Vietnam Food & Drink Report INCLUDES BMI's FORECASTS

Q3 2011 www.businessmonitor.com

VietnAM food & Drink Report INCLUDES BMI'S FORECASTS

ISSN 1749-3072 Published by Business Monitor International Ltd.

Vietnam Food & Drink Q3 2011

INCLUDES BMI'S 5-YEAR FORECASTS

Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: April 2011

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Vietnam Food & Drink Q3 2011

CONTENTS

BMI Industry View ...... 7

SWOT ...... 9 Drink Industry SWOT ...... 9 Food Industry SWOT ...... 10 Grocery Retail Industry SWOT ...... 11 Industry Business Environment Overview ...... 12 Global Food & Drink View ...... 12 Commodity Prices Pressuring Margins ...... 12 Signs Of A Consumer Recovery In Developed Markets ...... 13 Emerging Markets Look Ever More Attractive ...... 14 Big Deals Could Be Back On The Agend ...... 16 Table: BMI FOOD & DRINK CORE VIEWS ...... 17 Asia Pacific Risk/Reward Ratings ...... 18 Table: ASIA PACIFIC FOOD & DRINK RISK/REWARD RATINGS -Q3 2011 ...... 23 Vietnam Food & Drink Business Environment Rating ...... 25

Consumer Outlook ...... 27

Industry Forecast Scenario ...... 31 Food ...... 31 Table: Table: Vietnam Food Consumption Indicators ...... 32 Table: Table: Vietnam Canned Food Sales ...... 33 Table: Table: Vietnam Confectionery Sales ...... 33 Table: Table: Vietnam Food & Drink Trade Indicators ...... 35 Drink ...... 35 Table: Table: Vietnam Alcoholic Drink Sales and Sales Growth ...... 36 Table: Table: Vietnam Hot Drink Sales ...... 37 Table: Table: Vietnam Soft Drink Sales and Sales Growth ...... 39 Mass Grocery Retail ...... 39 Table: Table: Vietnam MGR Indicators - Value Sales by Format - Historical Data & Forecasts ...... 41 Table: Grocery Retail Sales by Format - Historical Data & Forecasts (%) ...... 42 Food ...... 43 Industry Trends And Developments ...... 43 Market Overview ...... 45 Drink ...... 47 Industry Trends And Developments ...... 47 Market Overview ...... 49 Mass Grocery Retail ...... 51 Industry Trends And Developments ...... 51 Market Overview ...... 52 Table: Structure Of Vietnam's Mass Grocery Retail Market By Estimated Number Of Outlets ...... 54 Table: Structure Of Vietnam's Mass Grocery Retail Market - Sales Value By Format (US$mn) ...... 54

Table: Structure Of Vietnam's Mass Grocery Retail Market - Sales Value By Format (VNDbn) ...... 55 Table: Average Sales Per Outlet By Format - 2010 ...... 55 Competitive Landscape ...... 56 Food ...... 56 Table: Key Players in Vietnam's Food Sector - 2011 ...... 56 Drink ...... 56 Table: Key Players in Vietnam's Drink Sector - 2011 ...... 56 Mass Grocery Retail ...... 57 Table: Key Players in Vietnam's Mass Grocery Retail Sector - 2011 ...... 57 Company Analysis ...... 59 Unilever Vietnam ...... 59 Nestlé Vietnam ...... 61 Masan Consumer ...... 63 Vietnam Dairy Products Joint Stock Company (Vinamilk) ...... 65 San Miguel Pure Foods (VN) Co Ltd ...... 67 Hanoi Beer Alcohol Beverage Corp (Habeco) ...... 69 Saigon Beer Alcohol and Beverage Corporation (Sabeco) ...... 71 Carlsberg ...... 73 Metro Cash & Carry ...... 75 Saigon Co-op ...... 77 Methodology ...... 79 Risk/Reward Ratings Methodology ...... 79 Ratings System ...... 79 Indicators ...... 79 Table: Returns ...... 79 Glossary ...... 81 Food & Drink ...... 81 Mass Grocery Retail ...... 81 BMI Food & Drink Forecasting and Sources ...... 83 How We Generate Our Industry Forecasts ...... 83 Sourcing ...... 84

BMI Industry View

A large, youthful population and a rapid influx of foreign direct investment as firms seek to take advantage of this favourable demographic picture underline the enormous potential of Vietnam's food, drink and mass grocery retail markets, as evidenced by our latest industry forecasts. Investment will continue to flow into the industry, helping to drive double-digit annual sales growth across many market sub-sectors, especially given the level of maturity being reached within sectors of the industry in other South East Asian markets. That said, we note that an inflationary environment and government measures to stem inflation and put economic growth on a more sustainable footing could serve to undermine demand in the short term.

Headline Industry Data

• Food Consumption will grow by 72.3% to 2015, albeit from a very low base thanks to rising consumer affluence and the ongoing spread of mass grocery retail

• We have revised up our 2011 Vietnam beer consumption forecast from high single digits to 17.7% on the back of sustained industry investment and the strong performance of leading industry players

• To 2015 we expect mass grocery retail sales to increase by 54.1% (2011 growth is forecast at 15.9%), with hypermarkets set to be the outperformers in growth terms

Key Industry Trends

Weaker Retail Sales Data - Vietnamese retail sales of goods and services rose by 22.6% year-on-year in Q111 to reach VND451.8trn. Adjusted for inflation, which remains elevated, sales increased by 8.7%. The inflation-adjusted increase is far lower than the growth rate experienced for the same period of 2010 and 2009 (24.1% and 14.4% respectively). Weaker growth has been attributed to the severity of inflationary pressures and the impact this has had on consumer spending power. A number of retailers have already unveiled measures that attempt to address this problem by launching significant promotional campaigns, offering discounts across a range of daily essential items (among them are Big C and Lotte Mart) in an attempt to show that they are sharing the burden of elevated costs with consumers and thus retaining consumer loyalty.

Inflation Remains A Concern - The inflationary burden on the Vietnamese consumer is getting heavier. With Brent crude prices reaching highs not seen since mid-2008, Vietnamese manufacturers and suppliers have increased their sale prices, as they contend with soaring electricity and fuel prices. In response to the respective 20% and 15% increases in petrol and electricity prices announced by the government, the majority of Vietnamese manufacturers and suppliers raised their sale prices from March 1 2011. Faced with

the threat of surging transportation costs and sale prices from manufacturers, Vietnamese retailers have hiked prices of perishable products, which are directly exposed to petrol and electricity price increases, by 10-18%. On the other hand, prices of non-perishable goods, which bear indirect influences from inflationary trends in fuel and electricity, have been increased by 5%.

Key Company Trends

Largest Ever PE Deal - Global private equity (PE) firm Kohlberg Kravis Roberts & Co (KKR) has agreed to acquire a 10% stake in Vietnamese consumer goods producer Masan Consumer. Vietnam is emerging on the radars of PE investors looking to entrench themselves in the favourable consumer plays of emerging markets (EMs). KKR has agreed to acquire the stake in Masan Consumer, the largest producer of condiments like fish, soy and chilli sauce and the second biggest producer of instant noodles in Vietnam, for US$159mn, marking the largest PE investment in the country. Masan Consumer is a subsidiary of Masan Group, one of the largest private sector conglomerates in Vietnam. Upon completion of the acquisition, Masan Group's equity stake in Masan Consumer will decrease from 86.6% to 78%.

Key Risks to Outlook

We remain concerned that excessive monetary tightening in an attempt to battle rising inflationary pressures could result in a hard landing for the Vietnamese economy. Nonetheless, inflation remains a problem that must be tackled. Manufacturers have already had to implement a number of price hikes and while larger retailers have tried to counter the impact of these via loyalty problems, they will not be able to profitably sustain these indefinitely, meaning higher costs will have to be passed on to consumers.

SWOT Drink Industry SWOT

Vietnam Drink Industry SWOT

Strengths • Vietnamese consumers, particularly the young and affluent, are interested in brands, and, accordingly, renowned Western products backed by investment in marketing and promotions tend to have highly successful launches.

• The wealthy urban centres of Hanoi and Ho Chi Minh City now provide highly receptive consumer audiences.

• Alcoholic drinks are widely consumed and have gained popularity in recent years.

• Vietnam has been one of the fastest-growing economies in Asia in recent years, with GDP growth averaging 7.6% annually between 2000 and 2009

Weaknesses • There are wide income disparities between urban and rural areas, and local consumption patterns vary significantly according to income.

• The drinks industry remains largely fragmented except for a few key sectors, such as alcoholic and soft drinks.

• Vietnam's infrastructure is still weak. Roads, railways and ports are inadequate to cope with the country's economic growth and links with the outside world.

Opportunities • Accession to the WTO, in January 2007, will continue to benefit Vietnamese exporters, with the gradual removal of market barriers and trade restrictions set to increase competition.

• Vietnam's large domestic market, growing export opportunities and low labour costs, as well as the prospect of acquiring newly privatised drink companies, offer further investment opportunities.

• A growing tourism sector is fuelling interest in convenience categories, in addition to sub-sectors such as soft and alcoholic drinks.

• In line with consumers' rising disposable incomes, there are opportunities for premium-branded products in the soft and alcoholic drinks sub-sectors.

• The global trend towards health-consciousness provides an opportunity for drinks manufacturers to diversify into perceived healthier options.

Threats • Vietnam's WTO membership may result in smaller companies unable to cope with the increased competition being forced out of business.

• Rising raw-material costs threaten profitability in this competitive market in which higher prices cannot easily be passed on to consumers.

Food Industry SWOT

Vietnam Food Industry SWOT

Strengths • The food-processing sector accounts for a sizeable proportion of industrial output and GDP, with the sector attracting significant foreign investment in recent years from the likes of Unilever, Nestlé and San Miguel.

• Vietnamese consumers, particularly the young and affluent, are interested in brands and, accordingly, renowned Western products backed by investment in marketing and promotions tend to have highly successful launches.

• The wealthy urban centres of Hanoi and Ho Chi Minh City now provide highly receptive consumer audiences.

• Large and diverse domestic agricultural output aids the stability of ingredient supplies and prices for local producers -- a vital strength during this period of global volatility.

Weaknesses • There are wide income disparities between urban and rural areas, and local consumption patterns vary significantly according to income.

• The food-processing industry remains largely fragmented except for a few key sectors, such as dairy and confectionery.

• The country's agricultural sector has been criticised for being too slow to adapt to new technologies to be globally competitive in the long term, although the government is working hard to address this.

• Vietnam's infrastructure is still weak. Roads, railways and ports are inadequate to cope with the country's economic growth and links with the outside world.

• The lack of white goods among large sections of the consumer base slows down the development of the high-potential dairy sector

Opportunities • Accession to the WTO continues to benefit Vietnamese exporters, with the gradual removal of market barriers and trade restrictions set to increase competition.

• Rising income levels and changing lifestyles, particularly in urban areas, are increasing consumer demand for snacks, convenience and luxury food items.

• Vietnam's large domestic market, growing export opportunities and low labour costs, as well as the prospect of acquiring newly privatised food companies, offer further investment opportunities.

• The country's agricultural sector is in need of significant investment and willing investors can expect assisted entry.

• A growing tourism sector fuels interest in convenience categories

Threats • Vietnam's WTO membership may result in smaller companies unable to cope with the increased competition being forced out of business.

• Rising commodity costs will remain a risk for the profitability of processed-food manufacturers; farmers themselves also claim this as a threat, with the primary level reportedly seeing little in the way of these higher prices.

Grocery Retail Industry SWOT

Vietnam Mass Grocery Retail Industry SWOT

Strengths • The potential size of the MGR market makes it an attractive target for foreign retailers once improved market terms are granted. Further growth is expected, especially in the supermarket format.

• Hypermarkets, supermarkets and convenience stores have all proved popular in Vietnam, catering to different types of consumers and different shopping occasions.

• A growing multinational presence in the retail sector has aided the acceptance of modern retail best-practices in Vietnam, particularly things like added-value in-store services.

• The formation of buying groups has proved an effective means of facilitating quicker expansion among smaller industry players.

Weaknesses • Vietnam's retail distribution networks remain underdeveloped and expansion-oriented firms must invest in infrastructural development as well as new store openings.

• Regulations governing international participation in modern retail in Vietnam have resulted in slow rates of expansion, and aspects of government policy continue to make life challenging for foreign firms in spite of WTO accession.

• Poverty levels among the country's vast rural population hugely inhibit the potential audience size for modern retail in Vietnam.

■ .

Opportunities • The hypermarket concept is still in its infancy and, as familiarity with modern retailing grows, this format will represent an immense growth opportunity.

• Modern retail is currently focused on the major urban centres of the north and south, which still boast space for new entrants, and central Vietnam and the provinces provide further opportunities still.

• Modern retail concepts, such as discounting and private labelling, should prove popular with price-conscious Vietnamese consumers as familiarity with modern retailing builds.

• Rapid urbanisation and the development of new housing complexes provide ideal locations for the rolling out of modern retail outlets with a large and receptive audience.

Threats • Were industry majors Tesco, Carrefour and Wal-Mart all to enter Vietnam, the window of opportunity for other entrants would rapidly close.

• Rising operating costs will threaten retailer profit margins; with it difficult to pass price increases on to consumers in such a price sensitive environment.

Industry Business Environment Overview Global Food & Drink View

Developments within the global food and drink industry in the past three months have continued to reflect and support BMI's core industry views. Of particular importance in the last quarter has been the impact of rising commodity prices - a factor that BMI was particularly quick to recognise was likely to impact margins and also the valuation of food and drink firms. Rising global prices are also becoming an increasingly important factor in emerging markets, where surging inflation threatens to undermine confidence and put downwards pressure on growth in spending power.

Over the quarter we have seen encouraging signs of a consumer recovery in several important developed markets, including the US, Germany and France. However, we expect high unemployment, fiscal austerity measures and looming rate hikes to put pressure on growth rates over the longer term. Growth in emerging markets has continued to impress and for many firms has acted to offset the lacklustre rates of growth in developed markets.

Commodity Prices Pressuring Margins

In October 2010 the food and drink team wrote Underperfoming that 'the weakness of the consumer recovery Stoxx Global 1800 F&B Index vs Stoxx Global 1800 and the increase in commodity prices mean that there is significant potential for the food sector to underperform the wider equity index'. This view has played out extremely well, with the Stoxx Food and Beverage Index significantly underperforming the Global Index in the past four months (see first chart). The accuracy of this prediction can be partly linked to our correct view on commodity prices. In October, the commodities team expected grain prices to continue moving higher due to a significant deterioration in northern hemisphere harvests, Source: BMI, Reuters which was expected to have a knock-on effect on other important inputs such as dairy and meat. The situation has played out very much in line with this prediction, with food commodities outpacing the wider commodity index over the past six months.

Most major food groups have now reported their results for the fourth quarter of 2010 and they tell a clear story, with margins falling due to rising costs. In response food groups have announced that they will begin to raise prices more aggressively in 2011 and firms such as Unilever have suggested that they have learnt from the experience of 2008, when they priced up and down effectively. However, BMI is concerned that the consumer environment could make price increases harder to implement than in the past, with the slow pace of economic recovery continuing to weigh on consumer confidence and with retailers very reluctant to accept price increases. In addition, since 2008 consumer savviness has increased in many important markets - for example private labels and discount stores have made huge strides in the US and parts of Europe where they had previously had little presence, such as in Spain and Italy, meaning that any attempt to pass on price increases could simply strengthen the trend towards lower priced products and retail formats.

A general ramp up in commodity prices, including in a sharp increase in the price of energy, has acted to drive up inflation in both developed and emerging markets. This has led to a general move towards hawkishness among central banks. In emerging markets, food inflation has been particularly rampant, with double-digit levels of growth seen in many parts of the market. Given the disproportionate impact of rising prices on poorer sections of societies in countries such as China and Brazil, such governments are under pressure to cool down their economies and they have already begun raising interest rates. We are pencilling in further rate hikes in these and several other important emerging markets including India and Indonesia over the coming year, which will put downwards pressure on growth momentum.

Signs Of A Consumer Recovery In Developed Markets Slow Improvement

Unemployment (% of labour force, year average) In line with our expectations the consumer sector in developed markets struggled to deliver significant growth through much of 2010, with price sensitivity the preeminent theme and private labels and the discount sector gaining ground. However, there were some positive signs starting to emerge towards the end of the year and we now believe that 2011 could be the real year of recovery. For example, in the US there were signs that the US discount sector - characterised by the firms Family Dollar and

Dollar General - which delivered dynamic f = BMI forecast. Source: BLS, BMI

growth during the downturn, started to slow towards the end of 2010.

BMI believes this lower rate of growth (combined with improving results at mainstream retailers) can be attributed to an upturn in consumer confidence in the second half of 2010, combined with an improved outlook for GDP growth in 2011. The big downside risks for the US economy in 2011 - that taxes rise and unemployment benefits are not extended - actually turned into a major upside surprise in December 2010, after Congress not only approved an extension of the income tax regime and unemployment benefits, but also cut payroll taxes by two percentage points. This improvement in the consumer outlook will be greeted warmly by most retailers, but for discount operators, which have thrived thanks to the weak economic environment, a stronger retail sector could actually have a detrimental impact on results. This is borne out by Family Dollar's sales growth slowing as 2010 progressed, with comparable sales in December climbing by just 4%.

A similar story was seen in Europe, where the movement towards discount stores seems to have peaked in many important markets, including Germany, the UK and France. Germany proved to be one of the country's best positioned to bounce back from the economic downturn and this has been reflected in the relative growth of the retail sector. For example, German retailer Rewe registered growth of 4% in its German sales during the year. This growth was driven by the company's supermarket outlets, with growth up by 6.4%, but was weighed down by the underperformance of the company's Penny discount stores, which registered a 1.2% contraction in revenues. The outperformance of the supermarket sector is in line with a strengthening of the domestic consumer market and is reminiscent of the two years leading up to the economic crisis, when questions were asked about the long-term prospects for the discount sector in the German market.

Emerging Markets Look Ever More Attractive

Despite these signs of recovery in developed markets, we continue to believe that the pace of growth in the consumer sector over the next five years is unlikely to match the boom levels seen in the years leading up to the financial crisis. Fiscal austerity measures are only now starting to be felt by the average consumer, while rising inflation means that consumers may also soon have to contend with rising interest rates and mortgage repayments. Unemployment across the US and eurozone is also remaining stubbornly high and looks unlikely to fall significantly until we are some way into the economic recovery. BMI has a relatively pessimistic outlook for employment in the US, believing that the credit boom actually masked massive structural problems in the US economy, for which there is no quick fix. Because of this, we are forecasting that unemployment will not go back to its pre-crisis lows over the next ten years (see second chart).

Taken together this relatively muted outlook for demand over the longer term serves to underline our core view regarding the importance of emerging markets (EM). Over the past three months this strategy has once again been in the spotlight. At 2011's CAGNY investment conference a large number of firms focused on the potential for growth in EM. US multinationals have in general been slower than their European counterparts to embrace the EM opportunity (see third chart). However, this is gradually changing with firms such as Heinz and Campbell Soup all now paying much greater attention to their international operations.

Heinz was among the companies talking up its European Firms In Front potential for EM growth and used the

conference to announce an increase in its EM Revenues From Emerging Markets (%) targets. The firm now aims to generate 30% of its revenues from EM over the next five years, having previously had a goal of 20% by 2015. Heinz is a clear example of what can be achieved in a relatively short space of time through targeted investment in EM. In the final quarters of 2010, Heinz was generating nearly 18% of its sales from EM. This is up from just 14% in the previous financial year and demonstrates its rapid pace of expansion in this area, with the firm gaining significant ground in key markets such as China and Mexico. The Source: Nestle, Investor Relations, BMI Estimates speed at which concentrated efforts can deliver results is illustrated by the success of Heinz's ketchup brand in Mexico, where distribution agreements with leading retailers and fast food outlets have seen its market share increase from 1% to 12% in just two years.

Us-food group Kellogg was also talking up its EM growth potential, stating that it expects around two- thirds of its future growth to come from developing and emerging markets. This is likely to be built around organic growth due to the lack of a significant cereal culture in many of the most important EMs (a fact that means there are a very limited number of suitable EM targets) and Kellogg is focusing on generating growth by stimulating the overall category and per capita consumption of cereal in countries where it is not normally part of the diet. As an example, the firm is pushing its Special K brand in South Korea, Mexico and Colombia by focusing on its weight-loss benefits. Other firms focusing on the EM opportunity during the conference included coffee and jam maker JM Smucker and spice maker McCormick. Currently

Smucker generates nearly all of its revenues in North America, but used the conference to reveal it was exploring plans to enter the attractive Chinese market. The firm revealed it was exploring a number of avenues for market entry, including an acquisition of or partnership with a local firm. With a debt-to- EBITDA ratio of only 0.89, Smucker looks well positioned to make acquisitions and it has previously demonstrated an appetite for large-scale transformational takeovers.

Meanwhile, McCormick announced a target of generating 12% of its revenues from EM by 2015, which compares to 9% at present. The firm highlighted the tremendous opportunity in India, where consumers traditionally buy spices in bulk, but where middle-class consumers are increasingly 'seeking the higher quality and convenience of branded products'. With even medium-sized producers now seeking out acquisitions in EM, the battle to acquire attractive assets can only intensify, with a positive result for EM valuations. While acquisitions can be a straightforward way to gain EM exposure, particularly for firms that have little or none, the success of Heinz has also demonstrated the enormous amount that can be done by simply investing in distribution and marketing, with many developed market firms already in possession of brands and products that have enormous potential for growth in EM countries.

Big Deals Could Be Back On The Agend

Strong growth in EMs combined with a return to growth in developed markets means that many firms look to be feeling more confident about their long-term prospects and we believe that this could spur a significant ramp up in M&A activity in 2011. During much of 2010 there was a general attitude of caution, with firms waiting to see which way the global economy was moving before committing to any big deals. In Q111 we saw the first tentative steps in this direction, with PepsiCo purchasing a 66% stake in Russia's Wimm-Bill- Dann for US$3.8bn, General Mills looking set to buy a 50% stake in Yoplait for EUR800mn and Diageo agreeing to acquire Turkey's Mey Icki for US$2.1bn.

All of the major deals concluded by consumer groups in Q111 were bolt-on acquisitions and we are yet to see a return to the more transformative deals seen in the years leading up to the financial crisis, such as InBev's acquisition of Anheuser-Busch or Pernod Ricard's purchase of Absolut Maker Vin & Spirit. However, with economies of scale such an important force in the food and drink sector, these kinds of deals are sure to eventually re-emerge and we think that they could once again be on the cards in 2011. Firms that we think are in a strong financial position to fund major acquisitions during 2011 include Diageo, Nestlé and SABMiller, with acquisitions seen as a viable way to prop up relatively lacklustre sales growth in developed markets.

One of our long-term core views is that multinationals with balanced developed and EM portfolios are best positioned for growth. For EM-based firms this means that we see acquisitions in developed markets are a

priority as they look to develop better rounded companies with less volatile earnings. This trend has been evident over the last six months with Colombia's largest food company Grupo Nacional de Chocolates announcing it is to purchase US cookie producer Fehr Foods for US$84mn, while Chilean wine producer Concha y Toro is to buy California-based Fetzer Vineyards from US drinks firm Brown Forman. This follows on from Mexican bakery firm Grupo Bimbo announcing in November it is to acquire Sara Lee's North American bakery business for US$925mn and is a trend that we expect to gather pace as major firms in the EMs of Asia and Latin America start to look to develop businesses that can truly compete on a global scale.

Table: BMI FOOD & DRINK CORE VIEWS

Short-term Outlook Higher input costs will affect margins and raise tensions between producers and retailers Rising inflation will put pressure on demand in emerging markets Developed market growth returning but unlikely to match levels seen years leading up to the financial crisis due to: Government fiscal policy - austerity Government monetary policy - increasing likelihood of rate hikes due to rising inflation Long-term Outlook MNCs with balanced developed and EM portfolios are best positioned for growth Companies with strong Emerging Market exposure will continue to outperform Multinationals will increasingly pursue frontier market investments Investment in innovation will increase as producers seek differentiation; emphasis will be placed on protecting innovations Brand builders will continue to leave sectors under threat from private labels 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 be the highest growth sector in developed markets Consolidation will continue as producers seek greater efficiencies Beverage companies will continue to invest in diversification away from carbonated beverages and into healthier sub- sectors

Source: BMI

Asia Pacific Risk/Reward Ratings

The 9.0 magnitude earthquake and tsunami that struck Japan on March 11 2011 has inevitably placed a damper on the country's investment appeal. Although Japan was top in our Q211 Asia Pacific food and drink (F&D) risk/reward ratings, thanks to an enviable balance of a low-risk operating environment and high consuming levels, the recent spate of natural catastrophes in Japan saw the country slip to the second position this quarter. Indeed, the extensive damages caused to Japan's transport infrastructure and tough domestic picture are likely to keep potential investors at bay in the near term, thus dimming the attractiveness of Japan.

Meanwhile, high-growth economies such as China, India and Indonesia continue to feature strongly in our risk/reward ratings, underlining the massive abundance of opportunities in Asian Pacific emerging markets (EMs). More noteworthy of mention is, however, the upward shifts in rankings for India and Indonesia. We have repeatedly stressed that the developed economies of the Asia Pacific region will gradually lose their investment appeal over the coming decades as opportunities for long-term growth dwindle, and our updated risk/reward ratings for this quarter bear out this view.

Quake Deals Japan A Blow, China Now Tops

The recent dynamics in Japan has tipped the country off its top spot in our Q311 Asia Pacific F&D risk/ reward ratings. Japan's risk/reward rating score has declined from 63.7 in the last quarter to 61.8 presently, implying a shaky operating environment for consumer goods investors.

Tough-looking Domestic Demand Picture For 2011

Japan: Food Consumption Growth, % chg y-o-y and Private Consumption Growth, % chg y-o-y

Source: Cabinet Office, BMI

I n terms of rewards, domestic F&D players clearly face a challenging year ahead in delivering revenue growth given that consumers are likely to put a cap on their discretionary spending and load up on daily essentials. With the premiumisation trend taking a back seat over the course of 2011, the prospect of reaping strong near-term returns on investments looks particularly subdued, in our view (see chart).

In terms of investment risks, under the assumption that the nuclear situation will continue to stabilise, the devastation effects from the earthquake and tsunami should serve up significant near-term challenges for consumer goods manufacturers. Consumer goods players in affected regions are likely to scale back their production in the near term, both due to the loss of capacity or energy shortages and in order to use their retained earnings to rebuild facilities.

While the near-term dynamics bode poorly for Japan, investors are also likely to lose interest in the country over the longer horizon due to its limited prospects for growth and high level of market maturity. Yes, Japan's high F&D consumption levels, well-developed labour force and low levels of bureaucracy will remain strong attractions for investors but realistically the market is mature and clearly would not be the best place to search for solid long-term revenue growth.

China Tops Our Chart

Asia Pacific Food & Drink Risk/Reward Ratings - Q3 2011 y

Source: BMI. Scores Out Of 100, with 100 highest. For full methodology see Appendix at the back of our Food & Drink Quarterly Reports, or visit our online service

Contrastingly, China continues to represent one of the region's most exciting growth opportunities (see chart). The positive qualities of dynamic economic growth, favourable demographic profile and strong forecast growth in F&D consumption levels will continue to count in China's favour from a rewards point of view. On the risks side, China's relatively well-developed infrastructural systems as compared to its regional

developing market peers and sturdy near-term economic fundamentals further accentuates the country's reputation as an enticing foreign direct investment (FDI) destination. This healthy balance of risk to reward ensures that China remains one of the largest recipients of foreign investment and also explains its top position in our rankings.

Developed Countries Still South Korea: A Healthy Risk/Reward Balance Dominating the Upper-Half Spots

Asia Pacific Food & Drink Risk/Reward Ratings - Q3 2011 A feature of our ratings has long been how developed states have managed to secure a number of the top spots in our ratings - Japan, Australia and South Korea in particular being regular occupiers. A combination of solid spending levels and low-risk business environments remains a major boon behind these economies' investment attractiveness, thus allowing them to hold on firmly to their higher-ranking spots. Source: BMI

To be sure, a detailed examination of South Korea's ratings breakdown is illustrative of the importance striking a balance between risks and rewards. Although South Korea's rewards score is on par with the regional average of 54, the country's higher risks score of 72 offset the country's relatively low prospects for investment returns, enabling it to secure the fifth spot in our ratings (see chart).

Even though the maturity of the F&D sectors in Australia and South Korea means that these markets offer only a modest scope for growth, they have the benefit of high spending levels, which are proving very supportive of premiumisation. The developed market consumer, while already enjoying high levels of incomes, will continue to trade up to ever higher value and innovative products, and this presents dynamic opportunities for producer sales growth.

A favourable risk profile is another positive underpinning the investment appeal for Australia and South Korea. These countries have better developed infrastructure, a higher skilled workforce and more open financial and business systems.

Fast-Growing EMs Closing The Gap

While the likes of Australia, Japan and South Korea are likely to stay put in their top-ranking positions in the near-to-medium term, we acknowledge that the Asian Pacific EMs are quickly catching up with their developed market counterparts.

We like the long-term promise of domestic-demand oriented countries such as India, Indonesia and Vietnam, which backed by massive consumer bases, provides dynamic long-term growth potential for consumer-facing players. Although the negative attributes of weak distribution and labour infrastructure, perceived excessive bureaucracy and corruption will remain key stumbling blocks to attracting foreign investment in these EMs, which explains their weak risks scores, these markets will continue to climb up our ratings ladder and potentially take over the leading positions from developed markets over the long horizon.

Specifically, India and Indonesia have overtaken Taiwan and moved up the rankings by one spot to the sixth and seventh position respectively in this quarter, underlining the countries' increasingly attractive investment appeal. At the bottom half of our risk/reward table, Vietnam and Malaysia are also closing the gap with their developed market peers.

Pakistan and Philippines Remain Markedly Different Fortunes Rooted

Asia Pacific Food & Drink Risk/Reward Ratings - Q3 2011 Both Pakistan and the Philippines clearly have a lot more work to do before they can join the ranks of their developing market peers such as Vietnam and Indonesia. Interestingly, however, both countries have markedly different fortunes in terms of risks and rewards.

For Pakistan, it has a remarkable performance in rewards terms but scores poorly on the risks aspect. Pakistan is a demographic behemoth with a large and Source: BMI young population and has barely

scratched the surface of its potential on the consumer side, with incomes generally still very low. However, Pakistan remains beset by challenges such as a destabilising insurgency, poor infrastructure and a chronic lack of electricity generation capacity, which drags down its overall ratings score.

The situation in the Philippines is just the opposite of Pakistan (see chart). The Philippines scores high on the risks aspect on the back of a favourable regulatory environment and reasonably-strong near-term economic fundamentals, but has yet been able to secure higher-ranking spots due to its low F&D consumption levels and food consumption growth.

Looking Ahead

China's ascent is unsurprising given the country's domestic demand credentials and we would expect it to retain this leading position over the coming decade. While we do not expect our developed states such as Australia and South Korea to fall away too quickly, further upwards movements by EMs such as India, Indonesia and Vietnam are likely over the coming years, in line with greater industry investment and improvements in domestic best practice, and in turn allowing them to close the gap with our developed markets. Pakistan's size and the fact that on a per capita GDP basis disposable incomes remain low, which translates into massive room for growth in F&D consumption levels, suggest that it has the potential to climb up our ratings table, but this remains a distant possibility given its structural shortcomings.

Table: ASIA PACIFIC FOOD & DRINK RISK/REWARD RATINGS -Q3 2011

Industry Country Industry Country Risk/Reward Regional Rewards Rewards Rewards Risks Risks Risks Rating Ranking China 55 65 60 65 68 67 62.1 1 Japan 52 63 58 65 75 71 61.8 2 Australia 56 61 59 60 74 68 61.5 3 Thailand 64 57 60 55 70 64 61.4 4 South Korea 50 57 54 70 73 72 59.1 5 India 50 69 60 60 51 54 58.1 6 Indonesia 52 65 58 65 51 57 58 7 Taiwan 55 50 53 70 71 71 57.9 8 Singapore 39 51 45 90 77 82 56 9 Hong kong 50 46 48 70 75 73 55.5 10 Vietnam 47 60 53 70 51 59 55 11 Malaysia 41 56 48 70 70 70 54.8 12

ASIA PACIFIC FOOD & DRINK RISK/REWARD RATINGS -Q3 2011 - Continued

Industry Country Industry Country Risk/Reward Regional Rewards Rewards Rewards Risks Risks Risks Rating Ranking Pakistan 58 64 61 30 38 35 53.1 13 Philippines 37 55 46 70 57 62 50.7 14 Regional Average 50 59 54 65 64 65 57.5 N/A

Source: BMI. Scores Out Of 100, with 100 highest. For full methodology see Appendix at the back of our Food & Drink Quarterly Reports, or visit our online service

Vietnam Food & Drink Business Environment Rating

Having languished near the Risk/Reward Profile Looking Increasingly Appealing

foot of our Food & Drink Vietnam Risk/Reward Ratings Scores vs Regional Average Risk/Reward Ratings for some years, Vietnam's huge long-term potential is beginning to become evident in its climb up our regional ratings table. The country now stands in 11th place out of 14 regional markets analysed in terms of the Risk/Reward ratio it offers investors. Source: BMI

Perhaps surprisingly for a market known to suffer from corruption and with still-weak physical infrastructure, Vietnam actually scores higher on Risks than it does in terms of Rewards. With both the aforementioned factors representing Country Risks, rather than industry-specific Risks, the country does underperform for this sub-indicator. However, its overall Risks score is pulled up by a relatively low risk industry environment. Of course, weak infrastructure is a major challenge for Food & Drink investors. However, the sector is open to foreign investors, which continue to play a key role in its growth and development, while ongoing privatisations have also shown the regulatory environment to be fairly open.

In terms of Rewards, Vietnam fares less well. Of course this is a very attractive market, with enormous long-term growth potential. The industry's immaturity, the size of the country's population, not to mention the fact that the country's demographics are highly appealing from an age perspective, all count in its favour - the latter in particular contributing to a reasonably good Country Rewards score. However, growth is coming from a very low base, with per capita food and soft drink consumption well below regional average, and this does mean that investors will not necessarily all be able to realise immediate returns on their Vietnamese investments.

That said, notwithstanding the low base from which growth is coming, we would expect Vietnam to continue its climb up the Ratings over the medium-term, as spending picks up and growth remains at hugely attractive levels.

Consumer Outlook

We remain concerned about the impact of spiralling inflation on consumer demand in Vietnam, with Q1 retail sales data providing some reason for caution. Nonetheless, we retain our view that in the long term the market is one of the most attractive investment opportunities in the South East Asian, and indeed, the Asia Pacific region. Low spending and demand, coupled with sector immaturity and a plethora of macroeconomic and demographic driving factors, make the Vietnamese consumer goods sector a high- growth prospect.

Weaker Than Usual

Vietnam Retail Sales of Goods and Services (% chg y-o-y)

Source: General Statistics Office

• Demographics - Vietnam boasts a population of 88.4mn and this is forecast to grow by 9.8% to 2020. Most exciting though is the country's demographic breakdown; 52.3% of the population were under 30 years old in 2010, which translates into a massive potential audience for consumer goods manufacturers which typically target younger groups.

Youth Heavy

Vietnam Population Breakdown by Age (mn people)

Source: World Bank

• Tourism - Despite suffering during the global financial crisis, Vietnam boasts a robust and high-growth tourist sector and arrivals provide an essential fillip for consumer goods sales, particularly sales of more expensive, premium products. Vietnamese tourist arrivals increased by 6.3% y-o-y to reach 460,000 in April. For the first four months of 2011 growth stood at 10.5% y-o-y.

• Immaturity - Unlike many other South East Asian markets, Vietnam still affords investors strong growth potential due to low existing consumption rates and low retail and branded food penetration. To give an example, organised grocery retail sales as a percentage of total grocery retail sales stands at 15% in Vietnam, compared to levels of between 40-70% elsewhere in South East Asia.

• FDI - Immaturity and strong growth potential mean that the sector continues to attract the attention of major consumer multinationals and expansionary regional players. Investments by these firms, particularly in terms of distribution, will drive sector growth.

• Wages - Vietnamese economic and private consumption growth are booming (the latter will average 6.3% annually over the next 10 years). Although coming from a very low base relative to its regional peers, strong economic growth and investment will drive wage growth, further benefiting consumerism.

• Premiumisation - While demand for premium items is currently confided to a very small group (and tourists), a lack of penetration in this area leaves enormous room for growth. Low-income consumers will gradually trade up to mass-market branded items and in turn existing consumers of mass-market goods

will gradually increase their discretionary spending on these products, creating opportunities for premium product sales.

The aforementioned factors and a relatively relaxed regulatory environment will stand Vietnam in good stead to attract investments from the world's major F&D players, which could further stimulate consumer interest in modern retailing methods and higher-value F&D products.

Singapore MGR operator NTUC Fairprice is the latest company to jump aboard the inbound investment bandwagon in Vietnam, joining the likes of South Korean retailer Lotte, Japan's FamilyMart and German retailer Metro as it looks to capitalise on the country's emerging market potential. While UK retailer Tesco has stayed silent on speculation that it is weighing up an entry into the Vietnamese market, we would not be surprised if Vietnam were to pop up on the retailer's long-term radar, given the country's high-growth retail prospects. Clearly, investments in the retail sector will only intensify and consumption habits should move up several notches over the coming years, as the variety of consumer products and demand increase.

At Worrying Levels

Vietnam CPI vs Food Price Inflation, % chg y-o-y (left), % chg m-o-m (right)

General Statistics Office

Risks To Outlook

This bright consumer outlook is, however, not without risks. Vietnam's consumer price index (CPI) continues to accelerate. In April, inflation hit 17.52% year-on-year, while growth in food prices was even

more dramatic at 24.43%. Monthly growth figures underline the severity of this trend. Month-on-month GPI growth in April stood at 3.32%, a third consecutive monthly gain.

The need to get inflation under control raises the risk of further rate hikes in 2011 (following a 100 basis point hike in April). Of course the downward pressure that inflation places on demand makes inflation the greater risk and yet aggressive tightening does increase the risk of a hard landing for the Vietnamese economy and this would of course also pose a threat to consumer goods players even if it could ultimately translate into greater long-term economic stability.

Industry Forecast Scenario Food

Food Consumption

• To 2015, food consumption in Vietnam is forecast to experience strong growth of 72.3%, at which point consumption is expected to reach VND496.7trn.

• Per capita food consumption is forecast to grow by 64.0% over the same time period, reaching a fairly modest VND5.4mn by 2015, reflecting the low starting base.

This impressive level of growth in food consumption could be attributed to two key factors: the rising affluence among Vietnamese consumers and an ongoing expansion of the country's mass grocery retail (MGR) industry.

At present, income levels in Vietnam are a long way behind developed economies and consumer purchases remain largely centred on food staples and daily necessities. However, as incomes start to accelerate off a low base on the back of sturdy economic growth, consumer tastes and preferences are expected to calibrate towards the higher-value food and beverage segments, which should guarantee a receptive and growing audience for branded food and beverage products in the medium term.

The ongoing expansion of the MGR industry will also drive up per capita food consumption levels, provided goods sold through such outlets remain competitively priced. Ultimately, food consumption growth will be driven by the government's ability to harness rural spending power and by modern retailers' ability to find a model that stirs consumer interest, without forgetting that price will remain the major purchasing determinant.

Table: Table: Vietnam Food Consumption Indicators

2008 2009 2010e 2011f 2012f 2013f 2014f 2015f

Food consumption (US$bn) 14.60 14.35 15.02 17.45 19.18 21.59 24.26 27.21

Food consumption (VNDbn) 239,971 255,243 288,312 344,695 378,841 415,535 454,832 496,660 Per capita food consumption (US$) 168.2 164.4 169.9 195.5 212.7 237.0 263.8 293.2 Per capita food consumption (VND) 2,764,637 2,924,207 3,262,852 3,861,207 4,201,275 4,562,991 4,946,401 5,350,215 Total food consumption growth (y-o-y) 14.58 6.36 12.96 19.56 9.91 9.69 9.46 9.20 Per capita food consumption growth (y-o-y) 13.00 5.77 11.58 18.34 8.81 8.61 8.40 8.16

Food consumption as % GDP 16.16 15.39 14.89 15.15 14.75 14.32 13.93 13.59

NB Excludes beverage consumption. e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam, BMI

Canned Food

• Canned food sales in Vietnam will increase by 29.4% in volume terms to 2015

• Value sales growth will exceed volume growth at 51.4%, led by the premiumisation trend which is affecting the wider food and beverage industry

Buoyed by ongoing urbanisation and increasing affluence among Vietnamese consumers, BMI is currently forecasting strong growth in canned food sales over the next five years. A stronger value growth forecast in the canned food sub-sector reflects an acceleration of premiumisation momentum, as demand for higher- value products picks up strongly on the back of rising disposable incomes.

Vietnamese consumers are experiencing a growing awareness of hygiene concerns and food origin as their living standards improve and numerous health scares beg their greater caution. This will further encourage consumers to purchase processed foods over fresh produce, while strong investment in this sector from both domestic and international operators should also help to fuel sales growth. Meanwhile, city workers are increasingly cutting back on restaurant meals and opting for canned and processed foods in order to save money, with major retailers such as Saigon Co-op reporting a recent spike in sales.

Table: Table: Vietnam Canned Food Sales

2008 2009 2010e 2011f 2012f 2013f 2014f 2015f Canned food sales ('000 tonnes) 8.37 8.59 9.09 9.56 10.06 10.59 11.15 11.75 Canned food sales (VNDmn) 326,639 341,895 368,494 407,682 439,138 475,938 515,565 557,941 Canned food sales (US $mn) 19.88 19.22 19.19 20.64 22.23 24.72 27.50 30.57

e/f = BMI estimate/forecast. Source: General Statistics Office, Company information, Trade press, BMI

Confectionery

• Confectionery sales will increase by 50.8% to 2015

• Chocolate will be the highest growth sub-sector - sales are forecast to increase by 65.4% over the next five years - even though it is coming from the highest base

The confectionery sector continues to be one of the most dynamic in Vietnam's food and drink industry, demonstrating enormous growth potential to 2015. Again, rising disposable incomes will encourage the consumption of these non-essential goods, while continued exposure to Western brands and consumption habits will also contribute to the growth of the industry. The latter driver will in particular be responsible for value sales growth, since it should lead to the emergence of new premium and added-value brands, which carry higher sales prices.

Companies such as South Korea's Orion Confectionery and Lotte Confectionery, which are planning investments for the industry, should ensure that the Vietnamese confectionery sector continues to grow at a rapid rate through product innovation and ongoing marketing and promotional initiatives.

Table: Table: Vietnam Confectionery Sales

2008 2009 2010e 2011f 2012f 2013f 2014f 2015f Confectionery sales ('000 tonnes) 97.0 99.1 101.1 104.1 107.7 111.6 115.7 120.1 Confectionery sales growth, tonne, (y-o-y) 3.23 2.16 2.01 2.91 3.51 3.60 3.68 3.77

Chocolate sales (VNDmn) 2,340,058 2,492,883 2,756,249 3,126,866 3,435,426 3,783,542 4,158,239 4,558,786 Sugar confectionery sales (VNDmn) 2,169,421 2,253,956 2,393,738 2,582,709 2,760,791 2,953,833 3,161,681 3,383,926

Table: Vietnam Confectionery Sales - Continued

2008 2009 2010e 2011f 2012f 2013f 2014f 2015f

Gum sales (VNDmn) 429,377 433,373 439,398 453,191 460,728 468,506 476,812 485,632 Confectionery sales (VNDmn) 4,938,856 5,180,212 5,589,384 6,162,767 6,656,945 7,205,880 7,796,731 8,428,343 Confectionery sales growth, VND, (y-o-y) 10.46 4.89 7.90 10.26 8.02 8.25 8.20 8.10

Chocolate sales (US$mn) 142.4 140.2 143.6 158.3 173.9 196.5 221.8 249.8 Sugar confectionery sales (US$mn) 132.0 126.7 124.7 130.8 139.8 153.4 168.6 185.4

Gum sales (US$mn) 26.13 24.36 22.89 22.95 23.33 24.34 25.43 26.61 Confectionery sales (US $mn) 300.5 291.2 291.1 312.0 337.1 374.3 415.8 461.8

e/f = BMI estimate/forecast. Source: General Statistics Office, Company information, Trade press, BMI

Trade

• The value of food and beverage exports is forecast to increase by 64.4% to 2015

• This will slightly surpass import value growth of 56.7% over the next five years

Robust private consumption, on the back of rising wages and improving consumer sentiment will support food and beverage import growth over the next five years. However, export growth will also remain well supported - marginally outstripping import growth over our forecast period. A major driver behind the growth in exports is the sustained government efforts to improve local food production and agricultural industries. This will boost output and make more produce available for export, as well as improving the quality competitiveness of local exports.

Over the long term, increasing urbanisation and continued exposure to Western influences are expected to generate growing import demand, while increasingly busy lifestyles and rising interest in branded produce will lead to growth in the processed-food industry. In order to meet this demand, local manufacturers will be forced to import the necessary raw ingredients.

Beyond 2015, the government will be hopeful that its investments and its efforts to attract foreign investors will pay off, and that much of this new and specific type of demand will be able to be accommodated domestically.

Table: Table: Vietnam Food & Drink Trade Indicators

2008 2009 2010e 2011f 2012f 2013f 2014f 2015f Exports (US $mn) 10,585 9,706 10,713 11,517 12,587 13,883 15,335 16,961

Imports (US$mn) 3,479 3,206 3,354 3,638 3,982 4,363 4,786 5,256 Balance (US $mn) 7,106 6,500 7,359 7,879 8,605 9,520 10,549 11,705

e/f = BMI estimate/forecast. Source: UNCTAD, BMI

Drink

Alcoholic Drinks

• To 2015, alcoholic drinks sales in value terms are forecast to increase by 70.9%

• Beer will be the main driver of sector growth - in fact we recently revised up our forecast for Vietnamese beer consumption growth in 2011 from high-single digits to 17.7%

The outlook for Vietnam's alcoholic drinks industry remains very strong, as it continues to attract considerable interest from foreign investors. A number of industry majors such as Diageo, Asia Pacific Breweries and Carlsberg have been attracted by the alcoholic drinks sector's bright outlook. Beer will continue to dominate the alcoholic drinks sector, accounting for the vast majority of volume sales, and will remain the main contributor to value sales. This is in part due to the strong interest the beer sector has been attracting from both local and international brewers.

In fact, this level of interest, coupled with impressive sales figures from leading brewers Habeco and Sabeco have prompted us to revise our 2011 forecast for beer volumes upwards. Over the long term, beyond the current forecast period, the outlook for the Vietnamese beer sector is very positive as well, as the brewing industry gradually moves towards premiumisation on the back of rising consumer affluence. Ongoing strengthening in the Vietnamese tourism sector further spells optimism for higher beer sales over the coming quarters. Vietnam remains a developing, low-income country and the domestic beer sector is arguably more reliant on tourist arrivals to drive value sales. Tourists generally have a greater penchant for higher-value items and have the purchasing power to afford the higher-priced consumer goods.

In light of this outlook market leaders Sabeco and Habeco, which control an estimated 35% and 20% of the domestic beer market respectively, have continued to ramp up their production capacities and these expansionary activities should stimulate stronger value sales. Sabeco, for instance, started operating new

breweries such as Saigon-Phu Ly Brewery in May 2010 and Saigon-Song Lam Brewery and Saigon-Quang Ngai Brewery in June 2010, and this greater production capacity should leave it poised to meet surging beer demand.

Volume sales growth in the wine and spirits industry is also expected to be strong over our forecast period to 2015, albeit developing from much lower bases. Both are fairly immature industries, which have been held back by an absence of multinational investment and their relatively higher price tags. However, both of these factors are expected to decline in importance over the forecast period, as alcoholic drinks manufacturers in Vietnam diversify away from beer and into less mature, higher-growth categories, and as rising consumer incomes begin to erode consumer price sensitivity.

Indeed, with its sights set on the high-growth opportunities of the Vietnamese spirits sector, UK spirits leader Diageo has agreed to acquire a stake of around 24% in Vietnamese spirits major Hanoi Liquor Joint Stock Company (Halico) for GBP33.0mn (US$52.2mn). Although a small, bolt-on deal for Diageo, this acquisition could forge closer partnership ties between itself and Halico, and thus mark a step towards building a strategic platform from which to launch a deeper push into the Asia Pacific region.

Looking ahead, investments in the Vietnamese spirits and wine sub-sectors are expected to intensify as an increasing number of investors such as Diageo recognise the higher margin growth opportunities on offer in these sub-sectors, and this should instil further dynamism to drive volume sales.

Table: Table: Vietnam Alcoholic Drink Sales and Sales Growth

2008 2009 2010e 2011f 2012f 2013f 2014f 2015f Alcoholic drinks production (mn litres) 1,433 1,533 1,640 1,755 1,878 2,009 0 0 Alcoholic drinks sales (VNDmn) 26,834,070 28,055,193 30,915,919 34,558,532 38,553,502 42,839,246 47,595,752 52,847,801 Alcoholic sales growth, VND, (y-o- y) 8.00 4.55 10.20 11.78 11.56 11.12 11.10 11.03 Alcoholic drinks sales (US$mn) 1,633 1,577 1,610 1,750 1,952 2,225 2,538 2,896 Alcoholic drinks sales (mn litres) 1,885 1,946 2,396 2,819 3,266 3,786 4,389 5,091 Alcoholic sales growth, litres, (y-o- y) 5.07 3.20 23.15 17.63 15.87 15.91 15.95 15.99

Table: Vietnam Alcoholic Drink Sales and Sales Growth - Continued

2008 2009 2010e 2011f 2012f 2013f 2014f 2015f Beer sales (mn litres) 1,871 1,931 2,381 2,803 3,250 3,769 4,373 5,074 Spirits sales (mn litres) 14.72 14.90 14.96 15.32 15.73 16.21 16.72 17.27 Per capita beer consumption (litres) 20.60 22.12 26.95 31.40 36.04 41.39 47.55 54.66

e/f = BMI estimate/forecast. Source: General Statistics Office, Company information, Trade press, BMI

Hot Drinks

• To 2015, hot drink sales in Vietnam in value terms will increase by 79.2%

Vietnam's sturdy economic growth over the next few years will continue to fuel demand for aspirational food and beverage products, such as coffee. Vietnam's massive youth population is another major positive behind our coffee forecast, for whom visiting cafés and drinking coffee is a growing lifestyle choice. Moreover, as this group of young, aspirational consumers enter the working force, the accordant rise in their level of incomes will serve to further buoy demand for higher-value coffee products. Demand is likely to start in cafés and coffee shops before filtering through to the retail sector as consumers seek their favourite variants for consumption at home.

Meanwhile, the tea sector is also set to experience strong growth over our five-year forecast period, buoyed by rising incomes and increasing domestic demand.

Table: Table: Vietnam Hot Drink Sales

2008 2009 2010e 2011f 2012f 2013f 2014f 2015f Hot drink sales (VNDmn) 5,296,536 5,659,305 6,405,238 7,652,138 8,424,728 9,253,412 10,141,116 11,086,224 Hot drink sales (US $mn) 322.3 318.2 333.6 387.5 426.6 480.7 540.9 607.5

NB Combined tea and coffee sales only available data. e/f = BMI estimate/forecast. Source: General Statistics Office, Company information, Trade press, BMI

Soft Drinks

• Volume sales of soft drinks are forecast to increase by 33.3% to 2015

• In line with the emerging premiumisation trend, value sales growth will be stronger at 53.6%

• Economic growth, increasing urbanisation, external investments and rising tourist numbers will all serve to drive sector growth.

Although Vietnamese consumers will retain an interest in healthy living, as Western influences pervade consumption habits, we would expect carbonated soft beverages to be the highest-growth sub-sector of the soft drinks industry to 2015, owing to their popularity among aspirational young Vietnamese consumers and their relative affordability when compared with energy drinks and premium fruit juices.

Intensified rivalry between the country's major soft drinks players PepsiCo and The Coca-Cola Company (Coke) is another key driver behind our bullish growth forecast for the sector. PepsiCo has scheduled a US $250mn investment in the country, with projects including upping the manufacturing capacity of its Vietnam operations, strengthening existing brands and continuing product development through innovation. These investments will further strengthen PepsiCo's foothold in Vietnam, where for the past two years it has invested in two new manufacturing facilities, including a beverage plant in Can Tho.

Coke similarly does not intend to rest on its laurels. In September 2009, the firm announced plans to invest US$200mn in Vietnam over three years, focusing on organic expansions, increasing production capacity and boosting marketing efforts.

Table: Table: Vietnam Soft Drink Sales and Sales Growth

2008 2009 2010e 2011f 2012f 2013f 2014f 2015f Soft drinks sales (mn litres) 764 792 820 867 933 993 1,056 1,123 Soft drink sales growth, litres, (y-o-y) 4.98 3.70 3.58 5.70 7.64 6.37 6.34 6.32 Soft drinks sales (VNDmn) 5,327,109 5,544,000 6,126,106 7,072,386 7,598,305 8,163,946 8,768,929 9,412,179 Soft drink sales growth, VND, (y-o-y) 5.35 4.07 10.50 15.45 7.44 7.44 7.41 7.34 Soft drinks sales (US $mn) 324.2 311.7 319.1 358.1 384.7 424.1 467.7 515.7

NB Figures include both on-trade and off-trade sales. Volume data is calculated using per capita consumption and population data while value is calculated using historic average price estimates. e/f=BMI estimate/forecast. Source: Company information, Trade press, BMI

Mass Grocery Retail

• Mass Grocery Retail Sales to increase by 54.1% to 2015, and by 15.9% y-o-y in 2011

• By a small distance, hypermarkets will be the highest growth format, sales increasing by 58.9% to 2015

Compared to the rest of the Asia Pacific countries, Vietnam has a relatively underdeveloped mass grocery retail (MGR) sector, which presents plenty of upside for organised retail growth. Despite the rapid influx of foreign investment into the Vietnamese MGR sector in recent years, the presence of modern retailers has been largely restricted to the affluent urban cities of Vietnam such as Hanoi and Ho Chi Minh City. However, the Vietnamese retail landscape is rapidly evolving, accompanied by growing purchasing power, and modern retail should play an increasingly prominent role in driving grocery retail sales growth over the coming years.

We are forecasting 54.1% growth in Vietnam's MGR sales through to 2015 on the back of three key drivers. Firstly, Vietnam will remain one of the fastest-growing economies in the Asia Pacific region, with GDP growth forecast to average 7.2% annually between 2011 and 2020. This sustained economic boom should prove supportive of job creation and fuel the expansion of an affluent consumer class, which has the purchasing power to participate in modern retailing methods.

With incomes remaining low, Vietnamese shopping baskets are still largely filled with food staples and independent grocery stores largely suffice to meet the consumers' daily essential needs. Buoyed by growing purchasing power, however, consumers are paying greater attention to the other purchasing determinants of

product quality, hygiene and service. Modern retail outlets such as hypermarkets, supermarkets, discount and convenience stores provide more compelling alternatives to traditional retail stores in these aspects, and the opening of these modern retail stores should accelerate as a growing number of consumers yearn for a more conducive shopping experience.

Secondly, tourism should also support stronger traffic performance across modern retail stores. Vietnam is increasingly becoming one of South East Asia's top attractions and higher tourism levels should translate into stronger demand for higher-value food and beverage products, such as convenient and packaged food and alcoholic beverages, which can easily be found on the shelves of modern retail stores.

Lastly, we foresee greater multinational involvement, particularly in the less-urbanised areas, to assist the emergence of modern retail. For now, traditional retail stores will continue to dominate Vietnam's retail landscape. However, retailers could find it increasingly difficult to expand their networks in big cities, which are witnessing rapid crowding. Such a scenario would, in turn, prompt retailers to turn to under- retailed areas in search of future growth, encouraging the spread of modern retail across the country.

Of course, the major risk for retailers looking to expand in the less-urbanised areas of Vietnam is that few communities exist that can support modern retail development at present. Even the low prices offered by discounters would be unlikely to attract buyers in rural communities, for whom self-sufficiency and wet markets remain the sole methods of consumption. Another challenge retailers could face in expanding their rural presence is the country's poor infrastructure, which complicates supply chain management. Nonetheless, modern retailers are likely to gradually turn their heads towards rural areas, as they look to entrench themselves early in the country's favourable retail play.

Stretching its retailing footprint beyond the big cities, where it is already enjoying rapid growth, French retailer Groupe Casino opened its 14th Vietnamese outlet in the city of Nam Dinh and hopes to replicate its urban success in the smaller provinces and cities. German retail operator Metro Cash & Carry is also looking further afield for longer-term growth opportunities by opening distribution centres in the provinces of Binh Dinh, An Giang and Binh Duong, as well as in the southern city of Vung Tau.

Over our five-year forecast period, we expect the outperformance of the supermarket and hypermarket sub- sectors as they are set to receive the most attention from new retail investors, owing to their greater per- store profitability levels. Singaporean MGR operator NTUC Fairprice and Vietnamese retailer Saigon Union of Trading Co-operatives are two recent examples of companies looking to exploit the high per- store profitability levels in the hypermarket sector. NTUC Fairprice and Saigon Union of Trading Co-

operatives have recently inked a joint venture agreement to establish a chain of hypermarkets in Vietnam and are expected to set up their first hypermarket in Vietnam by 2012.

Moreover, the supermarket and hypermarket formats have already gained strong popularity among Vietnamese consumers, given their combination of both food and non-food items, and retailers operating in these sub-sectors are likely to face considerable ease in expanding their presence further. Through 2015, we are forecasting sales in the supermarket and hypermarket sub-sectors to grow by 53.9% and 58.9% respectively.

Sales through the convenience store format are forecast to experience the slowest, albeit still an impressive growth rate of 48.5% to 2015. Accordingly, the demand for convenience, with the pay-off of higher prices, is not yet on the agenda for most consumers - they are still familiarising themselves with the modern format in general. Nevertheless, this subsector can be expected to attract growing interest from retailers. Japanese convenience retailer FamilyMart opened its first outlet in Ho Chi Minh City in early 2010 and has plans to set up another 300 stores in five years, as it looks to capitalise on the city's young and increasingly busy population.

Table: Table: Vietnam MGR Indicators - Value Sales by Format - Historical Data & Forecasts

2008 2009 2010e 2011f 2012f 2013f 2014f 2015f

Supermarkets (VNDbn) 2,021 2,187 2,547 2,976 3,324 3,713 4,133 4,580

Hypermarkets (VNDbn) 822 899 1,052 1,223 1,383 1,557 1,744 1,943

Convenience (VNDbn) 690 738 838 943 1,039 1,151 1,272 1,400 Total mass grocery retail sector (VNDbn) 3,533 3,824 4,438 5,142 5,746 6,422 7,148 7,923 Total mass grocery retail sector growth, VND, (y-o-y) 20.79 8.23 16.05 15.87 11.75 11.75 11.31 10.85

Supermarkets (US$bn) 0.1230 0.1229 0.1327 0.1507 0.1683 0.1929 0.2204 0.2510

Hypermarkets (US$bn) 0.0500 0.0505 0.0548 0.0619 0.0700 0.0809 0.0930 0.1065

Convenience (US$bn) 0.0420 0.0415 0.0437 0.0477 0.0526 0.0598 0.0678 0.0767 Total mass grocery retail sector (US $bn) 0.2150 0.2150 0.2311 0.2604 0.2909 0.3336 0.3812 0.4342

e/f = BMI estimate/forecast. Source: Company information, Trade press, BMI

Table: Grocery Retail Sales by Format - Historical Data & Forecasts (%)

2010e 2020f Organised/MGR 15 28 Non-organised/Independent 85 72

f = BMI forecast. Source: BMI

Food Industry Trends And Developments

Massive Potential Evident As Masan Secures Largest Ever Private Equity Investment In Vietnam

Masan Consumer Corp (formerly Masan Food before broadening its business to include telecoms and resources interests) is to sell a 10% stake in its business to private equity firm Kohlberg Kravis Roberts (KKR) for US$159mn. The deal values Masan Consumer at US$1.6bn and represents the largest ever private equity investment in Vietnam.

A market leader in soya, fish products, chilli sauce and a major player in instant noodles, Masan is a high growth business benefiting from Vietnam's burgeoning consumer story. Already present in high-growth consumer categories and keen to diversify further, Masan's appeal to KKR is unsurprising. Supported by KKR, Masan is expected to intensify its expansion efforts, most likely with a focus on mergers and acquisitions having previously relied more on organic expansion.

Food Price Inflation An Ongoing Concern

The inflationary burden on the Vietnamese consumer is getting heavier. With Brent crude prices reaching highs not seen since mid-2008, Vietnamese manufacturers and suppliers have increased their sale prices, as they contend with soaring electricity and fuel prices. In response to the respective 20% and 15% increases in petrol and electricity prices announced by the government, the majority of Vietnamese manufacturers and suppliers raised their sale prices from March 1 2011. Faced with the threat of surging transportation costs and sale prices from manufacturers, Vietnamese retailers have hiked prices of perishable products, which are directly exposed to petrol and electricity price increases, by 10-18%. On the other hand, prices of non- perishable goods, which bear indirect influences to inflationary trends in fuel and electricity, have been increased by 5%.

This inflationary environment should place a particularly tight squeeze on the Vietnamese consumer. Travel expenses and utilities bills have pushed higher in recent weeks, putting greater stress on consumer purchasing power. Given that Vietnamese consumers spend a significant proportion of their household budgets on food, higher food prices are likely to trigger reduced spending on non-essential food and beverage products (such as seafood) this year. Vietnamese retailers are likely to feel the squeeze from both ends. On the one hand, operational fees of retailers have been rising due to higher utilities costs, thus

placing a greater burden on retailers' margins. On the other hand, retailers could find it challenging to register strong revenue growth in 2011 as consumers lessen their purchases.

Outlook For Rice Sector Remains Positive

We maintain our expectations for Vietnam rice output to grow by 1.2% to reach 25.3mn tonnes in 2010/11 on the back of a slight improvement in yields. This dynamic reinforces our projection for rice prices to remain subdued. While Vietnamese rice exports for 2011 are officially forecast slightly lower than 2010, we believe they are in a long-term uptrend. We expect Vietnam to maintain its position as second largest price exporter in 2010/11.

We expect rice production in Vietnam to grow modestly by 1.2% to 25.3mn tonnes in 2010/11 on the back of higher yields. According to the US Department of Agriculture, rice yields in Vietnam are projected to increase year-on-year to 5.41 tonnes/hectare, up from 5.39 tonnes/hectare. This increase in production should boost regional rice supplies and reinforce our outlook for rice prices to remain subdued over the medium term.

Although exports for 2011 are officially forecast by the Vietnam Food Association (VFA) to come in between 5.5-6.1mn tonnes, slightly lower than 2010's record of 6.8mn tonnes, we note that this level is still considerably higher than the 2007-2010 average of 5.3mn tonnes. Moreover, it is not unusual for officials to understate rice export figures at the start of the year to ensure domestic food security, and we do not rule out upward revisions to export targets as 2011 unfolds.

Recent reports of diesel shortages could pose some downside risks to our supply view. According to the local distributor of the Vietnam Fuel Corporation in the Mekong Delta region where rice is predominantly grown, the shortage of diesel is a result of lower sales commission from selling the fuel. This has resulted in increased smuggling across the border into Cambodia where diesel can be sold at a higher price. Farmers in the Delta typically power pumps using the cheap fuel and the current diesel scarcity could possibly delay harvesting of the Winter/Spring crop. That said, we believe that this is a minor downside risk as farmers have already harvested more than 60% of the crop in the Delta region as of March 30 according to the VFA.

Market Overview

Agriculture

Owing to the country's vast population, food security - or the state's desire to be free from reliance on food imports - has always been something of an issue in Vietnam. As a result, Vietnam's agricultural sector has become one of its most important industries and serving as a major employment provider, particularly in rural areas.

Thanks to significant government investment in the sector, agriculture in Vietnam has developed enormously in recent years, and output is now achieving annual growth to the point where the country can now meet domestic demand in most areas. In fact, some agricultural subsectors have developed to such an extent that surplus produce is becoming available for the export market. This has predominantly occurred in the fields of livestock and fisheries, which are also, owing to their potential profitability, the areas that have attracted most private investment in recent years.

However, despite improvements over the review period, Vietnam's agricultural industry still has some way to go if it is to become globally competitive and prove a real stimulant to the country's economy. Considerable investment in new processing facilities that meet international standards will be needed, while production capacity will also need to be increased to meet the longer-term storage needs of processed foods. Agricultural losses also remain a problem and a review of harvesting techniques will also be needed if the industry is to fulfil its vast potential.

Food Processing

Vietnam's food-processing industry comprises around 260 seafood-processing plants (the country is a major exporter), 24 slaughter houses and meat-processing plants, 160 beverage plants, 65 fruit- and vegetable- processing plants, 27 plants manufacturing instant noodles and 23 confectionery manufacturers. Despite a significant proportion of processed food being imported, consumption of imported produce remains fairly low in the country - although it has increased in the main population centres of Ho Chi Minh City and Hanoi.

Overall, the Vietnamese food-processing industry remains largely fragmented, and is dominated by relatively small domestic operators. International firms, including companies such as Procter & Gamble and The Coca-Cola Company, have had to enter into joint ventures with domestic operators in order to be

allowed to operate in the country. This has been enough of a deterrent to prevent significant foreign investment in the country's agribusiness and food-processing industries, and this lack of investment has contributed to the underdevelopment of these industries and their failure to fulfil their full potential.

Food Consumption

In terms of consumption trends, the expansion of modern lifestyles and the rise in disposable incomes - which have accompanied Vietnam's economic growth, particularly in major urban centres - have increased consumer demand for snacks, convenience foods and premium and luxury food items. Domestic food manufacturers are beginning to respond to this trend, albeit slowly, and increase the range of ready-to-eat and semi-prepared foods on offer. In addition, domestic food producers are having to confront the penchant for Western consumption habits and brands that is common in Vietnam, particularly among younger and more affluent consumers. The dairy sector in particular has experienced very strong growth in recent years, along with increasing urbanisation and rising incomes. Huge multinational companies have managed to sway consumer preferences, owing to their considerable advertising and promotional power, and domestic firms have to work hard to secure brand loyalty.

Drink Industry Trends And Developments

Positive Results At Brewers Underline Industry Potential

Sabeco reported a 21% increase in its total production output (a good proxy for domestic demand) for 2010 and is forecasting a 20% growth in its total production output for 2011. Habeco's results also point to strong demand in the beer market, with production output reaching 600mn litres of beer in 2010, which exceeded its forecast of 588mn litres. These positive results have contributed to an increase in our beer market growth forecast (see Industry Forecast Scenario - Drink), while over the longer-term horizon, the premiumisation trend is expected to influence both growth and the make-up of the leading brewers' product portfolios.

Strong growth potential has already attracted significant investments from major brewers, such as Asia Pacific Breweries and Carlsberg, and more multinational brewers are likely to jump into the fray over the coming years and further stimulate dynamism to buoy beer sales.

Diageo Reaffirms Vietnam Commitment With Halico Buy

With its sights set on the immense growth opportunities in the Asia Pacific region, UK spirits giant Diageo has agreed to acquire a stake of around 24% in Vietnamese spirits major Hanoi Liquor Joint Stock Company (Halico) for GBP33.0mn (US$52.2mn). Although a small, bolt-on deal for Diageo, this acquisition could forge closer partnership ties between itself and Halico, and thus mark a step towards building a strategic platform from which to launch a deeper push into the Asian Pacific region. The stake purchase is expected to be completed by June 2011. Besides benefiting from the Vietnamese growth story, Diageo's acquisition is likely to be a prelude to further partnerships in the Asia Pacific region. In February 2008, Diageo entered into a joint venture with Halico to bump up its presence in the Vietnamese spirits market, and its acquisition of a 24% stake in Halico demonstrates a desire to further strengthen and leverage on the existing distribution and marketing relations with the firm.

Supply Chain Investment Further Underlines Positive Outlook

US packaging manufacturer Ball is building a new US$45mn drinks can factory in Vietnam, according to Beverage Daily. The firm claims that the move is to capitalise on growing demand, not just in Vietnam but throughout South East Asia. Ball forecasts that the drinks can market in the region will grow by 15%

annually over the coming years. The plant is expected to become operational in early 2012, producing 850mn cans annually. The project will be a 50:50 joint venture with Thai Beverage Can Ltd Production. The two firms are already joint venture partners in Thailand.

Coffee Still Buoyant But Exports Weaker

We recently bumped up our production estimates for the 2010/11 coffee harvest in Vietnam to 18.4mn 60kg bags in accordance with recently released government estimates. However, this improved production should not significantly weigh on prices given currently low global coffee stocks. Indeed, we believe that coffee prices should continue to remain elevated in the short term. Strong Vietnamese output of robusta coffee will likely sustain the bean's underperformance versus LIFFE robusta coffee.

BMI has raised its forecast for Vietnam's 2010/11 coffee crop in line with official expectations. Indeed reports from Dak Lak, the largest coffee-producing region in Vietnam, indicate that 2010/11 coffee production increased 6% year-on-year to 400,000 tonnes (6.7mn bags). The 2010/11 Vietnamese coffee market year runs from October 2010 to September 2010/11, and harvesting takes place between November 2010 and February 2011.

Despite an anticipated crop improvement in 2010/11, exports are expected to be weaker this year compared to a year ago. According to anecdotal reports, Vietnamese exports of coffee could fall 1.8% in 2010/11, likely due to the government stockpiling scheme to store 500,000 tonnes of coffee beans from December to May. Although the scheme is meant to help smooth out price fluctuations, we do think the scheme has been successful up to now. Indeed, local prices having risen almost 6% year-to-date, and February export loading is also expected to have fallen more than 40% month-on-month from 140,000 tonnes in January, due to delays as exporters could not buy coffee locally as a result of higher domestic prices. These dynamics should ensure that coffee prices remain elevated in the near term. According to the price ratio chart between Vietnam coffee prices and LIFFE robusta coffee, the strong trend of the former outperforming the latter should continue to hold in the foreseeable future

Market Overview

Soft Drinks Sabeco Dominates

Per capita consumption of soft drinks in Vietnam Beer Industry Market Share; 2010 BMI estimate Vietnam is low, but it is growing. The soft drinks sector is dominated by multinationals The Coca-Cola Company and PepsiCo, which jointly command an estimated 88% share of the market. The major focus of the multinationals is on carbonated soft beverages, with small local drinks firms producing other types of drinks and fighting it out for the remaining market share. The largest of the other players is Saigon Beverages Joint Stock Company (Tribeco), with an approximate Source: Trade press, Company reports 6% market share.

Smaller drinks companies have had a chance in recent years to win some market share back from the major multinationals owing to the rising interest in healthy drinks, such as teas and juices, in which these local firms specialise. In fact, the competition that these high-growth categories have stimulated has seen investment interest in the soft drinks sector increase in recent months. Most recently, Japanese major Kirin Beverage announced plans for a Vietnamese soft drinks joint venture (JV) with local noodle producer Acecook.

The country's largest and second largest coffee manufacturers - respectively Vinacafe Bienhoa Joint Stock Company and Thai Hoa Coffee Corporation - are leading the investment activity in the coffee sector at present. Thai Hoa Coffee will invest US$34mn in a processing plant with the capacity to produce 65,000 tonnes of fresh coffee, 100,000 tonnes of dry coffee and 2,000 tonnes of soluble coffee annually. Meanwhile, Vinacafe Bienhoa has constructed a plant capable of supplying 3,200 tonnes of exportable instant coffee. Singapore's Jayangti Pte has also joined the investment activity in the coffee sector, investing US$16.5mn in a factory with the capacity to produce 6,000 tonnes of instant coffee by mid-2011. Coffee giant Trung Nguyen Corporation is starting work on a US$40mn instant coffee plant, which is expected to have an annual capacity of 60,000 tonnes. Most recently Outspan Vietnam Coffee Company under

Singapore's Olam Group invested US$50mn opening a coffee plant with an initial annual capacity of 4,000 tonnes before rising to 7,000 tonnes after two years.

Alcoholic Drinks

In the brewery sector, several multinational operators have established JVs to avoid being subject to the high import duties on beer. Domestically produced international brands include Heineken, Fosters, Tiger, Carlsberg and San Miguel, with the first three all produced by Heineken and Fraser & Neave's Asian JV APB. The government levies substantial duties on all imported alcoholic beverages and there are also consumption taxes. There is a substantial black market for smuggled products, with the government estimating that a third of spirit sales come from smuggled goods. High taxes have created this smuggling problem, which the government now must work hard to address. Owing to the inherent price sensitivity of Vietnamese consumers, the majority of alcoholic drink products in the country fall at the economy end of the market. However, this is changing gradually - particularly within wealthy urban centres - with the brewing industry a major driver of this slow move towards premiumisation.

A number of foreign players have invested in the Vietnamese market, including the Danish major Carlsberg (operating both alone and via a stake in Habeco), UK spirits leader Diageo (operating both alone and through a partnership with Halico), the Philippines' San Miguel Corporation, which recently announced plans to boost beer production in Vietnam to 1mn hectolitres, Anglo-South African brewing leader SABMiller (which recently bought out local partner Vinamilk), UK-based Scottish & Newcastle (S&N), with its partner Vinataba (S&N's Vietnamese operations fell into the hands of Carlsberg after the Danish firm's takeover of the UK brewery and asset split in partnership with Heineken and Carlsberg has subsequently decided to withdraw from its JV with Vinataba), and most recently Japan's Sapporo through its acquisition of a 65% stake in Kronenbourg Vietnam, the Carlsberg and Vinataba 50:50 JV. Heineken's Vietnamese operation is controlled through Vietnam Brewery, which is majority-owned by the Dutch brewing major and its regional affiliate APB. The group's Vietnamese partner is Saigon Trading Corporation (Satra). Government privatisations of state-owned brewing companies have given foreign players a chance to increase their market share in Vietnam and this process is likely to be ongoing in the coming years.

However, despite the growing presence of multinationals in the market, local firms continue to dominate and state-backed brewers Sabeco and Habeco control an impressive 35% and 20% of the local beer market respectively.

Mass Grocery Retail Industry Trends And Developments

First Quarter Retail Data Weaker Than In Recent History

Vietnamese retail sales of goods and services rose by 22.6% year-on-year in Q111 to reach VND451.8trn. Adjusted for inflation, which remains elevated due to high fuel, packaging and food prices, sales increased by 8.7%. The inflation-adjusted increase is far lower than the growth rate experienced in Q110 and Q109 (24.1% and 14.4% respectively). Weaker growth has been attributed to the severity of inflationary pressures and the impact this has had on consumer spending power.

A number of retailers have already unveiled measures that attempt to address this problem. BMI retains its core view that we will see a moderation of global food price inflation in the second half of 2011. Nonetheless, retailers have launched significant promotional campaigns, offering discounts across a range of daily essential items (among them are Big C and Lotte Mart) in an attempt to show that they are sharing the burden of elevated costs with consumers, and thus retain consumer loyalty.

Starting To Consider New Retail Locations

Pockets of wealth in less-urbanised areas are beginning to attract the attention of foreign retailers. Stretching its retailing footprint beyond the big cities, where it is already enjoying rapid growth, French retailer Groupe Casino has opened its 14th Vietnamese outlet in the city of Nam Dinh and hopes to replicate its urban success in the smaller provinces and cities. German mass grocery retailer (MGR) Metro Cash & Carry is also looking further afield for strong growth opportunities by opening distribution centres in the provinces of Binh Dinh, An Giang and Binh Duong, as well as in the southern city of Vung Tau.

Yet domestic retailers do not intend to let these massive growth opportunities slip through their fingers. Interestingly, domestic retailers have sought partnerships with foreign retailers in expanding their retail reach rather than going it alone. A recent example would be Trung Nguyen Group's partnership with Japanese retailer AEON 's convenience subsidiary Ministop to develop a convenience store chain in Vietnam.

This strategy can be linked to the capital springboard and expertise provided by foreign retailers. By linking up with a financially powerful, expansion-oriented foreign retailer, domestic retailers should find themselves in a stronger position to contend with growing competition from big multinational retailers.

For now, traditional retail stores will continue to dominate Vietnam's retail landscape. Eventually, however, retailers could find it increasingly difficult to expand their networks in big cities, which are witnessing rapid crowding. Such a scenario would, in turn, prompt retailers to turn to under-retailed areas in search of future growth, encouraging the spread of modern retail across the country

Immense Retail Growth Sparks Expansion And Speculation

UK retail leader Tesco has stayed silent on speculation that it is considering a foray into the Vietnamese retail market. Growing organically in Asia remains a keystone in Tesco's wider emerging market (EM) strategy and we would not be surprised if Vietnam were to emerge on the retailer's long-term radar. Tesco's rumoured entry is not the only piece of speculation to arise from the market's undoubted potential. South Korean retailer Lotte has denied news published by the JoongAng Ilbo newspaper regarding its plans to acquire Vietnam-based retailer Maximark. According to the newspaper, the company was in talks to acquire the local supermarket chain, to which Lotte replied that the firm does not have any plans to purchase the retailer because the owner does not have any intentions of divesting its Vietnamese operations. Nonetheless, Lotte did recently announce that it is planning to accelerate its expansion in China to reduce its reliance on South Korea's increasingly mature domestic market, while Vietnam and India are also on Lotte's long-term expansion radar.

With more concrete plans to expand are Singapore MGR operator NTUC Fairprice, which has inked a joint venture agreement with Vietnam's Saigon Union of Trading Co-operatives to establish a chain of hypermarkets in Vietnam. Given Saigon's local expertise and NTUC's experience in operating hypermarket stores, this is clearly a formidable-looking partnership, and their expansionary activities are likely to place considerable upward pressure on our hypermarket growth forecast for Vietnam. This follows Japanese convenience retailer FamilyMart announcing plans to focus on its Asian operations outside of Japan, with a focus on Vietnam and China, in order to reduce its reliance on its stagnant domestic market. The company, which operates one outlet in Vietnam, is aiming to launch five more stores in Ho Chi Minh City in the near term, and expand its Vietnamese network by opening a total of 300 outlets in five years.

Market Overview

Over the past five years, an increasing presence of supermarkets and shopping centres has been gradually eroding the traditionally dominant position of open-air markets in urban areas. Modern MGR outlets are now concentrated around Vietnam's major urban centres. The vast majority of these outlets are to be found in and around the main urban centres of Hanoi and Ho Chi Minh City, although modern retail outlets are increasingly appearing in smaller central towns and cities.

Convenience stores in Vietnam are generally larger than those in Western Europe or the US and stock a wider range of goods, in order to fully cater for areas that do not have the scale to warrant a large supermarket outlet. In rural areas of the country, open-air markets continue to dominate, although this can be expected to change, as modern retail formats become more commonplace and this acceptance spreads to the provinces.

Unlike many markets in the region, the Vietnamese authorities initially encouraged the entry of modern retailers, rather than viewing them as a threat to traditional operators. In Hanoi, city authorities have actively encouraged supermarket expansion as a means of modernising lifestyles and progressing towards a fully functioning market economy. However, as cities have started to get more crowded, with the market share of traditional retailers suffering accordingly, there have been signs that the government is backtracking on this open policy slightly. In line with the country's WTO accession, the Vietnamese government now looks set to have to walk the fine line between allowing foreign investment in order to stimulate modernisation and job creation, while at the same time employing restrictions to protect its traditional retail sector.

Owing to the growing demands of customers in Vietnam, supermarkets are increasingly providing a wider variety of products. Demand for a wide range of produce and a certain standard of product has risen in line with disposable incomes, which have in turn increased in line with improvements in the economy. Food products such as fresh meat and vegetables, ready-to-cook meals and snack foods are sold alongside non- food product lines, including toys, gifts and electrical appliances in supermarkets and hypermarkets. In fact, MGR outlets in Vietnam currently focus more on non-food items than similar stores in the Western world. Daily food items are still, for the most part, purchased from markets. Accordingly, for the time being, stores are better off giving more floor space to profitable non-food items. If they are to effectively erode the market share of traditional retail, however, this focus will have to change and they will need to compete directly in terms of stocking the sorts of foods available in markets - namely fresh food produce - at low prices.

In addition to open-air markets and modern MGR outlets, there are also a large number of small, independently operated grocery store chains. The most significant of these operators include Western Canned Food, Kim Thanh, Food Stuff Shop and Hanoi Star. International operators within the sector include Germany's Metro, France's Vindémia (now wholly owned by Casino), Japan's Seiyu and, most recently, Hong Kong's Dairy Farm. In addition to the above, speculation continues to grow concerning the possible entry of some of the world's leading multinational retailers. The UK's Tesco, France's Carrefour and US-based Wal-Mart have all been linked with a possible market entry and, in preparation for this,

leading local retailers have started to form associations in order to strengthen their buying and distribution power and, in turn, their ability to compete.

France's Casino is already present with its Big C chain, and has been present in the Vietnamese market for over 10 years, having opened its first hypermarket in Dong Nai in 1998, and has now established outlets in Ha Noi, Hai Phong, Hue, Da Nang, Bien Hoa, and Ho Chi Minh City. Japan's FamilyMart also recently entered the market with the opening of its first outlet in Ho Chi Minh City. The company has ambitious expansion plans aiming to increase its Vietnamese network by opening a total of 300 outlets in five years.

Table: Structure Of Vietnam's Mass Grocery Retail Market By Estimated Number Of Outlets

2003 2004 2005 2006 2007 2008 2009 2010 Supermarkets 74 88 100 115 130 165 181 197 Hypermarkets 3 4 7 8 10 14 14 14 Convenience stores 52 62 75 120 180 255 277 302 Total MGR outlets 129 154 182 243 320 434 472 513

Source: General Statistics Office, Company figures, BMI

Table: Structure Of Vietnam's Mass Grocery Retail Market - Sales Value By Format (US$mn)

2003 2004 2005 2006 2007 2008 2009 2010 Supermarkets 55 64 70 85 101 123 123 133 Hypermarkets 20 20 25 32 40 50 51 55 Convenience stores 22 25 29 33 37 42 42 44 Total MGR sales 97 109 124 150 178 215 216 232

Source: General Statistics Office, BMI

Table: Structure Of Vietnam's Mass Grocery Retail Market - Sales Value By Format (VNDbn)

2003 2004 2005 2006 2007 2008 2009 2010 Supermarkets 904 1,052 1,150 1,397 1,660 2,021 2,187 2,547 Hypermarkets 329 329 411 526 657 822 899 1,052 Convenience stores 362 411 477 542 608 690 738 838 Total MGR sales 1,594 1,791 2,038 2,465 2,925 3,533 3,824 4,437

Source: General Statistics Office, BMI

Table: Average Sales Per Outlet By Format - 2010

US$mn VNDbn Supermarket 0.68 12.90 Hypermarket 3.93 75.14 Convenience store 0.15 19.05 Total MGR 0.45 8.65

Source: BMI

Competitive Landscape Food

Table: Key Players in Vietnam's Food Sector - 2011

Year Sales Sales (US Year- Employ Establis Company Sub-sector (VNDbn) $mn) Ending ees hed Unilever Vietnam Food and beverages na 650.0e 2010 5500 1995 Nestle Vietnam Food and beverages na 550.0e 2010 na 1995 Masan Food Food - Instant noodles, sauces 5,585.0 267.0 Dec-10 5079 1996 Vissan Import Export Corporation Food - Meat na 125.0e 2010 2,500 1974 San Miguel Purefoods Food and beverages - Vietnam Miscellaneous na 100.0e 2010 na na Sao Ta Foods Joint Stock Company Food - Seafood 1,470.0 70.3 Dec-10 na 1996 Nam Viet Corporation Food - Seafood 1,432.0 68.5 Dec-10 na 1993 Bibica Corp Food - Confectionery 788.0 37.7 Dec-10 1305 1999 Halong Canned Food Joint Food - Canned seafood, meat, Stock Company fruit & vegetables 533.0 25.5 Dec-10 1070 1957 Hanoi Milk Joint Stock Company Food and beverages - Dairy 326.0 15.6 Dec-10 na 2001

e = BMI estimate, na = not available. Source: BMI, Trade press, Company corporate data (US$ based on FX rate of VND1,000 = US$0.0478)

Drink

Table: Key Players in Vietnam's Drink Sector - 2011

Year Sales Sales (US Year- Employ Establis Company Sub-sector (VNDbn) $mn) Ending ees hed Sabeco Beverages - Alcoholic 16,714.0 798.9 Dec-10 na na Vinamilk Beverages - Dairy 15,753.0 753.0 Dec-10 3,000 1976 Unilever Vietnam Food and beverages na 650.0e 2010 5,500 1995 Nestle Vietnam Food and beverages na 550.0e 2010 na 1995 Coca-Cola Vietnam Beverages - Soft drinks na 175.0e 2010 1,182 1994 Habeco Beverages - Alcoholic 3,268.0 156.2 Dec-10 na na

Key Players in Vietnam's Drink Sector - 2011 - Continued

Year Sales Sales (US Year- Employ Establis Company Sub-sector (VNDbn) $mn) Ending ees hed Vietnam Brewery Ltd Beverages - Alcoholic na 150.0e 2010 500 1991 Pepsi-IBC Vietnam Beverages - Soft drinks na 140.0e 2010 na 1991 Trung Nguyen Corp Beverages - Coffee na 125.0e 2010 na 1996 Food and beverages - San Miguel Purefoods Vietnam Miscellaneous na 100.0e 2010 na na Saigon Beverages Joint Stock Company (Tribeco) Beverages - Soft drinks 678.0 32.4 Dec-10 1,074 1992 Vinacafe Bienhoa Joint Stock Company Beverages - hot drinks na 30.0e 2010 na 1969 Beverages - Alcoholic & Tan Hiep Phat Group Soft drinks na 25.0e 2010 2,000 1994 Food and beverages - Hanoi Milk Joint Stock Company Dairy 326.0 15.6 Dec-10 na 2001

e = BMI estimate, na = not available. Source: BMI, Trade press, Company corporate data (US$ based on FX rate of VND1,000 = US$0.0478)

Mass Grocery Retail

Table: Key Players in Vietnam's Mass Grocery Retail Sector - 2011

Sales In Reported Country Currency Sales US Financial Outl Establi Parent Company of Origin (bn) $mn Year Ending Fascias Format ets shed December Supermarke Saigon Co-op Vietnam VND8,600 412.8 2009 Co-op Mart ts 50 1989 Convenienc Co-op e stores 90 Co-op Convenienc Food e stores 2 Metro Cash & Carry Germany/ December Cash & Vietnam Vietnam EUR2.5* 3,622 2010 Metro Carry 13 2002 Thailand/ Convenienc CP Group Vietnam THB720e 23,880e 2010 FreshMart e stores 120 na France/ EUR11.1** December Hypermarke Groupe Casino Vietnam * 16,085 2010 Big C ts 14 1998 VND6,600 December Supermarke Hanoi Trade Corporation Vietnam e 316.8e 2010 Hapro ts 50 na Convenienc Hapro e stores 90

Key Players in Vietnam's Mass Grocery Retail Sector - 2011 - Continued

Sales In Reported Country Currency Sales US Financial Outl Establi Parent Company of Origin (bn) $mn Year Ending Fascias Format ets shed Vietnam National Textile Vinatexmar Supermarke And Garment Group Vietnam na 20e na t ts 56 na Saigon Trading Supermarke Corporation Vietnam na 13e na Saigon ts 12 1995 Dairy Farm International December Wellcome/ Supermarke Holdings Vietnam na 2,395.8** 2010 Citimart ts 3 na Supermarke Intimex Hanoi Vietnam na 9e 2010 Intimex ts 14 1979 Supermarke An Phong Company Vietnam na 3e 2010 Maximark ts 11 na Japan/ Supermarke Seiyu Vietnam na 2e 2010 Seiyu ts 1 na

na = not available, e = estimate, *Asia/Africa sales ** East Asia regional sales, ***International Sales, Source: Company Financials, Trade press, BMI

Company Analysis Unilever Vietnam

Strengths • Strong brand appeal facilitates reach to Vietnamese consumers.

• Diverse product portfolio with multiple price entry points allows Unilever Vietnam to capitalise on varying demand from the different income groups.

• Complete ownership of its local subsidiary means full operational control.

• Focus on affordability ensures access to a wide lower income consumer base.

Weaknesses • Limited food product offerings as compared to the other F&D multinationals limit further sales opportunities.

• The absence of a local partner could impact its ability to respond to changing local taste preferences.

Opportunities • Urbanisation and middle-class growth could dramatically increase Unilever Vietnam's existing consumer base.

• Rising incomes could increase demand for non-essential consumer items.

• Relative sector immaturity provides massive long-term growth opportunities for Unilever Vietnam.

• Vietnam's favourable demographic profile is well-suited to Unilever's FMCG portfolio.

Threats • Not a problem for non-perishable personal care items, food expansion may necessitate further supply chain investment due to underdeveloped infrastructure.

• Input cost volatility cannot easily be passed on in such a price-sensitive environment.

• Increased competition from rival multinationals and expansionary local and regional players could undermine the company's strong market share position.

Overview Unilever Vietnam is a wholly owned subsidiary of Anglo-Dutch fast-moving consumer goods leader Unilever. The parent took full control of the subsidiary in mid-2009, buying the 33.3% stake it did not already own from its local partner. By far the largest section of Unilever's portfolio in Vietnam is accounted for by personal care products, while the company also has a large number of homecare brands. Its presence in the food sector is relatively smaller than that of its other consumer products but it does have some notable brands in Knorr, Lipton and Wall's.

Strategy Given Vietnam's still-vast income inequalities, Unilever has wisely made product affordability its strategic focus. The majority of its products are at the economy or mass- market end of the market. Notably, the company has recently decided to invest in

promoting its Wall's ice cream brand in the country -- targeting both out-of-house and take-home shoppers. As a luxury item, this move could suggest that Unilever is now increasingly looking at premiumisation opportunities in line with Vietnam's rising disposable incomes. The fact that substantial brand-building and distribution investments are being made (i.e. branded freezers) lends further weight to the idea that a growing audience for these sorts of products exists. However, the company is continuing to import ice cream from its Thai subsidiary, rather than prioritising local capacity increases, which tells much about the scale of the opportunity on offer in Vietnam's ice cream market at present.

Nonetheless, if premiumisation remains a relatively minor opportunity, certainly relative to some regional markets, Vietnam has been an outperformer for Unilever. While the company does not provide a country-specific performance breakdown it has announced that the market provided double-digit volume sales growth in 2010.

Financial Data Unilever does not publish country-specific performance data. Vietnam is included within the Asia, Africa and Central & Eastern Europe operating region.

• Estimated local sales: US$650mn

Asia, Africa and Central & Eastern Europe Revenue

• 2010: EUR17.69bn • 2009: EUR14.90bn • 2008: EUR14.47bn • 2007: EUR13.42bn

Asia, Africa and Central & Eastern Europe Operating Income

• 2010: EUR2.25bn • 2009: EUR1.93bn • 2008: EUR1.70bn • 2007: EUR1.71bn

Nestlé Vietnam

Strengths • Strong brand appeal facilitates reach to young, aspirational Vietnamese consumers.

• Strong price proposition will appeal to emerging consumers.

• Health and wellness commitment should appeal to an increasingly affluent middle class.

Weaknesses • Despite a growing commitment to South East Asia, Vietnam has received relatively less investment from the parent company than other neighbouring economies.

• Domestic and multinational competition is high, even in this fragmented market place, and Nestlé Vietnam will have to continue pouring in capital investments to secure its market share.

Opportunities • High birth rates create strong sales opportunities for Nestlé's infant nutrition products.

• Urbanisation and middle class growth could dramatically increase Nestlé Vietnam's existing consumer base.

• Rising incomes could increase demand for non-essential consumer items.

• Relative sector immaturity provides massive long-term growth opportunities for Nestlé Vietnam.

Threats • Further expansion in Nestlé's core dairy sector will necessitate significant supply chain investments to improve distribution infrastructure.

• Input cost volatility cannot easily be passed on in such a price-sensitive environment.

Overview Nestlé Vietnam is a wholly owned subsidiary of Swiss food and beverage major Nestlé. The subsidiary domestically manufacturers beverages, dairy products and prepared meals and cooking ingredients out of three Vietnamese production plants. The company also distributes pharmaceuticals in Vietnam, although it imports rather than domestically manufactures these goods. In terms of food and beverage brands, the company markets Nescafé, La Vie, Gau, Milo, Nestea and Maggi in Vietnam.

Strategy Given Nestlé's enormous global product portfolio, its Vietnamese product offerings are actually fairly limited. Interestingly, the company appears to have a dual-pronged growth strategy, aspects of which might appear incompatible but which have propelled it to one of the country's leading consumer goods players. It emphasises product value. That is not to say that it is only focused on economy products; however, it does engage in price promotions in an effort to build customer loyalty among Vietnamese consumers. Avoiding economy positioning, Nestlé Vietnam is also pushing the health and wellness credentials that the company promotes globally. With discretionary spending still limited among much of Vietnamese society, necessity remains a far more important purchasing determinant than health. However, by combining its health push with its value positioning, Nestlé is developing a long-term strategy that should appeal to both

Vietnam's increasingly affluent middle classes (via the health push) and its emerging consumer base (via the value push).

While this reflects the company's mid-term Vietnamese strategy, Nestlé has given an indication that it may review its product portfolio in a number of emerging markets where rising commodity costs are threatening margins and where a price-sensitive environment makes these costs harder to pass on to consumers. With a lack of higher-margin premium products in Vietnam, the market could be the subject of a review although whether this means a reduction in portfolio size or not is as yet unclear.

Financial Data Nestlé does not post country-specific performance data for Vietnam. Vietnam resides within its Zone Asia, Oceania and Africa operating region, under the Other Asian Markets division.

• Estimated local sales: US$550mn

Other Asian Markets Revenue

2010: CHF7.80bn

2009: CHF6.89bn

2008: CHF6.64bn

Masan Consumer

Strengths • A nationwide distribution network gives Masan rare access to both of the country's high- spending urban centres and the rural, low-spending population.

• Established strong brands are a significant advantage in the current regional environment of food hygiene and safety scares.

• An increasingly diversified product portfolio which caters specifically to local tastes.

• Investment from a leading private equity fund should provide capital for expansion.

Weaknesses • Local consumers generally do not exhibit strong brand loyalty or a preference for Vietnamese products.

• Domestic and multinational competition is high, even in this fragmented marketplace, and Masan Food will have to continue pouring in capital investments to secure its market share.

Opportunities • A young and fast-growing population represents a receptive audience for branded foods.

• Further product development in perceived healthy, and innovative product channels is a long- term opportunity, even if the audience for such goods is currently small.

• Masan has received investments from a number of multinationals, providing funds for future expansions, product launches and marketing campaigns. The latest PE investment is just another example of this.

• The company has confirmed that it may consider mergers and acquisitions as a means of accelerating growth.

Threats • Despite having an established nationwide distribution network, the movement of goods remains a problem given the country's underdeveloped infrastructure.

• The arrival of multinationals, with an emphasis on branded food sales, will jeopardise Masan's market share.

• The return of higher input costs could threaten margins, with these difficult to pass on to consumers in what remains a price sensitive environment.

• The return of inflationary pressures could reduce discretionary spending, with branded food and beverages to suffer.

Overview Masan Consumer, formerly Masan Food (a name change which reflects its desire to diversify into a wider range of consumer products) is part of conglomerate Masan Group, a company that is also engaged in financial services via its Techcombank arm. The company is a leading producer of instant noodles and sauces, including soy sauce, fish sauce and chilli sauce. A branded food specialist, its key brand names include Nam Ngu, Chin-Su, Tam Thai Tu and Omachi. The company controls 74% of the domestic fish sauce market, 80% of the Vietnamese soy sauce market and 40% of the local premium instant noodles market.

Strategy Having attracted investments from both international and domestic private equity firms, Masan will look to continue to exploit the rising demand for branded food and beverage products via investment in marketing and brand-building initiatives and the ongoing expansion of its existing nationwide distribution network. The latest PE investment, the largest ever PE investment in Vietnam, underlines the firm's appeal - investors see the company as a great way of benefiting from Vietnam's great consumer growth story; this is a local firm, with strong brands, a balanced portfolio and an impressive distribution network.

Masan has been a key local player in terms of Vietnam's transition from non-branded to branded foodstuffs. If it is to maintain healthy growth rates in the long term it may also have to look to further portfolio diversification. Increased investment from international food and drink companies, with powerhouse brands and immense marketing resources, will create additional competitive pressure for Masan and yet the company does have the advantage of an existing distribution reach and an established domestic name.

However, Masan will not sit on its position and its latest capital investment will help facilitate its move into non-food consumer products, including beverages, home and personal care. To aid its transition to a more diversified company, Masan will seek to establish umbrella brands, thus leveraging of off its existing strong brand name. This is an advisable strategy if under pressure from Western powerhouse brands. The company is also likely to pursue increased manufacturing efficiency, a priority that must be balanced against expansionary investments during such a period of volatile input costs.

Financial Data • 2010 Revenue: VND5,586bn • 2009 Revenue: VND3,958bn • 2010 EBITDA: VND1,425bn • 2009 EBITDA: VND715bn • 2010 Net Income: VND1,253bn • 2009 Net Income: VND669bn

Vietnam Dairy Products Joint Stock Company (Vinamilk)

Strengths • A market-leading dairy brand name, which dominates sales in this high-growth channel.

• A diverse product range and a large export division allow Vinamilk to offset downturns in one category with an improved performance elsewhere.

• Benefiting from soaring demand for both primary and processed dairy products in the fast- growing local economy.

Weaknesses • Competition from international investors is intense and Vinamilk will have to keep up its expansionary activities in order to secure its market share.

• Reliance on Vietnam, which is characterised by a vast low-income rural population, means that Vinamilk faces a limited audience size for fresh dairy.

• Vinamilk still faces raw material shortages, importing over 70% of its raw material from abroad, and this places it highly exposed to commodity price volatility.

Opportunities • In urban centres, processed dairy products represent a high-value, high-margin channel.

• Dairy consumption at the mass-market level is experiencing high single-digit growth annually.

• Experience in the emerging Vietnamese market should increase Vinamilk's chances of success when exporting to other emerging South East Asian markets.

• Increasing product diversification, such as with instant coffee, will allow the company to benefit from strong forecast growth in the other food and drink subsectors.

• Vinamilk's recent investments in domestic capacity expansions and in New Zealand's Miraka will allow it to ease current supply shortages.

Threats • Vietnam's weak distribution infrastructure reduces sales opportunities for perishable, high-value dairy products.

• Vinamilk considers itself disadvantaged by the strength of international brand names and their prevalence will only increase going forward.

• Rising commodity costs threaten profitability, particularly with regard to mass-market primary products.

Overview Vinamilk is the market leader in Vietnam's dairy industry. It produces over 200 dairy products for both domestic sale and for export. The company recently released more of its state-owned equity in order to reduce the state's share to 50% and qualify for stock- market listing. Vinamilk controls an estimated 75% of the high-growth Vietnamese dairy market.

Strategy To exploit the rewards on offer in the Vietnamese dairy sector, Vietnam's largest dairy producer, Vinamilk, has reportedly started construction on a US$120mn milk factory in the southern Binh Duong province. We are maintaining our upbeat assessment of the

growth prospects of Vietnam's dairy sector on the back of the country's strong economic rebound and favourable demographics. The country's economic recovery has lifted many Vietnamese out of poverty and we believe consumer spending will continue to hold up very strongly over the coming years. Moreover, Vietnam's massive and relatively young population will continue to bolster demand for dairy products.

The new factory will have a capacity of 400mn litres of milk per year when it becomes operational in 2012, and is expected to double its capacity by 2017. The company is also planning to increase its stock of milk cows to 80,000, which will allow it to boost its milk supply by 1.3mn litres a day.

While we are largely positive on the outlook for Vietnam's dairy sector, we do see certain risks limiting the scope for long-term growth in the dairy industry. In the wake of the melamine contamination scandal in China, Vietnam's lack of a national quality-control body for dairy products continues to weigh on consumer confidence and domestic demand for dairy products, and the poor quality of the country's dairy products (the majority of domestically produced dairy products have lower-than-advertised protein levels) deters consumers from drinking locally produced fluid milk. In view of this, we expect Vinamilk to continue ramping up investments in marketing and branding initiatives to improve consumer confidence in its dairy brands.

Financial Data Q1 2011 Revenue: VND4,630bn (+40% y-o-y)

Q1 2011 Net Profit: VND1,000bn (+22% y-o-y)

Revenue

• 2010: VND16,081bn • 2009: VND10,820bn • 2008: VND8,381bn • 2007: VND6,675bn • 2006: VND6,289bn

Net Profit

• 2010: VND3,616bn • 2009: VND2,376bn • 2008: VND1,249bn • 2007: VND963bn • 2006: VND660bn

San Miguel Pure Foods (VN) Co Ltd

Strengths • San Miguel is a hugely important regional food company and thus a highly influential parent company.

• The company has a strong tradition in health food production, which stands it in good stead as the global health trend catches up with emerging Asia.

Weaknesses • Questions have been raised about Pure Foods' ability to balance meat farming, feeds and branded food operations, with product focus tending to be the industry buzzword during this period of high operating costs.

• The company has faced significant negative publicity in recent years, with accusations that its plant has caused serious environmental and health concerns.

Opportunities • High feed prices should help to supplement Pure Foods' profits for as long as grain demand from the alternative energy sector remains strong.

• Branded consumer food products represent an important long-term growth channel for the company.

• Processed meat products, which meet the emerging demand for convenience, should prove the next logical step for Pure Foods.

Threats • Regional food hygiene scares have served to undermine consumer confidence in local meat producers.

• Growing competition from international food manufacturers could undermine any competitive advantage Pure Foods possesses from being a regional player.

• Just as higher animal feed costs will benefit Pure Foods in its feed division, they could make life more challenging in the company's meat-farming sector.

Overview Pure Foods is a leading Vietnamese food and beverage company and is part of the Philippines-based San Miguel Corporation, which owns 97% of the company. In 2003, Pure Foods acquired a pig-farming and feeding-mill facility from Taiwan Tea Corporation. It was the food division's first acquisition and feeds now contribute around 15% to group revenue. In Vietnam, 80% of the unit's output is utilised directly by the business, while the remainder is sold to customers within Vietnam. As well as feed, the unit produces and distributes Le Gourmet processed meat products.

Strategy Pure Foods is focused on increasing revenues and improving profit margins by boosting operating efficiencies across all divisions. Accordingly, it embraces and attempts to use the most up-to-date technologies in its business activities. In terms of specific strategies, the company intends to increase the size of its hog farm by 19%, after the division contributed particularly significantly to profits. The company has recently opened five

Monterey Meatshops in southern Vietnam. Three are in major supermarkets in Ho Chi Minh City, with the remaining two in Binh Duong.

Pure Foods Filipino parent company San Miguel is now looking to sell up to 49% of Pure Foods in order to finance its diversification into other sectors. Such a capital injection could benefit the Vietnamese subsidiary. The parent's diversification strategy has meant that Pure Foods has not received significant expansionary investments in recent years and a renewed focus, triggered by a new partner, could accelerate revenue growth for the Vietnamese unit.

Financial Data San Miguel Corporation does not publish financial data at a country-level

• 2010 Vietnam Revenue Estimate: US$100mn

Hanoi Beer Alcohol Beverage Corp (Habeco)

Strengths • Vietnam's beer market has grown at a rapid pace, supported by economic growth, rising tourism and favourable age demographics.

• The company is already looking to regional expansion, profitable partnerships and premium brands.

• Dominant position in the North of country.

• Several major brands in the key economy sector.

Weaknesses • In 2008, Habeco postponed its scheduled IPO due to challenging trading conditions in the local market. Global uncertainty continues to restrict access to new capital from this source.

• Relatively weaker dominance in the more affluent southern part of Vietnam limits the potential for stronger revenue growth.

• Focus on economy segment could eventually prove an impediment to growth as incomes increase.

Opportunities • Vietnam's proximity to the dynamic frontier beer markets of Laos, Cambodia and Myanmar offer up huge opportunities for regional expansion.

• Increasingly close relationship with Carlsberg should facilitate wider distribution and synergies.

• We recently revised up our beer consumption growth forecast for 2011, highlighting the extent of the short-term opportunity on offer.

Threats • Competition in the sector continues to intensify as multinationals seek out the few truly explosive growth opportunities that remain in the regional beer market.

• The expansion pace of the market leaders has raised concerns that the beer industry is now oversupplied, particularly when one considers that much of the country still lives in poverty.

• Sabeco has reportedly attracted the attention of US giant Anheuser-Busch InBev. A takeover would likely lead to an increase in investment and hence competition.

Overview Habeco is a major Vietnamese brewer and dominates sales in the north of the country, particularly in the increasingly affluent city of Hanoi. In early 2007, Carlsberg acquired a 10% stake in the company and in September 2009 increased its holding to 30%, making it Habeco's largest single strategic investor. The firm has a focus on economy brands, which has helped it ward off international competition and deliver sustained growth. The firm is also positioning itself for growth in the spirits markets. In 2008, through its subsidiary Hanoi Liquor Joint Stock Company (Halico), the company entered into a JV with UK-based spirits leader Diageo, the world's largest spirits company. The two companies have joined forces to expand within what remains a fledgling branded spirits industry and to exploit the strong growth potential that exists in the market.

Strategy The benefits of Carlsberg's acquisition have been substantial for Habeco. The local firm now has access to a number of popular Western beer brands and while these are for now beyond the financial reach of the average Vietnamese consumer, this is slowly changing in line with the country's sustained and impressive GDP growth. As well as the share sale, the two companies are now expected to co-operate in other key business areas, perhaps marketing and distribution, to effectively combine their respective expertise.

Faced with multinational competition in recent years, Habeco has focused closely on its competitive strengths. The company has continued to pursue growth in the Bia Hoi segment, this low margin but high volume, keg-only product now accounting for 40% of its total sales. The unique distribution challenges of Bia Hoi - it is sold in the Hanoi area's plethora of street cafés, typically to lower income consumers - has kept international players out of this segment and given local players some breathing space. In extending its relationship with Carlsberg, Habeco is expressing an interest in widening its own product portfolio and looking for ways to improve margins.

Carlsberg and Habeco together control around 33% of Vietnam's beer market, putting them on level pegging with Sabeco which dominates in the higher-spending south. Together, the two partners will be optimistic about achieving market leadership, after which wider regional growth is likely to become a priority, with the attractive frontier markets of Laos, Cambodia and Myanmar on the doorstep. Habeco will be looking to leverage the expertise of new shareholder Carlsberg, to increase distribution beyond its northern stronghold and to add new brands to its portfolio to support the popular Hanoi Beer and Halida brands.

Habeco's strategy of playing to its strengths while leveraging off of an international partner to increase distribution and boost its premium profile served it well in 2010. Producing 600mn litres of beer (using production as a good proxy for consumption), the company exceeded its production growth target of 588mn litres for the year.

Financial Data • 2010 Revenue: VND3,268bn (US$156.2mn)

Saigon Beer Alcohol and Beverage Corporation (Sabeco)

Strengths • Dominance in what is perceived as one of the world's highest-potential beer markets provides strong growth potential.

• Strong economy beer brands Saigon Beer and Beer 333 are very popular in the south.

• Its economy-heavy portfolio means that Sabeco brands tend to perform well even during periods of low consumer confidence.

Weaknesses • A disappointing IPO, although not attributable to the perceived attractiveness of Sabeco itself, is reflective of tough market conditions.

• A predominantly economy portfolio reduces Sabeco's competitiveness in wealthy urban centres and its ability to exploit the tourist dollar.

Opportunities • A potential MNC partnership would improve brand portfolio and boost the availability of capital, with behemoths SABMiller, Anheuser-Busch InBev, Asahi Breweries and Heineken all thought to be interested.

• Tourism represents an excellent opportunity for Sabeco to enter the premium branded segment.

• Regional diversity allows for easy expansion in what remains an immature market despite investment levels.

• We recently revised up our beer consumption growth forecast for 2011, highlighting the extent of the short-term opportunity on offer.

Threats • Rising raw material costs threaten profitability in this competitive market in which higher prices cannot easily be passed on to consumers.

• Significant expansion plans from Carlsberg, APB and Habeco could threaten Sabeco's market share.

Overview Sabeco is Vietnam's leading brewer, controlling around 33% of total beer sales and a far larger proportion of sales in southern Vietnam. The state-backed brewer has recently commenced initial privatisation and had planned to offload around 20% of its shares in order to raise US$560mn. Tough market conditions meant than only 61% of this target was reached, although this was not seen as a poor reflection on Sabeco, whose flagship Saigon Beer and Beer 333 continue to enjoy strong success. The state currently holds an 89.5% stake in Sabeco.

Strategy Sabeco's IPO was meant to raise funds to support continued expansion; a vital requirement if it is to continue to dominate amid intense local and international competition. Although short of initial targets, IPO funds are likely to drive further expansion, with regional diversity thought to be a particular priority.

Sabeco increased production by 21% in 2010 thanks in part to the construction of a 50mn-litres-per-annum factory in the south central province of Ninh Thuan; this followed on the back of the establishment of the 200mn-litres-per-annum Cu Chi brewery in March 2008.

As well as expansion, brand diversification remains a key element of the company's strategy as it looks to complement its popular local economy brands with some premium, potentially international, products. Finding a multinational partner could contribute enormously towards this and should not be a difficult objective for such an attractive firm.

Financial Data • 2010 Revenue: VND16,714bn • 2009 Revenue: VND15,400bn

Carlsberg

Strengths • Carlsberg's strong financial capacity enables it to pour in significant capital investments without the need for immediate returns.

• Famous Carlsberg brand should prove popular with young, brand-oriented consumers.

• Early pursuit of a diverse regional presence has given Carlsberg a head-start.

• Carlsberg acquired Scottish & Newcastle's Vietnamese business. S&N had itself been expansionary in Vietnam thus significantly lifting Carlsberg's output.

Weaknesses • Distribution infrastructure remains problematic, with separate brewing facilities in separate regions the best way to overcome this, despite the obvious expense.

• Carlsberg lacks a presence in the economy end of the market, and in such a price-sensitive market, these brands remain the most popular.

• Carlsberg will have to invest heavily in acquisitions and expansions if it is to achieve its goal of establishing a strong presence across the country.

Opportunities • Economic growth should lift sales of Carlsberg's premium, international brands.

• Small-scale brewers, struggling with increased competition, could represent handy market share building acquisition targets.

• We recently revised up our beer consumption growth forecast for 2011, highlighting the extent of the short-term opportunity on offer.

Threats • In line with market liberalisation, the beer market will receive a flood of investment in the coming years dramatically ramping up competition levels.

• Rising commodity costs threaten brewers in a market where higher costs cannot be passed on to consumers.

Overview Carlsberg entered Vietnam in 1993 via the acquisition of a 60% stake in South East Asia Brewery in northern Vietnam. It has since expanded, acquiring 30% of Halong Brewery in the north east of the country in early 2007 and 50% of Central Vietnam's Hue Brewery in 1994, followed by an announcement in late 2009 that it would acquire the remaining 50%. Also in early 2007, Carlsberg acquired a 10% stake in state-owned Habeco, followed by a 16% stake in April 2008, then in September 2009 it further upped its stake to 30%, making it Habeco's largest single strategic investor. The Danish company now has a market share of around 10% in Vietnam, which will increase following the completion of the Hue Brewery acquisition, and is the country's second largest international player behind Heineken-backed Asia Pacific Breweries. Carlsberg estimates that together it and Habeco control 33% of Vietnam's beer market, putting them on level pegging with market leader Sabeco.

Strategy One of Carlsberg's key objectives in Vietnam is to improve its regional presence. To this end, it has formed a joint venture - Hanoi Vung Tau Joint Stock Company - with Habeco for a brewery construction in southern Vietnam, thus complementing its northern, north- eastern and central facilities. Carlsberg's focus remains on economy local brands, such as Hue. However, it is increasingly targeting tourists and wealthy urban residents with its premium, eponymous Carlsberg brand. The Vietnamese beer market continues to attract major investment and Carlsberg will want to ensure that its early entry sees it retains a favourable position. Inorganic growth will be integral to this, and Carlsberg is expected to play an active role in the future auction of small-scale brewers. With its increased stake in Habeco, the company is optimistic about achieving market leadership, after which regional growth is likely to become a priority. The company has also been investing heavily in marketing and brand building, and is now the sponsor of the Carlsberg Gulf Classic in the region.

Financial Data For the Asia Region

• Q310 Revenue (end September 2010): DKK1.5bn (US$273.3mn), decline of 1.9% • 2009 Revenue: DKK4.2bn (US$765.3mn), growth of 18.9%

Operational Data • 2009 market share (including Habeco): 33%

Metro Cash & Carry

Strengths • The financial backing of parent company Metro enables it to pour in significant capital investments without the need for immediate returns.

• By remaining in the wholesale sector, Metro is able to exploit the needs of the country's still- strong independent retail sector.

• As one of few international brands in the market, Metro has proved popular among consumers.

• Metro's strategy for growth is very compatible with Vietnam's current economy, as this remains an inherently price-sensitive market, with premium brands appealing to very few

Weaknesses • Distribution remains a problem for Metro, particularly with regard to the sale of perishables, as Vietnam's infrastructure is still weak with roads, railways and ports that are inadequate to cope with the country's growth

• Metro will have to continue to invest heavily in expansions and distribution networks, with little short-term returns.

Opportunities • In the long term, Metro could consider unveiling one of its popular European consumer retail brands on to the Vietnamese market.

• By working with local suppliers, Metro is ensuring that its economic contribution extends beyond retail, putting it in a favourable negotiating position with government.

• Expansion into increasingly wealthy central cities is an important growth channel for Metro.

Threats • The arrival of fellow multinationals, in line with sector liberalisation, will erode an element of Metro's competitive differentiation.

• Rising operating costs threaten profit margins with these hard to pass on to buyers on such a price-sensitive independent sector.

Overview Germany's Metro Group has been the pioneer of the cash-and-carry format in Vietnam having entered the market in 2002. It operates 13 outlets and is Vietnam's leading multinational retailer. As is the case across its entire Asian store network, Metro is present only in the wholesale format in Vietnam and has not to date hinted at amending this strategy to incorporate consumer grocery retailing.

Strategy Metro plans to pursue a reasonably moderate expansion strategy in Vietnam, investing US$120mn in opening five more stores - subject to the receipt of further licences for new store openings - with Hanoi, Ho Chi Minh City, Nha Trang and Dong Nai representing potential targets. Metro is also intent on building its relationship with suppliers, with a view to ultimately adding Vietnamese produce to its global network. To date, this has focused on non-food items, although growing demand for Vietnamese seafood, fruit and vegetables has prompted Metro to establish another sourcing office in the country. A

recent loan from the European Investment Bank will assist Metro both in financing store openings and in enabling Metro to invest in supplier training. The fact that Metro is present only in the wholesale sector necessitates a relatively modest approach to growth, although the company will be wary of the effect of greater competition following sector liberalisation.

Financial Data Metro Group does not publish country-specific financial data

• 2010 Asia/Africa Revenue: EUR2.50bn (US$3.62bn) • 2009 Vietnam Revenue Estimate: US$150mn

Operational Data • Estimated number of employees: 3,000 • Average registered customers per Vietnamese store: 90,000

Saigon Co-op

Strengths • Saigon Co-op has a very strong brand in the southern part of the country, where its name is synonymous with low prices.

• Operating in both the supermarket and convenience sectors diversifies Saigon Co-op's potential audience size.

• With a focus on low-cost and increasingly, private label goods, the company is well positioned for strong performance during periods of low consumer confidence.

Weaknesses • Scale-building investments of the type needed if Saigon Co-op is to remain competitive will be enormously costly.

• Unlike its potential rivals, Saigon Co-op cannot make high-risk investments, needing immediate returns in order to remain afloat.

• Unlike in many other markets in the region, being a domestic operator does not give Saigon Co- op a major advantage against its foreign counterparts.

Opportunities • Saigon Co-op's low profit mark-up will give it a strong edge over its multinational rivals should they enter Vietnam.

• Price-cutting promotions are an excellent means of generating customer loyalty, although they are becoming increasingly hard to offer.

• Seeking partnerships is a wise means of building scale in a low-risk manner.

• Planned fresh food and convenience offerings are strong long-term growth prospects.

• The retailer has announced plans to launch an outlet in neighbouring Cambodia, which has a far less developed MGR sector, giving it a first mover advantage.

Threats • The imminent arrival of international retailers poses a real threat to Saigon Co-op's market leadership, as it is far less experienced than the newcomers.

• Focus on Vietnamese brands could backfire as exposure to Western brands increases.

• Price hikes - a result of volatile food prices - could threaten customer loyalty.

Overview Saigon Co-op is Vietnam's leading retailer. The firm has 70 convenience stores and 43 supermarkets, the majority of which are located in Ho Chi Minh City, where Co-op controls 50% of the city's supermarket sector. It has also recently launched a new chain of convenience stores called Co-op Food. Its network is oriented towards low-income consumers, although it increasingly resembles that of the modern retail concept proliferating in the country.

Strategy Saigon targets Vietnam's low-income population - providing choice at affordable prices. Its strategy involves maintenance of this image and, having been forced to raise prices in

2008 due to high wholesale costs, it has since been promoting a five-pronged approach to keeping prices low. This involves requesting suppliers to justify price increases; building stockpiles of basic items; improving distribution to ensure supply and reduce panic buying; accepting lower profit margins; and looking for further cost cuts through efficiency. As well as targeting 100 supermarkets by 2015, it is also targeting logistical improvements and, potentially, further joint ventures and partnerships to help meet its store-opening aims, particularly in those cities in which it lacks expertise or infrastructure. Saigon Co-op's slim margin mark-up should help it in the face of multinational competition. The firm has joined the trend towards private-label goods, recently developing its Co-op Mart brand for frozen and dried goods and its SGC brand for clothing. It has also recently launched a chain of small-scale convenience stores, Co-op Food and has ambitions of expanding this to 120 outlets by 2012. Bringing convenience to residential areas of Ho Chi Minh City, along with further supermarket openings, is part of the company's strategy for preparing for the arrival of multinational competition. The retailer recently announced plans to build its first ever overseas supermarket in Cambodia.

Financial Data Company Data • 2009 Revenue: VND8.6trn (US$438.6mn), growth of 35% • 2008 Revenue: VND6.4trn (US$326.4mn); growth of 48.9%

Methodology

Risk/Reward Ratings Methodology

BMI's approach in assessing the risk/reward balance for food and drink industry investors globally is fourfold. 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. Third, where possible we attempt to identify objective indicators that may serve as proxies for issues/trends to avoid subjectivity. Finally, we use BMI's proprietary Country Risk Ratings (CRR) in a nuanced manner to ensure that only the aspects most relevant to the food and drink industry are incorporated. Overall, the system offers an industry-leading, comparative insight into the opportunities/risks for companies across the globe.

Ratings System

Conceptually, the ratings system divides into two distinct areas:

Rewards: evaluation of sector's size and growth potential in each country, and also broader industry/ state characteristics that may inhibit its development.

Risks: evaluation of industry-specific dangers and those emanating from the country's 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. Overall, the ratings use three subjectively measured indicators, and 41separate indicators/datasets.

Table: Returns

Industry Rewards Food and drink consumption Indicator denotes overall breadth of market. Large markets score higher than smaller ones. per capita, US$ Soft drink consumption per Indicator denotes overall breadth of market. Large markets score higher than smaller ones. capita, US$

Returns - Continued

Industry Rewards Alcoholic drink consumption Indicator denotes overall breadth of market. Large markets score higher than smaller ones. per capita, litres Per-capita food consumption Indicator denotes sector dynamism. Scores based on total growth over our five-year growth, five-year % growth forecast period. Indicator denotes market's natural resources and dependency on imports for food and raw Food and drink trade balance ingredient supply. Country Rewards Economic structure Rating Evaluates structural balance of economy; evaluating issues such as over-reliance on from BMI's CRR. single sectors/markets as well as past economic volatility. Population size Proxy for Large countries considered more attractive. potential market size. GDP per capita, US$ Proxy Size of population is important, but needs to be considered in relation to spending power. for wealth. High income states receive better scores than low income states. Market entry potential/ Subjective rating based on level of industry development and level and strength of industry maturity competition in a market. Mature and/or competitive markets get low scores.

NB See Business Environment section for regional and country-specific ratings explanations. Source: BMI

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 BMI's 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 owing 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 BMI's 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.

Hypermarket: BMI classifies hypermarkets as retail outlets selling both groceries and a large range of general merchandise goods (non-food items) and typically over 2,500m² 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 300m², 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 500m² and 1,500m² 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 privatelabel goods, an absence of added-value services - often called a no-frills environment - and a high product turnover rate.

Convenience stores: BMI's classification of convenience stores includes small outlets typically below 300m² 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 that are independently owned but which 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 and operate more like normal supermarkets, and are thus classified as such within BMI's reports

BMI Food & Drink Forecasting and Sources

How We Generate Our Industry Forecasts

BMI's 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 coefficients are significant (normally t-test and/or P-value)

• All results are assessed to alleviate issues related to auto-correlation and multi-collinearity

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 BMI's 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.

Example of Food Consumption Model:

(Food Consumption)t = β0 + β1*(GDP)t + β2*(Inflation)t + β3*(Lending Rate)t + β4* (Foreign Exchange

Rate)t + β5*(Government Expenditure)t + β6*(Food Consumption)t-1 + εt

Sourcing