The food industry: Where to from here?… Part One

Posted by Daniel Palmer on 9th October 2008

As talk of economic turmoil continues to dominate media reports, food industry participants can’t help but feel it is only a matter of time before the downturn impacts on them – if it hasn’t already. However, in the case of economic conditions, it is important to remember that ‘what goes down must go up’.

The impact on the food industry is fortunately softened by the fact that everyone still needs food, but some areas are still likely to suffer.

Over the course of the next two days Australian Food News will look at a wide variety of sectors to discover the likely business impact of deteriorating economic conditions.

Fine dining is one of the sectors of the industry under the greatest pressure. Consumer confidence is waning, food prices had – until recently – been on the up and the much discussed labour/skills shortage has only put greater stress on fine dining establishments.

There is little doubt fine dining will be one of the first areas hit by a fall in consumer spending. Companies with established reputations for high quality food and great service will ride out the downturn, however, assuming standards are not dropped in an endeavour to reduce costs. Profits are likely to fall for most, but there is light at the end of the tunnel.

There has been a lack of new entrants to the fine dining scene this year, particularly in Melbourne and Sydney, as casual dining begins to command greater attention. With the downturn likely to lead to some businesses going under or reverting to a more casual set-up, survivors will be in a great position to increase their slice of the market when growth returns. Fewer competitors, coupled with a return to more prosperous times, will be a recipe for success for strong fine dining businesses.

Casual dining establishments, on the other hand, have become more prominent and may continue to take away business from fine dining establishments. There are concerns for the sector, though.

Recent Nielsen research in Australia established that, of the 22% of Australians already lowering their spending, two in five listed dining out as the biggest casualty. Similar findings were discovered in August by Freshlogic, with their research indicating a 6% drop in eating out at restaurants over the first half of 2008.

A recent UK study carried out by PriceWaterhouseCoopers discovered that, of those who were going to cut back on eating out, 20 per cent said they would stop going all together – in favour for cooking at home. A further 46 per cent reported they would simply eat out less often, 13 per cent will spend less at the same restaurants, and 11 per cent will eat out at a cheaper restaurant.

Consequently, despite gaining some business from fine dining, casual restaurants are likely to be hurt by a “trade down” to fast-food and ready-to-eat supermarket meals.

The positive for restaurateurs is that a night out remains a form of escapism for some, providing cause for optimism.

Importantly, restaurants are better placed to cope with a possible recession than back in the late 80s.

In the early 1990s, restaurants struggled in the wake of the recession but since then we have seen significant cultural changes and, with that, certain categories of consumer spending have arguably shifted from being discretionary to essential, such as eating out.

Australia became wealthier during the boom and enjoyed high employment rates. As people now work longer hours and more women work full-time, eating out has slipped closer toward the essential as opposed to luxury bracket for many. And the statistics suggest that, for now, many Australian remain unwilling to make great sacrifices to their lifestyles.

Reports in recent times have suggested supermarkets are putting pressure on fast-food retailers. Consumers, in an endeavour to reduce costs, have been more willing to buy supermarket products and cook at home.

The trend toward convenience will, however, keep the fast-food industry ticking over during tough times. Longer working hours and the prospect of getting a quick meal at a reasonably cheap price will ensure consumers still frequent fast-food outlets in droves. Overall, sales for the sector might be expected to fall slightly in coming months, but divisions within the fast-food industry may still continue to prosper. Companies which have found a way to appeal to the trend toward ‘better for you’ products, for example, may be among the least affected in the industry.

Ultimately, the fast-food industry has changed dramatically since the last recession and the increased flexibility of many operators will enable a greater ability to adapt. This may include menu changes or an improved capability to offer promotions that suit a specific target market.

The landscape will be tougher due to the increased competition that has built up in recent years and the decrease in consumer spending, but, if a shakeout occurs, survivors will be well placed for the future, as the trend toward convenience is only likely to strengthen.


Farmers/Primary Industries
Many Australian farmers are unfortunately still suffering with the impact of drought and the downturn is unlikely to do them any favours. Inflation is anticipated to fall and food commodity prices are being placed under downward pressure. As such the prices they can command for their produce is unlikely to rise further. Add this to higher fuel and feed costs and concerns abound.

With every cloud there is a silver lining, though.

Most notably, the dramatic fall of the dollar, which has made Australian exports more attractive and should boost the bottom line of exporters.

There was also talk of a food crisis earlier this year and, as soon as the current discussions of financial turmoil ease, food commodities could be expected to escalate once again.

A recent Rabobank report discovered that the future for beef suppliers was encouraging as Asian consumers increase their demand for meat and skeptics remain about the quality of American exports in the region (in the wake of the 2003 Mad Cow Disease scandal). The other positive is the demand for healthy foods, which offers potential for growth, including organic farmers and seafood operators.

Many primary industries are heavily dependent on favourable conditions and prosperity for many, particularly farmers in drought-stricken regions, will revolve around getting suitable conditions to enable an increase in supply and sales.

Part two will be published online tomorrow, with supermarkets, convenience stores, manufacturers and gourmet retailers/specialty stores under the spotlight.