bahrain food & drink report 2011

Q1 2011www.businessmonitor.com

food & drink report

iSSn 1749-2599published by Business Monitor international Ltd.

BAHrAin INCLUDES 5-YEAR FORECASTS TO 2014

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BAHRAIN FOOD & DRINK REPORT Q1 2011 INCLUDING 5-YEAR INDUSTRY FORECASTS BY BMI

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: October 2010

Bahrain Food & Drink Report Q1 2011

© Business Monitor International Ltd Page 2



CONTENTS

BMI Industry View ............................................................................................................................................ 5

SWOT Analysis ........................................................................................................................................................................................................... 7 Bahrain Food Industry SWOT ............................................................................................................................................................................... 7 Bahrain Drinks Industry SWOT ............................................................................................................................................................................. 8 Bahrain Mass Grocery Retail SWOT ..................................................................................................................................................................... 9

Business Environment .................................................................................................................................. 10

BMI’s Core Global Industry Views ........................................................................................................................................................................... 10 BMI Food & Drink Core Views ........................................................................................................................................................................... 11

Middle East Food & Drink Business Environment Ratings ...................................................................................................................................... 12 Regional Food & Drink Business Environment Ratings ...................................................................................................................................... 14

Bahrain’s Food & Drink Business Environment Rating ........................................................................................................................................... 15 Macroeconomic Outlook ........................................................................................................................................................................................... 16

Table: Bahrain – Economic Activity .................................................................................................................................................................... 19

Industry Forecast Scenario ........................................................................................................................... 20

Consumer Outlook .................................................................................................................................................................................................... 20 Food.......................................................................................................................................................................................................................... 22

Food Consumption ............................................................................................................................................................................................... 22 Table: Food Consumption Indicators - Historical Data & Forecasts .................................................................................................................. 23 Trade ................................................................................................................................................................................................................... 23 Table: Bahrain Sectoral Trade Balance - Historical Data & Forecasts .............................................................................................................. 24

Drink ......................................................................................................................................................................................................................... 24 Soft Drinks ........................................................................................................................................................................................................... 24 Table: Drinks indicators ...................................................................................................................................................................................... 25

Mass Grocery Retail ................................................................................................................................................................................................. 25 Table: Bahrain Mass Grocery Retail Sales - Value by Format - Historical Data & Forecasts ........................................................................... 26 Table: Bahrain Grocery Retail Sales By Format, 2009 & 2019........................................................................................................................... 27

Food ................................................................................................................................................................. 28

Key Industry Trends and Developments .................................................................................................................................................................... 28 Increasing Interest In Processed Foods ............................................................................................................................................................... 28 Continued Government Investment ...................................................................................................................................................................... 28 Growing Investment Interest From Non-Regional MNCs .................................................................................................................................... 29

Market Overview ...................................................................................................................................................................................................... 30 Agriculture ........................................................................................................................................................................................................... 30 Key Food Processors ........................................................................................................................................................................................... 30 Halal Food ........................................................................................................................................................................................................... 31 Table: Muslim Populations In Selected Middle East & Africa Countries, 2009 .................................................................................................. 32

Drink ................................................................................................................................................................ 33

Key Industry Trends and Developments .................................................................................................................................................................... 33 Carbonates Still Strong ........................................................................................................................................................................................ 33 Diversifying Towards New Product Categories ................................................................................................................................................... 33

Market Overview ...................................................................................................................................................................................................... 34 Soft Drinks ........................................................................................................................................................................................................... 34 Alcoholic Drinks .................................................................................................................................................................................................. 35 Hot Drinks ........................................................................................................................................................................................................... 35



Mass Grocery Retail ....................................................................................................................................... 36

Key Industry Trends and Developments .................................................................................................................................................................... 36 Growing Investment In Convenience Retailing .................................................................................................................................................... 36 Catching the Eye of Foreign Investors ................................................................................................................................................................. 36

Market Overview ...................................................................................................................................................................................................... 37 Table: Structure Of Bahrain’s MGR Market – Number Of Outlets, 2004-2009 ................................................................................................... 38 Table: Structure Of Bahrain’s MGR Market – Sales By Retail Format, 2004-2009 (US$mn) ............................................................................. 38 Table: Structure Of Bahrain’s MGR Market – Sales By Retail Format, 2004-2009 (BHDbn) ............................................................................. 38 Table: Value Of Sales Per Outlet, 2008e ............................................................................................................................................................. 38

Competitive Landscape ................................................................................................................................. 39

Table: Key Players in Bahrain's Food & Drink Sector ........................................................................................................................................ 39 Table: Bahrain’s MGR Key Players .................................................................................................................................................................... 40

Company Monitor ........................................................................................................................................... 41

Food.......................................................................................................................................................................................................................... 41 Bahrain Flour Mills Company ............................................................................................................................................................................. 41 General Trading And Food Processing Company (TRAFCO) ............................................................................................................................. 42 Kraft Foods MEA ................................................................................................................................................................................................. 43 Delmon Poultry Company .................................................................................................................................................................................... 44

Drink ......................................................................................................................................................................................................................... 45 Awal Dairy Company ........................................................................................................................................................................................... 45

Mass Grocery Retail ................................................................................................................................................................................................. 46 EMKE Group ....................................................................................................................................................................................................... 46 Fu-Com International/Géant ............................................................................................................................................................................... 47 Carrefour MAF .................................................................................................................................................................................................... 48

BMI Methodology ........................................................................................................................................... 49

Food & Drink Business Environment Ratings .......................................................................................................................................................... 49 Table: Returns ..................................................................................................................................................................................................... 50 Table: Risks ......................................................................................................................................................................................................... 51

Weighting .................................................................................................................................................................................................................. 51 Table: Weightings ................................................................................................................................................................................................ 52

BMI Food & Drink Industry Glossary ...................................................................................................................................................................... 53 Mass Grocery Retail ............................................................................................................................................................................................ 53

BMI Food & Drink Forecasting And Sourcing ......................................................................................................................................................... 55 How We Generate Our Industry Forecasts .......................................................................................................................................................... 55 Sourcing ............................................................................................................................................................................................................... 56



BMI Industry View

The Bahraini economy does appear to be showing signs of improvement, although we do not see what

will drive the recovery beyond government spending. As such, our forecasts are somewhat conservative.

However, despite the subdued outlook for the economy, the food and drink industry continues to illustrate

considerable potential, as it is far from maturity. For most residents, personal wealth growth is likely to

remain subdued throughout the forecast period, with a concomitant effect on retail sales. Falling

property and stock prices will have damaged savings, not to mention consumer confidence, and will add

to the effect of job losses and pay cuts. However, while BMI estimates that consumer spending in 2009

was flat, we expect a rebound to 5.0% growth in 2010 and 6.0% in 2011.

Key Company Trends

Online Grocery Shopping Debut – In August 2010, Bahrain’s first virtual supermarket was launched.

Called Cart, the company has started a new grocery shopping website (cart.com.bh) in Bahrain. The

website helps the company to deliver food orders directly to shoppers' doorsteps, with the site having

received about 250,000 visitors since its launch in July 2010, making it the seventh most visited website

in the country, according to visitor tracking website Alexa Rank. Project Development Co-Ordinator

Ebrahim Haroon said the retailer aims to deliver 100 orders per day in three months. Haroon added that

the company is also looking to expand its service outside of Bahrain. The initial success of Cart reflects

the growing importance of convenience in consumers’ shopping decisions, particularly with increasingly

modern lifestyles and longer working hours.

Investments By Local Player – In October 2010, local retail operator BMMI announced its plans to

launch a major retail expansion in Bahrain. The retailer said that it plans to have opened five large

supermarkets as well as five neighbourhood stores in the country within five years. The first large

supermarket will be opened shortly in Amwaj under the Alosra banner. The Alosra supermarket chain

specialises in sourcing Western brands and specialty products, and the company plans on also carrying

prepared salads, sandwiches and sushi which will be offered as both take-away and at the in-store cafes,

as BMMI looks to target high-spending and health-conscious consumers who value quality and

convenience.

Key Risks To Outlook

National Debt Growing – Bahrain has already doubled its national debt (to 25% of GDP) and earned itself

a ratings downgrade by Moody's. Any problems in the financial industry could further delay a private-

sector recovery and derail investor and consumer confidence, leaving the government in charge of

growth, which is all well and good as long as oil prices stay high. However, as Moody's pointed out

recently, the breakeven price has been getting higher and higher. We estimate Bahrain needs an average

oil price of US$72/bbl just to balance its books, with anything lower than that likely to entail deficits and

further borrowing.



A drop in oil prices – While a drop in oil prices does not look likely at the moment, it is certainly not

beyond the realm of possibility if BMI’s double-dip global downturn scenario plays out. Bahrain will

muddle through if the oil price stays high, as is our core scenario, but if it drops again, making the

implementation of income tax necessary, then there are serious risks to growth, the size of the expatriate

population and the financial sector.



SWOT Analysis

Bahrain Food Industry SWOT

Strengths Consumers are brand-loyal and susceptible to new products and innovations.

Rising incomes and the development of the mass grocery retail sector has benefited the packaged and processed food industries.

The country has a large high spending expatriate population.

Food consumption growth in Bahrain is forecast to outperform the wider Gulf Cooperation Council region to 2015.

Bahrain’s regulatory environment is business-friendly and has succeeded in attracting a number of multinational food companies.

The dinar’s peg against the US dollar shields multinational companies from adverse exchange rate movements.

Weaknesses Companies looking for long-term volume gains will be limited by Bahrain’s small population of under 1mn.

A relatively low GDP per capita means that consumers are price conscious by regional standards.

Similar to the wider region, Bahrain runs a large food and drink trade deficit.

The outlook for the agricultural sector is limited by the small size of the country and the hot, arid climate. Many key food ingredients need to be imported.

Opportunities A number of segments remain fairly fragmented, creating opportunities for new product launches.

Opportunities for premiumisation will return as the downturn passes.

Demand for packaged and convenience foods will continue to pick up as lifestyles get busier and eating habits become more Westernized.

Bahrain has a Free Trade Area (FTA) with the US.

Threats Consumer confidence remains lower than pre-downturn levels, which is affecting demand for higher value products.

As the dinar is pegged to the US dollar, weakness from the latter is leading to imported inflation.

Despite the country’s wealth, there is high unemployment, particularly among the Shi’a community, which is a persistent source of unrest.



Bahrain Drinks Industry SWOT

Strengths Consumers are brand-loyal and susceptible to Western consumer trends.

Per capita consumption of soft and hot drinks is high.

Alcohol consumption is fairly high by regional standards, driven largely by the tourism sector.

Bahrain’s regulatory environment is business friendly.

The dinar’s peg against the US dollar shields multinational companies from adverse exchange rate movements.

Weaknesses At under 1mn, Bahrain’s small population deters investors seeking long-term volume gains.

Consumers are relatively price-conscious by regional standards.

Although fairly dynamic by regional standards, the alcoholic drinks industry is highly unlikely to attract major investment due to the small market and strict sale regulations.

Opportunities All soft drinks categories have yet to saturate.

The bottled water category will continue to provide opportunities.

Demand for healthier fruit juices, energy drinks and other value-added products will continue to increase.

Further premiumisation potential exists across all soft drink segments.

Non-alcoholic malt drinks could replace beer and provide a niche market.

Threats The downturn’s negative effect on Bahrain’s expatriate population, and therefore the size of the market, is likely to affect the wider drinks industry.

There is ongoing talk of banning or severely restricting alcoholic drinks sales, as many Bahrainis are growing increasingly unhappy with the level of tolerance of Western cultural imports such as alcohol consumption.



Bahrain Mass Grocery Retail SWOT

Strengths Consumers are brand-loyal and susceptible to Western consumer trends.

The MGR sector continues to grow, with consumers increasingly favouring modern retailing.

The market entry of regional majors Carrefour, EMKE and Waitrose will fuel MGR growth and convert more shoppers to modern retail formats.

Bahrain’s regulatory environment is business friendly.

Weaknesses The entry of discounters is unlikely as most consumers’ perception that discounted goods lack quality remains intact.

Bahrain’s small population, even by regional standards, means it will probably remain a supplementary rather than growth market for regional retailers.

Downward price trends as a result of the global economic slowdown have put pressure on the margins of retail operators and their suppliers.

Opportunities All MGR categories have yet to saturate.

Private label products are more popular in Bahrain than in most Gulf countries, with the economic downturn having increased their popularity and allowed private labels to establish themselves.

The end of the real estate bubble has made it easier to locate appropriate retail space and could speed up the transition from attached-mall to standalone retail outlets.

Mirroring the latest developments in the UAE, the underdeveloped convenience store segment could be boosted by the development of community stores.

Threats The downturn’s negative effect on Bahrain’s expatriate population, and therefore the size of the market, is likely to affect the wider retail industry.

The relatively limited long-term volume potential of the sector means likely entrants will be pressed to enter sooner rather than later.



Business Environment

BMI’s Core Global Industry Views

Developments within the global food and drink industry in the past three months have continued to reflect

and support BMI's core industry views. In major developed markets, fiscal austerity measures and slow

recovery in employment continue to weigh on our expectations for growth in the medium term. However,

over the last quarter, emerging markets have again demonstrated their ability to outperform the wider

market and have continued to attract investment. One major trend during the quarter has been the

increased role of private equity groups in the food and drink sector, which we think is indicative of its

‘safe haven’ status and the uncertainty surrounding the strength of the wider economic recovery.

In many markets the strength of the recovery has disappointed, with little sign of resurgence in consumer

demand across the US, Western Europe or emerging markets that were particularly hard hit by the

downturn, such as Venezuela and Romania. In line with our wider economic outlook and our core short-

term view, we believe the recovery in demand will continue to be muted. Our caution can be traced to the

fact that unemployment in many markets remains high and shows little sign of retracing, with companies

still wary about the strength of the recovery and holding back on hiring. Meanwhile, many consumers

who are still in employment have yet to be hit in the pocket by the downturn, but this is set to change as

fiscal austerity measures are implemented.

Over the last few months, emerging markets have again shown their importance, delivering significant

outperformance over their developed market peers, in line with our core long-term view. However, even

in those markets that bounced back strongly from the global downturn, such as Brazil and China, we

remain cautious, due to signs of slowing growth in H210 as the knock-on effects from a weaker US and

eurozone weigh on global demand. Despite this relatively subdued short-term outlook, the long-term

picture is undoubtedly favourable and investment continues to flow into the most attractive regions.

Our core view that government legislation will continue to play a role in marginalising unhealthy foods

and drinks has come to the fore in the alcoholic drinks sector over the latest quarter, with a rise in excise

duties in several key markets. This trend is likely to have been accelerated by a drop in tax revenues as a

result of the downturn, with excise duties an easy way for governments to help prop up their tax income.

Perhaps the most significant movement has been in Russia, where restrictions on the sale of alcohol and

hefty tax hikes have led to higher average prices and a significant drop in consumption, while other

markets hit by tax hikes include Turkey, Greece and Spain.



BMI Food & Drink Core Views

Short-term Outlook

Consumer demand in developed markets remains too weak to support a strong rebound in sector growth

A stuttering recovery in the US and Eurozone will increasingly way on the performance of emerging markets

Commodity price volatility will continue to affect producer earnings

Premiumisation will remain on hold

Private labels and off-trade alcoholic drinks will outperform their respective sectors

Discount grocery retailers will continue to gain market share

Government fiscal policy – austerity – will be unsupportive of industry growth

Government monetary policy – the reduced likelihood of further rate hikes – will help limit demand destruction

Major takeovers will remain scarce, leaving room for the private equity sector to step in

We continue to favour private consumption-led economies, over export-oriented states for consumer goods investment

Long-term Outlook

Companies with strong emerging market exposure will continue to outperform

Emerging market multinationals will increasingly pursue frontier market investments

Tension between producers and retailers will remain

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; notably alcohol

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



Middle East Food & Drink Business Environment Ratings

UAE Tops Ratings But Egypt The Real Story

With the exception of the UAE, the Middle East and North Africa (MENA) has by in large not been

dramatically affected by the global economic weakness that has pervaded over the past two years.

Although outlandish premiumised spending has been reined in within the Gulf, the evolvement of

consumer spending in absolute spending and taste terms in some of the frontier MENA markets (Egypt in

particular stands out) has largely continued apace.

While the sheer weight of growth (most of it led by energy) racked up by most of the Gulf region over the

past decade has pushed up per capita GDPs in the UAE, Kuwait and Qatar to the upper echelons of the

global economy, the atypical pace at which this has taken place has meant that the development of the

food and drink industry was bound to lag behind. With key industry indicators such as organised retail’s

proportional contribution to absolute retail sales still comfortably lagging most developed economies,

even in the UAE, investment from both Gulf and foreign-based companies is likely

As a result, even though with the exception of Saudi Arabia, which makes up about two thirds of the Gulf

consumer market, the region lacks long-term scale, perpetually evolving tastes and preferences dictates

that the Gulf should retain its attractiveness to non-regional food, drink and retail companies. Moreover,

markets like the UAE and Bahrain in particular continue to serve as exciting export bases into the wider

MENA region.

Egypt Closes On UAE

Notwithstanding the fact that disposable incomes in the Gulf region remain considerably higher than in

the rest of the MENA region, the Gulf’s dominance of the top positions in BMI’s regional food and drink

business environment ratings no longer appears as secure. Egypt has pushed into second place behind the

UAE and looks very well placed to assume top position in the near future. Even though its food and drink

industry is clearly not nearly as sophisticated as the UAE’s, this does in fact count in Egypt’s favour from

a ratings point of view.

Egypt’s push into second place reflects our industry and macroeconomic expectations. We like the long-

term promise of the Egyptian domestic demand story, which backed by a population approaching 82mn,

provides dynamic long-term growth potential. Comparing historical and forecast annual per capita food

consumption growth in both Egypt and the UAE highlights Egypt’s outperformance in this regard (see

chart). Its economy is growing strongly and is expected to continue doing so, as reflected in our outlook

to 2015.

Egypt’s position as the standout frontier market in the MENA region is largely uncontested. Iran and Iraq,

two of the other potential rivals for this tag, for a variety of reasons cannot match Egypt, certainly when it



comes to pulling in investment from Gulf and Western companies alike. From an investment point of

view, Egypt’s trade links are also important. In addition to smooth access to the Gulf Cooperation

Council (GCC) region, Egypt is a major net exporter to the emerging Common Market for Eastern and

Southern Africa (COMESA).

Therefore from both a ratings and competiveness standpoint, Egypt uniquely combines a strong long-term

economic and subsequently consumer spending outlook, with an unusually large market by regional

standards and an ability to attract foreign investment. It will therefore be increasingly difficult for the

UAE to maintain its hold on first position.

Assessing The Rest Of The Gulf

Saudi Arabia is the big underperformer in this quarter. Placing sixth does not do it justice as the Gulf

region’s most promising long-term growth. It is the only Gulf market that combines scale with a strong

scope for long-term growth. Its lowly ranking comes despite an above average Risk score and clearly

emphasises the fact that a much stronger Industry Reward score is necessary for Saudi Arabia to push up

the ratings table. Saudi Arabia’s size and the fact that on a per capita GDP basis disposables incomes are

reasonably high suggests that it has the potential to move the ratings, possibly eventually settling into the

top three alongside the UAE and Egypt, although for now this remains only a distant possibility.

Fundamentally speaking and momentarily looking over nuances, Kuwait and Qatar are in essence less

dynamic versions of the UAE from a ratings point of view, if only – particularly in the latter’s case –

because they have smaller populations. It will be difficult for them to distinguish themselves and move

much higher up the ratings than where they currently find themselves. Third placed Bahrain largely

benefits from the fact that in addition to having the region’s strongest Risk score, some of the key

indicators within its food and drink industry are poised for fairly strong growth to 2014 from a lower base

than the UAE, Kuwait and Qatar.



Regional Food & Drink Business Environment Ratings

Reward Risk

Industry Reward

Country Reward Reward

Industry Risk

Country Risk Risk

Food & Drink Risk/Reward

Rating Regional Ranking

UAE 67 60 64 70 39 51 60.0 1

Egypt 63 55 59 50 62 57 58.4 2

Bahrain 53 53 53 70 66 68 57.3 3

Kuwait 34 58 46 65 71 69 52.6 4

Qatar 41 52 46 65 66 65 52.1 5

Saudi Arabia 31 60 45 60 66 63 50.8 6

Oman 29 46 38 60 72 67 46.4 7

Lebanon 32 46 39 45 51 49 41.9 8

*Israel 49 45 47 70 76 74 55.2 *4

*Israel has been included for comparative purposes only. Had it been ranked, it would have scored fourth respectively. Source: BMI. Scores out of 100, with 100 highest. The Food & Drink BE Rating is the principal rating. It is comprised of two sub-ratings Reward' and 'Risk'', which have a 70% and 30% weighting respectively. In turn, the 'Reward' Rating is comprised of Industry Reward and Country Reward, which have equal weighting and are based upon growth/size of food/alcohol and soft drinks industry (Market) and the broader economic/socio-demographic environment (Country). The 'Risk' rating is comprised of Industry Risk and Country Risk which have a 40% and 60% weighting respectively and are based on a subjective evaluation of industry regulatory and competitive issues (Market) and the industry's broader Country Risk exposure (Country), which is based on BMI's proprietary Country Risk Ratings. The ratings structure is aligned across the 14 Industries for which BMI provides Business Environment Ratings methodology, and is designed to enable clients to consider each rating individually or as a composite, which the choice depending on their exposure to the industry in each particular state. For a list of the data/indicators used, please consult the appendix at the back of the report.



Bahrain’s Food & Drink Business Environment Rating

Bahrain has dropped to third position from its previously held first in BMI’s quarterly Food & Drink

Business Environment Ratings for the MENA region. Displaced by the UEA and Egypt, which took first

and second place respectively, we can see that the Gulf countries’ dominance of the top positions in

BMI’s ratings no longer appears as secure.

Despite losing its top place ranking, Bahrain nevertheless manages to do well, thanks to a winning

combination of the region’s highest F&D market score and one of the region’s highest Risk scores. While

spending on food and drink is relatively low compared to its Gulf peers, this low base gives Bahrain one

of the region’s strongest food and drink consumption growth forecasts, giving it a major competitive

edge.

Bahrain’s strong business environment continues to be one of its key strengths, particularly compared to

its regional peers. Despite significant economic progress over the past decade, business environments

across much of the region remain fairly bureaucratic compared to Bahrain – a fact that continues to draw

investors to this stable country. Unsurprisingly, Bahrain’s Risks score is second only in the region to

Kuwait.

However, there are some obvious drawbacks, such as the very small population of under 1mn, which

significantly limits the long-term growth opportunities. GDP per capita is relatively modest by Gulf

standards, which also weighs down the Country Reward score. These two factors are the main reasons

why Bahrain lost its pole position this quarter. Nevertheless, the country remains an attractive proposition

for Gulf and non-regional food and drinks companies, particularly given the lack of premiumisation in the

local market, with the food and drink industry posed for fairly strong growth.



Macroeconomic Outlook

Strong Q1 Figures Masking Weak

Domestic Demand Picture

BMI View: We do not see what will

drive the recovery for Bahrain,

beyond government spending; and,

as such, our forecasts are low. That

said, we acknowledge that official

figures may paint a rosier picture.

We remain concerned about the

stability and health of the Bahraini

services economy and private sector

in general. Latest figures suggest

that there was a substantial rebound

in overall growth in Q110, but we

see risks for the remainder of the

year. Although fiscal stimulus plans

remain in place, they remain under threat from lower oil prices, while further turmoil in the financial

sector is not out of the question. We could well see defaults from some of the over-leveraged investment

companies, hitting banks' asset sheets and investor confidence more generally. Although the official

numbers may come in higher than our projections, we believe that our low forecasts are a more accurate

reflection of the state of the economy.

Our forecasts see a slowdown in growth in 2010 (to 1.5%) and only a mild uptick in 2011 (to 1.9%), with

sub-optimal rates of expansion persisting throughout the forecast period. However, with 2009 growth

figures having surprised to the upside (going against our own and anecdotal perceptions of growth in the

Kingdom), the 2010 and 2011 figures could do the same. Overall GDP figures tell a different story to

individual indicators. Our forecast figures are primarily being held back more by sluggish oil exports: we

do see a moderate uptick in gross fixed capital formation and private consumption from 2009's low base.

Uninspiring

Real GDP Growth (%) and OPEC Basket Price (US$/bbl)

Source: Central Informatics Organisation, BMI



Contradictory Indicators

Looking at Q1 results, the economy

does appear to be on the rebound.

Overall real GDP growth came in at

an annualised 5.2%, compared with

2009's full-year outturn of 3.1%,

with strong performances registered

by hotels and restaurants (up 14.4%),

onshore financial institutions

(12.8%) and social and personal

services (14.9%). The latter

encompasses private health and

education, which are mainly used by

expatriates, as the government

subsidises these services for

Bahrainis. Even construction growth

came in at 2.2% in Q1, after

averaging -2.5% over Q109-Q409,

with real estate managing the same rate.

The government also estimates that employment stood at 489,657 in Q110, up 1.2% on Q109, and

accounting for 44.2% of the population. Although this could imply some decline in population – in line

with the view we have been promoting for some time – we do not expect to see the government

confirming this in official data. In any case, the percentage is the highest since the government's data

series began in 2006. Against this backdrop, the outperformance of these three sectors suggests a strong

global and expatriate consumer demand situation, which is, in theory, very good news for the Bahraini

economy.

Indeed, this is in line with our forecasts. We do see private consumption growth of 3.0% for 2010, rising

to 4.0% in 2011. Unfortunately, the government has not yet provided a breakdown of either Q110 or 2009

growth by expenditure, so we cannot compare it at this stage, but a 3.0% growth rate in real terms is not

to be sniffed at in this climate. However, we also think that private consumption – and the sectors

highlighted above – are also growing from the lowest bases. Indeed, while private consumption accounted

for 45.2% of real GDP in 2006, we estimate that it made up just 42.0% in 2009 and 2010. Moreover, we

think that enthusiasm over the double-digit GDP growth figures will be mitigated by (a) anecdotal

evidence and (b) other indicators.

Among other reasons for concern, we see the bank lending growth rate as a sign that consumers have not

gone back to their old ways: Bahrain's banks have seen the lowest loan growth in the Gulf region, with a

Call This A Recovery?

Bahrain - Aluminium Output (metric tonnes)

Source: Bahrain Central Informatics Organisation



y-o-y increase of 3.9% (against inflation of 2.4%) in May, compared with 27.0% y-o-y in Qatar. This

compared with around 45% at its peak. True, personal wealth may have increased due to the apparent rise

in employment, but given the extent to which credit fuelled spending during the boom years – even now,

retail banks' client loans per capita amount to US$67,764 (although this includes business loans) – it is

hard to imagine the stagnation not having an effect. In addition, there are risks going forward: tax rises

are more than possible after the elections, given the fiscal position.

Did Recovery Peak In Q309?

That said, it is not just services that have driven Q1's impressive growth number. Goods exports are also

doing well. Manufacturing apparently rose by 6.8%, quarrying by 8.9% and even oil and gas managed an

upturn of 0.5%.

Again, though, individual data sets cast some doubt on these impressive outturns. In volume terms, oil

output growth remains subdued, threatening to undermine our forecast for a 1.0% rise in volume terms in

2010. Bahrain ramped up oil output from its Abu Saafa oil field in Q309, in line with the price increase;

but, unlike most of the OPEC countries, it has since reduced output again. Total output from the Abu

Saafa and Bahrain oil fields came in at around 164,360 b/d in Q110, down from a nine-month high of

169,720 b/d in Q309. Refined oil output is coming from a lower base than crude, so y-o-y growth remains

high (at 17.9%), but this also peaked in Q309 – and was down 2.2% q-o-q in the first three months of the

year. Aluminium followed the same pattern: output bounced to 213,224 metric tonnes in Q309, but

remained lower in y-o-y terms, and then fell again in Q409 and Q110 (at a rate of 1.6% y-o-y, to 210,009

metric tonnes).

Meanwhile, global demand does not inspire much confidence either. As we move towards the end of the

year, the global economic scenario we had envisaged for 2010 – namely, a shaky and largely jobless

recovery slowing in the second half, alongside continued deflationary pressures – is playing out. This

suggests sluggish demand going forward, and we forecast a slowdown in growth for all the major

economies except the eurozone (which, in any case, is coming from a much lower base). Against this

backdrop, we see downside risks to our oil price forecast (US$85/bbl for the OPEC Basket in 2011, rising

to US$90/bbl in 2012), as well as lower demand for Bahraini industrial exports: we are pencilling in 0.8%

average annual growth for the period 2010-13, outpaced by greater import growth (around 3.0%) as

infrastructure spending pushes up the capital goods bill.

Fiscal Expansion To Continue

On the government spending front, we expect growth to remain strong in 2010 and 2011, in spite of the

fiscal difficulties, pencilling in real growth of 8.0% and 6.0% respectively. Indeed, from the tone of the

Central Informatics Organisation's latest bulletin, there does not appear to be much impetus to pare down

spending, unless it becomes urgent: the bulletin states that the better economic performance and higher oil

prices in Q110 will afford 'greater discretion to the government over its spending plans and financial



policies' – implying that any austerity measures had more to do with financing ability than a desire to

change tack.

Risks To Outlook

This will keep growth robust, but does pose risks to overall stability. Bahrain has already doubled its

national debt (to 25% of GDP), and earned itself a ratings downgrade by Moody's. Any problems in the

financial industry could further delay a private-sector recovery and derail investor and consumer

confidence, leaving the government in charge of growth, which is all well and good as long as oil prices

stay high. However, as Moody's pointed out recently, the breakeven price has been getting higher and

higher. We estimate Bahrain needs an average oil price of US$72/bbl just to balance its books, with

anything lower than that likely to entail deficits and further borrowing.

Table: Bahrain – Economic Activity

2005 2006 2007 2008 2009e 2010f 2011f 2012f 2013f 2014f

Nominal GDP, BHDbn 1,2 5.1 6.0 7.0 8.2 7.7 11.1 12.0 13.5 14.1 14.9

Nominal GDP, US$bn 1,2 13.5 15.8 18.5 21.9 20.6 29.6 31.9 36.0 37.5 39.5

Real GDP growth, % change y-o-y 1,2 7.8 6.7 8.4 6.3 3.1 1.3 1.9 2.5 2.6 16.6

GDP per capita, US$ 1,2 18,499 21,320 24,320 28,240 26,026 36,164 37,921 41,119 42,258 49,276

Population, mn 3 0.7 0.7 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.9

Notes: e/f-BMI estimate/forecast. 1 GDP For 2010 confirmed, breakdown by expenditure not yet available; Source: 2 Central Informatics Organisation, BMI, 3 World Bank/BMI



Industry Forecast Scenario

Consumer Outlook

Bahrain’s consumer outlook appears fairly weak over our five-year forecast period as the economic

slowdown has affected consumer confidence. While the official numbers suggest an economic recovery is

in place, with real GDP growing by 3.1% in 2009 according to the CIO, other indicators such as bank

lending, the stock market, house prices and consumer confidence suggest otherwise, indicating that the

real picture is somewhat bleaker. There is also a degree of public discomfort with their government’s

relentless pursuit of foreign investment. In a bid to attract foreign business, Manama has allowed an

increasingly liberal leisure environment and many Bahrainis are unhappy with the level of tolerance of

Western cultural imports such as alcohol consumption, which could mean a long-term risk for the

alcoholic drinks industry.

Bahrain has one of the most open economies in the Middle East and is home to a large financial services

sector. Developing the service economy has been a top priority for the government given Bahrain’s

relatively small, and dwindling, oil reserves, and the financial services sector has emerged as a major

driver of economic growth. The small size of the local population is a significant limitation for the growth

of mass retail but tourism plays an important part in boosting retail sales in the region. In Bahrain, tourist

arrivals have risen by an average of 10-15% annually over the past three years and are projected to rise by

an average of 2.5% a year over the next decade, according to the Ministry of Culture and Information’s

tourism affairs division. Bahrain also remains a popular weekend shopping destination for many Saudi

consumers, who cross the King Fahd Causeway, boosting local retail sales.

BMI estimates that consumer spending in

Bahrain was flat in 2009 due to low

consumer confidence and high levels of

unemployment, but we expect a rebound

to 5.0% growth in 2010 and 6.0% in

2011. While private consumption is now

growing again, we believe that this

growth is starting from a low base.

Indeed, while private consumption

accounted for 45.2% of real GDP in

2006, we estimate that it made up just

42.0% in 2009 and 2010. Currently, we

see private consumption growth of 3.0%

Bahrain GDP & CPI

2008-2019

Source: CIO, CBB, BMI forecasts (2010-2019)



for 2010, rising to 4.0% in 2011. Unfortunately, the government has not yet provided a breakdown of

either Q110 or 2009 growth by expenditure, so we cannot compare it at this stage, but a 3.0% growth rate

in real terms is not to be sniffed at in this climate.

The local retail sector is characterised by an increased tendency on the part of consumers to trade up to

higher value products, a trend that slowed significantly during the downturn as consumers turned to more

economically priced food and drink products. Despite the country’s wealth, unemployment remains a

problem, particularly among the Shi’a population, where unemployment can exceed 30% and is a

continual source of unrest. However, looking at Q1 results, the economy does appear to be on the

rebound. Overall real GDP growth came in at an annualised 5.2%, compared with 2009's full-year outturn

of 3.1%, with strong performances registered by hotels and restaurants, up 14.4%.The government also

estimates that employment stood at 489,657 in Q110, up 1.2% on Q109, and accounting for 44.2% of the

population. Although this could imply some decline in population – in line with the view we have been

promoting for some time – we do not expect to see the government confirming this in official data. In any

case, the percentage is the highest since the government's data series began in 2006. Against this

backdrop, the outperformance of these three sectors suggests a strong global and expatriate consumer

demand situation, which is, in theory, very good news for the Bahraini economy.

Looking further ahead we are projecting very modest GDP recovery as the financial and real estate

sectors remain very subdued. This is in line with the view that we expressed at the beginning of 2009: for

all the talk of the importance of economic diversification over recent years, and despite the drop in oil

prices, it will be the economies that are least diversified that will emerge from this particular crisis

strongest in the short-to-medium term. Bahrain’s oil resources and revenues are relatively low compared

with its neighbours and there is little scope for major increases in production. With a very hefty financial

sector, Bahrain is very vulnerable to volatile global financial sentiment and overseas demand. While

economic growth is expected to return to positive territory from 2010, averaging around 2.8% over 2015-

2019, we expect a spurt of 16.4% in 2014 on the back of an increase in oil output from the Abu Saafa

fields, which will then boost the export sector in real terms.

The 10-year outlook for Bahrain is similar to its fellow GCC members. As long as political stability is

maintained, robust government spending and oil-based liquidity will keep it a relatively attractive

destination for investment. However, the last few years have been a boom time and we do not see growth

returning to the levels posted over 2001-2008 (7.8% on average). Attracted by the country’s stability and

positive business environment, a number of major international retailers, including Carrefour and

Waitrose, have been drawn to the Bahraini market, investing in new store openings. Such investments

will bring a wider range of food and drink products to market, thereby driving demand and boosting sales.

The Bahraini retail market will also continue to benefit from events such as the annual Formula One

grand prix in Sakhir, which has generated hundreds of millions of dollars in revenues since it became a

fixture on the racing calendar in 2004.



Risks To Outlook

The clear downside risk to this scenario is a drop in oil prices, which is not beyond the realm of

possibility if BMI’s double-dip global downturn scenario plays out. Bahrain will muddle through if the

oil price stays high, as is our core scenario, but if it drops again, making the implementation of income

tax necessary, then there are serious risks to growth, the size of the expatriate population and the financial

sector.

The government is going all out to promote its business environment with its worldwide Business

Friendly marketing campaign. However, we note substantial risks to the investment climate emanating

from the worsening fiscal situation. In October 2009, it was reported that the government was considering

increasing corporate tax for Bahraini and foreign businesses, although there have been no further details

since then. Meanwhile, the business community is already up in arms about the expatriate workers’ tax.

Furthermore, Bahrain has already doubled its national debt (to 25% of GDP), and earned itself a ratings

downgrade by Moody's. Any problems in the financial industry could further delay a private-sector

recovery and derail investor and consumer confidence,

Food

Food Consumption

BMI’s current outlook for the Bahraini

economy is rather subdued, although we

are continuing to forecast steady growth

in headline food and drink consumption.

We remain concerned about the stability

and health of the Bahraini services

economy and private sector in general.

Latest figures suggest that there was a

substantial rebound in overall growth in

Q110, but we see risks for the remainder

of the year. Although fiscal stimulus

plans remain in place, they are under

threat from lower oil prices, while further

turmoil in the financial sector is not out

of the question.

Currently we are forecasting that total food consumption will grow by 10.9% between 2010 and 2015 to

reach a total value of BHD0.214bn. We do believe that good growth opportunities remain, despite the

small size of the market at just under 1mn. While this size does significantly limit long-term growth

opportunities, there nevertheless remains considerable room for growth in most segments of the wider

Food Consumption

2005 - 2015

e/f = BMI estimate/forecast. Source: Bahrain Monetary Agency, Bahrain Centre for Research & Studies, Gulf Cooperation Council Secretarial General, BMI



food industry. With the economy having expanded at such a rapid rate in recent years, the food industry is

still continuing to catch up with this growth, which accounts for our solid forecast figures. With the

market still far from saturation, further investments will continue to be made in the processed food sector,

thereby fuelling food consumption growth.

Bahrain benefits from a large expat population with high spending on food and drink products, although

disposable incomes and spending on food across the general population is lower than in its Gulf

neighbours. However, the fact that the food and drink industry is still far from maturity and saturation

means that growth opportunities across most of the food industry’s core segments such as edible oils and

dairy have yet to be exhausted. This is highlighted by the fact that while per capita food consumption was

estimated at BHD239 (US$635) in 2010, a figure lower than in a number of other Gulf countries, this

indicator is forecast to experience growth of 1.72% to 2015.

Table: Food Consumption Indicators - Historical Data & Forecasts

2005 2006 2007 2008 2009 2010e 2011f 2012f 2013f 2014f 2015f

Food consumption (US$bn) 0.418 0.441 0.466 0.504 0.547 0.513 0.531 0.539 0.546 0.562 0.569

Food consumption (BHDbn) 0.157 0.166 0.175 0.190 0.206 0.193 0.200 0.203 0.205 0.211 0.214

Per capita food consumption (US$) 574.9 593.3 613.0 650.0 691.5 635.4 645.7 644.8 641.5 649.0 646.4

Per capita food consumption (BHD) 216.2 223.1 230.5 244.4 260.0 238.9 242.8 242.4 241.2 244.0 243.0

Total food consumption growth (y-o-y) 4.85 5.46 5.53 8.28 8.54 -6.29 3.50 1.66 1.25 2.93 1.28

Per capita food consumption growth (y-o-y) 2.56 3.20 3.31 6.04 6.38 -8.12 1.63 -0.14 -0.51 1.18 -0.41

Food consumption as % GDP 3.11 2.78 2.52 2.30 2.66 1.73 1.66 1.50 1.46 1.42 1.21


Trade

Not surprisingly, Bahrain’s food and drink trade balance will become increasingly negative over our

forecast period. The small island state faces major geographical restrictions, which, paired with the hot

arid climate, mean that opportunities for agricultural output are highly restricted. While the government

does work to support a number of agricultural projects, Bahrain will always be a net good importer and

allocates its considerable wealth according to this reality. Between 2010 and 2015, the trade deficit is

forecast to increase by 8.65% as imports continue to make up for the country’s domestic food production

shortfall. Over the forecast period, exports are expected to grow by 7.6% to US$65.9mn, while imports

are forecast to grow by 8.54%; however, this growth will be starting from a far higher base.



Table: Bahrain Sectoral Trade Balance - Historical Data & Forecasts

2005 2006 2007 2008 2009 2010e 2011f 2012f 2013f 2014f 2015f

Exports (food, drink & tobacco) (US$mn) 58.62 57.36 59.12 63.27 57.28 61.20 61.80 62.72 62.83 65.73 65.85

Imports (food, drink & tobacco) (US$mn) 634.7 512.7 539.4 626.9 551.4 532.7 541.1 549.8 558.9 568.4 578.2

Balance (US$mn) -576.1 -455.4 -480.3 -563.6 -494.1 -471.5 -479.3 -487.1 -496.1 -502.6 -512.3


Drink

Soft Drinks

As the country’s leading drinks sector,

strong and steady growth is forecast for

Bahrain’s soft drinks industry. Due to the

severe restrictions on the sale of alcoholic

drinks and the hot climate, soft drinks are

very popular and play an important role

in social occasions. Sales of soft drinks

are forecast to experience growth of

40.4% between 2010 and 2015 to reach

BHD47.99mn. While segmented soft

drinks data is not available, BMI believes

that higher-value segments such as fruit

juices and functional drinks will begin to

outperform the more established and lower-cost carbonates segment, as premiumisation begins to play a

stronger role in driving values sales over the forecast period.

Looking ahead, we see that the two key trends expected to be the main drivers of industry growth are

rising health consciousness and premiumisation. Rising health consciousness will provide opportunities

for carbonate producers as low-calorie substitutes will become increasingly popular. Higher value

segments such as fruit juices and functional drinks are expected to continue to gain traction as the

evolution of the wider industry and rising health consciousness trend plays out. The flourishing bottled

water category and energy drinks are also expected to continue performing well. Non-alcoholic beers and

other malt beverages are also benefiting from stronger demand, particularly among younger consumers

that are keen to experiment with new products.

Soft Drink Sales

2005 - 2015

NB Historical data are estimates, based on country sales as a % of total Gulf sales. Source: Company information, Trade press, BMI



Table: Drinks indicators

2005 2006 2007 2008 2009 2010e 2011f 2012f 2013f 2014f 2015f

Soft drinks sales (BHDmn) 26.65 27.99 29.43 30.98 32.64 34.19 36.40 40.21 42.04 47.40 47.99

Soft drink sales growth, BHD, (y-o-y) 9.77 5.04 5.15 5.25 5.38 4.74 6.47 10.45 4.56 12.74 1.25

Soft drinks sales (US$mn) 70.9 74.4 78.3 82.4 86.8 90.9 96.8 106.9 111.8 126.1 127.6

Per capita soft drink spend (US$) 97.4 100.1 103.0 106.2 109.7 112.7 117.8 127.8 131.3 145.5 144.9

NB Historical data are estimates, based on country sales as a % of total Gulf sales. Source: Company information, Trade press, BMI

Mass Grocery Retail

While the small size of the local market

places significant limitations on the

potential growth of the Bahraini MGR

industry, we are nevertheless forecasting

strong growth ahead, as the informal

sector currently still accounts for a large

proportion of sales. Between 2010 and

2015, total MGR sales are forecast to

increase by 47.0% to reach a value of

BHD243.5mn. The main drivers will be

the continued robustness of the local

economy and the conversion of many

shoppers from traditional to organized

retail. While the small size of the

population suggests that the opportunities for long-term growth will be fairly negligible, the fact that the

informal sector still accounts for more than 50% of food and drink sales suggests there are still significant

opportunities available through organic store growth.

MGR sales experienced explosive growth between 2002 and 2008 on the back of the country’s

hydrocarbon-fuelled economic boom, increasing by over 95%. This rapid economic expansion attracted

investment into the country’s underdeveloped retail sector, with operators targeting the spending power of

the expatriate-heavy consumer base, the increasing preference for Western-style consumption trends and

the subsequent desire for modern retailing.

Mass Grocery Retail

2005 - 2015




The hypermarket and supermarket segments will continue to be the main drivers of growth in the MGR

sectors, with sales forecast to grow by 38.8% and 30.7% respectively between 2010 and 2015. Due to the

vast selling power of hypermarkets, the addition of just one store (there are currently only five in the

whole country) can significantly add to MGR sector sales. Meanwhile, supermarkets will continue to

cater to those consumers seeking a more niche retail experience, as can be seen with the opening of the

high-end supermarket Waitrose. It is the convenience sector that is forecast strong growth, with sales

expected to rise by an impressive 97.8% to 2015. This is partly a reflection of convenience stores’ ability

to penetrate urban residential areas far more easily than larger store formats, but also reflects the far lower

base of the sales figures.

Looking further ahead, by 2019, we expect that the food retail sales split will shift to 65:35 in favour of

organized retail, which should enable the annual headline MGR growth rate to remain strong past the

2015 forecast period.

Table: Bahrain Mass Grocery Retail Sales - Value by Format - Historical Data & Forecasts

2005 2006 2007 2008 2009 2010e 2011f 2012f 2013f 2014f 2015f

Supermarkets (BHDbn) 0.0417 0.0469 0.0515 0.0566 0.0613 0.0641 0.0682 0.0725 0.0769 0.0825 0.0838

Hypermarkets (BHDbn) 0.0466 0.0542 0.0609 0.0664 0.0729 0.0699 0.0739 0.0796 0.0864 0.0954 0.0970

Convenience stores (BHDbn) 0.0132 0.0155 0.0199 0.0230 0.0268 0.0317 0.0371 0.0438 0.0513 0.0616 0.0627

Total mass grocery retail sector (BHDbn) 0.1015 0.1165 0.1324 0.1460 0.1609 0.1656 0.1793 0.1960 0.2146 0.2395 0.2435

Total mass grocery retail sector growth, BHD, (y-o-y) 17.3913 14.7594 13.6032 10.3409 10.1992 2.9197 8.2333 9.3118 9.4950 11.5974 1.6708

Supermarkets (US$bn) 0.1110 0.1246 0.1370 0.1506 0.1630 0.1705 0.1813 0.1928 0.2044 0.2194 0.2228

Hypermarkets (US$bn) 0.1240 0.1441 0.1620 0.1766 0.1938 0.1858 0.1967 0.2118 0.2298 0.2537 0.2579

Convenience stores (US$bn) 0.0350 0.0411 0.0530 0.0612 0.0713 0.0842 0.0988 0.1166 0.1364 0.1637 0.1668

Total mass grocery retail sector (US$bn) 0.2700 0.3099 0.3520 0.3884 0.4280 0.4405 0.4768 0.5212 0.5707 0.6368 0.6475




Table: Bahrain Grocery Retail Sales By Format, 2009 & 2019

2009 2019f

Organised/MGR 48% 65%

Non-organised/Independent 52% 35%

f = forecast. Source: BMI



Food Key Industry Trends and Developments

Increasing Interest In Processed Foods

While traditional foods and diets are still very popular in Bahrain, a major shift has been occurring with

processed foods and fast food restaurants becoming increasingly popular. These changing eating habits

have seen consumers demonstrating a growing preference for processed Western foods and snacks. In line

with this trend, snack food producers and chain restaurants have been ramping up their investments in the

Bahraini market.

The end of 2009 witnessed a spree of investments from a number of food producers. In December India-

based Britannia and Oman-based al-Sallan Food Industries relaunched the popular biscuit brand

Baker’s Pride in the Bahraini market, working with local distribution partner A. Latif al-Aujan Food

International. The relaunch strategy for the Baker’s Pride range, which is manufactured at the

company’s plant in Sohar, Oman, included an improved recipe and new packaging, designed to give the

brand a new look and feel, while the sales price remained the same. The Bahraini biscuit market is

estimated to be worth US$21.42mn annually, with per capita consumption of biscuits estimated at 5.65kg

per annum. Meanwhile, the Auntie Anne’s pretzel chain opened its first location at the Seef Mall and

stated that it will continue to expand in the country, with plans to open at least five stores over five years,

and may eventually develop customized products to fit local taste profiles. The local operations in

Bahrain are managed through a sub-franchise license by Da’Rosa Food Company.

Also, in late December 2009, Bahrain’s Global Banking Corporation announced that it established a

new limited liability company called Diyafa Holdings Company to capitalise on opportunities in the

food and beverage, hospitality and retail and business service sectors. The new company plans to target

some of the leading international food and hospitality brands, while also creating and developing its own

brands in specific market segments. Diyafa is expected launch two major restaurants in Bahrain and is

also looking into the boutique hotel market.

Continued Government Investment

Bahrain’s food production industry is characterised by very high levels of government involvement. The

government has made investing into the local food industry a priority, with this sector providing

employment for its citizens, as well as a means of wealth redistribution. Furthermore, the country is

highly dependent on food and drink imports due to its geographical restrictions and the very harsh local

climate. More recently, these projects have gained growing importance as the country looks to decrease

dependence on imports where possible and to keep inflation in check. To this end, in July 2010 it was

announced that plans are underway for the establishment of a private poultry firm in the country as a part



of a BHD10mn (US$26.6mn) investment project. The government is supporting an initiative spearheaded

by the private sector with the aim of promoting the country’s food security. When completed, the facility

is expected to produce up to 10mn chickens annually, which will go a long way in meeting consumer

demand at affordable prices.

Growing Investment Interest From Non-Regional MNCs

While regionally based companies have a strong presence in the local food and drink sector, multinational

companies operating in the Gulf region have also been seeking expansion into the wider Middle East and

North Africa region.

In May 2010, Mars GCC launched a US$40mn manufacturing facility in Dubai as the Gulf Cooperation

Council (GCC) region assumed greater strategic significance. As emphasised by the fact that the region

has consistently posted double-digit sales growth since 2000, demand for Western chocolate brands

(Mars produces its namesake and the Snickers brand) is widespread, with the demand for snack foods

growing strongly, as discussed above. Companies such as Mars can also leverage off duty-free export

opportunities to efficiently supply all six GCC markets (including Bahrain), as well the wider Middle East

region.

Also in May, Nestlé announced it was investing in four new manufacturing facilities across the Gulf,

while bullishly forecasting 2010 sales growth of 10% year-on-year (y-o-y). Consolidated Nestlé Middle

East region sales reached US$1.4bn in 2009 from 17 factories, with the UAE accounting for between

10% and 11% of the total. Nestlé is expanding organically from a position of significant strength, having

established itself as comfortably one of the region’s most well-invested firms.

In mid 2009, global dairy firm Fonterra announced that it expects the Middle East region (specifically

the affluent GCC area) to be one of its key long-term growth engines, following this comment with full

takeover of the outstanding 51% stake in its Saudi joint venture partner Saudi New Zealand Dairy

Products Company from Saudi Dairy and Foodstuff Company (Sadafco) in a deal believed to be

worth about SAR120mn (US$32mn). Based out of New Zealand, Fonterra has reported double-digit

turnover growth in the region over the last three years.

American food and drink major Kraft Foods has long been a major presence in the country’s food and

drink sector, having invested US$40mn in a manufacturing plant in the Bahrain International Investment

Park. Having already established its presence in the country, Kraft is looking to develop further its

operations and has been pursuing a drive to become more environmentally friendly. Paying particular

attention to the water scarcity issue in Bahrain, in mid-2009 the company announced that it had reduced

the amount of water used in manufacturing by 21% since 2005, having reached its targeted goal two years

early.



Market Overview

Agriculture

Given its geographical restrictions and desert climate, Bahrain is highly dependent on food and drink

imports to meet the needs of its population. Most of these imports are sourced from the US and Saudi

Arabia. The government has made some efforts to address this dependence, such as its investments in

poultry farms, as it has generally sought to diversify the economy away from the oil industry. However,

the country’s agricultural sector still only employs just over 1% of the population while contributing less

than 0.7% to GDP.

The reality is that despite heavy government subsidies, which have prevented the country from falling

even further behind in terms of self-sufficiency, the sector is held back considerably by a climate

unsuitable for most forms of agriculture. Bahrain receives minimal rainfall, with annual harvests and

outputs highly dependent on whether the sector has been fortunate enough to receive favourable weather

conditions during the year. This lack of consistency prevents continual reinvestment in the sector.

Similarly, the technological and harvesting techniques that need to be adopted to improve output in such

conditions require considerable investment. Despite the government’s commitment to diversification, it is

unlikely to be persuaded into making such a risky and low-return investment, when returns elsewhere, not

least in the oil sector, are so much greater. Another concern likely to curb future investment is the

country’s limited fresh water resources.

However, the government has started to prioritise the country’s long-term food security in the face of

rocketing global food prices. This is likely to lead to renewed investments in Bahrain’s agriculture sector

within the industry sub-sectors where some growth is possible, such as poultry production. The seafood

and fisheries industries have also been able to benefit from subsidies and have successfully expanded.

Through the National Pisciculture Centre there have also been efforts to revive the Gulf’s fish stock. The

centre is looking to improve production technologies and add new breeds of local fish to the production

cycle. It is also trying to encourage more fish farming as a means of reducing seafood imports and

providing local employment opportunities.

Key Food Processors

Saudi companies such as Almarai and Saudi Dairy and Foodstuffs Company (SADAFCO) are major

players in the dairy products segment, with their respective Almaria and Saudia brands widely available

throughout Bahrain. Owing to the sophistication of Saudi farms, and their high production levels and

extremely high quality products, Bahraini milk producers find it almost impossible to compete with Saudi

Arabian producers. A number of Saudi milk producers supply Bahraini producers with raw milk. Dairy

products are particularly popular across the Gulf region and make up an important part of the diet, with



high consumption of yoghurt, laban, processed cheese and cream products. It is estimated that Bahrainis

consume 65-70kg of dairy products per capita annually.

Among the country’s leading industry players are Awal Dairy Company (previously called Bahrain

Danish Dairy), a manufacturer of dairy and juice products, and General Trading and Food Processing

Company, a distributor working across a wide range of food and beverage subsectors. Changing diets

have resulted in a rising demand for packaged Western foods, a demand that is being met by both local

and international companies. Kraft Foods is also a major presence in the country’s food and drink sector,

having invested US$40mn in a manufacturing plant in the Bahrain International Investment Park. The

60,000m2 operation produces Kraft cheese and Tang beverages for export across the Middle East.

Halal Food

The importance of the halal food industry is continuing to grow in the Middle East. According to the

World Halal Forum (WHF), the value of the global halal food industry is expected to climb above

US$650bn in 2010 as demand continues to pick up, in spite of the global financial meltdown. The long-

term outlook for the halal food industry is captured by the fact that world’s Muslim population represents

close to 25% of global population (over 1.6bn people). As investment into the industry increases,

competition among producers will intensify, which will beef-up output of halal products.

While Middle Eastern consumers traditionally prefer fresh meat, health and hygiene scares have been a

major driver in changing consumer habits and have ultimately benefited the packaged meat industry.

Meat and halal products are now being imported from many countries, including Australia, New Zealand,

Ireland, Brazil, Canada and the US. In fact, most distributors of halal products are not from Muslim

countries, with many international producers having recognised the potential of the market and investing

accordingly.



Table: Muslim Populations In Selected Middle East & Africa Countries, 2009

Total Population Muslim Population as % of Total Muslim Population

Bahrain 727,785 81.2 590,961

Egypt 83,082,869 90.0 74,774,582

Iran 66,429,284 99.0 65,764,991

Israel 7,233,701 16.0 1,157,392

Jordan 6,342,948 95.0 6,025,801

Kuwait 2,691,158 85.0 2,287,484

Lebanon 4,017,095 60.0 2,410,257

Nigeria 149,229,090 75.0 111,921,818

Saudi Arabia 28,686,633 100.0 28,686,633

South Africa 49,052,489 2.0 981,050

Syria 20,178,485 74.0 14,932,079

Turkey 76,805,524 99.6 76,529,024

UAE 4,798,491 96.0 4,606,551

Source: CIA World Factbook



Drink

Key Industry Trends and Developments

Carbonates Still Strong

Despite the increasing global interest in health-consciousness, carbonates still dominate the drinks sector

in Bahrain. After holding prices steady for around 30 years, in early 2010 The Coca-Cola Company

(TCCC) and PepsiCo raised prices of their core carbonate brands in Bahrain by 50%. The global giants

finally made this decision on the back of strengthening raw material costs that have been placing

significant pressure on margins. Across many of their emerging markets, the prices of PepsiCo and

TCCC’s core brands have historically not increased in line with inflationary trends, which have allowed

TCCC in particular to build significant brand equity in some of the world’s poorest countries.

Historically, the Gulf and the Middle East region have been two of the few regions where PepsiCo has

outperformed the emerging market specialist TCCC. In mid-2009, PepsiCo had announced plans to shift

its Gulf headquarters to a new manufacturing facility in Jeddah, Saudi Arabia. PepsiCo has invested

approximately SAR1bn (US$266.7mn) in the development, its largest in the Middle East and Africa

region, as this region remains strategically very important due to PepsiCo’s rare dominance over TCCC.

While the market is dominated by the two global behemoths TCCC and PepsiCo, smaller regional players

do still have a presence and a competitive advantage at times of rising anti-Western sentiments. One of

the more successful local players had been Mecca Cola. Despite its initial success, Mecca Cola slowly

disappeared from the market and in May 2009 announced plans to relaunch across the Gulf region.

Having established that considerable demand existed for an alternative to the traditional carbonate

juggernauts during its first stint, Mecca Cola will have to establish a stronger advertising and branding

campaign in the Gulf this time round if it is to establish a long-term presence.

Diversifying Towards New Product Categories

While carbonates do continue to lead the drinks sector, due in part to the severe restrictions on the sale of

alcoholic drinks and the hot climate, the Bahraini soft drinks industry is increasingly segmented, with new

products launched on a regular basis. Leading players are continually launching new products within the

core carbonate, bottled water and fruit juice segments.

In April 2010, PepsiCo’s UAE-based franchise bottler and distributor Dubai Refreshments Company

(DRC) announced that it was in discussions to strengthen its product portfolio as it looked to strengthen

its non-carbonate portfolio in the GCC region. In 2009, UAE-based al-Ain Mineral Water Company (a

subsidiary of Emirates Foodstuff and Mineral Water Company) began manufacturing a range of



Capri-Sun juice products, a move that allowed al-Ain to dip its toe into the lucrative fruit juice segment in

the GCC market.

Other drinks sub-categories expected to experience strong growth are functional and energy drinks.

According to a December 2009 report from Just-drinks, despite the economic downturn, the functional

drinks category is forecast to experience strong growth over the coming four years, driven by emerging

markets. Based on research published by global drinks consultancy group Zenith International, the

report said that functional drinks sales grew by an average of 8% annually in volume terms between 2003

and 2008. Although sales growth did experience a slowdown in 2008, the medium-term prospects remain

strong on the back of continued emerging market demand, with energy drinks forecast to experience

particularly strong growth in the Gulf countries.

Across the Gulf region consumer tastes and preferences have evolved considerably over the past decade,

with widespread disposable income growth at the forefront of the evolution. Although the 2009 downturn

somewhat stemmed demand for higher-value industry segments like functional drinks and ready-to-drink

teas, strong scope for long-term growth still remains.

Innovation and product development within bottled water has largely continued over the past year, with

investment into new segments such as flavoured water gathering pace. In addition to outright new product

investment, investment into the outperforming bulk water category has continued to gather pace across

the Gulf.

Market Overview

Soft Drinks

Carbonated soft drinks remain the mainstay of the soft drinks market, with PepsiCo and the increasingly

prominent The Coca-Cola Company dominating the subsector, although bottled water brands such as

Masafi are prominent, owing to the year-round hot climate. Despite on and off competition from regional

carbonate companies such as Mecca Cola and ZamZam (influenced by geopolitical tensions), Coca-Cola

(bottled domestically by the Coca-Cola Bottling Company of Bahrain, which serves as its regional

headquarters) and PepsiCo have managed to regain the majority of their market share. PepsiCo achieved

this by investing in its brand in an effort to make it appear an international rather than American

company. Its International Dairy and Juice joint venture with Saudi Arabia’s leading dairy company

Almarai has bolstered the company’s regional reputation and the goodwill generated could boost sales of

its carbonate power brands. PepsiCo underlined its commitment to the Gulf region by announcing plans

to invest SAR1bn (US$267mn) to shift its Gulf headquarters to a new manufacturing facility in Jeddah –

Saudi Arabia’s second largest city.



On the functional drinks front, Red Bull leads the market. PepsiCo has also entered the energy drinks

segment with its Pepsi X Energy Cola brand. It is aiming to leverage the popularity of its brand to

develop a strong position in this high growth segment.

Alcoholic Drinks

Alcoholic drinks are available in Bahrain, although they are mainly sold in restaurants and hotels for

consumption on site. Despite a ban on sales of alcohol to Muslims, Bahrain does a strong trade in sales of

alcohol to Saudis travelling across the King Fahd Causeway for weekends. Many liberal Muslims,

whether Bahraini or expatriates, purchase and consume alcohol in hotels, bars, nightclubs and restaurants.

Non-alcoholic malt beverages and beers have also proved popular with local consumers. Notable non-

alcoholic malt beverage brands include Laziza and Fairouz.

The Iraq war and Islamist resurgence in the Gulf and across the Middle East have led to a decline in

tourist numbers from Western European countries and the US, which has dented sales in the alcoholic

beverages and soft drinks subsectors. However, there has been an increase in Arab expatriates and tourists

since the September 11 attacks, with Arab visitors preferring to holiday closer to home, and this has offset

the decline slightly.

Although a potential ban on alcoholic drinks sales has been discussed and supported by most political

parties during election campaigns, it has not come to fruition and is unlikely to be voted in and

implemented any time soon.

Hot Drinks

The tea bag market is dominated by Unilever’s Lipton tea brand. Lipton has been available in the Gulf

since the 1960’s and is particularly popular. Its ability to innovate and cater to developing consumer

preferences sets it apart from its competitors. Lipton produces a variety of black and green teas out of its

regional manufacturing headquarters in Dubai. Its Jebel Ali-based facility is the second largest teabag

factory in the world with a production capacity of around 5bn tea bags per annum.

Lipton has also steadily introduced a range of fruit teas. Across the GCC, Lipton has a market share in

excess of 70%. A steady rise in health consciousness is also expected to boost tea sales. Rising disposable

incomes over the long-term will boost per capita tea consumption. While the coffee market is still

dominated by traditional Arab coffee, Westernised styles are gaining popularity, particularly with the

introduction of Western-style chain cafés throughout the region, with this diversity of offerings helping to

drive consumption growth.



Mass Grocery Retail

Key Industry Trends and Developments

Growing Investment In Convenience Retailing

Significant development in organised retail channels over the past decade in the Gulf region has been led

largely by the hypermarket segment. Typically attached or adjacent to malls, hypermarkets flush with a

variety of value-added services are immensely popular across the Middle East and North Africa (MENA)

region. The supermarket segment has also played an important role in fast-paced transition from largely

the wet market dominated and largely independent grocery landscape to one where organised retail

contributes to a major proportion of grocery sales.

In July 2010, Bahrain’s first virtual supermarket was launched. Called Cart, the company has started a

new grocery shopping website (cart.com.bh) in Bahrain. The website helps the company to deliver food

orders directly to the shoppers' doorstep, with the site having received about 250,000 visitors since its

launch, making it the seventh most visited website in the country, according to visitor tracking website

Alexa Rank. Project Development Co-Ordinator Ebrahim Haroon said the retailer aims to deliver 100

orders per day in three months. Haroon added that the company is also looking to expand its service

outside of Bahrain. The initial success of Cart reflects the growing importance of convenience in

consumers’ shopping decision, particularly with increasingly modern lifestyles and longer working hours.

In October 2010, local retail operator BMMI announced plans to launch a major retail expansion in the

country, saying that it plans to have opened five large supermarkets as well as five neighbourhood stores

in the country within five years. The first large supermarket will be opened shortly in Amwaj under the

Alosra banner. The Alosra supermarket chain specialises in sourcing Western brands and specialty

products, and the company plans on also carrying prepared salads, sandwiches and sushi which will be

offered as both take-away and at the in-store cafes. Clearly BMMI is looking to target high-spending and

health-conscious consumers who value convenience.

Catching the Eye of Foreign Investors

Bahrain’s MGR sector has also been increasingly receiving investments from international retailers

looking to increase their presence in emerging markets. Most recently, in June 2010 British premium

supermarket retailer Waitrose announced plans to launch its first store in Bahrain in a bid to strengthen

its position in the high-spending Gulf region. The 2,0000m2 store will be operated under license by local

operator Fine Fare Food Market at a new complex called The Lagoon and is a part of the retailer’s

regional diversification strategy. Waitrose is attracted by the Gulf region’s high-spending, expatriate-

heavy population and the fact that organised retail remains an only modestly developed channel,

particularly outside Dubai. This is Waitrose’s second foray into the Gulf, having already launched two



stores in the UAE in association with Spinneys Dubai. While Bahrain may not appear to be the most

obvious choice of market after the UAE, it is an attractive market due to its positive regulatory

environment and a high-spending expatriate community that arguably lacks retail options. Most of the

investment into retail has so far focused on hypermarkets, which do not have the convenience and

premium food and drink options of high-end supermarkets such as Waitrose.

International retail giant Carrefour opened its first outlet in Bahrain in September 2008, two years after

announcing its intentions to enter the market. The hypermarket covers 16,066m2 and sells 35,000

products. It is located at the Bahrain City Centre mall, which has been developed by the Majid Al

Futtaim Group (MAF Group), which runs Carrefour’s Middle East operations through a joint venture

with the French company. Emirati retail group EMKE, which operates Lulu hypermarkets in the

country, is another major presence, both regionally and in Bahrain. In July 2009, EMKE had announced

plans to invest AED1.5bn in its operations over the next 18 months, with plans to expand its hypermarket

presence in regional markets, including Bahrain. This was followed by the announcement in June 2010 by

EMKE that it has made a major investment in the logistics of its Bahraini operations. EMKE is working

with Ehrhardt + Partner to implement the Warehouse Management System LFS 400. Through such

investments EMKE is looking to guarantee future compliance with international logistics standards and

improve efficiencies.

Market Overview

Prices across Bahraini MGR are generally quite low by GCC standards, as Bahraini consumers tend to be

relatively price-conscious. Low prices in supermarkets also help to stimulate sales from lower-income

consumers, as they tend to prefer shopping at smaller, traditional stores.

Bahrain’s hypermarket category has only started to attract investment over the past few years. Until 2005

Bahrain had only one hypermarket – Géant, jointly run by local company Fu-Com International and

Groupe Casino of France. Fu-Com is itself a joint venture between Bahrain-based Retail Arabia and the

Dubai-based al-Ghurair Group. However, in 2005 a group of Saudi investors, A.K. al-Muhaidib &

Sons, introduced their Giant hypermarket concept to the country with the opening of one store.

Carrefour finally opened its first outlet in September 2008 in association with its regional affiliate MAF

Group, while EMKE’s Lulu network continues to expand across the Gulf, having previously announced

plans to invest AED3.2bn (US$0.87bn) in building 14 hypermarkets and shopping centres across the

GCC region.

The most prominent supermarket retailer in Bahrain is Last Chance, run by Fu-Com, followed by Al-

Jazira supermarkets (operated by Al-Jazira Group) and Jawad supermarkets (operated by Jawad

Business Group). Jawad operates a network of 24-seven supermarkets that sets a benchmark for

convenience. Other operators include Midway Supermarket, 24 Hours Market, the Alosra supermarket

chain run by the Bahrain Maritime & Mercantile International Group and Mega Mart. In June 2010,



British supermarket operator Waitrose opened its first outlet in Bahrain, targeting the high-spending

section of the consumer market.

Table: Structure Of Bahrain’s MGR Market – Number Of Outlets, 2004-2009

2004 2005 2006 2007 2008 2009

Supermarkets 27 27 28 30 32 33

Hypermarkets 1 2 2 3 4 5

Convenience stores 567 576 586 598 608 615

Total MGR stores 595 605 616 631 644 653

Source: BMI

Table: Structure Of Bahrain’s MGR Market – Sales By Retail Format, 2004-2009 (US$mn)

2004 2005 2006 2007 2008 2009

Supermarkets 0.097 0.111 0.125 0.137 0.151 0.163

Hypermarkets 0.106 0.124 0.144 0.162 0.177 0.194

Convenience stores 0.027 0.035 0.041 0.053 0.061 0.071

Total MGR sales 0.230 0.270 0.310 0.352 0.388 0.428

Source: BMI

Table: Structure Of Bahrain’s MGR Market – Sales By Retail Format, 2004-2009 (BHDbn)

2004 2005 2006 2007 2008 2009

Supermarkets 0.036 0.042 0.047 0.052 0.057 0.061

Hypermarkets 0.040 0.047 0.054 0.061 0.066 0.073

Convenience stores 0.010 0.013 0.015 0.020 0.023 0.027

Total MGR sales 0.086 0.102 0.117 0.132 0.146 0.161

Source: BMI

Table: Value Of Sales Per Outlet, 2008e

US$mn BHDmn

Supermarkets 4.71 1.77

Hypermarkets 44.15 16.60

Convenience stores 0.10 0.04

Total MGR sector 0.60 0.23

e = estimate. Source: BMI



Competitive Landscape

Table: Key Players in Bahrain's Food & Drink Sector

Company Country Of

Origin Sub-sector Sales

BHDmn Sales

US$mn Fiscal

Y/E Number Of Employees

Year Established

Unilever Middle East

UK and Netherlands Food & Drink na 700e* na na na

Al Safi Dairy (Danone) Saudi Arabia Food - Dairy na 266 (e) na 2,000 (e) 1979

General Trading and Food Processing Company (TRAFCO) Bahrain

Food - Processed

Meat and Dairy 36 96 Jan-09 608 1978

Al Islami Foods (formally Co-op Islami) UAE

Food - Halal Meat na 76 (e)* na 400 (e) 1981

Awal Dairy Company** Bahrain

Food & Drink - Dairy and

Juices 11 29 Dec-08 240 1963

Delmon Poultry Company Bahrain Food - Poultry 10.95 29 Dec-09 180+ 1981

Bahrain Flour Mills Company Bahrain Food - Flour na na na 100 1970

Bahrain Dairy Bahrain Food - Dairy na na na na na

Coca Cola Bottling Company of Bahrain USA

Drink - Soft Drinks na na na na na

Kraft Foods Bahrain USA Food & Drink na na na na na

Saudi Dairy and Foodstuffs Company (SADAFCO) Saudi Arabia Food - Dairy na na na na na

na = not available; e = BMI estimate; *Middle East Sales; **Awal is a subsidiary of TRAFCO, its sales are also included in TRAFCO's mentioned performance. Source: Company Results, Trade Press, BMI



Table: Bahrain’s MGR Key Players

Company Country of

Origin Sales,

BHDmn Sales,

US$mn Fiscal Y/E Fascia Format No of

Outlets

EMKE Group UAE/India na 2,100* na Lulu Supermarket/Hypermarket 29

Fu-Com International/Casino Bahrain na 115 (e) na

Last

Chance Supermarket

franchise 3

Le Marché Hypermarket 1

Geant Hypermarket 1

Carrefour/MAF France/

UAE na 50 (e) na Carrefour Hypermarket 1

Al-Jazira Group Bahrain na na na

Al-Jazira Supermarket 5

Al-Jazira Distribution

Company 1

BMMI Group Bahrain na na na Alosra Supermarket 1

Mega Mart Bahrain na na na Mega Mart Supermarket 3

Jawad Business Group Bahrain na na na Jawad Supermarket 25

e = estimate; na = not available; * group sales. Source: company results, trade press, BMI



Company Monitor

Food

Bahrain Flour Mills Company

Company Overview Established in 1970, Bahrain Flour Mills Company (BFMC) is majority-owned by the Bahraini

government through Bahrain Mumtalakat Holding Co and is engaged in wheat grinding and

flour marketing, supplying flour to the majority of the country’s bakeries. The Kuwait Flour

Mills & Bakeries Company is another of the company’s significant shareholders.

Strengths BFMC supplies over 90% of Bahrain’s flour.

BFMC has a first rate manufacturing facility.

BFMC’s export business is growing promisingly.

Weaknesses Despite access to subsidies, significant investment will be required to compete on par with regional rivals.

The company’s business model is heavily dependent on government subsidies.

BFMC reported a significant drop in net profit for H110, following solid results for 2009.

Opportunities Rising regional food consumption should continue to strengthen demand for flour.

Exports are likely to play an increasingly important role over the coming years.

Threats Fluctuations in the price of flour could affect BFMC.

Any revisions over the government’s subsidy policy could severely undermine the company.

Strategy The company buys significant amounts of flour on the international market. It then sells this

locally at lower prices and receives government subsidies to cover its losses. This makes

the company one of the most heavily subsidised in Bahrain, as well as particularly

vulnerable to the fluctuating price of flour in the international marketplace.

Company Data Estimated Annual Sales: US$19mn

Employees: 100

Annual flour production: 85,000 tonnes

Net profit (H110): BHD586,843, 15% y-o-y decrease

Net profit (Q110): BHD249,793, 33% y-o-y decrease

Net profit (2009): BHD1.1mn, 15% y-o-y increase



General Trading And Food Processing Company (TRAFCO)

Company Overview Established in 1978 as a public joint stock company as a part of an initiative to revolutionize

the local food industry, TRAFCO is one of Bahrain’s leading food distribution companies. It

has a wide and varied product portfolio, which includes the popular Rainbow milk brand,

Sadia meat products and La Ronda confectionery. The company operates three subsidiaries

– Bahrain Danish Dairy Company, Food Supply Company and Kuwait Bahrain Dairy

Company. The company also owns 100% of Bahrain Water Bottling and Beverage Company

(up from 41%), and has stakes in Bahrain Livestock Company and Bahrain Fresh Fruits

Company.

Strengths TRAFCO counts on a large and well established product portfolio.

Equity positions in a number of Bahrain’s most promising food and drink companies.

Regional sales are increasing at a promising rate.

Product diversification shields it from a downturn in any one subsector.

Weaknesses TRAFCO has had to invest heavily in recent years to improve warehousing and efficiencies .

The company imports fresh fruits and other raw ingredients and is therefore vulnerable to global fluctuations in food prices.

Opportunities Demand for processed meats is rising in line with shifting consumer preferences.

Favourable demand triggers are expected to continue strengthening the bottled water industry, which should benefit TRAFCO’s Bahrain Bottling and Beverage Company subsidiary.

The company has a wide product portfolio, including a presence in the fresh fruits and bottled water categories, both of which should experience strong growth on the back of rising health consciousness.

Threats TRAFCO food processing products face increased competition from multinational food firms, such as Kraft, which operates its regional hub in Bahrain.

Strategy TRAFCO’s aim is to become Bahrain’s leading food distributor, as well as widening its GCC

reach. The company does plan to expand its product portfolio to achieve this aim. However,

its philosophy is that being the best does not have to mean being the biggest. Accordingly,

in addition to pursuing growth through product development, the company also targets

consistent growth in terms of the value and service it offers. In April 2010, the company

opened a US$13.3mn warehouse facility in Galili. The new warehouse can store up to

85,000 cubic meters of chilled, frozen and dry foods.

Company Data Sales, year ending January 2010: BHD35.08mn (US$93.05mn)

Sales, year ending January 2009: BHD36mn (US$96mn)

Established: 1978

Employees: 608



Kraft Foods MEA

Company Overview Kraft Foods is the second largest food company in the world, with operations in 140

countries and 2009 sales of US$40.4bn. Kraft has been marketing its products in the Middle

East and Africa (MEA) region since the 1930s and over the past decade it started production

in Morocco, Egypt, South Africa and most recently, Bahrain. The company’s leading brands

in the MEA region include Philadelphia spreadable cream cheese, Oreo cookies, Nabisco

crackers, Toblerone and Côte d’Or chocolate, Dream Whip, Jell-O, Tang powdered

beverage and Maxwell House and Jacobs coffee.

Strengths Kraft’s Gulf region sales have continued to perform well over the course of the downturn.

Kraft’s spreadable cheese and Tang juice products are particularly popular.

With its local manufacturing presence and Bahrain as its regional hub, Kraft is in a strong position cater to local preferences and customer demands.

The dinar’s peg against the US dollar moderates the effects of currency fluctuations.

The company has a strong corporate social responsibility programme which helps to increase brand awareness and also to offset potential anti-Western sentiments

Weaknesses The company has had to invest heavily in its expansions and acquisition activities.

Kraft also has to invest heavily in marketing as it continues to launch new products on a regular basis.

Opportunities Rising dairy and soft drinks consumption across the Gulf region should continue to support volume growth of Kraft’s core brands.

Having a local production facility will allow the company to introduce a broader range of region-specific products.

Threats Kraft faces competition from Bahraini companies, a number of whom benefit from both government subsidies and domestic brand equity.

Strategy Kraft has been expanding its MEA operations through a series of acquisitions and

investments. In late 2006, Kraft announced plans to construct a 60,000m2 production plant,

at an estimated cost of US$40mn, in Bahrain’s International Investment Park – the first

direct investment by Kraft Foods in the Gulf region. The plant produces Kraft cheese and

Tang powdered beverages for export across the Middle East. Kraft has said that this new

production plant is expected to contribute US$120mn annually in wages, raw and packaging

materials and operations. This move is in line with the company’s global strategy, which is to

focus on high-growth developing markets, such as the Middle East, and away from low-

growth, established markets, such as Europe and America. The company is also working

towards making its operations more environmentally friendly, having recently announced

major cuts in water usage in its local production.

Company Data Global sales, year ending December 2009: US$40.4bn



Delmon Poultry Company

Company Overview Delmon Poultry Company is a public joint-stock company engaged in poultry production and

animal feed manufacturing. From its three manufacturing facilities in the country it produces

the popular Farm Chicken brand as well as poultry feed. The company also has a broiler

processing plant, rendering plant and hatchery. The government holds a 15% stake in the

company.

Strengths Delmon is a market leader in Bahrain’s poultry sector.

Delmon benefits from government subsidies.

Poultry is very popular in Bahrain as well as the wider Gulf region.

Weaknesses Delmon’s will have to invest substantially in order to increase its export competitiveness against some of the Gulf region’s leading meat processors.

The frequent bird flu scares in the region have had a negative impact on the poultry sector

Opportunities Poultry consumption will continue to rise in Bahrain and the wider Gulf region on the back of forecast disposable income gains.

Further regional diversification with a particular focus on value-added products will strengthen Delmon’s position relative to its regional rivals.

Increasing health-consciousness will drive poultry sales in the short and long term

Threats Rising competition from GCC players both domestically and regionally could undermine sales.

The small size of Bahrain’s population limits Delmon’s long-term domestic volume growth outlook.

Strategy Delmon’s strategy for pursuing growth includes establishing or investing in facilities for

processing, packing and storing frozen chicken; feed factories and an integrated project for

broiler meat. The company also invests in its distribution network to provide easy

accessibility for consumers and is increasingly looking to expand operations abroad.

Company Data Sales, year ending January 2010: BHD10.95mn (US$29mn)

Sales, year ending January 2009: BHD11mn (US$29mn)

Established: 1981

Employees: 190

Annual production capacity: 100,000 tonnes of animal feed; 6mn chickens



Drink

Awal Dairy Company

Company Overview Formerly known as Bahrain Danish Dairy, Awal is one of Bahrain’s leading food and drink

manufacturers. The company changed its name in March 2006 to end its affiliation with

Denmark, after controversial cartoons showing the prophet Muhammad were published in a

Danish newspaper. The company produces fresh and long-life milk and juices, soft drinks,

tomato paste and ice cream. It is a subsidiary of TRAFCO, which holds a 51% controlling

interest.

Strengths Awal is an established market leader within the fresh milk segment.

Awal possesses a multi category product portfolio that also includes fruit juices and ice cream.

Awal benefits from the financial strength of TRAFCO.

Weaknesses The company will have to invest heavily to compete with a number of ambitious vertically integrated regional dairy companies.

Awal’s sales and profit were negatively impacted by the economic downturn

Opportunities Demand for value-added dairy products in Bahrain and the wider GCC region is expected to continue rising at an encouraging rate.

Demand for fruit juice is expected to continue strengthening in Bahrain and the wider Gulf region.

Awal could target fragmented Middle East markets such as Jordan and Iran, which are less competitive than GCC states.

Threats The GCC (particularly Saudi Arabia)’s dairy sector is increasingly competitive with a number of prominent companies competing for regional market share.

Strategy Following an image rebranding in 2002, which helped to consolidate its local position, the

company is looking to pursue exports more vigorously. To this end, the company will invest

in equipment to increase its capacity and will continue to seek distributors in overseas

markets, as has been done in Qatar, the UAE and Jordan, in order to improve its operating

efficiency in these markets.

Company Data Sales, year ending December 2008: BHD11mn (US$29mn)

Established: 1963

Employees: 280

Annual production capacity: 12,000 tonnes of fresh milk; 25,000 tonnes of juice; 43,000 tonnes of long-life milk; 75,000 tonnes of pasteurised milk



Mass Grocery Retail

EMKE Group

Company Overview Abu Dhabi-based food and retail group EMKE operates the Lulu hypermarket chain in the

Middle East – the region’s largest Indian-owned chain – as well as a number of supermarkets.

The company also has interests in shopping mall development and management. EMKE

launched its first hypermarket in Bahrain in September 2007 and has a store network of 29

outlets.

Strengths Lulu is Bahrain’s largest MGR by sales.

EMKE has announced plans to strengthen its hypermarket footprint regionally.

Lulu’s private label range is particularly popular in Bahrain.

The company has continued to invest in logistics in order to improve operating efficiencies and profit margins.

Lulu benefits from a strong brand reputation and from being a regional operator

Weaknesses With Carrefour MAF and Fu-Com International/Casino present, further investment will be required in the hypermarket category.

Opportunities With the independent sector still contributing a high proportion of grocery sales, there are opportunities for further expansion in both the supermarket and hypermarket segments.

Demand for cheaper private label is likely to continue strengthening as part of the industry’s ongoing structural development.

Threats Despite its small size, the market is competitive with Carrefour MAF and Fu-Com International/Géant seeking to grow their market share

Although real estate prices are declining, the limited availability of land together with the expansion plans of rivals will increase expansion costs.

Strategy EMKE’s strategy for its Lulu hypermarket brand is simple. It intends to use the network to bring

modern, organised retailing within reach of the entire Gulf population and beyond and plans to

do so through an ambitious and expansive store-opening programme. The company is to invest

around AED750mn in opening 12 new stores across the wider region, including outlets in

Oman, Yemen and Kuwait, before eventually investing in expansion to Africa and India. Despite

being expensive, the profitability and inevitable level of competition in the region in the coming

years makes EMKE’s rapid-growth strategy for the Lulu brand a sensible one.

Company Data Estimated MENA sales: US$1,100mn



Fu-Com International/Géant

Company Overview Domestic retail group Fu-Com International operates the Bahrain Mall, as well as the country’s

first ever hypermarket – in partnership with Casino-owned Géant – and the popular Last Chance

supermarket chain. The 14,000m2 hypermarket is in the company’s 70,000m2 mall.

Strengths Géant has a strong hypermarket presence in Bahrain.

The company has established a strong reputation for quality

With over 50 checkout counters and a product line that stretches above 60,000 Géant provides both quantity and convenience.

Weaknesses Further investment will be required as competition from EMKE and Carrefour MAF increases.

The company now faces greater competition in the supermarket sector from Waitrose and the new online retailer Cart

Opportunities Much of the grocery retail sector is still accounted for by independent retailers.

Géant may opt to launch stand-alone outlets, particularly as real estate prices decline.

Hypermarket sales are expected to continue growing as the size of the formal grocery retail sector expands.

Threats Many consumers continue to prefer shopping at informal independent stores.

The growing presence of competitors such as Carrefour and EMKE could affect turnover growth.

Strategy The Fu-Com/Casino partnership, which led to the Géant hypermarket, benefits from the former’s

local retailing knowledge and the latter’s hypermarket expertise. Fu-Com adopts a no-frills

strategy across its retail brands to ensure that it provides the lowest possible prices and will

continue to focus its marketing campaigns on its low prices and value during this period of

lowered consumer confidence.

Company Data Géant hypermarket details: 65 checkouts; 400 staff; 65,000 product lines

Bahrain Mall details: 120+ stores; 480,000 customers monthly



Carrefour MAF

Company Overview French retailer Carrefour opened its first Bahraini hypermarket in September 2008 in

association with its regional partner Majid Al-Futtaim Group (MAF). Carrefour MAF is also

present in the UAE, Oman, Qatar, Kuwait, Egypt, Saudi Arabia and Jordan.

Strengths Carrefour MAF sets the regional benchmark in terms of the variety and quantity of goods it sells at its outlets.

Carrefour MAF has a strong reputation for the quality of its stores, which has also allowed it to launch a private label range, which appeals to Bahrain’s price-conscious consumers.

Carrefour MAF’s private label range is particularly popular during this period of lower consumer confidence.

Weaknesses Operating only one store in Bahrain presently, Carrefour MAF will need to invest heavily to gain ground on EMKE and Fu-Com International/Casino.

Opportunities Much of the grocery retail sector is still accounted for by independent retailers.

Carrefour MAF could benefit from launching standalone stores.

Demand for private label products is expected to continue rising as the economic downturn allowed these products to establish a greater presence.

Threats Carrefour is not the only retailer expanding in the Bahraini market, with regional rival EMKE also having opened its first hypermarket in the country

Competition is also increasing from Waitrose, which recently launched a high-end supermarket, and the new online retailer Cart

Strategy Carrefour’s strategy for the Middle East region has been to drive modernisation and create a

demand for its brand rather than delay market entry until modernisation occurs. The company

has tapped into a small, but constantly expanding, middle class, which has been enough to

sustain it. As this middle class – and the demand for Western goods – has grown, Carrefour

has been able to expand its store network. Carrefour’s strategy is also to diversify its in-store

offering, providing toy corners, games areas and a wider variety of international products in

order to set itself apart from local rivals who lack the floor space required to accommodate

such features.

Company Data Employees: 6,000



BMI Methodology

Food & Drink Business Environment Ratings

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 returns

Food and drink consumption per capita, US$

Indicator denotes overall breadth of market. Large markets score higher than smaller ones.

Soft drink consumption per capita, US$


Alcoholic drink consumption per capita, litres


Per-capita food consumption growth, five-year % growth

Indicator denotes sector dynamism. Scores based on total growth over our five-year forecast period.

Food and drink trade balance Indicator denotes market’s natural resources and dependency on imports for food and raw ingredient supply.

Country returns

Economic structure Rating from BMI’s CRR. Evaluates structural balance of economy; evaluating issues such as over-reliance on single sectors/markets as well as past economic volatility.

Population size Proxy for potential market size. Large countries considered more attractive.

GDP per capita, US$ Proxy for wealth. Size of population is important, but needs to be considered in relation to spending power. High income states receive better scores than low income

states.

Market entry potential/maturity Subjective rating based on level of industry development and level and strength of industry competition in a market. Mature and/or competitive markets get low scores.

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



Table: Risks

Industry risks

Barriers to entry Subjective rating based on the prevalence of industry-specific barriers that might impede investment and growth. States with many barriers receive low scores.

Regulatory environment Subjective rating based on the industry-specific regulatory environment and the presence of potentially restrictive legislation. Low scores reflect a regulatory environment.

Country risks

Short-term economic growth

Rating from BMI’s CRR. It evaluates likely growth trajectory over two-year forecast period, based on BMI’s forecasts and projections of business and consumer confidence.

Short-term financial risk From CRR. It denotes risk of currency crisis and stability of banking sector. The former would hit revenues in hard currency; the latter would curtail investment funding.

Short-term monetary risk Rating from BMI’s CRR. It denotes the risk of inflationary pressures and interest rate fluctuations, while taking into account the position of a country’s economic cycle.

Short-term external risk From CRR. It denotes the state’s vulnerability to externally induced economic shock, which tend to be the principal triggers of economic crises.

Characteristics of society From CRR. It evaluates impact of income distribution, poverty and ethnic division on broader stability.

Scope of state From CRR. Low state control markedly increases security risks, thereby increasing costs in certain states.

Institutions From CRR. It evaluates the risks to business posed by official bureaucracy, the broader legal framework and corruption.

Market orientation Subjective rating from CRR to denote predictability of openness to foreign investment and trade.

Physical infrastructure From CRR. Poor power/water/transport infrastructure act as bottlenecks to sector development.

Labour infrastructure From CRR. Denotes cost/availability of labour. High costs will affect risk-returns calculations.


Weighting

Given the number of indicators/datasets used, it would be inappropriate to give all sub-components equal

weight. Consequently, the following weightings have been adopted:



Table: Weightings

Component Weighting, %

Returns 70, of which

– Industry returns 50

– Country returns 50

Risks 30, of which

– Industry risks 40

– Country risks 60




BMI Food & Drink Industry Glossary

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 due 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 private

label 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 fast-

moving 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.

Cooperatives: BMI classifies cooperatives as retail stores which are independently owned but club

together to form buying groups, under a cooperative 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 cooperatives remaining that

conform to this model. Most cooperative 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 Sourcing

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-co-linearity.

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

BMI uses the following sources in the compilation of data, developments and analysis for its range of

Food & Drink reports: national statistics offices; local industry governing-bodies and associations; local

trade associations; central banks; government departments, particularly trade, agricultural and commerce

ministries; officially-released information and financial results from local and multinational companies;

cross-referenced information from local and international news agencies and trade press outlets; figures

from global organisations, such as the World Trade Organisation (WTO), the World Health Organisation

(WHO), the United Nations Food and Agricultural Organisation (FAO) and the Organisation for

Economic Cooperation and Development (OECD).

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