Cost reduction is the top priority in 2009 for senior executives in the food and beverage industry according to a new report, Food and Beverage 2012, from business advisory firm Deloitte, which provides strategies for manufacturers to cope with volatile conditions.

Thirty-one per cent of respondents have made cost reduction their number one issue this year as they face up to the challenges of the economic downturn. While food and beverage executives are more positive than some other sectors, 48% believe the outlook for their industry will worsen.

“The economic downturn has presented food and beverage companies with new challenges,” Lawrence Hutter, Global Head of Food and Beverage at Deloitte, noted. “It is impacting how much money consumers spend but also the way in which they spend it. Footfall in discount grocers is rising and many shoppers are trading down. That said the focus on good nutrition and health has not gone away.”

“People are still spending money but their priorities are changing, with price and value increasingly central to the choices they make about where to shop and what to buy. We are, for example, seeing significant shifts away from eating out to eating at home, with consequent challenges in food service and opportunities in grocery.”

The report advised that convenience, quality, health, environmental and ethical concerns had not evaporated from the consumer mindset, it’s just that price and value were now taking precedence more often.

“Public health and the environment are key areas of government policy and will continue to shape the political agenda… Public pressure on manufacturers and retailers to behave more responsibly in terms of, for example, animal welfare, (will not) go away, driven by pressure groups, the media and celebrity chefs,” the report said.

The changing nature of consumer behaviour has not gone unnoticed by manufacturers, with 25% of respondents reporting the profile of their target consumer was changing, while the same proportion said their customers were trading down. Notably, 83% of those surveyed expect to change the way they communicate their brand proposition to their target audience. This will be done by putting greater emphasis on brand differentiation and value, and by working more closely with retailers on communicating with the shopper in-store.

2008 was a tumultuous year for the food and beverage sector as sharply rising food commodity prices dominated the agenda in the first half of the year and economic conditions caused great concern in the second half. Seventy-three per cent of businesses in the survey reported substantial input cost rises during the previous 12 months. A quarter faced increases of between 11% and 25%. Tellingly, only 8% of respondents implemented price increases to match this rise, with 56% putting up their own prices by 10% or less. Only 37% of respondents passed on all cost increases to their customers, although a further 6% managed to increase prices at a greater rate than input costs.

“With a range of input costs falling, many manufacturers are now seeing their retail customers ask for price reductions,” Mr Hutter added. “Intense competition between… grocers will ensure that commodity price falls are passed through to consumers.”

The price spike of 2008 is widely seen as a taste of what’s to come, with commodity prices and the security of food supply remaining high on the agenda for food and beverage industry executives. In the survey, 38% of respondents cited these two issues as the biggest facing the sector in the next 5-10 years.

“Businesses must prepare themselves for ongoing volatility in the markets. Food and oil prices will almost certainly rise again in the future as the global economy recovers and the world’s population continues to grow,” Mr Hutter explained. “Food and beverage businesses need to give careful thought to their sourcing strategies and relationships with key suppliers.”

The report also touched on a trend toward fewer and more planned trips to the supermarket and  an increasing number of “careful shoppers” who are shopping around for commodities in one store, and luxuries in another.

“Our respondents have identified both serious challenges and real opportunities that the economic downturn will present the industry. Some businesses need to tackle urgent issues related to debt and liquidity. Many need to focus on immediate drivers of trading performance such as pricing and cost structures.”

“Longer term the winners will be those organisations that effectively track and anticipate changing consumer needs and meet these needs with relevant brands, products and services that deliver value, while at the same time responding to consumer values that have not gone away such as the desire for good nutrition and sustainable sourcing,” Mr Hatter concluded.

The full report can be found at: www.deloitte.com/dtt/article/0,1002,cid%253D247897,00.html

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