The global food industry will continue to double-down on cutting operating costs during 2017 in the face of rising input expenses and an increasingly challenging pricing environment, according to the results of just-food’s annual Confidence Survey. However, when we asked our readers what they expect 2017 to hold at the end of last year, it was not all doom and gloom.
The majority of respondents to the just-food Confidence Survey expect to grow sales over the coming year. The largest single group of respondents anticipate revenue to rise by 0-5% in the period.
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This is largely in-line with the expected global growth rate for packaged food sales and suggests that most companies, at the very least, expect to retain market share in the coming 12 months. According to market research company Research and Markets, global packaged food sales are expected to see a compound annual growth rate of 4.5% through to 2020. Growth will be led by the emerging markets in the Asia Pacific region and by higher-growth categories such as infant nutrition, the research firm predicts.
A significant number of respondents, however, expect to see faster-paced growth. Taken together, 36.25% forecast revenue growth of more than 6% in the period, with 18.75% predicting sales to increase by more than 10%. As part one of our survey breakdown revealed, growth will be supported by a focus on international expansion. Many companies also intend to maintain or increase investments in M&A and R&D to support expansion. This confident outlook also reflects an upbeat assessment of the consumer environment.
2016 was a turbulent year, marked by Brexit and the rise of populism in Europe, the election of Donald Trump in the US and a slowdown in China. But, according to the results of our survey, the majority of you enter 2017 with a positive view of consumer sentiment in your main markets.
The UK’s economy has – for the time being at least – defied the gloomy economic predictions forecast after the Brexit vote. Meanwhile, the forecast for Europe’s 2017 economic growth stand at around 1.5% and unemployment is expected to come down as a result of an easing of fiscal policy. The question mark over the region’s stability is the upcoming elections in France and Germany, with opinion polls suggesting a stronger showing from populist or anti-EU groups. In the US, growth above 2% is expected under Trump and the Republican Party, with expected policy initiatives to include lower taxes, fiscal easing and some infrastructure investment. Meanwhile, in Asia, China’s ability to maintain a stable growth trajectory while balancing risks years of debt-fueled stimulus appears to remain intact.
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By GlobalDataAs with sales, the majority of respondents expressed confidence they will be able to grow profits over the coming year. However, profit growth is expected to lag sales gains, the results of our survey would suggest. The survey revealed 33.75% of respondents think their profits will grow by 0-5%, compared to 38.75% who think their sales will increase by 0-5%; 10% expect profit growth of 6-10% while 17.5% expect sales growth of 6-10%; 16.25% think profits will rise by more than 10% compared to 18.75% who think sales will increase by more than 10%. More respondents thought profit would either decrease or stay the same, at 40%, than thought sales would decrease or stay the same, at 25%.
The disparity, it would seem, can largely be chalked up to expectations that input costs are going to increase.
Almost 70% of people who took the confidence survey predicted that input costs will increase in 2017. In contrast, under 10% of people thought that input costs will ease in the coming 12 months.
A primary driver for cost inflation in markets like the UK and EU is currency, with the sterling and euro both dropping against the dollar. For companies that buy ingredients overseas this represents a significant headwind because commodities are largely traded in the US dollar. Already this year, we have seen a swathe of UK companies – including Premier Foods plc and Mondelez International – suggest they will look to hike prices in the UK due to increased currency-related costs.
To date, this currency fluctuation has largely been sparked by Brexit. However, according to analysis from Rabobank, the Trump presidency “brings currency uncertainty” which “will translate into volatile food prices”, while elections in Europe add “further unpredictability”.
On the positive side for input prices, Rabobank researchers note key agricultural commodities are being stored in “record volumes” and this is likely to keep prices down. However, Stefan Vogel, Rabobank’s head of agri commodity markets, says China is the “wild card” here.
“Given the size of its population, its economic growth and its massive share of global agri commodity imports, it exerts a colossal influence on world food prices. And with huge stocks of many of the most important commodities – including corn, wheat and soybeans – any decision by China’s policymakers to begin selling down these reserves would have a profound effect on world markets as Chinese imports would decline,” Vogel notes.
As has already been witnessed in the UK, global food makers are likely to try and offset headwinds like forex by raising prices. This could spell an end to the era of food deflation that has characterised many global markets.
However, respondents do not expect price hikes to be easily won. Seventy-four percent of survey respondents said that the pricing environment would get tougher in 2017, while almost 22% thought it would remain the same. Speaking to the industry, phrases like “it is always difficult to pass pricing on” are commonplace. Less than 4% of people polled said they expected pricing to become less challenging in 2017.
Indeed, in the coming 12 months, there is likely to be significant retailer resistance to any move to pass pricing along to consumers. Price increases also run the risk of depressing consumer demand. As a result, many food makers will try and minimise their pricing actions.
Most food makers do not expect to pass large price increases along the chain. According to the survey, almost 67% of manufacturers believe that they will not increase prices by more than 3% and a little over 24% expect to take pricing of 4-6%. Around 9% of respondents expect to increase prices by more than 7% in the next 12 months.
This restrained approach to pricing means that food makers intend to take action elsewhere to offset rising costs and support profitability.
Cost reduction has been a major theme for the food sector in recent years. As our analysis pages have highlighted in 2016, accounting techniques such as zero-based budgeting have increasingly become the norm among CPG corporations.
Many of you – almost 80% – expect this increased focus on efficiency to continue in 2017. Barely over 1% of survey respondents said their organisations were likely to tone down the emphasis being placed on cost reduction in the coming year.
Food companies expect to look to internal factors to drive down costs, the just-food Confidence Survey suggests, with 31.17% of respondents suggesting that this will be the primary source of efficiency gains. Most, however, expect savings to come from both internal and external factors – suggesting there will also be pressure on suppliers and service providers to reduce expenses.
