The food and drink industry in the UAE seems to be on firm ground, especially with no shortage of demand.
Annual per capita food consumption growth is forecast by London-based research firm Business Monitor International (BMI) at 5.1 per cent to 2015. Continued investment in the mass grocery retail sector and the rise in population and disposable incomes are the supporting factors.
Moreover, economic buoyancy is expected to bring back high-spending expatriates, who drive premiumisation — creation of ultra-luxury high-end version of products — a key driver of growth in the sector.
Since agriculture is not a sustainable industry in the UAE, given the unsuitable climate, most of the country's food demand is met by imports from the Indian subcontinent, Australia, New Zealand, US, Brazil, South Africa and Europe. It is the second-largest importer of food in the region, behind Saudi Arabia.
In order to reduce its import bill and ensure food security, the UAE is looking at farmlands in Africa and Asia to grow staples. Government efforts back home to increase production have resulted in self-sufficiency in fish and dates.
According to a study titled Investment Opportunities in the Food Sector in Ras Al Khaimah by the Ras Al Khaimah Investment Authority (Rakia), the country now meets more than 80 per cent of the demand for milk, almost 40 per cent of the demand for eggs, about 30 per cent of the demand for red meat and about 18 per cent of the demand for white meat. Vegetable production meets more than half of the domestic demand.
But the UAE relies on imports to fill the gap between domestic production and demand of the growing population, especially the expatriates with their varied tastes and preferences. By 2014, BMI expects imports to increase by more than 23 per cent to reach $9.1 billion.
Meanwhile, the government focus on increasing domestic production has spawned a thriving food-processing sector, which depends largely on imported raw materials as well as some locally produced ingredients. Major sub-sectors include the dairy industry, meat and poultry products, soft drinks, tea and teabags, sugar, confectionery, fish, bakeries and wheat milling.
The country has about 100 food-processing plants, according to Rakia's study, adding value to products and target the local and re-export markets.
With annual per capita dairy consumption of 80-85kg and many dairy firms in the market to exploit that demand, the UAE dairy industry is one of the world's most competitive. Local companies (such as Al Ain Dairy Farm and Al Rawabi Dairy Farm) as well as regional companies (such as Saudia Dairy and Foodstuffs Co and Al Marai) dominate the market, catering to a loyal customer base built up over the years with a strong distribution network and a presence in retail outlets across the country.
International companies from non-Muslim countries account for most products in the meat and poultry industry, exploiting the potential of the halal market as demand for packaged meat grew in Muslim countries. Major countries that export halal products to the UAE are Australia, New Zealand, Ireland, Brazil, Canada and the US. However, regional companies such as Al Islami Foods have stepped up production to increase their share in the pie.
With one of the world's highest per capita consumption rates of its product on its own doorstep, the UAE soft drinks industry is primed for growth, with BMI forecasting annual headline value sales growth of 10.5 per cent to 2015.
The bottled water segment, along with fruit juices, is expected to lead growth to 2015, with annual value sales growth forecast of 12.8 per cent and 13.6 per cent respectively. At more than 100 litres a year, the UAE is the world's highest per capita consumer of bottled water.
"The size of the bottled water segment is 600 million litres a year and is growing annually at about 3-5 per cent in terms of volume and value," says Fasahat Beg, General Manager, Al Ain Mineral Water, which has a market share of about 26 per cent in the local bottled water market and 5 per cent in the local five-gallon home and office delivery (HOD) market. "Growth rates in the UAE bottled water segment can be attributed to consumer health-conscious trends to move away from carbonated drinks, as well as some population growth."
Demand for premium products
As premiumisation is anticipated to drive growth in the sector, demand for flavoured water and functional drinks such as energy drinks and ready-to-drink teas is expected to increase.
"We see potential growth prospects in flavoured water and the enhanced/functional water segments, as these are value-added propositions, which offer additional minerals and vitamins to the increasing number of people around who are becoming aware of a healthy lifestyle," says Beg.
Within the soft drinks sector, the carbonates segment is expected to grow the slowest, with annual value sales growth forecast of 2.2 per cent to 2015. With rising health-consciousness and a maturing carbonates segment, BMI expects diversification into healthier sub-sectors such as low-calorie drinks. PepsiCo's brands, distributed in Dubai, Sharjah and the northern emirates by Dubai Refreshments Company (DRC), lead the carbonates segment in the UAE with more than 75 per cent market share.
The tea and sugar sub-sectors depend entirely on imported raw materials.
Tea is imported mainly from India and Sri Lanka. Traditional loose tea dominates the market, with demand for green tea and fruit and herbal teas picking up. Unilever's Lipton Tea holds sway over the teabag market, with about 75 per cent market share and a production facility in Jebel Ali Free Zone. Loose tea and teabags are exported out of the UAE into neighbouring GCC countries, Iran, Iraq and some CIS countries.
As featured recently in Gulf News (9.2.11), sugar is now a major food-processing sub-sector, as it is required in substantial quantities for the soft drinks, confectionery and bakery industries. Globally, prices have soared upon weather-related factors and the generalised commodities boom. Most of the raw sugar is imported from Brazil and then processed into refined sugar. After meeting domestic demand, it is also exported in large quantities.
Growing exports
"The UAE... is also a growing market for [food] exports and re-exports," says Mark Napier, Exhibition Director, Gulfood 2011, the leading food and drink trade event in the region. "Dubai is increasingly exporting food products around the world with about Dh11.4 billion traded in 2009, according to recent figures from the Dubai Department of Tourism and Commerce Marketing. Similarly, statistics released from the Dubai Export Development Corporation show that Dubai food exports have grown by 17 per cent over the past two years and reach more than 130 countries."
BMI expects exports to outperform imports to 2014, growing by more than 51 per cent, albeit from a lower base.
With top ranking in BMI's Food and Drink Business Environment Ratings for the Middle East and North Africa (Mena), the UAE is also seen as an export base into the wider Mena region.
Multinational companies are investing in the UAE to build capacity in the region to exploit anticipated long-term consumer spending, thereby giving a boost to the local industry. Last March Nestle launched a plant with a production capacity of 100,000 tonnes in Dubai to manufacture powdered milk, confectionery and bottled water. In May 2010 Mars GCC announced the launch of its $40 million manufacturing facility in Dubai to meet the increase in regional demand for its products.
Meanwhile, UAE companies are diversifying and entering new market segments to increase their share in the processed food sector. Companies such as Emirates Foodstuff and Mineral Water Company (Agthia) are setting up production facilities to cater to the greater demand for frozen and packaged food products as a result of busier lifestyles. Agthia has announced that its new frozen foods plant will start production in the second half of 2011.
UAE companies are also looking at strengthening their position and presence in the region through acquisition and mergers, for instance ANC Holdings, which acquired a majority stake in Oman-based Dhofar Fisheries to boost its frozen food business.
With multinational firms increasing their production capacities in the UAE and local companies expanding their horizons, the food-processing sector has something of a feast in prospect.
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Talking shop
The mass grocery retail (MGR) sector in the UAE has grown in leaps and bounds on the back of strong economic development over the past several years. It is one of the largest in the region, with sales of Dh16.7 billion in 2009, according to Business Monitor International (BMI).
Though a double-digit growth rate of the boom years (2002-08) is not expected, BMI has forecast an average annual growth of more than 8 per cent in the hypermarket and supermarket segments to 2014.
Leading retailers have gone ahead with their ambitious expansion plans to take advantage of the situation, despite the economic downturn's effect on spending.
EMKE Group, the largest UAE retailer that operates the Lulu chain of stores, opened 11 new hypermarkets in the region last year, out of which six were based in the UAE.
"Our strong faith in the UAE economy and the huge brand loyalty we enjoy has propelled us to go ahead with our expansion plans," says Yusuffali M.A., Managing Director, EMKE Group. "We will continue to do so to achieve our annual growth rate of around 18 per cent."
Major retailers have also started tapping neighbourhood convenience stores as a potential growth area. The drop in property prices and rents is expected to help them in their expansion into residential areas.
The convenience store is anticipated to become the fastest-growing segment, BMI forecasting an annual growth rate of 16 per cent to 2015.
As established retailers took the effects of the downturn in their stride, the latest entrant to the UAE market, French food retailer Auchan had to beat a hasty retreat last December. BMI reports Auchan's decision to quit might be due to the view that "the growth on offer probably was not worth investing in when capital can arguably be directed to higher growth markets elsewhere".
Auchan's exit, however, is not expected to have a big impact on the food retail sector.
Sana Toukan, Senior Research Analyst, Euromonitor International, says, "Industry sources believe the impact will be minimal as Auchan only represents 1.9 per cent of the hypermarket channel in the UAE in value terms with only one outlet. The fact that the company only entered the UAE in 2008 translated into it not establishing strong consumer loyalty."
According to BMI, the organised retail's contribution of about 60 per cent to grocery retail sales is low for a market with GDP per capita of about $50,000. It shows the MGR industry in the country is not as developed or dominant as in other developed economies. But that presents opportunities for further investment and expansion.
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Increasing health-consciousness has given rise to a nascent/emerging health foods and beverages market in the Gulf.
According to a study by Frost & Sullivan, the total health food market in the UAE and Saudi Arabia stood at $374 million in terms of revenue in 2009. The total health beverages market was $472 million.
Health foods are products fortified with nutritionally essential ingredients. Major examples available in the GCC countries are fibre-fortified health bakery products, low-fat and low-sugar health biscuits, whole grain breads and fortified breakfast cereals. Among health foods, the breakfast cereal is the fastest-growing segment.
Health beverages include fruit drinks, flavoured milk, sports and energy drinks, malt-based health beverages and soy beverages. They differ from mainstream carbonated beverages or regular health beverages in that they supply minerals, provide energy, prevent ailments and increase immunity, along with quenching thirst.
Soy beverages and sports and energy drinks are the emerging segments in the region, and are expected to register strong growth in the future. Malted health beverage is a fast-growing segment, popular among expatriates. The market for flavoured milk is comparatively mature.
Source: Frost & Sullivan's Strategic Analysis of GCC Health Foods and Beverages Market
