Appetite for growth Assessing the critical success factors in the rapidly changing food sector Did you know? • EY works with the world’s leading food companies: • 37 of 42 in the Forbes Global 2000 • 26 of 27 in the S&P Global 1200 • Our food team is part of our worldwide consumer products network which numbers 16,000 professionals Feedback on Talking Food An update of significant developments in the global food sector Client comments include: “V ery valuable — better than anything we have in-house.” “ A quick read and gets you grounded on what our competition and peers are doing.” “Well structured, very interesting and useful.” “L oaded with industry insights — an extremely useful industry snapshot.” 202 Contents 04 Appetite for growth — assessing the critical success 24 Sharpening execution factors in the rapidly changing food sector 28 Enhancing corporate reputation 06 Maximizing growth opportunities 32 Teaming together 12 Increasing adaptability and responsiveness 33 Sharing insights 18 Delivering margin improvement Appetite for growth Assessing the critical success factors in the rapidly changing food sector 3 Appetite for growth — assessing the critical success factors in the rapidly changing food sector Food companies are facing “C ompanies that have responded proactively to a tougher market environment challenging times. Caution have on the whole emerged from the financial crisis fitter and leaner, with strong is the watchword as balance sheets. They are focusing on operational excellence, innovation and macroeconomic indicators maximizing volume to maintain growth; optimizing the potential in emerging remain volatile. What are markets and looking for appropriate transaction opportunities as consolidation in the strategies that will help the sector continues.” food companies survive and prosper? Mike Sills Global Food Co-Leader, Consumer Products EY 04 Food companies face a challenging and volatile environment. The need to understand Whether your interests are domestic, regional or global, we have on-the-ground changing consumer needs, innovate effectively and put goods on the shelf at a professionals in every key developed and developing market and we can bring you the price that works for manufacturer, customer and consumer continues. Ongoing resources of our global team, coordinated through a single point of contact. Our strong commodity price volatility, fluctuating exchange rates and uncertain tax and regulatory commitment to the food sector means we can offer you in-depth knowledge, practical environments, particularly in emerging markets, make decision-making complex. As experience, strong industry relationships and genuine global reach to help you fulfill emerging markets players take their place on the global stage and start challenging your objectives. for share in both developed and developing markets, food manufacturers are focusing This document presents a selection of our work with companies in the sector. Please more closely than ever on the need to maximize volume to maintain growth. get in touch with us if you want to find out more, contact details have been inserted at Companies that meet these challenges with a well-designed and well-executed strategy the back. can, and are, doing well. We believe that successful companies will need to: We very much look forward to having the opportunity to work with you. • Find new routes to growth — prioritizing the right markets and doing the right deals. • Increase adaptability and responsiveness — optimizing business structures, taking an holistic approach to the supply chain and innovating with agility. • Deliver margin improvement — improving performance across business functions, Mike Sills Patricia Novosel managing costs sustainably and getting pricing right. Global Food Co-Leader Global Food Co-Leader Consumer Products Consumer Products • Sharpen execution — improving consumer insight, brand and marketing EY EY effectiveness as well as collaborating better, transforming the finance function and revitalizing risk and control. • Embrace sustainability — both in the individual enterprise and the wider environment. Good corporate citizenship must be part of business as usual: stakeholders expect high standards of behavior including strict regulatory compliance, ethical sourcing and positive societal impact. Appetite for growth Assessing the critical success factors in the rapidly changing food sector 05 Maximizing growth opportunities “F ood companies are struggling to achieve their desired levels of growth in established markets. Emerging markets, transactions and improved consumer and customer understanding are the likely strategies of choice for future growth.” Patricia Novosel Global Food Co-Leader, Consumer Products EY 06 Adapting your strategy to different markets Focus on fast-growth emerging markets Emerging markets are seen as holding the key to future growth for food companies: of Innovation and differentiation: the key to the one billion people projected to enter the middle class by 2030, two-thirds will come from developing economies. Other emerging markets that continue to expand include developed markets Bangladesh, Indonesia, Mexico, Pakistan, Turkey and Vietnam. Africa as a whole is The leading food companies want to continue to grow in established markets: most an area of growing importance for its combination of exciting demographics, high are expecting that around half of their business will continue to come from these economic growth potential and lack of local competition. markets in future. But it is a struggle and they face substantial headwinds. Retailers are The opportunities are significant, but so are the complexities. Each market is unique, powerful and many product categories are commoditized, so raising prices is difficult. requiring companies to build new consumer insights, rethink product development Apart from the US, populations are generally aging. Low consumer confidence is and adapt market strategies that reflect local learning. We are seeing many companies widespread in the aftermath of the financial crisis as austerity measures, particularly adapt products to suit local tastes, wallets and buying preferences. in Europe, begin to bite. Credit remains tight and rising energy and raw material prices continue to put pressure on companies. What attracts food companies to emerging markets? Combating these negative pressures will require innovation, excellent marketing and • 82% of the world’s population live there the ability to offer consumers a proposition that they value, particularly if companies are to continue to mount a credible challenge to private label. • 92% of the world’s births occur there • GDP growth is 4%–5% higher than developed markets Our food clients are responding by seeking out new retail and marketing channels, • By 2030, 93% of the world’s middle class will live in what is currently termed investing more in social media and online platforms to learn more about consumers, emerging markets form a close brand relationship with them and potentially sell directly to them. They are differentiating themselves and adding value by customizing products to the needs of • 70% of global GDP will come from emerging markets in the next 10 years different consumers and channels. Companies that tend to do well in these markets are typically strong on strategic improvization and flexible in the absence of hard market data. They learn fast, respond rapidly to changing conditions and are willing to experiment — but they always start with the fundamentals. Appetite for growth Assessing the critical success factors in the rapidly changing food sector 07 • Do we understand the growth opportunity in this country or region? Food company leaders say emerging • Where do we stand relative to our competitors? markets will drive future success • Where should we start — can we leverage an existing presence? • What level of investment will be necessary and what are the timescales “E urope and the US will be, for the next 10 years, low- for returns? growth territories. Soon we will have 75% of our turnover in emerging markets, where 2bn more people will be born Right deal, right now: pursuing scale and in the next 40 years, and obviously where most of the market presence through M&A world growth is going to be.” Food consistently accounts for the greatest volume of deals in the consumer products Paul Polman CEO, Unilever, The Daily Telegraph, 18 August 2011 sector.1 Key trends driving current deal activity include: • The search for scale and new product opportunities in developed markets. “I t is true that you see in these emerging markets, very strong competitors coming up, just go to China and • The pursuit of emerging market growth by developed world businesses. India. The local and regional players are multi-billion • Expansion into the developed world by emerging market companies. dollar players and they are investing in R&D and they are • The assertion of control in joint venture or similar structures by domestic companies attracting good talent because of the growth.” in emerging markets. • The growth of private label manufacturers, which attracts both corporate and Paul Bulcke CEO, Nestle, Dow Jones International, 17 May 2011 PE buyers. 1. According to EY research since 2007. 08 The scale opportunities from consolidation are still compelling and we may continue Building your brands through local to see transformational deals — either defensive mergers or strategically enhancing consumer insights acquisitions. More companies appear to be focusing on “bolt-on” deals in emerging markets. For these businesses, doing the right deals will be key to their success in a Food companies continue to leverage their understanding of consumers and customers, climate where achieving critical mass is all-important. to identify the core brands that have the greatest relevance, and maximize growth Creating opportunities for partnerships and collaboration across the value chain are opportunities at every level, including economy, mass and premium markets. also likely to become a feature of corporate policy. This will be particularly true of While some companies are reworking the same core product across different market developing markets, where business models need to be adapted to reflect local cultures segments, others are focusing on developing entry-level products to draw in new and where companies have an increasing responsibility to promote local skills consumers, or adapting existing brands into new geographic territories. and employment. In developed markets, this includes widening product appeal by identifying new usage occasions or tailoring products to the needs of specific consumer segments. For Adapting to local tastes and buying habits in emerging markets example, extending lighter, healthier options of existing brands or introducing new • Knorr entered Africa with bouillon cubes — a cheap, scaleable “building functionality around wellness. block” product allowing them to build brand reputation before introducing In emerging markets, developing the portfolio starts with finding answers to further products fundamental questions: • Oreo has adapted to the tastes of Chinese consumers with a less sweet product and a green tea flavoured variety • How will consumers use our products? • In Mexico, Nestlé reformulated basic food products to counteract typical dietary • How can we tailor them to reflect local taste and habits? deficiencies, repricing and repacking them in the local language to maximize • What is our strategy on pack size and price? consumer take-up • Danone has developed products for “base of pyramid” consumers in India and • What proportion of the brand portfolio should be local? Bangladesh that have lower price points and are fortified with nutrients Appetite for growth Assessing the critical success factors in the rapidly changing food sector 09 Health and wellness: a new continuing trend How EY can help Food companies are capitalizing on growing government and consumer interest in EY’s strong industry knowledge positions us well to help clients execute on their growth health and wellness through better nutrition to develop products for new niches such strategies. We have a proven track record in helping businesses all over the world to as “nutraceuticals,” functional foods containing branded active ingredients, organics create opportunities for growth — and knowledgeable local teams to support strategic and ethically sourced foods. moves in all key markets. We can advise on: In the developed world, a key area of focus is relevance to the aging population. Nestlé • Market prioritization and market segmentation has created Nestlé Health Science S.A. and the Nestlé Institute of Health Sciences “to pioneer a new industry between food and pharma.” In this new nutraceuticals market, • Growth opportunities in emerging markets the company aims to create products to prevent and treat conditions such as diabetes, • Transaction due diligence obesity, cardiovascular disease and Alzheimer’s disease. • Transaction tax • Merger integration and valuation • R&D program management and innovation • Monetizing assets Transaction support EY is a leading advisor on food transactions, with a network of 6,500 transaction professionals in more than 90 countries. We have been involved in many of the largest food sector M&A deals in recent years. We offer in-depth understanding of food industry issues, businesses and local dynamics to boost our clients’ competitive edge on deals. Our closely integrated teams are highly experienced in serving clients across different cultures, languages and regulatory systems. We are ready to advise on the full transaction life cycle including: 10