World

463

Market profile
This section was originally published on November 15th 2004
1998a Consumer expenditure Food, beverages & tobacco (US$ m) Food, beverages & tobacco (% of household spending) Food Meat consumption (kg per head) Milk consumption (litres per head) Fruit consumption (kg per head) Vegetable consumption (kg per head) Confectionery, sales volume ('000 tonnes) Beverages Coffee consumption (kg per head) Tea consumption (kg per head) Alcoholic drinks, sales volume (m litres) Soft drinks, sales volume (m litres) Tobacco Cigarettes, sales volume (m units)
a

1999a 591,911 9.4 124 256 109 134 2,878 4.3 0.5 20,540 64,650 428,794

2000a 630,135 9.4 122 258 126 130 2,881 4.6 0.5 20,734 66,155 419,300

2001a 655,054 9.3 122 257 113 125 2,895 4.0 0.5 20,936 67,815 406,300

2002a

2003b

550,357 9.4 121 252 117 119 2,797 4.0 0.4 20,285 62,618 464,130

682,572 719,690a 9.3 122 259 115 125 2,895 4.0 0.5 21,168 69,895 9.3a 124 261 116 126 2,932a 4.1 0.5 21,481a 72,361a

391,400 387,006a

Actual. b Economist Intelligence Unit estimates.

Source: Economist Intelligence Unit.

Overview

The US is by far the world's biggest market for food, beverages and tobacco, worth an estimated US$720bn in 2003. US daily calorie consumption per head is the highest in the world, at 3,800. US meat consumption per head is higher than any other country in the world, unlike US consumption of fruit, vegetables and fish. In terms of sales value, the US is the worlds largest market for both alcoholic and soft drinks, and is second for cigarette sales (after China, with four times as many). The US is the world's biggest exporter of food, thanks to an efficient farming sector and an innovative food-processing industry, backed by extremely strong brands. The contribution of the agricultural sector to GDP has been constant at about 1.4% since 1999. Rapid mechanisation has led to high productivity levels, resulting in increasing exports of agricultural products. The packaged-food industry is undergoing consolidation as large domestic companies acquire smaller players. Although the US is the biggest food, beverages and tobacco market in the world, these items accounted for only 9.3% of US household expenditure in 2003, the lowest proportion of any country in the world. This partly reflects very high income levels and partly the fact that consumers are cooking less and eating out more. With statistics showing that half of every US food dollar is spent on food prepared away from home, food producers are finding themselves devoting more attention to products designed for restaurants, vending machines and other foodservice providers. While this trend is bad news for grocery retailers, foodmakers know that food eaten away from home is still food they can provide, often at higher margins. Concerns about the impact of smoking on health have put tobacco sales on a longterm secular decline. There are restrictions on the advertising, marketing and promotional activities of cigarette manufacturers, and smoking in public places is becoming increasing difficult. The tobacco industry has also been subject to a number of costly lawsuits, primarily as a result of the damaging health effects of smoking. The most significant lawsuit is the Master Settlement Agreement of 1998,

Food, Beverages and Tobacco Forecast June 2005

www.eiu.com

2005 The Economist Intelligence Unit Limited

464

World

and the industry is braced for further litigation. Food suppliers are also coming under increasing pressure to modify their products in an effort to reverse the alarming increase in obesity among Americans. Food-industry lobbyists are pitted against healthcare advocacy groups, while trial lawyers are looking for ways to apply legal strategies honed in fights against the tobacco industry to win lucrative settlements. Some food companies, such as the food and beverages giant, Kraft, and the fast-food chain, McDonalds, motivated by changing consumer sentiments and fears of class-action lawsuits, are cutting portion sizes and offering healthier menus. Demand The wealth of attractive food on offer, combined with very high income levels and relatively low prices, means that Americans have the highest calorie intake in the world, at 3,800 calories a day. Total consumer expenditure on food, beverages and tobacco was US$720bn in 2003, representing 9.3% of household spending. Demand for packaged food has been rising mainly because of an increase in the number of single-person households and pensioners. Meat consumption has grown fairly steadily for the past decade from 116 kg per person per year in 1993 to an estimated 124 kg per year in 2003. Fruit and vegetable consumption has followed a generally upward, but erratic, trend over the last ten years, as the availability of fresh produce has improved and as the health benefits of eating five servings per day have been emphasised by doctors. However, high-fat diets and excessive eating have led to a major increase in the number of overweight and obese Americans. The US National Centre for Health Statistics estimates that 65% of the population was overweight (body mass index greater than 20) or obese (body mass index greater than 30) in 1999-2002, and 30% of the population was obese. US consumers are increasingly looking to counter the effects of obesity by taking up the low-carb Atkins and South Beach diets. Total sales volume of alcoholic drinks amounted to an estimated 21.5bn litres in 2003. Consumption of premium alcoholic products has increased as qualityconscious US consumers prefer to spend more on higher-priced, better-quality products. As a result of rising health consciousness, more people prefer light beer. Consumption of spirits has declined, owing to both health concerns and high tax rates. Total sales of soft drinks reached an estimated 72.4bn litres in 2003. Among nonalcoholic beverages, soft drinks are the most popular. Coffee is much more popular than tea. The number of cigarettes sold fell to 387bn in 2003, with the percentage of adults who smoke down from 30% in 1985 to 22.7% in 2001.

Food, Beverages and Tobacco Forecast June 2005

www.eiu.com

2005 The Economist Intelligence Unit Limited

World

465

Nominal GDP (US$ bn) Population (m)b GDP per head (US$ at PPP) Private consumption per head (US$) No. of households ('000)
a

1998a 8,747 276.1 31,679 21,294 101,139

1999a 9,268 279.3 33,185 22,494 102,191

2000a 9,817 282.3 34,770 23,870 105,780

2001a 10,128 285.0 35,534 24,752 107,050

2002a 2003a 10,487 11,004 287.7 290.3 36,454 37,900 25,640 26,730 108,297 109,283c

Actual. b Resident population plus armed forces serving overseas on July 1st c Economist Intelligence Unit estimate.

Source: Economist Intelligence Unit.

Pricing

Item White bread, 1 kg (supermarket) Sugar, white, 1 kg (supermarket) Milk, pasteurised, 1 litre (supermarket) Instant coffee, 125 g (supermarket) Wine, common table, 750 ml (supermarket) Gin, Gilbey's or equivalent, 700 ml (supermarket) Cigarettes, Marlboro, pack of 20 (supermarket)

Price (US$) 2.18 2.75 1.05 4.26 7.89 7.57 6.25

% of monthly personal disposable income 0.09 0.11 0.04 0.17 0.32 0.31 0.25

Affordability rank 3 out of 52 25 out of 53 1 out of 52 2 out of 53 6 out of 51 1 out of 50 6 out of 53

Note. Affordability rank: for each country the price of an item as a percentage of monthly personal disposable income is calculated. Countries are ranked according to these percentages. The most affordable country will have the lowest percentage and be ranked first.

Supplyfood

The US has a strong and diversified agricultural sector and numerous wellestablished food-processing companies that supply most domestic needs. The leading crops are maize (corn), soybeans, wheat, tobacco, cotton, sorghum, potatoes, rice, oats and sugarbeet. The US produces about 40% of the worlds maize, 25% of its sorghum and 50% of its soybeans. According to the US Department of Agriculture (USDA), the market value of total crop production reached an all-time high of US$106.2bn in 2003, up by more than 15% on 2000. The value of animal output (including livestock and dairy products) reached an all-time high of US$106.4bn in 2001, but eased to US$105.5bn in 2003. There are more than 22,000 food-processing companies in the US. Between them, they employ nearly 1.7m workers, which is about 1% of all US employment. Most plants are small, and larger establishments account for the major portion of

Food, Beverages and Tobacco Forecast June 2005

www.eiu.com

2005 The Economist Intelligence Unit Limited

466

World

shipments. The 20 largest firms in food manufacturing account for about 35% of sales; the 50 largest firms account for 51%. Meat processing, including livestock and poultry slaughter, processing and rendering, is the largest single component of food manufacturing, accounting for 27% of sales. Other important components include dairy (14%), other food products (12%), fruits and vegetables (12%) and bakery and tortilla products (11%). Manufacturers are launching newer products in the market to attract consumers. According to the USDA, around 12,000 new products are launched every year across 14 major food categories. The giants of the US food-processing industry include Kraft Foods (sales of US$31bn in 2003), Archer Daniels Midland Co (US$30.7bn), Tyson Foods (US$24.5bn), ConAgra Foods (US$19.9bn), Sara Lee (US$18.3bn), Mars Incorporated (US$17bn), General Mills (US$10.5bn), Kelloggs (US$8.8bn) and Heinz (US$8.2bn). The industry is undergoing consolidation, with Kelloggs acquisition of Keebler Foods in March 2001 and General Mills acquisition of Pillsbury in October 2001. Tyson's purchase of beef and pork giant, IBP Fresh Meats, in 2001 made it the largest meat-processing company in the world, serving retail, wholesale and foodservice customers in the US and more than 80 countries overseas. Equity buy-outs have become commonplace in the food industry, typified by the purchase of Michael Foods by an equity firm, Thomas H Lee Partners, in November 2003 for US$1bn. Some of the major food companies have interests outside the food sector as well. Kraft Foods is part of the Altria Group, which is also the parent company of the tobacco giant, Philip Morris, as well as the biggest shareholder in the worlds second-largest brewer, SABMiller. Meanwhile, Sara Lee has diversified its portfolio to include clothing and household products in addition to its food and beverages businesses. Diversification is not a new trend in the mature US food market. Brand-swapping deals are about the only shake-ups keeping many of the industry's major players active. To find more room for growth, companies are looking to emerging markets. Companies are also opting to offer more value-added foods by either turning basic items into higher-margin products or adding established brand names to previously undistinguished products, such as Tyson chicken wings. The US is a major agricultural exporter, and trade dependency is relatively high for some commodities. Agricultural exports were US$39.5bn in 2003, whereas imports were US$22.9bn, generating a trade surplus of US$16.6bn. Exports of rice, cotton and wheat approached 50% shares of US production in the 1990s. For some fruits and nuts, the shares exported are even larger. Canada overtook Japan as the main consumer of US farm products in 2002. Mexicos imports of US farm products, under the freedom brought by the 1994 North American Free-Trade Agreement (NAFTA), have grown particularly fast, and it is now the third-largest market for US agricultural exports. The EU, Canada and Mexico are the three top sources of US agricultural imports. In spite of widespread criticism, both in the US and abroad, the farm sector remains heavily subsidised, reflecting the inherent difficulties of farming as well as the domestic farm lobbys political clout. Federal subsidies administered by the USDA jumped from US$7.2bn in 1995 to US$22.9bn in 2000, dropped to US$11bn in 2002 but then rebounded to US$17.4bn in 2003. A farm bill approved by Congress in May 2002 provides for higher subsidies over the next decade. Farm subsidies are one of the most contentious issues in international trade, with the agricultural sector in the developed world remaining heavily protected. The US, the EU and Japan impose stiff tariffs on many agricultural imports as well as

Food, Beverages and Tobacco Forecast June 2005

www.eiu.com

2005 The Economist Intelligence Unit Limited

World

467

offering their farmers subsidies to export their agricultural surpluses. The inability of the US and the EU to agree on how to reduce agricultural subsidies and improve market access was one of the reasons for the breakdown of the Doha round of trade talks in Cancn, Mexico, in September 2003. The trade talks were rescued in Geneva in September 2004 when the US and the EU agreed to cut their tariffs on farm produce and end export subsidies. The US also agreed to curb its food aid and export credit programmes and to give priority to reform of world trade in cotton. The US and the EU are at loggerheads over genetically modified (GM) foods, and the US, along with Argentina and Canada, lodged a complaint with the World Trade Organisation (WTO) in May 2003 over the EUs five-year moratorium on imports of GM foods. The moratorium was replaced in May 2004 with a scheme in which all products containing GM ingredients would have to be labelled as such, and those ingredients traceable to their source. However, some EU countries have continued to resist approving new GM crop varieties, and the US is continuing to press its complaint at the WTO, which does not expect to deliver its final report on the dispute until June 2005. Meanwhile, the EU is putting pressure on the US and other countries to protect the names of items like Champagne and Parma ham, which the US sees as generic names. Useful web links Altria: www.altria.com Archer Daniels Midland Co: www.admworld.com ConAgra Foods: www.conagrafoods.com General Mills: www.generalmills.com Heinz: www.heinz.com Kelloggs: www.kelloggs.com Kraft Foods: www.kraft.com Mars: www.mars.com Sara Lee: www.saralee.com Tyson Foods: www.tyson.com US Department of Agriculture (USDA): www.usda.gov Supplydrinks The alcoholic beverages market is a mature one and characterised by low growth. Beer in the industrys topseller, but brewers struggle against fierce price competition and greater awareness of the health risks associated with heavy drinking. As a result, many global brewers are merging operations to reduce costs and gain market share. The three main domestic players in the beer market are Anheuser-Busch, Miller Brewing Company and Adolph Coors. Anheuser-Busch was the worlds largest brewer, with 12 breweries in the US and two overseas, but has been pushed into second place by the merger between Interbrew (Belgium) and Ambev (Brazil) to create Inbev in March 2004. Anheuser-Busch owns two of the leading brands, Budweiser and Bud Light, in the premium and light beer categories respectively, along with newer brands such as Michelob Ultra, a low-carbohydrate beer. The early success of Ultra, based on the popularity of the low-carbohydrate Atkins diet, has spurred other brewers to launch their own low-carbohydrate brews. The Miller Brewing Company was sold by the tobacco giant, Philip Morris, to SAB in 2002 for US$5.6bn, creating the USs second-largest brewer (SABMiller). Some of its popular brands are Miller Lite, Miller Beer and Miller Genuine Draft. Adolph Coors is the third-largest brewery, and is looking to increase its market share by merging with
www.eiu.com 2005 The Economist Intelligence Unit Limited

Food, Beverages and Tobacco Forecast June 2005

468

World

Canadas Molson. One of its popular brands is Coors Light. Among imported beers, Corona (Mexico, owned by Anheuser-Busch) is the most popular brand. Heineken (the Netherlands) and Labatt Blue (Canada, owned by Inbev) are the other popular brands. The US is the fourth-largest wine-producing country in the world. The wine market is fragmented and led by domestic wineries such as Ernest & Julio Gallo and Constellation Brands. Ernest & Julio Gallo is the largest, with four wineries located in California. However, Constellation Brands US$1.1bn acquisition of an Australian producer, BRL Hardy, has arguably created the worlds largest winery. With Australian imports to the US rising, Constellation is set to overtake the previously unassailable position of Ernest & Julio Gallo. Other key players in the US wine market include Brown-Forman and San Francisco Wine Cellars. A recent innovation in the US wine industry is the two-buck chucka super cheap brand, Charles Shaw, which sells wine for US$1.99 a bottle. This has increased demand at home and abroad, which has also been boosted by a growing awareness in the US of the health giving properties of red wine. The spirits sector is highly concentrated among a small number of domestic and foreign players. Diageo (UK) is the worlds largest premium-brand alcoholic-drinks business and has been the most active player in the US market after buying up half of Seagram, which was controversially split between it and Pernod Ricard (France) for US$8bn. This deal took two years to approve and was finalised in December 2002 after the US Food and Drug Agency (FDA) made both companies sell off other assets. Diageo is now trying to rationalise its supply process in the US. The success of the Diageo-Pernod Ricard bid for Seagram left other interested parties, namely Bacardi (Bermuda) and Brown-Forman, out in the cold. Bacardi now may issue stock to the public after 100 years of family ownership, and would be of great interest to Diageo and others. PepsiCo (US) and Coca-Cola (US) are the leading players in the soft-drinks segment, with sales of US$27bn and US$21bn in 2003 respectively, followed by Cadbury Schweppes (with its Dr Pepper and Seven Up brands). Pepsi and Coke are bitter rivals in the carbonated-cola market, but have also diversified into new product flavours (for example, cherry and vanilla) and non-carbonated drinks. They have also tried to exploit the low-carb craze with the release of Coca-Cola C2 and Pepsi Edge. The fastest-growing non-alcoholic drink is bottled water, and Nestl currently dominates this market. Smaller players are finding niche markets for enhanced water with added vitamins and herbs. Useful web links Adolph-Coors: www.adolphcoors.com Anheuser-Busch Inc: www.anheuser-busch.com Cadbury Schweppes: www.cadburyschweppes.com Constellation Wine Company: www.cbrands.com Coca-Cola: www.coca-cola.com Diageo: www.diageo.com Ernest & Julio Gallo: www.gallo.com PepsiCo: www.pepsico.com SABMiller: www.sabmiller.com

Food, Beverages and Tobacco Forecast June 2005

www.eiu.com

2005 The Economist Intelligence Unit Limited

World

469

Supplytobacco

One of the most important regulations affecting tobacco manufacturers is the Master Settlement Agreement (MSA) of 1998, which sets standards for tobacco manufacturers and imposes restrictions on the advertising, marketing and promotional activities of cigarette manufacturers. Cigarette manufacturers are forbidden from directly or indirectly targeting children. Restrictions are imposed on cartoons, distribution of free product samples and sponsorship of events. The MSA also imposed US$2o6bn in fines on US tobacco companies, to be paid to 46 states over the following 25 years (with more, unspecified, payments thereafter) in compensation for medical costs treating smoking-related illnesses. Another US$40bn in fines had previously been agreed in separate deals with Florida, Minnesota, Mississippi and Texas, bringing the total cost to the US tobacco industry of the MSA and other deals to US$246bn. The state of California has the toughest laws related to tobacco control. These laws prohibit smoking at the workplace, including restaurants and bars, to protect passive smokers. The excise tax imposed by the Californian state government is also one of the highest among the states. Other cities and states have followed Californias lead, mainly to protect the health of employees in the hospitality industry. As well as increasing restrictions on smoking, the big US tobacco companies are also having to deal with various lawsuits, dwindling demand and the switch to non-premium brands. The four major tobacco players in the US, collectively known as Big Tobacco, are Altria Group (formerly Philip Morris), Reynolds American (a joint venture between RJ Reynolds and British American Tobacco), Loews subsidiary, Lorillard Tobacco Company (part of Carolina Group), and Vector Groups subsidiary, Liggett. Altria is the leading manufacturer with a whopping 52% market share. It owns four of the most popular brandsMarlboro, Parliament, Virginia Slims and Basic. Despite the health problems, lawsuits and rising prices associated with cigarettes, Big Tobacco remains a profitable business. Big Tobacco has avoided extinction by passing the costs of the MSA onto consumers, pumping marketing dollars into price promotions and merchandising contracts, and managing some legal victories. However, the legal pursuit of Big Tobacco is continuing, opening up new areas of dispute such as the nature of low-tar or "light" brands and the use of exploitative advertising. The US Department of Justice is also pursuing a case against the industry, citing 50 years of evidence it claims points to a cover-up of the health risks associated with smoking. Tobacco companies are researching cigarettes that they hope one day will prove to reduce the health risks associated with smoking. Another challenge to Big Tobacco lies within the industry itself. Smaller, discount cigarette manufacturers, many of which are free from the costs of the MSA, have gained nearly 15% of the market as the cost of smoking has risen. Not only has Big Tobacco raised the price of cigarettes to help pay the costs of the MSA, but federal and state taxes have also significantly boosted the retail price to more than US$7 per pack in some areas of the country. This has encouraged smuggling and contraband sales of cigarettes via the Internet and other means could represent as much as 10% of the US market. Cigarettes are the most important tobacco product, accounting for over 97% of value total sales by value of tobacco products. The most important distribution channels for cigarettes are gas stations, accounting for more than 40% of sales in 2002. In sharp contrast to cigarettes, cigar smoking has become increasingly popular over the last ten years, according to the American Cancer Society.

Food, Beverages and Tobacco Forecast June 2005

www.eiu.com

2005 The Economist Intelligence Unit Limited

470

World

Useful web links Altria: www.altria.com American Cancer Society: www.cancer.org Liggett: www.liggettgroup.com Lorillard Tobacco Company: www.lorillard.com Reynolds American: www.reynoldsamerican.com

Food, Beverages and Tobacco Forecast June 2005

www.eiu.com

2005 The Economist Intelligence Unit Limited