A Taste of Things to Come

The food industry has frequently been described as recession-proof but while the sector has proven more resistant than most to recent economic events, such resilience is relative. Surviving 2009 has meant different things to individual players, and the survival strategies adopted have at times been as varied in their conception as in their success; inevitably, some have found the going easier than others.

Almost daily tales of unfolding economic disaster throughout the second half of 2008 meant food processors in 2009 initially faced consumers in panic mode, with massive swings to discounters, the abandonment of elective or luxury products and a general trend to trading-down. They were challenging and uncertain times for the industry, but they also represented unexpected opportunities, which some were quick to spot and exploit.

The rise of the private label is a case in point. With brand switching suddenly established as endemic, the perceived value-for-money of own brands provided major retailers with a viable countermeasure to the burgeoning rise of the discounters. Primarily appealing to the psychology of thrift, the emergence of the so-called ‘fighter’ ranges from the likes of Tesco, Carrefour and the Metro Group was a response to the moment, and is unlikely to retain its impetus – or space – on post-recovery shelves.

Many believe the result will be long term. According to a report from retail consultancy Verdict Research, consumers across the EU have moved over to private labels on an “unprecedented scale” since the fourth quarter of 2008, and the move is likely to be a permanent one. The story is broadly similar in the US.

A globalised food industry

There are, of course, wider forces at play than behaviour at the individual point-of-sale. Food is one of the most globalised industries, which makes the combination of longer supply chains and a truly global economic storm a distinctly unhappy one, as national events play out on an international stage. Weaker US and EU markets, for instance, led to a first-half sales drop for Japan’s Ajinomoto food group of 6.6% as operating income tumbled by almost ten times as much. In Europe, falling demand, price pressure and a supply/demand imbalance led the Danish dairy giant Arla to post a 45% decline in its first-half profits in September, while low Spanish consumer spending still threatens food retailers and suppliers in the country.

Even so, it is seldom easy to get the full picture, since local modalities also influence the observable effect. In EU nations, for example, the top five retailers account for about 80% of food sales, while in the US the figure is little more than half that; differences between national food markets mean that straight like-for-like comparisons are often impossible to draw.

Food investment and local sourcing

For some players, 2009 was largely a question of the good business acumen and sound investments of previous years paying off, something which benefitted small companies as much as larger ones. As Alan Stewart, factory manager at Downies of Whitehills, a family-owned fish processor on Scotland’s Moray coast, explains, positioning yourself ahead of the curve pays dividends in a downturn. “We were first to invest in filleting machines for large cod and haddock, long before it became industry standard, and it’s proved to be a major success. It’s the backbone of what we do now.”

Couple that with GBP-denominated export contracts – avoiding exposure to the caprices of the foreign exchange markets – and the year has left them well placed to face 2010, despite the wider uncertainties of the fishing sector and the quotas to come. With pressure growing to protect dwindling fish stocks, including the recent call from the Marine Conservation Society for supermarkets to “use a sustainable seafood sourcing policy”, Stewart believes that quality and local sourcing will remain important issues.

Nevertheless, consumer habits have changed in this area since the onset of the downturn. At November’s English Farming and Food Partnership conference, Marc Bolland, CEO of Morrisons, suggested that buying local currently had “less of a meaning” and it seems that the march of organic food has slowed. Sales in Germany fell 4% in the first half of 2009 and, according to retail market consultants TNS, the UK dropped by nearly 20% in the first 12 weeks of the year.

However, although there may be some work to be done to rebuild the image of added value, the news is not all bad. In a recent study from grocery analysts IGD more than half of the UK shoppers asked expected to spend more carefully after the recession, while 37% anticipated buying more local produce and almost as many wanted high animal welfare standards to be met. It seems, in the long run, Stewart could be right.

The shape of food processing to come

The shape of the global food market at the start of 2010 looks different from the way it did at the beginning of 2009, but it has been more a case of gradual evolution rather than sudden metamorphosis. Credit strictures may be easing and consumer panic reducing but what remains is still a long way from a return to business-as-usual.

Adapting to changes in consumer buying will be one of the big challenges for 2010. While discounters seem to have lost some of their early gains and trading-down is beginning to plateau, the underlying ethos persists. As Wal-Mart CEO Mike Duke puts it: “When the recession is behind us, we believe people will continue to shop with a new instinct for value.”

The rise of ‘nostalgia’ brands in 2009 looks set to continue with November’s prediction from Minitel that familiar products with a new twist will be the hot items of 2010, opening up the debate for retailers and manufacturers as to how to reach their target buyers. While clever packaging and premium positioning will dominate physical outlets, many will hope to emulate the success of what Leatherhead Food Research manager Chris Brockman has described as “the sheer proliferation of online sites where you can buy retro sweets”. Clearly, appealing to developing consumer trends will be essential.

The industry also faces significant factors imposed from outside of its immediate orbit, including long-term pressures to meet dietary obligations, address food-safety issues and cut waste. With the UK the slowest of the G20 nations out of the slump, this may weigh particularly heavily and the return to full-rate VAT will have its impact, despite food being zero-rated, as overheads and other elements in supply-chain costs rise.

This is unlikely to drive anything more than a modest price increase during 2010 – probably largely offset by adjusting portion control – but by the third quarter of 2011, the EFFP retail price forecast suggest a hike of nearly 20% compared with the start of 2007. Preparing for that kind of tectonic shift in food chain dynamics will arguably present the sector’s largest challenge for the year ahead.

It scarcely seems the time for new entrants to the industry and yet the beginning of 2010 has seen the UK’s latest supermarket chains – Haldanes and Asco – chose to set up shop. Unsurprisingly, many eyes will be on these recent arrivals and their progress may be a good barometer of these troubled times. Fortune favours the brave? We will all just have to wait and see.