New III Pasta perspectives World Congress

European Pasta Complex In A State Of Flux

Barcelona, 25th October 2005

New perspectives

Introduction

Strategy Rabobank Group

To become the largest, best and most innovative Allfinanz provider in the Netherlands To be the most sustainable and socially involved bank Global no. 1 in financing in the food & agri market

International network in 35 countries International market leader Food & Agri wholesale Domestic retail banking in selective countries Knowledge based banking

New perspectives

EU pasta complex in a state of flux

Shift in consumer demands

Food expenditure as proportion of household income is declining Consumer have become more and more price sensitive Serving an ageing and declining consumer base Obesity has vast societal dimensions Diets come and go Continuing popularity of the Mediterranean diet Increasing on the go and out of home consumption

Manufacturers challenge: How to capture a greater share of consumers food expenditure

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A gradually growing pasta market

EU Pasta Market
10.000 9.000 8.000 7.000 6.000 5.000 4.000 3.000 2.000 1.000 0 1999 2001 2003 2005 2007 2009

In Euros (m)

CAGR 99-09: 3.6%

CAGR 99-09: 6.3%

Dry pasta
Source: Datamonitor, 2005

Fresh pasta

Supermarkets remain main channel for pasta purchases, but

Distribution by Value, 2004
Convenience stores 0,4% Traditional grocers 10,6% Discounters 16,0% Others 3,7%

Supermarkets/ hypermarkets 69,3%

Source: Datamonitor,Rabobank estimates, 2005

, discounters will become an even more dominant force in Europe,

Discount percentage shares in total grocery retailing
60 50 40 30 20 10 0
U el K et gi u h m S erl w an it ze ds rl a Fr nd an c S e p ai n It al P o rt y u g G al re ec N e o rw D en a y m S ar w k ed Fi en n la n d rm a n y

Main discount labels

G e

Source: M + M Planet Retail, Rabobank estimates

, as is seen in the stunning growth of Aldi and Lidl outlets

7.000 6.000 5.000 4.000 3.000 2.000 1.000 0

Number of outlets in EU

Number of discount outlets in EU

35.000 30.000 25.000 20.000 15.000 10.000 5.000 0

Aldi
1990
10

Lidl
2000 2004 1990 1995

EU
2000 2004

1995

Source: GfK

Private label gaining acceptance at the expense of brands

Price difference brand over PL

Consumer's willingness to pay a premium for private label

Spend on private labels
30% 20% 10% 0% 45% 40% 35% 30% 25%

Spend on private labels

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Sp ai n Fr Ne a n c th er e la nd Ca s na De da nm ar k US Sw A ed en Ita Hu ly Cz nga ry ec h Re p.
Source: IGD 2004, Rabobank

an y G er m

UK

Price difference PL and brand

Italy still the major producer, but Russia and Turkey can have a major influence in the midterm
Australia 0,4% Asia Africa 2,1% 4,5% Central and South America 19%

Global pasta production, volume

Middle East 0,3%

Italy 27,1%

Europe 53%

Russia 8,0% Turkey 4,0%

North America 21,4%

Germany 3,0% Others 10,1%

Source: UNIPI, Rabobank estimates, 2004

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Italian pasta producers depend heavily on export; Germany main destination

Italian exports account for 48,5% of

production Export volume CAGR 1990-2003: 8% Significant price differential between

Italian export destinations By volume, 2003

Germany 22% Others 32%

national and export markets

Italian producers are the main private label suppliers for EU retail trade In addition export to fill up production

Nether lands 3% Sweden 3% Japan 5% USA 10%

France 14%

capacity
As a result the European pasta market is suffering from overcapacity
UK 11%

Source: UNIPI, 2004 13

Polarisation in EU pasta market: as is the case in the German market

Structure of German dry pasta market

Price per 500g pack 0.29-0.59 0.89-1.19 1.80-2.50

Discount market 30%

Middle market 60%

Premium market; 10%

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Source: Industry sources, AC Nielsen and Rabobank estimates

Policy developments will continue to impact the pasta industry

CAP reform:

1992 reform Price volatility (reduction of the intervention price) Non-traditional areas switched production from durum to other
crops (e.g. soft wheat)

Mid Term Review Impact of production in tradional areas will be limited EU will remain a net importer
Eastern EU enlargement (May 2004):

Better access to these markets Per capita pasta consumption is close to EU-15 levels
Turkey, a future EU member?

Turkey seems to have a competitive (export) position in the entire pasta

complex

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New perspectives

Adaptation of business model

Changes have urged players to adapt their business model

Top line
Increase market share

Internationalisation
Diversification of products and services

Access new markets Rationalization of portfolio Innovation

Growth

Increase buying power Raise efficiency

Higher margin products Restructuring

Bottom line

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Rationalization in pasta complex

275 5.000 4.500

Number of EU pasta companies

Production
225

3.500 3.000

200

2.500 2.000

175 150

Number of companies

1.500 1.000 500

125
1992 1997 2002 2007 (est.) 2012 (est.)
Source: UN.A.F.P.A (2003), Rabobank estimates

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Production (x 1000 tons)

250

4.000

Fragmented industry offers growth potential

Main producers*

Key characteristics
Several dominant branded players, but
strong demand for private label suppliers

No pan-European player with exception of

Barilla

Diversity of consumer demand has resulted

in many small factories, short runs and manufacturing complexity

Fragmented market with many small scale

players (<EUR 50m)

Most larger players have traditionally held a

strong position in their domestic market

No uniform business model Polarisation between short and long shelf

life operators

* Selection of main producers

Market place remains competitive Oversupply concerns Majority of companies are family owned Ample room for growth, both organically as

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by acquisition

Sizeable players already active in Central and Eastern Europe

Per capita consumption of pasta in Eastern Europe
Romania Poland Lat via Lit uania EU-14 (excl. It aly) Slovak Rep Turkey Est onia Russia EU-15 Hungary Czech Rep 0 1 2 3 4 5 6 7

Pasta production (volume) Agros Makfa Adriana Altan Lubella (Maspex) UMC Malma Vermani 0 50 100 (in th. tonnes) 150

20

kg /capit a

Source: UNIPI, Rabobank estimates

Will the pasta industry create its own Actimel?

New product development will be a key element for sustainable

success in the pasta industry,

although very complex The pasta industry has not been very innovative over the last

decade
Innovation has been predominantly incremental-me Organic growth toos and brand extensions Focused on health and quality Relevant innovation will be
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rewarded

Strategies in European pasta industry

Multiple strategies across country borders
Global

Brands N.P.D.
Europe

Disintegration? Volume Cost leadership

Commodity
Source: Rabobank,, 2005

Generic

Premium

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Value added

Domestic

Geographic expansion

Pasta industry has the tools to overcome these challenges

Challenges
Cost input price inflation Inability to pass this on to customers Competitive pricing Commoditization Weather risks in supply Involvement of food multinationals Fall in demand/volumes Cross sector competition Current debate on obesity

Tools
Focus on higher margin products
Established key brands with strong support New product development Strong market share Distribution power with critical mass Customer retention and loyalty Reduction of cost base Efficient capacity utilisation Secure ingredient supply Access to stable growth markets Access to optimum financial resources

Strategy
Clearly defined strategy, based on understanding of individual markets and industry drivers, supported by a strong and in-demand portfolio of products

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New perspectives

Outlook

Rabobanks view on the European pasta complex

Outlook

The pasta market will remain a value growth market throughout Europe
characterised by many, highly professional competitors

Cost side of the pasta industry needs to improve Retail-supplier relationships will become even more intense The share of private label products on offer will continue to grow Some segments will become commoditized, making cost leadership in these

segments a necessity
There is an urgency for further industry consolidation New product development will be a key element in further value growth Expansion to non-traditional growing areas CAP reform will lead to more open markets and more volatility in durum prices As a result of CAP reform, EU durum production could fall
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New III Pasta perspectives World Congress

European Pasta Complex In A State Of Flux

Barcelona, 25th October 2005

Strategy Rabobank Group

To become the largest, best and most innovative Allfinanz provider in the Netherlands To be the most sustainable and socially involved bank Global no. 1 in financing in the food & agri market

International network in 35 countries International market leader Food & Agri wholesale Domestic retail banking in selective countries Knowledge based banking

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