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Frost & Sullivan Analyst Briefing: Global Economic Outlook - Food & Beverage Ingredients Market

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In 2008, the most obvious source of discomfort is the ailing economy that has adversely impacted most industries, including the food & beverage (F&B) industry. In addition to the recent economic slowdown, supply chain issues such as ingredient availability and vendor pricing has continued to put pressure on F&B manufacturer margins. From the farmer’s field to the consumer’s fork, the food & beverage industry is facing a wide set of challenges and industry reaction will transform the future of this industry. First, this briefing reviews the issues of the slowing economic environment on F&B industry supply chains and price volatility in 2008.

Research Analyst, Christopher Shanahan, will review issues of the slowing economic environment on F&B industry supply chains and price volatility in 2008, the primary strategies currently adopted by current industry participant within this uncertain environment, and assess various strategic actions companies can implement in order to grow their businesses in these challenging times.

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Frost & Sullivan Analyst Briefing: Global Economic Outlook - Food & Beverage Ingredients Market

  1. 1. Economic Outlook for the Global Food and Beverage Market Christopher Shanahan Food Industry Research Analyst Chemicals, Materials and Food February 26th, 2009
  2. 2. 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
  3. 3. 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
  4. 4. 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
  5. 5. 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
  6. 6. 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
  7. 7. 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
  8. 8. 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
  9. 9. 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
  10. 10. 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
  11. 11. 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
  12. 12. 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
  13. 13. 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
  14. 14. 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
  15. 15. 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
  16. 16. 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

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