State of the Food Industry 2011: End of Recession Changes Everything … or Nothing

U.S. food industry faces a tough road ahead.

By Diane Toops, News & Trends Editor, and Dave Fusaro, Editor in Chief

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"As we saw in the Food Processing Top 100, in 2009, sales were down, but profits were up," continues Manning. "The reason is that once the commodities spiked in 2007, companies reacted quickly to cut costs before the recession hit. As they went into the 2008-2009 recession, they benefited from these cost reductions."

Looking at 2011 from a financial standpoint, Manning adds, "Companies are getting stronger; there will be more consolidation of the ones that are not. With the credit market thawing, we are seeing more opportunities to buy other companies, so [mergers and acquisitions] will continue to be strong."

Rising food prices
"Swiftly rising input costs have put packaged food companies in a situation where margins are being squeezed," said Judi Rossetti, senior director at Fitch Inc., a New York- and London-based global ratings agency. "It will take time for price increases implemented by the food companies to catch up with the commodity cost inflation they are already incurring."

It certainly is taking time. A late-November report from USDA's Economic Research Service projects the consumer price index (CPI) for all food to increase 0.5-1.5 percent in 2010 — the lowest annual food inflation rate since 1992, says the agency. Food-at-home (grocery store) prices also were forecast to increase 0.5-1.5 percent, while food-away-from-home (restaurant) prices were predicted to rise 1-2 percent. The all-food CPI increased 1.8 percent between 2008 and 2009.

"Although inflation has been relatively weak for most of 2009 and 2010, higher food commodity and energy prices are now exerting pressure on wholesale and retail food prices," wrote ERS in the report. "Hence, food inflation is predicted to accelerate during the final months of 2010 and the first half of 2011, leading to a forecast of 2-3 percent food price inflation in 2011."

Prices of sugar have move sharply higher in the final weeks of 2010. There's been a rally in corn and soy complex futures prices reflecting USDA production reports, which estimate smaller than anticipated crops. As a result, the most recent stocks-to-use ratio for corn in 2010-11 was projected at a paltry 6.2 percent, down from 13.1 percent in 2009-10. With prospects for an extremely tight carryover, corn futures prices surged, peaking recently above $6 a bushel for the December contract, and trading was extremely volatile.

Rising input costs will challenge food companies even more because of the continuing weak economic environment. Consumers are not likely to be as receptive to the higher retail prices as they were prior to the recession, according to Fitch, which expects volumes will be impacted negatively and consumer switching to private label substitutes to be prevalent. Even with price increases and cost-cutting initiatives, packaged food companies are not likely to retain the margin improvement they attained early last year.

But the price increases are under way. In our November news story General Mills, Kraft and Nestle already were hinting at price increases, and Unilever and ConAgra joined the list shortly after our report. In its third quarter financial report, Kraft Foods said "base business organic net revenues" grew 2.5 percent, driven by 2.3 percentage points from pricing.

Supermarket trends
As we mentioned before, private label/store branded food & beverage products enjoyed the recession, rising from 15 percent before the economic meltdown to 18.7 percent of total sales in 2009 – $55.5 billion -- and that number is expected to rise when 2010 is tallied. Further, those numbers were in dollar sales. In terms of unit share, private label holds 23.7 percent of the market. Both dollar and unit levels are record highs, according to the Private Label Manufacturers Assn.

Industry ShoppingStore brands accounted for 90 percent of all revenue gains in supermarkets, adding $1.5 billion in new sales (up 2.9 percent), while national brands were virtually flat (up 0.1 percent), according to PLMA. Moreover, the decline in national brand units suggests even their modest sales gain of $200 million was a result of price inflation.

As executives at TreeHouse Foods, our Processor of the Year, pointed out in our December issue, those numbers are still well below private label penetration figures for most European countries. So plenty of opportunity remains.

There appears to be no going back to the dominance brands once enjoyed – not by the supermarkets, who make more profit on their own-brand items, and not for consumers, who have discovered private label's lower prices, similar quality and, now, rising innovation in product development and packaging.

There also may be no going back to supermarkets for some shoppers. According to Willard Bishop Consulting, traditional grocery formats lost 0.8 percent of market share to drop to 47.5 percent of all grocery shopping. Gains were recorded within the traditional grocery format by limited-assortment stores, led by Aldi and Trader Joe's (up 6.2 percent to 2.4 percent market share), and fresh format stores (up 1.9 percent to 0.8 percent market share). Outside the grocery format, big gainers were supercenters (up 7.8 percent to 16.7 percent market share), dollar stores (up 16.8 percent to 2.0 percent market share) and drug stores (up 6.8 percent to 5.5 percent market share). Wholesale clubs lost ground.

Supermarkets are becoming take-out restaurants for many consumers. Shoppers' interest in supermarket ready-to-eat foods hit a four year high at 55 percent, according to Arlington, Va.-based Food Marketing Institute (FMI). The categories they are most interested in are: freshly prepared, heat-and-serve food to take home (up 47 percent); made-to-order sandwiches (37 percent); extensive salad bar (37 percent); and prepared hot food buffet (34 percent).

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