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Venezuela Food and Drink Report Q3 2011
Business Monitor International, June 2011, Pages: 76
The Venezuela Food and Drink Report provides industry professionals and strategists, corporate analysts, food and drink associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on Venezuela's food and drink industry.
In BMI’s view Venezuela's economic recovery from its two-year recession will be shaky, as they expect positive real GDP growth to be accompanied by chronic inflation, more nationalisations and stagnant oil production. Given that these factors are likely to weigh on private consumption, BMI believes that the majority of economic expansion will be fuelled by higher oil prices and the resulting uptick in petroleumrelated activity. That said, the recent increase in oil prices should have a positive impact on private consumption, particularly as the state will be able to fund an increasing volume of direct transfers.
Private consumption also stands to benefit from a gradual decline in inflation over the coming years. Indeed, even though inflation will remain elevated, given that it is such a politically sensitive issue, we believe that Chávez will be particularly aggressive with his subsidies and price caps in order to rein in the headline figure in the run-up to the presidential election in 2012.
Key Forecasts
- 2011 per capita food consumption (US$) = +7.5%; forecast to 2015 = -36.2%
- 2011 alcoholic drink sales (US$) = +4.4%; forecast to 2015 = -32.4%
- 2011 soft drink sales (US$) = +2%; forecast to 2015 = -42.2%
- 2011 mass grocery retail sales (US$) = +3.9%; forecast to 2015 = -38.7%
Key Company Trends and Developments
Currency Devaluation Increases Risk of Food Appropriations – In line with our expectations, the Venezuelan government devalued the bolívar at the start of 2011 by unifying the 'essential goods' rate of VEF2.6000/US$ with the higher 'non-essential' VEF4.3000/US$ rate. This has implications for the food and drink sector, weaker currency potentially putting more pressure on margins, with producers no longer able to import raw materials at the 'essential goods' rate and the possibility of higher inflation putting further pressure on the government to take control of production through appropriations.
Mercal Expanding – With local production flailing, the government is taking a greater role in food distribution to ensure demand is met. This is being largely orchestrated by state-owned retail chain Mission Mercal. Huge subsidies mean that Mission Mercal is able to offer food to the country’s poorer regions at substantial discounts on the market price. In autumn 2010, Venezuelan President Hugo Chávez announced that the domestic population had saved roughly VEB21bn since 2003 due to the prices provided by Mercal. The number of Mercal outlets nationwide has reached 16,000, with the network distributing 10mn tonnes of food on an annual basis.
Key Risks to Outlook
Shift in oil prices –The risk to our outlook also depends on the trajectory of global oil prices. On the one hand, higher-than-expected prices in 2011 and beyond could provide a significant boost to the state's coffers, increase the supply of dollars in the economy and stimulate private consumption. On the other hand, while not our core scenario, lower-than-expected prices could do the opposite, and could even drag the economy back into recession again. Elsewhere, we see political risks in the run-up to the election as a major risk to our outlook. While it is too early to determine exactly what will unfold in Venezuela over the next couple of years, we caution that the scope for political unrest could still derail this fragile economic recovery.
Inflationary unrest – With one of the highest rates of inflation in the world, we expect worker strikes within the private sector to be a persistent feature of Venezuela's landscape in the medium term. The recent strikes at both Coca-Cola FEMSA and Heinz plants highlight this negative aspect of the country's risk profile. While we are a forecasting improvement in the rate of inflation, we believe the rapid pace of price rises will still be enough to fuel a considerable amount of worker discontent over the coming year.
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