Turning rising food costs into opportunities

With the ever-increasing costs of energy and raw materials, soaring food prices are a threatening factor manufacturers struggle with on a daily basis. The fact is, the price of food purchased from stores rose 4.8 per cent from June 2010 to June 2011, according to Statistics Canada. The growing global demand and population also play a part in this emerging food industry trend. Manufacturers are under pressure to ensure consumers are kept from enduring those rising prices for as long as possible.

However, rising food costs can also serve as an opportunity for manufacturers to broaden their product offering and expand their business model to attract new customers. In turn, consumers benefit from innovative products that appeal to their tastes and wallets with a greater overall value proposition.

Branding private labels

In earlier days, private-label foods and beverages were seen by consumers as discounted or lower-quality products. However, more recently, these brands have seen a shift in perception.

Weathering the recent economic downturn, Canadians switched from going out to eat on a regular basis to making meals at home. This translated into a potentially larger pool of budget-conscious consumers unwilling to sacrifice quality for a lower price point.

Private-label products, though not at a drastically lower price point, provide a lower-cost option for consumers. They have the added benefit of capturing a market where there was previously a void – that is the quality-conscious consumer with a refined palate. Manufacturers continue to push their products front and centre by reinvigorating packaging and improving taste to be more attractive to consumers.

For manufacturers, this translates to the opportunity to diversify their product offering. As an example, a manufacturer of a branded product can now produce a similar product with minor variations to satisfy the private-label demand. This helps utilize excess capacity and reduces the exposure associated with producing for a few major brands.

Other challenges associated with rising food costs can also be met with private-label items. Marketing can be less costly and there is no premium as there is with a branded product in terms of hard cost and related co-op advertising/marketing rebates. Private-label items have an enduring benefit as they build their own brand, which can ultimately have an impact on the salability and success of future products offered under the same banner.

Marketing these products is vital in creating awareness that will lead to product purchase. Improving marketability through appearance and taste provides retailers with higher margins and better return on investment, and enhances the demand for this alternative provided by manufacturers.

Capturing Canada’s cultural mosaic

Canada’s growing population and increasingly diverse cultural landscape provide manufacturers with another advantage in gaining customers and widening their margins.

Retailers can offset rising food costs by providing more diversified offerings in response to Canadian consumers’ tastes. We see it more and more on the shelves where familiar products are being reworked to appeal to increasingly diverse tastes. An example is Kraft Food manufacturer’s barbecue sauces. Under the brand name Kraft, the Canadian company manufactures familiar barbecue sauce flavours such as Original and Garlic. Under the private-label Bull’s-Eye, marketed as the official barbecue sauce of the Calgary Stampede, Kraft offers more exotic flavours such as Guinness and Hot Southern Cajun. These flavours are exotic and targeted to various demographics looking for a taste associated with one of their favourite foods or restaurants.

From baby boomers to generation Y, there is a growing interest in different flavours and foods. Businesses are making access to these foods easier and taking location, age, income, ethnicity and culture into account by offering strategic products based on those demographics. Although the economic crisis has had an effect on Canadians’ wallets, it has not affected their evolving taste for food. Being in tune with the demand of consumers lowers barriers and offers great value to the market.

Dealing with raw material costs

Raw material costs are a significant portion of food price calculations and one which manufacturers and retailers are desperate to avoid passing on to customers. Facing this challenge, proprietary equipment is being developed that allows consumers to produce their own food items similar to what they would purchase in store. In providing both the raw materials and the equipment to produce food, consumers save money while producers are avoid passing those raw food costs on to customers.

An example is the increasing popularity of gourmet coffee or espresso machines such as Tassimo or Keurig. These products allow consumers to make espressos, lattes and other gourmet coffee-based beverages at home. The cost is less than buying these items from traditional coffee shops, but more importantly, it increases access to these beverages at home and brings customers back in-store for refill products.

Pursuing all available opportunities

Creating opportunities out of rising food costs goes beyond products alone. Many food manufacturers are venturing into acquiring other chains and/or manufacturers to meet consumer demand without the need to drastically change their product output. In September 2011, Richmond, B.C.-based Premium Brands Holding Corporation acquired Waterloo, Ont.’s Pillar Sausages & Delicatessens. The acquisition expanded Premium Brands’ delicatessen products, offering a unique deli platform across Canada, as well as expanding its specialty branded food businesses and proprietary distribution networks.

Access to funding for merger and acquisition transactions among food manufacturers and retailers is considerable as un-invested capital within private equity (PE) firms has risen by an astronomical 2,500 per cent from $20 billion to nearly $500 billion since 2003.

The manufacturers that will stand out from the pack are those that show the ability to innovate and operate efficiently with a focus on utilizing capacity to its fullest. There will also naturally be a focus on those that are positioned to take advantage of the growing trends within the food industry, such as health-conscious foods, fine-dining quality products for home consumption, and allergy-focused products. Additionally, there is no real substitute for strong financial performance, and those companies with the ability to demonstrate how they can grow their bottom line will garner much attention from PE groups.

There are numerous opportunities manufacturers and food industry retailers can leverage to compensate for rising food costs. With the effects and duration of the recession still unclear, these opportunities must be considered and executed to ensure the stability of the industry is not compromised. Many manufacturers have already begun to integrate private labels and diverse foods into their offering and are seeing the benefits. These trends look to be on the rise as they attempt to mitigate the impact of higher prices on their customers, while at the same time remaining competitive and profitable.

Jonathan Breido is principal at RSM Richter, based in Toronto. Contact him at jbreido@rsmrichter.com