package food world report part 1

Packaged Food 2010 - Part 1: Global Market Performance

November 2010

© Euromonitor International

2

Packaged Food: Market Performance

Introduction

After the Fall

Competitive Landscape

Retailing Landscape

Final Conclusions

Report Definitions

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Scope

Introduction

2010 Global Packaged Food Retail Value: US$1.95 trillion

2015 Global Packaged Food Retail Value: US$2.14 trillion





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• The core objective of this two-part report is to examine the current state of the global packaged food industry, and

determine how latest industry trends and developments are impacting both present and future retail performance.

This report will take into consideration a variety of industry developments that have taken place since the beginning

of 2010, discussing their effects throughout the calendar year to date as well as future potential impact.

• Since a full-fledged global economic recovery remains far from guaranteed – given high sovereign debt levels and

public spending cuts in Europe and unemployment rates that refuse to come down in the USA – the report begins

with analysis as to how all this lingering uncertainty has impacted packaged food sales over the past year, both in

general and by specific product category and geography. A mixture of staple and impulse food items will be

reviewed. Given the present impact of broader economic factors, future industry prospects through to 2015 will also

be discussed.

• The report also examines how the competitive landscape for packaged food has evolved since Kraft‟s purchase of

Cadbury in January 2010. Other M&A developments and their overall market impact will be reviewed, as well as

other potential mergers, acquisitions and joint ventures currently in the pipeline.

• Retailer consolidation – and its impact on packaged food sales – will also be examined, as it relates to developed

and developing markets alike. The impact of retail consolidation on private label development will be examined in the

process, as will the effects of retailing regulations in key emerging markets such as India and Russia.

• The separately published second part of the report will then examine the key trends, developments and opportunities

impacting and driving the industry, starting with the present state of the health and wellness trend. Given increasing

levels of regulatory and consumer scrutiny, particularly for functional food, many manufacturers with a health and

wellness positioning are having to re-evaluate their product development and marketing strategies. While rumours of

the „demise‟ of health and wellness remain unfounded, significant changes may be in store.

• Health and wellness also plays – at least in part – to mounting global consumer demand for „lifestyle‟ brands, that is

products that very explicitly speak to consumers‟ personalities, values, priorities and quirks. Other packaged food

new product developments with an overt lifestyle positioning will also be reviewed and analysed.

• Another „lifestyle‟ positioning that has been gaining traction – especially in Western Europe – is ethical packaged

food. As such, a summary of the current state of packaged food leveraging an ethical positioning will be provided,

focusing specifically on organic, fair trade and other sustainably-sourced items. Any impact that continued global

economic uncertainty is having on the retail performance of ethical packaged food will also be examined.

Objectives of Global Briefing

Introduction




5


• The report concludes with a series of forward-looking final conclusions, which draw on the industry developments of

the past year to provide strategic insights for any player in the global packaged food industry looking to maximise

future retail sales prospects and success potential.

• The report does not claim to be comprehensive but rather seeks to offer high-level insight into key developments and

opportunities in the packaged food market at a time of continued macroeconomic uncertainty.

• Other Packaged Food and Health and Wellness global briefings from Euromonitor International provide additional

insights on relevant industry factors, variables and trends such as macroeconomic conditions and their impact,

retailer consolidation, private label encroachment, value-added product development and the health and wellness

and ethical food trends. For more insight on these and other topics, please see:

• Diverse Corporate Strategies to Exploit Opportunities in Global Dairy

• Probiotics and Prebiotics: Moving Beyond Digestive Health Status Quo

• Probiotics and Prebiotics: Moving Beyond Digestive Health – Opportunities and Challenges

• Got Milk? – Mapping the Dairy Supply Chain in Developed Markets

• Ethical Packaged Food: Does It Really Have A Future?

• Do Brands Still Matter? – Focus on Private Label Packaged Food

• Forecast Revisit: Will New Scenarios Alter Prospects for the Global Packaged Food Industry?

• The Shapes and Sizes of Recovery in 2010

• Impact of EFSA's Changing Guidelines on Health and Wellness Food Claims

• After Kraft/Cadbury: What Next?

Find Out More With Other Euromonitor Global Briefings

Introduction




6


Global economic

recovery still far from

guaranteed…

While the recent global economic downturn had a comparatively minimal impact on

packaged food sales, continued economic anxiety and the spectre of public spending

cuts across much of Europe means future growth prospects are far from guaranteed.

… But both staple and

impulse packaged food

categories holding firm

Despite ongoing economic uncertainty, general consumer preferences have not

necessarily changed that much when it comes to packaged food, but consumers will

shop smarter and seek out value for money in whichever retail formats they can.

Is the end of ‘health and

wellness’ nigh?

Health and wellness remains a significant growth driver for the global packaged food

industry, but has also come under mounting pressure from both regulators and

consumers. Significant changes to product marketing and claims are in store.

Lifestyle positioning

remains salient for

packaged food

As in other industries, packaged food offerings with a clear lifestyle message and

positioning remain popular, irrespective of broader economic conditions. Products

that speak to consumers‟ personalities, aspirations and values tend to do very well.

Ethical packaged food

still in vogue despite

economic uncertainty

One such value that is continuing to resonate with consumers, especially those in

mature developed packaged food markets, is ethicality. Though still relatively niche,

retail sales prospects for organic and fair trade food remain fairly strong.

Where did all the M&A

go?

After Kraft bought Cadbury in January 2010, a flurry of packaged food M&A was

widely anticipated. However, not much has actually transpired as leading

manufacturers instead focus on inward investment and organic growth strategies.

Retailer consolidation is

transforming the

packaged food industry

Packaged food retailing is becoming more and more consolidated, to the benefit of

supermarket, hypermarket and discounter chains and at the expense of traditional

formats such as small independent grocers and outdoor markets/bazaars.

Battle heats up between

brands and private label

Retail consolidation is also spurring on private label encroachment across the

packaged food industry, in developed and developing markets alike. That said, room

still exists for brands to succeed, especially those with a strong added-value focus.

Key Findings

Introduction




7


Introduction

After the Fall


Retailing Landscape

Final Conclusions

Report Definitions




8


• The global packaged food market has carried on growing in constant retail value terms, and should approach US$2

trillion by the end of 2010.

• This represents a real terms gain of 1.5% from the previous year and is broadly in line with the 10-year CAGR for the

years 2000 to 2010, indicating that real terms consumer spending across the global packaged food industry remains

unfazed by broader macroeconomic conditions and lingering uncertainty.

• Bakery and dairy – both considered staple food items – remain the two largest product categories, accounting for

more than 40% of global packaged food retail value sales between them. This further underscores the inherently

recession-resistant – if not recession-proof – nature of packaged food, as consumers tend not to abandon perceived

necessities despite economic crisis.

• That said, global retail value gains for both categories have remained average at best during 2010, given their

general maturity in developed and developing markets alike and relatively depressed farmgate and commodity prices

in the wake of the dramatic peaks of mid-2008.

• Health and wellness continues to provide avenues for manufacturers to add value to otherwise mature product

categories. Companies such as Danone still find success via this strategy, which in turn has driven retail value gains

for dairy well above those of bakery in 2010.

• However, this strategy‟s viability has now come under threat given greater consumer and regulatory scrutiny.

0

500

1,000

1,500

2,000

2005 2006 2007 2008 2009 2010

US

$ b

illio

n

Global Packaged Food Retail Value Sales by Major Category, 2005-2010

Bakery Dairy Chilled Confectionery Dried Others

The State of the Global Packaged Food Marketplace in 2010

After the Fall




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• Real terms consumer spending on chilled processed food has increased steadily over the past decade, as

consumers in developed and developing markets demand more convenience and look to balance time-saving traits

alongside perceived freshness and nutritional value. That said, this balance comes at a comparatively high retail

price, which continues to constrain growth in 2010 relative to the 10-year CAGR as well as other, more affordable

categories such as frozen processed food. Slowing growth prospects have been further exacerbated by the fact that

some consumers in developing markets have reverted to fresh food, which is more labour intensive but also cheaper.

• Impulse and indulgence categories such as snack bars, sweet/savoury snacks, ice cream and confectionery

continue to see respectable retail value gains in 2010 as consumers look for small indulgences and treats to alleviate

economic worries. The relative affordability of value-added impulse food (healthy, ethical, decadent, etc.) relative to

„luxury‟ goods in the alcoholic drinks, cosmetics and fashion industries adds further appeal and reinforces value

growth.

• The importance of developing markets to global sales gains can no longer be understated. For example, strong and

global retail value growth for baby food and packaged noodles owes much to Asia Pacific, and specifically China.

0

2

4

6

% g

row

th

Global Packaged Food Retail Value Growth by Category, 2000-2010

2009-2010 % growth

2000-2010 CAGR

Consistent Global Retail Value Growth Across Industry

After the Fall




10


• Global packaged food retail volumes should reach 550 million

tonnes in 2010, up nearly 3% from 2009. As with retail value, this

increase is broadly in line with the 10-year CAGR for the years

2000-2010 and underscores the industry‟s resilience to recession.

• While packaged food manufacturers remain successful in

persuading consumers to spend more money on what they eat, it is

also significant that the physical quantity of packaged food

purchased worldwide continues to rise.

• This is due to a variety of factors, none of which are necessarily

new but their continued relevance, regardless of general economic

conditions, is nevertheless significant.

• Consumer preferences for packaged food have not changed that

much as a direct result of the global economic downturn or its

aftermath, which is supporting retail volume gains. However,

consumers continue to shop smarter, which has benefited modern

retail formats such as supermarkets, hypermarkets and discounters

at the expense of traditional independent grocers.

• Modern retailers compete in terms of price, which makes packaged

food generally more affordable. This has been further augmented

in 2009 and 2010 by low commodity prices compared to the spike

witnessed from mid-2007 through to the middle of 2008.

• Retail volumes have also been bolstered as more consumers in

developing markets substitute unpackaged and fresh food for the

perceived benefits of packaged food. Growth of packaged noodles

in China or milk in India owes much to just such a shift.

• Economic uncertainty also means consumers are eating out less,

especially in developed markets, to the further betterment of overall

packaged food retail volume sales and growth.

Global Packaged Food Retail Volume Also Expanding

After the Fall

0

50

100

150

200

250

300

350

400

450

500

550

2005 2006 2007 2008 2009 2010

Mill

ion

to

nn

es

Global Packaged Food Retail Volume Sales, 2005-2010

Dairy Bakery DriedOils and Fats Canned Others




11


0

20

40

60

Supermarkets/ Hypermarkets

Discounters Small Grocery Retailers

Other Grocery Retailers

Non-Grocery Retailers

Non-Store Retailing

% r

eta

il va

lue

Global Packaged Food Retail Distribution by Format, 2000/2010

2000 2010

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2007 2008 2009 2010

US

$ p

er

kg

Retail Unit Prices for Select Staple Packaged Food Categories, 2007-2010

Noodles Oils and Fats Baked Goods Rice Milk

Retail Distribution and Unit Prices for Global Packaged Food

After the Fall




12


-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2005-06 2006-07 2007-08 2008-09 2009-10

% g

row

th

Packaged Food vs. Consumer Foodservice Retail Value Performance, 2005-2010

Packaged Food Consumer Foodservice

Packaged Food Values Outperforming Consumer Foodservice

After the Fall

0

1

2

3

4

5

6

7

2005-06 2006-07 2007-08 2008-09 2009-10

% g

row

th

Packaged Food Retail Volumes vs. CFS Transactions, 2005-2010




13


22.4%

1.8%

8.0%

11.3%

4.7%20.2%

31.6%

Packaged Food Retail Value Sales by Region, 2005

Asia Pacific

Australasia

Eastern Europe

Latin America

MEA

North America

Western Europe

• In absolute terms, global packaged retail values are slated to increase by US$28 billion from 2009 to 2010. More

significantly, Asia Pacific and Latin America will between them account for more than US$21 billion of this increase.

Both regions have increased their retail value share of the global marketplace by 100 basis points from 2005 to 2010.

• Asia Pacific‟s overall impact on global packaged food sales is even greater when the comparatively developed

markets of Japan, South Korea, Taiwan, Singapore and Hong Kong are filtered out, all of which are expected to see

flat to declining retail values in 2010. By contrast, China alone will add more than US$7 billion to global retail values

in 2010, with a further US$1 billion or so each coming from India and Indonesia and US$480 million from Thailand.

• By comparison, the mature packaged food markets of North America and Western Europe will add only US$840

million and US$1.4 billion, respectively, to global retail value sales in 2010, less than 10% of total growth. On top of

general maturity, aggressive promotional pricing campaigns from manufacturers and chained grocery retailers alike,

coupled with increasing private label encroachment, is acting as a drag on overall retail value performance.

• That said, not all emerging packaged food markets are thriving. Economic recovery remains tenuous in Eastern

Europe, with the region‟s packaged food market expected to only increase by US$570 million in real terms in 2010.

However, market prospects should improve from 2011, after the region‟s economic recovery consolidates itself.

Emerging Markets Drive Global Retail Performance

After the Fall

23.4%

1.8%

8.2%

12.3%

4.9%

19.3%

30.1%

Packaged Food Retail Value Sales by Region, 2010




14


• Bread, a staple in most countries, has weathered the

economic downturn fairly well as most consumers

reduce expenditure on non-essentials instead. While

not extraordinarily dynamic in a global context, constant

retail values have still held steady. Moreover, packaged/

industrial bread has performed slightly better than

unpackaged formats despite its higher retail price point.

• Value-added health and wellness trends are also

holding firm, regardless of economic concerns. In the

USA, whole grains and their health benefits remain

popular and continue to influence consumer choices.

While white bread, which tends to be much cheaper

than brown bread, still commands more than 31% of US

packaged/industrial bread retail value sales in 2010, it

has declined 100 basis points from the previous year.

Meanwhile, wholewheat bread has gained 20 basis

points in 2010 to account for nearly 11% of category

retail value as consumers remain fixated on fibre.

• Greater demand for healthier options is also driving

bread sales in emerging markets. In Argentina, the

Fargo and Bimbo packaged/industrial bread brands

offer variants with extra fibre, omega-6 and omega-9

and 0% trans fat, all attracting many new consumers.

• Argentine packaged/industrial bread sales are also

benefiting from aggressive price promotions in

supermarkets and hypermarkets, a tactic that has

greatly increased its affordability among lower-income

consumers and is relevant to other emerging markets.

0%

20%

40%

60%

80%

100%

2005 2006 2007 2008 2009 2010

% r

eta

il va

lue

US White vs. Wholewheat Packaged Bread Sales, 2005-2010

White Wholewheat

0

50

100

150

200

2005 2006 2007 2008 2009 2010

US

$ b

illio

n

Global Bread Sales, 2005-2010

Packaged/ Industrial Unpackaged/ Artisanal

Global Bread Sales Benefit From Staple Status, Added Value

After the Fall




15


• Even though in global real terms, retail value growth for frozen processed food has slowed in 2010 relative to the 10-

year (2000-2010) average, in large part thanks to continued economic uncertainty, constant value retail spending per

head has still held relatively steady – if not improved – since the start of the global crisis in 2008.

• It comes as no surprise that consumer spending per head for frozen processed food in the comparatively developed

markets of North America, Australasia and Western Europe far outstrips levels in Eastern Europe, Latin America,

Asia Pacific and MEA.

• However, what is remarkable is the fact that real terms consumer spending did not fall in any region between 2008

and 2010, be it developed or developing, with spending per head in most cases actually increasing.

• Growth is being driven by various factors, including sustained demand for convenient meal solutions irrespective of

economic conditions and the expanding presence of domestic and commercial freezer units in emerging markets

specifically. In developed regions there is also a growing perception that freezing food helps it to retain its nutritional

value better than chilled.

• The longer shelf-life of frozen food also appeals to more consumers in developed and developing markets alike.

• Manufacturers recently expanding their scale in frozen processed food via high-value acquisitions include Nestlé SA

and Iglo Bird's Eye Frozen Foods, while Kraft Foods and Unilever have sought to exit the category.

0

20

40

60

80

100

120

North America Australasia Western Europe Eastern Europe Latin America Asia Pacific MEA

US

$ p

er

he

ad

Frozen Processed Food Retail Per Capita Spending, 2008/2010

2008 2010

Frozen Processed Food Retail Values Hold Firm Worldwide

After the Fall




16


• Retail value growth for ice cream has proved resilient in

2010 thanks to a generally warm summer, which has

helped push global projected sales gains for the year

ahead of the 2000-2010 average. The 2010 FIFA World

Cup also no doubt bolstered retail sales performance.

• Likewise, the World Cup also appears to have benefited

other impulse food categories such as confectionery and

sweet and savoury snacks, with 2010 anticipated retail

value gains for both categories outperforming the 10-year

(2000-2010) average as well. However, the tournament

can only be seen as one bolstering factor, and even a

somewhat marginal one at that.

• The more important point to draw from 2010 retail

performance is that consumers around the world still crave

their „junk food‟ regardless of economic conditions and

conflicting industry trends such as health and wellness.

• Emerging markets are becoming more important to

impulse and indulgence food sales in retail value and

volume terms, thanks to more sustained – relatively

speaking – economic growth and increasingly Western

consumer lifestyles, preferences and eating habits.

• China‟s sweet and savoury snacks market should reach

US$9 billion in 2010. Moreover, real terms retail value

growth should continue to outpace retail volume gains.

This means Chinese consumers are continuing to trade up

to more premium-minded – and higher-priced – snacks,

which bodes exceptionally well for manufacturers‟ margins

and profitability going forward.

0

2

4

6

8

10

2005-06 2006-07 2007-08 2008-09 2009-10

% g

row

th

Chinese S/S Snacks Retail Sales Performance, 2005-2010

Retail Value

Retail Volume

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Confectionery Ice Cream S/S Snacks

% g

row

th

Global Impulse and Indulgence Food Retail Value vs. Volume Growth, 2010

Retail Value Retail Volume

Impulse and Indulgence Food Prospects Remain Resilient

After the Fall




17


• One potentially significant unknown quantity for packaged food retail prospects is the looming spectre of commodity

price volatility. Cocoa and wheat prices have continued to rise in 2010, while corn prices reached a two-year high on

commodity markets on 11 October 2010 after the US Department of Agriculture warned of “dramatically” reduced

stocks due to bad weather. In turn, this rise could have a profound impact on meat production costs, and thus prices.

• While most industry sources still believe that a repeat of the rocketing food prices seen from mid-2007 to mid-2008 is

unlikely, upward pressures are mounting thanks to a mixture of commodity speculation and natural disasters

including the recent wildfires in Russia and flooding in Asia Pacific that has blighted the likes of China and Pakistan.

• In turn, this potentially dangerous mix is leading to renewed social unrest, with Mozambique experiencing „food riots‟

in early September 2010. In turn, this has prompted the UN Food and Agricultural Organization to issue a series of

warnings in recent months, not least a report published in June 2010 stating that at current trends global food prices

could rise by as much as 40% by 2020. Rising prices are also attracting the ire of industry bodies. In a statement

published on its website in May 2010, the German Confectionery Association (BDSI) condemned the speculative

investment by banks and investment funds on agricultural commodities such as cocoa. Cocoa price fluctuations

since the end of 2009 and start of 2010 have caused uncertainty for chocolate manufacturers around the world.

100

110

120

130

140

150

160Commodity Food Price Index: March 2009-September 2010

What’s Happening With Global Food Commodity Prices?

After the Fall

Source: IMF




18


• In the case of wheat, which has come under considerable scrutiny lately, global stocks are predicted to remain close

to 2008/2009 levels (despite the recent Russian fires) and consumer demand for wheat-intensive products is not

changing much. As such, strong fluctuations in the price of wheat stemming from supply/demand imbalances are

fairly unlikely in the short term. However, stronger than predicted demand in emerging regions and/or relatively poor

crops in specific countries could push up wheat prices close to 3-5% between September 2010 and the end of 2011.

• Any price movements going beyond this range could be driven by other factors. For example, a general economic

recovery is picking up pace in Asian markets, especially in China, India and Indonesia. Moreover, the urban

population in these countries – which accounts for the bulk of bakery consumption – is predicted to grow by 140

million between 2009 and 2014. Meanwhile, in the Middle East and Africa, where bread remains a heavily subsidised

staple food item, the total population is projected to grow by 140 million between 2009 and 2014.

• Nevertheless, the early August 2010 price hikes seen on international wheat markets are testament to just how jittery

trading in global food commodities is becoming. The prevailing mentality of so-called “food insecurity” has made

wheat, alongside other food commodities, particularly prone to speculative attacks, and thus mounting uncertainty. In

turn, this makes securing longer-term input supply contracts even more important to the future health of the industry.

Repeat of 2008 Food Price Spike Still Considered Unlikely

After the Fall

150

175

200

225

250

275

300

Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10

US

$ p

er

me

tric

to

nn

e

Wheat Monthly Prices: October 2009-September 2010

Source: IMF




19


Introduction

After the Fall


Retailing Landscape

Final Conclusions

Report Definitions




20


• The global packaged food marketplace remains

extremely fragmented, with the top 10 players

collectively accounting for little more than 15% of retail

value sales worldwide based on 2009 estimates. While

private label on aggregate claims another 12.5%, more

than 70% of value sales stem from smaller, more often

than not, highly localised players.

• As of November 2010, only two manufacturers of

branded packaged food can claim to account for more

than 3% of global packaged food retail value sales: the

newly-merged Kraft/Cadbury and Nestlé SA.

• The competitive landscape is so fragmented that

meaningful organic share growth – on a global or even

regional scale – is exceptionally hard for companies to

achieve. As such, mergers and acquisitions have

become the preferred method of expansion and

consolidation within the industry, and the only

perceived way to move up the company rankings.

• In the last three years, Mars is one of only two

companies to have moved up – albeit by only one

place – in the global company rankings, thanks to its

2008 acquisition of Wrigley and its iconic gum brands.

• The only other company to improve upon its global

ranking between 2007 and 2010 is, of course, Kraft

Foods, thanks entirely to its acquisition of Cadbury Plc

in January 2010. Based on 2009 sales, Kraft/Cadbury

is now the single largest packaged food company in

the world, just pipping Nestlé to the top spot.

Global Packaged Food Competitive Landscape in 2009-2010


Global Packaged Food – Top 10 Companies by

Retail Value 2007-2009

Company2007

Rank

2008

Rank

2009

Rank

2009 %

Share

Kraft/Cadbury - - - 3.3%*

Nestlé SA 1 1 1 3.2%

Kraft Foods Inc 2 2 2 2.4%

Unilever Group 3 3 3 2.1%

PepsiCo Inc 4 4 4 1.8%

Mars Inc 6 5 5 1.4%

Groupe Danone 5 6 6 1.3%

Cadbury Plc 7 7 7 0.9%

Kellogg Co 8 8 8 0.8%

General Mills Inc 9 9 9 0.7%

Ferrero Group 10 10 10 0.6%

Note: *Based on consolidating Euromonitor International’s

published 2009 Packaged Food retail value shares by Global

Brand Owner for Kraft Foods Inc and Cadbury Plc to reflect

Kraft’s acquisition of Cadbury on 19 January 2010




21


• Immediately after Kraft‟s successful acquisition of

Cadbury on 19 January 2010, speculation ran riot on

potential deals and tie-ups elsewhere in the global food

industry. In particular, attention focused on what Nestlé

would do next, as the Swiss “nutrition” giant was no

doubt smarting after being knocked from its number one

spot and – more importantly – was flush with cash after

selling its remaining shares in eye care subsidiary Alcon

for around US$28 billion in cash.

• At the time, suspected acquisition targets for Nestlé

centred primarily on established US packaged food

companies such as General Mills, Heinz and Hershey.

• However, since the Kraft/Cadbury acquisition – and also

since it formally received payment for its Alcon shares

on 25 August 2010 – Nestlé has not actually made any

strategic acquisitions of any note or consequence (see

Nestlé Global M&A 2010 timeline to the right).

• Rather, it has used the proceeds of the Alcon sale – at

least in part – to invest in setting up its new Nestlé

Health Sciences division and focusing on medical

nutrition in the packaged food and beverage industries.

• Similarly, no other significant M&A events of truly global

significance have taken place among packaged food

companies since the Kraft/Cadbury tie-up at the start of

the year, though some speculative prospects remain

firmly in the pipeline and thus worthy of consideration.

• All of this begs the question: what happened to all the

packaged food M&A that was so widely anticipated?

What Happened to all the Promised Food M&A?


• Nestlé purchases Ukraine‟s LLC Technocom for an undisclosed amount.

• LLC Technocom is a local market leader in dehydrated culinary products sold under the Mivina brand name.

3 March 2010:

LLC Technocom

• Nestlé acquires Liverpool, UK-based Vitaflo International for an undisclosed sum.

• The move boosts Nestlé‟s standing in clinical nutrition and tailor-made food for people with hereditary metabolic disorders.

4 August 2010: Vitaflo

• Nestlé becomes majority shareholder in Guatemalan company Malher, pending regulatory approval.

• Mahler has been active in the region for 50 years with brands including Malher, Yus and Toki.

10 August 2010: Malher

Group

Nestlé Global M&A 2010




22


0123456789

0

2

4

6

8

Savoury, Dressings & Spreads

Ice Cream & Beverages Personal Care Home Care & Other

% U

SG

Tu

rno

ve

r (E

UR

bill

ion

)

Unilever Financial Performance by Category: H1 2010

Turnover USG

• While some might argue that global credit markets remain tight after the 2007/2008 credit crunch, thereby precluding

any significant M&A events, takeovers have been taking place elsewhere in the global FMCG marketplace.

• Most notable has been Unilever‟s late September 2010 takeover of hair care group Alberto Culver for US$3.7 billion.

Unilever also acquired Sara Lee‟s divested personal care division in late September 2009, despite lingering global

financial malaise and fears at the time. Procter & Gamble also picked up Sara Lee‟s home care division, including

the Ambi Pur air and toilet care brand portfolio, in mid-July 2010 for US$470 million.

• If both Unilever and Procter & Gamble can make such acquisitions in home and personal care, irrespective of any

banking, financial or economic factors, why is this not being replicated in packaged food? Indeed, with the sale of its

Findus frozen food business in Italy, Unilever looks to be continuing to move away from the food industry.

• If anything, now is the perfect time for more M&A in global packaged food, given how well – relatively speaking – the

industry has performed in a retail context through the global economic crisis and its aftermath.

• Moreover, many packaged food companies – large and small alike – have taken advantage of low interest rates and

other factors stemming from government economic stimulus packages to get their balance sheets into better order.

All of this makes the general climate even more conducive to M&A, so why is it still not happening?

Significant M&A Events Still Taking Place Elsewhere in FMCG


Source: Unilever financial reports, reflecting the acquisition of Sara Lee’s personal care operations on 25 September 2009, but

not the later Alberto Culver acquisition nor the divestment of the Findus frozen food business in Italy




23


• Consolidation in the global confectionery market, for

example, has all but stalled since the Kraft/Cadbury

takeover, even though the general competitive

environment remains essentially the same. Strategic

company aims continue to focus on achieving larger

scale and wider geographical reach, although there

are few well-fitting acquisition targets of sufficient

scale and international reach still available to buy.

• Rather, the top players have pursued more organic

means of expansion, including investing in

manufacturing capacities in emerging regions, setting

up distribution alliances in new markets and similar

initiatives to fuel international growth.

• Of the top 10 global confectionery companies, the

only one to have made an acquisition so far in 2010

is Lotte Group, buying Cadbury's E Wedel-branded

confectionery operations in Poland from Kraft Foods

for an undisclosed sum. The business division was

up for sale as a result of EU competition clearance

following Kraft's acquisition of Cadbury.

• Although E Wedel represents Lotte's second recent

acquisition in the European confectionery market,

after buying the Belgian manufacturer Chocolaterie

Guylian NV in 2008, neither one has succeeded in

significantly widening the company's geographical

reach, nor have they reduced Lotte‟s over-reliance on

its mature – as well as indigenous – South Korean

and Japanese markets.

Top 10 Global Confectionery Players M&A Potential:

2010

Company2009

Rank

2009

ShareM&A Potential

Mars Inc 1 14.4% Privately-held

Cadbury Plc 2 10.1% Acquired

Nestlé SA 3 7.7%Confectionery part

of wider operations

The Hershey Co 4 4.9% Trust-controlled

Kraft Foods Inc 5 4.7%Confectionery part

of wider operations

Ferrero Group 6 4.5% Privately-held

Perfetti Van Melle

Group7 3.0% Privately-held

Chocoladefabriken

Lindt & Sprüngli AG8 1.9%

Publicly-listed –

feasible target

Lotte Group 9 1.6%Confectionery part

of wider operations

August Storck KG 10 1.4% Privately-held

M&A Dries Up in Confectionery After Kraft/Cadbury Merger





24


• Throughout 2010, the world‟s largest confectionery

producers have been actively investing in expanding their

manufacturing capacity in key emerging markets, most

notably Russia, India and Brazil.

• In August, Nestlé and Mars announced their intentions to

increase chocolate production in Russia. Mars stated that it

will open its second largest confectionery factory in the

country in the Ulyanovsk region in 2012 at a total investment

of US$111 million. The factory will produce all of Mars‟

brands, including its well-known chocolate bars. Mars'

current Stupino factory, in the Moscow region, is no longer

sufficient to supply the Russian market‟s rising demands.

• Nestlé announced it will produce its premium chocolate

brand Comilfo, acquired in 2008, in Russia's Samara region.

• In May, Mars also opened a second chocolate factory in

Dubai, investing some US$40 million. The facility will produce

Mars and Snickers bars for the Gulf markets. Mars claims the

investment reflects the company's long-term commitment to

growth throughout the entire Middle East and Africa region.

• In India, Ferrero has firmed up plans for a new production

facility in Maharashtra, with an investment of over US$125

million to manufacture some of its more popular brands,

including Ferrero Rocher and Kinder.

• Hershey‟s latest attempts to move beyond its core domestic

US market in 2010 have included distribution alliances, in

Europe with Euro Food Brands, and in India via a joint

venture with local powerhouse Godrej Consumer Products.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Mars Inc Cadbury Plc

Nestlé SA

Hershey Co

Kraft Foods

% r

eta

il va

lue

Top Five Global Confectionery Company Retail Value Sales by

Region, 2009

Asia Pacific Australasia Eastern Europe

Latin America MEA North America

Western Europe

Focus Centres on Organic Expansion in Emerging Markets…





25


• Following the Kraft/Cadbury deal, further consolidation among leading

packaged food companies was widely expected – and not just in

confectionery – to create even larger economies of scale and widen

geographic reach. However, over the past year manufacturer focus

has been on long-term plans to expand production capacity

organically, especially in emerging markets, and enhance the

presence of existing brand portfolios rather than purchasing an

assortment of local brands, each of which represents something of an

unknown quantity for the buyer.

• Another reason for the lack of any further large-scale M&A deals – at

least in confectionery – could be the difficult task of identifying a target

that is a good strategic fit and lacks any major obstacles to takeover.

For example, after the Cadbury acquisition, the only leading publicly-

listed, standalone confectionery company is Lindt & Sprüngli, the

premium portfolio of which would be a valuable asset to any suitor.

However, the company has suffered from the economic downturn,

making the potential future benefits of acquiring an exclusively

premium portfolio in a post-recessionary environment, with consumers

more reluctant to return to earlier levels of spending, open to question.

• While efforts to expand emerging market presence in a more organic

fashion are laudable, especially given the still challenging global

economic environment and other variables such as fluctuating raw

material and commodity prices, meaningful and strategically well-

thought out M&A is still one of the best ways to diversify global scope.

For example, a combined Kraft/Cadbury – based on 2009 regional

retail value performance – now has a much more diversified

geographical reach across the global packaged food market

compared to what Kraft Foods Inc had on its own.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

% r

eta

il va

lue

Kraft/Cadbury Packaged Food Retail Value Sales by Region:

2009

Asia Pacific AustralasiaEastern Europe Latin AmericaMEA North AmericaWestern Europe

…Even Though M&A Can Still Help Diversify Global Reach





26


• Given the general necessity of M&A to bolstering a company‟s position in a very

fragmented global marketplace, the prospect of more significant packaged food

M&A may well still exist. As such, the operative questions should continue to

focus on „who‟ and „when‟ rather than on „whether‟ something will happen in the

short to medium term.

• One company coming under mounting takeover speculation has been Chicago-

based Sara Lee Corp. In an effort to refocus and deliver better shareholder

value, it has made several key divestments in fiscal 2010, including selling its

personal care business to Unilever for US$1.9 billion and its home care unit to

Procter & Gamble for US$470 million. While a now streamlined Sara Lee is

targeting high-growth developing packaged food markets like Russia and Brazil

in its international expansion plans, including possible acquisitions, it has also

become an acquisition target itself, just as Cadbury began attracting Kraft‟s

interests not long after divesting its beverage operations in 2008.

• One strategic hurdle remains Sara Lee's over-reliance on the mature North

American market; with some 77% of its packaged food retail value sales

generated in this region. Moreover, the recession hit Sara Lee's core chilled

processed food categories hard, though strong labels like Hillshire Farm, Jimmy

Dean and the eponymous Sara Lee would still be good assets for those looking

to expand in these categories. Sara Lee's food operations would deliver

synergies to players like General Mills, Smithfield Foods or Maple Leaf Foods.

• News broke in early October 2010 that Sara Lee had received – and rejected –

an unsolicited US$12 billion takeover bid from private equity firm KKR & Co six

weeks earlier. While Sara Lee spurned this approach, sources claim that once it

sells its bakery business and replaces CEO Brenda Barnes it will split its US

and international businesses before possibly auctioning itself off piecemeal.

• On 9 November 2010, Mexico‟s Grupo Bimbo bought Sara Lee‟s North

American bakery business for US$959 million to boost its sales beyond Mexico.

0

1

2

3

4

5

6

2005 2006 2007 2008 2009

US

$ b

illio

n

Sara Lee Corp Packaged Food Retail Value Performance by

Region, 2005-2009

Australasia Latin America

North America Western Europe

Packaged Food M&A Prospects: Sara Lee Corp





27


• Another potential M&A target – which also happens to be American – is

dairy processing giant Dean Foods Co.

• During the recent downturn, most dairy companies have witnessed

growing consumer preference for lower-priced – and in particular private

label – dairy products. In turn, company strategies to fend off a

subsequent squeeze in profit margins include expanding operations via

M&A. Indeed, 2010, has seen several fairly good-sized acquisitions

occur across various national dairy markets, including France‟s Lactalis

purchasing Ebro Puleva's dairy division in Spain.

• The sale of Dean Foods would easily eclipse any of these deals in terms

of impact on the competitive landscape of the global dairy market.

Speculation about a probable takeover has repeatedly boosted the

company's trading value on the New York Stock Exchange, with the most

likely buyer being Groupe Danone, the world's leading dairy player.

• Based on 2009 retail value performance, Dean Foods is the world's

eighth largest dairy player, but its global retail value share has been

steadily decreasing, falling from 1.6% in 2006 to 1.4% in 2009. Also, the

company's retail value sales of branded dairy products have declined

slightly since 2007, falling to just over US$4.8 billion in 2009 .

• In terms of geographical and category spread, Dean Foods is positioned

in less dynamically growing areas. Until the acquisition of Alpro's

operations in Western Europe in 2009, almost all the company's sales

were generated in North America, and in 2009 the share of sales from its

domestic market fell to 92%, thanks to Alpro's European revenues.

• In terms of product segmentation, about half of the company's revenues

in 2009 were generated in lower-margin milk, while yoghurt, a more

dynamic and higher-margin category, only accounted for 6% of branded

retail operations.

0

1

2

3

4

5

2005 2006 2007 2008 2009

US

$ b

illio

n

Dean Foods Co Global Dairy Retail Value Performance by

Region, 2005-2009

North America Western Europe

Packaged Food M&A Prospects: Dean Foods Co





28


0%

20%

40%

60%

80%

100%

Dean Danone Merged

% r

eta

il va

lue

Dean vs. Danone Global Dairy Sales by Region: 2009

Asia Pacific East Europe Latin AmericaMEA North America West Europe

0%

20%

40%

60%

80%

100%

Dean Danone Merged

% r

eta

il va

lue

Dean vs. Danone Global Dairy Sales by Major Category: 2009

Other YSMD DMP

• All that said, buying Alpro gave Dean Foods the leading position in European soy food and beverages. Alpro has

strong brand equity to allow for further category and/or geographic expansion and an established consumer base.

• Buying Dean Foods would further consolidate Danone‟s leadership position in the global dairy market. The combined

global retail value share, based on 2009 data, would be 6.6%, with number two player Nestlé commanding just 3.9%.

A deal would also catapult Danone into dairy leadership in the affluent North American market, where the group

currently only generates some 15% of its total dairy retail value sales. That said, buying Dean Foods would not

significantly increase Danone's presence in US yoghurt beyond its existing offerings, but it would grant instant

access to a large-scale local production and distribution infrastructure, which is the ultimate necessity for entry into

dairy categories given perishability and limited opportunities for exporting such products over long distances.

• Another valid consideration for Danone would be whether the high price Dean Foods would likely command could be

better invested in expanding Danone's operations in more dynamically growing emerging dairy markets, such as Asia

Pacific or Latin America, as well as in categories which would not dilute its currently high-margin, functional food-

focused product operations. Would Danone really want to get its hands dirty with staple drinking milk products?

Dean Foods and Danone Fit Geographically, Not By Category





29


• Following the highly publicised sale of Cadbury, United Biscuits, the UK's

leading biscuit manufacturer, was put up for sale in July 2010 by its private

equity owners, Blackstone and PAI Partners, for an estimated GB£2 billion.

• Based on 2009 retail value performance, United Biscuits is the world's

fourth largest biscuit manufacturer and also ranks 11th globally in sweet

and savoury snacks with brands such as McCoy's, Hula Hoops and KP

Nuts. The company generates some 65% of its overall retail value sales

from biscuits and nearly 30% from sweet and savoury snacks, while also

having a lesser presence in a number of other packaged food categories,

such as snack bars.

• Despite a broad geographic presence covering Asia Pacific and the MEA,

about 85% of United Biscuit‟s biscuits sales are still generated in Western

Europe, a market expected to achieve a weak CAGR of 1% from 2010 to

2015 and accounting for less than 12% of global biscuit value expansion

over this period. As such, any buyer looking to secure a good short- to

medium-term return on an investment of some £2 billion, in a category

where the core geographic market is expected to grow by only £620 million

(US$945 million) over the next five years, will likely be in for a challenge.

• Continuing demand for healthier products and lingering economic

uncertainty are the main reasons for downbeat Western European biscuits

forecasts. Injecting wellness-led innovations will not be without its

obstacles, but trends such as high-fibre biscuits and products sweetened

with stevia could be exploited to potentially achieve more dynamic sales

growth. Greater geographic diversification could also help a buyer

maximise their return sooner. For example, Asia Pacific‟s biscuits market

stands to generate over 42% of global market growth in absolute retail

value terms between 2010 and 2015. While Japan is the largest player,

India and China are proving the most dynamic.

0

1

2

3

2005 2006 2007 2008 2009

US

$ b

illio

n

United Biscuits Global Packaged Food Sales by

Region, 2005-2009

Western Europe Rest of World

Packaged Food M&A Prospects: United Biscuits (Holdings) Plc





30


• The likeliest acquirer of United Biscuits remains USA-based Campbell

Soup Co. Although unconfirmed, Campbell Soup is claimed to be

considering a £1.5 billion bid. In recent years the company has been

restructuring its activities to focus on simple meals, baked snacks and

healthy beverages. As part of this strategy it has exited confectionery

(divestment of Godiva) and sweet and savoury snacks, while it has

boosted its presence in bread via the acquisition of Ecce Panis in the

USA. Given all this recent activity – coupled with recent statements

indicating that it is seeking “external development opportunities” – a

bid for United Biscuits will not come as a complete surprise.

• Geographically, Campbell's activities are reliant on the developed

world, and in particular the USA, and its recent acquisition activity

(Ecce Panis and Wolfgang Puck) has only reinforced this bias. The

acquisition of United Biscuits would not significantly reduce Campbell

Soup's reliance on developed markets, given its own UK bias, but it

would still yield greater geographic diversity and give Campbell Soup

greater exposure to Western European markets.

• Category-wise, the integration of United Biscuits would almost double

Campbell Soup‟s global biscuits presence and help it become the

second largest biscuit manufacturer globally, with a retail value share

of 5.7% based on 2009 sales. That said, this remains some way off

global leader Kraft, with a 19% global value share in 2009.

• With its renewed focus on specific growth categories and enlarged

scale of operations, acquiring United Biscuits would help Campbell

Soup deliver even more improved margins, particularly in biscuits.

However, United Biscuits would not provide the geographical

diversification required to benefit from more dynamic growth in

emerging regions.

0

2

4

6

8

10

12

US

$ b

illio

n

Leading Biscuits Manufacturers Global Retail Value Sales by Region, 2009

Asia Pacific AustralasiaEastern Europe Latin AmericaMEA North AmericaWestern Europe

Campbell Soup Heads List of Suitors for United Biscuits





31


• Kraft Foods has undergone a major restructuring of its packaged food operations between 2007 and 2010, having

acquired large operations in its focus categories, such as Cadbury in confectionery and Danone‟s biscuits brands,

and also selling divisions falling outside its identified growth areas (i.e. frozen pizza, Post cereals).

• With the completion of the Cadbury acquisition, Kraft has clearly outlined its strategic aim to become a "global

powerhouse in snacks, confectionery and quick meals". Throughout all this, Kraft‟s dairy operations remained

untouched during the general restructuring process and now occupy a rather ambiguous and borderline space

relevant to its current stated focus areas. After the integration of Cadbury, dairy operations account for only some

17% of the company‟s overall packaged food retail value sales, equating to just over US$10 billion.

• Given the division‟s narrow category scope and geographic market reach, its limited potential to generate dynamic

growth rates and its generally ill fit relative to other, more explicitly stated, strategic objectives and aims, all these

factors could lead to the divestment of Kraft Foods‟ dairy business.

• Although not on the same scale, such a divestment is not without precedent. In 2007, the company span off its Post

cereals division to Ralcorp, with the arrangement that Kraft shareholders would own 54% of the new Ralcorp when

the deal was complete, and the division benefiting from an industry-focused operational and managerial structure.

• Among potential buyers of Kraft Foods‟ dairy business, there are a number of other dairy industry players or private

equity firms that would undoubtedly show an interest in Kraft‟s stable of strongly established dairy food labels.

• Given that 88% of Kraft‟s dairy portfolio is cheese, potential acquirers would need to take into consideration how they

would be either enlarging or complementing their existing operations, as well as whether or not their financial

capabilities were strong enough to acquire the world‟s largest cheese-producing corporate division.

• Lactalis, the second largest global cheese manufacturer, has shown interest in, and ability to, expanding via frequent

acquisitions, although a division on such a scale as Kraft‟s dairy business could well be beyond the reach of even its

financial and/or logistical capabilities.

• If the company ultimately decides upon a divestment, given that the division consists of many iconic Kraft brands, not

least Philadelphia cream cheese and Jell-O dairy snacks and dessert mixes, it would best benefit from a similar spin-

off arrangement to that achieved for Post cereals.

Packaged Food M&A Prospects: Kraft Foods Inc’s Dairy Unit





32


24%

25%

16%

10%

7%

18% 28%

23%17%

10%

7%

15%20%

17%

39%

7%

5%

12%

Kraft Foods Inc Retail Value Sales Breakdown: 2006 vs. 2009, Before and After the Cadbury Integration

Bakery

Dairy

Confectionery

Chilled Processed Food

Ready Meals

Other

Note: Inner circle shows category sales breakdown in 2006, middle circle shows breakdown in 2009 before the Cadbury

integration and outer circle shows the impact of the Cadbury acquisition on Kraft’s packaged food sales breakdown by category

in the wake of full integration

Potential Divestment of Kraft Foods’ Dairy Division





33


Introduction

After the Fall


Retailing Landscape

Final Conclusions

Report Definitions




34


• Supermarkets and hypermarkets will collectively remain the single largest purveyor of packaged food in 2010,

accounting for almost 53% of global retail value sales.

• Price-cutting campaigns, other forms of heavy discounting and a greater focus on private label ranges, have been

increasingly used by international and local players alike to maintain and broaden their customer base, with varying

degrees of success.

• Leading supermarket/hypermarket chains such as Wal-Mart, Tesco and Carrefour have also been expanding their

outlet numbers in recent years, especially in emerging markets. In turn, indigenous retailers in these same markets –

such as Brilliance Group and Bright Food in China, Pantaloon Retail in India or X5 Retail Group in Russia – are

doing a good job of replicating the success of leading multinational players and furthering the position of modern

retail formats in general.

• Many local supermarket/hypermarket operators in such emerging markets have received support from local laws that

control foreign ownership. That said, several legal changes may well be in store, paving the way for more robust

competition from multinational retail chains.

• As a result of all these factors, supermarkets and hypermarkets have made steady retail value share gains in all

emerging regions from 2004 to 2010. Despite this, they have still seen their share of global packaged food sales slip

over the same period thanks to mounting pressures in North America and Western Europe.

0

20

40

60

80

World Asia Pacific Australasia Eastern Europe

Latin America MEA North America Western Europe

% r

eta

il va

lue

Supermarkets/Hypermarkets Share of Global Packaged Food Sales by Region, 2004/2007/2010

2004 2007 2010

Supermarkets/Hypermarkets Coming Under Pressure

Retailing Landscape




35


• Small grocery retailers will remain the second most important retail distribution channel for packaged food in 2010,

accounting for just under 23% of global retail value sales. While globally such retailers have managed to hold their

own against fierce competition from modern formats, the expansion of supermarkets/hypermarkets and discounters

in many markets has been exerting more and more pressure, and they have become less able to compete with the

economies of scale, low-pricing models, wider product ranges and one-stop shopping convenience provided by

modern grocery retail chains.

• Most significantly, small grocers have been losing importance in Eastern Europe and Latin America. After growing

their share in Asia Pacific from 2004 to 2007, such retail formats have also been losing ground.

• Price remains the main reason for this declining share, with most packaged food items between 10-20% cheaper on

a per kg basis in a supermarket/hypermarket compared to an independent small grocer.

• While affordable prices will continue to exert a powerful pull on consumers, there are ways that small grocery

retailers can survive alongside supermarkets and hypermarkets. Consumers are returning to traditional small grocers

in emerging economies like Brazil, Vietnam and across MEA. This move has been helped by smaller retailers being

able to offer individual items, rather than multi-packs, or smaller packages. Independent shop owners have also

extended credit more readily than modern grocery chains.

0

20

40

60

World Asia Pacific Australasia Eastern Europe


% r

eta

il va

lue

Small Grocery Retailers Share of Global Packaged Food Sales by Region, 2004/2007/2010

2004 2007 2010

Small Grocery Retailers Slowly Recede on Global Stage

Retailing Landscape




36


• As the new kid on the block in terms of global packaged food distribution, discounters remained comparatively small

among store-based grocery retailers in 2010, with less than 8% of global packaged food retail value sales.

• Distribution of some packaged food staples and meal solution categories – including ready meals, frozen processed

food, and bakery – has increased via discounters between 2009 and 2010 due to ever greater price-cutting

strategies and the growing presence of their own private label packaged food ranges.

• However, discounters are also starting to see global level share losses in other categories – including confectionery,

SDC and soup – over the same period after making gains from 2008 to 2009. This has partly been the result of

aggressive price discounting from leading supermarket/hypermarket chains, looking to stave off the threat of

discounters once and for all. Other non-grocery formats following the dollar/pound store model are also encroaching

on discounters‟ traditional budget-priced bargain basement turf, stealing share.

• Discounters have been losing share in Latin America and MEA, and also hold a negligible presence in Asia Pacific.

In general, their limited product range is a big stumbling block, especially in increasingly aspirational markets like

Brazil, China and India. As these three markets – and their surrounding regions – move further into the global

economic limelight, as is widely expected, discounters should look to expand their presence within them.

Have Discounters Now Plateaued or More Growth in Store?

Retailing Landscape

0

5

10

15

20

World Asia Pacific* Australasia Eastern Europe


% r

eta

il va

lue

Discounters’ Share of Global Packaged Food Sales by Region, 2004/2007/2010

2004 2007 2010

Note: *Discounters continue to account for a negligible share of packaged food retailing across the Asia Pacific region




37


0

5

10

15

Discounters Small Grocery Retailers

Non-Grocery Retailers

% r

eta

il va

lue

Sales by Retail Distribution Format, 2004/2007/2010

2004

2007

2010

• After peaking at an impressive 65% of US packaged food sales by retail value in 2009, supermarkets/hypermarkets

are expected to suffer a sharp decline of 100 basis points during 2010. While they continue to compete aggressively

in terms of affordable prices – and balancing that against added value wherever possible, both for branded and

private label packaged food offerings alike – they have simply been unable to counter the triple whammy of

discounters, dollar stores and warehouse clubs, all of which can compete even more aggressively in terms of price to

win US consumer spending. Even though the US economy is now technically out of recession, US consumer

confidence remains shaken by the economic crisis and an unemployment rate that stubbornly remains near to 10%.

• Within discounters, Supervalu Inc‟s Save-A-Lot chain has proven particularly popular with cash-strapped US

consumers, both relative to supermarkets/hypermarkets and other discounter chains such as Aldi. The chain

promises consumers that it can help them save as much as 40% off conventional supermarket prices, and also

features tips on cutting grocery costs and creating meals that serve as many as four people for less than US$5.

• Within non-grocery retailers, member‟s only warehouse clubs have done well thanks to the value-minded bulk

purchases on offer. Additionally, „dollar stores‟ (where most items are priced at US$1) have performed extremely well

thanks to their uniformly low prices and increasing ubiquity. Category leader Dollar General boasts more than 9,000

stores in 35 states and is particularly well placed in small to mid-size communities to boost accessibility and footfall.

In turn, leading manufacturers such as Kraft Foods Inc are looking for new ways to retail through such channels.

US Consumers Increasingly Lost in the Supermarket

Retailing Landscape

63.6

63.8

64.0

64.2

64.4

64.6

Supermarkets/ Hypermarkets

%re

tail

va

lue

US Packaged Food




38


• As the US economy went into free-fall from 2008, many analysts predicted a

retailing cull leading to considerably more consolidation. However, as of mid-

2010, few grocery retailers had actually gone bankrupt, with fewer still

bought by supposedly „stronger‟ rivals.

• Looking ahead, though, all this may be set to change, with several US

grocery retailers now looking for M&A opportunities having battened down

the hatches during the worst of the US recession.

• US grocery retailing remains relatively fragmented, with only Wal-Mart

claiming a retail value share of 10% in 2010. However, as small and/or

regional US chains are put under sustained pressure by the continuous price

cutting of the country's largest retailers, many are losing share and finding

profits difficult to come by. In turn, two leading retailers have announced that

they are looking for takeover targets in the USA, but may wait until 2011

before making a move.

• First, Chief Executive of Netherlands-based Ahold, John Rishton, announced

the company had more than EUR2 billion that it could spend on acquisitions.

Then, Chief Executive of USA-based Kroger, David Dillon, said that the

company had been considering making more acquisitions as it sees “plenty

of growth opportunities” and there were prospects that the company had

previously identified in “our existing markets and adjacent markets”.

• The great unknown is what UK-based Tesco will do with its US operations.

The company has been slow to build a presence in the USA, through the

expansion of its Fresh & Easy banner, and has been continually forced to

justify its continuing presence in a market where it is losing money. While

acquiring a local retailer would further bolster Tesco‟s otherwise miniscule

presence in the world‟s largest economy, Tesco stated in its fiscal 2010 H1

results that it was looking to stay the course in the USA and that the chain

would become profitable by the 2012/2013 fiscal year.

0

5

10

15

20

25

% r

eta

il va

lue

Top Five US Grocery Retailers by Retail Value

Sales, 2010

US Grocery Market Looks Increasingly Set for Consolidation

Retailing Landscape




39


• When the economic downturn first struck, packaged food manufacturers and retailers alike across Western Europe

widely expected that falling consumer spending and a greater acceptance of private label would drive patrons into

the arms of value-conscious discounters. While this came to pass in several markets, it has not been uniform across

the region nor has it led to a permanent shift in terms of where Western European consumers buy their food.

• Hypermarket and supermarket operators have targeted the likes of Aldi and Lidl by cutting the cost of branded

goods, introducing new products to their private label ranges and promoting themselves as offering consumers more

value for money. In Belgium, Delhaize has been fighting an ongoing battle with discounters since 2006 and over this

time has learnt how to defend its share, even in the worst of times. The company closely followed the strategy

outlined above and has explained its new pricing position very clearly to consumers. This has helped Belgium‟s

supermarkets/hypermarkets to collectively increase their retail value share of packaged food distribution each year

from 2008 to 2010 – up 40 basis points over the last two years – even as discounters‟ share has remained static.

• Similarly, thanks to the strength of leading supermarket/hypermarket chains Tesco, Asda, Sainsbury's and Morrisons,

discounters have always played a peripheral role in the UK and this should continue longer term.

• Looking ahead, discounters are expected to see a slowdown in overall grocery retailing share growth but the channel

is still expected to be the biggest driving force for grocery retailing across Western Europe through to 2015.

-10

0

10

20

30

40

2005-06 2006-07 2007-08 2008-09 2009-10

% g

row

th

Five Fastest Growing Western European Markets for Discounters by Total Retail Value Sales (excl. Sales Tax), 2005-2010

Ireland Switzerland Netherlands United Kingdom Turkey

Discounters Face More Competition in Western Europe…

Retailing Landscape




40


• As supermarkets and hypermarkets take up the fight against discounters in Western Europe, the latter has been

looking further East for growth opportunities. Eastern Europe‟s economic collapse in 2008/2009 has been to the

benefit of discounters, as cash-strapped consumers flock to the format to get the best deals possible across FMCG.

• Between 2010 and 2015, five of the 10 most dynamic discounter markets worldwide are expected to be in Eastern

Europe. The region‟s proximity to the discounter heartland in Western Europe, together with a less developed retail

landscape, makes the region an attractive expansion target. Lidl (Schwarz Group) and Penny Markt (Rewe) are

already well established. Aldi is also growing very quickly, increasing its sales in the region by 70% in 2009.

• There are also several powerful indigenous discounters in the region, led by Russia-based Pyaterochka (X5 Group)

and Magnit (Tander). Fourth-ranked Dixy has also taken advantage of the economic slowdown by opening 100 or

more stores in 2010. This combination of austerity and outlet expansion is driving the format‟s regional performance.

• In Romania, the discounter channel has grown dramatically, boosted by the entry of Plus, Penny Markt and MiniMax

in 2005. By the end of 2010, discounters are forecast to generate some 15% of total Romanian grocery sales.

• Bulgaria has also seen a rapid influx of discounters since late 2009. In November, Rewe, which already operates the

Billa supermarket chain, launched Penny Markt, while Tengelmann opened its first six Plus stores in the market. In

February 2010, Schwarz Group also announced plans for an imminent launch in Romania and Bulgaria. Aldi has yet

to appear in either Romania or Bulgaria, but could well do given its existing operations in nearby Greece.

0

30

60

90

120

150

Bosnia- Herzegovina Belarus Serbia Morocco Croatia

% C

AG

R

Top Five Fastest Growing Discounter Markets by Retail Value, 2010-2015

…And Thus Looking to Move Further East To Find Success

Retailing Landscape




41


• The recent success of discounters in Eastern Europe – both in general and for packaged food specifically – shows

the opportunities available to players bold enough to seize them. At times, however, external barriers exist that

preclude such sudden and dramatic success. Legislation controlling the retailing landscape through limits on FDI and

foreign ownership is one such barrier, and one with significant implications for both companies and consumers.

• In India, legislation on foreign direct investment (FDI) in retailing remains an issue. While many Indian retailers are

proclaiming that the future will be dominated by modern formats, potential changes to the law restricting foreign

ownership means that while modern retailing may grow, it may not be just Indian companies that will benefit.

• On 1 April 2010, the Indian government put a cap on the amount of sales allowed to „group companies‟ at 25%.

However, the definition of what constitutes „group companies‟ remains unclear. Against this backdrop, foreign

retailers are hoping that the rules will be clarified or, better still, relaxed. The Finance Ministry appears to have come

under pressure, since the introduction of the cap, to relax the ruling, with several retailers, including Bharti Wal-Mart,

saying it was too drastic and would severely affect their operations. As international retailers grow their presence in

the Indian market, grow to better understand its differences and forecast the growth from which they could potentially

benefit, so the Indian government is likely to come under increasing pressure from them to change the law. Such

moves could see the acquisition of Indian retailers by their multinational/Western counterparts, leading to potentially

dramatic consolidation in what is an otherwise extremely fragmented grocery retailing landscape.

0

300

600

900

1,200

Pantaloon Retail India Ltd

Reliance Group Aditya Birla Group National Dairy Development Board

RPG Group

US

$ m

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Top Five Indian Grocery Retailers by Retail Value, 2010

Legislative Hurdles Block Multinational Grocers in India

Retailing Landscape




42


• Legislative issues have also characterised grocery retailing in Russia in 2010. On 1 February, the Russian

government introduced new regulations stipulating that retailers with a 25% share in their regional market will be

banned from adding more selling space within that region. In addition, payments to suppliers will have to take place

within a set timeframe, including as little as 10 days after delivery for most perishable food items.

• This is another example of a growing trend within the world's emerging markets for governments to attempt to regain

the upper hand in their relationship with increasingly influential retail environments. In Russia, the national retail

industry has changed from a fragmented and disorganised entity into a powerful economic force.

• The outlawing of extended payment terms for food and alcohol is a marked change from other markets where

retailers have been summarily imposing delayed payments on suppliers to protect their margins. The new law should

benefit suppliers, particularly domestic ones, despite a limited list of products under the new law‟s jurisdiction.

• The new retailing law could also benefit multinationals, by weakening the hold of dominant indigenous Russian

players such as X5 Group. By reducing the definition of local „dominance‟ from 35% to 25%, the new law stands to

greatly curtail the ambitions of the biggest players at present. Not surprisingly, industry heads such as X5 CEO Lev

Khasis and Magnit CEO Sergey Galitsky are not in favour of the changes, with Galitsky calling it „anti-market‟.

0

2

4

6

8

10

12

14

16

X5 Retail Group NV Auchan Group SA Tander ZAO Dorinda Holding SA Dixy Group OAO

US

$ b

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Top Five Russian Grocery Retailers, 2010

New Law Could Open Russia to International Retailers

Retailing Landscape




43


• As supermarkets/hypermarkets and discounters consolidate their position within global packaged food retail

distribution, sometimes supported by new retailing legislation that facilitates the expansion of leading multinational

retailers, this process is furthering the competitive position of private label packaged food at the expense of brands.

• Private label packaged food retail value sales totalled US$234 billion in 2009, or 12.5% of global retail value. Its

share should grow to 12.6% in 2010 thanks to ongoing economic uncertainty and public spending cuts in Europe.

• Private label‟s share of total packaged food retail value sales has also been increasing since the global credit crunch

began in 2007, driven by the continued expansion of supermarkets, hypermarkets and, to a lesser extent,

discounters. As such retail formats have expanded, increasingly displacing smaller, typically independent, retail

operators in the process, they have simultaneously increased their own brand food offerings.

• This trend is particularly pronounced in developed regions such as North America and Western Europe, where

private label has increased not only its shelf space but also the quality and sophistication of the products on offer.

More private label packaged food products are emulating the tiered pricing strategies so successful for many brands.

Retail Consolidation Spurs Private Label Encroachment

Retailing Landscape

12.1

12.2

12.3

12.4

12.5

12.6

2005 2006 2007 2008 2009 2010*

% r

eta

il va

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Global Private Label Packaged Food Retail Value Performance, 2005-2010

Note: *Private label share is estimated




44


• Private label‟s global expansion has been constrained by its relatively limited presence in emerging regions such as

Latin America and Eastern Europe and key emerging Asian markets such as India and China.

• This owes much to generally lower levels of consumer awareness for private label packaged food, coupled with

entrenched consumer preference for brands, which tend to better capture consumer aspirations.

• A comparatively underdeveloped modern retail network of chained supermarkets and hypermarkets has further

hindered private label‟s expansion in these markets.

• Latin America, Eastern Europe and MEA have the lowest packaged food private label shares mainly thanks to the

relatively low importance of supermarkets and hypermarkets to overall packaged food sales.

• Sales of packaged food via supermarkets/hypermarkets in Russia and India, for example, accounted for just 25%

and 11%, respectively, of total retail values in 2010, compared to 71% in the UK and 64% in the USA.

• The relatively low importance of private label-intensive product categories such as canned/preserved and chilled

processed food in emerging regions further impedes overall private label expansion. In Latin America, for example,

fresh food is regarded as both healthy and affordable and remains preferred over packaged food by many

consumers. In turn, Latin America accounted for less than 10% of global canned/preserved food sales by retail value

in 2010.

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10

15

20

25

Asia Pacific Australasia Eastern Europe Latin America MEA North America Western Europe

% r

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Private Label Packaged Food Retail Penetration by Region, 2009

Private Label Packaged Food Still Rare in Emerging Markets

Retailing Landscape




45


• While initiatives among branded manufacturers to add

value to their products, particularly among more easily

commoditised staple food items, have been commendable

and have created genuine innovations, retailers are

proving to be increasingly savvy when it comes to bringing

those same innovations to bear on their own private label

ranges.

• This is particularly true in developed markets, where

private label products have become more sophisticated

and retailers have implemented a tiered pricing strategy to

differentiate added-value private label ranges from the

basic value-for-money product portfolio.

• The addition of functional and ethical attributes to private

label offerings is becoming widespread. Examples include

Spanish retail chain El Corte Inglés, which offers probiotic

fat-free yoghurt under its own brand, some of which

contains fruit and cereal pieces.

• In the UK, retail chain Sainsbury‟s devotes much shelf

space to its own brand organic Fairtrade chocolate

confectionery, which is positioned as being more

sophisticated than mass-market brands and competes

with premium organic chocolate such as Green & Black‟s.

• Despite the increasing sophistication of private label,

however, consumers remain reluctant to buy private label

brands in certain product categories such as chocolate

boxed assortments or baby milk formula, where quality,

presentation and/or health properties tend to override

most price considerations.

Private Label Increasingly Adept at Mimicking Brands

Retailing Landscape

Private label food becoming more sophisticated

Ethical, functional and other added-value trends fairly well

established

Consumers still reluctant to choose

private label in some food categories




46


Strengths

Opportunities

Weaknesses

Threats

• The importance of

supermarkets and

hypermarkets in

developed regions, along

with their expansion in

emerging markets, is

contributing to even

greater shelf space for

private label foodstuffs.

Retail consolidation

• The recent global

recession and continued

economic uncertainty

have made cash-strapped

consumers even more

aware of the importance

of retail prices in planning

their household food

budgets.

Economic uncertainty

• The importance of corner

shops and small, typically

independent or family-run,

retailing businesses in

Latin America and Asia

Pacific has constrained

private label

encroachment in these

regions and will remain a

limiting factor.

Retail fragmentation

• Trust in private label still

constrains categories

such as baby food, where

brand loyalty is

exceptionally high.

Similarly, brands still tend

to trump private label

when it comes to

conveying a real sense of

product quality.

Reputation and trust

• The expansion of

supermarkets and

discounters from upper- to

lower-tier cities in

emerging markets stands

to ensure sustained

growth for private label

packaged food in fast-

developing countries.

Geographic expansion

• Demand for „fair trade‟

and organic products is

still far from its full

potential. As such, private

label should expand its

ethical stance from

traditional categories such

as chocolate and milk to

chilled and frozen

processed food.

Ethical positioning

• The increased importance

of non-grocery retailers

like warehouse clubs or

those which follow the

„dollar store‟ model in

major markets like the UK

and USA may provide an

opening for brands given

their low retail prices and

lack of private label items.

Non-grocery retailers

• Superior product quality in

terms of indulgence and

health properties, as well

as packaging and general

presentation in many food

categories, including ice

cream and chocolate

continue to override price

considerations.

Added-value brands

SWOT Analysis for Private Label Packaged Food

Retailing Landscape




47


• Looking ahead, the economic downturn, as well as continued economic uncertainty, has reinforced consumers‟

shopping habits even further. From 2010 to 2015, evermore price-sensitive consumers – especially those in Europe

facing public spending and benefit cuts – will not necessarily change what they buy when it comes to packaged food,

but are likely to shop smarter and seek out value for money wherever they can. This attitude will continue to benefit

larger retailers such as chained supermarkets/hypermarkets as well as discounters, which have greater scope to

reduce prices.

• A rise in spending through supermarkets/hypermarkets and discounters will be seen in all regions from 2010-2015.

Discounters should remain popular in Eastern Europe, where the effects of the economic downturn have been most

keenly felt, thanks to concerted expansion by multinational and local retailers alike.

• Further proliferation of modern retailers in Asia Pacific will continue to sway consumers from traditional channels,

namely outdoor markets and small grocery retailers, and also improve overall packaged food availability and

distribution in second-tier cities and rural areas, especially in key target markets such as China and India. Asian

consumers attracted by the varied offering of both staples and chilled and frozen packaged food at competitive

prices are expected to increase overall spending in hypermarkets and discounters by more than 55% in each format

from 2010 to 2015.

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Global Changes in Overall Per Capita Consumer Spending by Grocery Retailer Format, 2010-2015

Hypermarkets Supermarkets Discounters Convenience Stores Independent Small Grocers Other Grocery Retailers

Larger Retailers, Formats Should Continue Global Expansion

Retailing Landscape




48


• In the medium term, even as positive news about economic growth slowly emerges, consumers in Western Europe

are expected to have to face up to rising levels of tax and unemployment, with much of the latter stemming from

extensive public sector spending cuts in markets as diverse as the UK, Ireland, Spain and Greece. As public

spending is cut, so too will be government benefits, leading to a real terms decline in wealth for many consumers.

• All these factors are expected to undermine consumer confidence and purchasing power in the short term at least,

and are likely to provide fertile ground for discounters in which to operate, given the channel's concentration on low

retail prices, although, as previously noted, it is not something that other retailers will cede without a fight.

• It is against this backdrop that discounters are expected to continue to make significant share gains in the majority of

Western European markets. While modern grocery formats are expected to continue to take share from traditional

channels over the medium term, the discounter format is set to gain the most, increasing its share of total grocery

retailing sales by 100 basis points from 2010 to 2015. In comparison, hypermarkets and supermarkets are both set

to see their share of total Western European grocery retail increase by only 40 basis points over the same interval.

• These changes should continue to put pressure on branded manufacturers and cause problems for other grocery

formats by further lowering consumers' concept of price. As such, while discounters‟ growth is set to slow between

2010 and 2015, the shadow that the channel is likely to cast across grocery retailing in Western Europe is expected

to grow.

180230280330380430480530580

2010 2011 2012 2013 2014 2015

US

$ b

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Western European Grocery Retailing by Major Channel Format, 2010-2015

Discounters Hypermarkets Supermarkets

Will Austerity Spur Discounters Forward in Western Europe?

Retailing Landscape




49


0

5

10

15

20

25

30

2010 2011 2012 2013 2014 2015

US

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MEA Hypermarkets Total Retail Value Sales (excl. Sales Tax), 2010-2015

0

2

4

6

2010 2011 2012 2013 2014 2015

US

$ b

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Iran and UAE Hypermarkets Retail Value Sales (excl. Sales Tax), 2010-

2015

Iran UAE

• Hypermarkets have been a key driver of overall grocery value sales – and packaged food specifically – in the Middle

East, and will remain so as the format rises to the challenges posed by the region's diversified markets.

• Some markets, such as Dubai, are compact and highly Westernised, and retail saturation is a significant obstacle

regardless of the emirates‟ economic situation. Others, like Iran, hold enormous latent consumer demand for modern

grocery retail formats but suffer from a relative dearth of supporting infrastructure.

• Credited with introducing the hypermarket format to the region, Carrefour and its UAE partner Majid Al Futtaim Group

(MAF) opened the first store in 1995 in Dubai, and have now expanded across the Middle East. In August 2009, the

duo‟s Hyperstar banner entered Iran with licences for up to 11 outlets in major Iranian cities.

• By allowing a major international grocery chain to establish itself in the market, the Iranian government is hoping to

stimulate competition and lower prices across the rest of the retail landscape. Food sold through Hyperstar is mostly

locally sourced and substantially cheaper, up to 10-15% below existing retail prices.

• Despite government support, Hyperstar will face challenges. An underdeveloped regulatory framework meant that

the first outlet, near Tehran's Azadi Stadium, took two years to construct, rather than the usual six months. The other

element of difficulty is the local retail environment. Sainsbury's foray into Egypt famously ended with the chain being

subject to an unofficial fatwa, in part the result of protests from smaller, traditional retailers who found their prices

significantly undercut and shops increasingly deserted. A similar backlash in Iran could slow Hyperstar's progress.

Are Hypermarkets the Future of Food Retailing in MEA?

Retailing Landscape




50


• While much attention has been given to the interplay between supermarkets/hypermarkets on the one hand and

discounters on the other when it comes to food retailing, one neglected format has been the Internet.

• Internet retailing accounts for less than 1% of global packaged food retail values (0.7% in 2010), but has grown from

an all but negligible presence 10 years ago. Western Europe is the only region where the Internet claims more than

1% of packaged food retail value, though Asia Pacific is not far behind thanks to mounting broadband penetration.

• While online retailing sites for brick and mortar grocery retailers dominate packaged food Internet retailing, July 2010

saw Internet giant Amazon unexpectedly enter the online grocery markets of Germany and the UK, offering some

35,000 products in Germany and 22,000 in the UK, including perishable food such as vegetables, meat and fish.

• Operating within such different online markets as Germany and the UK for food and drink could prove to be a huge

challenge for Amazon. The first offers little in terms of direct competition but its consumers seem to lack the

motivation to switch to online grocery shopping. The latter is already very developed, with strong competition from

both online players and traditional brick and mortar stores alike. Amazon has overcome challenges in the past, but

the logistical complexity of delivering perishable food items represents an entirely new experience for the company.

• Amazon's early foray into online food and drink sales might not be an immediate success, but if the company could

entice consumers to change their habits; the extra competition could also push down prices, which could be

significant as consumers in both the UK and Germany tighten their budgets in the face of austerity measures.

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0.8

1.0

1.2

1.4


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Packaged Food Internet Retailing by Region, 2010

Will Internet Retailing of Food Ever Really Take Off?

Retailing Landscape




51


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4

6

8

10

12

14


US

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Food and Drink Internet Retailing Retail Value by Region, 2010/2015

2010 2015

0

2

4

6

8

10

12

14

16

2010 2011 2012 2013 2014 2015

US

$ b

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n

Western Europe Food and Drink Internet Retailing Retail Value, 2010-2015

Western Europe Germany United Kingdom

Market Forecasts for Food and Drink Internet Retailing

Retailing Landscape




52


Introduction

After the Fall


Retailing Landscape

Final Conclusions

Report Definitions




53


• According to Euromonitor International‟s Countries and Consumers database, global real GDP growth is predicted to

start recovering in earnest from 2010, with the currently nascent recovery expected to consolidate each year to 2014.

• The global economic recovery will be primarily driven by emerging markets. Asia Pacific will be the primary dynamo

underpinning global economic performance, bolstered by a relatively rapid recovery in Eastern Europe. Real GDP

growth is predicted to reach 22% in Asia Pacific and 17% in Eastern Europe between 2010 and 2014.

• Latin America‟s GDP is predicted to grow 16% in real terms over the 2010-2014 period, further assisting the global

recovery. Robust regional economic growth will be driven by positive economic prospects in large countries such as

Brazil and Mexico, where real GDP growth is set to increase by 16% and 22%, respectively, from 2010 to 2014.

• Meanwhile, economic growth in North America and Western Europe is predicted to be far lower than what is being

seen for emerging regions and individual markets, although from a relatively much larger base. GDP is predicted to

grow by 10% in North America and 8% in Western Europe in real terms over 2010-2014.

-1

0

1

2

3

4

5

2008 2009 2010 2011 2012 2013 2014

% g

row

th

Global Real GDP Growth, 2008-2014

Final Conclusions: Economic Growth Gathers Pace in 2010…

Final Conclusions




54


• Factors such as high sovereign debt levels (as currently faced by countries including Greece, Spain, Portugal, Italy

and the UK), high unemployment rates and/or the early withdrawal of fiscal stimulus packages in developed and

emerging countries alike could result in only a partial economic recovery (PER) from 2010 to 2015. The worst case

scenario would be for developed markets in Western Europe to suffer a double-dip recession following upon the

current sovereign debt crises, which could also severely constrain economic prospects globally.

• In turn, this potential slowdown in economic recovery stands to have significant repercussions for global packaged

food consumption, in both retail value and retail volume terms, for not only 2010 but also for the years to come.

• Compared to the full economic recovery (FER) currently reflected in Euromonitor International‟s published packaged

food forecasts, based on the latest IMF economic predictions, a PER will constrain retail volumes for non-essential

food categories such as confectionery, ice cream and sweet/savoury snacks, as consumers cut back. Even staples

such as bread, milk and oils and fats – not to mention meal solutions such as frozen processed food, soup and

canned/preserved food – could all see retail volume prospects somewhat constrained as consumers cut back.

• Were global and/or regional economic recovery to be derailed, this would likely provide a further boost for private

label packaged food, as consumers become even more price sensitive and once again tighten household budgets.

…Or Talk of Economic Recovery Still Premature?

Final Conclusions

0

1

2

3

Bread Ice Cream Milk Cheese Ready Meals

Oils and Fats

Soup S/S Snacks Frozen Canned

% C

AG

R

Global Packaged Food Retail Volume CAGR by Select Categories, 2010-2015

FER PER




55


• Recently published company results for Nestlé and

Danone, covering the first nine months of 2010, reveal

just how much emerging markets are driving revenues.

• Nestlé SA and Groupe Danone reported year-on-year

growth (at constant scope of consolidation and constant

exchange rates) of 6% and 7%, respectively, for the nine-

month period through to 30 September, largely driven by

Asia Pacific, MEA and other emerging markets.

• Nestlé‟s best performing markets include China,

Indonesia, and the Philippines, while dairy and

confectionery count among the most rapidly growing

categories in the Asia, Oceania and Africa region. Nestlé

has also widened distribution of its value-priced Popularly

Positioned Products (PPP) in the region with key growth-

driving Maggi Noodles and Nestea Litro.

• Danone has categorically stated that emerging markets

are the company‟s priorities as drivers of both present

and future growth. In Asia Pacific, Danone‟s water and

baby nutrition operations posted high growth rates in the

first nine months of 2010, with China and Indonesia being

the main global drivers of its infant food division.

• Danone‟s definition of emerging markets also includes the

USA, and it has announced plans to triple its US sales,

which currently stand at US$2.5 billion rsp, in the next

two years, without any large M&A, and ruling out buying

Dean Foods, the largest US milk producer and long

viewed as a target for Danone. The company argues that

milk does not fit into its strategic focus.

Nestlé SA 2010 9-Month Results

Geography Sales (CHF msp)% organic

growth**

Europe 15,946 2.0

Americas 24,985 5.7

Asia, Oceania

and Africa 12,9419.2

Total* 82,770 6.1

Final Conclusions: The Future Lies in Emerging Markets

Final Conclusions

Groupe Danone 2010 9-Month Results

Geography Sales (EUR msp)% like-for-like

growth**

Europe 7,061 1.8

Asia 1,798 14.3

Rest of World 3,852 15.1

Total 12,711 6.9

Notes: *Sales by geography for Nestlé do not sum to total

group sales as business divisions only reported on a global

level (i.e. Nestlé Waters, Nestlé Nutrition, Other Food and

Beverages and Pharma) are excluded

**Nestlé’s reported organic growth is equal to Danone's like-

for-like growth; both show y-o-y growth at constant scope of

consolidation and constant exchange rates




56


• Now that it is well on its way to integrating Cadbury‟s operations, Kraft Foods has started looking ahead, and has set

significant expansion throughout emerging markets firmly in its sights.

• During the long takeover battle for Cadbury, Kraft cited greater access to expanding international markets as one of

the main benefits of the acquisition. Based on the first full quarterly results for joint operations, published in summer

2010, Cadbury boosted net revenues across all regions but most significantly in Kraft's Developing Markets reporting

segment, where net revenues increased by over 73%, including a 61 percentage points impact from Cadbury.

• While Kraft's access to international markets has improved, there are still gaps to fill, not least a comparatively weak

presence in the most attractive geographic region of all: Asia Pacific.

• Nevertheless, more than half of Kraft‟s overall revenues originate from outside its „domestic‟ market of North

America. Even more importantly, the company‟s stated strategic objective will be to increase the proportion of

business stemming from so-called „developing markets‟ from a quarter of total revenue to approximately one third by

2013. Essentially, Kraft Foods is banking on its stable of „powerhouse‟ brands in established markets and product

categories to generate enough profit to allow for aggressive expansion into more high-margin categories and fast-

growing emerging markets across Asia Pacific, Eastern Europe, MEA and Latin America.

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80

Asia Pacific Latin America MEA Western Europe North America Eastern Europe Australasia

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Packaged Food Absolute Retail Value Growth by Region, 2010-2015

Final Conclusions: What Now For Kraft Foods?

Final Conclusions




57

Packaged Food: Market PerformanceFinal Conclusions

M&A Capabilities for Top 10 Global Packaged Food Companies: 2010

Company Evaluation of current acquisition capabilities

Kraft Foods IncFinancially stretched, with the recent Cadbury takeover and integration in the short to medium

term.

Nestlé SAFinancially most capable after the finalisation of Alcon divestment, but may be pre-occupied with

establishing the new Health Sciences division to buy anyone of significant note.

Unilever Group

After acquiring Sara Lee‟s personal care business, purchased Alberto Culver one year later.

Shows appetite for growth via high-scale acquisitions but could be financially overstretched in

the short term given high-profile takeovers in other non-food segments.

PepsiCo IncRecently completed the merger with its two largest bottlers, The Pepsi Bottling Group Inc and

PepsiAmericas Inc, rationalising operations.

Mars IncAs a privately-owned company, few details are known about its finances; recent integration of

Wrigley was a major financial commitment.

Danone, GroupeHas not made any acquisitions since Royal Numico in 2007; it has been following a policy of

debt reduction.

Kellogg Co

Only its cereal business is internationalised. As the clear leader in most markets it would face

strong competition issues with large-scale acquisitions in cereals. Is reluctant to internationalise

other divisions.

General Mills IncPotential acquisition target for Nestlé. Heavily reliant on US market, operates via joint ventures

in international markets.

Ferrero GroupeSeems to be interested in geographic expansion, especially into Asia Pacific, but looking

towards potential joint venture partners rather than outright acquisition.

Lactalis, GroupeIts recent European expansion campaign shows its appetite for acquisitions, including the March

2010 purchase of Ebro Puleva‟s dairy business.

Final Conclusions: M&A Capabilities of Top Food Companies




58


• In terms of packaged food retailing, a general trend towards consolidation between supermarkets and hypermarkets

on the one hand and discounters on the other looks broadly set to continue. That said, there are some deviations

from this trend, such as the growing success of dollar and pound stores in the USA and the UK or smaller grocery

formats offering more affordable (from a consumer point of view) pack sizes and greater access to credit. However,

these retail format deviations, where they exist, also tend to share one common quality: affordability.

• What consumers want has not changed much since the dark economic days of the Great Recession of 2009. What

has changed is that consumers are shopping smarter – in terms of where they shop – to save money, rather than

eschewing lifestyle brands and/or the products they genuinely want to consume the most. While this is certainly good

news for branded packaged food manufacturers, it also means that their margins will become increasingly squeezed.

• Looking ahead, there is a clear opportunity for further consolidation within the global grocery retailing market. This

process will create ever larger grocery retailers which will have enormous buying power and a greater hold over the

markets in which they operate. Moreover, SKU rationalisation – like Wal-Mart‟s Project Impact initiative – will become

more common. Carrefour, for one, now has SKU rationalisation high on its agenda.

• Moreover, expanding private label category penetration even further will remain high on the agenda, which will put

manufacturers under even more strain. As such, in 2015, after a wave of consolidation, brand owners could well look

back fondly on 2010, although convincing them of that at the moment is likely to prove rather difficult.

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Grocery Retailer Outlet Growth by Format and Region, 2010-2015

Supermarkets Hypermarkets Small Grocery Discounters

Final Conclusions: Global Retail Consolidation Will Continue

Final Conclusions




59


• Despite the steady expansion of private label packaged food

during the generally uncertain years of 2008-2010, brands still

accounted for around 74% of global packaged food sales in 2009.

Also, private label continued to have a very low presence in

emerging regions. In Latin America, private label accounted for a

mere 2% of packaged food retail value sales in 2009.

• Additionally, there is industry consensus that mass-market brands

remain essential to shaping consumer preferences and spending

habits, especially in more aspirational emerging markets.

• In China, for example, locally-sourced mass-market brand Le

Conté is leading the transition from sugar confectionery to more

expensive, but also more indulgent, chocolate confectionery

among middle-class consumers. Similarly, brands such as

Britannia (Britannia Industries Ltd) and Parle (Parle Products Pvt

Ltd) have underpinned the expansion of packaged biscuits in

India, particularly among busy professionals in urban areas with

little or no time for traditional hot meals during working hours.

• In baby food, brands have demonstrated the primacy of perceived

quality and health properties over price. Furthermore, the robust

performance of brands during the economic turmoil of 2008 and

2009 has shown the resilience of some food categories to

fluctuating consumer incomes and the subsequent impact on

demand for branded lines with specific health properties.

• In short, brands will remain vital to the future health of the global

food market, but they face increasing challenges in mature

markets/categories where differentiation from private label is

dwindling and the additional added-value properties brands offer

are more quickly mimicked by increasingly savvy retailers.

Final Conclusions: Branded vs. Private Label Packaged Food

Final Conclusions

Brands still account for almost three-quarters of global retail value sales

Brands drive the transition from fresh to

processed food consumption in

emerging markets

Brands face increasing challenges

in markets where private label has larger exposure




60


Industry prediction:

Economic recovery

Despite continued economic jitters, not least as many European markets are now

facing significant public spending cuts and the USA continues to struggle with 10%

unemployment, a double-dip recession is looking increasingly unlikely.

Industry response:

Emerging markets and

‘hot’ growth prospects

To stave off the constraining effects of economic uncertainty in increasingly mature

developed packaged food markets, aggressive and sustained expansion into

emerging markets, especially Asia Pacific, will be essential to future success.


Commodity prices

Commodity prices are once again facing the spectre of volatility, which will put

pressure on manufacturers and the broader supply chain. However, a repeat of the

rapid food price inflation seen from mid-2007 to mid-2008 remains unlikely.

Industry response:

Managing volatile

commodity prices

Nevertheless, manufacturers that anticipate any increases to commodity costs will be

in a stronger position, especially as cost savings and effective supply chain

management become more important in the face of mounting retailer consolidation.


Innovation

Packaged food manufacturers will increase investment in new product developments

in light of better economic prospects, particularly in fast-growing regions such as Asia

Pacific. Innovation will also remain crucial to staving off private label encroachment.

Industry response: Don’t

stop adding value

Manufacturers must become bolder and even more compelling in adding value to

their new product launches, while resisting the temptation to retreat into a single-

minded value-for-money proposition as they try to compete against private label.


Private label

Even though economic prospects are gradually improving, there is no guarantee that

consumers, especially those in developed markets, will return en masse to branded

products, especially now that private label has become more adept at adding value.

Industry response:

Diversify between brands

and private label

Private label encroachment looks here to stay, so if you can‟t beat them, join them.

Food manufacturers should explore opportunities to split production between added-

value brands on the one hand and more commodified private label on the other.

Final Conclusions for Packaged Food: 2010 and Beyond

Final Conclusions




61


Introduction

After the Fall


Retailing Landscape

Final Conclusions

Report Definitions




62

Packaged Food: Market PerformanceReport Definitions

• 2010 figures are provisional and based on part-year estimates.

• The forecast period under review subsumes the years 2010 through to 2015, inclusive.

• All forecast retail value data for Packaged Food are expressed in constant terms; inflationary effects are discounted.

All historical data – country-specific, regional and global – through to 2010 are also expressed in constant value

terms, with any inflationary effects completely discounted.

• All US$ data for Packaged Food – historical and forecast – at national, regional and global level are shown at fixed

2010 exchange rates. As such, any impact from currency and/or exchange rate volatility are discounted.

• All forecast retail value data for Health and Wellness and Health and Wellness Packaged Food are expressed in

constant terms; inflationary effects are discounted. All historical data – country-specific, regional and global – through

to 2010 are also expressed in constant value terms, with any inflationary effects completely discounted.

• All US$ data for Health and Wellness and Health and Wellness Packaged Food – historical and forecast – at

national, regional and global level are shown at fixed 2009 exchange rates. As such, any impact from currency

and/or exchange rate volatility are discounted.

Data Parameters




63


• Definitions for industry-specific and other terminology/abbreviations used in this report:

• CAGR – Compound annual growth rate

• Canned – Canned/preserved food

• Chilled – Chilled processed food

• DMP – Drinking milk products

• Dried – Dried processed food

• EU – European Union

• Fairtrade – Officially certified by a recognised and authorised accrediting agency

• fair trade – Absence of capital letters refers to the general ethical movement centring on fair prices and living wages

• FMCG – Fast moving consumer goods

• FER – Full economic recovery

• Frozen – Frozen processed food

• MEA – Middle East and Africa

• MR – Meal replacement

• MSP – Manufacturer selling price

• NPD – New product development

• PER – Partial economic recovery

• RSP – Retail selling price

• SDC – Sauces, dressings and condiments

• S/S Snacks – Sweet and savoury snacks

• USG – Underlying Sales Growth, reports turnover growth at constant exchange rates, excluding the effects of

acquisitions and/or disposals

• USP – Unique selling point

• YSMD – Yoghurt and sour milk drinks

Report Terms and Definitions

Report Definitions




64


• Packaged Food comprises the following Euromonitor International product categories and definitions, as well as

each individual component sub-category therein:

• Baby food

• Bakery

• Canned/preserved food

• Chilled processed food

• Confectionery

• Dairy

• Dried processed food

• Frozen processed food

• Ice cream

• Meal replacement

• Noodles

• Oils and fats

• Pasta

• Ready meals

• Sauces, dressings and condiments

• Snack bars

• Soup

• Spreads

• Sweet and savoury snacks

Product Definitions

Report Definitions




65


• Packaged Food retail sales are defined as sales through establishments primarily engaged in the sale of fresh,

packaged and prepared foods for home preparation and consumption.

• Packaged Food retail coverage subsumes the following Euromonitor International retail distribution categories and

definitions, as well as each individual component sub-category therein:

• Grocery retailers

• Hypermarkets

• Supermarkets

• Discounters

• Small grocery retailers

• Convenience stores

• Independent small grocers

• Forecourt retailers

• Food/drink/tobacco specialists

• Other grocery retailers

• Non-grocery retailers

• Health and beauty specialist retailers

• Other non-grocery retailers

• Non-store retailing

• Vending

• Homeshopping

• Internet retailing

• Direct selling

Retail Distribution Definitions

Report Definitions




66


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