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The Asia Pacific Packaged Food industry may be marked by relatively strong growth in 2013 and beyond, outpacing western Europe and North America, which should have strategy implications for multinationals looking to expand their presence in the region. The industry also faces several potential risks, including food inflation, the rise of private label and food safety.

Asia Pacific Packaged Food Sales Sales Analysis By Food Category

PACKAGED FOOD GROWTHThe packaged food industry in Asia Pacific is worth about $540 billion and has grown around 11% per year from 2007-2011. While growth will moderate in 2013 and beyond, the region is still expected to grow at more than twice the global rate, with Euromonitor forecasting that Asia Pacific packaged food sales will increase by 4.7% a year through 2016, with important categories including baby food (12.3% growth) and dairy (6.6%) leading the way.

Growth in the $19 billion Asia Pacific baby food category could be supported in several emerging markets by relatively high birth rates compared to developed countries, a demographic trend that may continue to drive volumes across the entire packaged food industry for several years. In China where the one child policy has led to a birth rate closer to mature markets, growth may be underpinned by middle class, urban families, often with dual incomes, using their rising disposable income to trade up to higher priced products.

Urbanization across the region supports rapid growth in all packaged food categories. As city populations increase consumers seek out packaged foods that offer convenience, while higher incomes encourage consumers to trade up from value tier brands to mid- and premium-tier products.

KEY THEMES » Sales Growth Persists –

Gains expected for all major categories, led by baby food and dairy.

» M&A – Multinationals may pursue acquisitions in Asia.

» R&D in Focus – Multinationals localize new product development.

» Food Safety – New safety initiatives may shrink margins.

» Food Inflation – A pick up in inflation may lower volumes, force consumers to trade down.

» Private Label – Retailers accelerate investment in private label portfolios.

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Q1 2013

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Q1 2013

Dairy Market Share

MULTINATIONALSAsia's relatively strong growth rate should attract greater attention from multinationals based in western Europe and North America as they look to offset weakness in their home markets where the economic downturn has led to more frugal consumer behavior. Euromonitor predicts North America packaged food sales will grow just over 1% a year through 2016, with sales in western Europe declining 0.3% per year.

In the fast growing baby food category, the top three companies are multinationals based outside the region. In the $90 billion dairy category, multinationals play a less dominant role, with China Mengniu, Inner Mongolia Yili and Meiji holding the top market shares. An increase in acquisitions and investment in locally based R&D facilities should play an important role as multinationals move into new categories and regions, create new products for regional palates, and look to protect their market share.

Baby Food Market Share

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RISKSRisks for Asia Pacific packaged food in 2013 include rising inflation, increased private label penetration and food safety issues. Elevated costs for raw materials including corn, wheat and soybeans could push food inflation higher, potentially lowering packaged food volumes and increasing consumer trade-down—particularly in emerging markets where a higher proportion of consumer income goes toward food. Increasing demand for raw inputs driven by changing dietary habits, combined with adverse weather conditions, has led to tighter inventory levels. Limited supply of raw materials creates a potential for an acceleration of food inflation in the event of additional weather shocks.

Asia food retailers are expanding private label offerings to increase consumer loyalty and improve profitability. Current penetration rates in the region are extremely low compared to mature markets including Germany, Switzerland and the United Kingdom. With private label penetration rates as little as low single digits in some markets and categories, retailers see a significant opportunity to expand their private label portfolio. As private label takes a greater amount of shelf space, branded food companies may need to increase their marketing spend to protect market share, particularly given the price sensitive nature of lower income consumers in emerging markets.

Input Cost Trends

CONCLUSION » The Asia Pacific region has experienced significant

growth in packaged foods, which is expected to continue in 2013 and beyond.

» Multinational companies suffering from downturns in western Europe and North America will increasingly look to Asia for growth.

» Rising food inflation, an increase in private label and

food safety concerns are risks that could impact costs and profitability in 2013 and beyond.

Surveys show that consumers in emerging markets, such as China, are increasingly concerned about food safety. Initiatives to address these concerns may raise costs and it remains to be seen who will shoulder these increases, which may vary by category. Additional costs borne by the manufacturer has the potential to hurt margins, particularly for smaller companies who do not have the opportunity to spread the costs across a large volume base.