Global Trends in the Food Processing Industry
Food processing or agri-processing is defined here as post-harvest activities involved in the transformation, preservation and preparation of agricultural production for intermediary or final consumption in the form of food and beverage.
The food processing sector is responsible for generating employment and income opportunities and contributes to enhancing the quality of, and the demand for, farm products. In addition, it can promote decentralized growth and generate non-farm activities in rural areas such as handling, packaging, processing, transporting and marketing of food and agricultural products, particularly in cottage industries. There are clear indications that the food processing industry is having a significant global impact on economic development and poverty reduction, in both urban and rural communities. However, the full potential as an engine for economic development has not yet been fully realized. There are a number of global trends in food processing that are creating new opportunities that developing economies can benefit from.
The increasing importance of processed agricultural products (food processing) is a long-run trend observed in trade across regions and countries. The global food and agricultural industry is estimated to be US $7.6 trillion, according to Plunkett Research, or about 10% of global GDP. Global food exports totaled US $1.38 trillion in 2012, according to the World Trade Organization. In the U.S., food accounts for approximately 13% of a typical household’s spending, ranking third behind housing and transportation, per the U.S. Bureau of Labor Statistics. In Asia, food ranks first, estimated at 23% of consumer spending, followed by education and housing. Global food processing alone will account for US $2.6 trillion by 2020.
US $2.6 Trillion by 2020
The share of processed food in total food exports increased for all categories of developing countries. Urbanization and population growth in the context of economic growth have transformed the domestic markets of developing countries into the principal source of expansion for the global agro-food system. These combined opportunities of export and domestic markets offer a strategic opportunity for the integration of agriculture into dynamic agro-industrial supply systems with strong regional and employment impacts. However, issues of quality, food safety and logistical considerations have placed a premium on agro-industrial management and supply system coordination, demonstrating that competitive advantage needs now to accompany comparative advantage if the new opportunities for development are to be seized. In other words, it is the human value added that creates competitive advantage.
Over the past two to three decades, consumers are rising to greater heights of power and control. They are no longer ‘takers’ but are increasingly driving economies. Consumers are becoming more knowledgeable, demanding, educated and sophisticated. With rising income levels and a growing middle class in many emerging economies, consumers’ preferences are becoming more discerning and markets are more heterogeneous. There are fundamental shifts in consumer patterns and behavior that need to be understood and taken on board. There are three fundamental shifts taking place (Tourism Intelligence International, The Paradigm Shift):
- Demographic shifts – the aging of the population and the rise of generations X, Y and Z – It is widely accepted that populations in many of the mature economies and the world in general, are aging rapidly. People are living longer because of healthier lifestyles and better healthcare systems. The decreasing family size is another factor driving the aging of populations. China’s One Child Policy for instance is a classic example. Consider that the world’s over 50s market has grown to an estimated 1.5 billion persons in 2014 – a market size that exceeds the population base of China (1.35 billion), according to United Nations (UN) estimates.
Generations X, Y and Z are very different from their parents and grandparents. They are more educated and are very technology savvy. They spend long hours on social networks and on other online sites. Gen Y and Z are considered digital natives. These generations are online 24/7 via computers, mobile devices, tablets, iPods, etc. Therefore, to stay ahead of the game in these markets, businesses need to focus their marketing efforts on the places and spaces these younger generations spend their time.
- Psychographic shifts – the emergence of the Creative Classes of consumers. The Creative Class is a group of sophisticated and talented consumers. They are stable income earners and are not afraid of spending to support their demanding lifestyles. Well-educated and savvy to begin with, they feel driven to expand their cultural horizons through authentic experiences and lifestyles. They consume and are dependent on the newest technology. They are city dwellers, who prefer an urban atmosphere of tolerance and creativity.
- Geographic Shift – rise of the emerging markets of Brazil, Russia, India, China, South Africa, etc. These markets are also fundamentally different from the traditional markets of North America and Europe. Even within and among these emerging markets there are fundamental differences along the lines of culture, demographics, ethnicity, income levels, education levels and general consumer tastes and preferences.
Customization, flexibility and individuality will be a premium because of these radical differences among consumers. Quality, content, originality and variety are therefore critical for success.
There is also an increasing shift in demand from western economies such as North American and Europe to emerging economies, primarily in the east, such as India and China. Consumption by developing economies is expected to increase from US $12 trillion annually in 2010 to US $30 trillion in 2025, according to Urban world: Cities and the rise of the consuming class, McKinsey Global Institute. As developing economies amass more wealth, nearly 2 billion individuals are expected to enter the global consuming class, and 60% of households worldwide with incomes of at least US $20,000 per annum are predicted to be in developing economies. By 2025, it is estimated that developing economies could account for nearly 70% of global demand for goods.
Agro-processing and agro business capacity grows where demand grows. For instance, food-processing output in Brazil, China, and India has increased by 8 to 18 per cent annually in nominal terms since 1995, reflecting growth in local consumption. At the same time, annual growth in Agro-processing in advanced economies has averaged 2 to 3 per cent, according to the McKinsey Global Institute.
Demand shifts to emerging markets are being driven not just by large economies such as China, Brazil and India but also by economic growth in Indonesia, Kenya, Vietnam, and other smaller emerging markets. This is a significant implication for the Agro-processing and agro business sectors in developing economies. Rather than focusing attention on the ‘big’ markets such as the USA, UK and Europe and the larger emerging markets such as China and India, smaller markets could be identified for long-term viability. For example, Grace Kennedy from Jamaica is exporting to Uganda, a non-traditional export market.
The confluence of two megatrends, middle class income growth and urbanization, is driving increased sales of processed food. According to the OECD, the size of the global middle class is projected to increase from 1.8 billion people (2010 estimate) to 3.2 billion by 2020. Of this projected growth, 85 per cent is expected to come from Asia. Based on analysis of IHS Global Insight data, middle class households in developing countries (households with real incomes greater than $20,000 per year) are projected to increase 54 per cent by 2020 compared to eight per cent in developed countries. The UN predicts that 90% of the global increase in urbanization will come from Asia and Africa.
Many of these new consumers will be living in emerging megacities where convenience, higher protein content, and functional ingredients take centre-stage in dietary preferences. Future demand for high-value processed food items will continue to be propelled by the increasingly urbanized middle class, a phenomenon that Agro-processing exporters stand to benefit from.
Technology and globalization have revolutionized the way that we grow food, as well as the way that we transport, process, package, purchase and cook it. Waste and spoilage are reduced (but still a problem) thanks to innovations like flash freezing, good highways and refrigerated trucks. Furthermore, it’s an everyday occurrence for consumers in the U.S., Asia or Europe to pick up strawberries from New Zealand, mangos from Mexico or bananas from Costa Rica in the fresh produce section of the local supermarket. Globalization has led to the rise of massive multinational food processing companies like Nestlé and Unilever, which often sell their foods under local names in local languages, after producing them in regional factories worldwide.
Genetic Modification (GM) technology creates opportunities for pest and disease resistance among crops and better yield in some cases. The use of chemical pesticides is reduced and creates a better environmental impact. However, GM technology results in higher priced seeds, but savings are experienced because of the lower rates of crop loss and reduced spending on pesticides. As a relatively misunderstood application, GM technology is often shunned by rural farmers who prefer the status quo. There is also a movement of consumers that are anti-GM and in favor of pure organic and natural farming. The increased investment in biofuels, growing populations around the world, and the concern about greenhouse gas emissions suggest that an increase in agricultural productivity is essential. The GM application is one technology that can contribute to productivity gains. In spite of this, data suggests that organic farming for the most part is the most practical option and can be a lucrative niche for farmers.
Food and beverage E-commerce is another trend shaping the future of food retail. Euromonitor estimates that the online grocery segment was worth US $42 billion globally in 2013. A joint study of six key markets by PayPal and Nielsen estimates that by 2018, there will be 130 million cross-border shoppers spending more than US $300 billion, compared to 94 million spending US $105 billion today. This presents a tremendous opportunity for U.S. food and beverage exporters to meet the demand of the Internet-savvy, time-pressed urban consumer.
Food “e-tailers”, another term for the business-to-consumer (B2C) platforms for online grocery retail, have witnessed explosive sales growth in emerging market megacities such as Shanghai, China. To advance the viability of this growth channel, a model partnership was established between FAS’ Agricultural Trade Office (ATO) in Shanghai and Tmall, China’s largest B2C E-commerce platform.
Together, along with various U.S. co-operator organizations, ATO Shanghai and Tmall have launched several product promotions that featured processed and consumer-oriented items such as cookies, dried fruits and nuts, pork, seafood, and candy. To demonstrate the potential scale of these promotion events, last summer’s promotion of cherries from the North-western U.S. led to sales of 168 metric tons of U.S. cherries to 84,000 individual shoppers in just over two weeks. According to Tmall, this is the equivalent of nine years’ worth of cherry sales at a medium-sized supermarket.
Websites such as Tmall provide a useful platform for American exporters of all sizes and in all sectors to market their products directly to China’s growing number of online consumers. However, the online revolution in food and beverage e-commerce is not a one-country phenomenon. Globally, more than 150 million new Internet users came online in 2013. Other e-grocery platforms in Tokyo, Sao Paulo, Moscow, and London show extraordinary potential for this booming cross-border retail channel.
Growing health concerns are significantly impacting all sectors of the food industry, as obesity levels have risen to alarming proportions in the U.S., Mexico, Asia and elsewhere. In the U.S., where soaring health care costs are a prime concern, US $147 billion in yearly medical costs were linked to obesity in 2008. In the massive health care act passed in 2010, the U.S. federal government set up a requirement that all restaurant chains with 20 or more restaurants post calorie counts for menu and buffet items.
American food processors are dramatically altering their strategies to serve consumers who are concerned about better nutrition and fewer sugars and fats in their foods. Many chain restaurants are likewise seeing excellent sales from lower-calorie foods. McDonald’s’ soaring success with salads is an excellent example. Snack food makers are likewise offering more and more reduced fat items. The Caribbean Region is not far behind in this regard as well.
Meanwhile, the soda industry is going through immense changes due to consumer trends. At one time, soda manufacturers and marketers assumed that there was limitless worldwide growth to be enjoyed in soda sales. However, the real growth in beverages lately has been in bottled waters, energy drinks and natural juices. As a result, 2009-10 saw dramatic regrouping at PepsiCo and Coca Cola when the firms announced their intent to acquire the massive companies that did much of their bottling under license agreements. These soft drink giants have attempted to cut costs, streamline operations and distribute new products as a result of these mergers.
In North America, Asia, Europe and elsewhere, producers and retailers of foods (including restaurants) are now faced with the challenge of positioning their brands to represent consistent quality and healthier options. Companies that rise to this challenge will have significant competitive advantage. This health positioning will go hand-in-hand with growing demand to satisfy additional consumer concerns about environmentally-sound food production methods, fair trade, fair use of labor and humane treatment of agricultural animals. However, a focus on such concerns as fair trade can add dramatically to costs.
Not to be overlooked when considering food industry trends is the potential effect of global warming on agriculture. While the United Nations predicts that food production needs to increase by as much as 70% from 2010 to 2050 due to a much larger world population and growing demand for food in nations with increasing household incomes, scientists are predicting much lower crop yields in some areas due to higher average temperatures as global warming worsens. On the other hand, some observers think that rising temperatures could increase the growing season and agricultural output in regions that currently have cold climates. One potential problem is that higher temperatures may lead to increased drought in many agricultural areas. Another potential problem is growing levels of greenhouse gases such as carbon dioxide and ozone.
There is general scientific consensus that global warming will negatively impact food production. “For the major crops (wheat, rice, and maize) in tropical and temperate regions, climate change without adaptation is projected to negatively impact production for local temperature increases of 2°C or more above late-20th-century levels, although individual locations may benefit (medium confidence)… All aspects of food security are potentially affected by climate change, including food access, utilization, and price stability (high confidence).” Source: IPCC WG2 AR5 Summary for Policymakers – Climate Change 2014: Impacts, Adaptation, and Vulnerability.