Deutsche Bank Research says German industry is currently in the grip of the most severe economic crisis since World War II. It says while certain sectors of industry will suffer real declines in output of more than 20% during the current year, there is one sector that has been largely unaffected by the global recession: the food industry is the pillar of strength that has hitherto been impervious to all negative influences.
Economist Eric Heymann says the industry may even post a small increase in output for 2009. In any case, he says the sector is characterised by the fact that it derives only below-average benefits from cyclical upturn phases. Conversely, in economically turbulent times it proves to be extremely crisis-resistant.
For the food industry it is naturally an advantage that its products are virtually non-substitutable, because people will always need to eat. That is why rising unemployment, declining disposable income and a higher savings ratio in Germany are taking less of a toll on the food industry than on the makers of consumer durables for example.
Heymann says the current crisis is not, however, leaving the food business completely unscathed. Consumers are switching to inexpensive products more frequently than in previous years. This is weighing on qualitative growth, which is based on the volume of premium foods sold. In addition, the already high price pressure in the sector is likely to intensify. For years margins in the SME-dominated industry have been squeezed as a result of the market power wielded by food retailers. Competition has been intensified considerably by the success enjoyed by price-aggressive discounters. The discounters have managed to grow their share of total retail food sales in the last few years and at last count claimed a share of well over 40%.
The Deutsche Bank Research economist says this trend is likely to continue on account of the economic crisis in Germany. On the cost side the food industry is seeing the pressure ease, however, as the prices of lots of agricultural commodities and of energy in 2009 are in some cases much lower than in 2008. Nonetheless, food retailers are likely to cite this development to back up their demands for price concessions. Price pressure will thus remain a key feature of the food sector. This will further stoke the consolidation process in the sector.
Heymann says the food industry is increasingly being confronted by absolute saturation tendencies on the demand side. The quantitative growth potential in Germany is therefore limited. The shrinking population will amplify this trend. Nevertheless, the industry will still be invigorated by qualitative growth going forward. The trend towards premium foods will continue. Furthermore, the manufacturers of foods are constantly launching new product variations and innovations. And finally, another growth driver for the German food business is to continue opening up foreign markets.
Eric Heymann says that over the last few years the importance of foreign sales has risen constantly and they now constitute around one-fifth of total turnover for the sector. Although the global economic crisis will negatively impact foreign business in 2009, the medium to longer-term prospects remain intact, since foods produced in Germany enjoy a good international reputation. And the same thing applies outside Germany: people will always need to eat.
