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Russia Food and Drink Report Q4 2008
Business Monitor International, Nov 2008, Pages: 78
Russia Food Drink Report provides independent forecasts and competitive intelligence on Russia's food and drink industry.
The mettle of foreign investors in the Russian food, beverages and mass grocery retail (MGR) sector has been sorely tested in recent months and BMI believes that conditions will get tougher in the short run before returning to the previous growth dynamic sometime in early 2009. The consequences of the war in Georgia should not be overstated, but the consequences will include delayed World Trade Organisation (WTO) membership, visa spats and other irritants short of sanctions. However, for Russian food company executives and their shareholders, the biggest worries are not international quarrels, but rather the macroeconomic situation, falling stock markets and a shortage of credit.
At first glance, it is difficult to see why the economy is generating such worries. Russia’s GDP grew by 8.5% in the first quarter and is on pace to deliver the highest growth since 2000. BMI’s US dollar growth forecast reflects what we believe are relatively solid fundamentals and sees 148% growth predicted for the food and drink market as a whole for the period 2007 to 2012, and 123% for the MGR market. At the same time, consumer price inflation (CPI) is a major concern, coming in at 14.7% in July. Russian consumers in regional markets outside of Moscow have been feeling the pressure of food-price inflation and are eschewing higher-cost and higher value-added products. For food producers this translates into falling profits, a factor that will intensify towards the end of the year when many inputs, especially raw milk, become even more costly.
Falling stock markets complicate plans by many mid-sized players in the food, beverage and MGR sector to raise funds on Russian and foreign stock exchanges. Russian markets were down by around a third for the year in early September and some players, such as food and beverages company Wimm-Bill-Dann, have seen their share price cut by more than half from annual highs, despite delivering solid growth and decent profitability in Q208 results reported in August. Tight credit markets also mean that companies are having a tough time raising funds needed for further expansion. So far defaults on existing debt have been few and far between, most by notably mid-sized MGR player Marta, local hypermarket group Alpi and agricultural groups Derzhava and Gotek.
The longer term impact of the Georgian conflict will likely be trade ties. WTO membership appears to be on indefinite hold. This delay will see damaging tariffs and rules stay in place. The war also signalled that Prime Minister Vladimir Putin and his most hawkish allies remain in charge. He is most likely to pursue further investigations through the powerful Federal Antimonopoly Service on leading food producers and retailers to cut the biggest players down to size. His backers may also favour fighting inflation by leaning hard on large food producers and retailers to keep prices low. Investors hoping that President Dmitry Medvedev would impose a more liberal approach to regulation have yet to see their hopes realised. Meanwhile, ideas such as the Ministry of Agriculture’s proposals to impose a Canadian-style regulated ‘cartel’ of milk producers or the much delayed new law restricting retail opening times suggests that interventionism, large and small, will remain a policy hallmark for the foreseeable future.
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