Economic Outlook
for the Global Food and Beverage Market
Christopher Shanahan
Food Industry Research Analyst
Chemicals, Materials and Food
February 26th, 2009

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
2

The Economic Downturn and the Food & Beverage Market
Early 2008 Late 2008
Early 2008 Late 2008
••Exponential increase in commodity & ••Exponential decrease in commodity &
Exponential increase in commodity & Exponential decrease in commodity &
energy prices energy prices
energy prices energy prices
••Increasing biofuel production ••Easing of margin pressures
Increasing biofuel production Easing of margin pressures
••Depreciation of the U.S. dollar ••Realistic valuation of acquisitive targets
Depreciation of the U.S. dollar Realistic valuation of acquisitive targets
••Increasing demand from emerging ••Continued depreciation of the U.S. dollar
Increasing demand from emerging Continued depreciation of the U.S. dollar
markets ••Restricted R&D and marketing
markets Restricted R&D and marketing
••Squeezed margins investment
Squeezed margins investment
••Inflated valuation of acquisition targets
Inflated valuation of acquisition targets
2009
2009
••Low price inflation rates for energy and other commodities
Low price inflation rates for energy and other commodities
••Decreased dependence on biofuels
Decreased dependence on biofuels
••Increased aggressive pricing strategy
Increased aggressive pricing strategy
••Health & wellness trend to continue
Health & wellness trend to continue
••Increased focus on cost saving strategies among businesses and
Increased focus on cost saving strategies among businesses and
consumers
consumers
3

Impact of the Downturn on Specific Industries
The Food Industry has been relatively resilient during the downturn
The Value of the Industry Today Relative to its Value One Year Ago
Value of the Industry Relative to its Value One Year Ago
100.0%
94.9%
77.8%
80.0%
69.4%
63.5% 62.1% 61.4% 59.8%
60.0%
51.6%
46.8% 45.7%
37.8%
40.0%
20.0%
0.0%
gy
l
e
e
n
t)
ee
ng
es
s
se
s
iv
ar
io
ke
tic
al
lo
ot
St
ic
si
en
C
ct
ic
no
as
ar
rv
m
es
ru
m
lth
ef
d
M
Pl
Se
ch
to
an
st
oc
he
D
ea
Au
al
on
Te
nd
Pr
C
&
l
n
ot
ia
H
Iro
C
ra
e
c
nc
(T
od
si
ac
be
na
Ba
Fo
0
sp
50
ub
Fi
ro
R
P
Ae
Source: Frost & Sullivan/Google Finance
S&
4

Commodity Food Price Index
The bubble burst due to the collapse of demand
Commodity Food and Beverage Price Index, 2005 = 100,
includes Food and Beverage Price Indices
200
180
160
140
120
100
80
60
04
05
06
07
08
3
4
5
6
7
8
-0
-0
-0
-0
-0
-0
n-
n-
n-
n-
n-
ec
ec
ec
ec
ec
ec
Ju
Ju
Ju
Ju
Ju
D
D
D
D
D
D
Source: International Monetary Fund
5

Consequences - Supply Chain Pressures
Economic conditions have impacted supply chain reliability
Biggest Problem Encountered with Ingredient
Supply Chain Pressures Suppliers in the Past Year (2008) n = 28
The economic downturn is pinching
• Supplier
consumer demand in the food market, Reliability
29%
but the food economy has been
recession resilient Rising Costs
Ingredient 50%
Availability
Other factors are impacting industry 21%
performance and supply chains
Impact on supply chain Average Price Increase for Primary Ingredients in the
•
Past Year (2008) n = 28
Squeezed Margins
• No Change -
Decreased
Availability
• 7%
Pricing
•
Increased 1%
Reliability to 10%
•
33%
Supply chain safety and traceability
•
More than 10%
60%
Source: Frost & Sullivan
6

Focus on the U.S. Organic Food
From 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
7

What Does the Downturn Mean for APAC?
Not much…yet
• 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
8

Industry Reactions to Economic Downturn
Increasing conservatism due to increase in uncertainty
PRICING
ADJUSTMENTS
Price Volatility
ORGANIC GROWTH
EXPECTATION
ADJUSTMENTS
Pinched
Consumer
MERGERS &
Demand
ACQUISITION
Food & Beverage
Industry
RENEWED FOCUS ON
Supply
HIGH GROWTH
Chain
SEGMENTS
Issues
9

Catalyzing the Turnaround
Specific 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
•
10

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
11

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
12

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
13

Next Steps
Register for Frost & Sullivan’s Growth Opportunity Newsletter and keep abreast of
innovative growth opportunities
(www.frost.com/news)
Register for the next Chairman’s Series on Growth:
Growth Acceleration System: The Architecture for Building A Successful Growth Strategy
(March 3rd) (http://www.frost.com/growth)
Join us at our 5th Annual Customer Contact Executive MindXchange April 19-22 2009,
Bonita Springs, FL (www.frost.com/ccs)
Request a proposal for a Growth Partnership Service to support you and your team to
accelerate the growth of your company. (myfrost@frost.com)
1-877-GoFrost (1-877-463-7678)
Follow Frost & Sullivan on-line at:
http://twitter.com/Frost_Sullivan
http://www.facebook.com/people/Frost-Sullivan/1131686497
14

Your Feedback is Important to Us
What would you like to see from Frost & Sullivan?
Growth Forecasts?
Competitive Structure?
Emerging Trends?
Strategic Recommendations?
Other?
Please inform us by taking our survey.
15

For Additional Information
To leave a comment, ask the analyst a question, download a copy,
or receive the free audio segment that accompanies this
presentation, please contact Stephanie Ochoa, Analyst Briefing
Coordinator, at (210) 247-2421 or via email,
analystbriefings@frost.com.
16