A fiercely competitive environment and the increasing bargaining power of major retailers is putting food producers under growing pressure, trade credit insurer Atradius has claimed.
Its latest Market Monitor report on the food industry reveals that while in general the global food sector is performing reasonably well, the margins of many food production and processing businesses are being squeezed – particularly among smaller businesses.
Combined with the sector’s susceptibility to sudden downside risks, such as commodity price volatility and health issues, food businesses face a difficult trading environment.
As a result, there has been a boom in the number of mergers and acquisitions within the sector as companies actively seek to mitigate pressures on their margins.
FoodBev has featured six significant acquisitions since the start of the year alone – including MilliporeSigma and Hygiena’s moves for food safety testing and diagnostics companies, Britvic’s consolidation of its Brazilian juice operation, and CP Foods, which appears to be targeting more developed markets after announcing deals in the US and EU.
“Positively, food is fairly resilient to business cycle downturns but other factors in play are taking their toll on the health of smaller producers and processors,” said Stuart Ramsden, commercial director UK & Ireland for Atradius. “Efficiency and low production costs are necessary for sustaining a competitive edge, sales growth and margin improvement. Alongside further economies of scale and increased bargaining power, [this is] best achieved through concentration. Therefore, it comes as no surprise that in many markets, merger and acquisition activities and a subsequent consolidation process have accelerated among food businesses.”
The findings are consistent with reports published last year that showed that M&A activity among the 50 largest FMCG companies had totalled $226 billion in 2015 – more than the previous four years combined – with further strong performance sector-wide in the first quarter of 2016.
At the end of last month, FoodBev found that the industry was on track for 565 acquisitions in the past year.
Atradius’ report also features a number of country-specific findings from the US, and countries in Europe.
In Belgium, increased exports are key for further sector growth – although with the UK being a key export destination, the outcome of a future post-Brexit will be eagerly anticipated.
The German food retail market is the most competitive in Europe, with structurally low market prices due to the overwhelming power of leading food retailers and discounters – accounting for 67% of the German market.
The value of total food sales in the Netherlands is forecast to grow an average of 2% per year until 2025. But small and medium-sized enterprises (SMEs) are under pressure and are expected to lose market share.
And finally, in the US, consumers are increasingly health conscious with natural, organic and gluten-free foods being strategic areas of new product development, perhaps at the expense of packaged and convenience food manufacturers.
Stuart Ramsden continued: “Doing business overseas brings with it a host of new challenges – whether the influences of the local economy, politics or market changes such as new consumer trends and habits. UK food exporters need to be aware of the performance of the sector around in the world in order to mitigate potential risks and seize any opportunities that may arise.”
© FoodBev Media Ltd 2020