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But Big Challenges May Wipe Out Optimistic Outlook

But Big Challenges May Wipe Out Optimistic Outlook

It's only natural to focus on what's ahead for the food industry in 2008 as we begin a new year. While no one knows for sure what's in store, macroeconomic, social and political trends set the stage for what the industry could expect. Here is what last week's news headlines told us.

  • The economy continues to undergo seismic stress, with no letup in sight. Some economists are predicting a 50/50 chance for a recession.

  • The subprime mortgage meltdown is still unraveling, with housing values dropping, more foreclosures and hundreds of billions in losses expected from the big financial institutions. Credit is tight.

  • The world, which has gotten a lot closer, and its economies are all exerting influence. Demand for oil from the developing nations, particularly in Asia, is one reason oil prices have spiked 57% in the last year. Political instability in developing nations — some leading oil producers — threaten to curtail oil supplies. U.S. crude oil inventories are at their lowest in three years.

  • The manufacturing sector fell last month to its lowest point in five years, adding to economic pressures.

  • The environment continues in a tailspin, with dire warnings about global warming and carbon emissions. Last month the U.S. passed an energy bill not favored by the Grocery Manufacturers Association for its mandate to increase production of renewable fuels — ethanol — fivefold by 2022. This will disrupt the food chain, say critics, with conversion from food to fuel of commodity crops such as corn causing greater food inflation.

  • Rising inflation, especially food, is expected to continue in 2008. One report listed food inflation at a 25-year high, driven by world economic growth, a weak dollar and increased use of corn to make ethanol. If the trend continues, it will eventually impact consumer spending.

While no one wants to be a grinch to spoil the optimism expressed by retailers in SN's 2008 outlook story on Page 1, the above news will result in big challenges for the food industry, even though retail sales have held up pretty well. Most important, said Bill Bishop of consulting firm Willard Bishop, is the economic downturn. “This will influence shopper reaction to retailers' value proposition,” he said.

He sees two forces at work: “the macro impact on demand; and retailers' pricing strategies that focus on items — in many respects, on produce — [prices] going up in single and double digits.” How do you maintain a strong value proposition facing increased food inflation and other pressures on consumer spending, he asks?

Furthermore, there is the coming of a new presidential administration. “People are impatient with the competence of government today,” said Bishop. He anticipates an activist government that is empowered by consumers' displeasure with all that is happening. That translates into more regulations.

“You can feel there is real impetus that will drive social responsibility on the environment and lifestyle factors that affect people's health today. Somebody will intervene in that process, and a lot of those interventions won't be that good for everybody.” Expect to buck soft sales in the aisles and tackle surprises ahead. Good luck in 2008!