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

2
Taking a Step Back and Reviewing the Recession Genesis
From Financial Sector to Real Sector

Defaults Lack of Trust in Financial Institutions

Sub-Prime Mortgages Financial Institutions

Losses
Lack of Capital Suspension of
for Companies Interbank Lending
Tightening Credit Markets
$

Banks Slow Lending Down

$ $
Lack of Lending for
Small Business

Slower Growth Lack of Retail

Consumers Reduce Spending
$ 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 Late
Late2008
2008
••Exponential
Exponential increase incommodity
increase in commodity&& ••Exponential
Exponential decreaseinincommodity
decrease commodity&&
energy
energyprices
prices energy
energyprices
prices
••Increasing
Increasingbiofuel
biofuelproduction
productionininUS
US ••Collapse
Collapseofofdemand
demandgrowth,
growth,especially
especially
••Depreciation of the U.S. dollar
Depreciation of the U.S. dollar from emerging markets
from emerging markets
••Increasing
Increasingdemand
demandfrom
fromemerging
emerging ••New
Newmargin
marginpressures
pressures
markets (BRIC)
markets (BRIC) ••Continued
Continued depreciationofofthe
depreciation theU.S.
U.S.dollar
dollar
••Squeezed
Squeezedmargins
marginsdue
duetotoincreasing
increasing ••Restricted
RestrictedR&D
R&Dand
andmarketing
marketing
costs
costs investment
investment

2009
2009

••Low
Lowprice
priceinflation
inflationrates
ratesfor
forenergy
energyand
andother
othercommodities
commodities
••Decreased dependence on biofuels
Decreased dependence on biofuels in USin US
••Flat
Flatdemand
demandgrowth
growth
••Lower
Lower agriculturalproduction
agricultural production
••Increased
Increasedaggressive
aggressivepricing
pricingstrategy
strategy
••Health & wellness trend to continue
Health & wellness trend to continue
••Increased
Increasedfocus
focusononcost
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 69.65
70.00 65.35 64.72
61.37 60.33 59.79
60.00 57.57
54.33 53.82 52.78
50.93 50.22
50.00 45.32
42.75

40.00

30.00

20.00

10.00

0.00
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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 Global Indexed Price Trend for Food & Beverage Commodities from April 2004 to
dramatic fall in prices. Pinpointing a particular cause for March 2009, Base Year 2005 = 100, U.S. (2009)
the increased volatility in food prices has been attempted 200
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 180
economy as a whole.
160

Price Index
140

Likely Factors Impacting Price Volatility 120

• Volatility energy prices 100

• Increasing biofuel production

80
• Depreciation of the U.S. dollar

Jul-04

Jul-05

Jul-06

Jul-07

Jul-08
Jan-05

Jan-06

Jan-07

Jan-08

Jan-09
Apr-04

Oct-04

Apr-05

Oct-05

Apr-06

Oct-06

Apr-07

Oct-07

Apr-08

Oct-08
• Nature – Averse Weather in 2007 and 2008
• Government Policy 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

6
Significant Decline In Second-Half 2008 Imports
Corresponded to Decline in World Sulfur Prices
• 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
$US Price per Pound

$0.15

$0.10

$0.05

$0.00
2006 2007 Q1 Q2 Q3 Q4 Q1 Q2 2010 2011
2008 2008 2008 2008 2009 2009
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

Biggest Problem Encountered with Ingredient

Supply Chain Pressures Suppliers in the Past Year (2008) n = 28

• The economic downturn is pinching Supplier

Reliability
consumer demand in the food market, 29%
but the food economy has been
recession resilient Rising Costs
Ingredient 50%
Availability
Other factors are impacting industry 21%

performance and supply chains

• Impact on supply chain Average Price Increase for Primary Ingredients in the
Past Year (2008) n = 28
• Squeezed Margins No Change -
Decreased
• Availability 7%

• Pricing
Increased 1%
• Reliability to 10%
33%
• Supply chain safety and traceability
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

9
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
3.50
CAGR %

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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
MERGERS &
Demand
Food & Beverage ACQUISITION
Industry

Supply RENEWED FOCUS ON

Chain HIGH GROWTH
Issues SEGMENTS

11
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

12
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

13
Boosting Top-Line Growth Through Differentiation

Top Line Accelerated Growth

Service Differentiation

The Solution Provider: The

Optimize Relationships with
Customers
Marriage of Value-
Value-Added
Quality Enhancement and
Customer Relationship
Optimization

Maximize Customer Value by

being the Low Cost Provider
Enhance Value-
Value-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
Focus on Food & Beverage Industry in China - SWOT
Analysis
Positive Factors
STRENGTHS
Internal Factors
• 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
External Factors
• Health scares have opened up the
market for food imports and has a
positive effect on sales of processed
foods
• Rising disposable incomes is fueling
growth in high-quality and specialty
processed foods
Negative Factors
WEAKNESSES
• 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
• Food scares have impacted the entire
food value chain
highlighted
vulnerabilities of the marketplace

could constrain FDI
• Emergence of India could mean
increased competition for FDI
15
Focus on Grocery Retail in China - SWOT Analysis

Positive Factors Negative Factors

STRENGTHS WEAKNESSES
Internal Factors

• 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 THREATS
External Factors

• China’s mid-sized cities remain fairly • Saturation in major cities is near

unsaturated • Hypermarket format is already facing
• The convenience and discount formats regulatory obstacles
remain underdeveloped • Structural problems such as wide income
• Private labeling inequality could constrain grocery retail
growth
• Rising tourist numbers

16
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17
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For Additional Information

Steve Lee
Strategic Account Manager Krithika Tyagarajan
Chemicals, Materials and Food, Asia Pacific Research Director- APAC
(65) 6890 0914 65.6890.0230
steve.lee@frost.com
ktyagarajan@frost.com

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