Introducing new products can help companies alleviate the burden of high food inflation because consumers will not be so concerned about a change in price, according to a new report on the food manufacturing industry from the Conference Board of Canada.
This year has seen record commodity prices but launching new products is “the perfect way to mitigate cost hikes” because new prices can be introduced with fewer worries about price comparisons, said the report called Canadian Industrial Outlook: Canada’s Food Manufacturing Industry – Summer 2008.
It stated that new products entering the market were a significant source of profit because consumers have been particularly receptive to product innovation over the last few years.
And although costs for food manufacturers are increasing, the industry’s pricing power has been enough to maintain profit margins.
Figures from Statistics Canada show that consumer prices in July saw the highest 12-month increase since March 2003, as they went up 3.4 percent in July 2008 compared with July 2007.
A climb in gasoline prices was the primary reason. However, there was a 4.3 percent rise in prices for food purchased from stores, led by a 13.2 percent rise in prices for bakery products, and this continued to exert upward pressure on consumer prices.
Price increases for other food products closely related to grain, such as breakfast cereal, rice, pasta and flour and flour based mixes, also continued to increase in the 12 months to July 2008.
Eating habits are also changing due to health concerns, immigration, demographic changes, and increasing disposable income, according to the report. This means that some segments of the food industry have to innovate and renew their product mix to stabilize their market share.
The report said: “Canadian consumers are seeking to eat better, and a growing number are prepared to pay a premium for food products that are healthier and taste better.
“Indeed, over the last five years, yogurt and processed fruit consumption per capita has increased by 43 per cent and five per cent respectively, while consumption of fats and oils has fallen by 12 per cent.
“High immigration coupled with a low birth rate has also changed the Canadian mosaic and therefore food demand over time.”
An example of how this has affected the industry is the consumption of rice in Canada which increased by 20 percent between 2001 and 2006, and mutton and lamb consumption which increased by 17 per cent.
The report said: “This diversity in demand has also forced diversity in supply, and so Canadian producers are changing their product mix to protect their market share from foreign producers.”
Agricultural product prices for grains, specialty crops and oilseeds increased more than 60 percent between May 2007 and May 2008.
But despite higher prices for many raw materials, which were the main cause of the 5.4 per cent growth in costs in 2007, industry revenues rose by 5.9 per cent in 2007.
Bakeries and “other” food manufacturing (such as snack foods, coffee, tea, syrups, and dressings), along with fruit and vegetable processing were the strongest segments.
The weakest performers were animal food producers and sugar and confectionery product manufacturers, which partly suffered from consumers switching to healthier choices.
Profit growth is expected to be weaker over the coming years but the report said “healthy production and price increases will still allow profits to keep growing” to a predicted level of $3.8 billion by 2012.
It added: “With the introduction of higher-value-added products, companies are expected to be able to gradually pass their higher input costs on to their customers. Thus, the industry’s profit margin should stabilize near four per cent over the next five years.”