Comment: US food industry braces for challenge ahead

The world's largest retailer Wal-Mart was able to report some encouraging news last week, when it unveiled improved domestic sales for the final quarter of 2011. 

In recent years, the company has increasingly leaned on its international operations to fuel top-line growth. In contrast, its US business has struggled to grow revenues. Various initiatives, such as reducing the number of SKUs it carries, were roundly rejected by Wal-Mart's brand- and price-conscious customers.

Wal-Mart responded to this lacklustre domestic performance with a back-to-basics approach that has seen it finally gain sales traction in the US – with a 2.5% sales lift in the market during the fourth-quarter.

Merchandising initiatives and improved availability, coupled with a renewed focus on price, have struck a chord with hard-pressed US shoppers. Wal-Mart, it seems, is once again the home of a wide assortment of big brands at low prices.

While you might have thought that rising US sales would have brought Wal-Mart's TM smiley face to its shareholders, the group's results actually left some in the investment community worrying over the impact that price investments will have on margins. Indeed, shares in the company dipped following Wal-Mart's fourth-quarter and full-year results release last week, which just goes to prove the old adage – “you're damned if you do, damned if you don't”.

Augmenting these margin concerns, it seems Wal-Mart could find it progressively harder to keep prices down in the coming year, if the general sentiment at the Consumer Analyst Group of New York conference is anything to go by.

US food giants from ConAgra to General Mills roundly warned of the impact that pricing initiatives were having on volumes.

US shoppers are “making do with less” in response to price increases that various brand manufacturers have pushed through as they look to protect margins in the face of higher input costs. The squeeze on the income of America's middle class has added to this problem and increased the threat presented to brands by private label alternatives.

These industry-wide concerns means that the US food sector looks set to continue to witness challenging conditions in 2012.

The majority of companies presenting at CAGNY offered their own spin on a fairly textbook answer to the problem at hand: increase investment in brand building and innovation while you cut costs to protect margins. Whether this will be enough to shore-up profits in the current tough trading environment remains to be seen.

However, it was not all gloom and doom in sunny Florida. Kraft was able to crow somewhat as management detailed how they achieved the company's impressive turnaround, while Mead Johnson insisted that there are “few” in the industry who can look to the future with such confidence, in spite of the anticipated negative impact from the publicity surrounding December's – false – safety scare.

So, with a mixed outlook for the US food industry, the remainder of the year looks set to be turbulent as companies vie for increasingly scarce consumer dollars and simultaneously attempt to keep a lid on margins.