In the spotlight: Manufacturers continue uphill battle in developed markets
Last week brought further evidence of the difficulties facing food manufacturers as they look to grow their businesses in the developed markets of the US and Europe.
Without the demographic growth drivers boasted by emerging markets, weak intrinsic growth prospects mean that food makers are having to focus on innovation and product development as they vie to expand their share of relatively stagnant sales. Investment such as Mars' GBP6m (US$9.8m) innovation centre, opened last week in the UK, are therefore crucial to success.
Poor economic sentiment in the US and Europe also means that price competition remains sharp. Branded food manufacturers must ensure they hit the right price points and are able to compete with rivals, including private label, while also protecting the brand equity. This is a difficult balancing act that means that - as pressure on input costs tracks volatile commodity prices - food manufactures must look internally to reduce their cost base in order to boost profits.
This necessity was one of the primary reasons that Campbell Soup Co gave for the announcement that it will shutter two manufacturing plants in the US, shedding 700 jobs in the process. Campbell said that falling demand for soup products, coupled with improved productivity, had resulted in an overcapacity in its production facilities.
The group said it will incur pre-tax costs of US$115m and capital spending of $27m as a result of the closures. However, the move is expected to save Campbell $30m a year.
Improved productivity at Campbell will certainly be music to the ears of investors in the US-based soup maker. As it looks to increase its focus on simple meals and snacks, and reducing reliance on its flagship soup business, the company has undergone an extensive restructuring programme. Campbell's efforts could be showing the first signs that this strategy will bear fruit.
Earlier this month, Campbell said its fourth-quarter earnings saw year-on-year improvement, boosted by lower restructuring charges. Significantly, Campbell also revealed that soup sales rose for the first time in two years. While this is still far from a rally, pundits will be watching with interest as Campbell - a business grounded in the US market - continues its turnaround drive.
Dean Foods, another US-focused company that is struggling to grow profits, also hit the headlines last week when it announced it is considering selling off its Morningstar business, a producer of creams and cultured dairy products for foodservice and own-label firms.
Like Campbell, Dean Foods has focused on driving cost savings (stripping $300m in costs out of the business since 2009). The group has also looked to focus on its core business, selling off under-performing units, while considering various strategic steps to optimise shareholder value - such as the planned spin-off of part of its WhiteWave-Alpro business.
Nevertheless, Dean Foods - like many operating in developed markets - is facing increased competition among suppliers due to the ongoing process of consolidation in the retail grocery industry.
Given this constriction - and with developed economies in Europe and North America still struggling - last week's confirmation that Nestle is increasing its focus on developing markets should come as little surprise.
Addressing investors at a summit in Shanghai, management of the world's largest food group revealed that it intends to treble sales in Asia, Oceania and Africa over the next ten years.
A cursory examination of recent news from the Swiss food manufacturer makes this push evident. Only last week, the company confirmed its ambitions in Africa with the inauguration of its first production facility in the Congo.
Expanding a business across divergent geographies and demographics obviously presents a number of challenges. But Nestle has proven itself a master of adapting products to meet local preferences. Indeed, meeting the nutritional needs of communities in the developing world at affordable price points is the driving force behind Nestle's "popularly positioned products" strategy. The company is also keen to leverage the expertise, market insight and infrastructure of local partners in new markets.
While Nestle is only-too aware of the significant competition from local players and other multinationals alike, the company has targeted an opportunity presented by the as yet largely underdeveloped health and wellness category in emerging markets, a strategy that is in-line with its aim to become a "health and wellness" focused company.
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