Guess who holds the power in the food industry - and it's not the processors

Once upon a time the food processors were the power brokers in the food industry and the supermarkets and grocery stores were just their retail outlets. But the balance of power has shifted dramatically since the retailers realised that, with 75% of food and beverage companies relying on them to actually sell the food, they could wrest the power from the processors and run the show.

The large retailers have realised that food processors rely heavily on the supermarkets and grocery stores to move their product. All the retailers have to do is decide not to carry a product or to limit the space allocated to a product or to only place the product unfavourably on an inconvenient bottom shelf to dramatically affect the income and, in many cases, actual viability of a food processor.

Advisory firm Grant Thornton has released a study ‘Hunger for growth: Food and Beverage looks to the future’ that examines the power relationships between food and beverage processors and the large retail outlets. The study has highlighted how the rise of mega-retailers around the world has left food industry executives wondering how to regain leverage in these often contentious relationships.

Food and beverage companies are warning that the power of the mega-retailers is the single biggest constraint on business growth. Vincent Frambourt, national leader food & beverage, Grant Thornton France, said it was a problem around the world.

“Food and beverage companies cannot do much to fight against retailers’ power,” Frambourt said.

Grant Thornton Australia’s food & beverage national leader, Tony Pititto, said Australian food and beverage companies were similarly affected by the worldwide rise in mega-retailers, with Coles and Woolworths controlling some 70% of retail sales.

“The market power of the mega-retailers is an international phenomenon with small retailers and suppliers getting squeezed everywhere around the world,” Pititto said.

He suggested that industry executives could improve their bargaining positions in a number of ways. “They can diversify customer portfolios, build a product leader, develop niche markets and diversify their product portfolios.”

More than half of food and beverage executives rated market dominance by retailers as a significant or moderate risk to their supply chains and organisations.

Despite those concerns, the study found that the outlook for the sector is positive with food and beverage companies poised for growth amid an improved global economic outlook and Australia is leading a wave of renewed optimism as more producers look to China and Southeast Asia as export markets.

Food and beverage businesses in Australia currently export a median of 5% of goods and expect this to rise to 10% in two years. In Europe, exports are forecast to increase from 7 to 10%, and North America from 4 to 8%.

Southeast Asia (excluding China) and China have been identified as the key markets for Australasian producers, with 63% and 57% of respondents in the region looking to enter these markets in the next two years.

Pititto said the power of the consumer in this region is key. “China alone has seen a 15-20% rise in salaries, which is helping fuel consumer demand for food and beverages,” he said. While the export market is seen as a boom for Australian producers, challenges still remain in the form of the high Australian dollar and increasing logistics and distribution costs.

This was echoed in the results of the survey, which found many Australian companies believed that government assistance to address logistics and distribution costs was a key area that would help their business to capitalise on the Asia exports opportunity.

Another big issue for Australian producers is the effects of pricing, with 92% of Australian F&B executives expecting an increase in raw material costs in the next 12 months, compared to 85% of the world.

Emerging trends

The global study, which surveyed 248 business leaders in food and beverage companies around the world, found the top five food trends that will positively impact companies in the next 12 months are premium/luxury (60%), healthy/nutritious (59%), locally sourced (49%), sustainably produced (46%) and convenience foods (44%).

“With China and India moving significantly more of their populations into middle class, Australian companies have a golden opportunity to capitalise on new and emerging trends such as premium or luxury products, as well as healthy and nutritious offerings,” Pititto said.

Approximately half of food and beverage companies (52%) will require additional funding in the next 12 months, although the sources will vary according to the local environment for credit. Nearly half (48%) of food and beverage executives are considering merger and acquisition opportunities as a way to strengthen their market position over the next 12 months.

Jim Menzies, global leader food & beverage at Grant Thornton, commented: “Those companies who can’t finance expansion plans through their cash reserves will need to be resourceful in finding funding and look at a range of options from bank lending through to private equity investment. We’re also likely to see companies being more strategic and looking for opportunities to partner or acquire other producers. This will enable them to get greater leverage in market prices and generate economies of scale on the production side of their businesses.”