Food & Beverage Industry

INTELLIGENCE REPORT2011

FOOD & BEVERAGE INDUSTRYMARKET FORECAST AND ANALYSISNAICS 311111-311999; 312111-312140

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FOOD & BEVERAGE INDUSTRY

Mature industries are those whose trends follow that of the macro economy. Due to the slow pace of natural growth within the industry, competition for market share is the largest source of expansion for companies within the industry. As a result profit margins usually weaken in the phase of maturity.

© 2011

Strategic View:

• Mature industry – new product/extended product lines consistent with current trends will drive domestic profitability • Growth Products: • Food safety/purity – increased focus on transparency via product labeling changes • Private label – becoming a major industry shift for the future • Functional foods (food + pharmacology) - estimated growth 14% per year

Financial Trends:

• Forecasted Revenue Growth: • 2.7% in 2010 followed by • 4.9% in 2011 and • 5.9% in 2012• Unemployment rate: 10.1% in June 2010 and 9.5% in 2011 – driving force behind consumption trends • Labor costs: are remaining low - an average pay in the food & beverage industry declined by 6.3% over the past 12 months • Capital spending • Restaurants: Operators reported a dip in capital spending • Food Manufacturers: 4.4% increase in 2011 and 5.4% in 2012• Net Profit Margin: Projected to grow by 8.5% by 2012 • Operating expenses projected to increase by 5.4% in 2011 and 6.4% in 2012

Macro Drivers:

• Aging population with an aggressive focus on extending longevity via healthy, simple value-oriented foods • Functional foods (food + pharmacology – quasi medicinal – boosting digestion, metabolism, immune system) – $27 billion in sales and account for over 5% U.S food market. 2012 estimated growth 14% per year, far more than overall food industry average • Affordable Care Act - requires restaurants, retail food establishments and vending machine operators to list calorie content information on menus and menu boards • Obesity rates in adults have risen - over 66% of states have obesity rates of above 25% - industry pressure to make healthy foods more available and affordable

Market Trends:

• Major industry shift - long term trend - private label products are gaining market share: • High unemployment and vanishing retirement savings drive private label consumption• Consumers are becoming increasingly receptive to private label food and beverage products - quality difference between private label and branded products narrowing in consumers eyes • Private label dollar share has increased in 13 of 15 sales categories, with natural cheese, butter and canned vegetables leading the way

• Fast Food Restaurants are stepping away from value deals - focused marketing tactics to new product offerings such as breakfast foods (ie. Subway and Taco Bell) • Increasing demand for locally grown and made products:

• Nearly 60% of consumers say they try to shop at farmers markets. Farmers markets – 5% annual revenue growth. There are over 5,000 farmers markets across the country • Wal-Mart and Safeway recently added “Locally Grown” sections to their produce departments• USDA launched a “Know Your Farmer, Know Your Food” marketing campaign

• Food labels natural and clean-label foods: • 77% percent of consumers use nutritional information to make their purchasing decisions• Packages - simplification of the ingredient statement as well as healthier ingredients

• Economic downturn and supply/demand issues helped broaden acceptance of the “natural” designation by many formerly strict “organic only” processors • Natural products on the rise: A combination of the economic downturn and supply/demand issues have helped broaden acceptance of the “natural” designation by many formerly strict “organic only” processors

• Natural sweeteners such as agave, stevia, turbinado sugar, honey and cane sugar• Consumers driving innovation in the low-sugar beverage area. Coca-Cola and Pepsi launched summertime-only products this year sweetened with cane sugar • Foods increasing immunity - Probiotics, a.k.a. friendly bacteria• Omega-3 in beverages

• Ethnic foods: • Hispanic and Asian population expected to double in the next 20 years • Increasing Indian population - Indian products – Unexpected creations: Curry Ketchup, Cashews & Cream Cooking Sauce, Tandoori Chicken Naanwich, and Tikka Masala Marinara

• Coca-Cola is placing greater emphasis on all non-carbonated beverages. In 2010 fist quarter the company reported 1.69 bil-lion unit cases of juice drinks globally. Coca-Cola reported 9% unit case volume growth worldwide for its juices and juice drinks • Bottled water – declining revenues - critics of the bottled water industry often claim “tap water is just as good” as bottled water and, since there is no difference between the two, the packaging and transportation of bottled water is a terrible waste of non - renewable resources

INTELLIGENCE REPORT

© 2011

Industry Drivers:

• Restaurant - sales are projected at $495 billion dollars in 2011 and 525.8 in 2012. • At home dining – remaining high to moderate with consumers seeking convenience foods such as meal kits, microwaveable meals, affordable and nutritious meals • Retail sales: Discount stores saw a record income in 2009 and Q1-2 in 2010• Healthcare reform - aging baby boomers put more emphasis on preventive care - growth quasi medicinal foods and health and wellness businesses • Organic food industry – 11.8% growth in 2010 • Consumer drivers: health, nutrition benefits, affordability, taste, freshness • 2011 Median Household Income - $55,195 a 0.6% projected increase from 2010• Alcoholic beverage industry - steady growth for the past three years - $458 billion in 2010 – driven by higher at home consumption of lower price point items

Pricing: • 0.4% price increase for meats, fish and eggs in 2010 • 0.2% price increase for cereals, bakery and dairy products in 2010 • Food at Home and Food Away from Home pricing projected to increase 2.0% in 2011 and 2012 from 2010

INTELLIGENCE REPORT

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Source: Bureau of Labor Statistics; Moody’s Economy.com; Lexus Nexus; Integra; Deloitte; Department of Commerce, Global Insight, Inc.; Harvard Business Review; Hoovers; Integra; McKinsey Quarterly; ING Foreign Exchange Wholesale Banking; Economist Intelligence Unit; Edgar; Federal Reserve Bank; PricewatherhouseCoopers Healthcare Indicators; Hospital Statistics; Bruegel Brussels Belgium; Standard & Poors; Security Price Index; American Petroleum Institute; Wall Street Journal; Consumer Confidence Board; EcoTrends 2008; Restaurant news; Food institute; USDA.

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