Food and Beverage: Risk
The sector - the processed food for human consumption and non-alcoholic beverages industries - performed well overall in 2009 and will likely continue to develop in promising emerging regions after having proven capable of adapting its product offer to new consumer tastes in mature markets.
The crisis has profoundly transformed consumer buying behavior in industrialized countries. Even if the labor market remains in the doldrums in 2010 households are not expected to cut spending but remain focused on entry-level products, especially in countries where consumer indebtedness is high, particularly the United States, Spain, the United Kingdom, Ireland, and Denmark.
The major groups - Campbell and Kraft - that pervade the market in the United States and the very large European companies like Danone, Yoplait, Panzani have adjusted to the changes by pursuing aggressive marketing policies enabling them to limit the decline in sales volumes. Some have broadened their range with low-price products, revamped existing formats by reducing the size offered, and relied heavily on advertising even at the expense of their margins. That strategy has enabled them to slow the soaring growth of distributor brands already well established with households before the crisis. Groups that hesitated to follow a low-cost model in the early stages of the crisis have latched on to the trend since then.
The situation has been more difficult for the relatively smaller European players. Positioned on niche markets they lack the room for maneuver to cope with the new paradigm. With a structural need to get financing for their working capital, they will likely suffer again in 2010 with conditions in the credit market expected to remain tight. Japan, whose economy was gripped by a severe recession in 2009 and will likely remain sluggish in 2010, is expected to experience greater difficulties with very small companies comprising 60% of its thus distinctive industrial fabric.
This context will spur the pace of mergers and acquisitions activity at the national and global levels: sell-offs of non-strategic activities and refocusing on core business (Danone), buyouts of brands or new business lines (Pepsi and Coca-Cola in the biscuit and cereal segments - the attempted takeover of the British Cadbury by the American Kraft for its chewing gum business), development of economies of scale to improve the competitiveness of products manufactured for the global market and strengthen the bargaining position in negotiations with megastores (listings and prices). The weakened condition of smaller companies will increase the number of buyout opportunities available to larger groups and spur the concentration process.
The sector will continue to enjoy good financial health despite the pressure on margins. But the gross margins of sector operators vary widely. Depending on company size they range from just 2.5% for very small companies to about 6% for medium-size companies and between 10% and 20% for major international groups.
Very high raw material price volatility has been a factor of uncertainty affecting inputs for several years. The resulting lack of visibility is exacerbated by exchange rate fluctuations with raw material prices denominated in dollars or pounds sterling. While price declines have largely benefited the industries in 2009 the trend has tended to reverse since autumn with upturns in the prices for wheat, soybeans, and corn and spectacular growth of the prices of sugar, tea, coffee, orange juice, and cocoa (attributable to poor weather fears of supply shortages, strong demand, and the growing proportion of arable land devoted to raw materials intended to substitute for fossil fuels). Sector industries, particularly confectionery, are ultimately expected to hedge their supply needs on a yearly basis to limit the impact of such price increases on their margins. This will constitute an additional factor of risk for smaller companies lacking the financial management tools to protect themselves against such risks.
Health risks constitute another element of uncertainty with some industry segments particularly exposed, especially poultry and pork-based dishes.
Food industries are facing disparate situations in emerging countries.
The sector will nonetheless continue to benefit from two structural factors: the essentially incompressible nature of spending on food and demographics, particularly in emerging countries, with the gradual development of a middle class increasingly attracted to the products of large global groups whose positions in emerging regions are expected to grow stronger in consequence.
The sector has performed well in Brazil spearheaded by several industries including soybeans, meat, and especially, coffee, and sugar where the country is the world leading producer. The proximity of sources of supply is a key asset of local food industries. The crisis has nonetheless weakened the sector, as has been the case for Sadia, which suffered large losses in 2008 attributable to dollar exchange rate hedges. The concentration process will likely go forward in the sector in 2010 (Sadia, its high debt notwithstanding, could thus be the target of a takeover by its national competitor Perdigao), backed by a Brazilian government partial to mergers between local actors. The real's appreciation, if it continues, will moreover hamper exports to the United States, the European Union, and the United Kingdom.
In China, changes in dietary habits among urban dwellers will benefit the business of global companies. Strictly Chinese local industries will continue to suffer from their poor reputation on health protection standards not only abroad but also in their home market with consumers increasingly giving preference to products that are either imported or manufactured in China by global players.
In Central and Eastern Europe, the difficulties experienced by debt-ridden households could henceforth make many products too expensive to include in their shopping baskets. The sharp currency devaluations registered in this region in 2008, even with exchange rates recovering since spring 2009, have increased the cost of euro-zone, Swiss and American products.
