Eat, Drink & Be Ready: Food And Beverage 2012 - A Taste Of Things To Come

DO YOU HAVE AN APPETITE FOR CHANGE?

It has never been tougher to build a successful food and beverage business in the UK than it is today. Food and beverage companies face an array of increasingly complex issues and questions. The manner in which they choose to respond to these challenges will shape the future of the industry for many years to come.

Over the past six months the Food and Beverage team at Deloitte has carried out interviews with board level executives at more than seventy leading manufacturers, retailers and food service companies. We have spoken to relevant government bodies and undertaken a survey of over 1000 consumers. This research has given us a unique insight into the current challenges facing the industry. Building on this, we are developing a major report that we believe will help food and beverage companies define their chosen future place in the industry, and to succeed in becoming a leader in this role.

This document gives a flavour of our findings. It is a high level summary of the full report, which will be published later in Spring 2007.

A Recent Period Of Significant Change

The food and beverage industry has experienced significant change in the last 5 years. Much of this change has been consumer-led with healthier eating, convenience and the quest for new consumption experiences having the greatest impact. The health and nutrition agenda has been aided by increasingly active government support and media focus.

Examples of some of the specific changes we have seen include:

New Products

Smoothies

"Finest" quality private label products

Probiotic and cholesterol lowering foods

Breakfast cereal bars

Allergen free ranges

Organic products

New Experiences

The "skinny decaff latte" coffee shop culture

Affordable sushi for a working lunch

Cold beer in the supermarket

Hot, fresh food "to go" in supermarkets

Growth in consumption of alcohol at home rather than in restaurants, pubs and bars

New Issues

Growing awareness of health issues among the broader community

Desire for fresher, simpler, natural food

Demand for clearer food labelling

Ethical concerns around food miles and Fairtrade

THE CONSUMER VIEW: HOW CONTRARY?

Consumers have multiple motivations which affect their purchasing and consumption patterns. They respond to concerns and ideas from an increasingly broad range of sources such as the media, celebrities, special offers, advertising and internet communities. Traditional mass media represent a less and less efficient means to target specific consumers whose purchasing habits are increasingly occasion based. Better understanding the increasingly fickle consumer is essential to anticipating and affecting consumer behaviour and, ultimately, in ensuring long term success.

It is not surprising that our research has shown that the key consumer trend as understood by the industry is towards healthy eating, particularly of fresh food. Interestingly, this is almost double the importance placed on convenience, the next most important trend.

However, the consumer view is much more complex than this. We have found consumers to be increasingly discerning and demanding. Very often they simultaneously demonstrate multiple mindsets which imply seemingly contradictory shopping patterns. The research also highlights substantial discrepancies between customer intention and behaviour, as shown below.

In summary, the consumer is increasingly fickle, discerning and occasion driven. Our research has confirmed that there is considerable overlap between opposing motivations. For example, more than thirty percent of the consumers in our survey indicated a desire to search for bargain products whilst at the same time indicating they will buy more premium products than ever before.

This is a very clear pointer to the need for manufacturers and retailers to make the best possible use of both consumer insight and outlet segmentation data to determine how, where and when to best target the right consumers with the right value propositions.

"Understanding the increasingly fickle, discerning and occasion driven consumer is essential to anticipating and affecting consumer behaviour."

THE INDUSTRY VIEW: GROWING CHALLENGES

Once the dominant member of the triumvirate of manufacturer, retailer and consumer, some would contend that today the manufacturers are now the least influential. This is an industry which is viewed by many observers as lacking in innovation and highly fragmented. The industry now finds itself facing a fresh set of challenges which were echoed time and time again in the course of our research.

Amongst these many challenges are:

Increasing pressure on costs - Once healthy margins are being pushed down as a result of intense price based competition in the market and increased customer buying power. In addition, the production cost base is on the rise due to escalating raw material, labour, energy, transport and packaging costs.

Making sure brands connect with current consumer issues - The businesses and brands that will be most highly valued by investors will be those that are proactive on issues that resonate with consumers. At the moment these include nutrition and health, consumer education, environmental impact, ethical sourcing, provenance and local community contribution. In the future the brands that resonate most strongly with consumers will "stand for something" on such issues.

An ever growing regulatory burden - Local, national and even international legislators are now major influencers on the future of the whole food and beverage value chain. Salt, fat and sugar content, sustainable production and transportation methods, recyclable packaging and labelling are among the key areas which are all coming under increasing scrutiny.

Retailer power - Grocery retailers are amongst today's leading innovators as they extend their range of services from the traditional food and non-food offering to telecommunications and financial services, as well as continuing to exploit new channnels to market such as via mobile phones and the internet. Their investment in consumer insight, brand reinforcement, space, assortment and merchandise planning has caused a seismic shift in the power dynamic. For the modern consumer, the large grocery retailer is now the "arbiter of choice" and where once manufacturers were selective and set the trading terms, today the grocery Category Manager has largely gained control. The bigger the retailer and the better the consumer insight they command, the greater power they wield.

Sustaining consumer trust - This is a simple concept but exceptionally hard to do in a market where the consumer is more sophisticated, informed and sceptical than ever before. The legacy of past food safety failures has left a climate of distrust that the industry needs properly to address. This requires strong quality management regimes allied to effective communication and explanation of standards to consumers.

Attracting and retaining top talent - For many years food and beverage has not been seen as a "destination industry" for bright young graduates or senior managers with strong commercial experience. Perhaps worse still is the retention issue, with many individuals using the grounding and training they gain with blue chip food and beverage businesses to then build their careers in other industry sectors.

"Grocery retailers are amongst today's leading innovators and their investment in consumer insight, brand reinforcement, space, assortment and merchandise planning has caused a seismic shift in the power dynamic."

A TASTE OF THINGS TO COME

The food and beverage sector in the UK is substantial, with consumer expenditure both in and away from home totalling around 153bn1 in 2005. While there is little overall top-line growth in the sector, this masks substantial changes in mix - both in what is consumed and where it is consumed. It is these changes that present both the challenges and opportunities for food and beverage businesses.

A successful future depends on how individual businesses, and the industry as a whole, respond and prepare to do business in what will be a somewhat different environment.

The Consumer In 2012

Today's consumers are sophisticated. They understand value versus price, and are used to selectively filtering the multitude of marketing messages aimed in their direction. Tomorrow's consumers are going to be even harder to identify, convert and retain.

The impact of changing consumer trends, behaviours and attitudes will continue to grow. This will naturally further drive complexity and heighten the challenges for the food and beverage business community. Interestingly, the industry view of the future from our research is that the major future trends are, for the most part, all known quantities. The key challenge facing the industry would appear to be how best to deal with those which afford the greatest opportunity for either success or failure. Anticipating the importance of these trends and the resulting impact on consumer demand and preferences will be key to future success. Whilst some of these trends will be generic in nature, there are many which will have very specific implications for individual sectors, channels and categories.

Finally, whilst the industry may believe that the major future trends are all...