In BMI’s Food and Drink Business Environment Ratings (BER) for Q110, Hungary remains in second place out of the 15 major CEE markets surveyed in the matrix, having lost pole position to Russia. In the longer term, Hungary’s placement is likely to worsen, as its attractive regulatory environment and high per capita food and beverage consumption levels are outweighed by challenging economic conditions, falling population numbers, and the rising demand for private-label and discount goods. Nevertheless, through to 2014, we forecast that Hungarian food consumption by value will increase by 17.04% in local currency terms, to reach HUF4,681bn (US$23.88bn).In the shorter term, the raising of the value-added-tax (VAT) from 20% to 25% in July 2009 was blamed on falling retail sales. According to the Central Statistical Office (KHS), 12-month retail sales in Hungary recorded a drop every month since February 2007, indicating systemic difficulties of the Hungarian market. In the first eight months of the year, retail sales topped HUF4,639bn (US$23bn), with food and fast-moving consumer goods (FMCG) accounting for some 46% of the total. Food sales should benefit to a degree from the lowering of VAT on staples (including bread and dairy products), although an increase in excise duties on fuel will negate some of such benefits.In terms of industry developments, the challenging economic conditions will continue to stimulate consolidation across both food and drinks and mass grocery retail (MGR) markets. To this end, in September 2009, Coop Szolnok acquired Heliker, a retail chain of 49 supermarkets and three cash & carry stores present the eastern and north-eastern part of Hungary, having previously expanded through the purchases of other regional retailers, including Rema 1000, Kunhegyesi Nagykun-Ker, and Tiszafured Coop. While discount retailers are expected to be the key beneficiaries of the current economic situation, which is pushing consumers to buy cheaper products, coops are also expected to fare well, given the emphasis on buying locally produced foods. This trend will continue to be pertinent over the coming year, as we expect the Hungarian economy to be a regional underperformer through the medium term.In the meantime, some foreign companies are willing to invest in the country, aiming for niche areas with longer term potential. For example, the owner of the Château Cos d’Estournel winery in France recently purchased a majority stake in Hungarian vineyards Hétszölö and Lencses Dulö. The acquisition leaves Reybier well positioned to capitalise on steady demand in both the Hungarian and French wine markets, with some local players in the former also exploring such avenues. In fact, in September 2009, Hungarian firm Bazaltbor Badacsony reported that the construction of a large wine-bottling facility in the Badacsony wine region is underway, as consumers turn away from spirits due to financial and health reasons.