2009 Economic Outlook For The Global Food And Beverage Market - Apr09

2009 Economic Outlook for the Global Food and Beverage Market Christopher Shanahan Food Industry Research Analyst Global Chemicals, Materials and Food San Antonio, Texas USA April 23rd, 2009

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

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

Lack of Trust in Financial Institutions Financial Institutions Losses

Sub-Prime Mortgages Lack of Capital for Companies

Tightening Credit Markets

$

Suspension of Interbank Lending

Banks Slow Lending Down

$

$

Lack of Lending for Small Business

Slower Growth

Consumers Reduce Spending

$

Lack of Retail Credit

$ Economy Slows Down/Contracts

• 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. 3

The Economic Downturn and the Food & Beverage Market Early Early2008 2008 ••Exponential increase in Exponential increase incommodity commodity&& energy energyprices prices ••Increasing Increasingbiofuel biofuelproduction productionininUS US ••Depreciation of the U.S. dollar Depreciation of the U.S. dollar ••Increasing Increasingdemand demandfrom fromemerging emerging markets (BRIC) markets (BRIC) ••Squeezed Squeezedmargins marginsdue duetotoincreasing increasing costs costs

Late Late2008 2008 ••Exponential decrease Exponential decreaseinincommodity commodity&& energy energyprices prices ••Collapse Collapseofofdemand demandgrowth, growth,especially especially from emerging markets from emerging markets ••New Newmargin marginpressures pressures ••Continued depreciation Continued depreciationofofthe theU.S. U.S.dollar dollar ••Restricted RestrictedR&D R&Dand andmarketing marketing investment investment

2009 2009 ••Low Lowprice priceinflation inflationrates ratesfor forenergy energyand andother othercommodities commodities ••Decreased dependence on biofuels in US Decreased dependence on biofuels in US ••Flat Flatdemand demandgrowth growth ••Lower agricultural Lower agriculturalproduction production ••Increased Increasedaggressive aggressivepricing pricingstrategy strategy ••Health & wellness trend to continue Health & wellness trend to continue ••Increased Increasedfocus focuson oncost costsaving savingstrategies strategiesamong amongbusinesses businessesand andconsumers consumers 4

Impact of the Downturn on Specific US Industries The 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 90.00 82.68

81.63

79.92

80.00

76.34 69.97

70.00

69.65 65.35

64.72 61.37

60.33

59.79

60.00

57.57 54.33

53.82

50.00

52.78

50.93

50.22 45.32

42.75

40.00 30.00 20.00 10.00

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5

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

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.

Global Indexed Price Trend for Food & Beverage Commodities from April 2004 to March 2009, Base Year 2005 = 100, U.S. (2009) 200

180

Price Index

160

Likely Factors Impacting Price Volatility • Volatility energy prices

140

120

100

• Increasing biofuel production

• Government Policy

Jan-09

Jul-08

Oct-08

Apr-08

Jan-08

Jul-07

Oct-07

Apr-07

Jan-07

Jul-06

Oct-06

Apr-06

Oct-05

Jan-06

Jul-05

Apr-05

Oct-04

Jan-05

Jul-04

• Nature – Averse Weather in 2007 and 2008

80 Apr-04

• Depreciation of the U.S. dollar

Source: International Monetary Fund, Index Mundi

• Long-term growth in international demand • Slowdown in agricultural production growth • Reduced global stockpiles of basic commodities like corn, soybeans, wheat, and rice

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

$US Price per Pound

• 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. $0.20 $0.15 $0.10 $0.05 $0.00 2006

2007

Q1 2008

Q2 2008

Q3 2008

Q4 2008

Q1 2009

Q2 2009

2010

2011

Source: Frost & Sullivan

• Price per pound based on a purchase of one metric ton order 7

Consequences - Supply Chain Pressures Economic conditions have impacted US supply chain reliability

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

Biggest Problem Encountered with Ingredient Suppliers in the Past Year (2008) n = 28 Supplier Reliability 29%

Rising Costs 50%

Ingredient Availability 21%

Average Price Increase for Primary Ingredients in the Past Year (2008) n = 28 No Change Decreased 7%

Increased 1% to 10% 33%

More than 10% 60%

Source: Frost & Sullivan 8

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

• 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

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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) 5.00 4.50 4.00 3.00 2.50 2.00 1.50 1.00 0.50 Vi et na m

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CAGR %

3.50

Total Population Growth

Urban Population Growth

10

Industry Reactions to Economic Downturn Increasing conservatism due to increase in uncertainty

PRICING ADJUSTMENTS

Price Volatility ORGANIC GROWTH EXPECTATION ADJUSTMENTS

Pinched Consumer Demand

Supply Chain Issues

Food & Beverage Industry

MERGERS & ACQUISITION

RENEWED FOCUS ON HIGH GROWTH SEGMENTS

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Catalyzing the Turnaround Specific 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

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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

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Boosting Top-Line Growth Through Differentiation Service Differentiation

Optimize Relationships with Customers

Top Line Accelerated Growth

The Solution Provider: The Marriage of ValueValue-Added Quality Enhancement and Customer Relationship Optimization

Maximize Customer Value by being the Low Cost Provider Enhance ValueValue-Added Quality through New Product Development Product Differentiation Source: 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. 14

External Factors

Internal Factors

Focus on Food & Beverage Industry in China - SWOT Analysis Positive Factors

Negative Factors

STRENGTHS

WEAKNESSES

• 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

OPPORTUNITIES

• 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

THREATS

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

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

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

• Emergence of India could mean increased competition for FDI

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External Factors

Internal Factors

Focus on Grocery Retail in China - SWOT Analysis Positive Factors

Negative Factors

STRENGTHS

WEAKNESSES

• China’s vast population

• Underdeveloped infrastructure

• High disposable incomes in urban centers

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

• Lifting of FDI restrictions has fueled increased investment

OPPORTUNITIES • China’s mid-sized cities remain fairly unsaturated • The convenience and discount formats remain underdeveloped • Private labeling • Rising tourist numbers

THREATS • 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

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Next Steps 

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For Additional Information

Steve Lee Strategic Account Manager Chemicals, Materials and Food, Asia Pacific (65) 6890 0914 [email protected]

Krithika Tyagarajan Research Director- APAC 65.6890.0230 [email protected]

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