The global economic downturn has had a profound impact on the way companies operating in the food sector do business. Recession has brought with it myriad challenges – ranging from securing credit lines to rapidly changing consumption patterns. Even as food companies grapple with these, they must also remain attuned to the new opportunities being thrown up by the exceptional economic conditions. Katy Humphries reports.

Food manufacturers in today’s challenging economic environment are taking a long, hard look at their businesses to assess the best way to navigate the economic downturn. 

Given that the heart of the recession lies with the financial sector and the credit crunch, it should be no surprise that one of the largest challenges facing many businesses today is liquidity.

In the boom years leading up to the crash, numerous food manufacturers – including the likes of Premier Foods plc in the UK and Pilgrim’s Pride in the US – borrowed heavily to fund acquisitive activity. The slowing economy has left many struggling to generate the cash flow needed to service existing debt levels.

For suppliers, this problem has been exacerbated by the increasing tendency among retailers to shore up their own cash reserves by demanding extended payment terms.

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Companies with high levels of debt, or those who have found themselves unable to secure finance, may be forced to look to alternative means to raise funds. These could include raising new equity by issuing shares or selling off non-core businesses and brands. 

Even for those companies who are successfully managing their debt levels, the unwillingness of lenders to provide new credit facilities or renew existing ones has added another layer to the problems facing the food manufacturing and retail sectors.

Take the example of US supermarket group Bi-Lo, which yesterday (24 March) filed for Chapter 11 bankruptcy protection. Despite satisfying all of its loan arrangements, Bi-Lo found itself unable to address upcoming debt maturity.

Announcing its move into bankruptcy, Bi-Lo insisted that the business remained operationally sound. “On an operational level, we are making significant progress this year and we have seen solid sales momentum and strong cash flow,” Michael Byars, president and CEO, said.

The uncertainty created by the turmoil in the credit markets and the constricting economic environment has made food businesses increasingly concerned about the sustainability of their supply chain, John Bee, director of market research consultancy White Space Insight, tells just-food.

“Locking down the supply chain is of critical importance. The extent of the downturn creates a risk that key suppliers will go under. Ensuring that all business-critical suppliers are out of danger and identifying back-up suppliers should be a major priority,” Bee says.

Bee suggests that food manufacturers should also look to understand and minimise the risk from retailer bankruptcies.

“The major grocers will be fine, but what about smaller retailers and those with who focus more heavily on non-food?” he asks.

According to new research from business advisory firm Deloitte, cost reduction is 2009’s top priority for senior executives in the food industry. In its report, Food and Beverage 2012, Deloitte found 31% of respondents have made cost reduction their number one issue as they face up to the downturn.

Food companies are employing a number of methods to reduce costs and improve efficiency. These include cuts in the workforce, reducing complexity, increasing cost competitiveness across the supply chain and streamlining product portfolios.

“On the back of a full understanding of what retailers and end-customers want, reducing number of SKUs would be well worth investigating. When supplier contracts come up for renewal, consider offering longer-term, broader deals to achieve the maximum possible discount. Under-utilised employees who lack specialist skills should, unfortunately, be the first to be let go,” Bee suggests.

US snack food giant PepsiCo has included all of these elements in its “Productivity for Growth” programme, which has seen it cut in excess of 3,300 jobs across its business. The initiative, launched last October, is expected to generate pre-tax savings of US$1.2bn over the next three years.

In a further drive to reduce costs, a number of business-to-business companies are shifting their focus towards sales and away from marketing, while those whose marketing message remains crucial – whose sales depend on their appeal to the end-customer – are looking at means to optimise their marketing spend.

Even before the current economic crisis, changing media trends and consumer behaviour were prompting FMCG companies to reconsider their marketing approach. As is evidenced by Mars’ move to link its Snickers homepage to social media sites including Facebook, YouTube and Twitter, food companies are increasingly looking to new media to reach out to consumers.

Shifting shopper behaviour brought on by the recession is now also challenging the allocation of marketing investment across brands and channels. Promotional activity is becoming increasingly important, with discounting initiatives often directly linked to volume gains.

Food companies are not only changing the way they communicate to consumers: they are changing the message itself.

Larger food manufacturers are examining brand portfolio management, shifting focus onto brands that provide quality at reasonable prices, while smaller food manufacturers are increasingly focusing on value, either in relation to competitors or to eating out.

“People are still spending money but their priorities are changing, with price and value increasingly central to the choices they make about where to shop and what to buy,” Deloitte’s Lawrence Hutter observes.

According to Hutter, even as food manufacturers begin to feel the benefits of falling commodity prices, the value-drive of retailers is likely to mean these gains are passed straight down to the consumer.

However, a value message alone is not enough, Hutter emphasises.

“Longer term, the winners will be those organisations that effectively track and anticipate changing consumer needs and meet these needs with relevant brands, products and services that deliver value, while at the same time responding to consumer values that have not gone away such as the desire for good nutrition and sustainable sourcing,” he insists. 

Indeed, Marks and Spencer boss Sir Stuart Rose (pictured) recently insisted that innovation remained the key to business success in the deteriorating economic climate.

“Keep innovating. Keep putting development in. Keep giving the customers a treat,” he urged last week.

In this regard, it seems advisable to heed the mantra of US food group ConAgra Foods, which recently revealed to analysts that its response to the downturn would be to focus innovation on “fewer, bigger, better,” product launches.

Consolidation in the food sector is likely to be another offshoot of the recession, as weaker companies fall by the wayside.

According to Mark Lynch of food and drink corporate finance specialists Oghma Partners, food companies who are well positioned in the market should be prepared to take advantage of any such opportunities offered by the current climate.

“In the wider economy we are faced with a very unusual situation – very unusual credit pressures – which may open up the possibility of acquisitions. Companies that historically would have bumbled along are now looking at a much more challenging future,” Lynch tells just-food.

The opportunity to poach a rival’s contracts may also present itself as retailers also examine their supply lines.

“Retailers might be interested in a price quotation not to get a lower price, but because they are concerned that their current supplier could be facing bankruptcy,” Lynch says.

Current economic pressures are propelling those in the food industry into dangerous waters. However, while we are entering a period of fresh challenges, there are also fresh opportunities. Those who are best placed to survive, and indeed thrive, in these testing times are companies who tackle balance sheet and productivity issues head on and are then able to develop an understanding of, and response to, shifting consumption patterns.

Success in today’s increasingly challenging market will depend on understanding shifting consumer needs and responding with the right products at the right price. Cutting costs out of the business can only achieve so much. As consumer spending constricts, food companies must give shoppers reasons to buy their products and brands. In bad times as in good, innovation remains key.