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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