Product and Service
companies, who are grouped in meat processing - pork sector of food industry, primarily produce and process commodity fresh meet - pork.
Demand for Product and Service
Pork processing industry is mature and has been growing slowly in terms of sales volume but declined in the recent year. Competition from alternative protein/meet limits transition of costs from feeding end to consumer end.
Sector’s current, trend, causes behind trend, and future
Current and Trend
- A shift in the current food and beverage market is becoming more apparent in the past several years, which is consumers’ preference in higher quality and better taste products.
- The sales in pork processing industry have been weak under the huge pressure from competition of other sources of protein such as chicken, beef, and seafood.
- The price cap created by downturning sales pressure, together with increasing feeding costs resulted from the increasing grain (corns or soybeans) price, squeezes the space for profit growth.
- The only effective way for hog producers/port processor to improve their profitability is cutting feeding costs by sourcing cheaper feeding grains.
Causes behind the trend
- As what has happened in other food and beverage industries, we think there are three similar fundamental drivers behind consumers behavior’s shifting to products with higher quality and better taste:
- Demographic changes
Population growth comes from aging population, which is a natural result of longer life, and the increasing young population. Benefiting from booming real estate and other wealth’s accumulation, older people usually has bigger purchasing power and thus more likely to choose premium products. It is also understandable for younger consumers to choose high quality food and beverage because they are less family burden and they are more likely to be influenced by consumption climate.
- Economy factors
Consumers whose purchasing powers are most vulnerable to the challenging economy in the past 10 years are only those who usually consume below premium food and beverage products. In fact, rising real estate property price driven by quantitative easing policies should have given more confidence on purchasing higher premium food products for consumers with higher income who are less likely to be impacted by challenging economy.
- Consumers’ preference
Increasing awareness among consumers that high quality protein means healthier life may play a role in the shifting of consumers’ preference away from pork.
The unfavorable climate in the pork consumption market creates a cap on pork price and makes it more difficult for hog producers to transfer increased feeding expenses to consumers since by doing it the whole industry may lose more revenue.
We may have to admit that we are probably not able to see any fundamental changes in near future among those causes behind the current trend in pork industry. It means that shrinking of sales growth will continue. Recovery of economy may bring some new changes. However, we do not still know if increasing income will bring more consumption for pork or for other type of meets. At the same time we think grain price will stay at high level fueled by the demand from developing countries.
Therefore, we think companies’ profitability in this industry will be possibly improved as supply of feeding crop increased and price fell. However, companies may also have to stay with low margin for a longer time until the supply of feeding product volume goes.
General Financial Performance of Companies In the Sector
This is a sector that has experienced slow growth (1-2% annually) in demand between 2015 and 2017 and a decline (1-2% annually) in 2018 as indicated by changes in organic volume of some of typical company. Unfavorable consumers’ preference causes huge downward pressure on price of pork and intensive competition while increasing feeding grain costs created need for increasing price. In such a situation, companies have been forced to raise price, which may be the reason behind the declining sale volume as a result of competition disadvantage with alternative meet/protein food. In order to improve profitability, companies found that they have to lower their production costs, the feeding grain mainly. However, it is obviously not sustainable in the current grain market. In addition, due to the market pressure on revenue companies have to spend more on selling and marketing, which in return worsen margins. The typical gross margin in this sector is about 21% and operating margin is about 12% (2018).