BMI 's regional risk/reward ratings provide a platform for investors to compare markets across a variety of indicators that assess the relative strengths and weaknesses of individual countries. In doing so, our ratings provide a platform for benchmarking regionally, and by being forward-looking by nature, we can gauge which markets we think are going to provide the strongest opportunities in the future. We can also dig a little deeper and go sub-regional, which would be useful for ambitious regional food retailers.
Just briefly touching on the indicators we use to assess countries, the reward part of the rating takes into account market size, current consumption levels, future industry growth prospects (based on our five-year industry forecasts), market fragmentation (with greater fragmentation indicating higher opportunities) and the size of the youth population. The risk part of the rating takes into account the legislative environment, the level of development of the organised retail sector (with higher development leading to lower risks), as well as relevant aspects of the economic and political environment.
Japan Edges Out China
The ratings landscape this quarter has Japan edging out China for top spot, which largely reflects its excellent risk score. While other countries, including Australia and Singapore also possess strong risk scores, they do not have Japan's reward profile. Despite being a high income market, Japan still possesses a strong enough reward score to see off China. While our ratings do favour countries with stronger growth outlooks with the reward portion carrying a 60% weight, the fact that markets like Japan can still outscore the likes of China and India continues to illustrate the nuanced nature of our ratings as a comparative tool.
The table below outlines the factors that make up each rating and the scores for the Asia Pacific region . The six factors that make up the reward rating are: food consumption per capita; market fragmentation; per capita food consumption (five-year compound annual growth); population size; GDP per capita; and youth population.
|Reward||Industry Reward||Country Reward||Risk||Industry Risk||Country Risk||Food & Drink Rating|
|Source: BMI. Scores out of 100, with 100 highest. The Food & Drink Risk/Reward Rating is the principal rating. It is comprised of two sub-ratings 'Reward' and 'Risk', which have a 60% and 40% weighting respectively. In turn, the 'Reward' Rating is comprised of Industry Reward and Country Reward, which have equal weighting and are based upon growth/size of food/alcohol and soft drinks industry (Market) and the broader economic/socio-demographic environment (Country). The 'Risk' rating is comprised of Industry Risk and Country Risk which both have 20% weightings respectively and are based on a subjective evaluation of industry regulatory and competitive issues (Market) and the industry's broader Country Risk exposure (Country), which is based on BMI's proprietary Country Risk Ratings.|
The first indicator we are going to look at is food consumption per capita , which reflects the existing spending power of Japanese consumer for example, which scores 10/10 here as the second table illustrates. By comparison, China scores only 4, which draws attention to how much more room there is for incomes to grow in relation to Asia Pacific region's wealthiest markets on a per capita basis. India, which we also profile in the second table is at the complete opposite end of the spectrum to Japan at this stage.
The second indicator we are going to look at is market fragmentation , which is a subjective indicator that assesses how relatively developed (less fragmented) or underdeveloped (more fragmented) a market is. Whereas the first indicator dishes out strong scores for high existing spending, the second indicator rewards countries where the long-term scope for growth is the greatest. These are typically markets where there is a lot of room for growth, innovation and development. Therefore, it does not surprise to see Japan comfortably outscored by India, China and almost all the emerging markets rated.
The third indicator within the reward part of the ratings system is per capita food consumption growth (five-year compound annual growth). Along with market fragmentation, this is joint highest weighted indicator within the reward score framework. For good reason, this indicator carries a strong weight. Given that our ratings are designed to be forward-looking, this indicator is one of the main ways we gauge growth and, in combination with some of the other high-weight indicators we look at, informs our preferences for certain markets. Population size is the fourth indicator, and China and India obviously do quite well here. Japan does too with its population of nearly 130mn.
The final reward indicator, youth population , was introduced as a way to factor in a more comprehensive demographic angle to our ratings. So while Russia has a very large population, it is much weaker when it comes to the age profile of its population. In fact, most of the CEE region scores poorly on this indicator. Only Turkey really does well here; when you combine this factor with the existing size of its population, its demographic dividend potential stands out.
The Seven Risk Indicators
The seven factors that make up the risk rating are: mass grocery retail (MGR) penetration; regulatory environment; short-term economic risk rating; income distribution; lack of bureaucracy; market orientation; and physical infrastructure.
The first risk indicator we are going to look at is MGR penetration . This is our principal way of assessing how relatively developed the overall consumer sector is. A higher MGR score is risk-positive in the sense that it reflects better developed routes to consumers. Very low MGR scores reflect the ongoing predominance of kiosks and markets with weak centralised distribution mechanisms. Many of the more mature and developed markets score well here, including the likes of Australia, Singapore and Japan. India, which has very recently initiated efforts to open up its food retailing sector to multinationals scores very poorly (1/10). In this sense, China is a lot further along in the development of organised retailing channels.
The second factor, regulatory environment , evaluates the complexity of things such as labelling and nutrition requirements. It also can be used to gauge the state of the overall business environment. The more developed and mature markets usually score better here and that is once again the case in Q213.
The third factor, short-term economic risk rating , assesses the degree to which the country approximates the ideal of non-inflationary growth with falling unemployment, contained fiscal and external deficits and manageable debt ratios. It is principally the candidates towards the top of our ratings that do well on this criterion - underlining the link between economic stability and the overall attractiveness of the consumer market. Notable underperformers include Serbia and Ukraine.
The fourth factor, income distribution , is measured by the proportion of private consumption accounted for by the middle 60% of earners.
The fifth factor, lack of bureaucracy , is a measure of the hurdles that any producer is likely to face in areas such as starting and closing businesses, paying taxes, dealing with licences and registering property. Similar to the regulatory environment rating, the Central European countries are among the best performers here, while Russia performs quite poorly.
The sixth factor, market orientation , is a measure of how business-orientated an economy is and measures the level of foreign direct investment protectionism, tax rates and the level of government intervention. The final risk factor, physical infrastructure , measures the ease and cost of operating in a market from an infrastructure perspective. Some of our favourite regional economies have a lot of work to do here. Developing physical infrastructure in Russia, Poland and Turkey will bring down the cost of getting goods to consumers, mak ing it easier to reach a wider proportion of the population, and provide a greater incentive for established companies to target greater growth in less-developed regions.
|Source: BMI. The Food & Drink Risk/Reward Rating is the principal rating. It is comprised of two sub-ratings 'Reward' and 'Risk', which have a 60% and 40% weighting respectively.|
|Food consumption per capita||10||4||1|
|Per capita food consumption five year Compound Annual Growth (CAR)||1||6||5|
|GDP per capita, US$||10||3||2|
|youth population (%)||2||2||6|
|Short term economic risk rating||6||9||6|
|Lack Of Bureaucracy||8||5||4|