Weak Outlook for the Food Industry

The food industry is hurting in terms of profits. Commodity prices are rising. However, the ability to increase retail prices remains limited. Discounts prevail. Many leading food companies have cut their outlook for earnings growth in 2011. My former company, Welch Foods of Concord, MA, actually recorded a decrease in sales for 2010.

This quote sums things up for the industry as a whole:

"Many executives in the food industry anticipated rising commodity costs, but the deep discounting at grocery stores has taken them by surprise. With unemployment stubbornly high, some in the grocery industry fear that shoppers have become too expectant of deals across the store."

Brat, Ilan, 2010. Conagra scales back outlook. The Wall Street Journal, Dec. 10.

I find it amazing that food industry executives would be "surprised" by deep discounting at the retail chain level. This attitude probably reflects an over reliance on the idea that through all economic conditions a strong brand will prevail, something that business schools have taught for many years.

For example, when a long-time retailer like A&P files for bankruptcy, it is a sure sign that there are deep pricing issues within the industry. This quote is representative of the problems that plague A&P and the grocery industry in general:

"But that wasn't enough to save the grocer, which has been squeezed by rivals chains like Stop & Shop and Shoprite as well as Wal-Mart Stores Inc. as consumers looked for deals amid the recession. Grocers that solidified reputations as low-priced alternatives have seen sales grow recently while those like A&P that have kept prices higher suffered declines."

Spector, Mike and Brat, Ilan, 2010. A&P in bankruptcy. The Wall Street Journal, Dec. 13.

Simply put, no matter how strong the food brand, pricing is the utmost consideration in consumers minds as weak economic conditions continue to persist.

This was accurately predicted by Alix Partners in a survey from 2009 (see Some Chilling Projections). There has certainly been a structural change in consumer attitudes toward spending. It is amazing to me that executives in the food industry could not anticipate this trend.

Overall, weak consumer demand will cause many changes in the food industry. For example, at least some retailers are cutting back on SKU selection (see Target, Inc. and SKU Reduction). I think this will develop into a major trend that is a negative for food manufacturers.

The best possible scenario for the food industry during the next few years might be flat earnings growth. No doubt there will be more consolidation within the industry.