Last week, a number of the challenges facing food manufacturers and retailers were once again thrown into sharp relief. The industry continued to grapple with the cyclical difficulties of a down global economy and weak consumer sentiment. However, a number of structural issues that, in some respects, represent the greater threat are also becoming increasingly evident.
Like many food firms, European meat group HKScan has looked to turn around its profits, which were heading south fast, by cutting costs from its business. The group announced last Monday (7 January) that it will shed almost 300 jobs from its domestic operations.
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The move follows a series of cost saving initiatives from HKScan, the brunt of which had – until now – been felt in the problematic Swedish market. Speaking to just-food, CEO Hannu Kottonen said the group expected these initiatives to get profits moving in the right direction once again.
By reducing the complexity of its operating units, HKScan is generating significant savings that should have immediate implications for the bottom line. But, for Kottonen, the company’s mission must look beyond this. Kottonen revealed that HKScan is focused on four “must win battles” including – perhaps most importantly – building consumer demand for HKScan’s “strong local brands”.
Kottonen is right to highlight the necessity of driving consumer demand in the face of poor economic conditions. While declining consumer spending is a cyclical issue that is likely to bounce back when the economy picks up, evolving shopping habits could well prove more enduring. As consumers look to reduce household spending across HKScan’s major markets, they are increasingly turning to own label. If HKScan allows this trend to become embedded, it will be difficult to convince consumers to return to their old shopping habits when conditions improve.
This trend was also evident in the UK food sector, as Sainsbury’s and Tesco both highlighted growing own label sales coming at the expense of manufacturer brands. Both retailers argued that the increases were a reflection of the quality and value on offer in their own label line-up.
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By GlobalData“Customers are recognising the value that you get from Tesco own brands and it’s one of the ways that they can manage the pressures on their household budgets,” Tesco CEO Philip Clarke explained.
And, while growing own label sales might represent a threat to branded manufacturers, to retailers and their own label supply base there are clear opportunities. On one hand, own label products are higher-margin for retailers while, on the other, they can be used to build loyalty to the “retailer as brand” – making customers less likely to float between retailers.
Even as evolving shopper trends present retailers with an opportunity to extend own label sales, in the UK they are throwing up further problems still. Overall, volumes in the UK food market are in decline. According to the assessment of Sainsbury’s CEO Justin King, this is a consequence of consumers wasting less food and buying smarter.
While King was upbeat on the long-term outlook for food volumes in the UK (which he expects to be driven by population growth), he acknowledged that lost volume is “not going to reappear” and suggested that volumes could decrease further in the year ahead.
A final difficulty facing UK food retailers is the rapid growth of less profitable on-line and convenience channels. As these new routes to market come to prevalence they are not generating incremental sales growth – but rather risk cannibalising sales from retailer’s core portfolios.
Nevetheless, Tesco’s Clarke maintained that the new “digital era” of retailing presents an opportunity for the group to expand. Clarke highlighted a number of recent acquisitions that the UK’s largest retailer has made to diversify its business in the online space, including video streaming and online music businesses.
Another firm that last week presented us with its answer to the structural challenges it faces was Arla Foods. The European milk cooperative is gearing up for the abolition of EU dairy quotas in 2015, when it expects the amount of milk produced by its farmer-owners to jump dramatically. Sluggish Europe, where demand is expected to be flat-to-down, will not cope with this extra supply.
As a consequence, Arla is now looking to expand sales to emerging markets and is targeting increased sales to Russia, China, Africa and the Middle East in particular.
The business logic behind this strategy is sound. However, growing in the increasingly crowded emerging market space will present challenges of its own. In China, for instance, the group will be coming up against well-established local and multinational players, all of whom are already engaged in developing a safe, reliable local milk supply.
In order to grow its consumer presence, then, Arla has said it will focus on developing its brands – particularly Arla, Castello and Lurpak. While the need to build its brand value in order to compete in these target markets is clear, it is also a task that is easier said than done. As ever, building consumer awareness of any brand is likely to prove both costly and time-consuming.
Meanwhile, the firm hopes to expand its B2C sales by growing its high-margin ingredient business. Again, developing customer awareness in emerging markets will likely present a challenge. But here Arla may be more on the front foot, as the group has access to processes and technologies that can act as strong USPs. A key question, as ever, will be whether Arla can modify these products to meet the demands of local business customers.
