Food industry: dynamics demand sustainability
Read all about the latest trends and developments in this 2022 update from Rabobank.
Unprecedented dynamics in the chain
The food chain currently appears to be in the eye of the hurricane with sharply rising costs, a rapidly changing consumer and the absolute need to become more sustainable. Key current events in a row:
1. Cost inflation. Within the food industry, virtually all costs are currently rising, with the various elements also reinforcing each other. Logistical disruptions, rising raw material prices, personnel shortages, higher energy prices, scarcity in packaging materials: on all fronts we are seeing an upward trend in costs. Already in fall 2021, Rabobank warned of a sharp price increase towards the final consumer. This was fuelled in part by the disruption to the chain caused by the corona pandemic combined with logistical problems, crop failures and geopolitical tensions. Added to this in 2022 was the war in Ukraine, which caused prices to rise for energy and various raw materials such as grain, fertilizer and vegetable oils. Through 2023, we expect above-average costs for the food industry.
2. Changing consumer and demand. Lockdowns of the hospitality industry during the corona pandemic already caused significant shifts in the market. Food retail benefited from this, food service on the other hand went down sharply. In 2022 we see a good recovery of the hospitality industry and thus a shift in demand from food retail back to hospitality. Current inflation is also having an impact; we expect further downtrading by consumers. This means consumers are becoming more wallet conscious and choosing cheaper providers and alternatives. Discount, supermarket and quick-service then typically benefit at the expense of more premium providers such as specialty stores and gourmet restaurants. In addition to corona and inflation, we see consumer change in several areas. Consumers are seeking more and more convenience; both in home delivery and immediate consumption. There is also mental convenience. Consumers like to have insight into such things as how healthy or how sustainable a product is.
3. The need for sustainability. Climate change is leading to increasingly severe weather extremes, resulting in droughts, floods and crop failures. This affects the entire chain and so has an impact on availability and pricing of raw materials. For food entrepreneurs, securing the supply of your raw materials is therefore one of the most important strategic challenges. Both in availability and in the right price. Especially for business-critical raw materials, it is important to work toward long-term connections with your suppliers and your primary producers. Transparency, interdependence and fairer prices within the chain are gaining in importance. Also, many entrepreneurs are making a choice for just-in-case inventory management. More inventory, but also stock closer to home. Instead of ordering when you need stock (just-in-time). The need for sustainability, both in terms of climate and environment (nitrogen, water, biodiversity) is greater than ever. As a food producer, you have to take the reins on securing a sustainable supply-chain.
The Dutch food market is highly saturated and has limited growth, equal to the relatively limited population and economic growth in our country. This also applies to the countries surrounding us to which a large part of our exports go. Real growth markets are often far away, in Asia and Africa, with numerous challenges to export to. The limited growth opportunities in our hinterland, Northwest Europe, versus the strong international growth, leads to increasing scale, chain integration and acquisitions and further consolidation in the chain. The outlook for the food industry is generally neutral with stable but limited growth and then mainly focused on exports within the EU.
So we are not going to eat more, but we are going to eat differently. We are going to consume differently and make different demands on products. Also due to demographic developments such as aging, migration and the arrival of more single households. A good price-quality ratio remains important for the average consumer. Only for products with a clear added value, or niche or premium products with a unique experience or taste, people are willing to pay more. The middle segment, especially the B brands, have been struggling for some time. Furthermore, consumers are especially willing to pay for the time factor. The amount of time the average consumer spends in the kitchen has been declining for decades in a row. We take less time to cook and increasingly seek convenience when we want something to eat. Segments benefiting from this are home delivery of groceries, the out-of-home market and offering pre-cut, prepared items and fresh ready-to-eat products.
Read here more on this topic.
The food supply-chain is changing
Throughout the food supply chain, supermarket chains have a dominant position, with 5 major purchasing organizations in the Netherlands. We also see this in Germany, France and the United Kingdom (UK), our main export countries. At the same time, the growth of online retail and out-of-home consumption is creating more competition. Supermarkets are looking for ways to differentiate themselves, this in turn provides opportunities for the industry. On these 5 points we see the chain changing:
1. Retail wants to buy as close to the source as possible. This is to be sure of delivery and quality. The current international dynamics increase this need, as logistics are disrupted and raw materials are more limited in availability. We see that chains are increasingly integrating, expanding and consolidating. There is also more investment in partnerships in the chain, and therefore in guaranteed supply, security of sales and more stable prices;
2. Home delivery of groceries continues to grow. More and more ordering platforms, delivery services, meal boxes and pick-up points are emerging. The chain is digitizing and it is all made possible by data. The underlying revenue model (last mile delivery) just remains difficult to make profitable. The future lies in personalization of the offer for consumers: tailor-made food. Digitalization is therefore becoming increasingly important, as is doing more with data to gain insight into consumer or food retail;3. Outlets such as food retail and foodservice are increasingly merging into each other (branch blurring). Instead of one and the same standard formula at all locations, food retailers and foodservice are increasingly opting for differentiation of their formula, and the associated assortment, based on the needs of the target group that comes to this location. We also see more and more food outlets emerging in places that traditionally attract a lot of people, such as gas stations. With increasing differentiation of formulas, producers have to adapt their products and offer more customization to, for example, other requirements in packaging, freshness, and whether something can be eaten immediately or not and more;
4. Private brands and A-brands are growing strongly and increasingly coming from the same factory. Driven by the growth of discount supermarkets such as Lidl and the Aldi, the large full-service supermarkets such as Jumbo and Albert Heijn have invested heavily in cheaper private brands. For their part, A-brand producers are increasingly outsourcing their products to specialized (private label) producers so that they can focus on product innovation and brand development;
5. Staff shortages are the new normal. Scarcity in good staff, both in hands on the shop floor and higher, technically trained staff, is leading to further automation and robotization of the chain.
Strategic challenges for the manufacturer
A changing consumer and a changing food chain, presents strategic challenges for the food producer. For food producers, operational excellence, producing as efficiently as possible, has become a basic requirement for success. The production process will be further digitized, with a particular focus on process automation and robotization of production.
Next, the challenge is to bind your buyers, i.e. food retail or foodservice, to you by excelling in category, product or service. Only a limited number of food producers succeed in engaging consumers with unique products, brands or services. The concentration of sales on countries further away is becoming more critical, while sales in one's own region, Northwest Europe and in shorter chains have become more attractive.
Finally, it is also important to engage suppliers of raw materials and/or the producers of your primary bulk products. Strategic sourcing is becoming crucial for sustaining your business model for the longer term.
These times call for sustainable innovation
Consumers are making increasing demands on how food is produced. Radical transparency is becoming the norm. We see retailers and producers responding to this by introducing labels such as Eco-Score. The aim is to give consumers more insight into the impact of the production of specific food products on climate and the environment, among other things. In the coming years, the large supermarket organizations will focus more on climate impact in particular. And since the chain is responsible for more than 95% of greenhouse gas emissions and not the supermarket itself, the supermarkets will largely place the responsibility for reduction on the food producers.
So as a producer, you will have to start taking steps to substantially reduce emissions in your chain over time. This not only involves costs, but also opportunities. Food retailers will want to distinguish themselves from their competitors by offering products with lower emissions. So innovating in this as a producer and being transparent about it offers extra added value towards your customers;
The complete article by Rabobank can be readhere