Bahrain Food and Drink Report Q4 2012

We retain our positive outlook in regards to Bahrains consumer sector, which has been steadily improving over recent quarters, as consumer confidence slowly regains momentum. We expect household spending in Bahrain to hold up well in 2012, and forecast it to expand by 8.0% y-o-y. Looking at the broader economy, Bahrain is now gradually recovering from 2011s slowdown, with growth in the hydrocarbon sector helping to support still weak activity in the construction, real estate and tourism industries. However, nothing has been fundamentally resolved in Bahrains political crisis, and we hold out little hope of any progress in the matter being made in the near term.

The decision to hold the Formula One race in Bahrain on April 22 appears to have backfired for the al- Khalifa government. Rather than sending a message that the political crisis was over, the outburst in protest activity and increased media attention that accompanied the event simply served to highlight the simmering sectarian tensions throughout the country. Despite organisers claiming the race was relatively insulated from the crisis, the thousands of demonstrators who took to the streets last week proved that tensions remain pronounced, re-focusing international media attention on the countrys ongoing political crisis, and also apparently galvanising the opposition. As a result, the net economic impact of staging the event could prove to be negative over the medium term. Even over the long-term, the impact the Formula One race had on Bahrains economy will also likely prove to be significantly smaller than authorities had anticipated.

Key Company Trends

Nestlé Makes Major Investment: In June global food and drink giant Nestlé announced plans to construct a new US$136.1mn production facility in Dubai. Nestlé has signed a partnership agreement with Dubai World Central (DWC) for a 175,000-square-metre plot which will be used to manufacture nutrition, culinary and coffee products. By boosting its regional manufacturing presence, Nestlé will be able to tailor an even greater proportion of its products to suit tastes and preferences across the MENA region.

This will also allow for greater local sourcing, fresher product, and being the second production facility in Dubai, will create opportunities for synergies.

Investments in Luxury Water: In July Qatar-based Tamani Foodstuffs announced that it has entered into an agreement with Canadian luxury drink producer Gize to expand Gizes presence in the Middle East region. Tamami Foodstuffs will be the new sales and distribution partner for the non-alcoholic drinks company that specializes in high-end mineral water. Tamani will represent Gize in Bahrain, Saudi Arabia, the UAE, Kuwait, Qatar, Oman and Yemen. A Gize representative has said that this partnership with Tamani will benefit Gize greatly as it will allow it to benefit from Tamanis network and logistics in order to be present in luxury hotels and gourmet venues, and make the drink a recognized part of menus in luxury venues across the region.

Headline Industry Data (local currency)

- 2012 food consumption growth = +8.7%; compound annual growth rate (CAGR) to 2016 = +8.5%
- 2012 soft drink value sales growth = +7.4%; CAGR to 2016 = +7.3%
- 2012 mass grocery retail (MGR) sales = +10.9%; CAGR to 2016 = +10.2%

Key Risks To Outlook

Inflation Remain a Dark Cloud: An ongoing concern is inflation; higher inflation will dilute the impact that higher government spending will have on real growth. Our optimistic stance on the regions macroeconomic prospects over the next few years is based to a large extent on the positive outlook for domestic consumption, which in turn depends on fiscal expenditure. Higher prices would weigh on consumer spending power, and will likely mean that the GCC will be unable to sustain the robust growth rates seen in recent years.