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Demographics, import substitution present opportunities
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Wednesday, 01 February, 2017, 08 : 00 AM [IST]
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Charvi Trivedi and Rahul Sheth
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In countries that are part of the Gulf Cooperation Council (GCC), the food and beverage industry has been witnessing a considerable boom in the past few years and is expected to reach further heights. The growth has been largely driven by, higher disposable income, tourist influx and steady rise in population base, especially, the young.
GCC heavily relies on imports due to limited availability of cultivable land and water. This has created demand for international foods and led to growth of packaged foods and food retail sector. Further, the GCC governments’ initiatives to strengthen food security has opened new avenues for domestic as well as international companies to invest in the region. The emerging food market in the region is expected to boost allied industries like food processing industry, processing machinery, packaging industry, and so on.
Food consumption
The food consumption in the region is close to 47 million metric tonne and is forecast to surpass 52 million metric tonne by 2020. With the changing demographics, thanks to increasing youth population, GCC nations are also experiencing a change in their food consumption pattern with increasing health-consciousness and inclination towards Westernised food.
The Gulf region is also expected to perceive an increase in the demand for Halal food, with meat being the major product consumed. Halal food imports are projected at US$53.1 bn by 2020.
GCC consists of some of the largest fish-consuming countries. With a speedy depletion of fish stock in the region, aquaculture and fish farming have gained impetus. To increase the domestic fish production, GCC governments are prioritising investments in fish farming, thereby making aquaculture one of the fastest growing segments in the food processing industry.
Free manufacturing zones in the region
GCC is home to numerous free-trade zones, specifically industrial zones with features like equipped infrastructure, accessibility to industrial amenities and so on that help in lowering the production cost and encouraging investments from various manufacturing and processing industries.
The UAE and Saudi Arabia have the highest number of free zones - 27 and 21 respectively. Other countries namely Qatar, Bahrain, Kuwait and Oman have 5, 3, 1 and 14 free zones respectively.
Supportive environment for food processing companies
Due to adverse climatic conditions and acute shortage of water, GCC countries rely on imported food products, accounting for about 70% of total food products. These imported products are processed locally and re-exported. Increasing emphasis on local processing by GCC governments has led to sharp rise in investments in the food processing sector.
The UAE and Saudi Arabia are poised to emerge as leading food processing countries.
Major players in the region in the sector
The promising food industry in GCC has attracted a number of international companies to expand their activities in the region. Various international brands operating in the food processing industry in GCC include Danone, Nestle, Unilever, and Mondelez.
In addition, several reputed companies have also entered into licensing agreements or acquiring existing food processing companies like Mars Inc., Mondelez International, Del Monte, Frito-Lay, Heinz, Danone Ltd, Arla Foods Amba, Fonterra’s, United Biscuits (UK) Limited, Coro Foods, and the Lactalis Group.
Major products from region
Dairy: The volume of dairy products consumed in the GCC countries was around US$8 bn in 2016 and is forecast to reach around US$11 bn by 2020. Key dairy products in the GCC region are liquid milk, flavoured milk, cheese, butter, yogurt, and laban with volume share of unflavoured milk being about 41% followed by laban (21%). Saudi Arabia is the largest dairy products manufacturer in the Gulf region exporting 20-30% of dairy production to the neighbouring Gulf countries.
Livestock: Among the GCC nations, Saudi Arabia is the largest red and poultry meat producer, followed by Kuwait and Bahrain. The UAE, Oman and Qatar mainly depend on imports to meet their demand.
Processed foods: Processed foods account for nearly 50% of the food market in GCC. The revenue of processed foods segment in GCC was worth US$4.3 bn in 2014. Saudi Arabia is the major exporter of processed foods, while the UAE and Bahrain are major exporters of tobacco. Other food products that are processed and exported include bakery products, confectionery sugar, coffee, cocoa, pasta, juices, sauces and seasonings, frozen fish as well as preserved food items like vegetable and meat.
Agriculture output of the region and raw-material availability
In addition to the vital agricultural produce, GCC is also a leading producer of edible oil, dry fruits, spices as well as cocoa.
Policy support for the new companies, ease of doing business
Policy support for the new companies, ease of doing businessA number of government initiatives have allowed local food processing companies to embrace new technologies and compete with imported products. GCC countries enjoy a duty-free trade relationship with their member countries. In order to facilitate economic amalgamation, GCC has launched a common market for its member countries. However, under the unified customs tariff, a 5% duty is levied on agricultural products with an exception of 344 essential products like unprocessed raw materials and bulk processed food products for the benefit of domestic food processors.
UAE: Apart from investing in agricultural and aquaculture projects to meet the domestic demand, the UAE is also looking to boost their domestic agricultural output by adopting advanced technologies. The country, being the largest trade partner of India among the GCC countries, has a bilateral trade agreement worth US$60 bn. With India having a leading edge in agricultural production and the UAE being self-sufficient in funding technologies and facilities, this relationship has proved to be constructive for both nations. The government also has about 27 free-trade zones, with the food processing sector having a major consideration as it enjoys incentives like custom duty-free trade of raw materials and finished goods.
Saudi Arabia: It levies infant-industry protection duties between 12% and 40% on imported food products. Further, the food processing industries avail various other provisions like interest-free loans, direct subsidies for food processing equipment, land at minimal rent, subsidised utilities and flour for bakery and snack production. The government’s foreign investment policy has also lured various multinational companies to establish manufacturing facilities or even to partner with existing food companies.
Bahrain: It provides substantial subsidies specifically on red meat, flour and poultry products that amount to about 5% of the country’s total subsidy budget. Bahrain is also seeking ways to ensure food security with focus on supporting local livestock farmers. The country also provides numerous incentives to foreign investors like 100% ownership of business assets, duty-free trade of some food products like vegetables, fruits, fresh and frozen fish, and meat, duty-free import of machinery and so on.
Oman: It has a dedicated state-owned enterprise called Oman Food Investment Holding Company (OFIC) which plans to invest US$~623 mn for joint ventures in the food production sector. The government along with OFIC has also launched a mega red meat project in 2015 to reduce reliance on meat imports by importing sheep and cows from African nations and setting up slaughtering houses in Oman.
The government is putting in efforts to improve the agricultural productivity by emphasising on the use of advanced irrigation and husbandry practices. Oman also plans to invest US$520 mn in developing and upgrading the infrastructure and existing facilities of various agricultural and fishery-related projects. The country is also likely to raise the investment to US$1.3 bn by 2020. Oman also implemented subsidy plans to restrain the growing prices of basic products like wheat, rice and sugar.
The industrial estates in Oman benefit from incentives such as a minimum five-year exemption on taxation of profits, exemption of customs duty, export credit insurances and, for small- and medium-sized enterprises, access to credit of up to US$2.6 mn from the Oman Development Bank.
Kuwait: It offers incentives to promote agricultural products to increase the supply of domestic food in the country. The Kuwait Development Plan (KDP) 2015-20 aims to increase the non-oil contribution to the GDP from 45% to 64% by 2020.
Qatar: The Qatar National Food Security Programme has articulated a “Food Security Master Plan” that aims to promote the food processing sector by the establishment of an Agro-Industrial Park.
Industry outlook
Favourable demographics, continuously growing population and blooming tourism would boost the food consumption growth in the GCC region. Demand for organic and retail food sectors is expected to rise as the consumption pattern is shifting towards healthy food. This has also intensified the competition among retailers leading to an evolving concept of private labelling among products such as rice, pulses, spices, oil, pasta, and canned food.
Reliance on imports results in the country being vulnerable to price volatility and supply concerns from producing countries. To overcome these shortcomings, government is actively encouraging local production, particularly in processed food products such as dairy, red meat, and poultry.
The food industry in GCC is expected to focus on improving operational capability by enhancing distribution, supply chain and logistics channels. E-commerce in food industry may also gain impetus.
Saudi Arabia being the most populated country in the Gulf region will continue to be the largest food-consuming country with the UAE and Qatar expected to emerge as the fastest-growing food consumers.
(Note: The views expressed here are those of the authors and do not necessarily represent or reflect the views of AGR Knowledge Services Pvt Ltd)
(Trivedi is an analyst and Sheth is senior manager at Avalon Global Research, Mumbai. They can be contacted at charvit@avalonglobalresearch.com and rahuls@avalonglobalresearch.com)
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