USMEF Strategic Market Profile

 

MARKET OVERVIEW

USMEF’s marketing plan has traditionally divided Europe into two separate markets – the European Union (EU) and Eastern Europe. The EU is one of the few regions in the world that did not ban U.S. beef because of the BSE case. As a result, U.S. beef exports to the EU increased almost 200 percent (January through July 2004) and made the EU the second largest importer of U.S. beef. Through July of 2004, the U.S. exported almost 25,000 mt of beef and variety meats to the two European markets, these exports were worth approximately $17 million. 

On May 1, 2004 the Treaty of Accession 2003 became effective and the European Union (EU) saw its fifth and largest expansion. The EU is now comprised of 25 members.  The ten new entrants are the Czech Republic, Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia. As a result, the population of the European Union has increased by 20 percent to 455 million, and around half of the 74 million new European citizens live in Poland. Enlargement brings approximately a 5 percent increase in EU gross domestic product, and agriculture continues to account for approximately 2 percent of output. Unemployment is much higher in the new member states; for example, it was 19 percent in Poland in January 2004. Cyprus has the lowest unemployment rate at just under 5 percent. This makes the average EU-25 unemployment rate 1 percent higher than the EU-15 rate, at 9 percent. In the enlarged EU, GDP per capita averages 11,320 Euros (US$13,810), less than 43 per cent of the EU-15 average. In 2002, the inflation level stood at an average of 7.7 percent for the ten new member states, in comparison to 2.1 percent for the EU-15. A higher proportion of consumers’ expenditure is spent on food and drink in the new member states than in the former 15 member states. In 2002, citizens of the EU-15 spent on average just 13 per cent of their total expenditure on food and non-alcoholic drinks. Of the new member states, the lowest proportion spent on food was 17 percent in Slovenia. The highest was 30 per cent, in Lithuania.

The prospects for the EU beef market in 2004 are uncertain as the impacts of enlargement and CAP reform are difficult to predict. Additionally, the Russian Veterinary Service will allow individual European Union (EU) country export certificates until October 1, 2004 , when a unified EU veterinary certificate will come into use.

Economic growth in the European Union in 2003 was flat, increasing by only 0.2 percent over the previous year. Nonetheless, while EU per capita incomes fluctuate between member states, they are generally high.  Incomes in Eastern Europe run substantially lower.

* Market Exchange Rate

Source:   The Economist

The Euro strengthened 18 percent against the dollar in 2003.  The rates have stabilized in 2004 and have traded in the .78 to .84 Euros per dollar range.

EUROPEAN UNION

FORCES SHAPING THE MARKET

Domestic Production and Self-Sufficiency

Beef production declined in 2003 as a consequence of lower slaughter numbers.  As for beef supplies for the foreseeable future, the former EU-15 will have a beef deficit and will also be without the stocks it had at its disposal in previous years. In 2004, EU beef and veal production is expected to decline by 1 percent, or 700,000 tons, to 7.28 million tons. In particular, French production will decline by 4.5 percent, or 70,000 tons. This reduction in volume is partly as a result of an increased number of younger and lighter animals going to slaughter. During the first three months of this year, slaughter was up year-on-year, mainly as a result of the reduction in the dairy herd, but is expected to decline throughout the rest of the year.

BSE has not only substantially increased costs in the meat chain, it has also wiped out the EU beef export business.  Most producers are in a defensive position because the industry image is not favorable.  As a result, almost all of the processors are very focused on their domestic markets.

With production in the EU declining, and the EU increasingly deficient in beef, there are clear opportunities for U.S. beef exporters. Opportunities are most evident in the growing HRI sector, where nationalism is less rampant, and where imported beef, such as South American, has traditionally filled any shortfalls in domestic production of high quality beef.   Additionally, since Russia and other key markets are closed to U.S. beef, prices of variety meats have dropped and exports to the EU and EE, particularly of liver, have increased dramatically through June 2004.  Increases of sales of beef variety meats to the U.K. are resulting from low prices and the product is most likely being used as pet food.  The high export volumes of beef variety meats to Poland and Germany are probably not remaining in these countries.  These exports are expected to decline significantly in 2005 as beef and beef variety meats re-enter the Russian market.

The EU is approximately 103 percent self-sufficient in beef. 

Imports - Includes intra-EU trade

Total Beef & Beef Variety Meat Imports

   (Metric Tons)

Source:  World Trade Atlas

Total Beef Imports

(Metric Tons)

Source:  World Trade Atlas

Total Beef Variety Meat Imports

(Metric Tons)

   Source: World Trade Atlas

Total EU beef imports in 2003 increased significantly, surpassing for the first time the level of EU beef exports. The larger imports are in part due to higher levels of beef imported from South America under the EU’s Hilton Beef quota. In addition, South American beef was so price competitive that some of it was imported out of quota with the full tariff rates.  Most of the EU imports of Argentine beef will be directed into Germany, while Uruguayan beef will be primarily imported into Spain.  Significant quantities of beef from Southern African markets such as Botswana and Namibia are also expected to be distributed in the UK market as a result of more competitive pricing compared to South American beef.

U.S. beef exports to the region are primarily driven by beef variety meats, (tripe in the Eastern European countries and pet food trade in the EU).   Because of the EU’s hormone ban, the vast majority of beef variety meats being shipped to the region are destined for non-food use, primarily pet food production.  Other variety meat items going to the EU are high value products, such as beef trachea, which are destined for the pharmaceutical sector.

There is a clear opportunity for U.S. beef suppliers, although beef will have to come from the Non-Hormone Treated Cattle (NHTC) program.  Beef sent to the EU must also undergo testing by an independent lab in Canada.

Competition

2003 Share of Total Beef & Beef Variety Meat Imports

(Metric Tons)

                                                                                 Source: World Trade Atlas

By far the largest competitor to U.S. beef in the EU is European domestic beef.   The intra-EU trade in beef is extensive and favors other EU members. South American beef, and specifically Brazilian and Argentine beef, are making significant inroads into the HRI sector.  Beef imports from Central Europe/Eastern European Countries (CEEC) also tended to trend upward over the year. 

Domestically produced product dominates the retail sector as consumers have grown increasingly cautious after successive meat scares, and have demanded more assurances on the origin of their beef. Strong retail brands in markets like the UK also help build consumer confidence, and retailers seek to maintain that trust by sourcing locally wherever possible. Nonetheless, South American, and to a lesser extent South African producers, have made significant inroads into the HRI sector, where country-of-origin is less of an issue. Argentine beef in particular has also built up a high quality brand image in Northern European markets such as Germany and the Netherlands.

  Market Access & Trade Policy Considerations

Although beef consumption in almost all European Union (EU) countries has returned to levels enjoyed prior to the BSE outbreaks in Europe, U.S. exports continue to be limited because of the hormone ban and the EU plant approval process.    As of this writing, the U.S. has two beef plants that are approved for export to the EU. Despite this, the U.S. has maintained a market in hormone-free beef which is processed through these EU-approved plants. 

There is limited access under the EU’s beef quota.   The quota for high quality beef is set at 11,500 MT.

The EU has required a system for residue testing that is costly for most U.S. plants that wish to export to the EU.  Plants that wish to export beef to the EU must be pre-approved by USDA/Food Safety Inspection Service to meet EU equivalency regulations.

If the U.S. is to adequately access this market, it must determine the cost and the return on investment, which could be considerable as the EU is a highly sought-after market with a taste for high quality products.  These costs will include:

• Animal production costs.   This includes extensive recordkeeping of the animal from birth to slaughter.  There are also potential losses in productivity from the prohibition of utilizing growth promotants.
• Product testing costs.   Currently exporters must have residue testing conducted on product moving to the EU.  These tests can only be completed by a single laboratory in North America (Canada).
•   Processing costs.   Processors must assure their plant equipment and operations meet EU requirements.

          Consumer Trends

Changes in consumer demands are linked to the changes in social values, lifestyles and demographic trends.  Demand for finished products such as snacks and health foods, is increasing to the detriment of unprocessed products.  Food and drink products may be split into two groups:  necessity purchases (high price competition) and luxury purchases (premium priced for branded labels).  The increasing numbers of working mothers resulted in the growth of easy-to-prepare foods, convenience foods, microwave and frozen foods.  The most significant trend in consumer demand is to combine pleasure, well-being and health.  The need for freedom and mobility encourages development of “nomadic” products, which can be used at any time in any place.  Increased travel, exotic holiday destinations and popular television programs have led to the marketing of new ethnic foods.  Increased consumption of fortified, health and dietary foods reflect the consumers’ belief that these foods can prevent disease and help them stay healthy.

Retail Sector

In the EU, and particularly in the UK, the meat retail market has been changing dramatically.  Competition between retailers is fierce and fresh meat is almost entirely sold as case-ready.  The majority of retailers purchase their meat pre-packaged, rather than having an in-store butcher.  In the UK, each retailer has several processors per species who service and implement their packaged-meat supply in a professional manner.

The retail market in Europe is becoming consolidated into larger and fewer operators and the proportion of meat and meat products now being sold through supermarkets are growing.  In the UK, more than 75 percent of meat is sold through supermarkets.  In Northern Europe, the amount is about 70 percent.

In mainland Europe, the turnover of many supermarkets has been affected by the introduction of the Euro, as well as a general economic turndown.  Nonetheless, despite some consumer economic doubts, most supermarkets have seen an increase in profits and turnover.  In the meat industry, more supermarkets are forming partnerships with processors and producers – a trend started in the UK and Ireland through supermarkets such as Tesco and Sainsbury.  The links between supermarket and processor are becoming firmer, which helps to ensure stability and a consistent supply of product. The partnerships have also been forged as a result of food crises such as BSE and Foot and Mouth Disease, so that the supermarkets can give assurances to their customers on the traceability and source of products.

The retail market in Europe is dominated by two very large retail chains - Carrefour and Tesco. Carrefour has extended it dominance not only in Europe, but worldwide, expanding into Asia and Latin America.  Meanwhile, Tesco has expanded into Eastern Europe and into Asia. Tesco is also one of the world’s largest grocery internet businesses.

Approximately 10 percent of U.S. meat exported to the EU goes into the retail sector.

Food Service Sector

The food and drink sector is the third largest industrial employer in the EU.  It employs 2.8 million people and represents 12 percent of the EU industrial workforce.  The food and drink industry is characterized by a high proportion of small and medium-sized enterprises.

A useful gauge of U.S. beef penetration into this sector is the number of U.S. beef purchasers that have joined the American Beef Club (ABC).  Membership in the ABC requires that the outlet purchase U.S. prime or choice beef on a continuous basis. As of September, 2004, there were a total of 24 ABC European members, two in the EU and 22 in Eastern Europe.

The growing HRI sector offers significant opportunities for the U.S. industry. The EU has a deficit in quality beef production, and the U.S. industry is well-positioned to capitalize on this market. As more U.S. product comes into Europe it will be possible to develop a lucrative niche in the HRI sector, positioning U.S. beef at the premium end of the market. In addition to its quality, U.S. beef is further differentiated by the fact that it is grain-fed. Much of the beef traded in the EU is grass-fed, offering a different eating experience.

Approximately 90 percent of U.S. beef exported to the EU goes into the HRI sector.

Processing Sector

The European beef sector is dominated by Irish-owned processing companies which have interests usually in the Irish Republic, Northern Ireland and the UK.  With markets reopening in the Middle East and a strengthening of the UK market, the Irish processors have reaffirmed their dominance in the European market.  Foremost among these processors is a group named AIBP and its further-processor Silvercrest.  AIBP slaughters more than 400,000 cattle and has ten processing plants in the Irish Republic.  It has around 25 percent of the national production.  The UK company, ABP, has plants in England, Scotland and Northern Ireland and slaughters more than 300,000 cattle in its 13 plants.  It has 12 percent of the national beef kill.  Following Ireland and the UK, other leading beef processors come from Germany and France.

In Germany, about 45-50 percent of total beef consumption is in the form of further processed product.  As a result, there are about 1,500 different sausage varieties produced in Germany, including a notable share of regional specialties, which are produced according to traditional recipes.

EASTERN EUROPE

FORCES SHAPING THE MARKET

Domestic Production & Self-Sufficiency

Bulgaria

Beef production is traditionally lower than consumption, which makes Bulgaria is a net importer of beef. Reportedly, about 45 percent of produced beef does not reach the market and stays for on-farm consumption. Therefore, the 2003 beef market can be estimated at 30,000 mt (55 percent of total production of 53,000 MT) local beef and 22,000 mt imported beef or about 52,000 mt of commercially traded beef. For 2004 and 2005, these figures can be estimated at 54,000 mt.

Bulgaria is around 77 percent self sufficient in beef.

Romania

Cattle inventory was steady throughout 2003 and no significant changes are expected by the end of 2004. A trait of the bovine sector in Romania is that there are no differences in feed ration formulation for dairy cows versus beef cows. In fact, there are no statistical registrations to make the distinction between the two categories of animals. Cattle and calves on feed stood at roughly 2.9 million heads in the beginning of 2004 and some increase was registered during the first half of the year (in absolute terms, with 2,000 animals) as against the same period of 2003. Even though bovine growers are eligible for different government subsidy schemes, recovery in the sector is very slow, due to both the long production cycle and the structural deficiencies that are characteristic to the Romanian agriculture, where market-oriented operations coexist with small subsidence farms, requiring deep restructuring. This means that most production continues to come from small farms. Households holding 1-2 cows count for the majority of dairy cows inventories (about 80 percent). Less than 40 percent of the domestic beef production (i.e., 142,000 MT, on a live weight basis) goes to meat processing units, while 26 percent are consumed in rural households and the remaining 35 percent supplied to the retail market.

Romania is 100 percent self-sufficient in beef.

Imports

Bulgaria

Beef imports in CY2003 were 22,500 MT ($19.0 million) or 5 percent higher than in CY2002 (21,400 MT) in tonnage and about 1 percent increase in value. Beef imports are almost entirely in a form of frozen, boneless meat, mainly beef trimmings and beef edible offal for processing (90 percent of total imports); and direct consumption (10 percent). The average import price in 2003 was $830/MT. Imports of bone-in beef from the EU were banned due to BSE. In 2004, only a few EU countries are allowed entry.

Major suppliers of beef to Bulgaria are Argentina, Brazil, Uruguay and most recently Greece. The United States significantly increased it imports in 2003 to 1,353 MT which represents 6 percent of total imports. In CY2003, Bulgaria imported small quantities of high quality U.S. beef steaks (about two metric tons) which were successfully sold to the HRI sector. 

Romania

In 2003 and 2004 Romania remains a net exporter of live animals (one of the most traded agricultural products), especially cattle and sheep. About 152,000 heads of bovine animals (mainly fattening calves to be finished in the country of destination) were shipped in 2003 to Middle East and Mediterranean countries (Syria, Greece, Italy, Libya) or EU states. During the first five months of 2004, another 60,000 head went to the same destinations, totaling $21 million.

U.S.beef exports to Eastern Europe face substantial pressure from South American countries, mostly because of price.   The U.S. has identified opportunities in Eastern European markets in the fast-growing restaurant sectors and for variety meats and trimmings for the processing sectors.   In the first seven months of 2004 the U.S. exported 3,946 metric tons of beef and beef variety meats to Eastern Europe, notably Romania and Bulgaria.  These exports were worth $3.3 million and represent a 120 percent increase in value over comparable 2003 U.S. exports. The vast majority of these exports were variety meats.  

The Central European Free Trade Agreement gave preferential trading rights to member countries and limited duties to 25 percent for all commodities and, as a result, the former CEFTA countries (Poland, Hungary, Czech Republic, Slovakia, Romania, Slovenia and Bulgaria) were the main suppliers of beef to Romania. Regarding the EU, Romania imported only from Germany and Austria due to concerns related to BSE.

Competition

Currently the main competition to U.S. beef comes from intra-Eastern European trade because of the Central European Free Trade Agreement. Nonetheless, trade dynamics will change, with the accession of ten new member states to the EU in May, 2004. While the more developed countries entering the EU will increase trading with EU partners, the less developed Eastern European markets will look for other sources of beef. The main competition to U.S. beef will come from EU producers, and South American producers, such as Brazil, that are already active in some of the Eastern European markets.

Large EU producers such as France and Germany will no doubt benefit from the liberalization of trade once the ten new EU countries come on-board. South American producers have also been making inroads into the beef processing sector, which is especially promising in Bulgaria, which is only 77 percent beef sufficient.

Market Access & Trade Policy Issues

In Bulgaria, the BSE crisis in the U.S. did not have an effect on beef trade. The Bulgarian Vet Service issued a temporary import ban for products originating from the State of Washington. The ban was effective from December 29, 2003 to February 6, 2004. The ban did not include dairy products and gelatins from hides and skins. Currently, there is no ban of any beef/cattle related products from the U.S.  Bulgaria also softened its import restrictions for EU BSE-affected countries. On June 3, 2004, it lifted the ban on imports of reproductive materials originating from BSE affected countries (bovine semen, ova and embryos). Also, a ban on pet food containing proteins from livestock originating from such countries was removed.

Imports of U.S. beef are banned in Romania, because of the December BSE outbreak, although the veterinary authorities from the two countries are currently making efforts to reach consensus on a mutually acceptable language in the health certificate for beef products to be shipped to Romania (especially on specific risk material –SRM –statements). Other products (casings, beef tripe) are allowed, and, in fact, US is the main source for such products imported into Romania.

As part of its EU accession, Romania bans the import of beef produced with growth promotants. Only beef from the U.S. Non Hormone-Treated Cattle Program (NHTC) program is allowed. 

From May 1, 2004 ten new Eastern European member states joined the EU and adopted the restrictive EU requirements. These countries are: Poland, Hungary, the Czech Republic, Slovakia, Slovenia, Lithuania, Estonia, Latvia, Malta and Cyprus. 

Consumer Trends

In Bulgaria consumers are not devoted to a single brand, but product availability (i.e., good distribution through supermarkets and smaller points of sale) plus an acceptable price/quality ratio are factors that influence consumption of a certain brand.  Currently, the market is in the growing phase. The top five meat-processing companies account for roughly 40 percent of the market, while consolidation is expected to continue.  Important foreign players are expected to enter, because of the still relatively low labor cost and the proximity of the country to EU and Russia. Lately, due to the rapid appreciation of pork prices in Europe and U.S., as well as the limited domestic supplies, many producers reportedly turned to black market operations, which, according to the estimates of the meat processing association, reached an alarming 60 percent of the total market.  Though the meat and meat processed products market are not foreseen to expand rapidly in terms of volume in the near future, the market value is expected to raise, since domestic consumers are shifting to higher value added and quality products. As of today, circumstances are quite favorable to multinationals to make takeover bids for local producers

Unlike poultry and pork, no significant changes in the total volume of beef consumption are expected in the near future. Beef meat produced in Bulgaria is not from meat breeds, it is obtained from slaughtered dairy cattle. Therefore, its quality is not high and it is used mainly for processing. A relatively small portion of beef is destined for direct consumption as fresh meat in retail and food service outlets. There are not any established commercial supply farms of beef for direct consumption. Future changes are expected mainly in the structure of beef market with the developing and increasing share of higher value cuts at the expense of beef for processing and edible offal which tend to be substituted with turkey and sometimes with pork.

Over the last two-three years, there is increased consumer interest in beef for direct consumption. A significant factor contributing for this trend is the fact the Bulgaria is known to be free of BSE; and that since 2003, there is a reliable vet testing for imported beef. Currently, high quality beef steaks on the market are imported from the U.S. and from Argentina. Importers of these products report increasing sales both in 2003 and 2004. In 2004, U.S. beef was offered at three promotions in the target HRI sector. Argentine steaks are promoted mainly at the retail level (in Metro outlets) since they are lower priced compared to U.S. beef steaks.

Retail Sector

Improvements in Eastern European economies mean that many retailers are looking to the East to expand their business. Recent market reports show that Eastern European economies provide opportunities for food retailers, and are at the top of the list for emerging markets. Although foreign investment has concentrated on relatively well developed markets such as Poland and Hungary, markets such as Bulgaria and Romania are also seeing increased levels of investment. German investors have been most active, Metro has a strong presence in the region, while Rewe currently operates eleven supermarkets in Bulgaria. Carrefour has begun to invest in Romania, with the opening of its second store due soon. Local retailers are also beginning to expand their own presence, modernizing their operations and acquiring new chains. 

Food Service Sector

Around 10,000 food and drink companies are active in the CEECs, employing almost one million people.  Products with higher added value are expected to develop more rapidly than more traditional sectors.  In each of the CEECs, the food and drink industry, representing 15 percent if industrial jobs (vs. 12 percent in the EU), played a key role in the national economy.  The share of household consumption devoted to food (an average of 22 percent) is higher than that registered in the EU-15 (13 percent).

The HRI sector has grown constantly over the last several years and, while cafes and fast food outlets are the fastest growing sector, there has also been a good level of growth at the high quality end of the market. The largest hotel chains in Bulgaria are Sheraton (South Korean ownership), Kempinski (German ownership), Princess (Turkish-owned) and Radisson and Hilton (U.S.-owned). Both the Radisson and Hilton are members of the American Beef Club. The tourism industry in Bulgaria also shows good growth, and EU visitor numbers are growing. The development of local consumer taste and preferences along with increased foreign visitors will favor high quality beef imports. The HRI sector in Romania has also shown growth in recent years, and a flagship Marriott has recently opened in Bucharest. As both countries come closer to EU membership, investment will continue to increase, thus further promoting the development of the HRI sector.

Processing Sector

The estimated meat products market reached in 2003 EUR 300 million. In terms of geographical distribution, the largest processors are located in the southern Romania.   More than half of the meat-processed products are sold in bulk, while domestic products are preferred to the imported ones. Romanian consumers prefer “tasty” fresh products and, though fat content and additives are not yet an issue, there is a trend towards buying more expensive higher quality products. 

The Romanian and Bulgarian meat processing industries have been very active in recent years, with many processors investing in new processing facilities and modern equipment, as well as expanding their number of retail customers. Processors have also begun to advertise and promote their products more effectively. The sector has recently attracted foreign investment from US, Greek and Spanish partners.

U.S.COMPETITIVE POSITION

Strengths

U.S. beef is consistent in quality.

The US industry is large enough to supply most customers needs.   

Weaknesses

Market access for U.S. beef is limited because of the hormone ban and other trade access barriers.      

Only two plants are currently approved for export to the EU, thus limiting the U.S. supply of beef available.

Opportunities

The growing beef deficit in the EU.

The expanding EU HRI sector offers additional opportunities for U.S. beef.

U.S. is attempting to get additional suppliers approved for export to the EU.

The growing food service sector in Eastern Europe is showing an increasing demand for better quality beef cuts.

Threats

The EU enlargement will have an effect on U.S. exports to Europe as U.S. plants will need to comply to EU standards in an ever-increasing number of markets.

Increased competition from intra-EU exports within the newly enlarged EU will limit opportunities for U.S. beef.   

STRATEGIC OBJECTIVES

Market Development & Promotion

Work with the U.S. industry to increase the supply of beef eligible for export to the EU.

Establish distribution links for U.S. beef and build product loyalty among targeted end-users through trade servicing.

Position U.S. beef as the highest quality, preferred product among targeted end-users through educational activities.

Expand the number of HRI outlets that incorporate U.S. beef onto their menus by demonstrating the high profit potential inherent in U.S. beef products.

Market Access & Trade Policy

Eliminate the majority of requirements under the Non Hormone Treated Cattle (NHTC) program.

Use trade servicing to encourage importers of U.S. beef to continue purchasing and distributing U.S. beef on a continuous basis.

incorporate U.S. beef onto their menus.