UK: Eat, Drink & Be Ready: Food And Beverage 2012 - A Taste Of Things To Come

It has never been tougher to build a successful food and beverage business in the UK than it is today. Food and beverage companies face an array of increasingly complex issues and questions. The manner in which they choose to respond to these challenges will shape the future of the industry for many years to come.

Over the past six months the Food and Beverage team at Deloitte has carried out interviews with board level executives at more than seventy leading manufacturers, retailers and food service companies. We have spoken to relevant government bodies and undertaken a survey of over 1000 consumers. This research has given us a unique insight into the current challenges facing the industry. Building on this, we are developing a major report that we believe will help food and beverage companies define their chosen future place in the industry, and to succeed in becoming a leader in this role.

This document gives a flavour of our findings. It is a high level summary of the full report, which will be published later in Spring 2007.

The food and beverage industry has experienced significant change in the last 5 years. Much of this change has been consumer-led with healthier eating, convenience and the quest for new consumption experiences having the greatest impact. The health and nutrition agenda has been aided by increasingly active government support and media focus.

Examples of some of the specific changes we have seen include:

• Smoothies

• "Finest" quality private label products
• Probiotic and cholesterol lowering foods
• Breakfast cereal bars
• Allergen free ranges
• Organic products

• The "skinny decaff latte" coffee shop culture
• Affordable sushi for a working lunch
• Cold beer in the supermarket
• Hot, fresh food "to go" in supermarkets
• Growth in consumption of alcohol at home rather than in restaurants, pubs and bars

• Growing awareness of health issues among the broader community
• Desire for fresher, simpler, natural food
• Demand for clearer food labelling
• Ethical concerns around food miles and Fairtrade

Consumers have multiple motivations which affect their purchasing and consumption patterns. They respond to concerns and ideas from an increasingly broad range of sources such as the media, celebrities, special offers, advertising and internet communities. Traditional mass media represent a less and less efficient means to target specific consumers whose purchasing habits are increasingly occasion based. Better understanding the increasingly fickle consumer is essential to anticipating and affecting consumer behaviour and, ultimately, in ensuring long term success.

It is not surprising that our research has shown that the key consumer trend as understood by the industry is towards healthy eating, particularly of fresh food. Interestingly, this is almost double the importance placed on convenience, the next most important trend.

However, the consumer view is much more complex than this. We have found consumers to be increasingly discerning and demanding. Very often they simultaneously demonstrate multiple mindsets which imply seemingly contradictory shopping patterns. The research also highlights substantial discrepancies between customer intention and behaviour, as shown below.

In summary, the consumer is increasingly fickle, discerning and occasion driven. Our research has confirmed that there is considerable overlap between opposing motivations. For example, more than thirty percent of the consumers in our survey indicated a desire to search for bargain products whilst at the same time indicating they will buy more premium products than ever before.

This is a very clear pointer to the need for manufacturers and retailers to make the best possible use of both consumer insight and outlet segmentation data to determine how, where and when to best target the right consumers with the right value propositions.

"Understanding the increasingly fickle, discerning and occasion driven consumer is essential to anticipating and affecting consumer behaviour."

Once the dominant member of the triumvirate of manufacturer, retailer and consumer, some would contend that today the manufacturers are now the least influential. This is an industry which is viewed by many observers as lacking in innovation and highly fragmented. The industry now finds itself facing a fresh set of challenges which were echoed time and time again in the course of our research.

Amongst these many challenges are:

Increasing pressure on costs – Once healthy margins are being pushed down as a result of intense price based competition in the market and increased customer buying power. In addition, the production cost base is on the rise due to escalating raw material, labour, energy, transport and packaging costs.

Making sure brands connect with current consumer issues – The businesses and brands that will be most highly valued by investors will be those that are proactive on issues that resonate with consumers. At the moment these include nutrition and health, consumer education, environmental impact, ethical sourcing, provenance and local community contribution. In the future the brands that resonate most strongly with consumers will "stand for something" on such issues.

An ever growing regulatory burden – Local, national and even international legislators are now major influencers on the future of the whole food and beverage value chain. Salt, fat and sugar content, sustainable production and transportation methods, recyclable packaging and labelling are among the key areas which are all coming under increasing scrutiny.

Retailer power – Grocery retailers are amongst today’s leading innovators as they extend their range of services from the traditional food and non-food offering to telecommunications and financial services, as well as continuing to exploit new channnels to market such as via mobile phones and the internet. Their investment in consumer insight, brand reinforcement, space, assortment and merchandise planning has caused a seismic shift in the power dynamic. For the modern consumer, the large grocery retailer is now the "arbiter of choice" and where once manufacturers were selective and set the trading terms, today the grocery Category Manager has largely gained control. The bigger the retailer and the better the consumer insight they command, the greater power they wield.

Sustaining consumer trust – This is a simple concept but exceptionally hard to do in a market where the consumer is more sophisticated, informed and sceptical than ever before. The legacy of past food safety failures has left a climate of distrust that the industry needs properly to address. This requires strong quality management regimes allied to effective communication and explanation of standards to consumers.

Attracting and retaining top talent – For many years food and beverage has not been seen as a "destination industry" for bright young graduates or senior managers with strong commercial experience. Perhaps worse still is the retention issue, with many individuals using the grounding and training they gain with blue chip food and beverage businesses to then build their careers in other industry sectors.

"Grocery retailers are amongst today’s leading innovators and their investment in consumer insight, brand reinforcement, space, assortment and merchandise planning has caused a seismic shift in the power dynamic."

The food and beverage sector in the UK is substantial, with consumer expenditure both in and away from home totalling around £153bn1 in 2005. While there is little overall top-line growth in the sector, this masks substantial changes in mix – both in what is consumed and where it is consumed. It is these changes that present both the challenges and opportunities for food and beverage businesses.

A successful future depends on how individual businesses, and the industry as a whole, respond and prepare to do business in what will be a somewhat different environment.

Today’s consumers are sophisticated. They understand value versus price, and are used to selectively filtering the multitude of marketing messages aimed in their direction. Tomorrow’s consumers are going to be even harder to identify, convert and retain.

The impact of changing consumer trends, behaviours and attitudes will continue to grow. This will naturally further drive complexity and heighten the challenges for the food and beverage business community. Interestingly, the industry view of the future from our research is that the major future trends are, for the most part, all known quantities. The key challenge facing the industry would appear to be how best to deal with those which afford the greatest opportunity for either success or failure. Anticipating the importance of these trends and the resulting impact on consumer demand and preferences will be key to future success. Whilst some of these trends will be generic in nature, there are many which will have very specific implications for individual sectors, channels and categories.

Finally, whilst the industry may believe that the major future trends are all currently known this does beg the question as to what would be the impact of an unconsidered event or trend emerging. The chance of a significant geopolictical or economic discontinuity occurring sometime in the next 5 years is significant given current global conditions. The ability to respond to the unknown as well as the known issues is clearly going to be a differentiator for the would be winners.

In addition to understanding the evolving complexity of consumer decisions and motivations, successful food and beverage businesses are going to have to contend with a shift in the demographic make up of the UK population. Over the next five years the UK population will continue to age with the percentage of people over 60 reaching 23% by 2012, representing a growth of 14.5% for that age group when compared with 20042. With the post-war "baby boom" generation entering retirement, this segment of the population will include a significant portion of well educated, active, health conscious and affluent older citizens.

The ethnic mix will also continue to change through continuing inbound and outbound migratory flows and higher rates of childbirth in particular ethnic groups compared with the rest of the population. Following current trends, citizens from the rest of Europe, Africa and Asia will continue to represent an increasing percentage of the UK population. The geographic spread of different socio-demographic and ethnic groups will remain unevenly distributed across the country with resulting implications for highly targeted ranging and merchandising strategies.

Business strategies that respond to the opportunities that these different groups represent will become more and more important to mainstream grocery retailers and food and beverage manufacturers.

"There will be a greater focus on animal welfare standards and the provenance of meat, dairy and other agricultural products. The consumer will be willing to pay a premium for high quality, naturally produced foods."

1. Health And Nutrition

   The health and economic consequences of poor diet are huge. It is safe to assume that the current focus by the government on improving nutrition, especially amongst children, will only get stronger. Restrictions on advertising will become even tougher, labelling requirements more onerous and "unhealthy" ingredients banned completely.

   Medium term developments are likely to include:

   • Consumer education through the school curriculum
   • Ongoing debate around the advantages of alternative approaches to food labelling
   • Pervasive front-of-pack nutritional content labelling
   • Food and beverage companies themselves playing a major role in consumer education through various channels
   • Industry bodies taking a more proactive approach in representing the industry and publicly reassuring and educating the consumer
2. Environmental And Social Factors

   The environmental agenda will continue to grow in importance. Retailers and manufacturers alike will be expected to report performance in areas such as waste management, energy efficiency, reducing food miles, the amount recycled and carbon emissions. We will see new consumer packaging approaches including an increase in re-usable transit containers and the end of the plastic carrier bag as we know it. All of these issues will also present significant opportunities to differentiate.

   Attitudes to water use will have changed significantly by 2012 with clean, fresh water seen as a precious resource that will become more and more expensive. Manufacturing strategies will be increasingly influenced by the availability of high quality, cost effective water sources.

   There will be a greater focus on animal welfare standards and the provenance of meat, dairy and other agricultural products. The consumer will be willing to pay a premium for high quality, naturally produced foods. As a result however, we can expect to see much tougher policing of provenance-related claims such as "organic". Difficulties such as avian flu, combined with concern about food miles, are likely to give a substantial boost to food produced close to home.

   Sensitivity to the social impact of business activities will also have reached new levels. Major retailers and manufacturers will place an even higher priority on understanding how their stores and factories integrate into the local economy and community and must be able to demonstrate the positive nature of that impact. Both retailers and manufacturers face the need to strike the right balance between ensuring good employment practices wherever they do business around the world whilst reflecting local circumstances as appropriate.

   This also extends to sourcing strategies and the employment practices of suppliers. We can expect Fairtrade and similar schemes to become much more widespread.

   The regulatory environment will demand much greater transparency of information about the environmental and social impact of both retailers and manufacturers. Comprehensive "triple bottom line" reporting will increasingly be the norm, covering the financial, environmental and social performance of the business

3. Changing Brand Equity

   What’s clear is that consumers love brands. However, the brand landscape is becoming more complex. Retailers are now as much in the brand marketing business as the traditional branded manufacturers. Consumer research consistently demonstrates that retailers’ brands are more trusted than those of food manufacturers, which reinforces the need for the manufacturing segment of the industry to better present its case.

   Category Management has changed the brand landscape on supermarket shelves since the early 1990s. The results of such work have usually been highly successful in terms of improving business performance and have almost always led to radical range restructuring and rationalisation.

   Some of the outcomes of Category Management have been:

   Growth of Private Label

   Through the late 1990s leading retailers themselves increasingly embraced the principles of Category Management. This has resulted in the virtual elimination of number 3 and 4 brands and significantly more space being allocated to retailers’ private label products.

   Private label products will continue to take a growing percentage of available shelf space making major inroads into many of the areas which were once the sole preserve of the branded suppliers. The retailers have cornered some key high growth and high margin categories, fresh chilled ready meals are an obvious example, almost to the exclusion of major branded suppliers. In addition, private label delivers some excellent lessons in brand extension and portfolio management. Nowhere is this more evident than at Tesco’s, Sainsbury and Marks and Spencer with their range of value, luxury and healthy sub-brands. For many food manufacturers, the choice of whether (and how) to compete with or embrace private label is a strategic choice which will shape the future development of their businesses.

   Fewer Brands

   As a result of the continued war for shelf space we predict that there will be as few as 1,500 brands in the average supermarket in the UK – half the number of fifteen years ago. The growing space allocated to non-food products puts further pressure on brand and product ranges.

   Innovative Brands And Marketing

   It is not all doom and gloom for branded suppliers. Retailers continue to look for innovative new products and categories to meet ever changing consumer demand. We will undoubtedly continue to see new emerging innovative brands and products such as Innocent or Walkers Sensations, which will claim significant share of mind and ultimately consumer spend.

   Assortment And Merchandising

   In line with the growing multi-cultural society in the UK, we would expect to see more and more assortment and merchandising decisions being informed by the tastes and preferences of the local communities that each retail store supports. Loyalty card programs will continue to offer valuable insight into which brands and products should be stocked by an individual store reflecting the different needs of particular demographic and ethnic groups.

4. Continuing Industry Consolidation

   Industry consolidation will continue unabated. Driven not only by the desire of companies to achieve scale and the potential opportunity to drive out additional economic value, but also by the need to make the appropriate levels of investment in consumer, shopper and brand insights.

   Further catalysts for industry consolidation will be the desire to acquire new ideas, products and services as well as to acquire companies who may not be able to make the necessary investments to meet the increasingly stringent demands of food safety.

   Scale and industry leadership will become even more key enablers of business success in these areas. By 2012 we will see substantial further category consolidation, particularly of global brand-led businesses. We will also see other businesses more focused on building strong national brand portfolios, often taking over national food brands that are not viewed as strategic assets by global players. Contract and private label manufacturing businesses will also consolidate further to achieve effective economies of scale.

5. The Rise Of The Hard Discounters

   The European hard discount movement started in Germany and has spread widely across Europe. Mainstream grocery retailers struggle to find strategies that successfully compete with the value proposition offered by companies such as Aldi, Lidl and Netto. Their ranges are simple and the prices very keen, with stores typically close to the town centre and offering easy parking. Their spread is causing another downward turn of the screw on prices and margins. The hard discounters also present new challenges to brand owners who will need to balance brand and merchandising values with the need for consistent volume. It is likely that leading branded manufacturers will do more business with the hard discounters as the norm going forward.

6. An Even Tougher Regulatory Environment

   The high levels of assurance required to ensure the integrity of our food supply is very good news for consumers. For suppliers, regulation in areas such as nutrition labelling, complete removal of hazardous substances, guarantees of traceability and production hygiene practices can be a significant burden.

   This regulatory burden can be expected to grow further and in the future enforcement will be even more rigorous, most likely directly administered by the Food Standards Agency rather than through local authorities. Smaller businesses may struggle to keep abreast of the changes, let alone fully comply. This will give added impetus to consolidation.

7. Technology And Value Chain Integration

   By 2012 we will finally be experiencing widespread adoption of much hyped new technologies such as Radio Frequency Identification and Product Data Synchronisation in the end-to-end supply chain. This will be driven by the combined pressures to improve availability on-shelf, take further cost out of the supply chain by reducing losses and improving labour efficiency, and the need to provide ever higher levels of guarantees of process integrity and traceability.

   We also expect to see real progress in integrating demand and supply planning processes across retailer and supplier which will be greatly facilitated by the GS1 sponsored alignment of data standards. This will have significant implications for the business processes and systems of manufacturers. It may also lead to the wider benefits of "favoured supplier" status with key retail customers.

8. The Role Of Private Equity

   Why focus on the private equity community when talking about the things that will shape how the industry will look in 2012?

   The answer is because it will play a substantial role in some of the changes we have been talking about. Private equity businesses are focused on opportunities to create value in the medium term. In spite of the many challenges facing the industry such opportunities do exist, both in grocery retailing and in food and beverage manufacturing.

   Given specific business turnaround opportunities, we expect to see private equity playing a role in the further consolidation of the industry – both in building strong brand portfolios and in accessing the opportunities presented by economies of scale. The availability of funds is not a problem. Private equity may cause businesses to radically challenge traditional operating models. For example, how many branded consumer goods companies will own manufacturing facilities in 2012? The challenge private equity investors face, lies in finding the management talent that can develop and execute the strategies that will drive both revenue growth and eliminate unnecessary costs and create value for the investors.

Discussions with senior executives of the UK’s leading food and beverage manufacturers and retailing businesses have highlighted six issues companies are grappling with. These do not represent an exhaustive list but do seem to be those that are most "front of mind". How companies choose to respond will substantially impact what they will stand for, shape their business strategies, and determine their operating models going forward to 2012. The six key areas of debate are:

• Health and nutrition
• Regulation
• Carbon emissions
• Food miles

• To manufacture or not?
• The role of private equity

Below we have provided a brief synopsis of the "debate", the potential impact on business and examples of the key questions that will need to be addressed for companies to compete successfully in 2012.

There is a growing consensus that the nation’s eating habits represent a major health and economic challenge. Policymakers are becoming more focused on the issue and there is increasing (at least implicit) acceptance, evidenced by much of the activity we see in the market, that different stakeholders feel they have a role to play in encouraging healthy eating and healthy lifestyles more broadly. Good examples include Tesco’s Nutrition & Fitness programme and Sainsbury’s Active Kids and Active Kids Get Cooking programmes. The CIES Top of Mind Survey for 2007 identified consumer health and nutrition as the number one issue concerning the CEOs of food retailers and manufacturers alike.

Our food is getting healthier with, for example, lower salt levels, reduced use of artificial additives and removal of saturated and trans-fats. This has driven new product introductions to unprecedented levels with 17,779 new food products introduced in 2006³. This is a jump of almost 2,000 items over the previous year. Persuading consumers, most importantly children, to adopt good eating habits is however not always easy and those with the worst diets are often the hardest to reach. According to our primary consumer research, 62% of UK consumers surveyed cite upbringing as critical in influencing meal choices within the home.

So, who should lead the way in addressing health and obesity issues and educating consumers to adopt a healthier diet and lifestyle? Is this purely the responsibility of government or should food manufacturers and retailers play an active role? There is an increasing consensus that the industry has a key role to play and that food and beverage products need to be promoted within the context of a balanced overall diet. Labelling clearly has an important role to play, but that is just the start.

Food manufacturers and retailers need to learn how to better incorporate consumer education into marketing programmes. Moreover, we can expect initiatives to agree key performance indicators that will help regulators, shareholders and consumers better assess the contribution each business is making to the health of the nation. Those businesses that are proactive will have the opportunity to influence the next steps in the health and nutrition debates as well as positively contribute to the health of their business.

The burden of regulation faced by food and beverage manufacturers and retailers has risen progressively over the last two decades. While HACCP⁴ remains the primary foundation of modern food safety legislation, this is supplemented by the specific requirements of a growing body of legislation such as the Food Safety Act 1990, the Food Labelling Regulations 1996, Beef Labelling Regulation 1760/2000, EU Regulation 178/2002 Articles 18 & 19, EU Regulation 852/2004, the Food Allergen Labelling Act 2004, the General Product Safety Directive 2005 (update) and the Removal of Hazardous Substances Act 2006. This regulatory burden can be expected to grow further, and enforcement will also become more rigorous.

This increasingly complex array of requirements presents two major areas of challenge for food manufacturers and retailers. The first is simply the effort associated with keeping up with the changing regulatory landscape and understanding its implications. Many smaller businesses will struggle to keep abreast of the changes, let alone fully comply. This is likely to give added impetus to consolidation in the industry.

The second, is that all of this is happening at a time when there is continuing downward pressure on prices and margins, and trends in consumer preferences away from dried, canned and frozen foods towards higher risk chilled and convenience foods. Processes and systems need to be re-engineered to improve efficiency, reduce waste and risk, as well as to meet the regulatory requirements for ever greater rigor in end-to-end supply chain integrity and traceability.

What is also clear is that focusing on regulatory compliance is necessary but not sufficient to win in the market. The businesses that succeed in winning and retaining the respect and trust of customers and consumers, will be those that take a holistic approach to governance, quality, risk management and compliance.

"The answer to these questions is not straight forward but successful food and beverage businesses of the future may look very different from today’s end to end organisations."

Since the start of 2007, the issue of climate change has moved very rapidly up the agenda of politicians, consumers and businesses alike. Initiatives such as Marks & Spencer’s "Plan A", and Tesco’s pursuit of carbon footprint labelling are setting the pace.

Carbon labelling may be the industry’s best opportunity to ensure that decisions can be made by consumers rather than politicians. Meaningful and trustworthy labelling will, however, be difficult to achieve and requires rapid work on industry standards by many of the major stakeholders if consensus is to be achieved. A split on approach, such as that affecting nutritional labelling, could be costly in terms of confusing and upsetting shoppers and bringing nearer the requirement for specific legislation.

But labelling is unlikely to be sufficient. Increased focus on the carbon footprint of the grocery industry will demand changes in the supply chain and also in-store. One of the challenges faced by major retailers will be to develop carbon-neutral store designs while still providing an attractive shopping experience for the consumer. It would require a profound change of heart among consumers to select stores with weaker lighting, poorer heating and more difficult to access chill cabinets.

Other strategies may also successfully combine carbon efficiency with attractive propositions for the consumer and shopper. Home shopping is, for example, more carbon efficient than the traditional supermarket shopping expedition. A move towards the consumption of more local and fresh produce can provide a more attractive value proposition to the consumer, bring health and nutritional benefits and reduce carbon emissions at the same time. There are many opportunities for those who get their stance correct.

Put simply, food miles are the measure of the distance a food item travels from field to plate. The issue of food miles is coming more to the fore following increased environmental concern. However, many imports such as fruits and vegetables from Africa, provide well paid legitimate work and a vital opportunity to earn hard currency. The economic development and social positives may well counterbalance the environmental negatives of food miles in both politicians and consumers’ eyes. In addition to the food miles debate, consideration should also be given to total energy use, especially in production.

It is unlikely that legislation will be introduced in the short term due to the political, economic and social complexities involved. However, retailers and manufacturers will be expected to do more – and are doing more – to manage sensibly the amount of miles products unnecessarily travel. Products are frequently shipped from one region or country to a processing plant in another region or country, and then back to the same location. Such product movements are often driven by differences in processing labour costs which outweigh the shipping costs involved. Even ‘local’ produce may travel long distances in this way without any indication being available to the consumer. There will be increasing pressure to change such practices. Could ‘low food miles’ branding and merchandising become the new ‘organics’?

One thing is clear. We are going to see more focus on local and low food miles produce, perhaps much like today’s dedicated organic space. The ability of retailers and their suppliers to combine these different propositions into clear and meaningful value propositions and merchandising concepts will determine who succeeds in creating real differentiation and winning the associated increases in share and margins.

A challenge for global brand owners is where does manufacturing belong within the overall business model? Many fast moving consumer goods businesses have separated their manufacturing and supply organisation from the country marketing and sales offices. This reorganisation allows for economies of scale, the chance to move to lower cost environments, tax advantages and the opportunity to deliver additional efficiency benefits. The result in the UK and the rest of Western Europe is that we continue to see an exodus of manufacturing capacity to Eastern Europe and further afield.

But the issue for many is not just about where they should locate manufacturing operations but more fundamentally whether should they manufacture at all. This debate is magnified by the increasing recognition that many of the skills and capabilities required to run a consumer-led businesses are somewhat different to those required to run highly efficient, high quality manufacturing operations. It’s not that the two cannot be accommodated under the same roof, but more and more businesses are asking themselves what their core competencies really are, and focusing accordingly.

As manufacturing operations become a stand alone entity versus marketing and sales, might the next step be to sell or outsource facilities to a third parties with valuable long term supply agreements? Such outsourcing could provide significant opportunities to achieve economies of scale through consolidation and cost reduction, as well as moving asset-intensive manufacturing operations into a separate vehicle. In many ways this is mirroring the trends in other sectors such as computer manufacturing which started down this track in the mid 1990’s.

An alternative could be to run manufacturing as a profit centre, rather than a cost centre and, for example, undertake contract manufacturing for other brand owners as well as for retailers’ private label businesses. The answer to these questions is not straight forward. The successful food and beverage businesses of the future may, however look very different from today’s end to end organisations.

Private equity has been taking control of an increasing share of the industry in both retail and manufacturing. There are differences of opinion as to whether it is healthy. Many contend that a period of private ownership and tight financial management provides an opportunity to get a business in good shape for subsequent healthy growth and value creation. Others make accusations of shorttermism, asset stripping and a lack of interest in the long term health of the UK industry.

In reality, private equity is only another form of ownership that brings particular disciplines that other businesses might often better emulate. Similar accusations are often made about the even more marked short-termism of quarterly results driven publicly quoted companies.

So what are the strategic issues around private equity that management teams need to grapple with? Do we as a management team think we can do better under private equity ownership than as a quoted company, and if so how and why? Can we learn anything from private equity’s apparent capability to deploy specific levers to deliver improved business performance? Do we need to increase our leverage to match private equity players, either to make better use of capital or simply to make ourselves less attractive to a predator?

Is there a way we can use private equity to help achieve some of our strategic ends, for example, lining up a private equity house to buy unwanted parts of our current business or parts of a planned acquisition?

The involvement of private equity in the food and beverage industry is unlikely to diminish in the short term. The opportunity for the industry is to learn from relevant private equity practices such as growth, cost and performance management approaches.

So, against the backdrop of this changing and challenging landscape, what can food and beverage businesses do to drive profitable growth and value creation? We strongly believe that there is real opportunity to create substantial value in the industry. Doing so requires businesses to do three things:

• Make the right strategic choices
• Mobilise to win
• Get the basics right

For most businesses all three are achievable with the right leadership. In the following paragraphs we offer some thoughts about how to approach each of these.

While businesses in food and beverage face many common challenges and opportunities, strategy in the industry is not a ‘one size fits all’.

For all food and beverage businesses it is important that in the demanding and competitive markets in which they trade, there is absolute clarity as to the strategy being pursued and how that strategy will be executed. There is no room for ambiguity.

Strategies need to reflect the choices that are right for the business, given the available opportunities in the market and the capability of the business to exploit those opportunities and thus create value. These choices include:

• What type of business do we want to be?
• How close are we to our customers and consumers?
• Are we clear about our future category and product portfolio focus?
• Will you focus on innovation and brand-led organic growth or will we focus on seeking out potential acquisition candidates?
• In what geographies should we operate?
• What channels to market will we exploit?
• What position will we take on the wider corporate responsibility agenda?

Every business should ask itself these questions and make the choices that are right for the business. The outcomes will shape the strategy of the business and determine the capabilities that must be in place to execute that strategy.

Having set out a clear strategic direction and vision for the business the next priority is to mobilise the organisation around that vision and establish the right capabilities and operating model for effective strategy execution. With real challenges in attracting high quality resources into the industry, focusing on the talent agenda is a thread that runs through almost every aspect of mobilising to win.

For most food and beverage businesses this includes:

• Getting clarity on the required operating model
• Establishing a clear performance management framework aligned to strategic goals
• Investing in leadership and management skills
• Establishing and incentivising employee engagement
• Building and promoting fulfiling careers
• Strengthening commercial insight and decision making
• Re-energising and focusing innovation
• Driving the total value chain not just the supply chain

In parallel with mobilising to execute the strategy and drive profitable growth, most food and beverage businesses need also to address a range of tactical and operational issues that are important to the effective and efficient running of the business.

For most businesses this includes:

• Improving discipline in managing commercial spend
• Adopting excellent sales and operations planning disciplines
• Standardising, strengthening and streamlining operational and administrative processes
• Eliminating unnecessary complexity
• Retaining key talent

"Attracting high quality resources into the industry, and focusing on the talent agenda is a thread that runs through almost every aspect of mobilising to win."

As part of our ongoing contribution to the debate of the future of the food and beverage industry, and returning to the opening theme of this document, we have listed a few potential scenarios which we believe are likely to appear on the menu.

• Major growth in "nutraceuticals" and wellbeing products, with price premiums eroded as these become staple items
• Major decline in the number of brands as a result of a greater stretch amongst brand champions and more and more incursion by private label. Expect some high profile casualties on the shelves of the major grocers
• Ongoing rationalisation of brands by major retailers leads to manufacturers exploring the use of new and innovative channels to supply these ‘secondary’ brands direct to the consumer

• "Back To The Future" – a return to the food market experience for some of the major grocers. Expect to see major diversification and even the introduction of new fascias depending on location
• A potential shift from the coffee shop culture to an environment selling more natural products to satisfy consumers’ increasing concern for healthy and nutritious products
• The re-emergence of the traditional family unit eating together in the home or in casual dining restaurants which serve fresh, simple, healthy meals

• At least one major brand will disappear due to unforeseen corporate responsibility oversights
• Significant changes in product constitution will mean legally enforceable limits on salt, sugar and fat contents will either be in effect or imminent
• Manufacturers will become more focused on the development of patented, specialist ingredients and formulations. Such patented technology will provide a key platform for protecting brand positioning and strength versus private label

This summary gives a flavour of some of the current issues and potential scenarios highlighted by our research. In the main body of our report, which will be launched later in Spring 2007, we will focus in greater depth on the many areas driving change in the food and beverage sector today. The report will address each area of the food and beverage industry in more detail and translate the issues captured by the research into practical insight.

We are always keen to engage in discussion with the industry and would be very happy to hear your views.

1. Source: Food and Drink Federation
2. Source: Government Actuary’s Department
3. Source: Mintel International
4. Source: Hazard Analysis and Critical Control Points

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