1) Introduction to the Food Industry
In the U.S., the retail food store and supermarket industry, with 40,000 stores, totaled about $527 billion in revenues during 2008, according to U.S. Department of the Census figures (plus an estimated $330 billion at 48,000 non-traditional stores such as wholesale clubs as well as $150 billion at 146,000 convenience stores, not including gasoline sales). The restaurant industry accounted for another $566 billion in revenues during 2008, for both dine-in and take-out foods, according to the National Restaurant Association, employing 13 million people at 945,000 locations.
The U.S. retail food industry is about a $1.57 trillion industry. Estimates of industry revenues can vary widely, due to many factors. For example, a large portion of supermarket sales is made in non-food items such as drugs and personal care goods.
U.S. farm sector gross receipts for crops, livestock and products were about $321 billion during 2008, according to the U.S. Department of Agriculture. America’s agricultural sector enjoyed $115.4 billion in exports in 2008, while the U.S. imported only $80.5 billion in such goods.
Globally, in the organized agriculture industry, 2,000 million metric tons of grain are produced yearly, including, in 2007/2008, 16,147 million bushels of wheat, corn, sorghum, barley and oats, plus 197 million hundredweight of rice. In addition, 2,585 million bushels of soy, 400 million metric tons of dairy products and more than 200 million metric tons of meats were produced.
The global processed food and beverages industry is dominated by a handful of multinational corporations. Among the leaders are Unilever, Cadbury Schweppes, H. J. Heinz, Kraft Foods, General Mills and Nestlé. Unilever, for example, estimates that 150 million people per day purchase its products in 150 nations around the globe, ranging from Knorr soups to SlimFast diet meals.
The entire food industry, from growing to processing to retailing, is an extremely competitive field where profit margins are typically so low that it is often challenging to maintain profitability. The processed food industry worldwide has been challenged by low growth rates, high-energy costs and changing consumer tastes. High feed costs have been extremely damaging to poultry and livestock firms, and high fertilizer costs have been challenging to crop farms. While extremely high prices for many commodities brought a cash windfall in much of 2006-2008, commodities in general have been plummeting, and the agricultural sector has felt the change. Pilgrim’s Pride, a major U.S. poultry processor, took bankruptcy in 2008. Smithfield Foods, the world’s largest pork producer, in February 2009 announced plans to shut six plants and cut production by 10%. Profit margins are off and exports are down at such firms.
More recently, the global financial crisis has created vast new challenges to all parts of the food industry. Restaurant sales are dismal, as consumers cut back on discretionary purchases and return to simpler, made-at-home meals. (McDonalds is the notable exception here. Its value pricing and modernized restaurants have created a robust growth period for this budget fast food restaurant chain.) Large numbers of restaurant firms have taken bankruptcy in recent months, including national chains such as Bennigan’s, Steak & Ale and Buffets Holdings, Inc., owner of the Country Buffet and Ryan’s restaurants.
Consumers are resisting food luxuries such as lobster (lobster prices have plummeted along with demand), gourmet coffees and upper-end convenience foods. More notably, consumers are shopping for bargains. Generic store brands are growing in market share while higher-priced name brands are suffering. Sales at discount giant Wal-Mart have been solid. Supermarket chains such as Kroger, Safeway and HEB are being forced modify their merchandising to meet the needs of cost conscious shoppers.
In the U.S., the supermarket industry is under attack by discounter Wal-Mart in particular, as well as by Costco and Target. Vast changes are sweeping through the supermarket sector as a result, as major firms such as Safeway and Kroger have cut prices and lowered operating costs dramatically, while Albertson’s sold itself to private investors. At Wal-Mart in 2008, grocery, candy and tobacco sales amounted to about $153.5 billion, or 41% of total revenues. Wal-Mart now has the leading market share of American supermarket sales.
The latest figures show that U.S. private-label food and consumer product sales grew 10% in 2008 compared to the previous year, according to the Private Label Manufacturers Association, to a total of $82.9 billion. Their numbers are based on a study by Nielsen. At the same time, sales of branded products grew only 2.8%.
In the U.S., at the end of the Civil War in 1865, farmers made up about 55% of the workforce. By 1900, 38% of working Americans still toiled on 5.7 million farms—growing enough food to feed the nation’s population of 76 million. Today, only about 2.5% of the U.S. workforce is employed on farms. The total number of American farms is down to a little over 2 million, but that dwindling count of farms and farmers meets the domestic needs of a national population of 300 million—nearly four times the population of 1900.
Since the early 1900s, the amount of manpower required to grow food has plummeted. The relative cost of an American family’s food has likewise dropped impressively. According to the Federal Reserve Bank of Dallas, in 1901 46.4% of a typical American household’s income went to food. By 1995, that ratio had dropped to 14.0%. Here’s another way to look at it: In 1919, at the end of World War I, a basket of staple food items (one pound each of coffee, bacon, bread, beans, onions, lettuce and ground beef, plus generous amounts of sugar, tomatoes and other items) cost what an average American would earn in 10 hours of work. By 1995, that cost had dropped to less than two hours. The drop has been caused by increases in total personal income, as well as improvements in food technologies. Outside the U.S., other industrialized nations have made outstanding strides in food cost, availability and quality. Many developing nations have seen vast improvements as well. (Ironically, while we all need food to live, and we tend to derive tremendous enjoyment from good food, we nonetheless do a poor job of compensating most people who work in the food industry. From fry cooks to chicken pluckers, many people who work in the food sector receive very low wages.)
Meanwhile, throughout much of the world, 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, interstate 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 or mangos from Mexico in the fresh produce section of the local supermarket. Globalization has led to the rise of massive multinational food processing companies like Nestlé and Kraft, which often sell their foods under local names in local languages, after producing them in regional factories worldwide.
The types of technologies affecting the food industry have evolved over time. From mechanized tractors and implements to diesel trucks to flash freezing, food technology has moved on to become high-tech. Today, computerization also has made marked changes in the food industry: Electronic data interchange ensures that inventories and shipments are well managed so your local grocer doesn’t run out of the products that are selling quickly. Point-of-sale systems at the cash register capture minute-by-minute sales data. Biotechnology is making sweeping changes at the ground level—in seed stocks and agricultural animal health. In fact, gradual genetic improvement of grain seeds like rice and wheat, combined with better fertilizers and other technologies, has created a “green revolution,” enabling nations like China and India to go from agonizingly underfed populations to a large degree of food self-sufficiency and, in some cases, net exports of bounteous crops. Now, genetically modified seeds are gaining ground with the promise of crops that not only resist insects and have extremely high yields per acre, but also produce high levels of desirable nutrients and vitamins.
Growing health concerns are significantly impacting all sectors of the food industry, as obesity levels continue to rise to alarming proportions in the U.S., Mexico, Asia and elsewhere. Various branches of the U.S. government, including the Food and Drug Administration (FDA), along with a host of consumer groups are squaring off with food producers over nutrition and the responsibilities and ethical issues inherent in the production and marketing of food. Humane treatment of agricultural animals is quickly becoming a major consumer issue.
Even local governments, such as the cities of New York and Chicago, are increasing regulations aimed at the food industry. These include Chicago’s famous 2006 ruling outlawing of the sale of foie gras (liver from geese kept in cages and force fed to increase fat—Chicago repealed the law in 2008), and New York City’s 2007 regulations requiring that chain restaurants prominently post nutritional values of menu items. This followed New York City’s earlier restrictions on the use of trans fats in restaurant foods. City officials estimate that 56% of New York’s adults are either obese or overweight, a common problem throughout America. Local public school boards around the U.S. are also enforcing better nutrition in meals and snacks served at schools.
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 safety. Companies that rise to this challenge will have significant competitive advantage. This food “safety” 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. All food processors, grocery distributors and retailers, including supermarkets and restaurants, would do well to study the practices of the handful of companies that have boosted their brands in this regard with superior results, particularly Whole Foods and Starbucks.
Today, high food prices are a stark contrast to the cheap food era of 1974 through 2005. For decades, improving farm technologies and high-output genetically modified seeds had consistently dampened food costs. The International Monetary Fund (IMF) calculates a food prices index that shows real food prices, adjusted for inflation, fell by nearly 75% during those 31 years. However, low-cost food is now a thing of the past. Numerous factors are at work in recent price increases, including higher demand for meat as well as great demand for foods in general by rapidly growing middle classes in China, India, Korea and elsewhere; intense demand for corn from the U.S. ethanol industry (an unprecedented shift of crop use from food purposes to fuel production); and higher producer expenses for fuel, petroleum-based fertilizer and freight. The global financial crisis had dampened freight, fuel and commodity prices dramatically as 2009 began, but the era of cheap food appears to be a thing of the past nonetheless.
Food commodity prices have been on a wild ride. Kansas wheat, for example, more than doubled between June 2007 and January 2008. By March 2008 it had climbed more than one-third above January levels. By early 2009, Kansas wheat had dropped 50% from its highs. Virtually all commodities were at astronomical highs in early 2008, from copper and steel to pork and barley. The global financial rout put an end to that boom, which had lasted five years, and commodities are down dramatically from their recent highs. However, food prices remain high, relative to the 1980s and 1990s, and they are placing severe financial stress on poverty-level populations worldwide. In its report, “Global Economic Prospects 2009,” the World Bank states that internationally-traded food prices climbed by 138% between 2003 and mid-2008.
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 50% from 2006 to 2030 due to a much larger world population and growing demand for food in nations with increasing household incomes, some scientists are predicting much lower crop yields in some areas due to higher average temperatures as global warming worsens. 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. While some observers believe that growing amounts of carbon dioxide in the air will increase plant growth, other scientists have a different opinion. Steve Long, a researcher at the University of Illinois at Urbana-Champaign has conducted open field trials of enriched carbon dioxide amounts in conjunction with the U.S. Department of Agriculture Research Service. His trials, over a period of three years, found unexpected complications from high carbon dioxide levels, including increased lifespan of destructive Japanese beetles and reduced mineral content of soybeans. Significant controversy over the potential effects of greenhouse gases and higher average temperatures will ensue over the mid term.