Walking steadily into 2009

Having fought a good fight in 2008, business is as usual for many manufacturers with bigger goals to position themselves for greater profits, expansion and sustainability. However, consumers seem to call the shots as manufacturers adopt measures to ensure food safety, compliance with manufacturing standards and labeling laws, and cater to market demand for more functional products at affordable prices.

Economic gloom or not, manufacturers interviewed say they are taking 2009 by its horns and are moving ahead with their plans for a better year. Excerpts below.

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ANALYSIS

Prioritize food safety, lean manufacturing and private labels in business

The year 2008 has been tough for the beverage industry – we have seen a slowdown in growth in the last two quarters with fast emerging markets growing at a slower rate than anticipated at the start of the year. While the full impact of the dairy problems in China is unknown, it is already considerable and it will affect the industry going forward. The industry will have a great responsibility toward ensuring food safety as more consumers become aware of its importance. Even as raw materials and energy costs have been dropping, and this is taking some pressure off the industry, 2009 is expected to be even more challenging than 2008 with slow growth expected.

Price-sensitive consumers are increasingly seeking 'value' in products as Europe and North America producers and retailers are already responding to this trend. As modern retail expands across the region, the need to offer 'value' will increase. Retailers, including discounters, will look to use private label products as a way to satisfy this trend and the demand for low prices.

Position business for growth in 2009

Food commodity prices initially spiked and subsequently tumbled globally in 2008. There were concerns over the availability of food supply, lapses in food safety standards and rising raw material costs. The strong and growing demand in emerging markets such as China and India remains influential in public sector policies.

With rising food demand, there will be opportunities for food and agribusiness (F&A) companies in large-scale projects such as the Singapore-China Food Zone in China’s Jilin province. Better farm management and technologies would increase food stock and reduce commodity price volatility, which will facilitate long-term decision making by F&A companies.

To strengthen their market positions, financially robust companies should seek to expand their production facilities and distribution networks especially in key agricultural commodity sectors such as grain and oilseeds (comprising crops like corn, wheat, soybeans and palm oil) that underpin the F&A value chain. China could see its self-sufficiency levels for oilseeds fall from 65% currently to approximately 52% in 2020 due to high demand growth for cereals and animal feed.

Food and beverage companies should focus on cost leadership strategies, as consumers with reduced household incomes generally prefer mass-market products to higher-premium alternatives. However, some niche downstream products such as dairy produce, functional drinks and Halal food may experience continued growth as they are perceived as staples.

Upstream F&A players can improve their product positioning by implementing food safety and traceability technologies, controlling animal and plant diseases, and investing in cold chain infrastructure. Improving market access in this way may help secure sufficient financing for companies at least in the first half of 2009.

Asia shines despite economic gloom

2008 set the tone on the need for greater accountability in Asia. We see a greater need for transparency in companies, which would ideally be industry self-regulation and individual firm’s responsibility to stakeholders. Governmental-imposed regulations would be an initial knee-jerk response to the current situation. However, this is not a sustainable or practical approach in the long run.

Our clients are realizing the need for greater value chain synergies such as evaluating current and potential suppliers; benchmarking their business strategies with key industry players; and exploring potential industry synergies and integration opportunities. We see these alignments as initial steps toward industry self-monitoring. We see three main trends developing in Asia in 2009:

1. More Asian consumers will be demanding “clean label”, as well as certified and organic products,

2. More manufacturers badgering for supply chain innovation in the food industry to ensure freshness and food safety, and

3. Consolidation in the industry.

In a 2008 Fusion Consulting survey of 25 major food manufacturers in China, 96% said food safety is ‘extremely important’ when choosing suppliers. In an earlier survey of 400 hotel and restaurant managers in Beijing, Shanghai, Guangzhou and Chengdu, 60% said they intended to increase their investments in food safety measures. These findings suggest that opportunities are abound for certified and organic ingredients companies.

While the main export market for Asia’s certified and organic products is Europe, we expect a shift toward Asia as a result of the 2008 food scare and faltering demand in European markets.

There will also be a paradigm shift toward cold supply chain in Asia. Manufacturers of products with limited shelf life will be hard pressed to evaluate their third party logistics, incorporate innovation in their supply chain, and source partners that have the ability to deliver fresher products faster to market.

With the opening Asian markets such as Vietnam in January 2009 to meet World Trade Organization (WTO) commitments, more local retailers, distributors and manufacturers are rethinking their business strategies in order to compete with global players entering the Asian markets. This would result to more joint ventures, partnerships and mergers, and acquisitions in the region.

If 2008 set the climate for greater consumer awareness, 2009 will set the tone for greater sustainability initiatives by the manufacturers. As global economic influence gradually shifts to Asia, manufacturers in the region will have to assume greater ownership of their roles in sustainability and rethink their strategies to meet the demands of a global market.

As manufacturers roll out their initiatives in 2009, accountability to consumers and timely response to the needs of the market would be important. They need to understand the changing consumer trends and buying behavior in Asia. The migration of large numbers female workers into larger cities and abroad is widespread because of higher pay and opportunities. Often, this results in grandparents becoming primary caregivers and pseudo-parents and they are expected to shape the buying behavior of the next generation. Manufacturers therefore need to reach out in order to sustain their growth into the next generation.

Flow with the consumers

There was a lower degree of innovation last year despite continued scientific development in the health and nutrition sector. Most scientific efforts were focused on creating substantial evidence for functional foods with proposed health claims. However, many companies are still uncertain about the development in the European nutrition and health claims legislation.

There is a strong market growth surge towards health and nutrition in North America, particularly in sectors such as heart and digestive health. Consumers would be expected turn to staples in a time of economic crisis, and they would continue to pay for functional food products that are seen to provide scientifically validated health benefits.

The publication of refereed scientific studies that support functionality in ingredients will remain as a top priority in the industry. Private label food products will be popular as consumers seek to maintain taste and functionality while minimizing cost. Established national brands will benefit in these hard times because of their association with comfort food.

The ailing economy will continue to pinch consumer demand in 2009. Supply chain issues such as the availability of ingredients and pricing by vendors will continue to put pressure on manufacturers’ margins. Ingredient manufacturers may face diminishing demand from consumers as more product manufacturers adjust their production levels downward and streamline inventory levels.

Above normal profit levels are expected in the short term due to the wholesale increase in consumer food prices in 2008 and the recent drop in commodity prices, despite the marginal drop in volume demand. However, in the long run, manufacturers will need to endure increased pressure to lower its prices and they may face more competition from low cost private label producers.

•Market trends in 2009

The food industry needs to expect another year of watching and waiting with regards new legislative developments and successful registration of products for health and nutrition. This is because the final approved results from the nutrition and health claims registration will remain outstanding until early 2010. The following are also expected to impact the food and beverage manufacturing industry this year:

1. Key barriers to healthier eating due to limited consumer knowledge and taste perceptions

Despite growing awareness, consumers are still in the dark regarding the functional benefits of ingredients such as prebiotics, sterols and glusoamines, as compared to Omega 3, probiotics and antioxidants. Scientific research, responsible advertising and targeted promotions will be crucial to manufacturers who play a key role in instilling consumer confidence in functional food. As consumers typically perceive taste could be compromised in healthy food, technological advances in the delivery systems and formats that do not compromise on taste in healthier food are therefore needed.

2. Legislative restrictions challenge market growth

As the market for value added/specialty food and beverage ingredients are witnessing robust growth due to growing market interest, obtaining government-endorsed qualified health claims for the ingredients will pose a major challenge to the growth of the sector. The European nutrition and health claims legislation is questioning the future of many functional foods. This might require lobbying through industry associations and manufacturers producing affi rmative scientifi c dossiers that clearly support the intended health claim.

3. Economic slow-down may curb growth in functional food ingredients Growth in functional food and beverage categories with established benefi ts and high level of consumer awareness would be less affected by lesser consumer spending, as many consumers consider preventive cost as being significantly lesser than treatment cost. However, the economic gloom may restrain consumer spending on functional food and beverages, where there are premium pricing strategies and consumers have fewer options, such as discount coupons and store/private label brands, to maintain their health and wellness goals.

4. Sustainability strategy

This year, more food and beverage products will be produced using sustainable methods and ingredient sources with a greater emphasis on improved efficiency in logistics and supply chain strategies. Manufacturers will try to alleviate challenges in supply and help to offset tightening economic conditions.

Food safety remains a primary concern for consumers, especially ingredients from Asia Pacific. The Chinese food industry, for example, has committed to reforming the regulation in the country regarding food ingredient production, in the wake of two major scares for both food and pet food industries in the last two years with melamine.

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AUTOMATION

Look to India for growth

We had one of our best years in 2008 with the expansion of our global footprint and enjoyed more customer activities. We are now prepared to focus more on aftermarket services and introduce cost-savings products as part of our ’going green‘ program, which prepares plant owners for the downturn period and assists them in avoiding wastage of raw materials. Asian investors should turn to India for more opportunities as the country seems to be the least affected by the recent economic crisis.

Reduce energy cost, earn carbon credits

We continue to see strong demand in our integrated energy management solutions that enable cost savings for our customers as they earn carbon credits on the trading floor at the same time. Singapore food companies can leverage on our energy efficiency improvement services in order to improve energy efficiency, reduce green house gas emissions and operating costs.

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INGREDIENTS

Have substantiated product claims

Natural ingredients experienced a boom in many sectors last year and the sector seems to be holding strong. This is probably because natural ingredients are contributing to increase in the number of products that are positively impacting the health and well-being of consumers and the environment. As more consumers become aware of environmental issues and food safety, this seismic shift towards natural ingredients is expected to continue.

There is a huge opportunity for authentic botanical extracts to support socially responsible initiatives in product development. As part of the sourcing program for our Maca extract in Ninacaca, Peruvian Highlands, Naturex Foundation projects are driven to improve care access, education, and means of communication for the local community. Naturex is also member of the United Nations Global Compact, where we are committed to respect and promote human rights, labor standards and environment. The Naturex Foundation will support new projects elsewhere in the world this year and we are currently reviewing partnership opportunities, especially in Asia. The wellness and weight management market has matured with more science-based products to support claims. As consumers desire health and weigh control as well as innovative and authentic products that provide more information and traceability, manufacturers are increasingly looking for weight management ingredients derived from natural sources. They are also calling for improved manufacturing guidelines, accurate labeling and higher levels of safety.

Include health and wellness sector on your drawing board

Our business has been quite resilient during previous economic downturns and as of now, we have not seen a major drop in our project pipeline. We are therefore cautiously optimistic about continuing our positive momentum in 2009.

While flavors may represent a small portion of raw material cost, they have a high impact on brand recognition and are key factors in driving repeat purchases. Our prices have been adjusted to reflect raw material cost inflation that remained substantial despite some softening between October and November last year. However, the current raw material cost environment provides opportunities for manufacturers to use our flavor technology to replace expensive raw materials.

Health and wellness is a very important trend for the region that has different meanings in each market – we have received customers’ requests on reducing salt, fat and sugar, enhancing sweetness, masking bitter and off-tastes from the addition of functional ingredients.

Health and weight management issues are growing as more Asians become more affluent. There are changes in regulations in some countries – Korea is limiting salt in packaged food and Thailand is considering similar changes. Japan’s aging population is concerned about healthy eating and consuming food with more functional ingredients.

According to World Health Organization (WHO), India has the highest incidence of diabetes in the world, with every fourth diabetic in the world expected to be an Indian. This creates an opportunity for manufacturers to enter the market while working with the local companies to reduce sugar and salt in their mass-market brands.

Value labels

Industry players can move into 2009 by strengthening their capabilities and systems, as well as engaging and cooperating with national and international authorities to ensure food safety. Companies should continue to invest in the supply chain to ensure food safety, good manufacturing standards and research and development capability. Companies that have 'reserved bad time resources' to invest in fundamentals will be able to ride through the economic gloom and build a more resilient and profitable business when the next up-cycle arrives.

Assisting companies with health claim matters in Europe will form a big part of our activities in 2009. We will continue to reach out and educate companies on the food and nutrition supplement regulations across Europe and Asia through workshops, podcasts and publications.

From past experience and the poor economic climate expected in 2009, the industry should not be exaggerating ’short-sighted‘ aesthetic trends like weight loss solutions that have either weak or no scientific substantiation. Common consumer concerns such as immunity, overall health, gut health, mental and physical alertness will continue in 2009.

Be cost effective

After years of relative price stability, raw material prices have now increased from two to six times compared with 2007. It is almost impossible to pass additional costs to customers as they typically review their annual contracts with food producers in October each year. Our market has grown in terms of tonnage and value until August or September 2007, but a slowdown in growth can be observed in the coming year. As a result, we are tightening credit control as contracting for 2009 is done for shorter periods (quarterly basis). The industry expects fewer new or innovative product launches in 2009. This may affect ingredient companies. However, we will continue to monitor such trends and decide on new product launches accordingly. We believe we can also add value to companies that are looking for cost effective ingredients.

Asia Pacific has been the fastest growing market for the last couple of years and we have seen double-digit growth rates in our ingredients sales in the region. This is due to the higher standard of living and greater consumption of prepared food and beverages. Barring the delaying effects of the general economic slowdown, this region is set to provide the highest potential for wellness, functional health food that is typically found in developed economies.

Innovate for growth

While we have done our best to compensate for the substantial increase in raw material and energy costs in 2008, , we are very optimistic about 2009 as we feel that we are better at managing these problems whilst offering our customers quality and value. We will also be launching new applications while investing in several new product launches.

We will be strengthening our core business this year by helping our customers with their manufacturing processes and by helping them to use our products in new ways. We will also diversify into new industries and expand into the anti-obesity and anti-aging sectors. Our most aggressive new line will be based on an innovation we developed for human and pet mobility management that relieves the suffering caused by joint cartilage degeneration and osteoarthritis.

Invest more to grow

We do not expect dramatic changes to the natural ingredient business Vitiva is in this year. However, we hope that the sharp increase in prices of agricultural materials that are raw materials for food products and natural extracts is going to be relieved, as we do not want to pass such increases to our customers.

On sustainability, we are already providing natural solutions that offer clean labels for finished products. We also use packaging materials made from recycled sources, and we work closely with environmental bodies in our country for their efforts in sustainability.

This year, we will continue with our current projects and strategies for providing our customers with natural solutions, invest in research and development, and application research. We will be looking into acquiring companies that have intellectual property potential and infrastructure that will complement our business.

Leverage on your strong reputation

We are seeing continuing growth in the industry, although perhaps indulgent food products may lose some ground in the market. Products from China will continue to be seen as 'risky' regardless of manufacturer.

Wellness and weight management are very influential trends in more affluent markets such as Japan, Korea and Australia. Developing countries like Vietnam, Indonesia and the Philippines are, however, more interested in basic consumption as about 70% of the population live below the poverty line in these countries.

In 2009, we continue to maintain our standards that customers have confidence in. Excellent relationships forge trust and this is essential in Asia. We are confident in entering 2009 with our strong base and reputation.

Cater to product-savvy consumers

Consumers will remain open to food alternatives that offer more health benefits even in times of recession. Innovation will remain a differentiator in the competition coupled with clear communication with the consumers on the product benefits. The industry can gain better market insights by conducting research on consumers’ buying behavior concerning ingredients and perceived benefits.

Sustainability is important to us. Saving on energy consumption and limiting packaging material can make us more cost efficient. Consumers are increasingly considering if a company that makes efforts in sustainability has produced a product, and we are considering this in our production process.

We remain focused and committed to product innovation in 2009, while helping manufacturers develop balanced and nutritional food products with a ‘feel good’ factor. Besides funding independent research to explore the benefits of inulin and oligofructose, we are also providing our manufacturing partners a comprehensive product-to- market package.

Go for certification

We faced the challenge of maintaining price stability for our customers with minimal disruption of supply as chemical suppliers raised raw material prices last year. In the same year, we have also added over 200 Halal certified aroma raw materials to our extensive flavor and fragrances (F&F) product line. This brings the total number of Halal offering to over 550 products.

We have also launched a new initiative designed specifi cally to assist our customers with their regulatory requirements under the new European Union (EU) regulation for chemicals — registration, evaluation, authorization and restriction of chemicals (REACH). This regulation is designed to improve the protection of human health and the environment from potential chemical effects.

Our plans for 2009 is to help our customers meet the initial-phase REACH requirements and to provide an uninterrupted supply of raw materials; several of our products are being pre-registered under REACH compliance and are ready for purchase. We have plans to extend pre-registration to more products upon request to handle registration for globally procured raw materials beyond our existing portfolio.

Invest in quality control measures

To remain competitive, companies should be responsive to customers' inquiries in a timely manner, while ensuring stable quality standards. To be sustainable depends on the supply of natural renewable resources that provide geo-political stability in the countries of origin, and the industry’s respect of the natural environment. Products from ecologically controlled supply sources and the FairTrade standard are working to fulfill sustainability objectives such as global environmental care and compliance with manpower regulations.

Moving forward, we will continue to invest in instruments for quality control and regular audits based on standards such as ISO 9001:2000, hazard analysis and critical control point (HACCP), Kosher, Halal norms and organic standards to safeguard nutritional values and functionality of food.

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PACKAGING

Bioplastics to grow in importance

The bioplastics sector enjoyed a good year in 2008. Production capacities of bioplastics are slated to expand with the construction of three new production facilities in Europe. This sector remains positive and the interest in environmentally friendly solutions remains high.

Oil prices, natural resources and climate change policies have increased the awareness of manufacturers to change their ways of production and consumption in the future. Many have announced their intentions to invest and expand their production capacities of bioplastics. Global production capacity is expected to quadruple from nearly 300,000 tons today to over a million tons by 2011.

We are seeing more products using different materials that are of higher performance than monolayers, and different packaging solutions. More companies are also seen working together to expand into a broader market with higher growth dynamics in the future. Companies involved in bioplastics packaging solutions should focus their activities to enable the growth of bioplastics and to support sustainable development because no raw material has unlimited availability and the most efficient use of resources must be achieved. We need to identify lead markets for bioplastics, address recovery and recycling issues, and have realistic solutions for waste management.

Meet the demand for sustainable solutions

It was unexpected for the industry to face the global economic downturn as mature markets were impacted at the beginning of 2008. However, we are confi dent that, being on a sound long-term growth market, the rebound will come, and we remain firm on our strategic directions of operational excellence, customers’ proximity and technology leadership. In October last year for example, we opened a new plant in China that assembles beverage complete bottling lines. The first Combi for water (one machine integrating blow-molding-filling-capping for PET bottles) assembled in Beijing has already been delivered to a Chinese customer.

Many of our customers say they will postpone their capital expenditure (Capex) investments in 2009 and we will therefore respond by working on our installed base to provide design services, tooling services and productivity solutions. We will continue to invest heavily in research and development to invent the next generation of packaging equipment, and there will be no slowdown in the launch of innovative machinery.

Driven by consumer demand, sustainability and environmental impact are increasingly important in our customers’ decision-making process. They want to use less material, water, energy and chemicals in their production, where we are able to cater to their demands. Sustainability will remain the focus of our business in 2009, and we will work on new designs that can help to provide light weighting such as new aseptic solutions like Predis and tools that help to save energy or water consumption on existing machines.

Be seen at major exhibitions

2008 has been very positive in which we could consolidate our market leadership. Even as raw material costs have affected many companies, we believe that the advantages provided by our machines will offer enough strength to our customers to enable them to continue to invest and obtain the market share they desire.

We shall attend the important exhibitions around the world such as Plastindia in New Delhi, India and Anuga FoodTech in Cologne, Germany this year. We will also be organizing a first “Crown Day”, a symposium where major crown cap manufactures from all over the world will compare and discuss the latest solutions available in the industry.

Create machines for sustainability

We saw many companies cut down on their investment on production facilities in 2008 and this is expected to continue for some time in 2009. To help companies who are still expanding despite the situation, we continue to supply machines and equipment that can contribute to cost savings at their production lines, and provide them with proposals for improved inspection systems for better food safety and greater production capabilities using total solutions.

We have been trying to secure ISO14001 certification as we continue to participate in ecological activities and fulfill our obligations to corporate social responsibilities. We are also planning to focus on developing sustainability products that use environmentally friendly materials and have energy saving features, while meeting customers’ requirements.

Localize businesses

The food industry will receive a lesser impact as a result of the financial crisis in 2008 than other sectors would. However, depending on the region and size of the company, some projects might be postponed until the economic situation improves.

In 2009, we are expecting more complex primary and secondary packaging such as soft packages and shelf-ready packaging, and more production for niche markets where manual packing and palletizing are mechanized.

More growth could be seen this year if packaging companies are to switch their existing packaging solutions to more cost effective ones by modifying existing lines or acquiring new lines.

Communicate product benefits to Asians

We will come through the global financial crisis with a product that addresses key issues and meets our consumers’ needs. We see a growing demand for beverage cartons as our customers see such cartons as providing a safe and cost effective way of packaging dairy products and non-carbonated beverages.

However, the challenge is to communicate the benefits of beverage cartons to consumers – 75% of the raw materials used for a beverage carton are derived from renewable resources and these cartons are recyclable. We are working to improve on this even further in the future, as we face the task of bringing this message to Asians who are becoming more environmentally conscious. In 2009, we will also intensify our local filler assembly efforts in Asia, and explore new markets and segments such as liquid food for further growth.

Advocate strong values

North America and Europe have been the hardest hit by the credit crisis. Asia has been less affected, and there has been strong government response, particularly in China, to avoid a sharp decline in consumer demand. We are confident that the food industry will come out stronger following the challenges it is confronting. With our solid financial situation, we remain committed to our strategy to support our customers during this difficult period and beyond. Reducing the environmental impact of our operations, equipment and packages is an essential part of our strategy. Our environmental commitment is embedded in the entire life cycle from development and manufacturing, to sales and then recycling. This is also about good business as saving energy, reducing waste and lowering our carbon footprint also help to reduce our business costs.

Our goals in 2009 are to bring new cost-efficient solutions to meet market needs, remain committed to investments required to grow and strengthen our business, and tighten our expenses internally in order to be cost-efficient.

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PROCESSING

Be close to customers

Last year has been an excellent year for Clextral with a record order intake of 12% from Asia Pacific. However, business is expected to be more difficult this year as more companies consider the efficiency of their investments.

Despite these issues, Clextral twin-screw extrusion technology can help us reach our objectives: well controlled and traceable processes for food safety, managing raw material costs with recipes that have the most economical ingredient sourcing, and using available raw materials to provide expected nutritional values. We will continue our marketing focus in Asia Pacific where growth will still be significant. New Clextral offices open in Vietnam and Australia this year.

The worst could be over

In the face of the economic downturn, we have tried to maintain costs without passing additional expenses to our customers. While customers are delaying purchases of larger equipment, sales of our smaller dicers and slicers and ongoing parts sales remain strong. Our engineering department continues to develop new slicers and dicers to meet industry demands. The difficult economy will not stifle creativity but it will lead to smarter engineering and better planning.

Many of our cutting machines offer variable frequency drive technology with variable frequency drives (VFD) that reduce energy costs and prolong the life of equipment by adjusting motor speed to meet load requirements. We also produce long-lasting, durable machinery and parts, thereby offering strong business sustainability to our customers.

We expect 2009 to be challenging. However, we are ready for the challenges and are optimistic. The worst could be over and recovery is on the horizon. Confidence will return just as it did when Asian countries started recovering from the crisis in 1997.