Vietnam Food and Drink Report Q4 2010

The Vietnamese economy appears to be solidly on the road to recovery, with BMI now forecasting real GDP growth of 6.0%, in light of faster-than-expected growth in H110, although we continue to warn of the risks of overheating. Vietnam’s real GDP growth in Q210 came in at 6.4% y-o-y, and while a breakdown of growth by expenditure is unavailable, we believe that private consumption is booming and is set to bolster domestic demand in H210 as confidence continues to improve. The country’s food and drink sector is certain to benefit from this positive outlook. In particular, the MGR sector is forecast to experience strong growth as it continues to attract considerable attention from international retailers, despite the challenges involved in doing business in Vietnam. Given that it has one of the highest MGR growth forecasts in the Asia Pacific region, it is not hard to see why.

Headline Industry Data

• 2010 food consumption growth = +11.2%; forecast to 2014 = +64.9%
• 2010 alcoholic drink sales = +5.7%; forecast to 2014 = +36.6%
• 2010 beer volume sales = +2.9%; forecast to 2014 = +31.7%
• 2010 mass grocery retail sales = +12.3%; forecast to 2014 = +71%

Key Company Trends
Expansions in the Dairy Sector – In May, Dutch dairy cooperative Royal FrieslandCampina announced
plans to invest US$12mn in the expansion of production capacity at a factory in Vietnam in order to meet the growing demand for dairy products with its Dutch Lady, YoMost and Friso brands. The factory in Binh Duong is scheduled to be fully operational by the end of 2012. Vietnamese dairy consumption growth will remain solid over our forecast period, as strong economic growth will filter through to rising disposable incomes. This will push up demand for non-essential food products.

Confectionery Consolidation – Also in May, Vietnamese confectioner Kinh Do Corp announced plans to acquire two smaller local players. Kinh Do Corp will take 100% ownership of North Kinh Do Food Joint Stock Company in a deal worth VND726bn (US$38.3mn), while it will also acquire the 72% interest it does not already hold in Ki Do Joint Stock Company for around VND239bn (US$12.6mn) – both estimates based on the company’s last closing share price of VND53,000. Kinh Do’s expansion plans are timely as we expect an increase in sector competition along with strong growth forecasts. Kinh Do’s acquisition-led enlargement should significantly improve its competitiveness, giving it access to a larger product pipeline, a wider distribution network and improved economies of scale in terms of procurement and manufacturing.

Vietnam Food and Drink Report Q4 2010

Key Risks to Outlook

Rising Inflation – Falling food prices are temporarily keeping consumer price inflation in check, but we are increasingly worried that a potential pick-up in food prices in the coming months may destabilise inflation expectations and could have a negative impact on food and drink spending.

Infrastructure Upgrades Desperately Needed – The success of government initiatives to promote alternative sources of growth will be heavily dependent on Vietnam’s infrastructure developments over the coming years. Despite witnessing relatively strong real GDP growth of 5.3% in 2009, chronic power shortages and congested roads are evidence that the economy faces risks of overheating, as well as operational bottlenecks for businesses. Most importantly, we are increasingly concerned that the government’s failure to make infrastructure investments in time due to its growing debt could greatly limit the economy’s potential for growth going forward.