In BMI’s Q109 Business Environment Rating covering food and drink sectors of the 14 major markets inCentral and Eastern Europe (CEE), Latvia is ranked ninth, below its Baltic peers and only above the twomore recent European Union (EU) entrants and the non-EU members. While the country is politicallysound, economy has emerged as a major shadow over its longer-term prospects as a destination forinvestment in the food and drinks markets. Food consumption is expected to post a negative 2008-2013growth in US dollar terms, falling by just over 1.13% to US$2.83bn in 2013. Previously, Latviaexperienced a strong growth of its mass grocery retail (MGR) sector, which also had a beneficial effect onthe value of food and beverages sold across the country.More recently, however, the economic turmoil, which translated in sharply contracting economic growthin the course of 2008, begun signalling a bleak outlook for Latvia. We believe that the risks of a sharp andprotracted economic slowdown in Latvia have elevated substantially, which will weigh on both consumerpurchasing power and confidence. Despite their competitive prices in comparison to Western Europeanproducers, local food and beverages manufacturers are also contending with lower demand for importsinto developed markets. Additionally, producers of alcoholic beverages will have to contend with atightening operating environment, as the government aims to reduce harmful effects of alcoholconsumption.Nevertheless, opportunities are still present, as illustrated by the November 2008 opening of a local officeby Dutch ingredients distributor Barentz Europe, which will be used to its business in the Baltic statesand Eastern Europe. Coca-Cola Hellenic Latvia reported that the proposed construction of a new plantby Coca-Cola Hellenic Bottling Company (CCHBC) in Latvia might take two to three years tocomplete, although the project indicates belief in the soft drink market in the country. Similarly, majoralcohol beverages producers, including Liviko and Aldaris, reported strong increases in their salesthroughout 2008, despite the beer market stagnation. The figures, with value sales growth exceedingvolume increases, indicate that consumers are still willing and able to purchase premium products. Thesituation in the MGR market is similar, as major grocers continue posting strong sales in the country.On the other hand, some multinationals are becoming more wary of the risks evident within the Baltics.To this end, US food conglomerate Kraft Foods recently divested of its Nordic and Baltic salted snackoperations, which were acquired by Norwegian Herkules Private Equity Fund. Kraft has insteadindicated that it will focus on a number of core brands in the coffee, chocolate and dairy segments inBaltic region, in a bid to capitalise on the premiumisation opportunities in more specialised segments.