Bulgaria Food and Drink Report Q1 2009 (Business Monitor International)

Summary: Despite global economic difficulties, the Bulgarian food and drink market is expected to continue its steady expansion, jumpstarted by EU membership gained at the start of 2007 and an envious amount of foreign direct investment (FDI). Rising manufacturing costs and saturation of Western European markets should support this development, as international food and drink producers as well as mass grocery retail (MGR) players increasingly look abroad, to emerging markets, for expansion opportunities.

As an illustration of the above point, in June 2008, Nestlé confirmed that the recent investment in an upgrade of its Bulgarian production facility was a confirmation of its commitment to the country’s confectionery market. The facility has been expanded at a cost of US$15.5mn to include a new line for the production of Kit-Kat Senses. Nestlé Bulgaria expects a 20% increase for 2008, despite some questions over the level of consumer confidence in the wake of the global credit crisis.

In the meantime, the Bulgarian wine industry has received geographical indications protection from Australia, which now recognises 51 local wine-growing areas. The original agreement between Australia and the EU did not include Bulgaria or Romania, as it had already been in negotiation stages when the two countries joined the bloc. The Bulgarian wine industry is also expected to benefit from the recently announced reform of the EU wine sector, which aims to stimulate developing markets.

Other beverage sectors also continue to exhibit marked dynamism. According to a September 2008 report by the Association of Bottled Water Producers, the consumption of non-alcoholic beverages in Bulgaria rose by 11% in H108. Bottled water and carbonates are expected to be the main drivers behind growth, as investments continue to pour into the industry. In fact, Bulgaria currently boasts the second-highest percapita consumption of soft drinks among EU members, indicating the strength of the market. Similarly, data recently released by the Union of Brewers in Bulgaria (UBB) show strong growth in domestic beer production as well as exports. Additionally, Bulgaria’s per-capita beer consumption is now around 70 litres per annum, just behind the EU’s larger markets of France, Spain and Portugal.

However, in light of the sustained turmoil in international financial markets and uncertainty surrounding the restructuring of the global banking system, we caution that a rapid severing of external credit lines to Bulgaria could precipitate a sharp unwinding of the country′s economic asymmetries. We have long been cautious of Bulgaria′s hefty current-account deficit and burdensome level of external debt. With economic growth still strong during H108, the potential for growth to collapse going forward could prove too great a shock for the economy. Indeed, should growth slope off sharply, economic asymmetries may unwind quickly, setting the economy up for a hard landing – a scenario that we believe now looks more likely should capital inflows dry up or an Emerging Europe-wide banking-sector crisis unfold. This in turn would further compound already-elevated risk aversion towards Bulgarian assets over the medium term.