Changing consumer lifestyle needs and growing retail power will heavily affect the Belgian Food Industry

Deloitte survey: "Financial and operational performance in the Food Industry"
15 December 2011

Brussels, 14 December 2011 – For 2011 and the next couple of years, the Food Industry will have to face important challenges in the developed economies in order to safeguard their margins. The performance of the Belgian Food Industry highly depends on the success with which Operational Excellence, Innovation, Diversification and Consolidation are pursued. The Industry in Belgium is on track and has the right focus to deal with the challenges of the future, such as the drastic changes that are expected in consumer behavior and the challenging management of the retailer-supplier relation. However, multinationals are in better shape to face these challenges compared to SME's in Belgium. SME's are facing challenging times with about 50% of the participants struggling to be profitable or even survive, but niche players and those supplying a local market prove to be successful with high operating margins. This are some of the main conclusions of the Deloitte survey on the Food Industry in Belgium.

One of the most dramatic changes expected in consumer behavior over the next couple of years is the change in consumption of foods. In the next 10 years, with the world's population to increase 11%, there will not just be 766 million more mouths to feed (United Nations), there will also be a change in what these mouths will be eating. At least 70 million new consumers are expected to enter the global middle class each year, 800 million by 2020, mainly due to the growth in emerging markets such as China and India. As income rise, people typically shift from grain-based diets to 'high-value' food such as meat, fish, dairy products, fruits and vegetables. As such, Deloitte expects global food prices to further increase significantly the coming years , impacting the business models and strategies of today's food producers.

Top priorities and challenges for the Belgian Food Industry

The Belgian food industry is mainly supplying developed countries. The emerging middle class in developed markets represents the biggest single opportunity for growth, but meeting the lifestyle needs of these customers will require radical innovation in delivering the right products at an even more competitive price. William Blomme, Food Industry Leader at Deloitte Belgium, adds: "The developed markets will remain, for the most part, the primary generators of profitability but will offer limited growth opportunities. Due to the recession, consumers are more value-conscious and will expect more value for less money."

In addition, as retail power is growing in developed markets, brand owners will need to focus on a clearly articulated value proposition. Increasingly important is what companies and brands stand for. In this respect, sustainability can become a major driver of the value creation as it leads to innovation, better products and business processes and opportunities for growth. William Blomme, Food Industry Leader at Deloitte Belgium, adds: "the brands and companies that stand for something relevant and engage themselves for consumers will survive in the competitive environment of the next few years".

The challenge which is recognized by most of the participating companies is the management of the retailer-supplier relation. Almost all companies have indicated that the power of the retailer has grown significantly over the past few years by the introduction of retailer brands and consolidation in the retail market. About 40% of the participants consider this as one of the top 3 challenges for the future.

Operational Excellence, Innovation, Diversification and Consolidation as key drivers for success – SME's lag behind

The Deloitte analyses of the performance in the Food Industry reveals that a high operating margin is not necessarily linked with the label strategy (brand vs. private label) nor with the size or geographical spread of the company. However, it highly depends on the success with which Operational Excellence, Innovation, Diversification and Consolidation are pursued. When less focus is put on either one or more of these drivers, the operating margin starts to decrease.

The survey shows that the Food Industry in Belgium is on track, with the right focus to deal with the challenges of the future. However, the survey reveals that multinationals are investing much more in this trend compared to SME's in Belgium. Bjorn Borghs, Director at Deloitte explains: "Although almost 50% of the SME's participating in the survey are branded label companies, only 14% of the total population does recognize the challenges for the coming years. Analyzing the financial performance of the others, reveals that their operating margin is significantly under pressure and some are facing structural losses. SME's in Belgium owning brands are therefore not sufficiently recognizing and dealing with the challenges of the future."

The survey also reveals that SME's are indeed facing challenging times with about 50% of the participants struggling to be profitable or even survive, equally spread over private versus branded label companies. Charlotte Vanrobaeys, Director at Deloitte adds: "With respect to consolidation, we notice that best performing SME's have started initiatives to consolidate procurement with other non-competing companies. To deal with these challenges, 38% of the best performing companies indicate that the required skill and competency set is altering, making HR one of the top priorities for the future."

Main volume drivers for the future

Surprisingly or not, innovation is by far the leading driver for future growth. Not surprisingly as high performing companies have always embedded innovation as a key principle in all their business processes and have been focusing on continuous innovation initiatives. The survey reveals that also low performing companies realize the importance of innovation and currently consider this as even more important for future growth compared to high performing companies.

William Blomme points out: "However, we do notice that these companies have difficulties in properly addressing attention points on how, when, what and where and consider innovation initiatives on an ad hoc basis, rather than as a continuous business process."