The long-term outlook for Chinas food and drink sector remains strong, as reflected in the continued international interest and investments in the sector. However, the shorter-term outlook is less positive due to brewing economic difficulties. We believe that cracks are beginning to appear in the Chinese economy, which should grow in magnitude over the coming months. Inflation is heading higher and economic activity growth is heading lower, strengthening our case for a slowdown in economic activity in China as monetary policy is tightened further. We expect Chinese overheating to lead to a secondary slowdown in 2011, and are forecasting real GDP growth of 7.5% in 2011, with growth to remain around this level thereafter over the medium term, slowing industry growth.

Headline Industry Data

- 2010 per capita food consumption = +11.9%; forecast to 2014 = +54.1%
- 2010 beer volume sales = +13.7%; forecast to 2014 = +74.9%
- 2010 soft drink sales = +12%; forecast to 2014 = +65.4%
- 2010 mass grocery retail sales = +12%; forecast to 2014 = +64.2%

Key Company Trends

Soft Drinks Investments – Foreign investments continue to poor into Chinas soft drinks industry, fuelling the sectors bullish growth. In May 2010 US soft drinks behemoth PepsiCo unveiled a US$2.5bn threeyear spending plan for the Chinese beverage market following the completion of its US$1bn two-year China investment package, due to finish later this year. With its latest investment package, PepsiCo will look to fully exploit the countrys vast opportunities while minimising the risks to which it is exposed. As well as expanding its soft drink and snack food production capacity, the company will also invest heavily in agricultural development, thus securing a degree of valuable control over its supply chain. PepsiCo will also invest in the development of beverages specifically designed for local tastes.

Retail Acquisitions – In July 2010 retail giant Carrefour was successful in acquiring a controlling 51% stake in Hebei-based hypermarket operator Baolongcang for an undisclosed sum. With the acquisition of Baolongcang coinciding with Carrefours 159th Chinese hypermarket opening, the company clearly retains every intention of maintaining its position as the countrys dominant international retailer. As is usually the case when a store networks come up for sale, competition for the Baolongcang network was fierce, with Vanguard, the grocery retail operation of Hong Kong-listed China Resources Enterprises, local firm WuMart and South Koreas Lotte Shopping, all believed to be in the running for the acquisition. Such attention for a single province retailer with just 11 stores speaks volumes about Chinese MGRs long-term potential.

Key Risks to Outlook

Double-Dip Ahead? – BMI expects a secondary slowdown in the Chinese economy, coupled with elevated risks of a bursting of the countrys property bubble. In addition, brewing inflationary pressures could weigh on Chinese consumption as shoppers tighten their purse strings and restrict spending on consumer goods. Over the medium term, we are looking at a slight erosion of Chinas export competitiveness as a stronger yuan and increasing wage pressures take effect.
Food Safety Still A Concern – The local food and beverage industry continues to be plagued by problems such as poor food hygiene, and inferior safety standards. Over this past quarter alone, there were several incidents of authorities seizing large quantities of milk powder laced with melamine.