Managing through uncertainty: Food and beverage industry in transition
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Managing through uncertainty: Food and beverage industry in transition Managing through uncertainty: Food and beverage industry in transition Document Transcript

  • Managing through uncertainty:Food and beverage industryin transitionWary consumers and rising prices challenge executives around the globe
  • The global food and beverageindustry suffered during therecession and the global malaisethat followed. And while measuredgrowth again appears to be thenorm in many markets, challengespersist. High commodity pricescontinue to impact profitability.Consumer spending remainssluggish and limits the abilityof food and beverage companiesto raise their prices.
  • IntroductionNot surprisingly, Managing Through Uncertainty — aGrant Thornton International Business Report (IBR) 2011 Contentsfood and beverage sector focus — finds privately heldbusinesses (PHBs) in the food and beverage (F&B) sectorare less confident than those in other sectors about their 3 Introductioneconomic prospects. But there is good news: optimism withinthe sector is increasing. Emerging consumer trends offer new 4 Cautious optimism among F&B businessesrevenue and profit opportunities, and a large balance of F&B 6 Revenues and profits likely to increasecompanies anticipate revenue growth and improved profits 9 Employment remains sluggishover the next year. Furthermore, while consumer spending generally remains 0 F&B companies react to consumer 1soft, there is increased demand for home-cooking products and market trendsand budget friendly, private label brands. Changing attitudes 1 3 Product development tops strategic prioritiestoward healthy eating and the importance of sustainabilityhave supported markets for healthy, organic, natural and 15 Obtaining finance still poses challengesgreen products, especially when these foods are marketed in 6 Companies dealing with constraints 1well defined ways to appropriate consumers. A significant of regulationsnumber of consumers are still willing to pay for high-end andgourmet products. 7 Call to action 1 F&B companies are racing to capitalise on these trends 1 8 About the Grant Thornton Internationalwith many looking to expand — possibly through mergers Business Reportand acquisitions (M&A) activity. F&B firms in recent yearshave focused intensely on cost reduction and improvedoperational efficiency; with most internal gains in profitabilityalready captured, companies are now looking for growthexternally through M&A. At the same time, size mattersmore than ever in the F&B sector; small and midmarketcompanies are increasingly dependent on suppliers andchannel partners for innovation, while larger companiesenjoy the financial scale necessary for new productdevelopment and technology investments. Managing Through Uncertainty examines global dataon the industry — financials, trends, and constraints — andoffers perspectives on these issues from Grant Thorntonspecialists around the world. 3
  • Cautious optimismamong F&B businessesOnly +10 per cent of businesses in consumer is not just consuming more, “In any developingthe F&B sector are optimistic about but also experimenting with hitherto economy on the path totheir respective countries’ economic exotic tastes, throwing open a hugeoutlook this year (i.e. companies that opportunity to numerous foreign economic prosperity, F&Bare optimistic outnumber those that are F&B companies and concepts. Rising expenditure is one ofpessimistic by 10 percentage points). disposable income has especially been the first to burgeon.This balance is substantially lower beneficial to the foodservice industry,than the overall IBR findings across with concepts that are unique and The Indian consumer isall industry sectors, at +28 per cent. well-priced being the top performers.” not just consuming more,However, the 2011 F&B findings But he added that “the environment is but also experimentingare marginally higher than 2010 still challenging due to sourcing and(+7 per cent). supply chain management issues: input with hitherto exotic tastes, Piyush Patodia, client service and commodity prices are increasing throwing open a hugedirector, Grant Thornton India, noted and Indian F&B companies still have opportunity to numerousthat the overall business environment limited ability to pass these on toin India is strong: “In any developing consumers through higher prices.” foreign F&B companieseconomy on the path to economic In Canada, the view is similarly and concepts.”prosperity, F&B expenditure is one optimistic. “I don’t believe theof the first to burgeon. The Indian Canadian manufacturing sector, and Piyush Patodia Client service director, Grant Thornton IndiaFigure 1: Outlook for the economy over the next 12 months: 2011Average percentage balance of businesses indicating optimismagainst those indicating pessimism. 28% 2011 24% 2010 Source: Grant Thornton IBR 2011 10% 7% All sectors Food and beverage4
  • in particular the F&B sector, has been formula. Ireland produces 16 per cent and acquisitions have been up, and a lothit as hard as in other parts of the of the world’s infant formula, and of capital that had been on the sidelinesworld,” said Jim Menzies, global food the industry aims to increase that to is back in the play,” said Manning. “Weand beverage industry leader, Grant 20 per cent by 2020. are seeing F&B companies spend onThornton Canada. “A transition has The UK faces challenges similar to capital improvements where they hadstarted — companies are coming out those in Ireland. “It’s quite a gloomy not in the past two or three years — aof survival mode and moving into a outlook at the moment for a lot of the loosening of spending for plannedcautious expansionary mode. In terms UK, and especially for some companies future growth. The overall businessof the overall business environment, operating in the food sector,” said climate for F&B companies moved in acompanies are starting to hire. They are Trefor Griffith, head of food and very positive direction during the firstexpanding some of their existing lines of beverage for Grant Thornton UK. half of 2011, in contrast to the turmoilbusiness, they are adding capacity, and Rising costs for nearly all imported in global markets and the governmentthey are entering new lines of business.” input products, along with an inability sector. However, the global credit crisis,Canadian F&B companies are also to pass along all those costs to especially at the government level,entering emerging consumers, has continues to contribute to businessmarkets, Menzies constrained the uncertainty and consumer fears, whichadded, looking F&B sector. The UK could reverse some of the gains madebeyond Canada’s unemployment rate rose during the early part of 2011 in thedominant trading to 7.9 per cent in July United States.”partner, the 2011, with more than South Africa’s F&B market isUnited States. 2.5 million people out of similarly strong. Receipts across The outlook is work.1 In March 2011, the South African F&B industryfar more restrained consumer spending increased to R9.1 billion in Q2 2011,in Ireland, a was at a 16-year low; up 3.2 per cent from a year ago.3country still on a like-for-like basis, Elsewhere on the African continent,struggling through sales were 3.5 per cent consumer incomes are increasing dueeconomic crisis. lower than the previous to rising oil and commodity profits.“We are in a very year.2 Added Griffith: Higher incomes, in turn, drive highertough economic “As well as having to rates of consumption.environment at deal with cost pressures,the moment,” companies are having “What we are seeing, coming out ofsaid Ciara Jackson, to adjust to changing South Africa, is further developmenthead of food and beverage, Grant consumer behaviour. The reduced of the F&B industry in differentThornton Ireland. She points to a purse has led to consumers adopting countries,” said Ian Scott, managingbanking crisis that has required support a far more prudent approach to their partner, Grant Thornton Cape Town,from the International Monetary Fund shopping habits, and, specifically, they South Africa. “Some South Africanand the European Union, along with are buying smaller quantities of food businesses are moving into otherhigh unemployment and energy costs: more often. This has led to a strategy African countries and taking over“Here in Ireland, in Grant Thornton, of the large retailers, which are very market share.we are calling that the ‘new normal.’” dominant in the UK, moving toward But despite the challenging convenience store formats — rather But, similarly, quite a lot of new plantsenvironment, there are positives than large out-of-town stores with lots are being erected. Africa has a largein Ireland for the F&B sector. The of non-food items as well.” number of farmers and, going forward,agrifood sector is viewed by many In the United States, Dexter Manning, should be able to supply more foodeconomic commentators as one of national food and beverage practice to the rest of the world than it doesthe key rescue engines of the Irish leader, Grant Thornton US, said the today.” Export growth, increased localeconomy. The government has mature F&B industry, “is in very consumption, and improved prosperityproduced a vision for the sector (Food good shape.” Weak companies were make the continent attractive forHarvest 2020), and the current minister stress tested during the recession, and F&B investment.for agriculture, fisheries, and food many either went out of business oris a vocal and passionate advocate for were acquired. The result, he said, isthe sector. Areas of particular focus a stronger industry that has improvedinclude sustainability/green initiatives, productivity through initiatives such as 1 Larry Elliott, “Unemployment Rises above 2.5Mas well as increased foreign direct lean manufacturing and deployment of Milestone,” The Guardian, Sept. 14, 2011. 2 British Retail Consortiuminvestment, especially for expansions new technologies. 3 “Food, beverages industry income down,”and new capacity to produce infant “Over the last 12 months, mergers Mail & Guardian, Aug. 22, 2011. 5
  • Revenues and profits likely to increase Figure 2: Revenue expectations over the next 12 months: 2011 Balance percentage of businesses 2011 A balance of +62 per cent of businesses 56% All sectors in the F&B sector expect revenue to 2010 increase in 2011 — a sharp increase from Source: 40% expectations in 2010 (+40 per cent), Grant Thornton IBR 2011 and higher than the average across all sectors (+56 per cent). Similarly, the Food and beverage balance of F&B businesses expecting 62% improved profits in 2011 is +40 per cent — up from +27 per cent in 2010, and 40% comparable to the all-sectors average of +43 per cent. “There is a consensus in our market that while companies do expect revenues“There is a consensus in our market that while companies to increase over the next few years,” said Tony Pititto, industry leader food and do expect revenues to increase over the next few years beverage, Grant Thornton Australia, ...there will be greater pressure on profitability as a result “there will be greater pressure on of increasing input costs in Australia — especially as it profitability as a result of increasing input costs in Australia — especially appears that we are on the way to a carbon tax here.” as it appears that we are on the way to a carbon tax here.” A heavy reliance Tony Pititto Industry leader food and beverage, Grant Thornton Australia on private labels by major supermarket chains is also likely to have a negative effect on F&B margins. Figure 3: Profitability expectations over the next 12 months: 2011 Menzies cited a study conducted by Balance percentage of businesses Grant Thornton Canada that found that two-thirds of Canadian manufacturing 2011 and distribution companies expect 43% All sectors revenues to rise in the next 12 months, 2010 and half anticipate improved profits as Source: well; only 20 per cent expect profits to 29% Grant Thornton IBR 2011 go down, and 30 per cent expect them to stay about the same. Food and beverage India’s Patodia expects F&B 40% profitability in India to either remain stable or possibly dip slightly over the 27% next 12 months due to commodity and input price inflation pressures as well 6
  • as increased regulatory environment. Rising commodity prices are processors have struggled to raise prices. The most prominent regulatory change affecting food production, selling prices, Volatile exchange rates and rising fuel that could have a negative impact on and profitability. Commodity price prices have also impacted profitability in the foodservice industry is an additional increases have been driven globally in the F&B sector. service tax, part of the Finance Act 2010 part by demand in China and severe Natural phenomena were the culprit in India, which took effect this year and weather conditions around the world behind commodity price increases in will impact a large number of restaurants. that limited supplies. In the last six Australia. After years of drought, the Most F&B companies are caught months of 2010, as drought and wildfires country experienced epic flooding in between rising commodity prices and a ravaged wheat crops in Russia, global Queensland in December 2010 and competitive environment that makes it wheat prices soared 95 per cent. January 2011. The weather’s effect difficult to pass along those increases to During this period, corn and soybean was felt on Australia’s seasonally customers. The IBR findings, though, prices also climbed 64 per cent and adjusted gross domestic product, down indicate that many F&B companies may 39 per cent, respectively, as adverse 1.2 per cent in Q1 2011 vs. Q4 2010, finally be able to increase their pricing; weather conditions in the United States and agriculture was down 8.9 per cent.5 a balance of +41 per cent of F&B led to smaller than expected harvests.4 Grant Thornton’s Pititto said that some businesses expected to increase prices A range of in country conditions has crops were wiped out and that produce, in 2011, compared to just +12 per cent also impacted commodity prices. such as bananas, became so expensive in 2010. Across all sectors, +29 per cent In South Africa, where supermarket that few people purchased them. Food of companies expected to raise prices. chains exert great pricing influence, food pricing was up 6.1 per cent in Q2 2011 vs. Q2 2010, and fruit prices were up 26.9 per cent.6 Figure 4: Selling price expectations over the next 12 months: 2011 In the United States, diversion of Balance percentage of businesses crops to emerging countries — such as China, India, and Brazil — contributed 2011 to commodity price increases. Further, 29% All sectors 2010 nearly one-third of the corn crop is being diverted for ethanol production, Source: 11% Grant Thornton IBR 2011 driving shortages within the F&B industry. “Commodity prices, especially corn and wheat, are going to be higher Food and beverage 41% than the historical average for the next several years,” Manning said. “I think that is just inevitable, and people are 12% coming to grips with it.” In France, the pricing pressure comes from large retailers — such as Carrefour and Groupe Auchan — that“Commodity prices are dominate consumer food markets and largely control pricing, said Vincent Frambourt, partner at Grant really getting high, Thornton France. “Commodity prices are really getting high, and companies are not maintaining their margins. and companies are not We really have a drop down on their profitability. I had a large client that maintaining their margins. succeeded in increasing prices by five per cent, which is great; but they have a 20 per cent increase on their We really have a drop down commodity prices. They cannot maintain their profitability.” on their profitability.” 4 “Food & Beverage Industry Snapshot,” Grant Thornton Corporate Finance, Winter 2011 edition. Vincent Frambourt 5 Australian Bureau of Statistics, April 2011. Partner, Grant Thornton France 6 Australian Bureau of Statistics, July 2011. 7
  • Ireland’s F&B sector is similarly similar price. Or vice versa — they are challenged by a combination of upsizing the package, putting more in increasingly volatile commodity prices and raising the price, but higher than and rising energy costs; at the same time, the incremental cost. They are playing a Ireland’s trading volumes with both the lot with the packaging to try to pass on UK and the United States have exposed the price point to the consumer.” the F&B sector to currency fluctuations. In the UK, consumers are simply Commodity prices in India also buying less, Griffith said. In June 2011, are going up, said Patodia, affected by food volume in the UK decreased by insufficient logistics and storage 4.2 per cent, according to the Office for infrastructure and a dependence on National Statistics — the steepest drop import fuels. Those conditions are since record-keeping began in 1988.7 likely to persist into 2012. At the same time, food prices rose 5.8 In Canada, rising commodity per cent, the biggest increase in two costs are “the biggest concern right years. In July, the consumer survey now for most food manufacturers,” group Which? found that 84 per cent said Jean-Pierre Haché, senior manager, of UK residents are worried about the Raymond Chabot Grant Thornton in rising cost of food.8 Quebec. “Especially those that have to As in most sectors, there is an buy exotic raw materials such as fruits, economic divide between consumer orange juices, and other types of juices groups reflected in relative value and from around the world.” selling prices, around the world and Haché said commodity cost within individual countries. “We have pressures are running into a depressed seen in the United States the average trading partner in the United States private label brand food products grow and pressure from retailers to keep every year to a higher percentage of costs low. Some companies are able to total food purchases,” said Manning. pass on up to half of those costs, while “Contrast that with a continued market others look to downsize or repackage for organic, natural, and more healthy products for relief. “Instead of selling food. People are willing to pay more one litre of orange juice, the package for those. It really is a diverging market now contains 960 millilitres, and it’s where some of the high end, more the same size package. Customers are expensive foods are still selling very well, buying a price. Some manufacturers, and the private label continues to grow 7 James Thompson, “Food Retailers Endure for example, instead of packaging at a pretty good pace.” Biggest Slump Since Records Began,” The Independent, July 22, 2011. eight products in a package, are now 8 “Consumers Hit Hard by Rising Cost of Food,” packaging six items for the same or Which?, July 21, 2011.“We have seen in the United States the average private-label brand food products grow every year to a higher percentage of total food purchases. Contrast that with a continued market for organic, natural, and more healthy food. People are willing to pay more for those. It really is a diverging market where some of the high end, more expensive foods are still selling very well, and the private label continues to grow at a pretty good pace.” Dexter Manning National food and beverage practice leader, Grant Thornton US 8
  • Employment remains sluggishAlthough F&B businesses anticipate Figure 5: Employmentgrowth in revenue and profits, there is Balance percentage of businesses expecting to add consensus that improved conditionswill translate into widespread workforce 2011expansion. A balance of +21 per cent ofbusinesses in the sector expect to add 2010workers in 2011 — up from +17 per centin 2010, but below the all sectors average Source: 29% Grant Thornton IBR 2011of +29 per cent. Even in countries where GrantThornton partners were most optimistic 21%about the F&B sector, few expected to 20%see significant hiring. 17% The UK is representative of theemployment future for the F&B sector.Employment in the UK industry willcontinue to contract as companiesadopt more automated processes toreduce costs. It is predicted that therewill be a loss of 27,000 jobs (decreaseof six per cent) between 2007 and 2017. All sectors Food and beverageThe UK is also forecast to recruithigh-skill level roles (eg managers,senior officials, technical roles) toapproximately 50% of current levels,which is an issue for the industry interms of being able to afford talent.9 To address these issues the Foodand Drink Skills Council has launcheda Skills Action Plan with the aim ofcreating 50,000 apprenticeship trainingopportunities in companies withinagriculture and primary production;food and drink manufacturing andprocessing; food retail; and hospitalityand catering.9 The Food and Drink Manufacturing & Processing Industry 2010,” UK Food and Drink Sector Skills Council. 9
  • F&B companies reactto consumer and market trendsFigure 6: Which of the following consumer trends offer the greatest opportunity for your business?Average percentage of businesses rating trend 4 or 5 on a scale of 1 to 5, where 1 is not an opportunity and 5 is a significant opportunitySource: Grant Thornton IBR 2011 very important segment, and more and more F&B companies are spending on R&D to take normal food and enhance it with vitamins or with other substances that will promote health.” In-home cooking In the UK it is a case of the “haves” and “have nots,” said Griffith. Consumers who have retained employment are often better off due to 25% Comeback of frozen foods low interest rates and reduced mortgage 29% Fairtrade and freerange commitments, while many other 30% People taking domestic holidays consumers are struggling to make ends 41% Green and local consumption meet, stress that is reflected in their food shopping habits. The consumers who 41% More environmentally conscious consumers have fared better may still be concerned 44% Increase in home cooking about their futures, constraining their 58% Health and wellbeing spending even as they seek quality foods, especially groceries; those F&B companies that offer quality brandedFour consumer trends offer the greatest However, these trends and business products are faring better.opportunities to F&B businesses: strategies vary dramatically from1. Health and wellbeing (58 per cent country to country. “All the supermarkets have done pretty rated it either 4 or 5 on a scale of 1 to well with their high quality, private label 5, where 1 is “not an opportunity” Health trends and healthy foods products. People are trading up. They and 5 is a “significant opportunity”) Many consumers — whether by choice cannot afford to go out and eat as2. In-home cooking (44 per cent rated or physicians’ orders — are pursuing many times as they would have in the it either 4 or 5) healthier lifestyles and healthier food past. They are eating more at home,3. More environmentally conscious consumption in the form of reduced which is partly because of the cost and consumers (41 per cent rated it fat, fewer calories, lower sodium, partly because of the celebrity chef either 4 or 5) more fibre, increased nutrients, etc. In culture in the UK,” added Griffith.4. Green and local consumption countries with aging populations, such (41 per cent rated it either 4 or 5) as in the United States where many baby “Instead of going to eat out on a boomers are entering retirement, healthy Friday night, they are cooking nice In response to these trends, a foods are even more popular. meals in the home,” Griffith said. “Theymajority of F&B businesses are working “We have a wave of demographics will end up buying products of higheron strategies to introduce more healthy in the United States that is going to quality in the supermarket or in nicheeating products (54 per cent), diversify be driving the health food market and high end retailers, either in the formproduct ranges (53 per cent), and find healthier foods over the next several of ingredients for a recipe or a quality,new retail/customer outlets (52 per cent). years,” said Manning. “So that is a very, ready meal.”10
  • Natural or organic foods on carbon emissions. “Quebec is in an marketing yet in Canada or even in theGlobal organic food sales were $54.9 enviable position because all of our United States that their products arebillion in 2009, up from $18 billion in electricity is hydroelectricity, which has carbon neutral. But I see a lot of the2000, according to Organic Monitor very low emissions. Other Canadian larger corporations at least thinkingestimates; 2009 was the first period provinces and US states use fossil about it. If there is one area of potentialin years in which sales of organics fuels, which emit a lot of carbon — growth that may be a niche todayexperienced only single-digit growth. not even counting the transportation and mainstream tomorrow, it wouldThe countries with the largest organic of the goods through all the different be carbon certification, or emissionmarkets were the United States, warehouses and distribution centres. certification and reduction certification.”Germany, and France.10 US sales of So a lot of our food companies are Bord Bia, the Irish Food Board, inorganic food and beverages have grown starting to look at using carbon collaboration with the Carbon Trustfrom $1 billion in 1990 to $26.7 billion footprinting as a marketing tool.” in the UK, are working toward havingin 2010. From 2009 to 2010 — when the a leadership position for Irish beefUS economy was at its worst — sales of Haché highlighted the example through a carbon-footprint calculationorganic foods grew 7.7 per cent.11 of a company that retained Grant model that confirms the natural advantages In Ireland, quality and value continue Thornton to certify emission reductions of grass-based production, noted be important buying criteria, said at a US plant — utilising those carbon Markets for green products areJackson, and people are willing to pay reductions to offset emissions of not as advanced in the United Statesfor premium products as long as the factories in Canada, thereby enabling it as in other parts of the world, butbenefits of those goods are clearly to potentially market certain products Manning anticipates growth in thecommunicated. She said willingness to with “carbon neutral” branding. “That category as more companies performspend on more expensive items seems is very new. No one that I know of is sustainability be focused on healthier products,while organic products have become Figure 7: Which of the following are you doing in reaction to social and demographic changes in your customer base? Percentage of businessesless fashionable. “Unless the organic Source: Grant Thornton IBR 2011products are priced well, there is not somuch interest in buying them.” 54% Introducing more healthy eating products Pititto indicated a similar dynamic 53% Diversifying product rangein Australia since the financial crisis of2008-2009. “The organic products were 52% Trying to find new retail/customer outletsthe first to feel the pain of the financial 41% Introducing more locally-sourced productscrisis. While they are still growing, 29% Introducing more fair-trade productsthe biggest issue here is that there really 28% Making more use of local mediaare no defined standards as to what 23% Introducing new ethnic (specialised) productsmakes something ‘organic.’ It isvery confusing.” 14% Longer opening hours South Africa’s Scott said organics 6% Nothingrepresent a buying segment only at thetop of a highly stratified food-buyingpopulation. Approximately 5 millionof the wealthiest consumers will buyorganic products and fuel growth in thecategory, while about 35 million othersare focused on buying basic food items.But reports of contaminated foods fromChina have contributed to broaderinterest in organic foods: “It’s made a lotof people aware of what they are eating,and when they can afford to they maychoose organic.”SustainabilityHaché said Quebec is at the forefrontof a sustainable industry, withregulatory mandates such as the 10 H. and Kilcher, L., The World of Organic Agriculture: Statistics & Emerging Trends 2011, IFOAM, Bonn, and FiBL, 2011.imposition of a cap-and-trade scheme 11 Organic Trade Association’s 2011 Organic Industry Survey, Organic Trade Association, April 2011. 11
  • Localisation Canadian F&B companies to really look to be packaged and promoted as cut-rateTo some extent green/sustainability, seriously at going to other countries substitutes; now many private labellocal foods, and organic and natural with their products.” products mimic manufacturer brands infoods overlap — food grown locally and In India, localisation is the rule rather both quality and appearance.organically without synthetic fertilizers than the exception, in part because of its “There is a lot of work beingis considered to be greener than non- still-developing logistics infrastructure. done in product innovation and neworganic agribusiness product shipped The two basic food trends, according product development, but mainly forin from out of state. And this creates to Grant Thornton’s Patodia, are the purposes of meeting private labelquestions for the industry. For example, localisation and ethnic foods, simply demand by the supermarkets,” saiddoes a wine imported by air have a because India is such a diverse country Pititto. “What we have here in Australiabigger carbon footprint than a wine with so many different cuisines and is that two chains predominantlytrucked across the country? Which one preferences. “It’s often said that you control two-thirds of all food spendingis greener? Is local always greener? F&B move a hundred kilometres and the at the retail level. They have significantbusinesses, large and small, are rushing cuisine changes — its texture, its colour, power in terms of what gets on theto sort through the issues. its taste as well. From that perspective, shelves.” Private labels in Australia In the United States, a movement have grown from about 10 per cent totoward localised foods is underway — approximately 25 per cent; supermarketsfrom consumers buying in local markets are now aiming for 40 per cent. Andto restaurateurs establishing agreements “The belief, whether while other trends, such as healthywith local farmers. Even superstores foods, ethnic foods, and localisation are it is right or wrong,like Walmart are trying to integrate local important, “that is not what is keepingfood and beverage items. The challenge is that the US market the manufacturers or the processorsfor many firms, processor and retailer will not grow awake at the moment. It is clearlyalike, is that their supply chains were not about ensuring that they are on thedesigned to support localisation. They significantly, and that supermarket shelves.”are now asking: “How can we localise historical reliance is “Store labels have been successful,and also save money?” and it is more profitable for the The localisation movement also is just not as strong as it supermarkets,” said Griffith in thestrong in Quebec, said Haché. As in may have been in the UK, “so they are obviously stillthe United States, there is a resurgence promoting those as much as theyof local farmers’ markets, and rumours past. That is causing can.” For example, retailer Tescothat Walmart will test localised waters. some of our Canadian has successfully offered a range of“They’re actually setting up warehouses private label products at differentand new logistics to be able to gather all F&B companies to price points. But this trend raises somethese commodities so that they could really look seriously issues for F&B manufacturers. First,buy them locally and put them in the production of private label goods isstores locally,” Haché said. Similar plans at going to other less profitable than the sale of brandedare underway at other grocers, he noted. countries with goods, Griffith noted. Second, retailers“There is a pretty strong push toward tend to concentrate their private label their products.”localisation. And I think one reason production to fewer suppliers. So someis that they know that the fuel cost is F&B producers will benefit from growth Jim Menziesmuch lower.” Global food and beverage industry leader, in private labelling, but others will suffer. Haché’s Canadian colleague Menzies Grant Thornton Canada Private labelling has not yetagreed, but also noted the beginning of taken hold in India, despite efforts ofa decidedly non-local trend in Canada; department store chains, said Patodia.companies are now more likely to localisation and ethnic foods become an “The trend has yet to see any tractionexplore market opportunities in places important success factor.” in India, since the value proposition forlike Mexico, India, China, and South such products is not yet clearly defined.”America — countries that in the past Private labellinghave relied heavily on food imports from Consumers still suffering from thethe United States. “The belief, whether it recession have tightened their belts,is right or wrong, is that the US market forgoing higher priced food items andwill not grow significantly, and that shifting to more in-home consumption.historical reliance is just not as strong as They are also saving money byit may have been in the past,” Menzies purchasing private label foods instead ofsaid. “That is causing some of our advertised brands. Generic foods used12
  • Product developmenttops strategic priorities Product development in the UKFigure 8: What are your priorities for investment over the next 12 months?Percentage of businesses is focused on evolving consumer tastes,Source: Grant Thornton IBR 2011 labelling requirements, smaller portion sizes, recycling, and cost reduction, said Griffith of Grant Thornton UK. But R&D funding has been pinched, first by the recession and then by rising commodity costs. “There is not a ready tap of money to use to sort out any one issue. It is very tough. They have got to be looking at how they make profit, how they satisfy shareholders in the short term, or how to stay afloat in the short term. New product development — which can take six months, a year, two years or longer — is something that is getting tough, but remains necessary to ensure listings on already competitive supermarket 15% Restructuring shelves. While difficult, this often 17% Mergers and acquisitions provides an opportunity for innovative 21% Cleantech companies to gain shelf space and 46% Process development market share.” Menzies said that in recent times, 50% Marketing product development has not been a 53% Up-skilling the workforce major priority among F&B companies 62% Product development in Canada — but the sector is changing. “While companies have been in survival mode, many of them have beenHalf or more of food and beverage countries. “It’s a huge differential. somewhat reactive, and have notcompanies ranked product development We are trying to educate our clients necessarily had that big picture(62 per cent), up-skilling the workforce of the importance of intervention to approach. And product development(53 per cent), and marketing (50 per stay competitive.” is one of those areas where you needcent) as key priorities for investment Jackson has observed a rising level to be looking at the big picture, andover the next 12 months. of collaboration between government, spending and investing. When you Product development/R&D is a industry and academia. The emphasis, are going through some toughpriority for food and beverage businesses she noted, is to develop new functional economic times, it is hard to do Ireland, said Jackson, “because and technical ingredients, as well Canadian companies are now gettingof the recession and a challenging as products that have health and/or back into investing money and resourcescash management/working capital nutritional benefits — helping companies in product development, processenvironment, they’re not spending as develop a model that offers premium improvements, new machinery, etc.”much as they would have done a few product at a premium price. Much lower on the sector’syears ago, and they never probably global priority list is M&A activityspent as much as they ideally should “Because we are a developed economy (17 per cent), though it is increasinghave.” She said that while there are some and a small open economy, we can’t in many countries. Last year, althoughnotable exceptions, it is not uncommon compete on the mass production, the number of announced F&Bto see R&D investments of less than commoditised playing field, so we need transactions remained significantlyone-half of one per cent of sales — much to really focus on the premium and below 2007 levels, it was higherlower than investment rates in other value-add products,” Jackson added. than in the previous two years. 13
  • “There are businesses The number of global food and beverage transactions rose 13 per cent from 255 in is increasing, along with demand for services to assist with cross-border that are struggling 2009 to 289 in 2010. The value of deals tax issues, setting up tax structures in also rose sharply, from approximately other countries, and transfer pricing and banks are not $22bn in 2009 to $38bn in 2010, up issues. “All of those areas will increase supporting them, almost 42 per cent.12 The big issue is availability of capital over the next few years as mergers and acquisitions continue on the uptick.” but if you are to drive deals, said Griffith. “There “In Canada, many companies do are businesses that are struggling and have cash and access to financing,” looking at M&A banks are not supporting them, but said Menzies. “I think that’s one of the if you are looking at M&A activity, reasons that the M&A market is a little activity, especially especially at the larger end, there is healthier here than one would expect. at the larger end, money available. And the outlook, in I also believe that there is a belief that, terms of consolidation, is probably since some companies really struggled there is money strong, which is partly driven by the through the economic recession, current need to consolidate due to cost issues.” valuations might be lower than what available. And the Large and medium-sized corporations they would normally be. Many believe outlook, in terms see the current market as an opportunity to grow via acquisition — easier than there are bargains out there as a result of that.” of consolidation, is growing organically — and diversify their product range and customer base. probably strong, Overseas buyers, especially those from which is partly the developing world, see acquisition as a way to enter the UK market and driven by the need as a way to take the UK’s higher F&B standards out to their markets. to consolidate due “There is going to have to be some to cost issues.” industry consolidation here in Ireland and possibly between Ireland and the UK in order to be competitive and Trefor Griffith to develop scale,” said Jackson. “That Head of food and beverage, Grant Thornton UK is definitely a challenge for a lot of our clients, particularly small- and medium-sized enterprises.” “Right now in Australia we are seeing a lot of overseas corporations that are endeavouring to buy up assets in F&B, whether that is land holdings or whether that’s commodities such as grain or wheat,” said Grant Thornton’s Pititto. “It is happening in the beef, beer, and sugar industries, to name a few. There is going to be greater M&A activity from overseas corporations buying into the Australian market.” Frambourt said that large F&B companies in France are still structured around brands. As it gets more difficult to create or develop brands, they are looking to M&A as a means to expand their portfolios. M&A activity will increase in Canada, according to Menzies of Canada — not just in the F&B sector, 12 “Food & Beverage Industry Snapshot,” Grant Thornton but across all industries. The need for Corporate Finance, Winter 2011 edition. M&A consulting and due diligence 14
  • Obtaining One-third of businesses in the F&B sector expect finance to become more accessible, the same as in 2010, and only expanding facilities or building new plants said they would be financing internally or with existing debt lines,”finance 18 per cent of F&B businesses expect finance to become less accessible in the year ahead, an improvement over 2010 said Pititto, “perhaps expressing lack of confidence in the availability of capital at reasonable terms and the fact thatstill poses findings. Nonetheless, obtaining finance in many countries still poses challenges for F&B businesses; 24 per cent rated companies have been in savings mode since the global financial crisis.” Patodia in India said midmarketchallenges a shortage of long term finance as a meaningful constraint (rated either 4 or 5 on a scale of 1 to 5, where 1 is F&B companies tend to focus on private equity to raise capital for expansion, given the size and nature “not a constraint” and 5 is a “major of their businesses. “There is a need constraint”). for finance for a lot of companies because of the way the industry wants “Finance is a challenge here at the to expand in India over the next three moment, given our banking collapse to five years. So, altogether, companies and economic crisis,” said Jackson are looking at raising finances, and in Ireland, “and there is a lot of I don’t think they are shying away nervousness about approaching the from debt as such. Obviously, they banks because people are fearing a would like to minimise the interest negative response.” costs and, therefore, look at how they can get the best deal domestically or In Australia, Grant Thornton in international markets. The key conducted a study that indicated issue when raising debt or equity is F&B companies are planning to the current scale of the local F&B invest in capacity, such as expanding companies — most of them are regional manufacturing lines. “But surprisingly, or category specific, and this typically over 80 per cent of those companies proves to be a hindrance in scaling up.” Figure 9: Accessibility of finance Percentage of businesses expecting finance to be more or less accessible in the coming 12 months 2011 2010 44% Source: Grant Thornton IBR 2011 35% 30% 28% 26% 14% 5% 4% 3% 3% Much more More accessible No change Less accessible Much less accessible accessible 15
  • Companies dealing withconstraints of regulations Figure 10: Constraints on expansion Average percentage of businesses rating constraint 4 or 5 on a scale of 1 to 5 where 1 is not a constraint and 5 is a major constraint Source: Grant Thornton IBR 2011More than access to capital, F&B 34%companies cite regulation and red Regulations/red tape 32%tape as their most pressing constraint;34 per cent rated it either 4 or 5 on Shortage of orders/ 27%a scale of 1 to 5, where 1 is “not a reduced demand 39%constraint” and 5 is a “major constraint.” 27%That alone signified a positive change Cost of finance 28%in the industry; a year ago, the highest-rated constraint was a shortage of orders Availability of 26%(39 per cent, down this year to a skilled workforce 21%second-place 27 per cent). In the United States, the Food Shortage of 25% working capital 26%Safety Modernisation Act (FSMA)became law in January 2011. It shifts Shortage of 24%the regulatory focus on the US food long-term finance 22%supply from contamination response Quality of informationto contamination prevention. F&B 2011 technology and 17%manufacturer reaction to FSMA has communications infrastructure 2010been varied; according to a survey of US Quality of transport Source:companies by Grant Thornton US and 14% Grant Thornton IBR 2011 infrastructureFood Processing magazine, 51 per cent ofcompanies reported that FSMA wouldaffect them positively, while 20 per cent The tax will take effect in 2012, and fats are subject to additional taxes.said it would have a negative effect.13 caught many in the industry by surprise, “I think I am right in saying Regulations can be a major obstacle said Frambourt. “We already know that the UK food industry is probablyin India, particularly the restriction our government is very imaginative, affected more by EU regulationson foreign direct investment in multi- having created a tax on tobacco and than UK regulations,” said Griffith.brand retailing, which has prohibited things like that. Of course, they did tax There is a strong feeling within thelarge supermarket chains like Walmart alcohol. But now I do not know where UK industry that the UK tends toor Tesco from entering India, said they will stop.” The Irish government adhere more strictly to regulationsPatodia. A change in this restriction is also considering introducing a “fizzy than other countries, added Griffith.could represent a seismic shift in drinks tax” to help fight obesity, Small companies find the regulatoryIndia’s organised retail sector, which said Jackson. Speculation is rife that environment — including labelling —currently accounts for only 4 per cent Ireland will follow Denmark’s lead particularly difficult.of market share.14 and introduce a “fat tax,” under which In France, the most recent regulatory products with a high level of saturatedchange impacting the F&B segment is anew tax on soft drinks (sodas). 13 Fast Facts on Food Processing, Grant Thornton US, September 2011. 14 K.T. Chacko, “No Need to Fear FDI in Retail,” Hindu Business Line, Aug. 23, 2011.16
  • Call to action“Managing Through Uncertainty,” the Grant Thornton International Business Report 2011 food and beverage sector focus,highlights emerging trends and their impact on food and beverage companies worldwide. How will your organisationrespond to these new challenges and opportunities?• Productivity improvement and operating-cost reductions: Rising commodity costs — coupled with customer resistance to price increases — make productivity improvements and cost control vital to success. Does your company have the internal resources and insight to evaluate processes in search of efficiency improvements? Have you comprehensively reviewed your cost structure and cost-drivers for savings opportunities?• Mergers, acquisitions and divestitures: Food and beverage companies are once again looking to grow through acquisition. Coming out of the economic downturn, F&B companies have seen a number of attractive acquisition opportunities, creating a sharp upswing in M&A activity. Are you able to identify target acquisitions that will fit well with your company? Does your company have the internal expertise to identify M&A opportunities, and then to conduct effective due diligence? Can you find financing to support acquisitions?• Regulatory compliance: F&B companies face an increasingly complex set of regulations around the world, along with emerging sustainability standards. Is your entire firm aware of the regulations it will face tomorrow — and next year? Does your company have the ability to monitor, measure, and document compliance?• Innovation and quality: Consumers want innovation, improved quality, and lower prices — a trio of demands that small, midmarket, and even larger F&B companies often find difficult to address. Can your company develop supplier relationships to leverage the power of partners for new product development expertise? Can you leverage these supplier relationships to enhance your technological and operational performance?• Country-specific changes: The global trends cited in this report affect individual companies and individual countries in unique ways, challenging F&B executives to stay abreast of trends that impact their bottom lines. Is your company ready to identify and respond to trends on its own?Any company can benefit from a fresh set of eyes to help address challenges and manage all of their new opportunitiesefficiently and effectively. As one of the world’s leading organisation of independently owned and managed accounting andconsulting firms — with more than 2,500 partners in over 100 countries providing assurance, tax and advisory services —Grant Thornton is ready to help. 17
  • About the Grant ThorntonInternational Business Report18
  • The IBR is a quarterly survey of theviews of senior executives in privatelyheld businesses (PHBs) all over theworld. Launched in 1992 in nineEuropean countries, the report nowsurveys over 11,000 PHBs per year in39 economies providing insights onthe economic and commercial issuesaffecting a sector often described asthe “engine” of the world’s economy.In the food and beverage sector,513 businesses were interviewedbetween November 2010 andMay 2011, 48 per cent frommanufacture of food products;16 per cent from manufacture ofbeverages; 16 per cent from retailsales of food, beverage and tobaccoin specialised stores; 12 per cent fromfood and beverage service activitiesand 8 per cent from other foodand beverage. To find out more about IBR andto obtain copies of reports andsummaries please site also allows users to completethe survey and benchmark theirresults against all other respondentsby territory, industry sector, and sizeof business. 19
  • Global contactsGlobal leader and Canada IrelandJim Menzies Patrick BurkeT +1 416 360-5008 T +353 (0) 1 6805 650E E Haché Ciara JacksonT +1 514 390-4267 T +353 (1) 6805 640E E South AfricaTony Pititto Ian ScottT +61 (3) 8663 6000 T +27 (0) 21 417 8792E E United KingdomFabio Silva Trefor GriffithT +55 (11) 3886-8976 T +44 (0) 207 728 2537E E United StatesVincent Frambourt Dexter ManningT +33 6 16 58 19 61 T +1 404 475-0061E E VietnamKai Bartels Bill HutchisonT +49 (40) 4321 862 8613 T +84 (8) 3910 9102E E PatodiaT +91 (11) 4278 7070E© 2011 Grant Thornton International Ltd. All rights reserved.Grant Thornton International Ltd (Grant Thornton International)and the member firms are not a worldwide partnership.Services are delivered independently by the member firms.