Bank Austria Sector Report on Food Industry:
Weak foreign demand puts food industry under pressure
- Decline in producer prices dampened sales in 2014 – exports supported industry activity
- No appreciable growth acceleration expected in 2015: prices remain under pressure, sales stagnating
- Foreign trade account worsening over long term
- Success factors, such as demand from Eastern Europe and qualitative improvement in product range, lose traction
- Demographics and demand saturation slow market growth in long term, without stopping it
Austria's food industry has still not effectively recovered after the weak growth of the 2014 fiscal year. Food production in 2014 grew 0.9%, which is slightly above the average for the last seven years, but declining producer prices led to a slight decline in sales, as shown by the latest sector report by Bank Austria economists on the food industry. Weak domestic demand in particular was responsible for the below-average performance of the industry in 2014 – industry sales reached EUR 16.4 billion in the previous year. Spending on food, beverages and outside catering stagnated in Austria in real terms. Industry activity was mainly supported by export demand, which in 2014 provided for an increase in food exports by 4 percent to EUR 7.4 billion and in beverage exports by 1 percent to EUR 1.7 billion. With the exception of fruits and vegetables (preparations), the exports of all major groups of goods in the food sector increased.
No growth acceleration expected in 2015
Industry activity picked up in the first three quarters of 2015. This is indicated by the 2.4 percent production increase up to August, and the increase in employment by an average of 0.7 percent up to September. Price pressure has not eased though and producer prices have fallen further, which resulted in the food industry having to post a slight decline in revenues overall. Important determinants of domestic demand are uneven and do not suggest any growth acceleration by the end of the year: consumer confidence in particular has deteriorated again significantly since the summer, dampening the positive signals from tourism and consequently demand for food. Real disposable income for private households is expected to increase by less than 1 percent in 2015, and not increase strongly again until 2016. Food demand is not overly dependent on income and prices on the whole, because food purchases can hardly be delayed. Nevertheless, in the short term demand adapts to changes in income and/or labour market conditions to a limited extent. For example, a "good financial situation" is cited as the most important motive for eating out.
In contrast with 2014, the food industry is missing foreign demand this year. In the first half of the year, food exports nominally decreased by 1 percent. The very poor reports on the status of export orders also rules out a recovery in export demand over the next few months. “Food production in 2015 will exceed the results of the previous year, and reach its long-term growth path again of an average 2 percent per year. However, the industry will probably not secure robust growth until 2016, on the basis of stronger domestic and foreign demand”, according to Bank Austria economist Günter Wolf’s summary of the current economic situation.
Foreign trade account worsening
The export-oriented part of Austrian food production has been working successfully for years for the most part, and has contributed significantly to the growth of the industry: From 2004 to 2014, industry sales rose by EUR 3.5 billion, and food exports from Austria have risen EUR 3.9 billion (including agricultural products and excluding beverages). Until 2009 Austria's traditionally negative foreign trade account for food improved. Between then and 2014, however, it slipped further into the red again to EUR 1.25 billion. In this context, Wolf said: "Austria's foreign trade deficit for food is growing because the export surpluses of dairy and meat products no longer compensate for the higher imports of vegetables, spices and fish. The disproportionately sharp rise in domestic consumer demand for fruits and vegetables in particular can no longer be covered by domestic production".
Increase in product quality loses traction
Strengthening its own competitiveness is increasingly becoming a challenge for the food industry. After the opening of the food market upon EU accession, foreign trade flows and the subsequent market consolidation have grown rapidly. At the same time, the competitiveness of the industry has improved because manufacturers had to specialise and access cheaper sources of raw materials. The proportion of more processed products within the Austrian food industry and their export successes have risen significantly.
But measured by the development of product values in foreign trade, the degree of processing of Austrian food exports has been growing more slowly for years. Additionally, products subject to little processing still dominate shopping baskets in key export segments, while more processed foods are increasingly imported at higher prices. For example, at an average of 1 euro per kilo, the export value of dairy products is far below the import value of 2.2 euros per kilo due to the high proportion of raw milk. This analysis of foreign trade values only provides information on the proportion of less processed products, and in no way questions the high quality of agricultural commodities from Austria. "A cautious interpretation reveals the quality aspect of food exports has reached its growth limit, at least as far as the industry average is concerned", said Wolf, summing up.
Demand from Eastern Europe declines
Despite the gradual opening of the food markets, products are still mainly traded under narrow regional frameworks: more than half of Austrian food exports go to Germany and Italy, 8 percent to Switzerland, and 15 percent to the new EU Member States, of which two-thirds goes to the neighbouring countries of Hungary, Slovenia and the Czech Republic. Judging by the high export growth, Austria's food industry benefited to a disproportionately high extent from the EU's eastward enlargement. Exports to the new Member States have grown by an average 13 percent per year since 2004, which is twice as quickly as exports to the EU-15. The export share for the NMS-10 (new Member States) climbed from 11 percent in 2004 to 17 percent in 2014. In part, the export successes were based on supply shortfalls in food markets, especially in the area of more processed goods, and partly due to the high demand for restructuring in local industries. In recent years, the growth of food exports to the region have weakened again. The restructuring of industry in Eastern Europe has been successful, and market saturation has grown. From 2011 to 2014, food supplies from Austria to the NMS-10 increased by only 2.5 percent on average per year, compared to 6.4 percent annually in the EU-15.
Demography and demand saturation slow industry growth, without stopping it
Demand for food is essentially determined by the number of consumers, which has grown increasingly weaker in Austria as in most parts of Europe, despite high immigration figures. At the same time, the proportion of elderly people with relatively low calorie needs is increasing. As a result, the proportion of household consumer spending on food is declining, while the demand-dampening effects of consumer saturation, influenced by demographic factors, are increasing. Three decades ago, households in Austria still spent 26 percent of their budget on food, beverages, restaurant visits and other forms of eating out - in 2014 this was only 21%. The industry can only partially compensate for the missing domestic demand with exports – at least not in Western European markets with similar consumption patterns. It is only in certain Eastern European countries that up to 30 percent of the household budget is used for food, beverages and eating out. Although the high level can very often be explained by the relatively low household income in the countries, it indicates differences in consumer behaviour that continue to exist. "Eastern Europe should offer even greater growth opportunities in the future for the domestic food industry, much in the same way as individual companies in non-European markets will continue to succeed", concluded Wolf.
Bank Austria Economics & Market Analysis Austria
Günter Wolf, Tel. +43 (0) 50505 - 41954;