Food and Beverage: Background

Industry Composition:

Deriving from the agriculture industry in our definition, the food and beverage industry is divided into two major segments. Those two segments are production and distribution of edible goods. Production includes the processing of meats and cheeses and the creating of soft drinks, alcoholic beverages, packaged foods, and other modified foods. The production segment of this industry excludes foods that were directly produced via farming and other forms of agriculture, as those are encompassed by our definition of the agriculture industry. Distribution involves transporting the finished food product into the hands of consumers.

The industry is much more focused on technology and mechanical manipulation of raw foods to create more value-added food products than the agricultural industry. Under our definition of these industries, grocery stores are excluded as they are considered a retail store by our definition. Distribution includes companies that ship food to retail outlets, restaurants, or directly to consumers.

History:

Food has been processed for nearly as long as it has been used. In early times, humans used to dry or smoke meat or other foodstuff in order to preserve it for longer periods of time. Salt preservation was also very common in the diet of sailors and soldiers during those times. Food processing essentially remained unchanged until the 19th century with the invention of canning by Nicholas Appert and pasteurization by Louis Pasteur. Both of these innovations changed the way that food was processed into a longer lasting food product that was canned or bottled.

During wartime, the food and beverage industry shifted, as food is often a precious commodity. Prices were determined by availability and regulation. Most countries involved in World War II rationed food and regulated prices in order to stabilize the economy. This increased innovation in the food processing segment with the inventions of food coloring, juice concentrates, artificial sweeteners, and more advanced preservatives, such as sodium benzoate. These innovations led to the current food processing market in place today with convenience foods, such as frozen TV dinners and instant meals, prepared snacks, and other instantly available foods.

The food distribution segment of this industry is fairly new. Prior to the industrial revolution, consumers typically ate what foods were available to them in their regional market. Foods were processed from these markets and used for journeys out of them. With the increased transportation of the industrial revolution, such as railroads and barges, as well as the concurrent rise in technology such as canning, it became feasible to transport food from one regional market for sale in another. Today, the industry segment has evolved even further due to increased transportation technology such as airplanes.

Leaders:

In the distribution segment of this industry; SYSCO, US Foodservice, and McLane Company are the major companies. In the processing segment; diversification and expansion has led to companies being involved in many different markets. PepsiCo is a major part of the beverage and, with their Frito-Lay brand, food processing segment. Nestle is the world’s largest food conglomerate and Kraft and its subsidiaries are very involved as well. In addition to PepsiCo, the nonalcoholic beverage is dominated by Coca-Cola and Dr. Pepper-Snapple. The big companies in the alcoholic beverage market are Anheuser-Busch InBev, MillerCoors, and Diageo.

Trends:

Due to the recent economic meltdown, consumers are looking to save as much money as possible. One major way that consumers are doing so is by purchasing more generic foods and making their own meals, not going out to eat. This is causing food processing companies to become more innovative to decrease the cost of goods sold, attract more customers, and increase profit margins.

The large amount of obesity in the world has a major effect on the food and beverage industry. There has been an increase in demand for health foods and more informative nutritional labeling. Both of these trends have caused companies to release lower calorie foods and to better control how their brand is viewed. Companies want to be viewed as a healthy brand and are promoting activities, such as youth sports, that show this healthy image. There also is mention of a tax on foods known to lead to obesity in order to curb consumers’ usage of them.

Rising costs of factors of production are a major factor to this industry as well. Since commodity prices went up in the past year, food companies have had to increase prices of the final product as well. With the economic collapse, this affected them two-fold, as consumers were less likely to want or even have the money to pay the higher prices. Fortunately, commodity costs have been decreasing in the last few months, which forecasts a lower final price for the products in this industry is to come.

The industry also has to deal with their reputation, as there have been incidents of unsafe food being released in the past. These outbreaks have to major potential consequences: loss of consumer confidence and increased regulation. Already, research has shown that consumers do not trust their food suppliers as much as they used to and nearly half of them have switched brands in the past year, either to save money or because they believe the new food will be safer. Government control of the food process has increased with the passage of new laws as well.

Future Outlook:

The food and beverage industry has seen their profit margins decrease recently. However, due to the falling cost of commodities, these margins should increase in the coming years. Food is a necessary part of life and will always be needed. Those are some reasons why this industry has an above average future outlook.

In addition, corporate and brand reputations are expected to become increasingly important, as consumers are trying to stretch their dollar further and competition is increasing. With the increase in competition, the only way companies can separate themselves from others is by brand recognition. Consumers are now very concerned with the reputation of a company, or their brand image, with respect to the safety and quality of product. Increased innovation in the industry will lead to newer, healthier products and lower production costs, both of which should increase profit margins.

Sources:

Deloitte Industry Outlooks

KPMG Industries

PwC Industry Sectors

EY Industries

Glossary