The last 18 months have seen the full impact of the global economic downturn hit the international business community. It is not just those of us in the agri-food industry who at some stage have been left asking the question: what will be the impact on us?
In times of past problems, today’s issues might have been confined to certain sections of the economy - witness the early 1980s, when the international competitiveness of the UK’s heavy industries came under huge structural pressures, but at the same time, other sectors such as financial services thrived. Some 25 years on, it seems that no sector of the economy is immune from the consequences of this downturn.
Some commentators allege that “food will be alright - people have still got to eat”. But going back only a short period of time - less than 12 months - it was food that was at the very heart of the problem. Soaring food prices were seen as a key driver of inflation and, along with concern over mortgages, fuel and utilities, were at the centre of declining consumer confidence. None of the key underlying factors that contributed to the spiralling commodity and food prices of the last 18 months have gone away - despite that, commodity prices have fallen considerably in the last few months.
Short term, things might look different, of course, but mid to long term, will the Chinese economy continue to grow? Yes, it will. Will there be ongoing problems associated with climate change in key agricultural producing areas? Yes, there will. Will there be market distortions caused by the key policy instruments in world agriculture - the CAP, US Farm Bill and the ever-grinding WTO trade talks? Yes, there will. These, and other real long-term drivers, do not change.
It seems inconceivable that the food sector - and this includes the fresh produce industry - will not feel the full brunt of the powerful forces being unleashed around the world at the moment. This is a global industry and the food industry will, rather than be immune from the impact of the credit crunch, be right in the middle of it.
What might be the key impacts, though? How keenly will these be felt across the supply chain? Our basic premise is that the impact will be felt at all stages of the supply chain and that no one is immune. There are, however, a few areas where companies and organisations look more vulnerable than others - although this will vary from sector to sector, and is also dependent on geographic factors, too.
We have looked at some of the key factors to take into account and believe that these will be as follows:
• Consumer behaviour - the holy trinity of price, appearance and quality has long been the key driver in terms of consumer decision-making when it comes to buying fresh produce. But in many developed markets around the world, we have seen that price is no longer automatically always the most important of these. Look at the rise in popularity of the organic and Fairtrade sectors of the market, which have seen significant growth over the last 10 years, as have other relatively high-value products, such as exotics and some ethnic produce, as well as the pre-prepared and convenience sectors. The indications are that consumers will refocus, not just on price but also on value for money, as a key determinant of what they spend, where they spend it and how. Early indications are that the organic market is already coming under pressure, yet the Fairtrade business is holding up well.
• Channel development & competition - the discount chains are doing well in the UK, but it has taken them 20 years to establish themselves. They, in turn, will see a countering of their strategies from the mainstream players such as Tesco, Asda, Sainsbury’s and Morrisons. Competition among the retail chains will be fierce and there are bound to be knock-on effects on the supply chain - there cannot be. Consumer behaviour will become more unpredictable in the future - value for money and, as some industry commentators such as Professor Tim Lang have said, values (note the s) for money will be absolutely critical to understand. At the same time, consumer behaviour that has developed over the last 30 years is not going to turn totally on its head.
Consumers still like exotic produce, they are still looking for new products and experiences, they are not all going to want, or even expect, all their produce to come from within a 30-mile radius of where they live - and the vast majority still want to shop in supermarkets. It is just that the battle to capture and retain their custom has moved up yet another notch.
• Agricultural policy - in the short term, there will be calls for additional subsidy on key areas of agricultural and food production, and not just from the more protectionist parts of the world such as the EU and Japan, but also from some of the larger emergent countries such as India, Pakistan and those in Latin America. We have already seen, in some cases, calls for the reintroduction of export subsidies, calls for export bans, the control of prices and concerns over levels of food security, etc.
One of the key learnings from the current crisis will be that the distortion of international markets - in almost any industry sector - actually causes more problems in the long term than it solves. While there needs to be appropriate levels of market regulation, one of the key ways to avoid these problems again will be to reduce levels of government involvement in agriculture and food - not least in the EU where, with an expanded group of 27 already in place and another nine countries seeking admission, the CAP in its current format is just not sustainable.
• Supply chains - the modern supply chain has been evolving over the last 15 to 20 years. It has now reached a high level of sophistication that we take for granted.
What might be the impact of the credit crunch and economic downturn on this and how should companies be looking to respond? We have picked out a few key areas that will be vitally important:
âñ The human supply chain and the best people - now is not the time to be losing key staff. The companies who have the most competent, experienced and loyal staff will be in a much better position to survive the future. Having the best people on board will be critical - they have the knowledge and insight to deal with suppliers and customers alike and have a strong sense of what is possible and what might not be. Investment in training and making sure that all staff are fully aware of their role in the operation is critical - and this needs to be well communicated.
âñ Better use of risk management tools - these are commonly used in other areas of the agri-food supply chain, but have seen poor levels of adoption in the fresh produce industry. With the ever-increasing level of globalisation in terms of procurement and supply, however, and the consolidation of buying power by a few really huge players, the use of these techniques and skills is one way that companies can protect themselves and their supply chain partners.
âñ Brands - those that have strong brands, whether they are B2C and/or B2B-based, are in a much better position to survive than those who do not. Brands create trust and help create and sustain value. Commodity players and products with no brands, limited added value and no real point of differentiation will be especially exposed.
âñ The ability to control costs - this will come under a new level of scrutiny, yet the temptation is to think that all costs need to be cut. This is not the case and in some instances, it is even more important to be investing in new projects and initiatives. Sensible cost control has to be the way forward.
âñ New customers, new markets - ironically, this might be an opportune moment to reassess markets and customers. One of the key things to have come out of all this over the last 18 months has been that suppliers who are very dependent on just one or two customers and/or markets are looking exposed. New markets - these could be geographically or channel-based - should be assessed and an informed decision made on the overall risk and return involved. Now is not the time to speculate on risky and/or uninformed opportunities, but to carefully consider the facts based on well-researched and robust data and opinions.
What is the end game for all this? In the short term, it will be an exceptionally tough operating environment - for everyone. Mid to long term, though, we believe the prospects for the fresh produce sector remain buoyant. It is a product that still suits the modern consumer demographic. It is a product by which major customers still place great importance. It is a product that fits all current government thinking on agri-food policy, consumer trends and wider, energy and environment-related issues. It is a global industry and, despite the setbacks of the last 18 months, we do not see the overall move to a truly international economy changing - indeed, one of the net results of all this might be that there are even more inter-linkages between the world’s major economies.
In any situation such as the one we are currently facing, there will eventually be some losers - maybe quite a lot in this case - but there will also eventually be winners too. Companies who can come through the next 12 months will invariably be fitter, leaner and be more attuned to customer needs and requirements, as well as having secured the best supply sources. They are the ones who really deserve to move on and prosper in the future. It will not be easy for anyone and the light at the end of the tunnel might be a bit dim at the moment - but mid to long term, it will still shine brightly for those that can adapt and change their businesses accordingly.
John Giles is a divisional director of Promar International, a leading agri-food consulting company operating across the value chain. It is a subsidiary of Genus plc, an international agri-business and technology group. Promar works across the EU, North American, Japanese, Asian, Middle East and southern hemisphere markets and has carried out a good deal of work in the fresh and processed horticultural sectors. Giles is also the chair of the Food, Drink & Agricultural Group of the Chartered Institute of Marketing and can be contacted at the following email address: jgiles@promar-international.com
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