Argentina Food and Drink Report 2013

Argentina has slipped down our regional ranking for the food and drink market in relation to 2012 on account of the worsening of both its risk and rewards scores. We believe that the government’s increasingly aggressive interventionist policies will result in more high inflation and low growth in 2013.

Moreover, we expect productive capacity to continue to deteriorate as long as strict capital controls and import restrictions remain in place. All of this will be reflected in the weakening of consumer confidence, and we expect that inflation-related factors, rather than volume increases, will be key drivers of food and drink values’ growth.

Headline Industry Data

2013 per capita food consumption (local currency) = +13.6%; forecast compound annual growth rate (CAGR) to 2017 = +9.4%

2013 alcoholic drink sales (litres) = -1.6%; forecast CAGR to 2017 = -0.8%

2013 soft drink sales (litres) = +0.0%; forecast CAGR to 2017 = +2.5%

2013 mass grocery retail sales (local currency) = +15.1%; forecast CAGR to 2017 = +12.2%

Key Industry Trends & Developments

Arcor To Enter Domestic Cereal Market: In July 2012, major Argentine food producer Arcor announced plans to enter the Argentine cereal market. As the market for cereal in Argentina is very small, Arcor will have to build the category as well as entice consumers to opt for its brands. However, the growing popularity of milk, combined with the desire for more convenience, means that the category has significant potential, and thus may attract investment from other major players such as Kellogg. Multinationals Continue Investing in Argentina: In April 2012, US-based food conglomerate Kraft Foods begun the production of its Milka chocolate brand at its Buenos Aires facility in Argentina. The local production has enabled the firm to replace the imports of the product from Brazil, said Pedro López Matheu, the corporate issues director for the South Cone region for Kraft. The local production of the chocolate brand is part of Kraft’s expansion plan, which it had formed for the past three years. The Milka chocolate brand is reportedly the second best-selling chocolate brand in the country.

Key Risks to Outlook

Economic Development: Argentina’s economic future is largely dependent on how long President Cristina Fernández de Kirchner can sustain policies that are creating significant economic imbalances within the Argentine economy. We believe that, the longer these policies are in place, the greater will be the risks to Argentina’s vast economic growth potential.

Elevated Inflation: Argentina’s high inflation rate, which we believe to be in the mid-20s rather than the high single-digit levels reported by statistics agency INDEC, remains one of the largest threats to the country’s long-term economic stability, continuing to weigh on credit growth and hampering muchneeded investment. What is more, the uncertainty surrounding the true rate of inflation is likely to cause additional damage to business investments.

Exchange Rate Risk: We believe that the Argentine peso is significantly overvalued. We therefore expect devaluation in 2013, boosting export competitiveness.

Business Environment: Nationalisation of private assets has allowed the government to meet its financing gap over the past two years, but the strategy is a short-term fix with negative long-term consequences. Business leaders have begun to fear that a transition to Venezuela-style policies could be in the offing. Although we see this as unlikely, we doubt that a reversal of the policies is on the cards.

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