Even in a staple market, growth is rarely without its challenges.
Food and beverage is no exception.
Food prices have risen sharply over recent years in line with commodity and energy costs. This upward trend has been strengthened by increasing demand from emerging countries and temporary spikes caused by climate-related crop failures in major food producing countries, resulting in the threat of food insecurity.
As the UN’s Food and Agriculture Organization recently reported: “The tightening of the cereal market anticipated in the 2010/11 marketing year has already resulted in a sharp increase in world prices of all major cereals in recent months with wheat and coarse grains currently trading at around 50 percent above the previous year’s levels. The FAO Cereal Price Index gained nearly 5 points in November, to reach 225 points, its highest value since September 20081.”
In developed countries, these rising prices are exacerbated by reduced consumer spending power and create inflationary pressures, a squeeze on household budgets, and a slump in demand: “Food retailers suffered their worst trading for nearly a quarter of a century in June but the launch of early summer discounting across the high street helped the retail sector as a whole bounce back to register growth of 0.7 per cent. The dire food figures confirm what analysts and grocery chief executives have been saying since the start of this year: that the squeeze on consumer spending – partly driven by sky-high petrol prices – has resulted in the toughest trading conditions for at least 30 years2.”
On the retail side, companies look for economies of scale and increased market share through consolidation.
In the UK, for example, four chains - Tesco, ASDA, Sainsbury’s and Morrison’s continue to dominate food sales and continue to grow with at least 480 stores added to their portfolios in the two years to November 20103.
Food manufacturers and marketers may be taking a similar route to growth, typified by the $19 billion Kraft-Cadbury takeover in January 2010.
Such deals may be impressive because of the big numbers that hit the headlines.
But their real significance for understanding the industry lies in the fact that they indicate a savagely competitive market where value must be sought in areas other than sales.
An improving cost-effectiveness and efficiency may now be even more important than growing volumes as a route to competitive advantage.
In June 2011, for example, Pepsico outsourced £33.2 million of procurement spend in Australia4.
We may see many more such deals in the months and years ahead.