Sri Lankan F&B industry: What’s next?

Stable macro economic developments and peace dividends

The food and beverage industry in Sri Lanka has become a thriving sector in the economy, propelled by the post war optimism and reaping maximum benefits from peace dividends since May 2009.

Contribution to the Gross Domestic Product (GDP) by the food and beverages industry was recorded at 7.9 % of GDP by the end of the 3rd quarter of 2011. The food and beverage sector industries listed in the Colombo Stock Exchange (CSE) witnessed a staggering growth of 42 per cent subsequent to the cessation of the three-decade-long internal conflict.

The private sector took full advantage of the end of the prolonged war by entering into untapped markets in the North and East Provinces. Private sector firms in the food and beverage industry penetrated the North and East Provinces in a massive wave, increasing firm level earnings by two to threefold. Post conflict buoyancy in the tourism industry also facilitated in expanding the food and beverage industry on a substantial scale.

On a macroeconomic level, the country’s economic fundamentals have considerably improved, facilitating enhanced participation by the private sector. Among these, stable and low inflation rate coupled with low inflation expectation by both consumers and investors, persistently low interest rate encouraging more and more private sector credit growth, healthy external reserve position and improving foreign inflows facilitating a stable exchange rate, gradually narrowing fiscal deficit are of significance.

All these positive macroeconomic developments have considerably helped in creating an extremely positive atmosphere in the country in its path towards achieving over eight per cent economic growth continuously for two years in 2010 and 2011.

Consolidating on peace and enhanced security condition coupled with integrating the North and East Provinces with rest of the country, greatly assisted the private sector firms to freely move goods, services, capital and people across the entire country thus enhancing their profits and earnings.

Among the many industries, the food and beverage industry, was among the fastest growing sectors in the economy and has the potential to grow even further in the short to medium term. During 2010, this industry grew by 6.8% and the growth in the first half 2011 was 7.2%. Therefore, the growth rate for 2011 could be projected at a comfortable 8.0 to 8.5%.

Trend dynamics

Major firms within the industry are carrying out capacity expansion activity on a massive scale to cater to the ever-expanding demand in the market. With the resettlement of Internally Displaced Persons (IDPs) in the North and East Provinces reaching a conclusion and livelihood of IDPs settling to a normal level, it could be envisaged that demand for the food and beverage industry from these regions would further expand.

Furthermore, increasing per capita income of the consumers, increasing standards of living of the rural population, narrowing urban-rural divide in the country, rapid growth in consumer spending, expanding middle income segment in the economy, massive influx of tourists into the country will also boost the demand for the food and beverage sector in the short to medium term, contributing to further growth in this sector.

The strategic plan of the Export Development Board (EDB) for 2011-2015 has identified the F&B industry as one of the seven key priority sectors and has set a target of US$ 1 billion in export earnings by 2015. All these factors reflect the growth potential of the F&B sector of the economy.

Furthermore, numerous fiscal incentives granted through the Budget 2011 and Budget 2012, in the form of zero tax concessions for processed food items, imposing a CESS on unprocessed and semi processed items as well as VAT exemption on machinery and equipment for F&B industry, will further support the growth in this sector.

Fastest-growing FMCG market in the Asia Pacific Region

According to market research findings published by Nielsen based on their retail audit, for the period January-September 2011, Sri Lanka recorded the highest nominal growth of 21% and a volume growth of 11.7 % in the FMCG category within the Asia Pacific region. The research findings further elaborate that the major contribution for this growth is from the F&B sector.

The corporate earnings of entities listed in the Colombo Stock Exchange (CSE) under the food and beverage sector witnessed a considerable growth from June 2009 onwards. The year on year growth in earnings in this sector recorded an impressive growth of 46 per cent during the 3rd quarter 2011, and it is projected to grow at a similar rate during 2012 as well.

Furthermore, this sector remained as one of the highest contributors to the total market’s earnings and it is expected that this high level of earnings will remain in the medium term with increased levels of consumer spending by both domestic consumers and foreign tourists.

Conclusive note

Hence, the outlook for the food and beverage industry is highly optimistic given the country’s stable macroeconomic environment and Government’s commitment towards maintaining a high growth path in the medium term.

The growth prospects for the corporate sector in the economy are improving continuously and considerable opportunities are available for further capacity expansion to take place. Therefore, industry players in the F&B sector must grab hold of this vast opportunity laid before them and obtain maximum benefits from the favourable economic environment.

As Sri Lanka enters into a high growth trajectory coupled with a targeted US$ 4,000 per capita income economy by 2014, consumer preference is also taking a new shape, where the value added branding culture is becoming more and more prominent. Influence by social media networks, expansion in IT sector, telecommunication and mobile services also play a major role in consumer behaviour and their spending patterns.

This trend in consumer buying behaviour will transform the Sri Lankan society into a new dimension, by creating more and more opportunities especially in branded F&B category and will continue to grow further resulting from lifestyle changes and social value changes of consumers.

(The writer is Chief Operating Officer of CW Mackie PLC – Scan Products.)