currently poorly suited to growth in emerging markets, as home-made soup is a cheap staple in many of these markets, and canned soup has therefore been poorly received. This assertion now seems to be increasingly recognised by the company, with the firm announcing that it would focus resources on its baking and snacking unit, and the firm's CEO stating in an interview with the Wall Street Journal that it was eyeing acquisitions to boost this part of the business. This would follow the footsteps of Kellogg, which has found cereal a relatively tough sell in some of the most attractive emerging markets and has recently focused on the salty snack category, most notably with the acquisition of Pringles.
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US Food Firms Lag Behind Revenues From Emerging Markets (%)
Source: BMI, Nestl, Investor relations
Deals emanating from Europe have meanwhile been focused in the alcoholic drinks segment. Heineken looks set to seal full control of Asia Pacific Breweries (APB) after reaching an agreement with ThaiBev and its partner TCC Assets (both linked to Thai billionaire Charoen Sirivadhanabhakdi), which had launched a cash bid for full control of Singapore conglomerate Fraser and Neave, which owns a substantial stake in APB. The acquisition will give Heineken improved access to a large number of highgrowth markets including Thailand, Cambodia, Vietnam and Indonesia, putting the firm in a much stronger position to develop its Asian business.
Also over the last quarter, Italian spirits group Campari announced the acquisition of Jamaican rum producer Lascelles DeMercado in a deal worth up to US$415mn. Campari will pay US$338mn to acquire the 81% stake owned by CL Financial and will make a public tender offer for the remaining shares. The deal gives the firm exposure to the buoyant rum category and affords the firm two of the strongest rum brands in the Caribbean: Appleton and Wray & Nephew. The move continues Campari's strategy of buying neglected brands that it can bolster with its strong distribution system and marketing expertise.
Diageo is another firm growing quickly in emerging markets, but this growth is actually spurring investments in the UK, with the firm announcing plans to invest GBP1bn in its Scotch whisky production facilities. The move comes at a time when whisky export volumes have returned to growth, with
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voracious demand in emerging markets now looking sufficient to offset any weakness in developed markets.
With export demand now growing at breakneck speed and finally offering up true scale, BMI expects widespread investment in the industry to resume, with Diageo's announcement likely to be followed by further investment from all of the major players as they seek to develop capacity to meet the demands of middle-class consumers across emerging markets.
Frontier Markets Increasingly Attractive
One of our core views is that multinationals will increasingly pursue frontier market investments as opportunities in the traditional emerging markets become more scarce and competition increases. Over the last quarter, this trend was exemplified by PepsiCo and The Coca-Cola Company, both announcing plans to re-enter Myanmar. The untapped potential of Myanmar's consumer sector is also increasingly attracting the sights of regional consumer goods investors, with Lawson and Singha recently flagging up expansion plans for the country. For Coca-Cola and Pepsi, Myanmar's youthful population and currently low soft drink consumption levels are likely to translate into a lot of room for growth. The fact that these two firms are among the first Western companies to make concrete plans for expansion demonstrates how important first-move advantage is perceived to be within the soft drink sector.
Developed Market Consolidation
Within developed markets, consolidation has been relatively low on the agenda in 2012, with most firms keen to expand their emerging market exposure instead. However, two notable deals have come to light over the past three months. UK-based soft drink producers Britvic and AG Barr have revealed that they are holding merger discussions. This looks like a logical deal, with Britvic's Robinson's and PepsiCo bottling franchise nicely complementing AG Barr's Irn-Bru and Rubicon brands. We have long suggested that AG Barr looked like a potential takeover target given its attractive brands and strong growth. However, the proposed deal would actually see AG Barr's CEO take the helm of the enlarged company, reflecting AG Barr's strong performance and Britvic's recent weakness.
Meanwhile, Norwegian conglomerate Orkla is to buy local food producer Rieber & Sn in a deal worth NKR6.1bn (US$1bn). The price represents a 78% premium on Rieber's closing share price ahead of the announcement, and the substantial premium can be linked to Orkla's strong desire to reshape itself as a fast-moving consumer goods firm with the scale to compete with industry majors such as Unilever and Nestl. Orkla and Rieber have a strong geographical overlap across the Nordic region and emerging Europe, but limited overlap within their product portfolio, which is likely to help the deal to gain approval from Norway's antitrust authorities. With its heritage as a conglomerate, Orkla has interests in areas such as power generation and aluminium production, and the firm is expected to continue to divest these assets
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and use the proceeds to bolster its food and drink operations. Given the firm's exposure to mature markets in the Nordics, we would expect further acquisitions to be centred on emerging Europe, with deals such as the 2010 acquisition of Estonian confectionery maker Kalev Chocolate Factory serving as an example.
Emerging Markets Buying Developed
Last quarter, we outlined the increased trend for emerging market-based firms to acquire developed market assets, and this has continued. Chinese soft drink firm Wahaha has emerged as a surprise front runner in the battle to acquire the snack unit of United Biscuits, which controls brands such as Hula Hoops and KP Nuts and has been put up for sale by its private equity owners. An acquisition would boost Wahaha's portfolio of foreign brands in the Chinese market as well as help to diversify the firm's geographic spread by providing access to high-spending European markets.
Meanwhile, state-owned Chinese food producer Bright Food announced plans to acquire a 70% stake in Bordeaux wine exporter Diva, which generates 45% of its sales in China and 60% in Asian markets, to gain a foothold in the wine sector. The acquisition forms part of its broader ambitions of building a diversified portfolio, with the firm having previously acquired a 60% stake in UK breakfast cereal Weetabix, along with food firms in Australia and New Zealand.
All Eyes On Indian Retail
In the retail sector, all the focus has been on Asia, in particular, India. In what may be in time remembered as the most significant global retail event of 2012, India looks set to finally open up its retail industry to foreign investors, potentially paving the way for global retailers Carrefour, Tesco and Walmart to enter what is possibly an outstanding retail opportunity. Until now, India has stubbornly stuck to its guns in refusing to allow foreign retailers to own controlling interests in domestic retailers. This was perceived to be a protectionist stance benefiting the plethora of small kiosks that dominate the retail landscape across most Indian states. The new legislation will allow foreign retailers to acquire 51% controlling stakes in Indian retailers, and the policy reforms come at a time when the Indian economy is facing its most testing period for a number of years, with economic growth slowing down markedly. That said, retailers will still have to find willing states in India, as the government is allowing individual states to decide whether to allow foreign retailers in.
The new legislation has been met very favourably by the pro-business lobby, and shares in some of India's leading retailers, including Pantaloon Retail and Shoppers Stop, rose substantially when the new policy measures were announced on the expectation that they may now be seen as key acquisition targets for major Western firms.
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Outside of India, the news emanating from the Asian retail sector has been more mixed. Carrefour has announced plans to exit Singapore, with the firm revealing it will close its two existing hypermarket outlets by the end of 2012. The move comes after the firm failed to sell the business and continues the firm's process of removing itself from Asian markets, in which it is not likely to become one of the top three largest players.
The move to exit Singapore comes after the firm also exited Thailand in late 2010 by offloading its retail stores to French mass grocery retail player Casino Guichard-Perrachon. The firm is also present in Malaysia, having 24 stores in the country generating sales of around EUR405mn (US$559mn). Here the firm has also failed to secure one of the top three market spots, and in 2010, put the assets up for sale, in combination with its Singapore holdings (the two countries are geographically close and have cultural ties). The sale process was subsequently discontinued after assets failed to achieve the expected bids. However, the decision to exit Singapore suggests that a decision to exit Malaysia may soon also be forthcoming.
China is also proving challenging. A drop in profits at Chinese retailer Lianhua, combined with Tesco's announcement that it is to shut four stores in the country, highlights the difficult state of the underlying market, which has high levels of competition and weakening demand. Tesco announced it is to shut four of its current hypermarkets, with a spokesperson stating that it was taking 'a more cautious approach to our capital investment in the market'. The stores to be shut are in the country's second- and third-tier cities, suggesting that the firm's store format is not well adjusted to less well-developed parts of the country, where local supermarkets have established a loyal base. In its latest quarter, Tesco reported likefor-like sales growth of just 0.6% in China, and this is clearly a long way off the dynamic growth levels that would be expected of such a promising consumer market.
As well as shutting these four outlets, Tesco has previously scaled back its expansion plans for China and now intends to open only 15-20 new hypermarkets a year. The firm's flagship 'Lifespace' shopping malls have proven to be difficult to execute, and the firm now operates just eight, making it very unlikely that it will come anywhere close to its target of 50 by February 2016. Tesco is not alone in finding China hard going. Over the last two years, Carrefour has closed a number of underperforming stores and has also reined in its pace of expansion. Walmart is also witnessing slower customer traffic and has struggled to maintain control of standards under its franchise operating structure a position that has seen the firm face a number of regulatory complaints and has damaged its reputation.
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The Power Of Innovation Nespresso Sales Growth
Source: Investor relations
Protecting Innovations Becoming More Crucial
Another of our core long-term views is that investment in innovation will increase as producers seek differentiation, and that emphasis will be placed on protecting innovations. The actions of Nestl over the last quarter have clearly demonstrated this trend. In June, the firm inaugurated a new clinical development unit in Lausanne, Switzerland that will conduct clinical-style trials to establish the efficacy of its product innovations in the areas of health and wellness. The move comes after an increase in scrutiny of the validity of health claims made within the food sector across the EU and North America. BMI has previously posited that this increased level of scrutiny will actually be beneficial to larger players as they will have the funding available to conduct the trials that are required to scientifically support the claims made in the functional sector.
Innovation has also played a key role in the development of the Nestl Nespresso coffee pod system and has helped make coffee pods the fastest growing part of the coffee industry in Europe. In stronger economies, it has benefited from consumers trading up from instant coffee (based on taste) and freshly ground coffee (based on convenience). In weaker economies, such as Italy and Spain, the sector has benefited from a move away from the on-trade sector, with coffee pods offering a price advantage over cafes and restaurants despite their premium positioning. However, in August, Nestl was dealt a blow in its bid to secure exclusivity over its Nespresso coffee pod system in Europe after a German court ruled in favour of a rival selling unofficial capsules that were compatible with Nestl's Nespresso machine. Nestl
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had sought an injunction against the Ethical Coffee Company and its distributor Betron, but Dusseldorf's regional court has rejected the request.
With the Ethical Coffee Company's capsules selling for around 30% less than Nespresso's official versions, Nestl faces the prospect of losing its monopoly on the market. Further court cases are ongoing, including a battle with D.E Master Blenders 1753 (formerly part of Sara Lee) in the Netherlands, France and Belgium. The CEO of the Ethical Coffee Company suggested that he was not surprised by the ruling and likened it to developments in the printer industry, with unofficial printer cartridges successfully challenging the monopoly position of printer makers and now being a ubiquitous part of the market.
Producers Facing Private Label Choice
Another of our core views is that some consumer goods manufacturers will leave sectors under threat from private labels, while others will calibrate their portfolios toward private labels to capitalise on their growing demand. This was again in evidence in the last quarter, with US food producer Dole reaching an agreement with Japanese conglomerate Itochu Corp to sell its global packaged food business and its Asian fresh produce unit for US$1.7bn. The move will leave the firm focused on fresh produce and is a move away from the added-value sector. The sale represents a big injection of cash that will bring the firm's debts down to a much lower level and will put the firm in a much better position to take advantage of growth opportunities in the currently unfashionable fresh produce category.
Meanwhile, Italy's Barilla looks to be moving in the other direction, with the firm announcing that former Unilever executive Claudio Colzani is to be the company's new CEO. The move comes shortly after Barilla revealed it was looking to offload its German bakery business, Lieken. Taken together, these moves are a signal of the firm's underlying strategy, with a focus on its core consumer brands likely to take centre stage. Barilla is the world's largest pasta producer, and therefore looks particularly threatened by the growth in private labels, with pasta proving to be a sector for which the advantages of branded products are harder to convey. However, with strong brands and a focus on its premium positioning alongside innovation, we believe Barilla is likely to be able to keep this threat at bay over the longer term.
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Table: Core Views
Short-Term Outlook
The recent spike in commodity prices will put pressure on margins into 2013. Developed markets will still feel the pinch, with economic weakness and political uncertainty weighing on spending. There are tentative signs of improvement in the US consumer market. The value theme is still very important across the developed world, with price consciousness inherent.
Long-Term Outlook Companies with strong emerging market exposure will continue to outperform. Multinationals will increasingly pursue frontier market investments. Emerging market-based firms will increasingly pursue developed market investments for the purposes of diversification. 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 beverage 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. Private equity companies will continue to be attracted to unfashionable food and drink categories.
Source: BMI
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Asia Pacific Food & Drink Risk/Reward Ratings

China Outperforms On Impressive Risk/Reward Balance There have been minimal changes in BMI's Asia Pacific food and drink risk/reward ratings over the past quarter. China continues to lead our ratings, while the Philippines and Pakistan continue to lag behind the rest of the pack. In this article, we examine the relative attractiveness of the Asian food and drink markets from the aspects of both risks and rewards, stressing the importance of striking a balance between risks and rewards to achieve robust investment appeal.
There are two aspects to our risk/reward analysis: the reward 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. Meanwhile, the risk part of the rating 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.
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Table: Food & Drink Risk/Reward Sub-Factor Ratings, Q113 (score out of 10)
South Korea
Hong Kong
Philippines
Singapore
Indonesia
Australia
Malaysia
Pakistan
Thailand 3 8 5 6 3 3
Reward Food consumption per capita Market fragmentation Per capita food consumption 5year compound annual growth Population size GDP per capita, US$ Youth population (%) Risk MGR penetration Regulatory environment Short-term economic growth Income distribution Lack of bureaucracy Market orientation Physical infrastructure 8 7 7 9 8 7 7 6 6 8 7 5 4 6 7 8 9 9 8 9 5 1 3 6 6 4 4 7 3 4 7 7 3 5 5 9 7 6 9 8 6 8 6 7 8 6 7 7 7 1 1 5 7 3 4 6 2 5 7 6 4 6 6 7 9 9 9 8 8 10 8 8 9 9 5 6 7 7 9 9 9 7 6 8 6 7 7 7 6 7 6 1 5 6 7 4 5 7 6 2 1 4 10 3 3 8 7 10 3 2 10 2 2 2 9 1 1 9 6 10 2 6 4 8 5 9 2 5 10 1 1 8 10 2 4 5 3 4 4 6 1 10 4 8 2 8 2 5 4 7 2 8 9 1 3 2 10 2 9 2 5 5 7 2 10 2 4 4 6 2 1 9 5 7 2 4
Source: BMI
India And Pakistan Lead The Pack In Rewards Intuitively, developed Asia Pacific markets score high on the indicator of food consumption per capita, with the premiumisation trend particularly well entrenched in markets such as Singapore and Japan. However, while these countries boast high food and drink spending levels, the relative maturity of their markets mean that they are viewed less favourably on the indicator of market fragmentation and per capita food consumption, five-year compound annual growth. Pakistan, India and Vietnam are among the most fragmented markets in the Asia Pacific region, which means there remains tremendous room for growth in the longer term. Although Pakistan, India and Vietnam are home to established, risk-averse food and drink players such as The Coca-Cola Company and Nestl, the fragmented and massive size of these markets is likely to provide relative ease of entry for regional consumer-facing companies. Comparatively, in markets such as China, Thailand and Indonesia, the rapid emergence of competition
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Vietnam
Taiwan
Japan
China
India
serves as a stronger headwind for potential market entrants. Not surprisingly, it is the underdeveloped markets that score high on the indicator of per capita food consumption growth.
The indicators of youth population and population size assess the attractiveness of the Asia Pacific markets from a demographic perspective. A massive population offers greater scope for organic growth for food and drink companies, which partly explains the increasing flurry of investments in China and India in recent years. Meanwhile, a youthful population generally translates into exciting opportunities in the mass-market segment. Philippines and Pakistan are perceived favourably on this front.
The final factor in the reward part of the table is GDP per capita. This metric is similar to the indicator of food consumption per capita, as both assess the markets appeal in terms of consumer spending power. Similarly, developed countries score well on the indicator of GDP per capita, with Singapore, Japan and Australia leading the pack.
Singapore Performs Most Strongly In Risks On the risks side, factors such as mass grocery retail (MGR) penetration, regulatory environment, shortterm economic growth, income distribution, lack of bureaucracy, market orientation and physical infrastructure combine to assess the structural challenges present in respective markets.
MGR penetration measures the maturity of the organised retail market in terms of food retailing. A high MGR penetration score reflects better routes to market and more developed retail distribution networks, which eases the distribution of goods to the end-consumer. Japan, Australia and South Korea are ahead of the curve in terms of organised retail development. The concept of modern retailing has quickly diffused in markets such as Australia, Japan, Hong Kong, Singapore and South Korea, and this can be linked to rapid urbanisation and continued expansion of affluent consumer bases in these economies over the past decades. Elsewhere in emerging markets (EMs), the development of the MGR sector continues to be held back by restrictive regulations and income inequalities. The lack of established formal food retailing systems in EMs such as India, Vietnam and Pakistan complicates distribution efforts for food and drink companies and remains a major hurdle for potential investors.
The second factor, regulatory environment, evaluates the impact of regulatory hurdles such as foreign direct investment (FDI) regulations and restrictive sub-sector legislation on the expansion efforts of consumer-facing companies. Countries such as Pakistan, India and Indonesia remain plagued by investment risks such as heavy bureaucracy and red tape, which deter less hardy investors from setting up shop in these markets. While consumer goods investors typically face greater regulatory hurdles in developing markets, government regulations continue to play a prominent role in shaping the developed food and drink markets as well. In South Korea, for instance, the government passed a bill in November 2010 mandating that supermarkets could not open within 500m of traditional markets and family-run
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stores without seeking approval from local authorities and small-business associations. This cordon was subsequently widened to 1km in July.
The third factor, 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. On this front, we caution that growing headwinds are piling on the near-term horizons for Asia Pacific food and drink markets due to economic uncertainties in the US, eurozone debt woes and a Chinese hard landing.
Income distribution, which is another risk factor taken into consideration, is measured by the proportion of private consumption accounted for by the middle 60% of earners. High levels of income inequality are pervasive in developing markets, which warrant them as tricky places to do business as consumer goods investors often have to plough in more marketing and advertising expenditures to encourage consumer uptrading. India, Malaysia and the Philippines do not compare as favourably as their peers in this regard.
The fifth factor, lack of bureaucracy, is a measure of the hurdles that any producer is likely to face in areas such as starting and closing businesses, paying taxes, dealing with licences, and registering property. Bureaucracy is viewed as a major problem in countries such as Indonesia, India, Pakistan, Philippines and Vietnam.
Market orientation is a measure of how business oriented an economy is and measures the level of FDI protectionism, tax rates and the level of government intervention. India, China and Pakistan are judged most negatively on this front, posing considerable challenges to consumer goods investors.
The last factor, physical infrastructure, underlines the nature of the transport and distribution infrastructure. The lack of well-developed physical infrastructure in EMs such as Indonesia, Pakistan, Thailand and the Philippines continues to frustrate distribution efforts for consumer goods companies, particularly in rural areas. In these markets, food and drink players have to invest substantially in developing their own distribution infrastructure to successfully entrench themselves and build brand awareness. Without a doubt, developed markets are viewed favourably on the indicator of physical infrastructure, with well-developed routes to market facilitating expansions of consumer-facing players.
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Risk/Reward Balance Counts The Most China, Pakistan & Philippines Risk/Reward Ratings Breakdown
Scores out of 100, 100 being the highest. Source: BMI
While EMs generally score well on the aspect of investment rewards, and developed markets score highly in terms of investment risks, it is the balance of risks and rewards that matters the most. Thanks to its impressive balance of strong rewards and risks, China remains a regional outperformer. Lacking a healthy balance between risks and rewards, Pakistan and the Philippines remain stuck at the bottom of the pile.
Table: Asia Pacific Food & Drink Risk/Reward Ratings, Q113
Industry Rewards China Japan South Korea Singapore Thailand Taiwan Australia Indonesia India Malaysia Hong Kong 66 28 46 34 58 44 32 60 62 40 36
Country Rewards 52 63 44 41 41 38 52 57 64 47 35
Rewards 59 45.7 45.2 37.7 49.5 41 42.2 58.3 63 43.7 35.5
Industry Risks 60 80 80 80 65 80 75 35 20 65 75
Country Risks 60 74 72 88 67 77 76 55 55 67 77
Risks 60 77 75.9 84 65.9 78.3 75.5 44.8 37.3 66.1 76
Overall Score 59.4 58.2 57.5 56.2 56.1 55.9 55.5 52.9 52.7 52.6 51.7
Rank 1 2 3 4 5 6 7 8 9 10 11
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Table: Asia Pacific Food & Drink Risk/Reward Ratings, Q113
Industry Rewards Vietnam Philippines Pakistan 58 40 58
Country Rewards 46 60 64
Rewards 41.8 50.2 61
Industry Risks 35 35 10
Country Risks 56 58 49
Risks 45.6 46.5 29.7
Overall Score 49.3 48.7 48.5
Rank 12 13 14
Source: BMI, The Food & Drink Risk/Reward Rating is the principal rating. It comprises two sub-ratings, 'reward' and 'risk', which have a 60% and 40% weighting respectively.
Hong Kongs Food & Drink Risk/Reward Rating

Hong Kong remains placed towards the bottom of our latest risk/reward ratings for the Asia Pacific region, ranking only above Vietnam, Philippines and Pakistan in terms of its longer-term commercial potential for food and drink companies. A fairly uninspiring growth outlook is insufficient to offset the appeal of a favourable investment climate, thus placing downwards pressure on Hong Kongs overall risk/reward score.
In BMIs improved risk/reward ratings, we use indicators such as market fragmentation and youth population to better assess the potential scope for growth across the Asian Pacific food and drink markets. Not surprisingly, Hong Kong scores low on these growth-oriented indicators, implying limited growth opportunities in the market. The Hong Kong food and drink market is considerably mature and consolidated, and the presence of strong incumbents in its sub-sectors means that multinationals have found it difficult to make any meaningful headway in the market. Moreover, Hong Kong has a small and ageing population, and this demographic characteristic clearly would not appeal strongly to growthoriented consumer facing players.
Although Hong Kong has a reasonably conducive investment climate, this was not sufficient to offset the limited prospects for growth in the market, which explains its lowly position among its Asian Pacific peers. In terms of investment risks, Hong Kong scores relatively high in the aspect of industry and country risks. On the aspect of industry risks, Hong Kong already has a relatively well-developed food retailing sector, which makes it easier for consumer goods manufacturers to distribute their products to the end-consumer market and facilitate the awareness of their brands. Hong Kong is also relatively receptive to foreign investments, as illustrated by its score of 8 on the aspect of regulatory environment, which is another positive supporting its investment appeal.
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Meanwhile, Hong Kong scores well in terms of country risks thanks to its sturdy macroeconomic fundamentals, low bureaucracy levels, low income inequalities and well-established physical infrastructure. With well-connected transport systems across Hong Kong, investors need not plough in substantial capital expenditures to build up their own distribution networks in the country.
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Macroeconomic Outlook
Property: Scope For Upside, But Corrective Pressures Mount BMI View: While the recent leg-up in prices runs against our call for a correction in the real estate market, we are not abandoning our bearish take on the market. Prices have become even more overstretched. We are not discounting a further marginal near-term upside in prices, as investors ride on bullish sentiment from the equity markets, as well as the third round of quantitative easing. That said, we believe that receding demand, stemming from further economic deterioration and the government's tightening measures, coupled with the anticipation of a meaningful increase in the housing supply in the coming years, will combine to enforce a correction in property prices in 2013.
Since the trough it hit in 2008, Hong Kong's property prices have surged more than 95%. The rapid rise in prices has been the subject of much popular discontent and the topic of housing affordability has increasingly become a social and political issue. A 4.5% fall in private property prices in the latter half of 2011 proved to be transitory as prices have now increased almost 14% since the start of 2012. The surge in prices has been contrary to our call for a correction; property prices are even more overvalued and due a correction. While we see scope for a marginal rise in prices, this trend is likely to be unsustainable and we maintain our view of a correction within the real estate market over the coming quarters.
Marginal Near-Term Upside: A considerable portion of the surge in property prices has been underpinned by foreign investors and wealthy locals, particularly investors from mainland China. This group of investors has been participating heavily in the luxury and higher-end homes, which, have in turn been driving up broader market prices. Chinese buyers were estimated to account for an estimated 51% of home transactions in Q311 and have reportedly commanded more than a 30% share of property transactions in recent months. The optimism in the housing market has also been reflected in the equity markets, with the Hang Seng Property Index having soared more than 50% since the bottom it hit in 2011. In our view, the third round of quantitative easing could possibly drive more bullish sentiment, as investors harbour expectations of a sustained period of abundance in liquidity and a low interest rate environment.
But Corrective Pressure To Win Out Eventually: Looking ahead, against a backdrop of extreme valuations, the city's property market continues to face considerable corrective pressures, with the most crucial being that of further economic deterioration. With Hong Kong's entrepot economy closely tied to a weakening global, and more crucially Chinese economy, we do not envision an improvement in Hong Kong's growth prospects. Local homebuyers are consequently likely to maintain a level of cautiousness. The global economic slide is also expected to stem, to a certain extent, interest from Chinese buyers. The new government administration also appears to be making meaningful efforts to curb the rise in property prices. The most recent set of measures saw the government tightening mortgage lending, as well as attempting to limit the influx of foreign buyers. Loan tenors across the board were reduced to a maximum
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of 30 years from 40 years previously. Homebuyers taking a second mortgage onwards will face a higher down payment requirement, while buyers with incomes that originate from outside Hong Kong will be subjected to the applicable down payment requirements, plus an additional 10 percentage points (pp).
Alongside the downside pressure on demand, supply-side issues support our contention for a property correction. The most recent policy measures saw the government announcing plans to rezone 36 sites meant for public use into use for residential purposes, as well as expediting the approval of permits for private home sales. This comes on the back of a pledge by the Chief Executive to speed up home sales and the supply of land. The scaling back in demand owing to economic deterioration, supplemented by an increase in housing supply, would combine to lead prices lower. Additionally, we remain unconvinced by the false sense of comfort investors may find in the abundance in liquidity as we cannot discount a tightening in bank lending when the downturn starts to kick in.
Upside Risk Stemming From Prioritising Local Buyers: Under the Hong Kong Land For Hong Kong People policy, sales of certain properties will be restricted to only Hong Kong citizens. While this measure may help curb social discontent and improve home ownership, we highlight that such a policy, if mismanaged, may have the unintended consequences of pushing property prices even higher. If the government fails to increase supply adequately to the broader range of investors, and places too much focus on local buyers, the pool of investable property available to all investors would be constricted, potentially leading prices higher.
With these factors in mind, we have seen fit to downgrade our forecasts for Hong Kong's real GDP growth. We now see 2012 growth in the city slowing from a previous estimate of 2.2% to 1.6%. This remains below consensus' projection of 2.5% and close to the midpoint of the government's recently revised forecast range of 1.0% to 2.0%. Our 2013 forecasts have also been revised downward to 2.5% from a previous estimate of 3.5%.
Private Consumption The expected slowdown in Hong Kong's consumption story is starting to kick into full force. Retails sales, in terms of both value and consumption, are now printing single-digit growth figures, down sharply from a average 22.0% over 2010 and 2011. Much of the slowdown can be attributed to the tightening of mainland Chinese shoppers' purse strings. Retail sales during the festive Golden Week are projected to witness double-digit declines, according to the Hong Kong Retail Management Association. The retrenchment in spending comes even amid a rise in mainland tourist arrivals. We expect the falling trend in consumption spending to maintain course for the rest of 2012 and extend into 2013 as recessionary pressures continue to mount and an expected uptick in unemployment starts to materialise. The expected property correction (as explained above) is also expected to significantly curb consumption spending. For these reasons, we are forecasting private consumption to grow 4.5% 2012, before slowing to 3.0% next 3.0% in 2013, contributing 2.8pp and 1.9pp respectively.
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Government Consumption In light of continued weakness in the economy, as well as an expected correction in property prices, we expect the government to once again embark on another round of budgetary expansion in 2013. We have yet to witness any signs of a turnaround in the Chief Executive's popularity ratings and we expect this to also be an added factor when budget plans are announced in 2013. Alongside our anticipation for a further rise in welfare expenditures, we expect broader public consumption to also receive a boost, growing from a forecasted 2.5% in 2012, to 3.0% in 2013. This would imply a 0.2pp contribution to headline expansion in both years.
Investment Investment activity 2012 has been well supported by public sector infrastructure expenditure. Looking into 2013, however, we are unlikely to see a similar occurrence transpire. While it may be reasonable to expect another boost in public infrastructure spending, against the backdrop of subdued economic activity, we do not envisage public sector investments of a similar magnitude in 2013. We are of the view that public funds are more likely to be directed towards welfare expenditure, than public infrastructure spending. On the flip side, investment activity could find supportive pressure from the government's pledge to increase land supply, thereby boosting construction activity. On aggregate, we expect investment growth to slow in 2013, growing 3.0% compared to a forecasted 6.0% in 2012, which would equate to a 0.6pp and 1.2pp contribution to real GDP growth.
Net Exports With China accounting for more than half of the city's exports, any hope of a V-shaped recovery in Hong Kong's dismal trade performance thus far rests on the mainland. However, given that we harbour expectations for continued weakness in China's economy, a strong pick-up in Hong Kong's trade activity is an unlikely scenario. In that we envision a stabilisation in global economic momentum in 2013, we expect a marginal recovery in external demand to provide supportive pressure for the city's exporters. We expect exports to recover from a 0.5% contraction in 2012 to 3.7% in 2013, as import growth accelerates from 0.6% to 4.0%. The outpacing of imports over exports should see net exports shave 0.4% off real GDP growth.
Table: Economic Activity
2011 Nominal GDP, HKDbn 2 Nominal GDP, US$bn 2 Real GDP growth, % change y-o-y 1,2 GDP per capita, US$ 2 1,925.3 247.3 5.0 34,728
2012f 2,039.1 262.3 1.8 36,453
2013f 2,163.3 278.4 2.5 38,273
2014f 2,295.8 295.5 3.6 40,182
2015f 2,424.0 312.0 3.6 41,979
2016f 2,560.5 329.5 3.7 43,891
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Table: Economic Activity
2011 Population, mn 3 Industrial production index, % y-o-y, ave 2 Unemployment, % of labour force, eop 2 7.1 -1.0 3.4
2012f 7.2 1.2 3.9
2013f 7.3 1.5 3.8
2014f 7.4 1.5 3.8
2015f 7.4 1.5 3.8
2016f 7.5 1.0 3.8
Notes: e BMI estimates. f BMI forecasts. 1 Base year: 2008. Sources: 2 Census and Statistics Department/BMI; 3 World Bank/UN/BMI.
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Industry Forecast Scenario

Consumer Outlook
Domestic Demand Cooling In The Near Term Hong Kong is one of Asia Pacific's smallest consumer markets, with its population standing at just over the 7mn mark. Therefore, from a demographic standpoint, there are few attractions for consumer industry investors.
Indeed, over the longer term, Hong Kongs small population limits the potential consumer base. This factor is compounded by the fact that the country has a steadily ageing population, meaning that Hong Kong is unable to entice investors by offering a youthful consumer pool that is typically more active in terms of purchasing non-essential and higher-value consumer goods.
In the shorter term, we have a slightly bearish outlook on the Hong Kong consumer. A reversal in Hong Kong's booming property market will inevitably weigh on consumer purchasing power and curtail spending on higher value consumer goods. Global headwinds are also likely to weigh on Hong Kong's export-oriented economy, with negative spillover effects on the labour market. These dynamics are likely to take their toll on the Hong Kong consumer, although we acknowledge that waning inflationary pressures should help lend some upward support to domestic demand.
Residential property prices in Hong Kong are significantly over-extended and core view calls for a correction in property prices in 2013. In fact, as expected, prices have begun to fall. Additionally, we foresee that an expected rise in social welfare expenditure is also likely to have some bearing on the government's fiscal position.
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Property: Half The Pie Property-Related Contributions To Operating Revenues
Source: BMI, Hong Kong Treasury
In the meantime, Hong Kong's trade prospects look increasingly bleak, which will weigh on GDP growth. The export sector saw a marked deterioration in Q312 and we expect this downward trajectory to extend into the fourth quarter as the performance in forward looking electronics and machinery sectors continues to disappoint. Looking ahead into 2013, while we could possibly see a stabilisation in economic momentum, we do not envision a strong recovery in the Hong Kong's exports given our expectations of continued economic weakness on the mainland, the city's largest source market.
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No Respite In Sight HKTDC Export Index
Source: BMI, HKTDC
Meanwhile, food inflation, which has been a major driver behind overall inflation in Hong Kong, is showing signs of peaking as well. Given that 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, we believe global food prices will continue to be moderate in the coming months, further alleviating inflationary pressures in Hong Kong.
Nevertheless, while investment by Hong Kong consumer-facing players and especially by multinationals has switched to neighbouring China, which presents much more exciting prospects, Hong Kong thanks to its high food spending levels still represents a very important sales and profit centre for consumer investors. A strong scope for premiumisation growth means that it remains worthy for firms already present in Hong Kong to maintain their domestic footprint, balancing it against their Chinese ambitions, rather than focusing solely on the mainland.
Labour Market Loosening The ongoing property market correction is likely to exacerbate the forthcoming weakness in Hong Kong's economy and, by extension, the employment market. While labour market conditions to date have been supported by strong trade performance within Hong Kong's export-dependent economy, global headwinds such as a sharp slowdown in China, a faltering US economy and a sovereign debt crisis in Europe are increasingly clouding the country's near-term export outlook. These dynamics mean that the export market may not be able to provide sufficient strength to prop up labour demand in the near term. This,
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coupled with a continued property market correction in Hong Kong, is factored into our wary outlook for Hong Kong's employment market in the coming quarters.
Risks To Outlook Political Risks: While we believe Hong Kong will remain at or near the top of our political risk ratings table over the next decade, a number of risks could lead to rising political instability. The sluggish pace of democratic reforms will continue to cause anger among pro-democracy supporters, and there is the potential for large-scale public protests. A lack of affordable housing and rising income inequality also could pose threats to social stability.
While a high degree of financial stability helps to counterbalance Hong Kong's long-term economic weaknesses, namely its high dependence on trade and over-reliance on the export of manufactured goods, Hong Kong is at risk of a larger-than-expected decline in the domestic property market that would result in a sharp fall in domestic consumer confidence and spending. A sharper-than-anticipated cooling of the Chinese economy as tighter credit conditions start to take effect could also weigh on domestic consumer sentiment given the key trading relationship between the two countries.
Nevertheless, the territory benefits from a transparent legal system and highly skilled workforce that have made the city a major hub for international finance, while the pro-investor climate is augmented by the absence of red tape, significant corruption or major security threats. However, the city-state still lags behind regional competitor Singapore, which sits atop the emerging Asia rankings.
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Food
Food Consumption
Total food consumption forecast compound annual value growth to 2017 (local currency): +2.95%.
Food Consumption 2010-2017
Per capita forecast food consumption compound annual value growth to 2017 (local currency): +1.88%.
A correction in the domestic property market is likely to weigh on

f=BMI forecast. Source: Census and Statistics Department, BMI
household purchasing power, and in turn curtail spending on higher value food and beverage products. An about turn in the Hong Kong property market has been precipitated by the introduction of a series of cooling measures by the government as well as slowing mainland demand. We are relatively cautious about the near-term domestic demand outlook for Hong Kong, and currently pencil in growth of 2.40% in overall food consumption in 2013, compared with 3.61% in 2012.
This highly modest outlook for food consumption growth albeit from a very high base can be attributed to two factors. Firstly, interest in discount and value products has increased among price conscious Hong Kong consumers and we predict sales via this retail category to continue to rise. This will moderate the potential for overall consumption growth in value terms. Furthermore, even those not shopping at discount stores (still not hugely prevalent in Hong Kong) will benefit from reduced prices due to aggressive price wars as a mainstay feature of the supermarket and convenience retail subsectors, and to the increased availability of cheaper foodstuffs from the developing food processing sectors of neighbouring markets. Secondly, consumption levels are already so high and the market already so mature, that there is not considerable room for significant consumption and spending growth.
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Table: Food Consumption Indications Historical Data & Forecasts
2010 Food consumption (US$bn) Food consumption (HKDbn) Per capita food consumption (US$) Per capita food consumption (HKD) Total food consumption growth (y-o-y) Per capita food consumption growth (y-oy) 11.42 88.68
2011 11.92 92.78
2012f 12.35 96.00
2013f 12.75 99.08
2014f 13.11 101.88
2015f 13.52 105.07
2016f 13.89 107.93
2017f 14.29 111.03
1,618 12,573
2.09
1,674 13,028
4.63
1,716 13,340
3.46
1,753 13,620
3.20
1,783 13,856
2.83
1,820 14,140
3.13
1,850 14,376
2.72
1,884 14,642
2.87
1.15
3.61
2.40
2.10
1.73
2.05
1.67
1.85
Canned Food
Canned food forecast compound annual value growth to 2017 (local currency): +3.28%.
Canned Food 2010-2017
Canned food forecast compound annual volume growth to 2017: +0.93%.
Interest in packaged foods will continue to increase moderately as a consequence of regional food hygiene and food safety scares and growing demand for convenience. A superior value sales growth forecast, as compared to volume sales, will partly be a result of manufacturer efforts to combine the demand for convenience, hygiene and health within their products, charging higher prices in
f=BMI forecast. Source: Census and Statistics Department, Company figures, BMI
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the process. Nonetheless, it should be stated that canned foods will remain lower-end, economy items and that goods like ready meals will see stronger growth as a result of the bid to combine convenience and premiumisation.
Table: Canned Food Value/Volume Sales Historical Data & Forecasts
2010 Canned food sales (tonnes) Canned food sales (HKDmn) (RHS) Canned food sales (US$mn) 69.51 1650.65 212.47
2011 71.07 1776.82 228.26
2012f 71.20 1851.20 238.16
2013f 71.29 1918.41 246.89
2014f 72.59 2001.26 257.55
2015f 73.10 2053.61 264.28
2016f 74.30 2126.98 273.73
2017f 74.56 2174.97 279.90
Confectionery
Confectionery forecast compound annual value growth to 2017 (local currency): +4.23%.
Confectionery 2010-2017
Confectionery forecast compound annual volume growth to 2017: +1.83%.
Chocolate forecast compound annual value growth to 2017 (local currency): +4.55%.
Chocolate forecast compound annual volume growth to 2017: +2.17%.


Sugar confectionery forecast compound annual value growth to 2017 (local currency): +1.28%.
Sugar confectionery forecast compound annual volume growth to 2017: +3.64%.
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Gum forecast compound annual value growth to 2017 (local currency): +3.46%.
Gum forecast compound annual volume growth to 2017: +1.10%.
Within the confectionery sector, chocolate will be the outperformer, although no one category will dramatically exceed overall sector growth. Despite a clear strategic preference for mainland China, food producers continue to invest in new product development and marketing and brand-building initiatives in order to retain domestic market share. Put simply, Hong Kong continues to offer significant revenues for confectionery producers because of existing high consumption and spending levels. Consequently, activity levels in the sector remain high and it remains dynamic.
New product development and innovation explain our superior value sales growth forecast as compared to our volume forecast. Moderate private consumption growth will also aid sector growth and given how well entrenched confectionery consumption is in the market (i.e. it is not considered a luxury item), our forecast is likely to be resilient to any worse than anticipated economic slowdown in 2013.
Table: Confectionery Value/Volume Sales Historical Data & Forecasts
2010 Confectionery sales (mn tonnes) Confectionery sales growth, tonne, (y-o-y) Chocolate sales (mn tonnes) Sugar Confectionery sales (mn tonnes) Gum sales (tonnes) Chocolate sales (HKDmn) Sugar Confectionery sales (HKDmn) Gum sales (HKDmn) Confectionery sales (HKDmn) Confectionery sales growth, HKD, (y-o-y) Chocolate sales (US$mn) Sugar Confectionery sales (US$mn) Gum sales (US$mn) 67.90 5.61 42.47 25.19 0.25 3226.93 1675.08 27.96 4929.98 7.69 415.37 215.61 3.60
2011 70.28 3.50 43.35 26.68 0.24 3468.28 1867.77 29.32 5365.37 8.83 445.55 239.94 3.77
2012f 71.36 1.54 44.29 26.83 0.24 3684.72 1953.22 30.47 5668.40 5.65 474.04 251.28 3.92
2013f 72.54 1.65 45.26 27.04 0.24 3897.25 2037.27 31.60 5966.13 5.25 501.55 262.18 4.07
2014f 74.54 2.75 46.25 28.04 0.25 4080.39 2164.30 32.69 6277.38 5.22 525.12 278.53 4.21
2015f 76.44 2.56 47.26 28.93 0.25 4248.38 2276.02 33.75 6558.16 4.47 546.74 292.91 4.34
2016f 77.50 1.38 48.28 28.96 0.25 4422.75 2321.56 34.89 6779.20 3.37 569.18 298.77 4.49
2017f 78.15 0.85 49.30 28.60 0.26 4601.89 2335.61 36.11 6973.61 2.87 592.23 300.58 4.65
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Table: Confectionery Value/Volume Sales Historical Data & Forecasts
2010 Confectionery sales (US$mn) 634.58
2011 689.26
2012f 729.25
2013f 767.80
2014f 807.86
2015f 843.99
2016f 872.44
2017f 897.46
Meat
Animal protein has become increasingly prevalent in Asian diets over the course of the last decade, which can be attributed to an increase in GDP, increase in tourism and retailers extending their markets outside of major cities. Pork and poultry are the most popular meats because they are the least expensive and easiest to prepare. The largest percentage increases in meat consumption between 2001 and 2011 were recorded in Vietnam (110%), Hong Kong (100%) and Indonesia (40%). Only Thailand showed a decline (-12%) and Taiwan recorded no change, according to reports on The Poultry Site.
Table: Meat
2010 Bacon/ham production, tonnes Bacon/ham production, tonnes, % change y-o-y Bacon/ham sales, tonnes Bacon/ham sales, tonnes, % change y-o-y Bacon/ham sales, kg per capita Bacon/ham exports, tonnes Bacon/ham exports, tonnes, % change y-o-y Bacon/ham imports, tonnes Bacon/ham imports, tonnes, % change y-o-y Bacon/ham balance, tonnes Bacon/ham balance, tonnes, % change y-o-y 11,677 33.99 14,280 22.95 2.02 540.15 20.42 3,143.16 -6.11 -2,603.01 -10.22
2011 13,955 19.51 16,302 14.16 2.29 591.10 9.43 2,938.48 -6.51 -2,347.38 -9.82
2012f 14,832 6.29 16,978 4.15 2.36 587.66 -0.58 2,733.79 -6.97 -2,146.13 -8.57
2013f 16,541 11.52 18,451 8.67 2.54 619.42 5.40 2,529.11 -7.49 -1,909.69 -11.02
2014f 18,351 10.94 20,025 8.53 2.72 650.57 5.03 2,324.42 -8.09 -1,673.85 -12.35
2015f 20,241 10.30 21,683 8.28 2.92 678.22 4.25 2,119.74 -8.81 -1,441.52 -13.88
2016f 22,226 9.81 23,440 8.10 3.12 701.47 3.43 1,915.06 -9.66 -1,213.58 -15.81
2017f 24,300 9.33 25,288 7.88 3.33 722.84 3.05 1,710.37 -10.69 -987.53 -18.63
Sausage production, tonnes
4,223
4,406
4,477
4,615
4,761
4,913
5,073
5,240
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Table: Meat
2010 Sausage production, tonnes, % change y-o-y Sausage sales, tonnes Sausage sales, tonnes, % change y-o-y Sausage sales, kg per capita Sausage exports, tonnes Sausage exports, tonnes, % change y-o-y Sausage imports, tonnes Sausage imports, tonnes, % change y-o-y Sausage balance, tonnes Sausage balance, tonnes, % change y-o-y 5.99 36,249 8.51 5.14 2,474 17.45 34,500 9.43 -32,026 8.86
2011 4.35 37,822 4.34 5.31 2,678 8.27 36,095 4.62 -33,416 4.34
2012f 1.60 38,038 0.57 5.29 2,665 -0.52 36,225 0.36 -33,561 0.43
2013f 3.08 39,143 2.91 5.38 2,792 4.78 37,321 3.02 -34,529 2.88
2014f 3.16 40,240 2.80 5.47 2,917 4.48 38,397 2.88 -35,479 2.75
2015f 3.20 41,245 2.50 5.55 3,028 3.80 39,360 2.51 -36,332 2.40
2016f 3.26 42,138 2.17 5.61 3,121 3.08 40,186 2.10 -37,065 2.02
2017f 3.30 42,995 2.03 5.67 3,207 2.75 40,962 1.93 -37,754 1.86
f=BMI forecast. Source: United Nations, BMI
Pasta
Westernisation of lifestyles has contributed to relatively high per-capita sales of pasta in Hong Kong, although noodles dominate, on account of tradition and convenience. Around one-third of the local uncooked pasta demand is met through imports, with this percentage expected to increase over the coming decades, largely on account of lower manufacturing costs in mainland China.
Table: Pasta
2010 Uncooked pasta production, tonnes Uncooked pasta production, tonnes, % change y-o-y Uncooked pasta sales, tonnes Uncooked pasta sales, tonnes, % change y-o-y Uncooked pasta sales, kg per capita 151,872 9.82 206,781 8.82 29.32
2011 162,317 6.88 218,904 5.86 30.74
2012f 166,339 2.48 223,184 1.96 31.01
2013f 174,176 4.71 232,225 4.05 31.92
2014f 182,475 4.76 241,706 4.08 32.87
2015f 191,143 4.75 251,437 4.03 33.84
2016f 200,244 4.76 261,457 3.99 34.82
2017f 209,753 4.75 271,836 3.97 35.85
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Table: Pasta
2010 Uncooked pasta exports, tonnes Uncooked pasta exports, tonnes, % change y-o-y Uncooked pasta imports, tonnes Uncooked pasta imports, tonnes, % change y-o-y Uncooked pasta balance, tonnes Uncooked pasta balance, tonnes, % change y-o-y 12,981 12.60 67,890 7.33 -54,909 6.15
2011 13,789 6.23 70,375 3.66 -56,586 3.05
2012f 13,734 -0.40 70,579 0.29 -56,845 0.46
2013f 14,238 3.67 72,286 2.42 -58,048 2.12
2014f 14,732 3.47 73,963 2.32 -59,231 2.04
2015f 15,171 2.98 75,464 2.03 -60,294 1.79
2016f 15,539 2.43 76,752 1.71 -61,213 1.52
2017f 15,878 2.18 77,961 1.57 -62,083 1.42
Prepared pasta production, tonnes Prepared pasta production, tonnes, % change y-o-y Prepared pasta sales, tonnes Prepared pasta sales, tonnes, % change y-o-y Prepared pasta sales, kg per capita Prepared pasta exports, tonnes Prepared pasta exports, tonnes, % change y-o-y Prepared pasta imports, tonnes Prepared pasta imports, tonnes, % change y-o-y Prepared pasta balance, tonnes Prepared pasta balance, tonnes, % change y-o-y
186,644 12.67 234,797 13.04 33.29 15,173 0.27 63,326 10.73 -48,153 14.50
202,791 8.65 254,222 8.27 35.69 15,187 0.09 66,618 5.20 -51,432 6.81
209,008 3.07 260,696 2.55 36.23 15,200 0.09 66,888 0.40 -51,688 0.50
221,123 5.80 275,059 5.51 37.81 15,214 0.09 69,150 3.38 -53,936 4.35
233,951 5.80 290,095 5.47 39.45 15,228 0.09 71,371 3.21 -56,144 4.09
247,351 5.73 305,471 5.30 41.11 15,240 0.08 73,360 2.79 -58,120 3.52
261,419 5.69 321,233 5.16 42.79 15,252 0.08 75,066 2.33 -59,814 2.91
276,120 5.62 337,523 5.07 44.51 15,264 0.08 76,667 2.13 -61,403 2.66
Frozen Food
The demand for convenience has contributed to the development of the market for ready-made and frozen foods. In the coming years, the market will be driven by demographic trends to a large degree, with some level of premiumisation also expected to remain present in the already well-developed packaged foods
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market. Some of the demand will continue to be met through imports. Wilson International Frozen Foods Ltd is one of the leading importers and distributors of food and beverages in Hong Kong, Macau and also mainland China. Other prominent players in the market include Leos Fine Food and Dah Chong Hong (DCH) Food Mart, the latter of which claims to be the market leader in the frozen food specialty chain stores in Hong Kong. The company operates over 80 stores in the territory.
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Table: Frozen Food
2010 Frozen fish production, tonnes Frozen fish production, tonnes, % change y-o-y Frozen fish sales, tonnes Frozen fish sales, tonnes, % change yo-y Frozen fish sales, kg per capita Frozen fish exports, tonnes Frozen fish exports, tonnes, % change yo-y Frozen fish imports, tonnes Frozen fish imports, tonnes, % change yo-y Frozen fish balance, tonnes Frozen fish balance, tonnes, % change yo-y 7,160.31
2011 8,399.58
2012f 8,876.73
2013f 9,806.56
2014f 10,791.09
2015f 11,819.49
2016f 12,899.22
2017f 14,027.49
29.04 21,166
17.31 30,082
5.68 31,535
10.48 37,886
10.04 44,197
9.53 50,005
9.14 55,208
8.75 60,224
35.85 3.00 24,519
42.12 4.22 26,834
4.83 4.38 26,677
20.14 5.21 28,120
16.66 6.01 29,535
13.14 6.73 30,792
10.40 7.35 31,848
9.09 7.94 32,819
20.44 38,525
9.44 48,516
-0.58 49,335
5.41 56,200
5.03 62,942
4.25 68,978
3.43 74,156
3.05 79,015
26.77 -14,006
25.94 -21,683
1.69 -22,658
13.91 -28,080
12.00 -33,406
9.59 -38,186
7.51 -42,308
6.55 -46,197
39.62
54.81
4.50
23.93
18.97
14.31
10.80
9.19
Preserved fish (other) production, tonnes Preserved fish (other) production, tonnes, % change y-o-y Preserved fish (other) sales, tonnes Preserved fish (other) sales, tonnes, % change y-o-y Preserved fish (other) sales, kg per capita Preserved fish (other) exports, tonnes Preserved fish (other) exports, tonnes, % change y-o-y Preserved fish (other) imports, tonnes
1,305.17
1,465.93
1,527.84
1,648.46
1,776.18
1,909.60
2,049.67
2,196.04
19.07 28,713
12.32 28,954
4.22 29,093
7.90 29,299
7.75 29,511
7.51 29,722
7.34 29,933
7.14 30,151
1.38 4.07 4,682
0.84 4.07 5,156
0.48 4.04 5,124
0.71 4.03 5,420
0.72 4.01 5,710
0.72 4.00 5,967
0.71 3.99 6,183
0.73 3.98 6,382
22.25 32,090
10.13 32,644
-0.62 32,690
5.77 33,071
5.35 33,445
4.51 33,780
3.63 34,067
3.22 34,337
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Table: Frozen Food
2010 Preserved fish (other) imports, tonnes, % change y-o-y Preserved fish (other) balance, tonnes Preserved fish (other) balance, tonnes, % change y-o-y
2011
2012f
2013f
2014f
2015f
2016f
2017f
3.33 -27,408
1.73 -27,488
0.14 -27,566
1.17 -27,651
1.13 -27,735
1.00 -27,813
0.85 -27,884
0.79 -27,955
0.67
0.29
0.28
0.31
0.30
0.28
0.26
0.25
Dairy
The dairy industry of Hong Kong is underdeveloped, on account of its geophysical characteristics. The market is largely supplied through imports. Some local production does take place, partly under the auspices of foreign companies.
The per capita consumption of dairy products has been steadily increasing over the past few decades. Key drivers of this change include tourism, marketing and population mobility. Hong Kong residents are also interested in soy milk, with per capita consumption being the highest globally (at 17 litres in 2011, according to TetraPak), which will represent a challenge to dairy industry players.
Global dairy player FrieslandCampina, which has been active in Hong Kong for over seven decades, claims to be the market leader by share (of over 70%). Friesland does not produce milk locally, instead importing it from Malaysia and the Netherlands.
Similarly, in the course of 2011, New Zealand dairy giant Fonterra invested NZD8mn (US$5.9mn) in upgrading its Auckland-based production facility to ramp up production of ultra-high temperature (UHT) milk. As well as facilitating its investments in Emerging Markets (EMs) such as Vietnam, Fonterra's UHT upgrade should also provide it with a stronger platform to consolidate its footprint in existing export markets such as Singapore and Hong Kong. These markets have exhibited a strong rebound in domestic demand as they emerge from the global recession and BMI remains confident that boosting its presence in these markets will benefit Fonterra's future growth prospects. The relatively high per capita food consumption levels in these economies are further reasons for optimism on the company's earnings outlook as it steadily increases its market penetration.
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Imports of whole milk powder to China almost doubled to an estimated 340,000 tonnes in 2010, according to Reuters reports. Demand for milk powder from Hong Kong rose on the increasing safety concerns of Chinese parents over the seizure of more than 100 tonnes of tainted milk powder in 2010. The strengthening of the yuan also resulted in a rise in imports.
In 2008, China was rocked by the melamine-tainted milk powder scandal that affected about 300,000 children, with contaminated milk powder also linked with the death of six infants. The scale of the scandal has been blamed on the burgeoning consumption of dairy products domestically and the inefficient industry's desperate attempts to meet this demand increase, which led to the adoption of shortcuts. The long-term impact of the scandal is likely to be a far more consolidated dairy industry, and far better dairy industry regulation, which will in turn trigger industry modernisation and consolidation.
Nevertheless, while high-spending Hong Kong does still hold some appeal to food and drink firms, particularly in terms of susceptibility to higher-value, innovative new product launches, the focus for domestic companies remains mainland China. Hong Kong-headquartered food companies continue to make the mainland their strategic priority and we see no sign of this changing in the future. As Chinese incomes grow, Hong Kong may also lose its advantage in terms of high existing spending levels, potentially resulting in even greater new product development investments heading to China.
Table: Dairy
2010 Processed liquid milk production, tonnes Processed liquid milk production, tonnes, % change y-o-y Processed liquid milk sales, tonnes Processed liquid milk sales, tonnes, % change y-o-y Processed liquid milk sales, kg per capita Processed liquid milk exports, tonnes Processed liquid milk exports, tonnes, % change y-o-y Processed liquid milk imports, tonnes 25,140
2011 26,547
2012f 27,089
2013f 28,144
2014f 29,262
2015f 30,430
2016f 31,656
2017f 32,937
7.85 73,371 3.98 10.40 4,319
5.60 75,291 2.62 10.57 4,641
2.04 75,923 0.84 10.55 4,620
3.90 77,351 1.88 10.63 4,821
3.97 78,835 1.92 10.72 5,018
3.99 80,332 1.90 10.81 5,193
4.03 81,844 1.88 10.90 5,341
4.05 83,396 1.90 11.00 5,476
15.52 52,550
7.47 53,385
-0.47 53,454
4.36 54,028
4.09 54,591
3.49 55,096
2.84 55,528
2.53 55,935
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Table: Dairy
2010 Processed liquid milk imports, tonnes, % change y-o-y Processed liquid milk balance, tonnes Processed liquid milk balance, tonnes, % change y-o-y
2011
2012f
2013f
2014f
2015f
2016f
2017f
3.05 -48,232
1.59 -48,744
0.13 -48,834
1.07 -49,207
1.04 -49,573
0.92 -49,902
0.79 -50,188
0.73 -50,458
2.07
1.06
0.19
0.76
0.74
0.66
0.57
0.54
Ice cream production, tonnes Ice cream production, tonnes, % change y-o-y Ice cream sales, tonnes Ice cream sales, tonnes, % change y-o-y Ice cream sales, kg per capita Ice cream exports, tonnes Ice cream exports, tonnes, % change y-o-y Ice cream imports, tonnes Ice cream imports, tonnes, % change y-o-y Ice cream balance, tonnes Ice cream balance, tonnes, % change y-o-y
15,109 15.74 16,518 15.09 2.34 67.08 17.75 1,476 8.88 -1,409 8.49
16,690 10.46 18,149 9.87 2.55 81.55 21.57 1,541 4.37 -1,459 3.55
17,298 3.65 18,764 3.39 2.61 80.57 -1.20 1,546 0.34 -1,465 0.43
18,484 6.86 19,985 6.51 2.75 89.59 11.19 1,590 2.87 -1,501 2.41
19,740 6.79 21,275 6.46 2.89 98.44 9.87 1,634 2.74 -1,535 2.31
21,052 6.64 22,618 6.31 3.04 106.29 7.98 1,673 2.39 -1,566 2.03
22,429 6.54 24,022 6.21 3.20 112.89 6.21 1,706 2.00 -1,593 1.71
23,868 6.42 25,486 6.10 3.36 118.96 5.38 1,738 1.84 -1,619 1.59
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Drink
Alcoholic Drinks
Alcoholic drinks forecast average annual volume growth to 2017: +2.44%.
Alcoholic Drinks Sales 2010-2017
Alcoholic drinks forecast average annual value growth to 2017 (local currency): +4.42%.
Beer forecast average annual volume growth to 2017: +2.48%.
Beer forecast average annual value growth to 2017 (local currency): +3.50%.

Wine forecast average annual volume growth to 2017: +2.28%.
Wine forecast average annual value growth to 2017 (local currency): +4.66%.
Spirits forecast average annual volume growth to 2017: +2.04%.
Spirits forecast average annual value growth to 2017 (local currency): +3.06%.
From an already high base, alcoholic drink value sales in Hong Kong will increase by 4.46%, on compound annual average terms, to 2017, boosted by volume increases as well as by launches of novel products and marketing. Hong Kong's alcoholic beverage sector is already in a highly mature state. Nonetheless, it remains dynamic and growth will be the result of four factors. First, there is a growing social acceptance of alcohol consumption among a wider cross-section of the population. Second, premiumisation will continue to contribute to industry growth in the long term. Third, March 2008 saw alcohol excise duties in Hong Kong eradicated, just a year after they were slashed. This did not have an enormous impact on domestic consumption, given the mature nature of the market and the fact that consumption was already healthy regardless of high prices. Nonetheless, it has had some positive
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impact on growth, and the effects of this will linger on. Finally, Hong Kongs tourism recovery will continue to provide an important fillip for alcohol sector sales in the longer term.
Table: Alcoholic Drinks Value/Volume Sales Historical Data & Forecasts
2010 Alcoholic drinks sales (HKDmn) Alcoholic sales growth, HKD, (y-o-y) Alcoholic drinks sales (US$mn) Wine sales (HKDmn) Beer sales (HKDmn) Spirits sales (HKDmn) Alcoholic drinks sales (mn litres) Alcoholic sales growth, litres, (y-o-y) Wine sales (mn litres) Beer sales (mn litres) Spirits sales (mn litres) 11,895 4.05 1,531 6,582 2,653 2,660 272 1.26 26.60 231.00 14.00
2011 12,761 7.28 1,639 7,048 2,859 2,854 276 1.78 27.23 234.92 14.27
2012f 3,775 -70.42 486 470 3,052 252 285 3.03 27.95 242.20 14.64
2013f 3,967 5.10 511 483 3,223 261 290 1.84 28.51 246.50 15.02
2014f 4,149 4.57 534 500 3,377 271 297 2.53 29.17 252.78 15.41
2015f 4,326 4.27 557 521 3,528 277 306 2.97 29.90 260.68 15.60
2016f 4,500 4.03 579 539 3,676 285 313 2.38 30.57 267.00 15.90
2017f 4,685 4.12 603 558 3,834 293 321 2.47 31.29 273.72 16.20
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Soft Drinks
Soft drinks forecast compound annual volume growth to 2017: +2.54%.
Soft Drink Sales 2010-2017
Soft drinks forecast compound annual value growth to 2017 (local currency): +4.57%.
Carbonated drinks forecast compound annual volume growth to 2017: +1.42%.
Carbonated drinks forecast compound annual value growth to 2017 (local currency): +3.78%.

Juice forecast compound annual volume growth to 2017: +2.23%.
Juice forecast compound annual value growth to 2017 (local currency): +4.61%.
Bottled water forecast compound annual volume growth to 2017: +3.07%.
Bottled water forecast compound annual value growth to 2017 (local currency): +5.47%.
Arguably, soft drink represents the most mature beverage sub-sector in Hong Kong. However, it is so profitable and competitive that manufacturers continue to invest huge sums in trying to increase their market share through advertising, promotions and the development of new products. As a result of this ongoing investment, the sector has not become stagnant and these trends look set to continue for the foreseeable future.
Improving health consciousness will also benefit the soft beverage sector, as it has done globally; bottled waters, fruit juices and energy drinks, many of which carry much higher profit margins than carbonates, will grow as the market share of carbonates decreases. Hong Kong's soft drinks sector is also likely to escape the rise in discounting being experienced in the country. With sector prices generally starting quite low, price increases to premium levels are unlikely to prove too off-putting to consumers.
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Table: Soft Drinks Value/Volume Sales Historical Data & Forecasts
2010 Soft drinks sales (HKDmn) Soft drink sales growth, HKD, (y-o-y) Carbonated soft drinks sales (HKDmn) Fruit/vegetable juice sales (HKDmn) Bottled water sales (HKDmn) Soft drinks sales (US$mn) Soft drinks sales (mn litres) Carbonated soft drinks sales (mn litres) Fruit/vegetable juice sales (mn litres) Bottled water sales (mn litres) 12,510.8 7.25 6,178.25 1,187.38 5,145.18 1,610.38 1,052.33 325.22 50.00 677.1
2011 13,662.4 9.21 6,732.91 1,350.30 5,579.24 1,755.13 1,088.06 336.65 54.01 697.4
2012f 14,474.9 5.95 7,051.49 1,443.31 5,980.17 1,862.22 1,113.30 339.01 55.51 718.8
2013f 15,326.4 5.88 7,451.03 1,494.02 6,381.40 1,972.41 1,142.69 346.11 55.52 741.1
2014f 16,105.2 5.08 7,804.31 1,560.23 6,740.76 2,072.64 1,174.51 353.85 56.59 764.1
2015f 16,817.8 4.42 8,082.86 1,654.25 7,080.75 2,164.34 1,206.17 359.65 58.88 787.6
2016f 17,450.4 3.76 8,266.40 1,748.55 7,435.52 2,245.76 1,233.72 360.95 61.08 811.7
2017f 18,102.3 3.74 8,488.40 1,808.40 7,805.57 2,329.65 1,261.92 363.74 61.99 836.2
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Hot Drinks
Coffee forecast compound annual volume growth to 2017: -0.33%.
Hot Drinks Sales 2010-2017
Coffee forecast compound annual value growth to 2017 (local currency): +1.99%.
Tea forecast compound annual volume growth to 2017: 0.05%.
Tea forecast compound annual value growth to 2017 (local currency): +2.27%.
f = BMI forecast. Source: Census and Statistics Department, Company figures, BMI
The hot drinks sector is already very mature, due to the traditional consumption habits of many Hong Kong's residents. In addition, the sector has already undergone a period of significant product development and premiumisation a classic path of growth in the hot drinks industry that has now started to level out. Tea and coffee drinkers are already purchasing top-end, more expensive products, and although this trend will continue, it leaves less room for growth. That said, product innovation will remain forthcoming and consequently industry sales will continue to increase, although fairly moderately.
Table: Hot Drinks Value Sales Historical Data & Forecasts
2010 Coffee sales (HKDmn) Coffee sales (US$mn) Tea sales (HKDmn) Tea sales (US$mn) 72.12 9.28 396.88 51.09
2011 74.35 9.55 411.34 52.84
2012f 76.11 9.79 422.77 54.39
2013f 77.78 10.01 433.62 55.80
2014f 79.30 10.21 443.41 57.06
2015f 80.75 10.39 452.64 58.25
2016f 82.30 10.59 462.46 59.51
2017f 83.97 10.81 473.10 60.88
f = BMI forecast. Source: Census and Statistics Department, Company figures, BMI
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Trade
Exports average annual value growth to 2017 (US$): +4.98%.
Trade 2010-2017
Imports average annual value e growth to 2017 (US$): +2.25%.
There is seemingly little cause for optimism in the near-term outlook for Hong Kongs food and drink (F&D) imports and exports, although we are decidedly more bearish for the countrys F&D export outlook. As
f = BMI forecast. Source: UNCTAD, BMI
Chinese growth eases, US economic growth remains lethargic and further fiscal crises continue to envelop the EU. Hong Kongs external trade performance is likely to wane over the coming quarters.
As with trade links with China, Hong Kongs property market continues to be a dominant theme in the islands growth story, and we expect this to have an impact on Hong Kongs import growth prospects. We have had a long-held view that Hong Kongs property market was overextended and that a correction was due. We are starting to see mounting evidence of our view playing out as both property transactions and values, and land auction prices have begun to decline. We thus expect to see a resonating impact on Hong Kong's imports in the absence of a crucial growth driver.
Hong Kong may benefit from mainland China's high profile food scandals to lift exports within its own food production industry. However, over the long term, the transference of investment from Hong Kong to China will further limit the output of the already minimal food processing and agricultural industries, thus reducing Hong Kong's already low export sales. In line with this trend, demand for processed foods will continue to rise, requiring such goods or at least the ingredients for the manufacturing of such goods to be imported. These trends mean that Hong Kong's food trade balance will remain firmly in negative territory.
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Table: Food & Drink Trade Indicators Historical Data & Forecasts
2010 Exports (US$mn) (RHS) Imports (US$mn) (RHS) Balance (US$mn) (LHS)
2011
2012f
2013f
2014f
2015f
2016f
2017f
3,401 10,036 -6,635
3,717 10,336 -6,619
3,942 10,441 -6,499
4,194 10,660 -6,466
4,418 10,896 -6,477
4,633 11,142 -6,509
4,831 11,400 -6,569
5,025 11,671 -6,646
f = BMI forecast. Source: UNCTAD, BMI
Mass Grocery Retail

Mass grocery retail forecast compound annual value growth to 2017 (local currency): +5.04%.
Supermarket segment forecast compound annual value growth to 2017 (local currency): +5.30%.
Discount segment forecast compound annual value growth to 2017 (local currency): +9.31%.
Convenience segment forecast compound annual value growth to 2017 (local currency): +3.29%.
Convenience stores (traditionally the strongest growth format in crowded markets) will underperform in Hong Kong, with sales increasing by just 2.2% to 2017, on compound annual average growth terms. This sector does not benefit from price consciousness, while the smaller format sizes of convenience stores means they cannot boost sales through the addition of added-value products and services.
In contrast, the discount sector is expected to outperform. Over our five-year forecast period, we expect discount store sales to increase at a compound annual average rate of 9.31%, which can be closely linked to its relatively low starting point. The discount store format is very much in its infancy, only really taking off as price competitiveness erodes the negative perceptions associated with purchasing lowerpriced grocery products. Due to this low starting point, the addition of just a few discount stores would bear a phenomenal effect on the sub-sector's total value. Of course, the increasingly subdued domestic demand conditions and a heightened level of consumer price sensitivity in the coming quarters will lend another helping hand to support discount store sales.
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Meanwhile, we are forecasting supermarket sales to increase at a compound annual average rate of 5.30% to 2017. As supermarket operators shift their attention to mainland China, they are likely to look to strategies such as improvement to existing store offerings domestically as they try to juggle both markets, and this should provide a positive impetus to the sector's growth.
The Hong Kong MGR market rebounded swiftly from the economic downturn during 2008 to 2009, helped by recovering macroeconomic conditions and improving tourist arrivals at that point in time. Bearing out the improved domestic demand conditions in 2010, Hong Kong's private consumption increased by 5.5% year-on-year (y-o-y) in 2010, up from 0.7% in 2009. Moreover, retail sales data from Hong Kong's Census and Statistics Department showed that retail sales growth came in better than expected. Overall MGR sales growth came in at 5.6% in 2010, which exceeded our original growth forecast of 5.1%.
The aforementioned dynamics, namely strong tourist arrival growth and improving domestic demand conditions, has continued to support MGR sales growth. Tourist arrival growth embarked on an acceleratory trend in early 2011, which helped provide some upward momentum to retail sales growth. Taking January to August 2011 retail sales figures and cyclical trends into consideration, BMI believes that there is further scope for growth in Hong Kong's MGR sector. We are currently forecasting the sector to grow by 6.56% in 2011, as measured in local currency, and by a similar margin of 6.61% in 2012.
However, we note our increasingly cautious outlook for Hong Kong's MGR sector. Declines in property prices will take a toll on household wealth, which could filter through to softer domestic demand conditions. Our Country Risk team has repeatedly highlighted that Hong Kong's property prices are unsustainably high and that the market is due for a correction, which appears to be happening.
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A Three-Tiered Hierarchy Organised Retail As A Proportion Of Grocery Retail Sales (2011 Vs 2020)
Source: BMI estimate
While the Hong Kong MGR sector will continue to hold its appeal in the near-to-medium term, thanks to high consuming levels and a strong scope for premiumisation growth, the market is fast approaching saturation point, implying limited scope for growth beyond 2015. As illustrated in the accompanying chart, Hong Kong is way ahead of the curve in terms of organised retail development. The concept of modern retailing has quickly diffused in Hong Kong, and this can be linked to the rapid urbanisation and continued expansion of the country's affluent consumer base over the past decades. With high purchasing power, local consumers already have a penchant for the higher-value modern retail formats.
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Developed Markets Leading The Pack 2011 GDP Per Capita (US$) and Proportional Contribution Of Organised Retail To Grocery Retail Sales In 2011 (%)
Source: BMI estimate, Statistical Agencies
With limited growth prospects in the Hong Kong MGR market in the longer term, it is not surprising that local MGR players are already looking abroad for stronger growth opportunities. Dairy Farm International, for instance, is one of Asia's most prominent retail multinationals and has aggressively expanded into high-growth regional markets such as Malaysia, Thailand and Vietnam in recent years.
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Table: Mass Grocery Retail Sales Historical Data & Forecasts
2010 Supermarkets (HKDbn) Discount stores (HKDbn) Convenience stores (HKDbn) Total mass grocery retail sector (HKDbn) Total mass grocery retail sector growth, HKD, (y-o-y) Supermarkets (US$bn) Discount stores (US$bn) Convenience stores (US$bn) Total mass grocery retail sector (US$bn) 30.32 0.40 6.36 37.08 5.55 3.90 0.05 0.82 4.77
2011 32.47 0.48 6.57 39.51 6.56 4.17 0.06 0.84 5.08
2012f 34.75 0.54 6.84 42.12 6.61 4.47 0.07 0.88 5.42
2013f 36.93 0.60 7.09 44.62 5.93 4.75 0.08 0.91 5.74
2014f 38.91 0.67 7.32 46.90 5.10 5.01 0.09 0.94 6.04
2015f 40.79 0.71 7.55 49.05 4.59 5.25 0.09 0.97 6.31
2016f 42.81 0.78 7.78 51.36 4.72 5.51 0.10 1.00 6.61
2017f 44.99 0.85 8.04 53.87 4.88 5.79 0.11 1.03 6.93
Table: Sales Breakdown by Retail Format Type
2012e Organised Nonorganised/Independent 71% 29%
2021f 78% 22%
Source: BMI
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Food
Industry Trends And Developments
Lindt & Sprngli Plans To Consolidate Its Hong Kong Unit
In March 2012, Swiss luxury chocolate and confectionary firm Lindt & Sprngli reported plans to expand further into emerging markets, in order to achieve growth after poor 2011 financial results. The firm said it intends to gain a foothold in new markets imminently and consolidate its units in markets such as Hong Kong and South Africa, as a springboard for expansion into the rest of Africa and China. Lindt saw net profit for 2011 rise by only 1.9% to EUR205mn (US$270.2mn), and a 3.5% decline in sales.
The Swiss company operates an importing and sales subsidiary in Hong Kong. Lindt & Spruengli (AsiaPacific) Ltd (Hong Kong) was established in 1986. As a regional headquarters, the Hong Kong arm is also engaged in exports to mainland China. Its main competitors in the market include other multinationals, including Nestl.
Hong Kongs Chain Loses Out As Walmart To Deal Directly With Factories
In September 2012, US retail company Walmart has scaled back its supply agreement with Hong Kongbased consumer goods chain Li & Fung, according to The Wall Street Journal. The deal would have seen Li supply Walmart's overseas stores, but Walmart instead decided to focus on securing deals directly with factories. The change is significant, as it indicates the breadth of cost-cutting measures. The Hong Kong company has over 300 offices in over 40 countries around the world, dealing in a variety of consumer goods, with a focus on non-perishables.
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Market Overview
Food Production
Hong Kong relies heavily on imports for its food supply, as land resources are limited and urbanisation is progressing rapidly. Consequently, the domestic food production industry is on a relatively small scale. The largest sub-sectors of the food processing industry are baked goods, pasta and instant noodle production, canned, preserved and processed seafood, dairy products and seasonings.
Due to Hong Kongs economic and geographical situation, major expansion within the industry is not expected. The countrys proximity to China a much more attractive prospect in terms of space and labour costs is also likely to inhibit investment in Hong Kongs food and beverage sectors.
Trends within Hong Kongs food processing industry include the recent growth of packaged foods, due to rising numbers of women in full-time employment and a general, but marked, shift in terms of the pace of life in the country. Growth in this sector has also been driven by the hygiene concerns that have arisen as a result of the SARS outbreak and bird flu epidemic. Packaged food is deemed to be safer than fresh produce and, given recent nutritional developments in processed foods, is not considered as unhealthy as it once was. In fact, in recent years, it is the manufacturers that have managed to combine the seemingly conflicting requirements of both convenience and health that have fared best in this sub-sector both in Hong Kong and globally.
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Drink
Hong Kong-Listed Brewer Up For Sale
In February 2012, Chinese brewers expressed interest in acquiring the beer assets of Kingway Brewery, which is listed in Hong Kong. Potential buyers included Tsingtao, Beijing Yanjing Brewery, Guangzhou Zhujiang Brewery, as well as CR Snow, which is a joint venture between China Resources Enterprise and SABMiller.
Kingway Brewery is reportedly mulling a sale of all or part of its business as it struggles to generate profits amid a highly competitive environment. With hugely enticing opportunities on offer in the Chinese beer market, the sale is likely to garner massive interest from both multinational and domestic brewers, such as SABMiller and Tsingtao, as they seek to grow their footprint in this highly dynamic market.
Struggling to turn a profit in the past few years, Kingway conducted a strategic review of its business, which we believe can be viewed as an attempt to enhance shareholder value. Kingway commented that its strategic options include a potential sale of its assets or equity, which could lead to a takeover of the entire company. Kingway also announced that it 'plans to commence discussions with certain independent third parties principally engaged in the manufacture and distribution of beer products' for the possible acquisition of its brewery assets.
However, in June 2012, Beijing Yanjing abandoned the potential purchase of the Hong Kong-listed brewer, reportedly after a failure to agree on the price, even though it had emerged as a front-runner, having beaten the offer made by Anheuser-Busch InBev. The transaction is expected to cost in the region of US$700mn. In September 2012, Kingway was reportedly still in talks with potential partners.
UKs Whisky Distiller Opens New Office In Hong Kong

In March 2012, UK-based whisky distiller Justerini & Brooks (J&B) announced the formal opening of its new office in Hong Kong. The office, located in the Centrium building in the city's central business district, was opened in order to manage the increasing demand for the J&B brand and its wines and spirits in East Asia, which is attributed to tourism and changing consumer preferences.
Wine Remains Dynamic

Boosted by the abolition of high tax rates on wine and beer, Hong Kongs wine trade industry continues to go from strength to strength. The countrys wine auction houses are benefiting from their proximity to
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China and from the steady emergence of an increasingly affluent group of Chinese consumers. For the first nine months of 2010, Hong Kong wine merchants imported some US$600mn worth of wine, already more than 2009s total. During this period, wine auction sales totalled US$120mn double that of 2009, and four times that of the level prior to excise cuts.
Indeed, according to a survey conducted by International Wine & Spirit Research, the average amount of wine consumed by a typical Hong Kong resident is higher than anywhere else in Asia. The study, conducted in 2010, revealed that an average wine consumer in Hong Kong drank 4.7 litres, the equivalent of 6.3 bottles which is twice the average consumption of Japan and Singapore during the same period. Wine consumption nearly doubled in Hong Kong in the four-year period to the end of 2010.
Asias wine market is the fastest growing in the world and, while Hong Kong will continue to benefit from its proximity to China, the country is also well positioned to exploit surging fine wine demand in other regional economies. Alcohol sales in Hong Kong have benefited from high private consumption. Sales have also been driven by the emergence of young female drinkers, for whom drinking alcohol is becoming more socially acceptable.
However, anecdotal evidence has warned of stagnation of the territorys fine wine auction market through an overabundance of products. Towards the end of 2011, auction houses recorded an increase in the amount of lots left unsold as buyers become more selective about their purchases, especially given more opportunities to shop around for bargains. Internet auctions may help to correct the Hong Kong market, however, as overseas buyers increasingly choose to buy fine wines from other areas, such as Europe.
Innovation Still Crucial

Although mainland China continues to receive the lions share of sector investment, companies are continuing to invest in new product development suggesting that innovation remains important in remaining competitive. Market leading beverage firm Swire Coca-Cola Hong Kong unveiled a string of new products in 2010, innovation primarily focusing on additional health benefits, although environmental issues have also featured, including bottles boasting reduced plastic usage. The company has also pursued a number of re-packaging and re-branding initiatives and its activity levels highlight the importance of continuing to innovate to remain competitive in spite of market maturity.
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Market Overview
Alcoholic Drinks
Alcohol sales in Hong Kong have benefited from high private consumption. Sales have also been driven by the emergence of young female drinkers, for whom drinking alcohol is becoming more socially acceptable. Beer remains the most popular alcoholic beverage, and recent marketing initiatives have focused on developing sales of economy beers, which suit value-conscious consumers the largest consumer base in Hong Kong, despite the countrys high per capita consumer spending levels.
While these marketing drives have been a success, they have done little to promote value sales, and brewers are accordingly seeing low profits. The lack of growth options in the territory is particularly problematic for its beer industry when compared to the boom occurring in Chinas beer industry. Investors have little interest in Hong Kong when the mainland currently represents one of the worlds largest and highest potential beer market.
Soft Drinks
Hong Kongs soft drinks sector has fared much better than its alcohol industry and the sector is one of the most competitive in Asia. It is dominated by three companies: Swire Coca-Cola Hong Kong, AS Watson and Vitasoy International Holdings. Together they control nearly two-thirds of soft drink volume sales in Hong Kong. Swire Coca-Cola Hong Kong dominates the carbonates sub-sector, AS Watson leads in bottled water and Vitasoy in the ready-to-drink tea sub-sector. Competition between the three leading companies is strong, particularly with each diversifying into the others categories, leading to high-profile advertising and frequent new launches of innovative products.
Hot Drinks
Hot drinks, with the sector dominated by tea, have traditionally been very popular in Hong Kong. The rising prominence of coffee chains has promoted the development of per capita coffee consumption. The market is saturated, but novelty still provides room for growth.
Leading players in the sector are multinational companies, led by Nestl Hong Kong Ltd, a subsidiary of the Swiss giant. Nestl offers a range of hot drinks products, including instant coffee Nescafe and the luxury Nespresso brand (machines and coffee capsules). Unilever Hong Kong Ltd is particularly strong in tea, holding around a third of the retail market by value.
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Mass Grocery Retail

Dairy Farm International Post Strong H112 Results
Hong Kong-based retail company Dairy Farm International posted strong results for the first half of its financial year, despite closing a number of stores. The company's sales for the six-month period ended June 30 2012 increased by 10% to US$5.5bn, compared to H111, while its underlying profit was up 12% to US$243mn. Dairy Farm's strong results were driven by some small acquisitions it made during the six months, including a 70% share in a Cambodia-based supermarket chain and a 50% stake in Philippinesbased retailer Rustan's. According to Kam City, Q212 sales in North Asia rose by 12.5% to US$277mn.
The company operates diverse MGR formats such as supermarkets, convenience stores and hypermarkets, which form the bulk of its overall sales, and also has non-grocery retail interests, including home furnishings. However, while we continue to see strong room for optimism in Dairy Farm's future prospects on the back of its regional diversification ambitions, the retailer's technical picture is looking increasingly precarious, and we would require a retracement in its share price before we see opportunities to go bullish in the longer run.
Reaping Strong Rewards From Its Regional Diversity Selected MGR Companies 5-Year Geometric Revenue Growth Average, %
Source: Bloomberg
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Banking on its massive spread across the Asian MGR markets it has established an extensive footprint across markets such as Malaysia, India, Indonesia, China, Thailand and Vietnam Dairy Farm recorded an impressive five-year geometric revenue growth average of 11.0%, which compares favourably with the performances of other global MGR players and regional retailers. Faced with domestic market stagnation, geographical expansion will remain at the forefront of Dairy Farm's growth strategy, and its diversification ambition is a major reason as to why we like the retailer's long-term prospects. The relatively immature MGR markets such as Vietnam and Thailand are showing tremendous long-term promise on the back of fast-accelerating income growth and a continued influx of sector investments, and Dairy Farm's expansions into these markets should supply greater upward momentum to its headline growth going forward.
Near-Term Retracement Likely Dairy Farm International Share Price, US$
Source: Bloomberg
The other positives underpinning our optimism in Dairy Farm's growth potential is the retailer's massive financial clout and multi-format retail offerings, which we believe will place it in a good position to capitalise on these compelling opportunities. A multi-format store offering allows Dairy Farm to cater for different shopping occasions and the varying needs of consumers in its regional markets.
Intensifying Competitive Pressures Could Undermine Uny's Growth Potential

In a clear bid to focus its resources abroad to offset the declining domestic market, Japanese supermarket operator Uny entered into a joint venture with China's leading food and beverage company Tingyi
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(Cayman Islands) Holding Corporation to set up supermarkets in China. Uny is planning to take a 70% stake in the joint venture while the remaining 30% will be held by Ting Hsin, the holding company of Tingyi (Cayman Islands) Holding Corporation. Via the joint venture, Uny aims to set up its first supermarket in China by February 2013.
From Tingyi's point of view, this partnership would complement its strong domestic foothold while providing the company with another lucrative opportunity for growth. Tingyi has been particularly aggressive in expanding its domestic reach, and we believe this is largely the cause of its stellar growth over the past few years. The company has set aside US$500mn for the expansion of its mainland instant noodle business and beverage production capacity and is also eyeing mergers and acquisition (M&A) opportunities in the baked goods sector.
The Tingyi-Uny partnership could therefore serve as a strong platform for Tingyi to branch out into areas where it does not yet have a presence for instance, the supermarket sector. More importantly, Tingyi's partnership with Uny should provide it with greater direct control over its supply chain, leaving it less susceptible to retailer pricing pressure and thus ensuring stronger margin growth.
This gloomy outlook for Japan's MGR sector has prompted the country's leading retailers such as Lawson and Seven & I Holdings to look abroad for stronger growth opportunities, and Uny is the latest company to jump on the outbound mergers-and-acquisitions bandwagon. While Uny currently still operates the bulk of its stores in Japan, it also opened its third supermarket store in Hong Kong in 2011. Uny's international expansion plans should put some upward pressure on its margin performance, and the backing of a leading and expansion-oriented domestic player in China potentially provides a further boost to its competitive position.
Premium Interest
Potentially benefiting from Hong Kongs proximity to China and from increased tourism traffic from the mainland to Hong Kong, luxury goods brands continue to expand in Hong Kong, the latest being Mulberry. As discussed in the Food section, the mainland remains the strategic focus for most consumer firms because of the superior growth opportunities on offer here. This is also true for luxury brands and luxury goods retailers. However, Hong Kong does have the advantage of being a global tourism and travel hub and consequently luxury goods firms are likely to continue to juggle their interests in both markets for the time being.
Morrisons Opens Office in Hong Kong

In June 2012, UK-based mass grocery retailer Morrisons inaugurated its first office in Hong Kong. The company aims to make this office its regional headquarters. CEO Dalton Philips believes that by getting
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to know Asian manufacturers, it is easier to source better products. He added that the business model used in Asia is the same as in the UK, which focuses on minimising the involvement of the middleman to deliver great value to customers. According to the companys website, the aim of Wm Morrison (HK) Ltd is to provide the best possible product range of Hard Goods to its 455 UK stores, from factories and suppliers throughout China, Hong Kong and the many other Far East Asian countries that the group uses.
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Market Overview
Following the closure of French retailer Carrefours four hypermarkets in 2000, Hong Kongs MGR landscape has been characterised by supermarkets, convenience stores and discount stores. The unsuitability of the hypermarket format for Hong Kongs grocery sector is a result of its limitations in terms of available real estate for such large store formats.
Traditional outlets, such as independent grocers and open-air markets, play a significant, albeit minor, role in Hong Kong society, accounting for around 30% of food retail sales. Open-air markets command a particularly strong position where the sale of fresh food is concerned. However, supermarkets have expanded their fresh produce sections in recent years in order to capture market share from their open-air rivals and going forward we expect the contribution of open-air markets to food retail sales to be reduced. The activities of supermarkets in expanding their fresh produce range has been particularly successful in light of recent health-related food scares in the region, which has seen consumer preference switch to more hygienic means of consumption. The ability of supermarkets to couple demand for fresh produce with hygienic surroundings has put them in a good position in the battle for a slice of the countrys fresh food market.
The provision of additional services within various retail formats has been an emerging trend over recent years and large supermarkets now offer a wide range of services to their customers, which have served as another mechanism for eroding the market share of traditional wet-markets. These added-value offerings include massage services, Chinese medicine clinics, drugstores and internet access. In many cases retailers have shown a far greater degree of innovation than in other markets in the region, where the addition of such services has centred on more straightforward offerings, such as coffee bars and drycleaning counters.
As a result of the competition developing in the country, the major supermarkets permanently offer discounts, with costs usually transferred to suppliers. The number of private label products in the sector has also increased significantly in recent years, with products normally between 10-20% cheaper than branded products. Although per capita food consumption is high in Hong Kong, due to relatively high disposable incomes and living standards, discounting is becoming increasingly popular and has avoided the negative connotations attached to the concept in other markets. This is due to consumers familiarity with low prices, and introducing any price increases now would most likely prove a huge deterrent to shoppers, regardless of whether or not they could afford it.
Due to the increasing number of working women, dual-income families and longer working hours, demand for convenience and ready-to-cook foods has increased in Hong Kong in recent years. Supermarkets have responded to this trend by introducing convenience food counters and home meal
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replacement products, while convenience operators have also steadily grown their store networks over the past few years to capitalise on this new requirement.
Table: Structure Of Mass Grocery Retail Market By Estimated Number of Outlets
2003 Supermarkets Discount stores Convenience stores Total MGRs 1,242 230 760 2,232
2004 1,280 225 820 2,325
2005 1,300 225 860 2,385
2006 1,325 230 1,000 2,555
2007 1,330 245 1,150 2,725
2008 1,335 230 1,250 2,815
2009 1,335 231 1,251 2,817
2010 1,334 231 1,249 2,814
2011 1,335 231 1,250 2,816
2012 1,337 233 1,253 2,823
Source: Official statistics, BMI
Table: Structure Of Mass Grocery Retail Market Sales (HKDmn) By Format
2003 Supermarkets Discount stores Convenience stores Total MGRs 19,650 210 5,090 24,950
2004 20,780 230 5,200 26,210
2005 22,130 250 5,340 27,720
2006 23,220 270 5,410 28,900
2007 24,740 300 5,560 30,600
2008 27,650 340 5,990 33,980
2009 28,590 370 6,170 35,130
2010 30,320 400 6,360 37,080
2011 32,467 479 6,567 39,513
2012 34,747 542 6,835 42,124
Table: Structure Of Mass Grocery Retail Market Sales (US$mn) By Format
2003 Supermarkets Discount stores Convenience stores Total MGRs 2,523 27 6,536 9,087
2004 2,668 30 6,676 9,374
2005 2,845 32 6,866 9,743
2006 2,989 35 6,964 9,988
2007 3,171 38 7,126 10,336
2008 3,551 44 7,693 11,288
2009 3,688 48 7,960 11,696
2010 3,903 51 8,187 12,141
2011 4,171 61 8,436 12,668
2012 4,470 70 8,794 13,334
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Table: Average Sales Per Outlet By Format 2012
US$mn Supermarkets Discount stores Convenience stores Total MGRs 3.34 0.30 7.02 4.72
HKDmn 25.99 2.33 5.46 14.92
Source: BMI
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Competitive Landscape
Key Players
Table: Key Players In Hong Kong's Food Sector
Company
Sub-sector Food & Drink soy-based products & soft drinks Food & Drink various branded consumer goods Food & Drink various branded consumer goods Food packaged rice products Food & Drink instant noodles, baked goods & soft drinks Food & Drink snack, frozen foods, confectionery & soft drinks Food instant noodles
Sales (HKDmn)
Sales (US$mn)
Financial Year End
Year Established
Vitasoy International Holdings
3,720
478.6
Mar 12
1940
Unilever Hong Kong Ltd
1,555e
200e
Dec 12
1925
Nestl Hong Kong Golden Resources Development Ltd
1,399e 939.5
180e 120.9
Dec 12 Mar 12
1907 1946
Tingyi (Cayman Islands) Holding Corp
61,262*
7,870*
Dec 11
1992
Four Seas Group New Dragon Asia Corporation
2,789.33 213
358.9 27.4
Mar 12 Dec 11
1971 1999
*total company sales, e = estimate, na = not available. Source: BMI, Trade press, Company Investor Relations
Table: Key Players In Hong Kong's Drink Sector
Company
Sub-sector Food & Drink soy-based products & soft drinks Drink soft drinks, juices & water Drink soft drinks (CocaCola brands)
Sales (HKDmn)
Sales (US$mn)
Financial Year End
Year Established
Vitasoy International Holdings
3,720
478.6
Mar 12
1940
AS Watson (Group) HK
144,009
18,500
Dec 11
1841
Swire Pacific Limited^
9,000e**
1,158e**
Dec 12
1965
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Table: Key Players In Hong Kong's Drink Sector
Company
Sub-sector Food & Drink various branded consumer goods Food & Drink various branded consumer goods Drink alcohol, beer Food & Drink instant noodles, baked goods & soft drinks Food & Drink snack, frozen foods, confectionery & soft drinks Drink coffee drinks
Sales (HKDmn)
Sales (US$mn)
Financial Year End
Year Established
Unilever Hong Kong Ltd
1,555e
200e
Dec 12
1925
Nestl Hong Kong San Miguel Hong Kong
1,399e 683.9
180e 87.9
Dec 12 Dec 11
1907 1948
Tingyi (Cayman Islands) Holding Corp
61,262*
7,870*
Dec 11
1992
Four Seas Group Tsit Wing
2,789.33 529.4
358.9 68.0
Mar-11 Dec 11
1971 1932
*total company sales, **Beverage sales, ^Hong Kong accounting for around 22% of sales, e = estimate, na = not available. Source: BMI, Trade press, Company Investor Relations
Table: Key Players In Hong Kong's Mass Grocery Retail Sector
Parent Company Dairy Farm International Holdings
Country of Origin Hong Kong
Sales (HKDmn) 71,070*
Sales (US$mn) 9,130*
Financial Year End Dec 11
Fascia
Format Total
No. of outlets 1,246 282 964 45
Wellcome 7-Eleven Aeon Stores (Hong Kong) Co Ltd Japan 7,200e 926.3e Dec 12 Aeon MaxValu Prime Jusco Bento Express AS Watson (Group) HK** Hong Kong 144,009 18,500 Dec 11
Supermar kets Convenie nce stores Total Supermar kets Supermar kets Supermar kets Total
505
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Table: Key Players In Hong Kong's Mass Grocery Retail Sector
Parent Company
Country of Origin
Sales (HKDmn)
Sales (US$mn)
Financial Year End
Fascia Park n Shop Park n Shop Express
Format Supermar kets Convenie nce stores Convenie nce stores Total
No. of outlets
Convenience Retail Asia (Li & Fung) China Resource Enterprises
Hong Kong Hong Kong
3,979.9 101,160
511.3 12,995
Dec 11 Dec 11
Circle-K
322 45e
Suguo Supermar ket CR Vanguard
Supermar kets Supermar kets
na = not available. All sales figures are for Hong Kong retail sales only, unless stated. *North Asia sales, **Retail Division Sales, Source: Company Investor Relations, Trade press, BMI
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Company Monitor
Food
Golden Resources Development
Company Overview Golden Resources is Hong Kongs largest rice wholesaler and distributor. It owns the only rice processing plant in Hong Kong and is therefore an important contributor to the import-dependent food industry. The company was listed on the Hong Kong Stock Exchange in 1991 and has gone on to become one of the markets best-known food brands. Output from Golden Resources accounts for an estimated 50% of Hong Kong rice consumption. Weaknesses Opportunities Threats A highly regarded brand name in Hong Kong, ensuring strong consumer loyalty. An extensive distribution network covering grocery retail outlets, restaurants and hotels facilitates its reach to the end-consumer market. Direct procurement from Thailand and Vietnam ensures affordable and efficient supplies. Manufacturing in Hong Kong is relatively uncompetitive in comparison to the opportunities available in the wider region. As a primary processor, Golden Resources is relatively confined in terms of pricing strategy, a particularl problem during this period of rising production costs. Golden Resources has established manufacturing facilities on Chinas mainland and the market represents an important long-term growth opportunity Innovative products, such as unique packaging sizes and even environmentally-friendly rice, ensure that Golden Resources retains competitive differentiation. The rising popularity of pre-prepared, flavoured and convenience rice products could impact Golden Resources market share if the company does not consider entering these processed sectors itself. Uncertain operating costs could impede profitability. Global headwinds could impact Hong Kongs export outlook and potentially weigh on domestic demand.
Strengths

Strategy
Golden Resources will continue to develop its operations in order to compete with rice importers that have flooded the industry since its liberalisation in early 2003. A primary element of the companys strategy is its commitment to innovation. Golden Resources was the first to introduce vacuum packed rice to Hong Kong, and the first to sell small-size rice packets. Similar premium innovations will remain important if the company is to stave off low-price competition from the import sector.
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Company Data
For financial year ending March: 2012 Sales: HKD939.5mn 2011 Sales: HKD844.0mn 2010 Sales: HKD743.0mn 2009 Sales: HKD757.7mn 2008 Sales: HKD556.8mn 2007 Sales: HKD643.6mn 2012 Net Income: HKD73.8mn 2011 Net Income: HKD146.7mn 2010 Net Income: HKD174.5mn 2009 Net Income: -HKD167.7mn 2008 Net Income: HKD8.7mn 2007 Net Income: HKD77.0mn Established: 1946
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Drink
Tsit Wing
Company Overview Tsit Wing is Hong Kongs leading tea and coffee supplier. The company is present in the food services sector, in which it provides its tea and coffee supplies to local tea bistros, cafs, fast food chains, etc., and the fast-moving consumer goods sector, in which its retails its instant beverage products through supermarkets and convenience stores, as well as operates its own caf SohoWay. In addition to Hong Kong and China, the company has expanded into Singapore and Malaysia. Weaknesses Tsit Wing's focus on optimising its product mix to achieve higher margins could help support its bottom-line. Thanks to its early diversification efforts, Tsit Wing was able to offset the relatively subdued growth prospects in Hong Kong with the more conducive demand conditions in China. Widespread and diverse availability of products ensures an extensive consumer base for Tsit Wing. Tsit Wing has shown itself to be tough in terms of cutting its losses with under-performing businesses. Hong Kongs tea and coffee industries are already fairly mature, with consumers already highly exposed to Western caf culture. Western multinational coffee chains have proved a formidable opponent in Asia, and Tsit Wing could struggle to compete with these foreign players due the lack of a globally recognised brand as in the case of Starbucks. A commitment to product diversification should aid growth with aspirational Hong Kong consumers keen to try new tea and coffee variants. China will remain a stronger revenue generator for Tsit Wing than Hong Kong, and the company will continue to lean on this higher-growth market to support its future performance. Fair Trade and organic teas and coffees could be a particularly profitable channel for Tsit Wing. Elevated raw ingredient costs could threaten Tsit Wings profitability, with the company struggling to pass these on to consumers due to competition levels. Global headwinds could impact Hong Kongs export outlook and potentially weigh on domestic demand.
Strengths
Opportunities

Threats

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Strategy
With over 80% of market share in the Hong Kong food services market, tea and coffee producer Tsit Wing has a strong domestic presence. However, the coffee and tea market in Hong Kong is already saturated and Tsit Wing will continue to expand its presence in China, which has much growth potential. Product and geographical diversification will remain at the heart of Tsit Wing's growth strategy, and these initiatives should prove revenue-supportive in the longer term. Thanks to its early diversification efforts, Tsit Wing was able to offset the relatively subdued growth prospects in Hong Kong with the more conducive demand conditions in China. For the year ending December 2010, Tsit Wing recorded a 42.7% growth in its sales from China, which translated into dynamic momentum to its headline growth. However, Tsit Wing's margins inevitably came under pressure amid high commodity prices. Due to the higher prices of primary raw materials such as coffee beans and tea leaves, the companys gross profit margin fell to 36%. In the near term, China will remain a stronger revenue generator for Tsit Wing than Hong Kong, and the company will continue to lean on this higher-growth market to support its future performance. The impact of commodity price inflation, on the other hand, is likely to be somewhat mitigated in the coming months. Our commodities team believes that prices of key raw materials such as sugar and coffee will continue to moderate in the coming quarters due to abundant supplies, which could provide some reprieve to Tsit Wing's margin growth. Moreover, its focus on optimising its product mix to achieve higher margins could help support its bottom line as well. Longer term, China will continue to grow in prominence to Tsit Wing's future expansion plans. The coffee culture is well-entrenched among Hong Kong consumers thanks to the presence of an affluent consumer base, and this rules out the prospect of explosive growth in the market. In contrast, the tea and coffee sectors in China are relatively immature and deliver long-term sustainable and reasonably high growth over our five-year forecast period. The expansionary activities of coffee industry players such as China Resources Enterprise, Starbucks and Gourmet Master continue to bear out the scope for growth in the Chinese coffee sector. Beyond China, Tsit Wing also has plans to enter new markets and improve the breadth of its geographical spread, which should enhance its future sales prospects. Moving into Singapore and Malaysia marked the start of its diversification plan, although moving forward more funds will be committed to intensifying marketing and promotional efforts and to pursuing further product innovation. Tsit Wing plans to launch a new coffeehouse concept known as Grab & Go in China to further its prospects in the country.
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Company Data
For financial year ending December: 2011 Sales: HKD529.4mn 2010 Sales: HKD433.5mn 2009 Sales: HKD404.5mn 2008 Sales: HKD402.4mn 2007 Sales: HKD362.7mn 2006 Sales: HKD321.7mn 2011 Net Income: HKD9.9mn 2010 Net Income: HKD24.0mn 2009 Net Income: HKD26.3mn 2008 Net Income: HKD20.0mn 2007 Net Income: HKD35.4mn 2006 Net Income: HKD34.3mn Estimated Contribution of Catering Business to Revenue: 90% Established: 1932
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San Miguel Hong Kong

Company Overview San Miguel Hong Kong is a subsidiary of Philippines-based San Miguel Corporation and the leading manufacturer and distributor in Hong Kongs beer market. The company is the only mainstream brewer still operating in Hong Kong, although it does compete with imports from European brewers Carlsberg and Heineken. Weaknesses With the backing of a financially powerful, regionally influential parent company, San Miguel Hong Kong has a strong capacity to expand. As the local market leader, the San Miguel brand is synonymous with quality. Widespread distribution in hotels and restaurants allows San Miguel to cater to Hong Kongs thriving tourism sector. Competition from low-cost China could undermine San Miguels efforts in establishing a manufacturing presence in Hong Kong. The parent companys diversification into heavy industry has left shareholders uneasy and concerns have been raised as to how committed San Miguel will remain to its core food and beverage business. With beer prices already high in Hong Kong, San Miguel cannot easily pass any increase in production costs on to consumers, which could weigh on its bottom line. Switching production at its disused brewery to spirits or ready-to-drink alcoholic beverages would widen San Miguels audience and boost sales opportunities. Having ridden out challenges in Hong Kong, San Miguel now looks to leverage its loyalty in marketing and promotional initiatives. Heavy investment in youth marketing has improved San Miguels chances of competing with the international branded spirits that are proving so popular with young consumers. The removal of excise duties on beer and wine may provide a slight fillip to San Miguels sales, even though its products will remain expensive. Beer sales are being impeded by growth in the wine and branded spirits sector. Global headwinds could impact Hong Kongs export outlook and potentially weigh on domestic demand.
Strengths
Opportunities Threats
Strategy
San Miguel Hong Kong is battling with changing consumer preferences in Hong Kong and the shift towards wine and flavoured alcoholic beverages. Despite its continued determination to retain faith with Hong Kong, the company has certainly begun to focus more and more on the Chinese market in recent years. This was made evident in 2007, when the company closed one of its two Hong Kong brewing facilities and shifted production to China in order to become more cost-effective and distribution-efficient. The company may yet convert the now-dormant plant to soft drink, spirits or flavoured alcohol beverage production.
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Company Data
For financial year ending December: 2011 Sales: HKD683.9mn 2010 Sales: HKD589.3mn 2009 Sales: HKD696.8mn 2008 Sales: HKD753.3mn 2007 Sales: HKD754.8mn 2006 Sales: HKD826.8mn 2005 Sales: HKD963.8mn 2011 Net Loss: HKD53.5mn 2010 Net Loss: HKD774.0mn 2009 Net Loss: HKD334.9mn 2008 Net Loss: HKD257.8mn 2007 Net Loss: HKD262.4mn 2006 Net Loss: HKD70.1mn 2005 Net Loss: HKD35.6mn Established: 1948
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Vitasoy International
Company Overview Vitasoy is Hong Kongs leading food and beverage producer, with a brand portfolio that includes drinks from all soft beverage sub-sectors. Vitasoy has a diversified portfolio consisting of soft beverages such as soymilk, tea, milk, distilled water and juices, although soymilk forms the bulk of its overall revenues. The company also produces food products such as tofu. Based in a mature and small market such as Hong Kong, Vitasoy ventured early into international markets such as China and Australia. Thanks to its diversification efforts, Vitasoy now boasts a strong geographical spread across developed economies such as Hong Kong, Macau, North America, Australia, New Zealand and Singapore and the high-growth market of China. A diverse product range allows Vitasoy to cater for most soft drink consumption occasions. A well established distribution network ensures widespread availability of Vitasoy brands. Early entry into the healthy beverages sub-sector has given Vitasoy a head-start in this increasingly popular category. While demand in Hong Kong was relatively sluggish due to an increase in dining-out activities, Vitasoy was able to mitigate the impact of softer domestic demand with stronger growth in its international markets, in particular Australia, New Zealand and China. Thanks to its cost-cutting initiatives and improvements in operational efficiencies, Vitasoy maintained its gross profit margin at around 50% despite facing these higher cost pressures. Strong competition from multinational producers requires a high level of investment just to maintain market share. A small population and market maturity limit growth opportunities for Vitasoy domestically. Further product launches in the health beverages category would most likely be met positively with the health trend having proved fairly sustainable in Hong Kong. Premiumisation of existing brands will allow Vitasoy to boost value sales, even as volumes remain stagnant. Uncertain operating and raw ingredient costs could undermine Vitasoys profitability and indeed its capacity to reinvest. Demand conditions in Hong Kong, Australia and New Zealand are expected to be relatively subdued in the near term, which could weigh on Vitasoy's revenue growth.
Strengths
Weaknesses Opportunities Threats
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Strategy
Hong Kong's leading food and beverage producer Vitasoy, in terms of market share, which has a strong focus on soy-based products, looks well positioned to continue enjoying strong growth from its strategy of enhancing brand equity and capacity expansions as well as product and packaging innovation. China, the only emerging market (EM) asset in Vitasoy's portfolio, will remain the strongest growth driver, and Vitasoy would naturally want to grow its presence in this high-growth market. Vitasoy has a diversified portfolio consisting of soft beverages such as soymilk, tea, milk, distilled water and juices, although soymilk forms the bulk of its overall revenues (see chart). The company also produces food products such as tofu. Based in a mature and small market such as Hong Kong, Vitasoy ventured early into international markets such as China and Australia. Thanks to its diversification efforts, Vitasoy now boasts a strong geographical spread across developed economies such as Hong Kong, Macau, North America, Australia, New Zealand and Singapore and the high-growth market of China. This strong geographical spread has gone some way to support Vitasoy's headline growth. While demand in Hong Kong was relatively sluggish due to an increase in dining-out activities, Vitasoy was able to mitigate the impact of softer domestic demand with stronger growth in its international markets, in particular Australia, New Zealand and China. For the year ending March 2011, Vitasoy recorded a 4% increase in sales from Hong Kong and Macau, which is lower than a 17% and 28% sales growth in China and the Australia and New Zealand region respectively.
A Diversified Portfolio And Geographical Footprint LHS: Vitasoy 2010 Revenue Breakdown By Product And RHS: Revenue Breakdown By Geographical Market
Source: Company Financials
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International Opportunities Abound Vitasoy Revenue Growth And Operating Profit Growth (%)
Source: Company Financials Although Vitasoy faced intensifying competitive pressures from retailers and competitors in Australia, the strong appreciation of the Australian dollar resulted in a positive translation impact on its revenue growth and helped offset this competitive impact. In China, domestic demand conditions remained robust over Vitasoy's FY2010/11 financial year as local consumers grew a bigger appetite for nutritious and functional beverages, and this provided a strong helping hand to support Vitasoy's growth. Undaunted By Cost Pressures Vitasoy also coped well with higher cost pressures. Raw material and utility costs as well as labour overheads have trended higher over the course of FY2010/11, placing tremendous pressure on Vitasoy's profit margin. However, thanks to its cost-cutting initiatives and improvements in operational efficiencies, Vitasoy maintained its gross profit margin at around 50% despite facing these higher cost pressures. Leaning On China For Growth Over the coming quarters, China should remain a relatively bright spot in Vitasoy's portfolio. Demand conditions in Hong Kong, Australia and New Zealand are expected to be relatively subdued in the near term, which could weigh on Vitasoy's revenue growth. In Hong Kong and Australia, consumers are grappling with declining home values while household debt deleveraging remains apace in New Zealand. The demand environment in China, on the other hand, should prove more conducive for Vitasoy. A Three-Pronged Approach Looking beyond the near term, Vitasoy is likely to aggressively expand its presence in China while strengthening its market positions in its developed markets of Australia, New Zealand, Hong Kong and Singapore. There are three key tenets of Vitasoy's growth strategy, which we believe will
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leave it well placed to pick up further market share gains in its markets and grow revenues. Firstly, Vitasoy aims to strengthen its brand equity in its markets. In our opinion, this strategy is pivotal for Vitasoy to consolidate its position in developed markets and to put itself in the best possible position to exploit the growing premiumisation trend as affluent consumers develop a greater penchant for functional beverages. Vitasoy is currently the leading soy milk producer in both southern and eastern China, and a stronger brand appeal should prove supportive of its nation-wide ambitions. Secondly, Vitasoy has a strong focus on capacity expansions in its international markets, in particular China, and this should equip it with a stronger capacity to deal with burgeoning demand. As a case in point, Vitasoy's construction of a third production plant in China is well under way, which is scheduled for commissioning in FY2011/12 and will allow it to double its production capacity in southern China. Lastly, Vitasoy will continue to engage in product and packaging innovation, which should enhance its sales opportunities. For financial year ending March: 2012 Sales: HKD3,720.0mn 2011 Sales: HKD3,329.0mn 2010 Sales: HKD3,012.3mn 2009 Sales: HKD2,783.2mn 2008 Sales: HKD2,416.4mn 2007 Sales: HKD2,693.5mn 2012 Net Income: HKD281.0mn 2011 Net Income: HKD284.0mn 2010 Net Income: HKD260.5mn 2009 Net Income: HKD217.4mn 2008 Net Income: HKD211.2mn 2007 Net Income: HKD173.9mn
Company Data
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Mass Grocery Retail

Dairy Farm International
Company Overview Dairy Farm is Hong Kong's leading mass grocery retail (MGR) player by some distance. The company operates diverse MGR formats such as supermarkets, convenience stores and hypermarkets, which form the bulk of its overall sales, and also has non-grocery retail interests, including home furnishings. Currently, the company operates 1,246 MGR outlets in Hong Kong, under the Wellcome, MarketPlace, ThreeSixty and Oliver's supermarket banners as well as the 7Eleven convenience banner. Dairy Farm is also one of Asias most prominent retail multinationals and has expanded into Malaysia, Thailand and Vietnam, as well as a number of smaller regional markets. Weaknesses Opportunities The market leader in a high-spending country which is highly susceptible to modern retailing. A multi-format store offering allows Dairy Farm to cater for different shopping occasions and different consumer types. Dairy Farm's strong financial clout should also prove supportive of its regional expansion plans. Regional diversity allows Dairy Farm to offset domestic market stagnation. Hong Kongs tiny population restricts Dairy Farm in sales terms, even if that population is high spending. Hong Kongs geography prohibits growth in the hypermarket sector, with this usually a very high return retail format. Dairy Farm has focused on developed markets, similar in structure to Hong Kong, and these restrict long-term growth prospects. Introducing new added-value in-store offerings to existing formats is a good means of boosting consumer per-trip spending. Fast-accelerating income growth, strong expansionary efforts from retailers and the massive scope for organised retail sectors translate into very exciting opportunities in Dairy Farms emerging markets. Further geographic diversification, particularly in the emerging markets of South East Asia, is Dairy Farms best means of securing long-term growth. Uncertain operating costs look set to threaten Dairy Farms short-term profitability. Growing consumer value-consciousness could impede growth in the more expensive convenience channel seeing the companys 7-Eleven convenience chain struggle.
Strengths
Threats
Strategy
Hong Kong-based mass grocery retail (MGR) operator Dairy Farm International has continued to reap strong rewards from its massive regional diversity. The company operates diverse MGR formats such as supermarkets, convenience stores and hypermarkets, which form the bulk of its overall sales, and also has non-grocery retail interests, including home furnishings. Faced with domestic market stagnation, Dairy Farm will continue to prioritise expansions in the other highgrowth regional markets in a bid to secure its long-term growth. With a multi-format retail offering and a strong financial clout, we are optimistic about Dairy Farm's future prospects. Dairy Farm is Hong Kong's leading MGR player by some distance. The company operates 1,246 MGR outlets in Hong Kong, under the Wellcome, MarketPlace, ThreeSixty and Oliver's supermarket banners as well as the 7-Eleven convenience banner. Although Dairy Farm is already the market leader in Hong Kong, which is a high spending market that is highly susceptible to modern retailing, the market is realistically mature and saturated, providing limited
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growth opportunities over the longer term. Hong Kong's small geographical size is a major restrictive factor behind domestic retailers' organic expansions, with hypermarket and supermarket retailers, in particular, finding it difficult to expand. While Dairy Farm is likely to continue to invest in developing new added-value in-store offerings to existing formats in order to retain its domestic market leading position and boost consumer per trip spending, international growth will take on a more prominent role in its growth strategy given the much more dynamic opportunities in overseas markets. Further geographical diversification, particularly in the emerging markets of South East Asia, is probably Dairy Farm's best means of securing long-term growth. Dairy Farm has established a wide footprint across regional markets such as Malaysia, India, Indonesia, China, Thailand and Vietnam, and the positive demand dynamics in these markets have clearly supported the company's revenue growth. In these markets, the combination of fast-accelerating income growth, strong expansionary efforts from retailers and the massive scope for organised retail sectors to grow paints a compelling picture of the opportunities on offer (see chart). Reflecting the attractive potential of the MGR markets in emerging Asia, Dairy Farm recorded an impressive five-year geometric revenue growth average of 11.0%, which compares well with the performances of the other global MGR players and regional retailers (see chart). In our opinion, Dairy Farm is in a strong position to pursue further growth across the region thanks to its multi-format retail offering. A multi-format store offering allows Dairy Farm to cater for different shopping occasions and the differing needs of consumers in its regional markets. In EMs, consumers are still largely familiarising themselves with the organised food retailing concept, with supermarkets witnessing the first signs of consumer uptrading to modern retail formats. As the rapidly expanding middle-and-upper classes in the EMs provide a growing stream of new customers for the other MGR formats such as hypermarkets, convenience stores and discount stores, Dairy Farm should find itself well positioned to tap into this burgeoning demand with its multi-format retail offering. Dairy Farm's strong financial clout should also prove supportive of its regional expansion plans. With a debt to earnings before depreciation, interest, amortisation and taxes (EBITDA) ratio of 0.9 and an interest coverage ratio of 18, Dairy Farm can take on more debt to finance its organic and acquisitional growth without putting its financial stability at risk. For financial year ending December: 2010 Sales*: US$4,009.8mn 2011 Sales*: US$9.13bn, +15% y-o-y 2011 Net Profit: US$484mn, +18% y-o-y
Company Data
*North Asia operating division, including mainland China, Macau and Taiwan
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AS Watson
Company Overview AS Watson operates a chain of supermarkets and convenience stores in Hong Kong, as well as a number of pharmacy and beauty outlets. The company, which is a retail subsidiary of Hong Kong conglomerate Hutchinson Whampoa, operates 500 PARKnSHOP-branded supermarkets and convenience stores across China, Hong Kong and Macau. Weaknesses Opportunities Threats A powerful parent company provides capital for sustained retail investment. A multi-format retail offering, incorporating both food and non-food retail, allows AS Watson to cater to a wider audience. AS Watson has incorporated aspects of traditional Hong Kong retailing into its offering which has appealed to local consumers. Price competition remains a barrier to strong profitability. Hong Kongs tiny geography restricts widespread expansion, while a small population limits sales potential. AS Watson has enjoyed success with its innovative retail offerings e.g. International by PARKnSHOP and further launches would most likely also meet with a positive reception. A reputation for innovation has encouraged consumer loyalty and put AS Watson at the forefront of retail trends such as green retailing. The companys private label brands continue to appeal to value sensitive shoppers. Uncertain operating costs could undermine profits at a time when price competitiveness is already high and margins are already pressured. Global headwinds could impact Hong Kongs export outlook and potentially weigh on domestic demand.
Strengths
Strategy
AS Watson has a defined strategy for growth in Hong Kong prematurely spotting the changing needs of the increasingly affluent population and its changing perceptions of what represents convenience and quality. By spotting trends early, the company believes it is better positioned than its rivals to introduce new products and services into its stores and to become synonymous with retail innovation. To this end, the company has been very early to spot the trend towards ethical consumerism, holding regular Green Days in its stores, while it also unveiled a new store concept in 2007. For financial year ending December: Retail division sales 2010: HKD123.2bn Sales 2011: US$18.5bn, +17% y-o-y Operating profit 2011: US$1.19bn, +19% y-o-y
Company Data
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Demographic Outlook
Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting model. Not only is the total population of a country a key variable in consumer demand, but an understanding of the demographic profile is key to understanding issues ranging from future population trends to productivity growth and government spending requirements.
The accompanying charts detail Hong Kong's population pyramid for 2011, the change in the structure of the population between 2011 and 2050 and the total population between 1990 and 2050, as well as life expectancy. The tables show key data points from all of these charts, in addition to important metrics including the dependency ratio and the urban/rural split.
Source: World Bank, UN, BMI
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Table: Hong Kong's Population By Age Group, 1990-2020 ('000)
1990 Total 0-4 years 5-9 years 10-14 years 15-19 years 20-24 years 25-29 years 30-34 years 35-39 years 40-44 years 45-49 years 50-54 years 55-59 years 60-64 years 65-69 years 70-74 years 75+ years 5,794 381 435 428 437 488 622 619 495 389 237 260 263 235 191 139 174
1995 6,144 378 385 430 421 451 539 655 637 507 399 241 256 255 222 165 205
2000 6,783 316 410 441 459 444 509 603 701 668 544 413 270 259 255 208 284
2005 6,810 221 333 415 434 471 487 556 591 689 648 510 388 235 246 228 357
2010 7,053 229 220 363 465 447 495 523 567 595 700 653 510 387 228 223 447
2012f 7,196 278 211 311 454 475 495 526 555 575 662 688 568 437 277 211 474
2015f 7,431 307 262 240 387 502 498 546 554 580 599 699 650 503 376 216 510
2020f 7,803 335 338 280 261 421 551 549 581 573 590 603 696 639 486 353 547
f = BMI forecast. Source: World Bank, UN, BMI
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Table: Hong Kong's Population By Age Group, 1990-2020 (% of total)
1990 0-4 years 5-9 years 10-14 years 15-19 years 20-24 years 25-29 years 30-34 years 35-39 years 40-44 years 45-49 years 50-54 years 55-59 years 60-64 years 65-69 years 70-74 years 75+ years 6.58 7.51 7.39 7.55 8.42 10.73 10.68 8.55 6.72 4.08 4.49 4.55 4.06 3.30 2.39 3.01
1995 6.15 6.27 7.01 6.86 7.33 8.77 10.65 10.36 8.24 6.49 3.92 4.17 4.15 3.61 2.69 3.34
2000 4.66 6.05 6.50 6.77 6.54 7.51 8.88 10.34 9.85 8.02 6.09 3.98 3.82 3.76 3.06 4.19
2005 3.25 4.89 6.09 6.38 6.92 7.15 8.17 8.68 10.12 9.52 7.49 5.70 3.45 3.62 3.35 5.24
2010 3.25 3.12 5.14 6.59 6.34 7.02 7.42 8.04 8.43 9.93 9.27 7.23 5.49 3.24 3.16 6.34
2012f 3.87 2.93 4.32 6.30 6.61 6.88 7.31 7.71 7.98 9.20 9.56 7.89 6.07 3.86 2.93 6.58
2015f 4.13 3.53 3.24 5.21 6.76 6.71 7.35 7.46 7.80 8.06 9.41 8.75 6.77 5.06 2.91 6.87
2020f 4.29 4.33 3.59 3.35 5.39 7.06 7.04 7.45 7.35 7.56 7.73 8.92 8.19 6.23 4.53 7.01
f = BMI forecast. Source: World Bank, UN, BMI
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Table: Hong Kong's Key Population Ratios, 1990-2020
1990 Dependent ratio, % of 1 total working age Dependent population, 2 total, '000 Active population, % of 3 total Active population, total, 4 '000 Youth population, % of 5 total working age Youth population, total, 6 '000 Pensionable population, 7 % of total working age Pensionable population, 8 '000
1
1995 40.9 1,785 70.9 4,359 27.4 1,193 13.6 592
2000 39.3 1,914 71.8 4,870 24.0 1,167 15.3 747
2005 35.9 1,800 73.6 5,010 19.3 969 16.6 831

2
2010 32.0 1,710 75.8 5,343 15.2 812 16.8 899
2012f 32.4 1,762 75.5 5,435 14.7 800 17.7 962

3
2015f 34.6 1,912 74.3 5,520 14.7 809 20.0 1,102
2020f 42.8 2,339 70.0 5,464 17.4 952 25.4 1,387
43.2 1,749 69.8 4,045 30.8 1,245 12.5 504
f = BMI forecast; 0>15 plus 65+, as % of total working age population; 0>15 plus 65+; 15-64, as % of total 4 5 6 7 8 population; 15-64; 0>15, % of total working age population; 0>15; 65+, % of total working age population; 65+. Source: World Bank, UN, BMI
Table: Hong Kong's Rural And Urban Population, 1990-2020
1990 Urban population, % of total Rural population, % of total Urban population, '000 Rural population, '000 99.5 0.5 5,676.0 28.5
1995 100.0 0.0 6,156.1 0.0
2000 100.0 0.0 6,665.0 0.0
2005 100.0 0.0 6,813.2 0.0
2010 100.0 0.0 7,053.2 0.0
2012 100.0 0.0 7,196.4 0.0
2015 100.0 0.0 7,431.2 0.0
2020 100.0 0.0 7,803.1 0.0
Source: World Bank, UN, BMI
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Risk/Reward Ratings Methodology

BMIs 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 sectors 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 countrys 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$ Per-capita food consumption growth, five-year compound annual growth % Market Fragmentation Country Rewards Population size (mn) GDP per capita, US$ Indicator denotes size of market. 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. 0>15%, % of total working age population. Younger populations are generally considered to be more desirable. Indicator denotes overall breadth of market. Wealthier markets score higher. Lead Food & Drink growth indicator. Scores based on compound annual growth over our five-year forecast period. Subjective score reflecting how relatively developed the industry is. Higher score reflects a more fragmented industry.
Youth Population (%)
NB See Business Environment section for regional and country-specific ratings explanations. Source: BMI
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Table: Risks
Industry risks Mass Grocery Retail (MGR) Penetration, % Regulatory environment Country risks Short-term economic growth Income Distribution Lack of Bureaucracy Market orientation Physical infrastructure Rating from BMIs CRR. It evaluates likely growth trajectory over two-year forecast period, based on BMIs forecasts and projections of business and consumer confidence. Middle 60% of population, % of total spending. Higher score is an indicator of incomes being spread more equitably. From CRR. It evaluates the risks to business posed by official bureaucracy, the broader legal framework and corruption. Subjective rating from CRR to denote predictability of openness to foreign investment and trade. From CRR. Poor power/water/transport infrastructure act as bottlenecks to sector development. The proportional contribution of the organised food retailing sector, higher scores reflect better developed routes to consumers and more efficient internal trade systems. Subjective rating based on the industry-specific regulatory environment and the presence of potentially restrictive legislation. Low scores reflect a regulatory environment.
NB See Business Environment section for regional and country-specific ratings explanations. Source: BMI
Weighting
Table: Weighting
Component Rewards - Industry Rewards - Country Rewards Risks - Industry Risks - Country Risks
Weighting 60% 30% 30% 40% 20% 20%
See Business Environment section of report for regional and country-specific ratings explanation
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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 BMIs 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 BMIs 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 co-operative retailing. Where supermarkets are independently-owned and not classified as MGR, BMI will state so clearly within the relevant report.
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Hypermarket: BMI classifies hypermarkets as retail outlets selling both groceries and a large range of general merchandise goods (non-food items) and typically over 2,500m 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 300m, 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 500m and 1,500m 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: BMIs classification of convenience stores includes small outlets typically below 300m in size, with long opening hours and located in high footfall areas. These stores mainly sell fastmoving 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.
Co-operatives: BMI classifies co-operatives as retail stores which are independently owned but club together to form buying groups, under a co-operative 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 co-operatives remaining that conform to this model. Most co-operative groups now have a more centralised management structure, operate more like normal supermarkets, and are thus classified as such within BMIs reports
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BMI Food & Drink Forecasting & Sourcing

How We Generate Our Industry Forecasts
BMIs 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 BMIs 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.
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Example of Food Consumption Model: (Food Consumption)t = 0 + 1*(GDP)t + 2*(Inflation)t + 3*(Lending Rate)t + 4* (Foreign Exchange Rate)t + 5*(Government Expenditure)t + 6*(Food Consumption)t-1 + t
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 Organization (WTO), the World Health Organization (WHO), the United Nations Food and Agricultural Organization (FAO) and the Organisation for Economic Co-operation and Development (OECD).
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FOOD & DRINK REPORT

HONG KONG FOOD & DRINK REPORT 2013

Part of BMI's Industry Report & Forecasts Series

Hong Kong Food & Drink Report 2013

Business Monitor International Ltd

Hong Kong Food & Drink Report 2013

Business Environment .................................................................................................................................. 13

Industry Forecast Scenario ........................................................................................................................... 33

Business Monitor International Ltd

Hong Kong Food & Drink Report 2013

Mass Grocery Retail ....................................................................................................................................... 65

Competitive Landscape ................................................................................................................................. 72

Company Monitor ........................................................................................................................................... 75

Demographic Outlook .................................................................................................................................... 89

Risk/Reward Ratings Methodology .............................................................................................................. 93

Business Monitor International Ltd

Hong Kong Food & Drink Report 2013

BMI Food & Drink Industry Glossary ........................................................................................................... 95

BMI Food & Drink Forecasting & Sourcing ................................................................................................. 97

Business Monitor International Ltd

Hong Kong Food & Drink Report 2013

Business Monitor International Ltd

Hong Kong Food & Drink Report 2013

BMI Industry View

Headline Industry Data (local currency)

Business Monitor International Ltd

Hong Kong Food & Drink Report 2013

Business Monitor International Ltd

Hong Kong Food & Drink Report 2013

Business Monitor International Ltd

Hong Kong Food & Drink Report 2013

Hong Kong Drink Industry SWOT

Business Monitor International Ltd

Hong Kong Food & Drink Report 2013

Business Monitor International Ltd

Hong Kong Food & Drink Report 2013

Hong Kong Mass Grocery Retail Industry SWOT

Business Monitor International Ltd

Hong Kong Food & Drink Report 2013

Spike In Prices Select Grains Price Rebased (1 June 2012 = 100)

Source: BMI, Bloomberg

Business Monitor International Ltd

Hong Kong Food & Drink Report 2013

Emerging Market Expansion

Business Monitor International Ltd

Hong Kong Food & Drink Report 2013

US Food Firms Lag Behind Revenues From Emerging Markets (%)

Source: BMI, Nestl, Investor relations

Business Monitor International Ltd

Hong Kong Food & Drink Report 2013

Frontier Markets Increasingly Attractive

Developed Market Consolidation

Business Monitor International Ltd

Hong Kong Food & Drink Report 2013

Emerging Markets Buying Developed

All Eyes On Indian Retail

Business Monitor International Ltd

Hong Kong Food & Drink Report 2013

Business Monitor International Ltd

Hong Kong Food & Drink Report 2013

The Power Of Innovation Nespresso Sales Growth

Source: Investor relations