USMEF Strategic Market Profile

  

MARKET OVERVIEW

In USMEF’s marketing plan, Europe is divided into two distinct markets, the European Union (EU) and Eastern Europe.  The EU has a population of 374 million and is the world’s largest agricultural importer.  Entry into the EU market is eagerly sought after because of the large and affluent consumer base that craves high value and value-added products. U.S. pork exports to the EU have increased slightly in recent years.  The major Eastern European markets are Romania and Bulgaria. Through July of 2004, the U.S. exported 9,929   metric tons of pork and pork variety meats to the two European markets, worth $23.3 million, making Europe the U.S.’ ninth largest export market for pork.

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 Union 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 percent 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 percent 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 percent, in Lithuania.

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 & Self-Sufficiency

· In 2003, total swine slaughter, as well as ending inventories, were lower than originally forecast.  This could partly be attributed to drought and higher swine mortality due to disease in the UK.  In 2004, the pig crop continues to show a reduction. This is caused by increasing feeding costs which are not counterbalanced by marginal price increases.  Total supply is expected to go down in 2004 as a result of the lower beginning inventories and lower estimated production for the year.

·   The 2004 forecast for slaughter is down also due to reductions in France and Belgium. In other countries, slaughter is expected to be stable or slightly up from the previous forecast. Pig crop/sow ratio is expected to increase in 2004 due to increases in fertility and lower mortality rates, especially in the UK.

· Large increases in EU pig production could result from the May 1, 2004 accession because of pig producing countries such as Poland, Hungary and the Czech Republic entering the EU common market.

· The EU is 107 percent self sufficient in pork production.

Imports

Total Pork & Pork Variety Meat Imports

(Metric Tons)

Source: World Trade Atlas, USDA

Total Pork Imports

(Metric Tons)

Source: World Trade Atlas, USDA

Total Pork Variety Meat Imports

(Metric Tons)

   Source: World Trade Atlas, USDA

·    Imports to the EU usually consist of intra-EU trade.  The EU gives preferences to other EU countries that basically shut out all other imports. 

·    U.S. pork imports to the EU largely consist of frozen muscle cuts, i.e., loins, hams, etc. that are destined for the processing sector.  Variety meats represent only a small portion of imports. 

Competition

2003 Share of Total Pork & Pork Variety Meat Imports

                                                                                 Source: World Trade Atlas/USDA

·   U.S. exporters face stiff competition both from domestic production and Eastern European suppliers who now have access through their accession to the EU.  The intra-EU trade in pork is extensive and favors other EU members.

Market Access & Trade Policy Considerations

·    Under the WTO Uruguay Agreement, the EU established a series of cut-specific import quotas for third country suppliers.  These total approximately 76,000 metric tons (MT), of which the largest sub-category, at 34,000 MT, is for boneless hams and loins. The costly EU plant approval process, however, has prevented the U.S. from fully accessing these quotas to any substantial degree. This situation is likely to ease as U.S. suppliers see a stronger euro offering more opportunities and with the implementation of the Veterinary Equivalency Agreement making plant approval more straightforward.

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 2.6 million people and represents 11 percent of the EU industrial workforce.  The food and drink industry is characterized by a high proportion of small and medium-sized enterprises.

·   Tariff rate quotas in the region give the U.S. the opportunity to introduce higher value pork cuts to the restaurant sector. The U.S. plans to introduce center cut pork loins and tenderloins to the EU HRI sector, and enhanced pork items to the Eastern European restaurant sector. 

   Processing Sector

·    The majority of the pork imported into the EU is used for further processing and it is always in short supply.  The U.S. is the second largest exporter of boneless hams to the European Union.  There is constant demand, particularly in Italy, for ham that is used for processing into prosciutto crudo, and in the UK for cooked ham. 

·    The best market opportunities for U.S. pork exports in the EU are to the processing sector under the cut-specific EU quotas. 

EASTERN EUROPE

FORCES SHAPING THE MARKET

In USMEF’s marketing plan, Eastern Europe consists of all remaining Eastern European countries that have not joined the EU, with special emphasis on Bulgaria and Romania.   With a population of less than eight million people, Bulgaria is a small, very price sensitive market.  Meat consumption fell significantly after an economic crisis in the mid-90s, but in the last yew years, there has been a pronounced positive upward trend. Increases in income usually proceed in tandem with an increase in meat consumption.  This is true in Bulgaria, where in 2003, for the first time in 14 years meat consumption increased 22 percent compared to the previous year.  The trend of economic growth and stabilization is expected to continue, as is the growth in meat consumption. 

Romania follows a similar pattern.  There are signs of stabilization of the economy and meat consumption has begun to grow again.  With its population of 22 million people, Romania is clearly a larger market than Bulgaria; however, like Bulgaria, it is also a very price sensitive market.

Both countries are primarily pork markets with little tradition of consuming beef.   For example, in Bulgaria, pork represents about 60 percent of total meat consumption. 

Domestic Production & Self-Sufficiency

·   In 2003, Bulgaria produced 150,000 metric tons of pork and is 86 percent self-sufficient in pork.

·    In 2004, Romania produced 435,000 metric tons of pork and is 89 percent self-sufficient in pork.

·   Over the last CY2003 and in early-2004, Bulgarian livestock industry faced difficulties related to the grain deficit and higher feed prices. These problems led to bankruptcy of small farms which slaughtered more than usual number of livestock, especially in the pork sector. 

·    Domestic production in neither Bulgaria nor Romania can satisfy the needs of the local meat processing sector. 

·    Romanian livestock numbers have begun to recover after a long period of decline, however, feed crops will be reduced in 2003/2004 causing tough economic conditions for pig producers.

Imports

·   Since 1995/96, Bulgaria has been a net importer of pork. Over the last three years, pork imports have remained high. Frozen pork usually accounts for 90 percent of imports (96 percent in 2003). Demand for imports of certain frozen cuts for processing is increasing due to higher consumer demand fro processed meat products versus fresh pork.  This demand is also stimulated by significant tourist inflow in the summer months.

·   Over the last few years Romania has also become a net importer of pork. In 2002 the main suppliers of pork to Romania were other European producers such as Germany, the Netherlands, France, Austria and Poland. In the early part of 2003 Polish imports flooded the market as the Poles sought to offload their intervention stocks. Romania has now imposed a 45 percent duty on imports of Polish pork. Exports of U.S. pork and variety meats to Romania were significantly in 2003, reaching 1,097 metric tons, an increase of 477 percent.

· In 2003, the U.S. share in Romania was smaller due to the tight competition from the EU (Denmark, France, Greece). Another competitor in 2003 was Poland.

·   Bulgaria is expected to continue developing its swine herd because of the accelerating development of the processing sector.  U.S. opportunities for pork destined for processing are excellent due to favorable demand and Bulgaria’s liberal veterinary policy.

Competition

·   U.S. exporters face stiff competition both from EU and Eastern European suppliers, who have the advantage of geographical proximity and long established trading relationships within the region. Intra-Eastern European trade is further promoted by the Central European Free Trade Agreement, which gives preferential trading rights to member countries, and limits duties to 25 percent for all commodities. Nonetheless, trade dynamics will change, with the accession of the ten new member states to the EU. While the more developed countries who are entering the EU will increase trading with EU partners, the less developed Eastern European markets may well look for other sources of pork.

Market Access & Trade Policy Considerations

·   The HACCP will be a required food safety system from January 1, 2006 for industrial facilities and from January 1, 2007 for smaller facilities. These requirements are included in the negotiation agreements and based on the new EU directives 852/2004, 853/2004 and 854/2004. The Association of Meat Processors (AMP) in Bulgaria will start developing generic HACCP plans for smaller facilities and will assist in their implementation.

·   It is anticipated that Bulgaria and Romania could join the EU as early as 2007 and adopt restrictive EU requirements.   

·    Bulgaria has a number of trade agreements which permit pork to be imported under favorable conditions. As well as taking advantage of its membership of CEFTA, there is a duty free import quota for EU-origin pork which disadvantages U.S. pork. This quota, however, is limited to 7,500 tons.  There is also a third country quota which enables U.S. pork to be competitive. This quota usually commences at the beginning of the year, and in previous years has amounted to 7,000 metric tons.

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

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

·  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 present in Bulgaria are Sheraton (South Korean ownership), Kempinski (German ownership), Princess (Turkish-owned) and Radisson and Hilton (U.S.-owned). The Radisson regularly features U.S. pork in its menus, and has actively promoted US pork over the past two years. 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 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. 

·   Pork consumption stays rather seasonal – in the winter the demand is higher for local purchases (traditional local holidays) and in the summer, the demand is driven by tourism and the HRI sector.

Processing Sector

·   Domestic production in neither Bulgaria nor Romania can satisfy the needs of the local processing sectors, which depend on imports.  Romania relies on imports for close to 90 percent of the pork it needs.

·   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 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 Greek and Spanish partners. 

·   Market opportunities for U.S. pork for processing are very good. The limiting factors are relatively high import duties and duty free import quota for the EU-origin pork which discriminates against U.S. pork products.

U.S.COMPETITIVE POSITION

Strengths

·    U.S. pork is a consistent product, ideal for processing.

Weaknesses

·   Market access for U.S. pork is somewhat limited.

·   Pork is very affected by price, a strong U.S. dollar or unfavorable exchange rate movement will likely decrease pork exports to Europe.  

Opportunities

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

·   The proposed EU enlargement in which tariffs will fall to zero on offals in new member states will benefit the U.S.

·    The growing foodservice and processing sectors in Eastern Europe offers opportunities for U.S. pork.

Threats

·    The proposed EU enlargement which will require U.S. plants to comply to EU standards in an ever increasing-number of markets.

·    U.S. pork will face increased competition from intra-EU exports within the newly enlarged EU.  

STRATEGIC OBJECTIVES

   Market Development & Promotion

·   Increase purchasing of U.S. pork loins and tenderloins by upscale and trend-setting restaurants.

Market Access & Trade Policy

· Eliminate the majority of tests required under the PFEU program that tests swine for hormone residue.