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Food & Drink Forecast Methodologies

How We Generate Our Industry Forecasts

BMI’s industry forecasts are generated using the best-practice techniques of time-series modelling. The precise form of time-series model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined. For example, data for some industries may be particularly prone to seasonality, i.e. seasonal trends. In other industries, there may be pronounced non-linearity, whereby large recessions, for example, may occur more frequently than cyclical booms.

Our approach varies from industry to industry. Common to our analysis of every industry, however, is the use of vector autoregressions. Vector autoregressions allow us to forecast a variable using more than the variable’s own history as explanatory information. For example, when forecasting oil prices, we can include information about oil consumption, supply and capacity.

When forecasting for some of our industry sub-component variables, however, using a variable’s own history is often the most desirable method of analysis. Such single-variable analysis is called univariate modelling. We use the most common and versatile form of univariate models: the autoregressive moving average model (ARMA).

In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a basis for analysis and forecasting.

It must be remembered that human intervention plays a necessary and desirable part in all our industry forecasting techniques. Intimate knowledge of the data and industry ensures we spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not.

Retail Industry

There are a number of principal criteria that drive our forecasts for each retail variable:

Mass Grocery Retail Sales

Figures for MGR sales are based, where possible, on primary government/ministry/trade association sources and official data. Where these are unavailable, MGR sales forecasts are based on a range of variables including:

• Company information about past and expected sales and market shares;
• Likely sales development based upon the future development of population, disposable incomes and general macroeconomic climate;
• Political factors (likely changes in legislation affecting the MGR sector).

Food Consumption And Expenditure

Criteria used to aid our forecasts for food consumption and expenditure include:

• The growth or otherwise of the population and its disposable incomes, as well as the development of price indices;
• Company results and expansion plans;
• Changes in the industry/new product developments affecting the price level.

Food, Drink And Tobacco Sales

Figures are forecast by taking into account:

• The growth or otherwise of the population and its disposable incomes, as well as the development of price indices;
• Changes in lifestyles/general societal trends;
• Likely development of product taxation and other government measures, such as anti-smoking legislation.

Food, Drink And Tobacco Imports And Exports

Forecasted based on the following criteria:

• The growth or otherwise of the population and its disposable incomes, as well as the development of price indices;
• Developments in domestic food, drink, and tobacco production;
• Currency exchange rate developments;
• Development of bilateral and multilateral trade agreements and negotiations, as well as political developments affecting trade.

Sources

Sources used in retail reports include local statistics offices, central banks, government departments, officially released company results and figures, trade associations, multinational organisations, including the OECD, the FAO, and the World Bank, and international and national news agencies.

Food & Drink Business Environment Ratings Methodology

Ratings Overview

Conceptually, BMI’s Food & Drink Business Environment Ratings system provides a globally-comparative, numerically-based assessment of the Risk/Return trade-off for the industry in each state covered in BMI Reports. In order to provide clients with a detailed assessment of this trade-off, the overall rating is comprised of two distinct sub-ratings:

Limits of Potential Returns: Evaluates the industry’s current size and growth potential, and also assesses broader industry/state characteristics that may enable/inhibit the industry’s development.
Risks to Realisation of Potential Returns: Evaluates issues within (a) the Food & Drink sector, and (b) the broader political/economic/business environment, that indicate the level of uncertainty surrounding the realisation of potential returns.

These ratings are themselves comprised of sub-ratings:

• The ‘Limits’ Rating is comprised of:
• Domestic Market: This evaluates industry growth/size dynamics
• Country Structure: This evaluates the broader economic/socio-demographic environment

• The ‘Risks’ Rating is comprised:
• Market Risks: This is a subjective evaluation of industry regulatory and competitive issues
• Country Risk: This evaluates the industry’s broader Country Risk exposure, which is based on industry-specific vulnerabilities that may be assesses using any combination of the 56 components of BMI's proprietary Political, Economic and Business & Operational Risk Ratings

Weighting

Given the number of indicators/datasets used, it would be inappropriate to give all sub-components equal weight. Consequently, the following weight has been adopted.

Component	Weighting
Limits of Potential Returns	70%
- Domestic Market	- 50%
- Country Structure	- 50%
Risks to Realisation of Potential Returns	30%
- Market Risks	- 40%
- Country Risk	- 60%

 

Indicators

The following indicators have been used. Overall, the rating uses five subjectively-measured indicators, and over 40 separate indicators/datasets.

Indicator	Rationale
Limits to Potential Returns
Domestic Market
Food and drink consumption per capita, US$	Indicator denotes overall breadth of market. Large markets score higher than smaller ones.
Soft drink consumption per capita, US$	Indicator denotes overall breadth of market. Large markets score higher than smaller ones.
Alcohol consumption per capita, litres	Indicator denotes overall breadth of market. Large markets score higher than smaller ones.
Per capital food consumption growth (5-yr)	Indicator denotes sector dynamism. Scores are based on total growth over our 5-yr forecast period.
Food & Drink trade balance	Indicator denotes state’s commodity endowment, and thus its dependency on imports for food and raw ingredient supply.
Country Structure
Economic Structure	Rating from BMI’s Country Risk Ratings (CRR). It evaluates the structural balance of the economy; evaluating issues such as over-reliance on single sectors/markets as well as past economic volatility.
Population Size	Proxy for potential market size. Large countries are considered more attractive.
GDP per capita, US$	A proxy for wealth. Size of population is important, but needs to be considered in relation to spending power. High income states receive better scores than low income states.
Market Entry Potential/Maturity	Subjective rating based on the level of industry development and the level and strength of industry competition in a market. Mature and/or competitive markets receive low scores.
Risks to Realisation of Potential Returns
Market Risks
Barriers to entry	Subjective rating based on the prevalence of industry-specific barriers that might impede investment and growth. States with many barriers receive low scores.
Regulatory Environment	Subjective rating based on the industry-specific regulatory environment and the presence of potentially restrictive legislation. Low scores reflect a regulatory environment.
Country Risk
Short Term Economic Growth Risk	Rating from BMI’s CRR. It evaluates likely growth trajectory over two-year forecast period, based on BMI’s forecasts and projections of business and consumer confidence.
Short Term Financial Risk	Rating from BMI’s CRR. It denotes risk of currency crisis and stability of banking sector. The former would hit revenues in hard currency, while the latter would curtail investment funding.
Short Term External Risk	Rating from BMI’s CRR. It denotes the state’s vulnerability to externally-induced economic shocks, which tend to be the principal triggers of economic crises.
Characteristics of Society	Rating from BMI’s CRR. It evaluates impact of income distribution, poverty and ethnic division on broader stability.
Scope of State	Rating from BMI’s CRR. Low state control markedly increases security risks, thereby increasing costs in certain states.
Institutions	Rating from BMI’s CRR. It evaluates the risks to business posed by official bureaucracy, the broader legal framework and corruption.
Market Orientation	Subjective rating from BMI’s CRR to denote predictability of openness to foreign investment and trade.
Physical Infrastructure	Rating from BMI’s CRR. Poor power/water/transport infrastructure act as bottlenecks to sector development.
Labour Infrastructure	Rating from BMI’s CRR to denote cost/availability of labour. High costs will affect risk-returns calculations.

 

 

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