Battling the recession – 2009 outlook

The financial crisis is staring us down, as we try to figure out who’s boss. The fear of a long-term economic slowdown is a reality that all manufacturers are beginning to realise.

Although, food consumption patterns are relatively insensitive to changes in personal income, it can be expected that there will be changes to what consumers buy and where they buy it. As consumers re-evaluate their spending, knowing which products are likely to be hardest hit could provide food companies with a competitive edge.

As Austrade’s chief economist, Tim Harcourt, put it, “the overall position of the food industry’s international business is difficult to predict, but it is reasonable to expect some individual businesses may do well, while others may not be able to ‘recalibrate’ to meet the changed circumstances.”

As consumers painstakingly re-evaluate each dollar that goes into their grocery bill, food manufacturers are at crossroads to find the best possible way to create and develop ‘recession proof products and alternatives’ to tide over the downturn.

The outlook for 2009 looks gloomy, however, and manufacturers are seeking ways which could provide some immunity during this period of economic uncertainty and help combat yet another inevitable reality.

Euromonitor analyst, Lee Linthicum, believes that while “the mass consumer would not pay a premium in times like this, the health conscious and selective niche segments will.”

Beliefs and shifts

A sharp fall in the value of the Australian dollar has improved the competitiveness of Australian products across the range of foods and services in various Asian markets – where currencies have not depreciated as much against the US dollar.

Moreover, there is a cautious optimism amongst exporters that they will see retailers and importers in select sophisticated consumer markets create more demand for ‘comfort’ and ‘feel good’ foods, to satisfy changing consumer demands. Consumer preferences will reflect a ‘trading down’ effect that favours smaller players who have a reputation for consistency, and value for money, to survive the recession.

According to Euromonitor, the aftermath of the food inflation and recent financial market crisis has had an immense effect on companies across the food value-chain. Financial and marketing support becomes vital as food and beverage importers in some markets look to extend their credit terms in order to manage their cash flows, if (and when) sales slow down.

In times like this, aggressive international retailers may therefore demand more promotional support from suppliers in order to maintain the sales volume.

Euromonitor’s recent report also predicted that the gourmet ingredients and regional specialty products are more vulnerable to a downturn in demand. As the market situation becomes less conducive for innovation, packaged food manufactures have lesser bargaining power to convince consumers to pay a premium.

The greatest hope for manufacturers in this time of turmoil is that consumer spending is expected to shift as people eat more at home. Positioning packaged food as a high-quality alternative to restaurant meals should therefore compensate the declining trend in the marketplace.

Survival of the freshest

The heterogeneous Asian market will open up opportunities for food exporters who are flexible in adapting to the new reality. According to Harcourt, companies that can offer lower cost options to retailers have an upper hand, especially in high retail concentrated markets.

In addition, companies that can meet the private label requirements of retailers could also benefit from the current situation. There may also be demand in wine export markets for those changing to reflect a ‘trading down’ to less expensive brands.

The economic downturn might prompt retailers to seek lowest cost supply options, particularly in markets where there is high retailer concentration. This is an opportunity for companies that can offer lower cost product options to retailers.

Consumers seeking value and convenience may increase consumption of takeaway and fast food, relative to fine dining, presenting an opportunity for companies supplying to this channel.

For Harcourt, “a company’s greatest vulnerability may lie in its distribution.” In order to survive and thrive in this time of economic crisis, food companies may need to quickly assess other distribution options in the existing market and rationalise their go-to-market decisions.

Last but not least, to ride out the recession and maximise profits in difficult market conditions, Euromonitor suggests that manufacturers think of several strategic responses befitting the profile of the company. Theseinclude raw material substitution, simplifying manufacturing processes, shifting into higher-margin segments, reducing package sizes, and increasing branding activities.

Analysts remain optimistic in their view that the Australian food industry has what it takes to ride out the recession. With the country’s well-recognised reputation of having a safe food manufacturing industry, this awareness may be enhanced in the light of unfortunate food contamination issues in other parts of the world.

It is becoming increasingly more critical for companies to understand their own business parameters, and the markets in which they are focusing their energies. In this way, while building on their differentiation and food quality and safety, even in these tough times, they can achieve success.

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