Rising food prices are not a short-term problem so food manufacturers must adapt accordingly, making wise strategic choices, strengthening innovation and streamlining operations, says a new report.
Escalating costs facing producers and suppliers is not an issue ignored by food producers, as new product launches boast more and more about their cost saving benefits. However, the Food and Beverage 2012: A taste of things to come report, published by consultancy and financial advisory firm Deloitte, emphasised the strategic moves industry must make to maintain margins. "In such an uncertain environment, retailers and suppliers must be prepared for the worst," said the report. Manufacturers must demonstrate flexibility, minimise costs, maintain several supply-chain choices, and differentiate themselves from their competitors so they can maintain pricing power relative to those competitors. 'Pillars of success' Deloitte pinpointed defining company's tactics as being an important focus in the changing landscape of the industry, recommending "the ruthless pursuit of business simplification". Areas identified as crucial include managing commercial spending, eliminating unnecessary complexity and standardising, strengthening and streamlining operational and administrative processes. There has been a lot of recent merger and acquisition activity in the food and drinks market with the aim of streamlining activities. Top food and beverage companies are divesting areas of their business deemed unprofitable so as to focus on core categories.
Linked to this, Deloitte stresses the need to make the right strategic choices: "Strategies must reflect the choices that are right for the business, given the available opportunities in the market and the capability of the business to exploit those opportunities." Furthermore, companies must "mobilise" the organisation around a vision. In interviewing representatives from various areas in the industry, Deloitte found that successful companies invest in leadership, strengthen commercial insight, and reenergise and focus innovation. Stepping up innovation would be helped by streamlining operations to create a clearer focus. Rising food prices Commodity prices have been on the rise since 2005, after three decades of food prices falling relative to consumer income, according to Deloitte. The prices of maize and rice have doubled since 2000, while the cost of wheat has tripled. In 2007 alone, wheat prices climbed 52 per cent. The problem has been blamed on increasing consumer demand from emerging markets and increasing populations, a competing demand for grains for use in biofuels, the rising cost of oil and poor weather conditions.
Deloitte said apart from the effect of biofuels, the factors are long-term phenomena. "We may experience several years in which food prices will increase in relation to the prices of other consumer good," said its report.