Reality bites, as report reveals new food price pressures and sector consolidation

25 November 2011

Food producers, that until now have been absorbing higher costs, are set to increase their prices, according to the latest findings of Grant Thornton's Food and Beverage International Business Report. Consequently, many consumers will find their household budgets under even greater strain over the next year.

The report highlights that in many developed nations, household budgets are being squeezed by high unemployment, flat earnings growth and high inflation. Powerful supermarkets, trying to appeal to cash-strapped consumers, are exerting pressure on producers to keep prices low whilst maintaining their own margins. And with agricultural prices increasing 45% between June 2010 and February 2011 (World Bank), food and beverage (F&B) producers have struggled to maintain their profit margins. Unable to continue absorbing rising costs, 41% of F&B businesses now expect to increase their prices over the next 12 months, compared to only 12% a year ago.

Jim Menzies, global food and beverage industry leader at Grant Thornton, said: “Most producers in this sector will be battling to protect margins. Focusing on cost savings and productivity gains must be a priority. But producers can only absorb so much in the way of increased costs. The levy looks set to be breached. Food and beverage producers are now looking to push higher commodity prices up the chain where ultimately the cost will be borne by the consumer.

“Many food and beverage producers are also looking at mergers and acquisitions in a sector that is ripe for consolidation. Our research found that one in five businesses are looking at M&A opportunities, something that is also borne out in conversations we are having with clients. A period of consolidation is inevitable. It will help deliver scale for greater efficiencies, and give businesses additional clout and flexibility in price negotiations with big retailers.”

The Grant Thornton report shows that F&B businesses do not think the inevitable price rises will necessarily translate into a rise in profits. According to the research, 62% of businesses expect revenue to increase over the next year. However, only 43% of businesses surveyed expect improved profits over the next 12 months.

The international report illustrates the polarised needs of food and beverage consumers around the world. On one side consumers are demanding food and drink priced to meet their dwindling budgets; on the other, more affluent shoppers are looking for higher quality produce; healthy and ideally locally sourced produce to cook at home.

These tastes reflect a growing middle class in emerging markets and a baby boomer generation that are demanding healthy eating. According to Grant Thornton, more than half (58%) of F&B businesses believe that the increased focus on health and wellbeing, and providing products that complement that lifestyle, represents a significant opportunity for their businesses. Moreover, almost half (44%) see the increased trend for home-cooking as an opportunity for business growth.

Jim Menzies added: “Despite a squeeze on profitability caused by high commodity prices, emerging consumer trends offer new revenue opportunities for businesses in the global food and beverage sector. Those manufacturers looking to capitalise on the growing demand for home-cooking amongst affluent consumers will need to invest time and resources in the production of high quality products.

“Conditions are tough, but food and beverage companies are cautiously optimistic about the year ahead. Inflation is rampant in many areas, and commodity prices remain high, but our report suggests that manufacturers and producers are looking to target specific groups of consumers in an attempt to boost their profits.”

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For further information please contact:

Christine Hobart
International communications manager
T +44 207 391 9548
E christine.hobart@uk.gt.com

Notes to editors

The Grant Thornton International Business Report (IBR) provides insight into the views and expectations of over 11,000 businesses per year across 39 economies. This unique survey draws upon 19 years of trend data for most European participants and nine years for many non-European economies. For more information, please visit: www.internationalbusinessreport.com.

Data collection

The research is carried out primarily by telephone interview lasting approximately 15 minutes with the exception of Japan (postal), Philippines and Armenia (face to face), mainland China and India (mixture of face to face and telephone) where cultural differences dictate a tailored approach. Telephone interviews enable Grant Thornton to conduct the exact number of recommended interviews and to be certain that the most appropriate individuals are interviewed in an organisation which meets the profile criteria.

Data collection is managed by Experian. Questionnaires are translated into local languages with each participating country having the option to ask a small number of country specific questions in addition to the core questionnaire. From 2011, fieldwork takes place on a quarterly basis every quarter with fieldwork lasting approximately one month and a half.

Sample

IBR is a survey of medium to large privately held businesses. The data for this release are drawn from interviews with 513 food & beverage businesses across the globe conducted in H1 2011.

The target respondents are chief executive officers, managing directors, chairmen or other senior executives (title dependent on what is most appropriate for the individual country) from 39 economies primarily across five sectors: manufacturing (25 per cent), services (25 per cent), retail (15 per cent) and construction (10 per cent) with the remaining 25 per cent spread across all sectors.

Locally, the sample tends to cover the sectors mentioned previously, with some countries being able to have local valid data for specific sectors or regions when the sample size is large enough.