Changing Food Markets and Marketing Vision for 20201
(Paper primarily drafted by an Bord Bia)
This paper seeks to set out the likely developments in the global food market between now and 2020 while assessing the ability of the Irish food sector to enhance its position within the global food market given its current strengths and weaknesses. It also highlights some of the key issues that need to be addressed by the sector along with a number of strategic actions that are necessary to ensure that the sector is in the best possible position to avail of market opportunities as they emerge and withstand the undoubted challenges that it will face between now and 2020.
The global food market by 2020
The Irish food, drink and horticulture sector has put in an impressive export performance over recent years, with the value of trade rising by almost 33 per cent during the 2002 to 2008 period. Much of this growth has been driven by strong export performance in dairy, beverages, prepared foods and, to a lesser extent, meat. The performance is even more impressive when viewed against the competitive challenges that the industry has had to face.
The level of volatility in global food commodity prices generates significant uncertainty for Irish food and drink exporters in terms of potential market returns. The sharp spikes evident in food commodity prices over the last number of years make it increasingly difficult for manufacturers to devise and implement growth strategies.
Long term forecasts from organisations such as the OECD and FAPRI all point to ongoing volatility over the period to 2020. This is a feature of the marketplace that the Irish food and drink industry must face. Despite this volatility, projections from these organisations suggest that the long term price prospects look set to remain ahead of those evident in the decade to 2006.
Key demand drivers remain positive
There are a number of positive drivers in the marketplace that should provide a solid global food demand over the longer term. These include:
Population Growth – The growth in the global population seems set to continue strongly over the coming years reaching 9.2 billion by 2050 relative to 6.7 billion in 2007. The growth in population is creating in population terms a market the size of Western Europe every five years. The vast majority of this growth will take place in the developing world.
Growing Urbanisation – A new milestone has been reached in 2008 with 50% of the global population living in urban areas for the first time. This figure seems set to grow strongly as the population increases with some 70% expected to live in urban areas by 2050. This growing urbanisation, combined with income growth, will continue to impact on food choices and the dietary patterns of consumers.
Changing Diets – Diets are expected to continue to diversify from starchy foods towards more meat and dairy products. This will intensify demand for feed grains and strengthen linkages between different food commodities.
Given the fact that it takes 5- 8kgs of grain to produce 1kg of meat, demand for feed stocks is likely to grow strongly, which will help keep a solid base in the cereals market. The anticipated strength of feed prices provides a potentially competitive advantages to Ireland with its predominantly grass based system.
Developing countries to provide new global growth markets - Where food is produced is also changing. Over the next 10 years, developing countries will account for 40-60% of food commodity production. Both consumption and production are growing faster in developing countries for all products except wheat. Imports are growing most strongly in developing countries, and an increasing share of this growth will be captured by larger exports from other emerging and developing countries. As a result, increased availability from these markets will not impact strongly on trade flows in developed markets, which will continue to provide the premium outlets for Irish exports.
Emerging consumer trends
Despite the economic downturn, a growing number of people are looking for companies and products they feel they can trust. Consumers are seeking stronger relationships with the products and brands they buy, often seeing traditional methods as a mark of trust and integrity. Modern interpretations of tradition are allowing new products to tap into the consumer’s desire for both tradition and product performance.
The increasing focus by leading retailers and manufacturers on the issue of sustainability, particularly in the UK through waste and packaging reduction initiatives and assessment of carbon footprints, is starting to impact on the requirements they set for their suppliers. This could potentially provide an opportunity for Irish manufacturers to increase sales by proactively addressing issues in relation to climate change while highlighting the strengths of Irish agriculture in relation to biodiversity and protection of the countryside.
Challenges facing the sector
Anticipated developments in the global food and drink market over the next number of years will present a number of significant challenges to the industry here. Some of the principal challenges anticipated include:
Food security – By 2030, the planet will need to produce 50% more food, with less land, water and energy as inputs. There are clear limits to the earth’s natural resource capacity as future demand for food, feed, fibre and energy grows. Food companies are faced with the challenge of meeting the needs of an ever-increasing population while at the same time limiting the impact of their activities on the environment.
The number of weather related shocks, biosecurity issues and their impact in recent years highlight the vulnerability of global food supplies. In Europe, ongoing low profitability at producer level has been causing significant declines in the production base for some agricultural products. From an Irish perspective, any further losses in the Irish supply base will have long term consequences for the security of local supplies on a year round basis, which would hamper the ability of Irish exporters to work with key retail and foodservice accounts.
Availability & use of water - The World Wildlife Fund (WWF) estimates that more than 40% of the global population live with ‘water stress’ and this is forecast to rise to 50% by 2025. WWF estimate that 70% of water used by humans is for agriculture and increasing demand for commodities will increase demands on water supplies. As well as being an important issue for consumers it is also becoming a substantial business risk. If tackled in a coherent manner, the Irish industry could turn this global issue into a source of competitive advantage, particularly in relation to food security.
Increasingly competitive marketplace - The growing scale of retail groups across Europe enhances their bargaining position with suppliers. In addition, new suppliers continue to emerge across product categories, particularly in the prepared foods and meat sectors. A number of these suppliers benefit from lower input and manufacturing costs and greater economies of scale. This presents a further competitive threat to Irish exporters and highlights the need to focus on developing and promoting key points of differentiation in order to maintain and develop our market position.
Policy developments - Policy changes on import tariffs and market supports have the potential to significantly alter global trading conditions. In this respect, the eventual outcome of the DOHA round of WTO talks will be a critical driver of the trading environment for Irish food and drink exports. Further changes to the CAP from 2013 have the potential to have a significant impact on the Irish supply base.
Currency volatility – Some 70% of Irish food and drink exports continue to go to non-euro zone markets. As a result, this trade remains open to considerable swings in exchange rates, which can have an immediate impact on competitiveness over a short period of time. Oil price developments combined with the outcome of the current credit crunch will dictate currency movements over the medium term. For Irish exporters, the movement of Sterling will remain a critical issue, given the fact that 45% of food and drink exports go to the UK.
The significant opportunities for Irish exporters, from expected developments in the global market for food and drink products, will only be realised if the industry can manage rising costs, broaden its product offering while creating a point of differentiation that can enhance its market position. To successfully position the Irish industry in an increasingly global marketplace requires competitiveness, the ability to utilise our natural advantages, in-depth market knowledge and a strong consumer led innovation capability to create a point of differentiation for Irish product.
Strengths/Weaknesses of Irish Agri-Food sector
The Irish Agri-food sector has a number of key strengths that will continue to ensure that it can operate at an efficient level within what is a rapidly changing marketplace both across Europe and on a wider global scale.
Some of the key strengths that the sector possesses include:
Experienced exporters – The fact that the sector has a strong export tradition and that it currently exports to more than 170 countries highlights the entrepreneurial capability within the sector. In addition sectors such as beef and dairy continue to produce volumes that provide critical scale in the international marketplace.
Investment in the sector – Recent years have seen considerable capital investments in the sector, which have served to upgrade manufacturing facilities and improve efficiencies within the sector. In addition, the sector has invested considerable resources in research and development in terms of both process and product innovation.
Market understanding – The knowledge that comes from being experienced exporters helps provide the sector with good understanding of market dynamics, which helps maintain and build market position and deal more effectively with competitive threats.
Product quality – the sector has a strong international reputation as a provider of high quality food and drink products. This provides a solid basis from which to build to build and enhance our presence across key markets and product segments.
Proximity to key markets – The Irish industry is in close proximity to over 450 million consumers that make up one of the highest value food markets in the world. This offers considerable potential to develop products that fulfil evolving consumer requirements in terms of premium products that can deliver enhanced returns to the industry.
Supply base maintains traditional values – At farm level, the relative size of farm and methods of production offer a key strength from an image point of view given the evolving consumer requirements in terms of environmental sustainability. While recognising the need for the sector to achieve the scale of supply necessary to compete effectively and efficiently, it is also important to maintain our key natural strengths.
Despite these strengths, there are also a number of weaknesses that need to be addressed in order for the sector to remain viable over the medium to longer term. These include:
Relative competitiveness – recent years have seen a significant erosion of the competitiveness of the Irish agri-food sector relative to other suppliers. Some of the key areas where competitiveness needs to be restored if the sector is to move forward include energy, waste, labour and regulatory costs.
Exposure to currency volatility – some 70% of exports continue to be destined for non-euro zone destinations, which leaves the sector open to sharp currency movements. This highlights the need for the sector to optimise the market opportunities that exist across Continental Europe for our products.
Lower relative returns – As an import supplier, Irish exports can find it difficult to achieve the same market returns to domestic products, which in turns put pressure on margins within the sector. This present the challenge to the sector to offer product solutions that will enhance the position of Irish food and drink products.
Increasing pressure on Irish market – Changing retail sourcing policies combined with currency movements have resulted in per capita food imports increasing by more than 50% since 2002. This creates significant pressure, as for many small to medium sized enterprises, the Irish market is the outlet for the majority of their output.
Scale issues – While some of the more traditional sector possess critical scale in terms of production, at processing level they often remain relatively small compared to international competitors.
Based on the current strengths and weakness of the sector and the likely developments in the international market environment between now and 2020, the sectors needs to ensure that it focuses on the following areas:
Ensure that it can compete effectively with other suppliers
Strategically expand export reach to optimise market returns
Build the sectors knowledge of changes in consumer demand to enable the sector anticipate rather than react to developments
Develop an enhanced ability to interpret evolving consumer needs to drive innovation
Maintain market position on the Irish market.
Utilise its natural advantages to deliver points of differentiation while also addressing challenges presented by climate change
Vision for the sector
When considering the future direction of the Agri-food sector to 2020, the preferred vision is that the sector will be:
Flexible, creative and innovative
Put consumers at the centre of everything that it does
One of the most efficient across Europe
Viewed as a leader in the European food and drinks sector
Dealing with common viability themes
Success in a changing marketplace requires an industry that is strongly focused on the areas that can deliver maximum returns to the sector. Central to this will be a focus on the following themes:
The UK will continue to be Ireland’s single largest export market and will remain a priority for most food and drink categories in the period ahead. Other eurozone markets, however, offer the prospect of new opportunities and more stability in the light of recent volatility on currency markets. Meanwhile, growth in Asia is set to continue.
Given the expanding global focus of key customers both in retail and foodservice, this increasingly requires targeting of key customers as well as geographic regions.
In the UK the focus of activities needs to be to build a sustainable market position for meat, dairy prepared food products and mushrooms, especially at retail level. This will require the facilitation of targeted business development through the identification of gaps in the marketplace while working with Irish suppliers to highlight their supply capabilities to targeted customers.
Currency fluctuations combined with the current saturated nature of some categories in the UK has meant that increasing numbers of manufacturers are looking to Continental EU markets for further growth. The fact that these companies are already successfully competing in the UK means they are in a good position to tackle competitors on the Continent.
However, supplying markets on the Continent often require product adaptation in terms of recipes and packaging. In addition, Continental EU markets present a different set of challenges than those faced when supplying significant volumes to the UK market.
It is more important than ever for Ireland to maintain its reputation as a food producer of high integrity and to clearly convey the key points of differentiation that can enhance Ireland’s position as a supplier of high quality food products.
Climate change and increasing consumer concern for the environment are now becoming key global issues. Given our international profile, these developments require that we review our positioning as we continue to build the image of Ireland The Food Island and what it stands for.
The issue of environmental sustainability is becoming a core strategic theme for leading global retailers and food manufacturers. They are increasingly starting to look at their suppliers to see what they can do reduce their impact on the environment. While consumers have yet to fully comprehend the topic, it is becoming an increasingly important issue for them.
For Ireland, the emergence of Sustainability as a key strategic issue means that it is no longer enough to say that we are natural and green, we now must actively demonstrate and prove it. This requires facing up to challenges such as the fact that agriculture accounts for 28% of all greenhouse gas emissions in Ireland. However, it also means that there is potential to clearly convey the natural advantages we posess in terms of grass based production and its role in terms of biodiversity and that most output comes from small family farms that are also looking after the countryside. This is where environmental measures provide the ideal platform as they offer considerable potential to create a clear marketing story with consumer appeal.
The fact that sustainability as a marketing issue is at a relatively early stage of development means there is an opportunity for Ireland to take a lead on this issue. This could involve developing a clear communications programme that demonstrates how the agri-food sector is responding to climate change and using this to enhance our position in the marketplace.
Innovating through market knowledge
A faster rate of change is evident in modern lifestyles. One of the striking trends in terms of innovation in recent years has been the reduced length of time it has taken to get from product ideas to full market launch. Figures from Deloitte show that over the last decade, the average time to market for new products has reduced from 18 to 13 months. This reinforces the importance for food manufacturers to be actively involved in product innovation and highlights the need to get products on the market that address a current consumer need.
Innovation in products, packaging, processing and branding will be critical to the success of the Irish industry. Central to this will be a strong ability to access and interpret market trends to ensure the sector can anticipate evolving market needs. This knowledge needs to feed into innovation programmes and processes.
However, this process remains resource intensive making it difficult for many Irish manufacturers to compete with larger competitors.
The global and European food and drink markets have become increasingly competitive over recent years. The emergence of global competitors across all major product sectors seems set to continue and indeed intensify over the period of this strategy. This process is only likely to be accelerated by policy changes at WTO level, which seem set to significantly liberalise global trade when an agreement is finally reached.
Given these developments, it is vital that the Irish agri-food sector is working from a cost base that is broadly in line with other European producers. At the moment this is not the case in relation to energy, waste and labour in particular. The realignment of these costs requires action at national level. Also the regulatory requirements must be examined to ensure they are being managed in the most efficient manner.
At the moment, funding pressures are very strong for both producers and manufacturers with cash flow issues and difficulty securing access to capital for both short and long term business development prevalent. While it is hoped that the economy will return to growth over the short term, it is important to ensure that viable companies are assisted as strongly as possible in their attempt to overcome the current difficulties they face.
Another challenge facing the sector is the increasing buying power of global retail groups and the impact this is having on prices that suppliers are able to secure. There is a requirement at both national and EU level to highlight the issue of retailer pricing and seek action to ensure that suppliers are able to do business effectively.
Strategic Actions Required
The most immediate action required is to highlight the role the sector can play in stimulating economic recovery. The sector currently accounts for as much as 1 in every 8 jobs in the Irish economy and given its largely rural location, it remains the principal source of employment and revenue in many parts of the country.
Despite the challenges facing the sector, it continues to show the resilience and capacity necessary to overcome the current difficulties. Given the decline in public funds, the sector needs to emphasise this capacity in articulating its strong case for the funding necessary to drive the sector forward over the medium term.
These funds need to be strongly focused on building both technical and market based knowledge within the sector that can help drive a strong innovation focus. Such an approach will help optimise the development of value added food and drink exports and optimise export revenues through an enhanced market position for Irish food.
The immediate challenge facing the sector is getting manufacturing costs back in line with European producers so that they can compete effectively across key markets.
Further development of market access to emerging markets, particularly in Asia is necessary to ensure that Irish exporters have access to markets that are likely to show strong import growth as income levels rise.
While issues around climate change present potentially significant challenges for the sector in relation to emission levels, the Irish agri-food sector has a number of potentially positive attributes when a broader environmental context is considered, especially in relation to biodiversity and economic/social issues. The sector needs a co-ordinated plan to tackle the issues that exists while also seeking ways to harness the positive elements of our production base.
The competitive challenges being faced on the Irish market in relation to changing retail sourcing patterns and increasing import levels need to be addressed urgently given the reliance of most small to medium and indeed some larger companies on the market as an outlet for their products.