Industry report of Bangladesh food and beverage industry

NORTH SOUTH UNIVERSITY

Strategy and Structure of the Food and Beverage Industry Course: Mgt 489 section: 6 Shahedul Alam (Shl)

Done By: Group 4 Fahima Ayesha Choudhury 1210030030 Zareen Tasnim Lazima 1210828030 Ashik Mahmood Andalib 1110448030 Mohammad Atikul Haque 1110244030 Saiful Alam Sunny 1110507030 Hamida Kaus Prianka 1110517030

Executive Summary Food and beverage industry is one of the fastest growing industries around the world as food is humans’ most basic necessity. Though this industry is growing on a moderate level in US, it is the largest industry in Europe. There is high competition in this industry. Though most companies in this sector are SMEs, a few large companies are contributing by doing merger and acquisition, vertical integration and expending into overseas market to increase their sustainability and efficiency. The large companies in this sector are- Nestlé, Kraft Foods, Unilever and Cargill. Alongside US and EU, emerging economy for food and beverage industry is China and India. They mainly provide the raw materials for this industry. Any Economic downfall may highly affect all other industry but food and beverage as it provides necessity product which people need to use even in heavy economic downfall. Being one of the fastest growing industries, this sector faces some issues such as technological development. Due to increasing completion the R&D of this industry should be well maintained which can be challenging to bring out new

technologies

to

make

the

products

sustainable

and

efficient.

Manufacturers are expending their market to developing countries such as China and Indian because of relaxed rules, large population, higher living standard and higher growth potentials. Food and beverage industry in Bangladesh is a potential sector and growing rapidly since 2000. This industry alone makes up 22% of the total manufacturing production in the country and around 2.45% of the country’s total labor force. Bangladesh being an agricultural country with large population can contribute largely in the food and beverage industry. Bangladesh is also impacting global market by exporting food and beverage to 90 different countries in the world. But many issues in Bangladesh are holding back this industry, such as unstable political situation, high barrier to entry, corruption in the controlling quality and lack of technological development. In the context of Bangladesh, food 2

and beverage industry is one booming industry to invest in. With the emergence of super shops concept and new technologies now many large companies are investing in this sector and exploring its potential. Thus this economic crisis immune industry has become one of the stable and sustainable industries in Bangladesh.

Table of Content Introduction…………………………………………………………………………………….4 Global Industry Structure………………………………………………………………………5 Global Industry Issues…………………………………………………………………………8 Bangladesh in Global Context Analysis and Conclusion References Research Method Formal thank you letter……………………………………………………………………….18

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Introduction Food and beverage industry includes harvesting, packaging, distributing, processing of consumer products over different regions. The industry is growing at a moderate level in United States because of which the companies are restructuring and realigning their activities to reduce cost, increase volume and improve profits. Furthermore, large companies are merging different companies varying in size to gain higher market share and widen the product line they hold. On the other hand the non-soft drink companies are seeing growth whereas the soft drink industry is not seeing as much. Due to the high competition companies are expanding into overseas market to grab more market share therefore increasing competition in different regions of the world (TB Woods Incorporated Headquarters, n.d.). In the EU food and beverage industry is the largest industry there, with an estimated production value of 720 billion euros, this industry accounts for 13% of the total value of manufacturing. The industry employs more than 4.4 million people and transforms 70% of the agricultural raw materials produced in EU. In EU the industry is highly fragmented with 99.1% of the total industry run by SMEs employing 2.7 million people. The industry is made up of many subsectors and uses different production process and packaging techniques. Since it is dependent on various different techniques it is highly dependent on the R&D sector since it helps improve the product and process to make the companies more efficient. Although the industry is highly concentrated with SMEs , there are a few large multinational producer who have a significant impact on the international market. These companies also participate in vertical integration to help increase the range of products 4

they can supply and increase their market. The large companies concentrate on the global market and the SMEs focus on meeting the local demands and specialize in different subsectors (European Commission, 2005). In terms of Bangladeshi market the industry is growing at a fast rate with many small companies fighting for a position in the food and beverage sector however, the market is mostly controlled by large corporation who enjoy economies of scales and supply a wide variety of products to the consumers. The top contenders in the industry are Transcom Beverage ltd, Akij Food and Beverage and Partex Beverage ltd (Businesshabit.com, 2014).

Global Industry Structure The global food and beverage sector is valued $5.7 trillion USD in 2008. The industry is the major contributor for growth in many economies and has been historically experiencing a consistent growth. It has been estimated that the industry will grow at 3.5% and by the year 2014 the industry will be valued at $7 trillion USD. In terms of structure the industry is highly fragmented with the key player- Nestlé, Kraft Foods, Unilever and Cargill who hold less than 5% of the total value (IMAP, 2010). As discussed before Europe holds the largest market share when it comes to food and beverage items, it generates revenue of $1.4 trillion in the year 2007 while employing 4 million people. The next key playing country is USA which has a contribution of $1 trillion USD. Although these countries are the key players however, emerging economies such as India and China are also contributing in the industry. The emerging economies provide raw materials to the food and beverage industry thus having substantial impact of the production of food and beverage. The food and beverage industry in India is valued to be $182 billion in 2007-2008 and the food processing sector to be valued at $72 billion in 2008. In China is industry is growing at 13.6% where

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the industry value was $50 billion in 2008. Below are some of the key players: Compa

Key

Market

Geographic

Reven

Operati

ny

brands

covered

coverage

ue

ng

name Nestlé

Nescafe,

Products are

Americas: 30.15%;

$101.8

profit $13.8

Maggi, Milo,

sold in 120

Europe: 25.62%;

billion

billion

Kitkat,

countries

Asia, Oceania, and

USD

USD

Gloria,

across the

Africa: 15.59%;

Nestlé,

world

Rest of the world:

ARCHER

Power Bar Monarch,

US,

32.45%. US: 51.27%,

$69.2

$2.7

-

Novatol,

Caribbean,

Germany: 10.74%,

billion

billion

DANIEL

Bionature,

Canada,

Other Foreign:

USD

USD

S

etc

Europe,

37.99%

MIDLAN

Middle east

D UNILEVE

Lipton,

Mainly Europe

Asia & Africa:

$59.6

$8.5

R NV

Knorr

and Asia

35.71%, Americas:

billion

billion

32.57%, Europe:

USD

USD

KRAFT

Easy

North

31.72% US: 50.80%,

$42.2

$4.9

FOODS

Cheese,

America,

Europe: 31.13%,

billion

billion

INC

Pepito,

Europe, and

Other: 18.07%

USD

USD

Toasted

Asia

Chips, Toblerone, Twist, Splendid Source: (IMAP, 2010)

The industry went through it downs due to the problems such as increased food prices, decreasing in consumer spending, increased transportation cost. Although such adversities have affected many industries highly however, the 6

food and beverage industry is relatively not as affected. The reason behind this could be the fact that food is a basic necessity of the people and regardless of how bad the economy is performing people need to use these products.

According to the figure beside the Dow Jones food and beverage index has been performing better than the S&P 500 index, which proves the point that although other industries have suffered greatly due to the slowdown in the economy however, the food and beverage industry has performed relatively better. Source: (IMAP, 2010) Mergers and acquisitions are very popular in this industry due to the level of competition. As discussed earlier many companies merge and go into acquisition to help increase the overall market share and increase the number of product under their product line. The summary of transaction in the food and beverage industry based on sector and country is given below. Summary of transaction in the food and beverage industry in 2009

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Source: (IMAP, 2010) As it can be seen the paged food and meats are industries that hold the highest number of mergers and acquisitions furthermore their value is also the highest. Since that is the case it can be deduced that the packaged food and meats industry is facing through fierce competition and to survive the condition many companies have opted for mergers and acquisition. In terms of opportunities in various regions of the world the figure shows that China shows the highest promise followed by India. Source: (Linklaters, 2013)

Global Industry Issues 8

The food and beverage industry is overall growing due to the growth in population however there are some global industry issues that all the companies are facing, below are some of the issues:

1.1 Technological Development Majority of the players in the industry believe that although there is big movements in the industry towards sustainability and resource efficiency however, most companies still focus on improving the quality and creating new products. Due to the type of focus most manufacturers do not prioritize health and wellness issues therefore not focusing on the development on such technologies. The trend shows that the core of the development in technology still is profit focused and companies want to mainly improve efficiency rather than focus on sustainability. According to the same survey the companies are more focused on product innovation rather than greener technologies, although that is the case however many companies are actually moving towards that direction. The food and beverage industry is highly dependent on the technological advancement due to the need to mass production therefore more development is made to help produce at a large scale at a lower cost (Leatherheadfood.com, 2012).

1.2 Government and Regulatory Issues Food safety regulations apply to each stage of food and beverage production, from processing and manufacture to distribution. The laws mostly focus on the safety of the products that are being produced and quality of distribution around the industry. The industry is also subject to laws which bound the companies to properly label the products and maintain minimum food safety standards. Laws such as the Nutrition Labeling and Education Act of 1990 (NLEA) and the Food Safety Modernization Act of 2010 (FSMA) work towards making the industry more safe for the consumers. In USA there are many agencies that control the quality of production for the food and beverage 9

industry for example Food and Drug Administration (FDA) Federal Trade Commission (FTC) are some of the agencies that work for the government to help maintain the basic regulation in the industry. Alongside these agencies there are many other local agencies which help in the regulation of SMEs thus helping the government regulate the industry properly (Hg.org, 2015). Similar to the FDA Bangladesh has a regulatory body called BSTI which oversees and regulates all the food and beverage industry’s products thus keeping the products safe for the consumers.

1.3 Strategic reaction to competitive pressure The food and beverage industry is constantly under pressure due to the increased competition from both local and international competitors, in order to survive the constant pressure the companies could follow the following strategies: 

Deliver products with more nutritional value and fewer allergens: Since more consumers are being interested in eating healthy the added factor will help bring competitive advantage. Many companies have already started acting on this by producing whole grain products to



attract the consumers (Infor, 2012). Continually drive down costs: As discussed before the only way food and beverage companies can survive properly is through cost cutting and increasing efficiency. This can be done by utilizing various technologies that are currently available. Many companies utilize these technologies and make the production system completely automated to help reduce labor costs greatly thus gain competitive advantage



against the competitors (Infor, 2012). Minimize environmental impact: large companies are currently focusing on this because they have figured that by reducing the impact on the environment not only do they gain competitive advantage in the eyes

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of the consumers they can also reduce costs by reducing the waste. (Infor, 2012)

1.4 New Market As discussed before the food and beverage market is growing however, the competition is also growing thus forcing many companies to go into new markets to sustain. Due to the large economic growth in the emerging economies many food and beverage companies are targeting these countries. Furthermore, the rules and regulations in these countries are also a lot more relaxed compared to the countries these companies originate from. Due to the relaxed rules the companies can be more flexible hence attracting them to those countries. Global food manufacturer respondents consider China, India and Brazil to offer the largest growth potential among emerging markets in 2013-2014. According to a survey US, Singapore, Taiwan and Hong Kong and South Korea offer the highest growth potential among developed countries in 2013-2014. The companies are under constant pressure due to decreasing margins and consumer price sensitivity, these problems can be overcome through going into economies such as China, India and Russia. Furthermore countries such as China and India have world’s largest population thus making them very lucrative markets to enter. There are many consumers who are now able to purchase the products due to increased standard of living hence many manufacturer are targeting such companies (Prnewswire.com, 2013).

Bangladesh in Global Context 11

Bangladesh possesses a very large and rapidly growing food and beverages industry which stands as a major potential sector of the economy in terms of employment, and value addition. In fact, the food and beverages industry of Bangladesh makes up about 22% of the total manufacturing production in the country, and employs around 20% of the industrial manufacturing labor force, and around 2.45% of the country’s total labor force. It is a 4.5 billion dollar industry which has around approximately 700 food manufacturing and processing businesses. The major sub-sectors in the food industry consist of rice, wheat, fruits and vegetables, tea, sugar, dairy, and edible oils. Being a country with one of the largest populations in the world, and with the population base growing ever more rapidly, the demand for food and beverages is always rising. Moreover, due to factors such as the growth in the economy and rising incomes, demand is being shifted away from traditional foods and more towards high value foods. (Kundu, 2015). The food and beverages industry was initially very small and limited to a few domestic and family businesses which emphasized on basic agricultural commodities. The industry did not gain significance in terms of operation until the 1980s. Since the early 2000s the food processing industry of Bangladesh grew at a rate of 7.7% annually and the range of variety of food products in Bangladesh increased drastically since the last decade due to the entrance of a number of both domestic and international food companies into the industry. (Md. Khairul Akter, 2015) Moreover, the geographical agrarian setting Bangladesh is situated on, and its strategic location, is very beneficial to the agricultural production. (Md. Khairul Akter, 2015) Agriculture contributes greatly to the food industry of Bangladesh. As of the 2012 – 2015 Bangladesh’s export policy, the agro sector remains one of the top most priorities. Out of the total Gross Domestic Product, 32% of it is made up by the agro foods and beverages industry. (Md. Khairul Akter, 2015)

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However, even with all this crop produced, constraints such as population pressures continue to make it hard for farmers to meet demand and therefore lead to food deficits and losses. For instance, the Bangladesh Sugar and Food Industries Corporation BSFIC has recently incurred a loss of TK 5.3billion last year alone. These food deficit gaps are met and matched by commercial imports from other countries. The Bangladeshi food and beverages industry plays an important role in both the domestic and the global market. The impact globally can be noticed through the increased exports of agro foods from Bangladesh to countries around the world. Although the agricultural sector of the food industry is falling, the country has great prospect if and when viewed as an industry which exports food. Moreover, when it comes to labor intensive agricultural manufacturing and processing and production of horticultural goods, Bangladesh has a comparative advantage over other countries. The Bangladesh Agro-Processors Association has been focusing on manufacturing, processing, and exporting approximately 90 different products to around 70 different countries. Moreover, the country is aiming to increase its GDP through the food and beverages industry by exporting certain agro foods. For instance, the fertility of Bangladesh is suitable for growing maize and corn which is in turn is exported to maize/corn consuming countries such as Egypt and Nigeria (Agro‐processed industry in Bangladesh, n.d.).

The figure below shows the market share of various industries in Bangladesh in 2001-2002. Since the Bangladesh food and beverage industry is growing fast it can be assumed that the market has expanded however, the overall structure to some extent has remained same.

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Source: (MINISTRY OF FOREIGN AFFAIRS OF DENMARK, 2009) Below the key player in the Bangladesh food and beverage industry is discussed

Company Transcom Beverage Limited

Global Beverage Co. Globe Soft Drink Ltd. & AST Beverage Ltd. Pran Beverage Partex Beverage

Akij food and beverage

Products Pepsi range of beverages-Pepsi, 7up, Mirinda Orange, Mirinda Lemon, Slice and Soda. Shark Energy Drinks, Zam Zam Cola, Appy Fizz Royal Tiger, Uro Cola, Uro Orange, Uro Lemon, Fizz Up Maxx Cola, Cloudy Lemon, Clear Lime. Power Drink RC Cola, RC Orange, Upper 10, RC Lemon, MUM Mineral Water, Danish Condensed Milk Mojo, Lemu, Clemon, Speed, Frutik

Source: (Bangladeshtrades.com, n.d.)

Strategic issues in Bangladesh Bangladesh frequently faces political crisis which hinders the daily business activities thus affecting the industries adversely. The food and beverage industry faces problems in delivering the products on time thus lose sales. Furthermore since all these products have strict expire date many products are not sold before date due to the low sales during political crisis. This 14

overall creates a disadvantage for the food and beverage company in Bangladesh The barriers to entry while entering this industry is relatively high due to the large initial investment required. Most of the companies have fully automated production system therefore making it difficult for new entrants to produce at the same scale as the major competitors and sustain in the market. Furthermore, the major competitors have already gained large market share and brand loyalty which makes it harder for new companies to enter the market and sell their products. Although this factor has helped the food and beverage industry however, it has also affected the industry adversely. The regulatory body for controlling the quality of the product sold in the food and beverage industry is not as efficient therefore hampering the controlling activities for the corporation. On the other hand the officers in the regulatory body are rather corrupt thus making it easier for many companies to bribe them and get unsafe products into the market. This means more products are in the market however, the consumers lose confidence in the products since they believe that the quality is not maintained. Due to the heavy level of corruption many companies face difficulty in getting safe products out into the market without having to bribe the officers, thus creating an issue for the industry.

Analysis and Conclusion Food and beverage industry is the source of growth for many countries, an example of such a continent would be Europe. The same strategy could be used by Bangladesh to stimulate growth in the economy. Since there is a large industry dedicated to the agricultural sector in Bangladesh, it would be rather easy to move into food and beverage industry for many corporations. The raw materials are available and cheap therefore making it a lucrative industry to enter. There is a large dairy, fruits and vegetable and fisheries 15

industry in Bangladesh and not many companies are there to take the market. As discussed before there is a growing demand for fruits and vegetable products therefore corporation could fixate on that industry. Abroad many companies make profitable business out of producing packaged fruits and vegetable, Bangladesh could go into a similar movement and expand the horizon of food and beverage industry. The food and beverage industry in Bangladesh is a lucrative market since the competition is not as fierce as it is in the global market due to the lack of competitors. Furthermore, the range of products produced in Bangladesh is also less therefore creating a gap in the industry. There are many small companies producing variety of products however, due to lack of technological development the companies are not being able to be the most efficient. If more research and development could be done to improve the efficiency of producers in Bangladesh the market would become more competitive thus forcing corporations to become even more efficient. Previously there were not many super shops in Bangladesh therefore most food and beverage items were brought from local vendor, now due to development in the super shop industry many super shops invest in making their own label which attracts the consumers more. The trend of generic food and beverage items has reduced greatly due to the influence of the super shops and is thought to change more in the future years. Furthermore, these super shops also have similar products from different food and beverage companies alongside their products which is allowing the consumers to compare and choose what they like best thus inevitably increasing competition. In the beginning most food and beverage items were imported from various countries; products such as Ketchup, dairy items, bakery items and fruits and vegetables were not as widely produced in Bangladesh. Due to recent development many local companies such as Pran and BD Food are producing 16

the same standard items in the local market at a much cheaper cost. This is lead to a new movement in the food and beverage industry which is to bring positive changes in the Bangladesh economy. Furthermore due to recent R&D many new types of fruits and vegetables are being produced in Bangladesh for example strawberry and dragon fruit are now widely available. If similar type of research is done more variety of products can be produced in the country thus reducing the need to import the products. In conclusion the food and beverage industry seems to be an a highly profitable and stable industry. Although it is dominated by few multinational there is scope for development by the SMEs. Food is a basic necessity of every human being hence making it an inelastic product for all consumers therefore it is clear that this industry is not bound to become extinct rather grow. Also as discussed earlier the food and beverage industry is immune to the economic crisis thus making it a rather interesting industry to work with. The government and the local authority has been trying to protect the SMEs for a very long time, this is to initiate healthy competition as well as create scope for development. In Europe the SME food and beverage industry is highly protected by the government and often given subsidies to help them sustain. A similar approach could be taken by the Bangladeshi government to stimulate the growth in the food and beverage industry. Overall the industry seems to be booming not only because it is an inelastic product but also because of the growing population therefore more investment should be done in this industry by more corporations in Bangladesh. Since the population is growing the opportunity seems to be the best one to grab in Bangladeshi context.

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References Agro‐processed industry in Bangladesh. (n.d.). 1st ed. [ebook] Dhaka. Available at: http://www.hortex.org/Employment%20and%20GDP_Agroprocessed_171113.pdf [Accessed 10 Jul. 2015]. Bangladeshtrades.com, (n.d.). Bangladesh Beverage Industry | Bangladesh beverage company list. [online] Available at: http://www.bangladeshtrades.com/bd-company-list/bangladeshbeverage-company-list.html [Accessed 9 Jul. 2015]. Businesshabit.com, (2014). Top 10 beverage companies in Bangladesh. [online] Available at: http://www.businesshabit.com/2014/12/top-10beverage-company-in-bangladesh.html [Accessed 9 Jul. 2015]. European Commission, (2005). ICT and electronic business in the Food and Beverage industry. [online] Available at: http://ec.europa.eu/enterprise/archives/e-businesswatch/studies/sectors/food/documents/Food_2005_I.pdf [Accessed 9 Jul. 2015]. Hg.org, (2015). Food and Beverages Law - HG.org. [online] Available at: http://www.hg.org/food-and-beverages-law.html [Accessed 9 Jul. 2015]. IMAP, (2010). Food and Beverage Industry Global Report — 2010. [online] Available at:

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http://www.imap.com/imap/media/resources/IMAP_Food__Beverage_Repor t_WEB_AD6498A02CAF4.pdf [Accessed 9 Jul. 2015]. Infor, (2012). White Paper How food & beverage companies gain competitive advantage. [online] New York. Available at: http://www.infor.com/content/whitepapers/howfoodandbevgainadvantage .pdf/ [Accessed 9 Jul. 2015]. Kundu, S. (2015). Wheel :: Business Magazine. [online] Wheel.com.bd. Available at: http://www.wheel.com.bd/cover_story.php?id=26 [Accessed 10 Jul. 2015]. Leatherheadfood.com, (2012). Emerging technology in the food and beverage industry | Leatherhead. [online] Available at: https://www.leatherheadfood.com/emerging-technology-in-the-food-andbeverage-industry [Accessed 9 Jul. 2015]. Linklaters, (2013). Food and beverage. The Linklaters Emerging Opportunity Index. London. Md. Khairul Akter, M. (2015). Sector profile and strategic planning for the agro-base food industry of Bangladesh. [online] Bangladesh Textile Today. Available at: http://www.textiletoday.com.bd/newsite/sector-profile-andstrategic-planning-for-the-agro-base-food-industry-of-bangladesh/ [Accessed 10 Jul. 2015]. MINISTRY OF FOREIGN AFFAIRS OF DENMARK, (2009). FOOD PROCESSING IN BANGLADESH. Prnewswire.com, (2013). Global Food and Beverage Survey 2013-2014 Market Trends, Buyer Spend and Procurement Strategies in the Global Food and Beverage Industry. [online] Available at: http://www.prnewswire.com/news-releases/global-food-and-beveragesurvey-2013-2014---market-trends-buyer-spend-and-procurementstrategies-in-the-global-food-and-beverage-industry-218839341.html [Accessed 9 Jul. 2015].

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TB Woods Incorporated Headquarters, (n.d.). An Introduction to Food and Beverage Industry. Pennsylvania, p.1.

Research Method The report “Strategy and Structure of the Food and Beverage Industry” is based on both secondary research and primary research. The information was collected from various online resources in different journals and articles. The primary data was collected through an interview session with an employee from Partex Star Group. He helped us give more insight about the local market and help give us suggestion. The referencing format for the whole document was Harvard referencing style. Limitation of this research is that there was a lack of data in the local market and most data was outdated. Therefore, most of the information connecting to the recent years is based on the estimations provided in the secondary sources.

Formal Thank You letter 02-07-15 Dear, Mr. Kazi Abul Hassan Thank you for meeting with us last Thrusday morning for discussing the topic regarding food and beverage industry. It was both enjoyable and informative. Your insightful presentation contained several innovative ideas that we are now considering for our report writing.

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To make a dynamic report it was very important for us to gather the latest and specific information regarding the food and beverage industry. We got some information from the secondary sources, but it was not the most fruitful one. Finally, it was our pleasure to meet you. We have learned a lot regarding the food and beverage industry such as the present market scenario, how they adapt themselves to the customer’s need, want and demand, their limitations and most importantly their impact on global and domestic economic trend. Apart from this, we have also learned some practical knowledge which will be very much useful in our near future. Once again, thank you for taking the time to meet with us. We hope that you feel as good about our interview as we do. We look forward to hearing from you, and We hope to be working with you and your co-operation soon. Sincerely, On behalf of managers group

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