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  1. Analysis
December 22, 2011

2011 in review – Industry tries to adapt to The Great Correction

The collapse of Lehman Brothers in October 2008 was a pivotal point in the evolution of our economic landscape. The fact businesses can look back to that day and pinpoint a sea-change in the shopping behaviour of Western consumers makes it the most extraordinary of events.

The collapse of Lehman Brothers in October 2008 was a pivotal point in the evolution of our economic landscape. The fact businesses can look back to that day and pinpoint a sea-change in the shopping behaviour of Western consumers makes it the most extraordinary of events.

The winter of 2011/12 may yet be defined by a similar cataclysmic economic event should the Eurozone finally collapse under the weight of sovereign debt and mismanagement. Even if politicians manage to swerve their very own Greek tragedy, or at least postpone what many commentators see as the inevitable, the final months of 2011 have been another watershed moment for the food and retail industries.

Data out this month showed how the UK grocery market has grown at only 4.2% for the 12-week period up until 27 November over the same period last year. This remains below the 6.2% inflation rate as shoppers continue to feel the pressure on their purse strings.

Living costs in the UK have now reached a 20-year high. Given the fall in mortgage rates, it’s an astonishing rise that is putting an unprecedented squeeze on consumers. Little wonder, then, that a recent Deloitte poll of UK finance directors showed 43% are preparing for a second recession. In the US, and across the rest of western and northern Europe, economists are also growing more pessimistic about the prospects for growth.

As Rod Street, of Symphony IRI, pointed out in his column for just-food in October: “In the West we are facing a new, unique inflection point in the market economy. Many grocery markets in Europe are not just at a standstill but have declined in terms of sales volume as households face a mammoth squeeze on their budgets. Economic pundits are now starting to understand just how long the recovery from a debt laden recession might be.”

These are not merely figures and projections from headline-seeking research groups looking to fuel the media’s hunger for gloom. They represent a second, significant shift in the boundaries that define customer behaviour.

“We used to think growth was the norm,” IGD boss Joanne Denney-Finch, said in her opening address to the annual IGD conference earlier this year. “From the mid-nineties to the mid-noughties, consumption in Europe grew by almost 4% per year. But since the credit crunch, sales volume for our sector is down by 2%. People are calling this the Great Correction and no-one knows how long it’ll last.”

The food industry, to its credit, has got wise to the fact that this double-dip recession – because that is what it is, no matter what the technical definitions – has forever altered the relationship between consumers, the products they buy and the retailers they buy them from.

If 2011 is to be remembered for its positives, then it should be remembered for the innovative efforts of those companies who have met this challenge head on.

Nestle’s decision to invest GBP110m to triple coffee capsule production at its Dolce Gusto site in the UK showed how the Swiss food giant had tapped into one of the most important consumer trends of this economic stagnation. Consumers may be eating out less – and perhaps eschewing that GBP3 cup of coffee on the way to work – but they still want to indulge themselves at home. Nestle said its Nescafé Dolce Gusto “coffee shop at home system” had grown “phenomenally” since its launch in 2006. This year, Nescafé Dolce Gusto has been growing at a rate of 50%, it said.

In the US, HJ Heinz has decided to launch a raft of smaller products as consumers looked to manage their spending on food more carefully. Heinz chairman, president and CEO Bill Johnston said there had been a “dramatic shift” towards small packs in Europe and in the US. The company’s new products in the US include items with “compelling price points of US$0.99 and $1.99”, he said. Heinz, for instance, is launching a ten-ounce version of its ketchup at $0.99 and plans to sell new sizes of Heinz-branded mustard and Worcestershire sauce, both at $1.

And, to prove that innovation can be eye-catching and not merely responding to recession, Tesco deserves a mention for its virtual shopping wall that it set up in a subway station in the South Korean capital of Seoul for a few months earlier this year. Commuters, using smart phones, were able to scan the products they wanted and have them delivered to their homes. The online channel continued to grow this year but, as industry watchers point out, manufacturers and retailers now have to look at how to adapt their goods and services to smart phones. “The future of the web is mobile,” a senior executive for Google told a UK industry conference in October.

The ability to adapt of course has not been merely about new products or routes to market, but about the very markets FMCG companies and retailers operate in. As the West stagnates, emerging markets seem a more attractive prospect than ever.

Populations have grown, the middle classes continue to expand and Western brands are ever more sought after, all of which has forced an unprecedented re-alignment of strategic priorities in retailers and manufacturers in the West.

“Company analysts are dissecting the portfolio of some of the world’s largest FMCG companies to calculate their emerging markets rate of growth and share of turnover. This in turn is seen to determine their overall potential for organic development,” Street said.

“All of this pressure to grow is going to have an immense effect over the next decade: on FMCG companies, on the economy and perhaps most markedly on the psyche of those working in the Western business units. Just as they face the most immense squeeze in their markets – all positive corporate attention goes East.”

But, while the last 12 months may be remembered as the year when emerging markets evolved from something of potential to strategic imperative, there were plenty of examples of why they remain beset by challenges.

China grew close to 9.2% this year, making up around two-fifths of global growth. However, economists are still worried this giant is heading for a hard landing, with wince-inducing implications for global economies.

On a micro level, the world’s largest food retailer Wal-Mart Stores has been beset by problems in the country, from high-profile resignations to police investigations and arrests over the labelling of pork in its stores.

Russia provided Danone with a BRIC headache all of its own. The French dairy giant made a significant strategic move in Russia in 2010 when it acquired local processor Unimilk. Danone had ambitious goals for its business in Russia but has since struggled, with management changes, falling volumes and lower-than-expected margins.

Meanwhile, just this month, India’s government provided the food industry with a timely reminder of why it cannot rely on emerging economies alone for salvation.

At the end of November, India’s cabinet announced it was easing rules on foreign ownership in the country’s retail market to a chorus of approval from the world’s grocery giants.

In the space of two weeks, authorities were forced into a humiliating climb-down, as politicians opposed to the move began protests that went on to cripple the country’s parliamentary process.

And, as if to paint a lasting mental image of the implications of our industry getting its expansion into emerging markets wrong, one protestor threatened to personally burn down any Wal-Mart that opened in the country.

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