Bahrain's confectioners invest locally to feed the Gulf's growing populations

The Middle East’s appetite for sweets and savoury snacks can be thanked for more than $240m worth of investments in Bahrain in just two years. In 2016 the new $90m Mondelez factory is due to start producing biscuits that will be shipped all over the MENA region and parts of Asia. It is opening two years after Arabian Sugar’s $150m refinery launched in the kingdom. Feeding the growing populations of the region is proving to be big business, and the business environment in Bahrain is clearly tempting for the firms meeting this need.

Bahrain Biscuits

Mondelez International has been in Bahrain since 2007, when it opened a factory to produce Kraft Cheese and the powdered drink Tang at the Bahrain International Investment Park (BIIP). Tang constitutes approximately two-thirds of the current volume of production and 70% of this is exported to Saudi Arabia, with the rest going to other GCC countries.

When Mondelez announced plans to build another factory to produce Ritz, TUC and Oreo biscuits, the company ran up against a potential problem. There was not enough space to accommodate a 250,000-sq-metre plant near its existing factory. However, the government of Bahrain was able to provide a solution by reclaiming the land from the sea. It is what Mondelez now calls the “ocean to Oreo” solution. The new factory is poised to have a much wider, pan-regional reach than the original facility, and although 50% of the target market may be located in neighbouring Saudi Arabia, the biscuits produced in Bahrain will be shipped both to the Levant and further west in Africa.

During its first phase of operation the factory will run four production lines producing 90,000 tonnes a year. The production facility will be scalable and so could be expanded in years to come. “We have worked hard to help Mondelez in the first phase and the government spent BD15m ($39.5m) on land reclamation for the site,” Gerry Sharkey, project director for the BIIP, told OBG.

Jobs Boost

The new Mondelez factory is expected to employ around 300 people directly, but is likely to help sustain 1000 additional jobs. Land has been set aside around the new factory so that it can be occupied by companies providing ingredients such as flour and sugar, as well as services like packaging. The impact the Mondelez plant has on the Bahrain economy will depend upon future expansion plans for the factory.

Arabian Sugar

Although no formal ties have been announced, the development of a large confectionery plant on its doorstep could also be beneficial for Arabian Sugar. Its $150m factory officially opened in Bahrain in 2014 with the capacity to produce 600,000 tonnes of sugar a year. The company imports raw sugar from Brazil into Khalifa Bin Salman Port and then ships it out as bagged white granulated sugar. The plant’s main export markets are Iraq and Saudi Arabia, with each accounting for 40% of sales and the rest going to Qatar, Kuwait and Jordan. In the next few years the factory will face increasing competition for its share of the Middle East market. There is already one competitor in Al Khaleej Sugar of Dubai, but a new refinery is due to be completed in Saudi Arabia in 2017 and Tate & Lyle is investing $200m in a new factory in Oman.

Regional Growth

According to the Gulf Organisation for Industrial Consulting (GOIC), the expansion of food factories in Bahrain may fit into a wider pattern in GCC states. In July 2015 GOIC reported the number of food production plants in the GCC had grown from 1606 in 2010 to 1965, showing a combined annual growth rate (CAGR) of 5.2%. It said that over the same period investment had grown by 14.8% from $16.69bn to $23.76bn and that the workforce employed in the food manufacturing industry had grown by a CAGR of 10.6% from 159,613 workers to 238,825. GOIC’s secretary-general, Mohammed Al Mazroui, said the food sector comprised 12% of manufacturing firms and 15.6% of the manufacturing workforce.

Imports

However, although food manufacturing and processing may be expanding in Bahrain, the country still relies heavily on food imports. In 2013 US trade figures show Bahrain imported $78m worth of American agricultural products. That included $27m of dairy products, $8m of poultry meat, and $7m in beef and beef products. According to a 2014 white paper on food security prepared by Bahrain’s Economic Development Board (EDB), 84% of imports came from 18 countries, with Saudi Arabia and Australia each representing 15% in 2011. Bahrain also imported $96m of food from India and $83m from the UAE that year.

Agriculture

The EDB report notes that scarcity of water and agricultural land means that Bahrain cannot hope to be self-sufficient in food, but that its provisions for import, safe food storage and distribution place it in the upper second quartile of the Global Food Security Index. However, the report does note that the poorest elements of Bahraini society may be somewhat badly served by universal food subsidies, which are enjoyed by nationals, residents and corporations and cover a range of staples, such as milk.

The report also points out that in 2012 the bill for food subsidies on these items was BD51.9m ($136.7m) and that this was 461% higher than in 2004. In 2013 the EDB report says the food subsidy for poultry was BD2.8m ($7.4m), the subsidy for flour was BD13.6m ($35.8m) and that BD50.6m ($133.3m) was paid out in subsidies for meat.

Food Subsidies

At the beginning of October 2015 the government removed the subsidy on meat, a move it expects will save around $80m per year. Some of the money saved will be redirected to Bahraini citizens in need of assistance. The rationale is that the government’s generosity should be directed to those most in need and not spread among the entire population, rich and poor, Bahraini and expatriate. According to the EDB, the government’s total subsidy bill for all products, including food, was BD935m ($2.5bn) in 2014. Under the new budget, the government aims to reduce the subsidy outlay to BD754.2m ($2bn) in 2015 and BD652.9m ($1.7bn) in 2016.

Removal of food subsidies could have direct consequences for the two companies that, along with Aluminium Bahrain, make up the industrial segment of the Bahrain Bourse, Delmon Poultry and Bahrain Flour Mills. According to published financial statements, neither company would be profitable without state subsidies. Delmon Poultry’s gross losses before government subsidies were BD1.9m ($5.01m) in 2013 and BD1.88m ($4.9m) in 2014. In 2013 the company received BD2.2m ($5.8m) in government subsidies, and in 2014 its subsidies totalled BD1.9m ($5m). The result was that Delmon Poultry’s profit from operations, before investment income was added to the mix, was BD43,500 ($114,600) and that was after it had received the subsidy payment.

Financial statements for Bahrain Flour Mills, also known as Al Matahin, show its gross loss before subsidy was BD11.6m ($30.5m) in 2013 and BD10m ($26.3m) in 2014, having received subsidies of BD12.2m ($32.1m) and BD11.3m ($29.8m) in each year, respectively. Despite the subsidy, Bahrain Flour Mills made a BD124,000 ($326,678) loss from operations in 2014, but was able to turn a profit of BD614,100 ($1.6m) thanks to investment and other income. Although the total amount of subsidy paid to these two listed food companies fell by 9% between 2013 and 2014, from BD14.4m ($37.9m) to BD13.2m ($34.8m), the total spent in 2014 is equivalent to BD21 ($55) a year for every one of the country’s 630,744 citizens.

It may be that if food subsidies are targeted directly at Bahrain’s neediest citizens, the market will be able to withstand any price increases that follow and that this mechanism will put companies relying on state funding on a more secure financial footing. While it would be a difficult measure for some businesses to accept, if the measures are flagged up long enough in advance, the firms may have the time necessary to make contingencies.

In addition to companies supplying these staple products, businesses catering to the Gulf’s increasing appetite for snacks and sweets appear to have growing confidence in the region, enough for them to invest hundreds of millions of dollars in new factories in Bahrain. If their assumptions are correct and companies such as Arabian Sugar and Mondelez thrive, the country’s citizens can expect to benefit from increased output and a significant number of new jobs going into the future.