2009 Economic Outlook for the Global Food and Beverage Market - Apr09

2009 Economic Outlookfor the Global Food and

Beverage Market

Christopher ShanahanFood Industry Research Analyst

Global Chemicals, Materials and Food

San Antonio, Texas USA

April 23rd, 2009

2

Agenda

• The economic recession and its

impact of economy on the food and

beverage industry

• What will catalyze the turnaround?

• Emerging trends in food & beverage

industry

• Best practices for staying resilient to

the recession

3

Taking a Step Back and Reviewing the Recession Genesis From Financial Sector to Real Sector

Defaults Lack of Trust in Financial Institutions

Tightening Credit Markets

Banks Slow Lending Down

Slower Growth

Financial InstitutionsLosses

Lack of Lending forSmall Business

Lack of Retail

CreditConsumers Reduce Spending

Economy Slows Down/Contracts

Sub-Prime Mortgages

$

Lack of Capitalfor Companies

Suspension of Interbank Lending

$

$

$

$

Defaults Lack of Trust in Financial Institutions

Tightening Credit Markets

Banks Slow Lending Down

Slower Growth

Financial InstitutionsLosses

Lack of Lending forSmall Business

Lack of Retail

CreditConsumers Reduce Spending

Economy Slows Down/Contracts

Sub-Prime Mortgages

$

Lack of Capitalfor Companies

Suspension of Interbank Lending

$

$

$

$

• Fear has a maelstrom affect on economic activity.

• Most economists argue that the primary catalyst of the economic downturn was the sub-prime mortgage

crisis and the associated collapse of the financial derivatives markets.

• This in turn drove mistrust in financial institutions and the economy as a whole began to unravel.

• Commercial banks began to slow consumer lending to both large and small companies and consumers.

• Job creation stopped and businesses shrunk, which spurred job losses.

• Thus, with declines in both industrial production and consumer demand, total economic activity regressed

and the current global recession had begun.

4

The Economic Downturn and the Food & Beverage Market

• Low price inflation rates for energy and other commodities• Decreased dependence on biofuels in US• Flat demand growth• Lower agricultural production • Increased aggressive pricing strategy • Health & wellness trend to continue • Increased focus on cost saving strategies among businesses and consumers

• Low price inflation rates for energy and other commodities• Decreased dependence on biofuels in US• Flat demand growth• Lower agricultural production • Increased aggressive pricing strategy • Health & wellness trend to continue • Increased focus on cost saving strategies among businesses and consumers

200920092009

Early 2008• Exponential increase in commodity &

energy prices

• Increasing biofuel production in US

• Depreciation of the U.S. dollar

• Increasing demand from emerging

markets (BRIC)

• Squeezed margins due to increasing

costs

Early 2008Early 2008• Exponential increase in commodity &

energy prices

• Increasing biofuel production in US

• Depreciation of the U.S. dollar

• Increasing demand from emerging

markets (BRIC)

• Squeezed margins due to increasing

costs

Late 2008• Exponential decrease in commodity &

energy prices

• Collapse of demand growth, especially

from emerging markets

• New margin pressures

• Continued depreciation of the U.S. dollar

• Restricted R&D and marketing

investment

Late 2008Late 2008• Exponential decrease in commodity &

energy prices

• Collapse of demand growth, especially

from emerging markets

• New margin pressures

• Continued depreciation of the U.S. dollar

• Restricted R&D and marketing

investment

5

Impact of the Downturn on Specific US IndustriesThe US Food Industry has been relatively resilient during the downturn

Relative Impact of the Economic Downturn on Various Industries

The Cumulative Market Cap Value per Industry Today Relative to the Same Value One Year Ago

April 1, 2008 to March 31, 2009

82.68 81.6379.92

76.34

69.97 69.65

65.35 64.72

61.37 60.33 59.7957.57

54.33 53.82 52.7850.93 50.22

45.3242.75

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6

Global Commodity Food Price IndexThe bubble burst due to the collapse of demand

Global Indexed Price Trend for Food & Beverage Commodities from Global Indexed Price Trend for Food & Beverage Commodities from Global Indexed Price Trend for Food & Beverage Commodities from Global Indexed Price Trend for Food & Beverage Commodities from April 2004 to April 2004 to April 2004 to April 2004 to

March 2009, Base Year 2005 = 100, U.S. (2009)March 2009, Base Year 2005 = 100, U.S. (2009)March 2009, Base Year 2005 = 100, U.S. (2009)March 2009, Base Year 2005 = 100, U.S. (2009)

Source: International Monetary Fund, Index Mundi

• Volatility energy prices

• Increasing biofuel production

• Depreciation of the U.S. dollar

• Nature – Averse Weather in 2007 and 2008

• Government Policy

• Long-term growth in international demand

• Slowdown in agricultural production growth

• Reduced global stockpiles of basic commodities like corn,

soybeans, wheat, and rice

Likely Factors Impacting Price Volatility

One of the biggest economic stories of 2008 to affect most of the world, including the United States, was the exponential increase in commodity prices and then the dramatic fall in prices. Pinpointing a particular cause for the increased volatility in food prices has been attempted but to no avail. This is because food price volatility was not the result of any particular reason, but rather the synergy of multiple challenges impacting the food economy as a whole.

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Significant Decline In Second-Half 2008 Imports Corresponded to Decline in World Sulfur Prices

• Price per pound based on a purchase of one metric ton order

$0.00

$0.05

$0.10

$0.15

$0.20

2006 2007 Q1

2008

Q2

2008

Q3

2008

Q4

2008

Q1

2009

Q2

2009

2010 2011

Source: Frost & Sullivan

• Sulfur is a critical input in the production of fertilizers

• Sulfur production is dependent on the petroleum industry and the demand for oil

• According to industry sources, the expected price of sulfur has dropped off from 2008’s high

due to the collapse of the fertilizer and industrial markets in emerging markets

• In the second half of 2008, China’s sulfur imports were down 26 percent compared to the

previous year.

• In a typical year, China accounts for approximately 30 percent of world sulfur imports, so its

reduced demand led to a rapid price decline.

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8

Consequences - Supply Chain PressuresEconomic conditions have impacted US supply chain reliability

Rising Costs

50%

Supplier

Reliability

29%

Ingredient

Availability

21%

Increased 1%

to 10%

33%

No Change -

Decreased

7%

More than 10%

60%

Biggest Problem Encountered with Ingredient Suppliers in the Past Year (2008) n = 28

Average Price Increase for Primary Ingredients in the Past Year (2008) n = 28

Supply Chain Pressures

• The economic downturn is pinching

consumer demand in the food market,

but the food economy has been

recession resilient

Other factors are impacting industry

performance and supply chains

• Impact on supply chain

• Squeezed Margins

• Availability

• Pricing

• Reliability

• Supply chain safety and traceability

Source: Frost & Sullivan

9

• Limited impact on the APAC food industry due to strong market

growth rates

• Asia shines despite economic gloom

• Food expenditures in indicate a shift toward consumption of higher

value food products across all income levels and regions

• 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 has slowed, but signs of rebound

are emerging

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

10

What Does the Downturn Mean for APAC?Urban Growth Rates - High Correlation with Growth in Economic Activity

Urban Growth Rates - High Correlation with

Growth in Economic Activity (2005)

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Total Population Growth Urban Population Growth

11

Industry Reactions to Economic DownturnIncreasing conservatism due to increase in uncertainty

PRICING ADJUSTMENTS

ORGANIC GROWTHEXPECTATION ADJUSTMENTS

MERGERS & ACQUISITION

RENEWED FOCUS ON HIGH GROWTH

SEGMENTS

Price Volatility

Pinched Consumer Demand

Supply Chain Issues

Food & Beverage Industry

12

Catalyzing the TurnaroundSpecific Growth Drivers in the Food & Beverage Industry Today

• Low inflation and increasing consumer spending

• Increasing Urbanization

• Government Stimulus

• 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

13

Best Practices in the Food & Beverage Market

• Invest in marketing strategies that focuses on

your core product offering

• Exploit opportunities from consumer feedback

• Have a complete 360 degree perspective on

your market’s external environment in order to

discover opportunities

• Establish partnerships with other suppliers

• Adopt proactive product and service

differentiation strategies

• Understand the consumer’s motivation for

buying your product

14

Boosting Top-Line Growth Through Differentiation

Service DifferentiationService Differentiation

Product DifferentiationProduct Differentiation

Maximize Customer Value by Maximize Customer Value by

being the Low Cost Providerbeing the Low Cost Provider

The Solution Provider: The The Solution Provider: The

Marriage of ValueMarriage of Value--Added Added

Quality Enhancement and Quality Enhancement and

Customer Relationship Customer Relationship

OptimizationOptimization

Top Line Accelerated Growth Top Line Accelerated Growth

Enhance ValueEnhance Value--Added Quality Added Quality

through New Product through New Product

DevelopmentDevelopment

Optimize Relationships with Optimize Relationships with

CustomersCustomers

Source: Frost & SullivanSource: Frost & Sullivan

What distinguishes the food industry’s high performers from the average more than any other single

factor is differentiation—of product, application, service and price, as well as differentiation in terms of

the kinds of collaborative partnerships and alliances these companies strike with both customers and

providers.

Reactive strategies rarely achieve competitive advantage. High performance companies always adopt

proactive strategies.

15

Focus on Food & Beverage Industry in China - SWOT Analysis

STRENGTHSSTRENGTHS

OPPORTUNITIESOPPORTUNITIES

• F&B industries is one of the fastest growing industry sectors

• Gradual removal of market barriers and trade restrictions

• Partnerships with multinationals have allowed for rapid development

• Health scares have opened up the market for food imports and has a positive effect on sales of processed foods

• Rising disposable incomes is fueling growth in high-quality and specialty processed foods

WEAKNESSESWEAKNESSES

• China’s underdeveloped agricultural sector remains a major barrier to growth ���� especially true for high-value perishable foods (fresh dairy)

• Food safety ���� higher production and labeling costs

THREATSTHREATS

• Food scares have impacted the entire food value chain ���� highlighted vulnerabilities of the marketplace ����could constrain FDI

• Emergence of India could mean increased competition for FDI

Positive FactorsPositive Factors Negative FactorsNegative Factors

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Focus on Grocery Retail in China - SWOT Analysis

STRENGTHSSTRENGTHS

OPPORTUNITIESOPPORTUNITIES

• China’s vast population

• High disposable incomes in urban centers

• Lifting of FDI restrictions has fueled increased investment

• China’s mid-sized cities remain fairly unsaturated

• The convenience and discount formats remain underdeveloped

• Private labeling

• Rising tourist numbers

WEAKNESSESWEAKNESSES

• Underdeveloped infrastructure

• Much of the country’s rural poor cannot afford most grocery retail products

THREATSTHREATS

• Saturation in major cities is near

• Hypermarket format is already facing regulatory obstacles

• Structural problems such as wide income inequality could constrain grocery retail growth

Positive FactorsPositive Factors Negative FactorsNegative Factors

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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 on 26 May 2009, 11am

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Innovation and Leadership (visit http://www.frost.com/growthapac)

� Join us at a GIL 2009 : Asia Pacific - A Frost & Sullivan Global Congress on

Corporate Growth from 12-16 Oct 2009 at Kuala Lumpur, Malaysia (visit

www.frost-gil.com)

� Request a proposal for a Growth Partnership Service to support you and your

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For Additional Information

Krithika Tyagarajan Research Director- APAC 65.6890.0230 [email protected]

Steve LeeStrategic Account ManagerChemicals, Materials and Food, Asia Pacific(65) 6890 [email protected]