May 2014 Retail & Consumer – A subsector focus on megatrends Packaged food and beverages (“F&B”) There are five megatrends reshaping the world economy, and, in turn, affecting the packaged food and beverages sector. In response, companies within the sector are paying close attention to their product mix, pricing, and global expansion strategies. In addition, sustainability efforts such as water conservation and technological advancements such as digital marketing are influencing changes across packaged food and beverage companies’ entire value chain. Megatrend 1: Demographic shifts Packaged food and beverages Lower sodium • Changing consumer demographics, including age, income, Fewer Sugar education, ethnicity, and population, vary by country and create calories substitutes new opportunities and challenges for F&B companies. Non• As such, packaged food and beverage companies should strategize Healthy GlutenG carbonated on their product mix and pricing. offerings free beverages - Many companies are reformulating their product portfolios to include healthier brands and positioning products in healthProtein Organic enhancing categories, but additional tailoring/ localization of Fortified/ products to tap growth potential across the changing Functional demographics is essential. ingredients - In addition, stores are providing organic, natural, and premium private label products, along with loyalty and marketing programs, causing many consumers to stick with store brands. To prevent market share loss and offer competitively priced options, packaged food and beverage companies should step up product innovation and marketing to differentiate their products. For example, a global snack and beverage company has introduced kettle-cooked chips with a Mediterranean twist for higher-end consumers; and a low-priced tortilla chip for value consumers. • Packaged food and beverage companies may need to re-think their health benefit plans and other social programs (e.g. pension programs) to reduce cost and increase effectiveness. Megatrend 2: Shifts in economic power Packaged food and beverages • Weaker economic growth in developed nations has forced F&B companies to not only expand their operations/production locations, but also their consumer base, to developing and emerging markets. - According to PwC’s 17th Annual Global CEO Survey (2014), the BRICs are important to consumer goods companies, but so are a whole host of other countries, from traditional consumer powerhouses like the USA, Germany and the UK to a wide range of growth markets like South Africa, Indonesia, and Mexico. • Management teams at packaged food and beverage companies should be conscious and knowledgeable of regulations and changes in foreign countries, where they operate or plan to operate. • In addition, packaged food and beverage companies must continuously manage their brand equity. As companies expand overseas they must comply with other countries’ regulations. Global sourcing also poses a challenge because imports may not meet Swiss standards. In addition, companies could face negative press associated with food borne illnesses or product recalls. • F&B companies should be mindful that new competitors will come from emerging markets, which are often state-sponsored, with different value propositions and have access to local market sponsors. • Deals in the F&B sub-sector drove 2013 retail and consumer activity. In fact, two of the ten largest corporate deals were inbound F&B transactions: a Chinese company acquired a Virginia-based producer and wholesaler of pork meat products; and a Singapore-based company acquired a San Francisco-based producer of canned food. Subsector implications, continued Megatrend 3: Accelerating urbanization Packaged food and beverages • Packaged food and beverage companies should innovate solutions to store and distribute products as many emerging markets have poor infrastructure and many developed markets have strained infrastructure. • With increased urbanization, many stores have transformed to smaller store layouts. Packaged food and beverage companies should modify their product packaging and refine their assortment mix to complement urban characteristics. • In emerging economies, urbanization coupled with better living conditions and rising income levels, are key growth drivers for packaged food and beverage companies. Emerging economies are also undergoing dietary shifts leading to increases in demand for items such as protein and packaged ready-to-eat foods. Megatrend 4: Climate change and resource scarcity Packaged food and beverages • Energy and utility dependent functions, manufacturing, and transportation will be forced to change dramatically, revolutionizing business models and affecting plant- and warehouse- locations. • F&B companies should continue to evolve processes to conserve water, reduce packaging waste, and green house gas emission so as to meet increasingly strict regulations and to attract environmentally conscious consumers. • Essential ingredients ranging from water, sugar cane, citrus, eggs, etc. are threatened by climate change and the growing global population. Not only are global packaged food and beverage companies concerned and trying to produce food and beverages with a more sustainable model, but new players are emerging as well. For example, a plant-based food startup company recently raised $23 million in Series B funding and is focused on creating tasty, affordable alternatives to animal-based foods. • Many F&B companies market their sustainability efforts through dedicated websites and third-party reports and surveys: PwC – CDP S&P 500 Climate Change Report 2013 (September 2013) “[Our] customer and consumer insights group is able to monitor our consumer’s perceptions with respect to environment and climate. We are also able to measure changes in buying behavior and communicate that information to our customers.[…] Being able to monitor, tap into, and take advantage of the changing consumer behavior towards more and more responsible products and packaging could be significant.” — Packaged food and beverage company Megatrend 5: Technological breakthroughs Packaged food and beverages • Packaged food and beverage companies should continue to use and advance information technologies to seamlessly share corporate functions, master data, and back office processing across geographies to lower costs and gain benefits. • Companies in the industry are also looking to increase marketing spend via digital means such as mobile apps, games, and online advertising to connect with consumers on a personal level. Mobile applications are being used for coupons, meal planning, and grocery delivery. Social media is being used for advertising, to create product loyalty and to engage with customers. • Digital platforms are also being positioned as channels to generate incremental sales. Likewise, growth in online grocery services is expected to grow, largely supported by technological advancements and changing shopper behavior. This new distribution channel may impact F&B companies’ supply chains. • Packaged food and beverage companies should utilize big data and analytics technologies to extract intelligence and value from data which can be used to efficiently launch new products, market to niche customers, or generate new product ideas. © 2014 PwC Switzerland helps organisations and individuals create the value they are looking for – serving them with over 2,600 employees and partners working in 14 different offices throughout Switzerland. 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