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Q: How do you view the F&B industry in Sri Lanka today?
A: At the outset I must mention that as per the recently released Nielsen Annual Survey 2013, the Food and Beverage sector recorded a growth of only 2%. However in the recent past in the FMCG sector, the Food and Beverage industry witnessed a considerable growth commencing 2010, with the end of the conflict.
Boosted by post-war optimism and reaping maximum benefits from the peace dividend, private sector firms in the F&B industry penetrated the North and East Provinces in a massive wave, increasing firm level earnings by two to threefold. Furthermore, post-conflict buoyancy in the tourism industry also facilitated in expanding the F&B industry on a substantial scale in recent years.
On a macroeconomic level, the country’s economic fundamentals have facilitated enhanced participation by the private sector as well. Among these, the stable and low inflation rate coupled with low inflation expectation by both consumers and investors and the persistently low interest rate encouraging more and more private sector credit growth are of importance.
Consolidating on peace and enhanced security condition coupled with integrating the North and East Provinces with rest of the country greatly assisted the private sector firms to freely move goods, services, capital and people across the entire country, thus enhancing their profits and earnings.
The F&B industry was among one of the growing industries in the economy since 2010 and has the potential to grow even further in the short to medium term along with the capacity expansion initiatives commenced by major players in the F&B industry in recent years.
Another positive factor I want to mention is that, according to market research data published by AC Nielsen in their Annual Review 2013, the food ratio of Sri Lanka is gradually coming down, signifying that the country is moving in the right direction in reaching middle income status.
However, this positive trend in the food ratio and stable consumer confidence levels recorded in 2013 was not reflected in the F&B category growth, particularly in the General Trade Category (GTC), which contributes approximately 80% to the total F&B industry as far as retail sales are concerned. However, we can see a notable growth in the HORECA (Hotels, Restaurants and Catering) sector for F&B products followed by a moderate growth in the Modern Trade Category (MTC).
Q: Can you elaborate more on this food ratio and how do you measure consumer wellbeing from this?
A: The ratio of household expenditure on food and beverages (excluding liquor, narcotic drugs and tobacco) to total expenditure is defined as the 
food ratio, which shows the proportion of expenditure spent on food and beverages out of total disposable income of consumers. In recent years we have witnessed a gradual improvement in this food ratio, especially in the urban and rural sectors, in which the food ratio has improved from 34% to 31% for the urban sector and from 41% to 39% for the rural sector during the period from 2010 to 2013.
Developed countries typically have a food ratio less than 15% and for middle income countries the ratio is less than 30%. On an overall scale Sri Lanka’s food ratio has improved from 40% in 2010 to 37% in 2013, indicating that on a holistic approach Sri Lankan consumers are spending a lesser proportion out of their disposable income on food and beverages, giving them more opportunity to spend more on other aspects such as leisure and travel.
Q: How do you see the growth prospects for the F&B industry in the future?
A: When we observe the FMCG sector for branded products, General Trade (GT) is still dominating Modern Trade (MT) with a ratio of 80%:20%. However, this ratio may vary with the type of product you market. For instance, for frozen and processed products, the MT ratio will be much higher than 20%. However, this structure will change considerably in the years ahead due to many reasons.
Q: What sort of reasons will contribute to this structural change?
A: The most significant contributing factor will be the expanding middle income market segment in the country. Higher economic growth and reduction in poverty level pave the way to a growing middle income market segment. In recent years, there is evidence of a growing middle class in Sri Lanka as well. Growing demand for technologically-advanced products such as smart phones, smart TVs and refrigerators, luxury products and increase in car sales are some evidence for this growing middle class in Sri Lanka. Middle class consumers have received greater attention in recent times due to the belief that a strong and large middle class is a precondition for sustained economic growth and development in a country. Evidence suggests that expanding middle class consumers will create opportunities for new businesses.
Demand for convenience from this market segment is also very high, which is evident from the increasing number of supermarket outlets opening up in every part of the country, including the former war-torn areas. In addition to these factors, price discounts, loyalty programs and credit/debit card payment facilities offered by these supermarket chains will attract more consumers to this MT category. I firmly believe that in the next two to three years, the MT category penetration will be much higher and will play a major role in the economy.
Coupled with this, development in infrastructure facilities, primarily highways interconnecting major cities in the country, will also discourage the high reliance on the GT category in years to come. For example, at present on freeways we observe a lot of grocery type outlets on both sides of the roads being patronised by commuters. However, with the development of highways in the country, reliance on these small grocery shops will decline and commuters will tend to move towards the MT category.
Therefore, increasing per capita income of consumers, increasing standards of living of the rural population, narrowing the urban-rural divide in the country, rapid growth in consumer spending, the expanding middle income segment in the economy and the massive influx of tourists into the country will boost the demand for the F&B industry in the short to medium term, contributing towards further growth in this sector. Furthermore, developments in the HORECA sector will also contribute to this structural change in years to come.
Q: How do you predict the HORECA sector growth?
A: The Government initiative to expand the tourism industry by increasing hotel rooms from 15,000 to 45,000 rooms as well as to attract 2.5 billion tourists by 2016 will create increased demand for the F&B industry and create more growth opportunities in this sector.
As an example, this season is very good for most of the hotels in the country; average occupancy rate has gone up. If the relevant authorities can focus more on specific promotions, different types of tourism – for example, beach tourism, eco tourism, adventure tourism, green tourism, meditation tourism) – we can expect a higher growth from this sector. All in all we can see an overall development in this sector.
Q: What are your concluding remarks on the F&B industry?
A: Well, the outlook for the F&B industry is very positive given the country’s stable macroeconomic environment. Growth prospects for the corporate sector in the economy are improving continuously and considerable opportunities are available for further capacity expansion to take place. Therefore, industry players in the F&B sector must grab hold of this opportunity laid before them and obtain maximum benefits from the favourable economic environment.
As Sri Lanka enters into a high growth trajectory coupled with a targeted US$ 4,000 per capita income economy by 2016, consumer preference is also taking a new shape, where the value-added branding culture is becoming increasingly prominent. Influence by social media networks, expansion in IT sector, telecommunication and mobile services also play a major role in consumer behaviour and their spending patterns.
This trend in consumer buying behaviour will transform Sri Lankan society into a new dimension, by creating more and more opportunities, especially in the branded F&B category, and will continue to grow further resulting from lifestyle changes and social value changes of consumers.
