Snack food market enjoys healthier profits

Volatile commodity prices, changing consumer trends and a saturated market are just some of the main characteristics that define the snack food manufacturing industry.

While the industry has shown glimpses of promise in the five years through 2011-12, rising commodity prices, turbulent economic conditions and rapidly changing consumer trends have restricted its true potential. Over the past five years, industry revenue is estimated to decline at an annualised rate of 0.3% to total $2.9 billion. In the current year, revenue is expected to increase by 3.1%.

The industry’s major players have been faced with lowered profit margins and stagnating domestic demand, particularly in the salty snacks segment, which has historically been the most profitable. Changing consumer tastes and lifestyles have warranted clever innovation and new product introductions in an attempt to stimulate sales growth in a mature and stagnant market.

The future prospects of the industry, modest as they may be, do present some niche growth opportunities. The nutritious snacks segment represents a beacon of hope for the industry as consumers become increasingly time-poor and health-conscious. Strong brand loyalty, combined with new product innovations and aggressive marketing strategies, will help the industry ride the current wave of stagnation and economic turbulence with relative ease. IBISWorld predicts that the industry will grow at an annualised rate of 1.3% over the five years through 2016-17, with revenue totalling an expected $3.1 billion.

Industry outlook

Future prospects of the Snack Food Manufacturing industry are modest, with revenue expected to increase by an annualised rate of 1.3% until 2016-17 to total $3.1 billion. Future consumption levels are forecast to increase moderately, as consumers are likely to increase the volume and frequency of snacking during the day to accommodate their busy lifestyles.

The recovery of the Australian economy is expected to drive up disposable incomes (and thus, spending) and restore consumer confidence to normal levels. The ability of producers to respond to the changing marketplace in an innovative and timely fashion is critical to future industry success. Trends of health and convenience are expected to continue to drive consumption patterns, and thus the products that are introduced. This is expected to drive growth in the nutritious snacks, nuts and pretzels segments, as health concerns become paramount in determining the choice of snack foods.

Changing products

As time constraints become further pronounced over the next five years, snack foods are no longer expected to serve as a filler between meals or as after-school refreshments. Producers are expected to increasingly integrate exotic flavours with premium and healthy ingredients such as wholegrain, fibre, protein and vitamins that are promoted to yield specific health benefits.

The consumption of snack foods is thus expected to be transformed from quick, filler assembly lunch or dinner foods into nutritious meals that may be consumed on their own. Labelling improvements that make the nutritional content of the snack clear and unambiguous will further enhance the credibility of these foods as a genuine meal replacement.

Supply-side factors also present a promising outlook, with an expected fall in domestic wheat prices over the next five years. Vegetable and fruit consumption is estimated to increase, reflecting the increased use of these ingredients in snack food manufacturing. All of the downstream demand industries are forecast to grow over the five years through 2016-17. Most notably, growth is expected in the Convenience Stores industry and the Supermarkets and Other Grocery Stores industry.

International trade

IBISWorld estimates that exports will perform strongly over the next five years at an annualised growth rate of 5.7%, to account for 9.5% of industry revenue in 2016-17. Export growth will primarily be driven by an increasingly saturated market, a forecast correction and stabilisation of the Australian dollar and rising disposable incomes in the countries of the Asia-Pacific region. The presence of the industry’s major players in overseas markets will further drive export volumes due to the ease of access to resources and market knowledge.

There is also expected to be similarly strong increases in the value of imports over the next five years. Imports are forecast to grow at an annualised rate of 6.2% until 2016-17, comprising an estimated 17.7% share of domestic demand. Free trade agreements with Thailand, Singapore, New Zealand and the US are likely to reduce import tariffs and quotas, which will ease the movement of goods and services between the countries. Increased import penetration may erode the market share of domestic producers, however, as they struggle to compete with the lower prices. This will require their engagement in aggressive marketing strategies and clever innovations in order to defend and maintain market share.

Looking ahead

The current recessive economic climate, typified by lower discretionary spending and consumer confidence, is expected to increase in-home food consumption. The recent evolution of traditional snack foods to become meals in themselves is expected to bode well for this industry, as time-poor consumers substitute snacks for their main meals. Demand for potato crisps and corn chips that contain exotic flavours is expected to continue growing as a result of increased ethnic diversity and rising disposable incomes.

Australia’s strong research and development skills in agriculture and food production are likely to result in the development of new functional foods, increased shelf lives and expansion into new markets. Over the next five years, major players such as Frito-Lay and Arnott’s will continue to invest considerable resources in advertising and brand promotion. Arnott’s is attempting to expand its market share by blurring the line between its biscuit and snack foods segments with new product lines and innovative packaging initiatives.

While obesity has emerged as one of Australia’s most pressing health issues, there has also been an increase in the consumption of snack foods. Consumers are, however, seeking out healthy snack foods such as cereal and snack bars, fruit- and nut-based snacks and other nutritious foods to ease their fears of obesity while continuing to lead busy lives. This has had profound impacts on labelling and advertising, which have been adapted to make consumers feel good about snacking and shedding its association with a bad or unhealthy lifestyle.

It is also likely that industry players will seek to expand their operations through mergers and acquisitions, which will eventually result in the rationalisation of some product segments over the next five years. The Snack Food Manufacturing industry cannot exclude itself from these ongoing changes and developments and is expected to continue innovating to suit changing tastes in a fiercely competitive environment.

Key success factors

• Economies of scale and scope: The scale and breadth of production largely determines marginal costs while also impacting on the volume which a producer is able to supply – a key determinant of market share success.
• Product differentiation: In an industry that is stagnant and mature, product differentiation is one of the most important factors in maintaining market share and increasing net sales revenue. The primary goal here is to attempt to reduce the directness of competition.
• Ability to adapt to change: Another key factor to industry success is the ability to anticipate, and respond to changes in consumer preferences in a timely manner.
• Supply contracts for key inputs: Reliable contracts with suppliers of key raw materials such as flour, corn, wheat, sugar and oil, considerably reduce supply volatility. Guaranteed supplies at fixed prices minimise supply costs and aid production planning.
• Ability to pass on cost increases: Given the volatility of commodity and energy prices, the ability of producers to pass on unexpected cost increases down the supply chain is vital to maintaining profitability.

Barriers to entry

The barriers to entry in the industry are medium. The biggest threat facing potential new entrants is the extremely well established position of the industry’s major players. Firms like Frito-Lay, Arnott’s and Nestle enjoy high brand and customer loyalty and have considerable resources to invest in advertising and promotions to protect and grow their market share. Further, the major players enjoy favourable contracts with key suppliers such as grocery stores and supermarkets that maybe difficult for new entrants to secure.

Technology constraints within the industry however, are not as prohibitive. Access to equipment and technology is relatively easy, with most of it being able to be sourced from either Europe or the United States. Furthermore, the costs of commencing production are reasonable as snack food manufacturing can be carried out on either a small or large scale. It is also complementary to other forms of food manufacturing such as biscuits, cereals or other confectionery, which enables existing manufacturers to diversify with minimal cost.