10:01
Page 4
CASE STUDIES
Food Producers
Challenging factories to save water: Unilever company would play its part to relieve the crisis. They issued this challenge to Unilever food factories in the region: “cut your water use by a million cubic metres in two years,” which was about 16.5% of their water consumption in 2002. This challenge marked the beginning of Project Medusa. At the Goiânia factory, water is used to wash and cook fresh tomatoes, clean equipment and
cool machinery. In the past, the water that evaporated during cooking was sent directly to the water treatment plant, but it is now used for cooling and to wash equipment. Project Medusa has achieved a reduction in total water consumption of 7.9% and a 14.7% reduction in the load per tonne of production. Source: www.unilever.com
Adapting to emerging markets: Groupe Danone While the United States, the European Union and Japan currently account for about two-thirds of global food sales, emerging markets and developing countries account for over three-fourths of total global food consumers. Groupe Danone is especially keen on expanding into emerging markets, and has adapted their products and strategy to do so. Their recent initiative launched in Bangladesh with
Grameen Bank (Grameen Danone Foods Social Business Enterprise in Bangladesh) allows Danone to develop and distribute products in partnership with local NGOs, thus bringing daily healthy nutrition to low income, nutritionally deprived populations. Grameen Danone will predominantly rely on solar energy and biogas energies for its operations as well as the use of innovative, environment friendly packa-
ging solutions for its products. The initial focus will be the launch of an easily affordable dairy product, which has been specifically developed to fulfil the nutritional needs of children in Bangladesh by bringing them the benefits of milk and other micronutrients they lack. Source: www.danone.com
Making healthier products: Nestlé Nutrition is an integral part of Nestlé’s corporate strategy as evidenced by the commitment of Mr. Peter Brabeck-Letmathe, CEO of Nestlé: “Nestlé will evolve from a respected, trustworthy Food Company to a respected trustworthy Nutrition, Health and Wellness Company.” Nestlé’s joint venture programme with General Mills
(Cereal Partners Worldwide) is working to reduce levels of sugar and salt in cereals incrementally. Since 2004 the salt in breakfast cereals has been reduced by 30%. Nestlé has reduced salt levels in overall products by 5,000 tonnes since 2002 and aims to bring the salt level down to 75% of the quantity in the original recipes by 2010. They are
also working on lowering sugar quantities in products by 16% before 2012. These reduction programmes will continue as long as consumer preference and product safety (since salt is an important preservative) is sustained. Source: www.ir.nestle.com
Eurosif wishes to acknowledge the support and direction provided by the Food Sector Report Steering Committee: Bank Sarasin & Co. Ltd Crédit Agricole Asset Management SAM Group Société Générale Asset Management Schroders This sector report, created with the support of the European Commission, has been compiled by:
11 avenue de l’Opéra • 75001 Paris, France Tel/Fax : +33 (0)1 40 20 43 38 contact@eurosif.org • www.eurosif.org May 2007
Designer: Catsaï - www.catsai.net / The views in this document do not necessarily represent the views of all Eurosif member affiliates. This publication should not be taken as financial advice or seen as an endorsement of any particular company, organisation or individual.
“Only take short showers and stop ironing your clothes or the lights will go out.” This was the message from the Brazilian government in 2001, urging its people to cut energy consumption by 20%. Brazil depends almost entirely on hydropower for their electricity and the lights had begun to flicker because of drought. Unilever’s top management in Latin America were determined that the
Sector Report - 5th in a series his Eurosif sector report describes the major social and environmental challenges facing the food production industry, and the associated risks and opportunities these pose for long-term returns. The food sector can be divided into “upstream” activities prior to industrial processing (e.g. agricultural industries) and “downstream” activities (e.g. food processing). This report concentrates on the “downstream” activities, including packaged foods but not alcoholic beverages.
T
FOOD OVERVIEW The food industry is made up of fresh (€395 billion) and processed (€1.2 trillion) products. Market sizes, as indicated by the value of retail sales, are much larger in high-income areas such as the European Union, the United States and Japan, however market growth has generally been faster among emerging markets.1 ● The food production industry is relatively concentrated with the top 4 players (Nestlé, Unilever, Kraft and Groupe Danone)
accounting for more than 50% of the global market capitalisation of the top 30 global food companies.2
●
Market Capitalisation of Top Food Companies
●
Health and nutrition are key drivers of sales growth in the food sector and offer significant pricing power and margin opportunity.3 Food products considered to be healthy include those which, for example, are organic, fortified with vitamins or minerals, contain reduced levels of sugar or fat, are highfibre, soy-based or gluten/lactose-free.4 Obesity (BMI* > 30 kg/m2) increase in adults from 2005 to 2015
EU companies
Source: World Health Organisation
2/07/07
Source: Dow Jones Global Index 6000, April 2007
food2 #212
*BMI: Body Mass Index
FOOD TRENDS Fast-paced lifestyles create an increase in demand from consumers for more timesaving and ready-to-eat food products. Higher income brackets tend to ask for healthier options or functional food5 choices, which may cost more, whereas in lower income countries people are eating more affordable processed foods, which may contain high levels of fat and sugar. This contributes to the alarming growing levels of obesity worldwide. ● The EU estimates that obesity currently accounts for up to 7% of health care costs and is expected to rise.6 Governments are receiving pressure from international health organisations to bring this figure down, posing a challenge for the food industry, which is being asked to adapt to these changes. ● Food retailers are placing more and more pressure on food producers to be competitive. Supermarkets want to deal with as few suppliers as possible and are reducing products on their shelves to 3 or 4 leading brands, often alongside their own private label.7
●
Emerging markets are attractive for food producers due to an increase in population as well as increases in per capita food consumption. Changes in diet, made possible by income growth, are expected to double demand for meat by consumers in these emerging markets by the end of 2020.8 This increase in meat consumption however creates a tug of war on the demands for arable land to grow crops versus grazing land to feed livestock.
●
The food industry is critically dependent on natural resources. Access to arable land, fertile soil and reliable water supplies is becoming more and more difficult due to unsustainable agricultural practices, the effects of climate change, deforestation, and competition between land for food versus land for biofuel. Additionally, the correlation between increasing consumer wealth and demand for meat is already putting constraints on water supplies, as the production of one kilogram of beef requires around 16,000 litres of water.9
1 Economic Research Service, “New Directions in Global Food Markets”, February 2005. 2 Goldman Sachs Global Investment Research, “Global Food & Beverages: Integrating ESG”, February 2007. 3 JP Morgan, “Obesity: Reshaping the global food industry”, October 2005. 4 Bernstein Research, “Big Thinking on Small Caps: Healthy Eating Trends Fortify Growth in Packaged Foods, but Exposure Increases for Smaller Cap Companies”, March 2007. 5 Functional food, or medicinal food, is any fresh or processed food claimed to have a health-promoting and/or disease-preventing property beyond the basic nutritional function of supplying nutrients.
6 European Commission, “Green Paper: Promoting healthy diets and physical activity: a European dimension for the prevention of overweight, obesity and chronic diseases”, December 2006. 7 Somo, “The Profit Behind Your Plate: critical issues in the processed food industry”, December 2006. 8 Economic Research Service, “New Directions in Global Food Markets”, February 2005. 9 Compared to 1000 litres of water needed to produce 1 kilogram of cereal. (Water for Life – Water for Food, 2007).
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food2 #212
2/07/07
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SOCIAL & ENVIRONMENTAL ISSUES ●
1 billion adults and one in ten children (with 30-45 million of them classified as obese) are overweight in the world. Increases in sugar and saturated fats, combined with reduced physical activity, have led to obesity rates that have risen three-fold or more since 1980 in some areas of North America, the United Kingdom, Eastern Europe, the Middle East, the Pacific Islands, Australasia and China.10
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As populations consume cheaper, ready-to-eat processed foods rather than fruits and vegetables they may be increasing their risks of cancer or heart disease. Overall, 2.7 million deaths are attributable to low fruit and
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Consumers are increasingly aware of dangers of microbial contamination as the most important threat to food safety. According to the World Health Organisation, major foodborne illnesses from microorganisms such as salmonella, e.coli and listeriosis are among the greatest risks. These can occur at any time during harvest, storage, processing, distribution, handling, or preparation of food items.
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vegetable intake, with 85% of those deaths from cardiovascular diseases and 15% from cancers.10 Additionally, the use of pesticides on crops could have adverse affects on human health. ●
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Land degradation, soil erosion and deforestation are threatening the world’s croplands. The food industry is under constraints to try to intensify the use of land already under cultivation without further damaging the environment, while slowing the expansion of agriculture into currently forested or grassland areas.17
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Many leading food production companies have operations in countries where freedom of association is restricted or even forbidden (e.g. Columbia, Philippines, Kenya, Brazil, China, etc.). Unionised workers in these countries may face intimidation and pressure from their companies making it difficult for employees to exercise this basic right.
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Food processing jobs often consist of repetitive tasks that lead to cumulative trauma disorders. This sector has one of the highest incidences of injury and illness among employees. Injury rates however vary among specific food manufacturing industries, ranging from a low of 1.8 per 100 workers in retail bakeries to 12.9 per 100 in animal slaughtering plants, the highest rate in food manufacturing.18
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10 11 12 13 14 15 16
Consumer Health & Nutrition
system that is hygienic and ensures product safety.13 However, one weak link in the chain can result in unsafe food, which may cause serious hazards to consumers and considerable cost to food chain suppliers.
Fears related to food production have been heightened by recent food safety shocks, such as cattle infected with Bovine Spongiform Encephalopathy (BSE). Consumers assume that food products reach supermarket shelves via a production and processing The food industry is heavily dependent on reliable supplies of fresh water. About 70% of the world’s fresh water is consumed by agriculture activities. This figures approaches 90% in Asian countries such as China and India, which rely on extensive irrigation.16
The food industry has been accused of irresponsible marketing from “super sizing” their products to targeting children with high-fat and high-calorie foods. In 2004, the UK Department of Health said that they hoped food advertisers would take a more responsible attitude to food promotion to children, with a threat that this may be regulated if the situation has not improved by 2007.11
Most European consumers state that they do not want genetically modified food ingredients in products they buy, partly due to fears about unknown consequences of these ingredients on consumers’ health and partly due to concerns of possible dangers to the environment.
Climate change is a potential threat to the food industry as it affects farming productivity. An increase in temperatures, drastic changes in precipitation patterns and an escalation of extreme weather (e.g. hurricanes) could severely hurt crop production, and thus gravely impact companies in the food sector.
Women hold an estimated 18% of low-skilled and lowpaid jobs in the food, drink and tobacco industries (2004 figure), and there has been little, if any, improvement in their position in recent years. Women currently comprise one third of all workers, but earn about two-thirds the wages of men in comparable jobs.19 Farm work is one of the world’s most hazardous occupations and is often associated with violations of core ILO labour standards. For example, 70% of the world’s child workers are employed in agriculture. Over 90% of hired farm workers do not have their work place rights enforced by labour inspectors, and fewer than 10% of the world’s hired farm workers belong to unions.20
World Health Organisation, “World Health Report 2002”. UK Department of Health, public health White Paper “Choosing Health?”, 2004. JP Morgan, “Obesity: Reshaping the global food industry”, October 2005. Economic Research Service, “New Directions in Global Food Markets”, February 2005. European Food Information Council, “From Farm to Fork”, June 2006. United States Department of Agriculture, Economic Research Service, “Food Traceability: One Ingredient in a Safe and Efficient Food Supply”, April 2004. Shah & Strong, “Food in the 21st Century: from science to sustainable agriculture”, October 1999.
MATERIAL RISKS & OPPORTUNITIES
KEY CHALLENGES
Safety of Food Products
Land Use & Water Shortage
Labour Standards & Human Rights
●
Food producers may have to focus their R&D efforts on healthier and functional foods in order to keep and expand their client base. New natural and organic products could also stimulate sales volume and create pricing power for companies.
●
Consumers, press, governments and regulators are increasingly focused on health with reference to the role that food companies play. This has led to a number of food producers being sued on false health claims and would require companies to allocate budget to dealing with lawsuits.
●
The success of food processing companies is dependent on the loyalty of the consumer to each individual brand and product. In turn, loyalty relies on the consumer’s trust in the quality and safety of products.14
●
While the food industry follows many rigorous quality assurance procedures, market opportunities exist for companies that favour partnerships with suppliers, transporters, wholesalers and retailers, as well as with the consumer and the catering industry, which are no less responsible for the preparation of safe meals.13
●
Food traceability in the supply chain is becoming more and more important to consumers. Industry analysts
●
Failure to address water shortage issues could lead to higher food prices and expensive food imports for water scarce countries. This may create conflicts of demand between local communities and world food producers.
●
Food companies that engage with agricultural suppliers in order to find solutions to pressing environmental issues facing the sector should be able to maintain productivity and improved long-term supplier relationships and may avoid costs associated with litigation and remediation of environmental impacts.
●
There have been several cases of alleged maltreatment of temporary workers and discrimination at leading food processors. These could lead to increased legal fees for food companies, as well as a damaged reputation.
●
Food companies could improve difficult working conditions by creating ergonomic programs that would cut down on work-related accidents and injuries. New technology is increasingly being applied to various functions, including inventory management, packing and inspection. However this should be properly implemented to avoid massive lay-offs.
17 18 19 20 21 22
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Potential restrictions on advertising to children may result in lower sales growth and diminished brand equity, whereas honest marketing could translate into sustainable sales growth and margin expansion.12
●
Potential new regulation concerning labelling may result in higher costs for the food industry (e.g. R&D costs could increase in order to support European Food Safety Authority (EFSA) approval12), and brands could be weakened by requirements to make the nutrition labels bigger on packaging.
calculate that in 2000, American companies spent $1.6 trillion on supply-related activities, including the movement, storage, and control of products across the supply chain. Supply management, traceability and good long-term relationships with suppliers are increasingly important areas of competition.15 ●
Manufacturers of food products face increased exposure to food safety and nutritional claims, so the threat of litigation is very real. The potential legal consequences and catastrophic losses, both directly on sales and indirectly on reputation, of making or distributing contaminated food products that might cause illness or death could be very costly to companies.
●
A positive public environmental image can help create market opportunities with consumers who value more sustainably produced food.
●
The rising trend towards using biofuel may divert crop cultivation away from food production creating competition between automobile owners and food consumers. This has already resulted in drastic increases in food costs, particularly for the world’s poorest people.
●
Poor relationships with workers and discriminatory gender treatment may impact a company’s ability to retain and motivate employees. Companies demonstrating superior employee management practices could be rewarded with undisrupted production and reduced operating costs.21
●
Food producers could increase sales through an improved reputation and better consumer loyalty by engaging in Fairtrade practices. 50% of adults recognise this brand in the UK, up from 39% in 2005. Globally, Fairtrade benefits nearly 5 million people - farmers, workers and their families – in 49 developing countries.23
Earthtrends: the environmental information portal: http://earthtrends.wri.org/features/index.php?theme=8. www.ilo.org/public/english/dialogue/sector/sectors/food/safety.htm. www.ilo.org/public/english/dialogue/sector/sectors/food/gender.htm. www.ilo.org/public/english/dialogue/actrav/new/agsymp03/index.htm. Goldman Sachs Global Investment Research, “Global Food & Beverages: Integrating ESG”, February 2007. www.fairtrade.org.uk
10:01
Page 4
CASE STUDIES
Food Producers
Challenging factories to save water: Unilever company would play its part to relieve the crisis. They issued this challenge to Unilever food factories in the region: “cut your water use by a million cubic metres in two years,” which was about 16.5% of their water consumption in 2002. This challenge marked the beginning of Project Medusa. At the Goiânia factory, water is used to wash and cook fresh tomatoes, clean equipment and
cool machinery. In the past, the water that evaporated during cooking was sent directly to the water treatment plant, but it is now used for cooling and to wash equipment. Project Medusa has achieved a reduction in total water consumption of 7.9% and a 14.7% reduction in the load per tonne of production. Source: www.unilever.com
Adapting to emerging markets: Groupe Danone While the United States, the European Union and Japan currently account for about two-thirds of global food sales, emerging markets and developing countries account for over three-fourths of total global food consumers. Groupe Danone is especially keen on expanding into emerging markets, and has adapted their products and strategy to do so. Their recent initiative launched in Bangladesh with
Grameen Bank (Grameen Danone Foods Social Business Enterprise in Bangladesh) allows Danone to develop and distribute products in partnership with local NGOs, thus bringing daily healthy nutrition to low income, nutritionally deprived populations. Grameen Danone will predominantly rely on solar energy and biogas energies for its operations as well as the use of innovative, environment friendly packa-
ging solutions for its products. The initial focus will be the launch of an easily affordable dairy product, which has been specifically developed to fulfil the nutritional needs of children in Bangladesh by bringing them the benefits of milk and other micronutrients they lack. Source: www.danone.com
Making healthier products: Nestlé Nutrition is an integral part of Nestlé’s corporate strategy as evidenced by the commitment of Mr. Peter Brabeck-Letmathe, CEO of Nestlé: “Nestlé will evolve from a respected, trustworthy Food Company to a respected trustworthy Nutrition, Health and Wellness Company.” Nestlé’s joint venture programme with General Mills
(Cereal Partners Worldwide) is working to reduce levels of sugar and salt in cereals incrementally. Since 2004 the salt in breakfast cereals has been reduced by 30%. Nestlé has reduced salt levels in overall products by 5,000 tonnes since 2002 and aims to bring the salt level down to 75% of the quantity in the original recipes by 2010. They are
also working on lowering sugar quantities in products by 16% before 2012. These reduction programmes will continue as long as consumer preference and product safety (since salt is an important preservative) is sustained. Source: www.ir.nestle.com
Eurosif wishes to acknowledge the support and direction provided by the Food Sector Report Steering Committee: Bank Sarasin & Co. Ltd Crédit Agricole Asset Management SAM Group Société Générale Asset Management Schroders This sector report, created with the support of the European Commission, has been compiled by:
11 avenue de l’Opéra • 75001 Paris, France Tel/Fax : +33 (0)1 40 20 43 38 contact@eurosif.org • www.eurosif.org May 2007
Designer: Catsaï - www.catsai.net / The views in this document do not necessarily represent the views of all Eurosif member affiliates. This publication should not be taken as financial advice or seen as an endorsement of any particular company, organisation or individual.
“Only take short showers and stop ironing your clothes or the lights will go out.” This was the message from the Brazilian government in 2001, urging its people to cut energy consumption by 20%. Brazil depends almost entirely on hydropower for their electricity and the lights had begun to flicker because of drought. Unilever’s top management in Latin America were determined that the
Sector Report - 5th in a series his Eurosif sector report describes the major social and environmental challenges facing the food production industry, and the associated risks and opportunities these pose for long-term returns. The food sector can be divided into “upstream” activities prior to industrial processing (e.g. agricultural industries) and “downstream” activities (e.g. food processing). This report concentrates on the “downstream” activities, including packaged foods but not alcoholic beverages.
T
FOOD OVERVIEW The food industry is made up of fresh (€395 billion) and processed (€1.2 trillion) products. Market sizes, as indicated by the value of retail sales, are much larger in high-income areas such as the European Union, the United States and Japan, however market growth has generally been faster among emerging markets.1 ● The food production industry is relatively concentrated with the top 4 players (Nestlé, Unilever, Kraft and Groupe Danone)
accounting for more than 50% of the global market capitalisation of the top 30 global food companies.2
●
Market Capitalisation of Top Food Companies
●
Health and nutrition are key drivers of sales growth in the food sector and offer significant pricing power and margin opportunity.3 Food products considered to be healthy include those which, for example, are organic, fortified with vitamins or minerals, contain reduced levels of sugar or fat, are highfibre, soy-based or gluten/lactose-free.4 Obesity (BMI* > 30 kg/m2) increase in adults from 2005 to 2015
EU companies
Source: World Health Organisation
2/07/07
Source: Dow Jones Global Index 6000, April 2007
food2 #212
*BMI: Body Mass Index
FOOD TRENDS Fast-paced lifestyles create an increase in demand from consumers for more timesaving and ready-to-eat food products. Higher income brackets tend to ask for healthier options or functional food5 choices, which may cost more, whereas in lower income countries people are eating more affordable processed foods, which may contain high levels of fat and sugar. This contributes to the alarming growing levels of obesity worldwide. ● The EU estimates that obesity currently accounts for up to 7% of health care costs and is expected to rise.6 Governments are receiving pressure from international health organisations to bring this figure down, posing a challenge for the food industry, which is being asked to adapt to these changes. ● Food retailers are placing more and more pressure on food producers to be competitive. Supermarkets want to deal with as few suppliers as possible and are reducing products on their shelves to 3 or 4 leading brands, often alongside their own private label.7
●
Emerging markets are attractive for food producers due to an increase in population as well as increases in per capita food consumption. Changes in diet, made possible by income growth, are expected to double demand for meat by consumers in these emerging markets by the end of 2020.8 This increase in meat consumption however creates a tug of war on the demands for arable land to grow crops versus grazing land to feed livestock.
●
The food industry is critically dependent on natural resources. Access to arable land, fertile soil and reliable water supplies is becoming more and more difficult due to unsustainable agricultural practices, the effects of climate change, deforestation, and competition between land for food versus land for biofuel. Additionally, the correlation between increasing consumer wealth and demand for meat is already putting constraints on water supplies, as the production of one kilogram of beef requires around 16,000 litres of water.9
1 Economic Research Service, “New Directions in Global Food Markets”, February 2005. 2 Goldman Sachs Global Investment Research, “Global Food & Beverages: Integrating ESG”, February 2007. 3 JP Morgan, “Obesity: Reshaping the global food industry”, October 2005. 4 Bernstein Research, “Big Thinking on Small Caps: Healthy Eating Trends Fortify Growth in Packaged Foods, but Exposure Increases for Smaller Cap Companies”, March 2007. 5 Functional food, or medicinal food, is any fresh or processed food claimed to have a health-promoting and/or disease-preventing property beyond the basic nutritional function of supplying nutrients.
6 European Commission, “Green Paper: Promoting healthy diets and physical activity: a European dimension for the prevention of overweight, obesity and chronic diseases”, December 2006. 7 Somo, “The Profit Behind Your Plate: critical issues in the processed food industry”, December 2006. 8 Economic Research Service, “New Directions in Global Food Markets”, February 2005. 9 Compared to 1000 litres of water needed to produce 1 kilogram of cereal. (Water for Life – Water for Food, 2007).
●