State of Flux
April 11, 2006
by Meyer Sosland
The European pasta industry is trying to adapt its business model in the face of significant pressure from food retailers and the need for consolidation
by Richard Verhoeff
Editor’s note: This article is based on a presentation made by Rabobank International’s Richard Verhoeff at the Third Pasta World Congress in October 2005.
The European pasta industry finds itself in a considerable state of flux. The pasta market in Europe will remain a valuegrowth market characterized by many highly professional competitors, but pasta producers face significant pressure from food retailers.
Retail-supplier relationships will continue to be intense in the forthcoming years, with retailers increasing the number of private labels on their shelves. Some segments will even become commoditized, making cost leadership a necessity. Moreover, the industry is facing overcapacity and there is a need for further consolidation.
A STABLE MARKET Most diets come and go, which was the case with the lowcarb fad that became popular in the early part of this decade, particularly in the U.S. The European pasta market was not significantly impacted by the low-carb craze, which featured the Atkins and South Beach diets.
With an ongoing popularity of the Mediterranean diet, which includes a high intake of cereals, the European pasta market maintained modest value growth rates — between 3-4% — during the last decade, while volume growth has plateaued.
Some European consumers are trading up as they try new types of premium, high-quality products while other consumers have become increasingly price sensitive.
As a result, the European pasta market has become polarized. Premium products are slowly increasing their share as are discount alternatives, thus squeezing out the middle market.
THE ITALIAN INFLUENCE Italians are by far the main consumers of pasta. Pasta is a staple in the Italians’ diet and their annual intake of more than 28 kilograms (kg) stands supreme in Europe. The rate in France, for example, is 7 kg per capita, per annum. German consumption is 6 kg per capita, per annum, while Spain’s intake is 5 kg.
With more than 3 million tonnes of pasta products, Italy is the world’s largest pasta producer and the sourcing hub for the European market. Italian exports account for 48.5% of domestic production and that percentage continues to grow each year. Germany (22% of total export), France (14%), and the U.K. (11%) are the main destinations.
A significant price differential factor of almost two exists between the domestic and export markets. Italian producers are the main private label suppliers for European retail trade, and in addition, use exports to fill up their production capacity. As a result, the European pasta market is suffering from overcapacity.
Russia and Turkey are predominantly domestic producers but can have a major influence in the midterm if these countries can solve their quality and logistics issues. The majority of Turkish pasta, for example, is soft wheat-based, whereas European consumers increasingly prefer hard durum varieties.
Although supermarkets such as Carrefour and Tesco remain the main channel for pasta purchases, discounters such as Aldi and Lidl will become an even more dominant force in Europe as consumers remain price sensitive.
The pasta segment is more prone to discounting than other food segments. This has led to fierce competition based on a limited number of specs. Suppliers will be confronted with continued price pressure and an expectation to supply at lower costs. Furthermore, European food retailers increasingly are in demand of pan-European sourcing with local competitive edge.
In general, private label products will increase in importance across the European food and beverage sector.
Retailers increasingly apply private label products to support their overall retail brand. Take, for instance, Spain, where private label pasta already accounts for 60% of sales.
An increasing number of consumers accept private label products as they have shifted from a single, low-cost alternative to a multiple price/quality range. Premium brands have become less differentiated from each other. The challenge for branded pasta producers lies in creating a must-have shelf position for established key brands supported by strong new product development schemes. The challenge for private label suppliers lies in delivering "brand-like" solutions to their retail customers at private label prices
MORE CONSOLIDATION In 1992, there were more than 250 pasta producers in the E.U. The market was very fragmented with many small-scale, family-owned operations which generated sales below €50 million (U.S.$60.2 million). As the European pasta market stabilized, pasta producers where urged to rationalize.
Fourteen years later, less than 190 producers are supplying the European consumer. Going forward, Rabobank expects a further reduction of these small-scale operations that are not able to adapt to the changing dynamics, resulting in around 165 producers by 2012.
The diversity of consumer demand has resulted in many small factories, short runs and manufacturing complexity. Through increased consolidation and further restructuring of production lines, many producers were able to increase their capacity utilization. But Italian producers, for instance, are still running at only 64% capacity and the European industry continues to experience some oversupply.
The European marketplace remains competitive with several dominant branded players but a strong demand for private label suppliers. Most of the larger players have traditionally held a strong position in their domestic market and have gradually internationalized, but with the exception of Barilla, there is not a pan-European player yet. The industry offers ample room for growth, both organically and by acquisition.
OUTLOOK Going forward, the pasta market will remain a value-growth market throughout Europe, characterized by many highly professional competitors. The future for European pasta producers is not gloomy, but sizeable action is needed to respond to an ever-changing environment. Many of Europe’s pasta producers will be qualified to adapt to the changing demands. However, some companies will not, because they are not able to improve their cost side by raising efficiency or are not able to find new, stable growth platforms.
The new E.U. member states in Central and Eastern Europe can provide pasta producers with such a growth platform. Although there is already a high penetration level of pasta products, a switch to higher quality is anticipated, so less soft wheat-based pasta and more durum-based pasta is expected as disposable income will increase and the retail channel will continue to develop in this region.
New product development will be a key element for sustainable success in the pasta industry, although it will be very complex. The pasta industry has not been very innovative over the last decade. Innovation has primarily involved incremental brand extensions, but relevant innovation will be rewarded by both consumers and retailers.
As integrated pasta producers benefit from purchasing advantages and a secure supply of raw materials and continuous interaction, Rabobank expects several producers — especially branded operations — to drop this integrated model and source for high-quality ingredients from third-party suppliers.
Pasta producers with a clearly defined strategy, based on the understanding of individual markets and industry drivers and supported by a strong and in-demand portfolio of products will be able to overcome these challenges and respond to an industry in flux. WG
Richard Verhoeff is an industry analyst in the food and agribusiness research department at Rabobank International, Utrecht, the Netherlands. He can be reached at Richard.Verhoeff@Rabobank.com.
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