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Economic Outlookfor the Global Food and Beverage Market
Christopher Shanahan
Food Industry Research Analyst
Chemicals, Materials and Food
February 26th, 2009
2
Agenda
• The economic recession and its
impact of economy on food and
beverage industry
• What will catalyze the turnaround?
• Emerging trends in food & beverage
industry
• Case studies of successful
companies resilient to the recession
3
The Economic Downturn and the Food & Beverage Market
• Low price inflation rates for energy and other commodities• Decreased dependence on biofuels• Increased aggressive pricing strategy
• Health & wellness trend to continue • Increased focus on cost saving strategies among businesses and consumers
• Low price inflation rates for energy and other commodities• Decreased dependence on biofuels• Increased aggressive pricing strategy
• Health & wellness trend to continue • Increased focus on cost saving strategies among businesses and consumers
200920092009
Early 2008• Exponential increase in commodity &
energy prices
• Increasing biofuel production
• Depreciation of the U.S. dollar
• Increasing demand from emerging
markets
• Squeezed margins
• Inflated valuation of acquisition targets
Early 2008Early 2008• Exponential increase in commodity &
energy prices
• Increasing biofuel production
• Depreciation of the U.S. dollar
• Increasing demand from emerging
markets
• Squeezed margins
• Inflated valuation of acquisition targets
Late 2008• Exponential decrease in commodity &
energy prices
• Easing of margin pressures
• Realistic valuation of acquisitive targets
• Continued depreciation of the U.S. dollar
• Restricted R&D and marketing
investment
Late 2008Late 2008• Exponential decrease in commodity &
energy prices
• Easing of margin pressures
• Realistic valuation of acquisitive targets
• Continued depreciation of the U.S. dollar
• Restricted R&D and marketing
investment
4
Impact of the Downturn on Specific IndustriesThe Food Industry has been relatively resilient during the downturn
Va
lue
of
the
Indu
str
y R
ela
tive
to
its
Va
lue
One
Yea
r A
go
The Value of the Industry Today Relative to its Value One Year Ago
77.8%
69.4%
63.5% 62.1% 61.4% 59.8%
51.6%
46.8% 45.7%
37.8%
94.9%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
Food
Proce
ssin
g
Hea
lth C
are
Basic
Che
mic
als
S&P 500
(Tot
al M
arke
t)
Aeros
pace
& D
efen
seC
onst
ruct
ion
Techn
olog
y
Rub
ber a
nd P
last
ics
Autom
otiv
eIro
n an
d Ste
el
Finan
cial
Ser
vice
s
Source: Frost & Sullivan/Google Finance
5
Commodity Food Price IndexThe bubble burst due to the collapse of demand
Commodity Food and Beverage Price Index, 2005 = 100,
includes Food and Beverage Price Indices
60
80
100
120
140
160
180
200
Dec-
03
Jun-
04
Dec-
04
Jun-
05
Dec-
05
Jun-
06
Dec-
06
Jun-
07
Dec-
07
Jun-
08
Dec-
08
Source: International Monetary Fund
6
Consequences - Supply Chain PressuresEconomic conditions have impacted supply chain reliability
Rising Costs
50%
Supplier
Reliability
29%
Ingredient
Availability
21%
Increased 1%
to 10%
33%
No Change -
Decreased
7%
More than 10%
60%
Biggest Problem Encountered with Ingredient Suppliers in the Past Year (2008) n = 28
Average Price Increase for Primary Ingredients in the Past Year (2008) n = 28
Supply Chain Pressures
• The economic downturn is pinching
consumer demand in the food market,
but the food economy has been
recession resilient
Other factors are impacting industry
performance and supply chains
• Impact on supply chain
• Squeezed Margins
• Availability
• Pricing
• Reliability
• Supply chain safety and traceability
Source: Frost & Sullivan
7
Focus on the U.S. Organic FoodFrom double digit growth to no growth
• In the past, the organic food market had been
regarded as relatively recession proof.
However, there is beginning to evidence of
diminishing growth, suggesting market
maturity.
• Zero growth of the organic food market in 2008
• Organic market is set to grow again, but at a
much slower rate
• Falling demand will negatively impact organics'
price premium
• Willingness to pay extra is still positive but
decreasing
• Awareness of supply chain safety can be positive
for organic “organic’ growth
8
• Limited impact on the APAC food industry
• Asia shines despite economic gloom
• Growing consumer interest in health &
wellness
• APAC remains a vital sourcing ground for raw
materials and low cost production
• 2009 outlook among APAC food
manufacturers is gloomy
• High growth in APAC food markets will begin
to slow
What Does the Downturn Mean for APAC?Not much…yet
9
Industry Reactions to Economic DownturnIncreasing conservatism due to increase in uncertainty
PRICING
ADJUSTMENTS
ORGANIC GROWTHEXPECTATION ADJUSTMENTS
MERGERS & ACQUISITION
RENEWED FOCUS ON HIGH GROWTH
SEGMENTS
Price Volatility
Pinched Consumer
Demand
Supply Chain Issues
Food & Beverage Industry
10
Catalyzing the TurnaroundSpecific Growth Drivers in the Food & Beverage Industry Today
• Low inflation and increasing consumer spending
• The American Recovery and Reinvestment Act of 2009
• SNAP
• Investment in infrastructure
• Growing interest and push towards health & wellness
• Expected increase in interest in preventative medicine as a way to curb
increasingly high health care costs
• Greater awareness of benefits of functional food ingredients
• Promotion of nutrients that are difficult to incorporate into a diet
• Demand for alternative delivery formats of dietary supplements
11
Emerging Trends in Food & Beverage Industry in 2009
• Food Product Customization
• Increased Food Health Regulation
• Multi-attribute Product Alternatives
• Food Safety and Traceability
• Simple Ingredients List
• Economic Slowdown and Changing
Diets
• Growing Consumer Interest in Local,
Environmentally-save, and Traditional
Foods
12
Best Practices in the Food & Beverage Market
• Invest in marketing strategies that focuses
on your core product offering
• Exploit opportunities from consumer
feedback
• Establish partnerships with other suppliers
• Adopt proactive product and service
differentiation strategies
• Understand the consumer’s motivation for
buying your product
• Effectively communicate the indirect costs
of product switching
13
Successful Companies Resilient to the Recession
The Hershey Co. - Reaping Rewards from a Strategic Marketing Initiative
Key Success Factors• Strong brand equity associated with comfort - Focus on core product lines
• Adoption of strategic cost reduction strategies
• Short term investment away from product innovation and toward effective marketing
strategies
Flowers Foods Inc. - Calculated Risks in Tough Times
Key Success Factors
• Smart acquisitions that complement its product line
• Product Innovation that relies on health and organic and natural ingredients
• Proven Growth and Increasing return on investment
14
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