Conform and Prosper

Economic News

22 Jul 2010
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As Bulgarian companies adapt to EU regulations regarding food production, and new players enter the market, fresh opportunities are emerging.



Recent moves by the EU have highlighted concerns associated with standards in the Bulgarian food production sector, and many expect that the small- and medium-sized enterprises (SMEs) operating in the industry will face serious challenges following the twin shocks of competition and regulation post-accession. Also, a recent avian flu outbreak added to these concerns.



The European Commission recently approved a series of proposals on food safety and animal health applicable to Bulgaria. Veterinary scientists on the Standing Committee on the Food Chain and Animal Health voted in favour of Bulgarian contingency plans for avian influenza ("bird flu"), Newcastle disease, swine fever and food-and-mouth disease.



Earlier this year, bird flu scares had a serious impact on poultry and egg producers. In February, several cases of bird flu were reported among wild birds, and although no humans or domestic fowl were affected, poultry consumption dropped by 30%. Local industrial group Stara Planina saw its first quarter profits halved year-on-year due to the losses of its poultry-producing arm Slavyana, the regional press reported.



The Commission stated that at present a "considerable proportion" of the raw milk produced in Bulgaria and sent to processing centres does not comply with EU standards. Thus much of the milk produced by Bulgarian dairies is not eligible for export to other EU member states.



Under the agreement with Bulgaria, a number of dairies will be able to continue processing "non-compliant" milk until the end of 2009, provided that it is not exported to the EU. Bulgarian authorities will be responsible for monitoring compliance with the regulations.



Bozhidar Bozhinov, the chairman of the Bulgarian Chamber of Commerce and Industry recently told the local press that companies operating in the food and agriculture sector are likely to face the roughest ride once the country joins the EU in January 2007.



Bozhinov said "there will be certain difficulties because many new requirements will be imposed, there will be many ecological requirements and there is no return on investment in ecology." He warned that a certain number of Bulgarian firms across sectors are poorly informed about the requirements of EU legislation. However, he made it clear that he did not expect more firms to be closed down after accession than is currently the case.



Ironically, recent rises in the cost of basic foodstuffs (a kilogram of bread crossing the psychologically important Lv1 ($0.68) earlier this year) are thought to be partly due to the shrinkage in the number of producers undercutting those that do meet regulations.



Bozhinov added that the opening of EU markets would be beneficial to Bulgarian producers considering opportunities in the "boutique" market.



Besides, losses derived from increased regulation should be offset by a rise in exports combined with the growing strength of the domestic market, as purchasing power increases.



Food companies from several EU member states, many of whom are former Communist countries, are said to be planning to enter the Bulgarian market. Local retailers report that the Bulgarian market is attracting attention of baked goods and beverage companies from Central and Eastern European countries; canned foods producers from Latvia, Hungary, Poland and the Czech Republic; wine makers from Italy and Iberia and dairy producers from France and Italy.



The opportunities for Bulgarian food producers who meet EU standards are exemplified by the meat processing industry. Pastries and salami maker Bella Bulgaria recently announced that net profits would nearly double year-on-year to about 1m euros ($1.32m) and turnover would more than double to 100m euros ($132m). This growth from 2005 was caused by an increase in meat processing capacity and the incorporation of two new factories, the regional press reported.



Elza Markova, executive director of Bella, told the press that she expects a further 40% increase in turnover in 2006, as the company focuses on the domestic market and is ready to compete with new foreign entrants onto the market. Total investments will reach 10m euros ($13.2m) by the year-end, including the opening of a 6m euro ($7.92m) minced-meat processing factory in the southern city of Plovdiv with a capacity of 120m tonnes of meat a day. Overall capacity will also be increased thanks to the acquisition of a majority stake in meat processing firm Solaris, while the opening of a second logistics centre will optimise distribution channels.



The firm has aggressive plans for expansion across sectors, including processed meat, pastries and margarine. Markova is also thought to be considering an IPO on a foreign stock market, which would boost confidence and awareness of the firm as it looks to overtake Western European rivals.



Another Bulgarian meat-processing firm, Gradus 1, recently opened a 17.9m euros ($22.4m) poultry plant with an annual capacity of 40,000 tonnes, to back ambitious export plans, the regional press reported. The growth in production capacity coincides with a decision to increase domestic consumption and exports as a way to offset higher meat import prices. Indeed, according to Kostadin Chorbadjiiski, chairman of the Association of Meat Processing Enterprises in Bulgaria, producers in Argentina and Brazil are raising prices of their meat exports in anticipation of Bulgaria's accession. The meat processing industry, in which 170 companies currently operate, is expecting a wave of consolidation due to greater regulation and competition, as well as higher raw material costs.

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