Sector Report - 5th in a series

T his Eurosif sector report describes the major social and environmental challenges facing the foodproduction industry, and the associated risks and opportunities these pose for long-term returns.The food sector can be divided into “upstream” activities prior to industrial processing

(e.g. agricultural industries) and “downstream” activities (e.g. food processing). This report concentrates onthe “downstream” activities, including packaged foods but not alcoholic beverages.

FOOD OVERVIEW● The food industry is made up of fresh (€395 billion) and

processed (€1.2 trillion) products. Market sizes, as indicatedby the value of retail sales, are much larger in high-incomeareas such as the European Union, the United States andJapan, however market growth has generally been fasteramong emerging markets.1

● The food production industry is relatively concentrated withthe top 4 players (Nestlé, Unilever, Kraft and Groupe Danone)

accounting for more than 50% of the global marketcapitalisation of the top 30 global food companies.2

● Health and nutrition are key drivers of sales growth in thefood sector and offer significant pricing power and marginopportunity.3 Food products considered to be healthy includethose which, for example, are organic, fortified with vitaminsor minerals, contain reduced levels of sugar or fat, are high-fibre, soy-based or gluten/lactose-free.4

CASE STUDIES

“Only take short showers and stopironing your clothes or the lights will goout.” This was the message from theBrazilian government in 2001, urging itspeople to cut energy consumption by20%. Brazil depends almost entirely onhydropower for their electricity and thelights had begun to flicker because ofdrought.

Unilever’s top management in LatinAmerica were determined that the

company would play its part to relievethe crisis. They issued this challenge toUnilever food factories in the region:“cut your water use by a million cubicmetres in two years,” which was about16.5% of their water consumption in2002.

This challenge marked the begin-ning of Project Medusa. At the Goiâniafactory, water is used to wash and cookfresh tomatoes, clean equipment and

cool machinery. In the past, the waterthat evaporated during cooking wassent directly to the water treatmentplant, but it is now used for cooling andto wash equipment. Project Medusa hasachieved a reduction in total waterconsumption of 7.9% and a 14.7%reduction in the load per tonne ofproduction.

Source: www.unilever.com

FOOD TRENDS● Emerging markets are attractive for food producers due to an

increase in population as well as increases in per capita foodconsumption. Changes in diet, made possible by income growth,are expected to double demand for meat by consumers in theseemerging markets by the end of 2020.8 This increase in meatconsumption however creates a tug of war on the demands forarable land to grow crops versus grazing land to feed livestock.

● The food industry is critically dependent on natural resources.Access to arable land, fertile soil and reliable water supplies isbecoming more and more difficult due to unsustainableagricultural practices, the effects of climate change, deforestation,and competition between land for food versus land for biofuel.Additionally, the correlation between increasing consumer wealthand demand for meat is already putting constraints on watersupplies, as the production of one kilogram of beef requires around16,000 litres of water.9

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1 Economic Research Service, “New Directions in Global Food Markets”, February 2005.2 Goldman Sachs Global Investment Research, “Global Food & Beverages: Integrating ESG”,February 2007.3 JP Morgan, “Obesity: Reshaping the global food industry”, October 2005.4 Bernstein Research, “Big Thinking on Small Caps: Healthy Eating Trends Fortify Growth in PackagedFoods, but Exposure Increases for Smaller Cap Companies”, March 2007.5 Functional food, or medicinal food, is any fresh or processed food claimed to have a health-promo-ting and/or disease-preventing property beyond the basic nutritional function of supplying nutrients.

6 European Commission, “Green Paper: Promoting healthy diets and physical activity: aEuropean dimension for the prevention of overweight, obesity and chronic diseases”,December 2006.7 Somo, “The Profit Behind Your Plate: critical issues in the processed food industry”,December 2006.8 Economic Research Service, “New Directions in Global Food Markets”, February 2005.9 Compared to 1000 litres of water needed to produce 1 kilogram of cereal. (Water for Life– Water for Food, 2007).

● Fast-paced lifestyles create an increase in demand fromconsumers for more timesaving and ready-to-eat food products.Higher income brackets tend to ask for healthier options orfunctional food5 choices, which may cost more, whereas in lowerincome countries people are eating more affordable processedfoods, which may contain high levels of fat and sugar. Thiscontributes to the alarming growing levels of obesity worldwide.

● The EU estimates that obesity currently accounts for up to7% of health care costs and is expected to rise.6 Governments arereceiving pressure from international health organisations to bringthis figure down, posing a challenge for the food industry, which isbeing asked to adapt to these changes.

● Food retailers are placing more and more pressure on foodproducers to be competitive. Supermarkets want to deal with asfew suppliers as possible and are reducing products on their shelvesto 3 or 4 leading brands, often alongside their own private label.7

Challenging factories to save water: Unilever

While the United States, theEuropean Union and Japan currentlyaccount for about two-thirds of globalfood sales, emerging markets anddeveloping countries account for overthree-fourths of total global foodconsumers. Groupe Danone is especiallykeen on expanding into emergingmarkets, and has adapted their productsand strategy to do so. Their recentinitiative launched in Bangladesh with

Grameen Bank (Grameen Danone FoodsSocial Business Enterprise inBangladesh) allows Danone to developand distribute products in partnershipwith local NGOs, thus bringing dailyhealthy nutrition to low income, nutri-tionally deprived populations. GrameenDanone will predominantly rely on solarenergy and biogas energies for itsoperations as well as the use ofinnovative, environment friendly packa-

ging solutions for its products. Theinitial focus will be the launch of aneasily affordable dairy product, whichhas been specifically developed to fulfilthe nutritional needs of children inBangladesh by bringing them thebenefits of milk and other micro-nutrients they lack.

Source: www.danone.com

Adapting to emerging markets: Groupe Danone

Nutrition is an integral part ofNestlé’s corporate strategy as evidencedby the commitment of Mr. PeterBrabeck-Letmathe, CEO of Nestlé:“Nestlé will evolve from a respected,trustworthy Food Company to a res-pected trustworthy Nutrition, Healthand Wellness Company.” Nestlé’s jointventure programme with General Mills

(Cereal Partners Worldwide) is workingto reduce levels of sugar and salt incereals incrementally. Since 2004 thesalt in breakfast cereals has beenreduced by 30%. Nestlé has reduced saltlevels in overall products by 5,000tonnes since 2002 and aims to bring thesalt level down to 75% of the quantityin the original recipes by 2010. They are

also working on lowering sugarquantities in products by 16% before2012. These reduction programmes willcontinue as long as consumer prefe-rence and product safety (since salt isan important preservative) is sustained.

Source: www.ir.nestle.com

Making healthier products: Nestlé

Eurosif wishes to acknowledge the support and direction provided by the Food Sector Report Steering Committee:Bank Sarasin & Co. Ltd

Crédit Agricole Asset ManagementSAM Group

Société Générale Asset ManagementSchroders

This sector report, created with the support of the European Commission, has been compiled by:

11 avenue de l’Opéra • 75001 Paris, FranceTel/Fax : +33 (0)1 40 20 43 38

contact@eurosif.org • www.eurosif.org

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Market Capitalisation of Top Food Companies Obesity (BMI* > 30 kg/m2) increase in adults from 2005 to 2015

May 2007

Food Producers

EU companies *BMI: Body Mass Index

food2 #212 2/07/07 10:01 Page 4

KEY CHALLENGESSOCIAL & ENVIRONMENTAL ISSUES MATERIAL RISKS & OPPORTUNITIES● 1 billion adults and one in ten children (with 30-45

million of them classified as obese) are overweight in theworld. Increases in sugar and saturated fats, combined withreduced physical activity, have led to obesity rates that haverisen three-fold or more since 1980 in some areas of NorthAmerica, the United Kingdom, Eastern Europe, the MiddleEast, the Pacific Islands, Australasia and China.10

● As populations consume cheaper, ready-to-eat processedfoods rather than fruits and vegetables they may beincreasing their risks of cancer or heart disease. Overall,2.7 million deaths are attributable to low fruit and

vegetable intake, with 85% of those deaths fromcardiovascular diseases and 15% from cancers.10

Additionally, the use of pesticides on crops could haveadverse affects on human health.

● The food industry has been accused of irresponsiblemarketing from “super sizing” their products to targetingchildren with high-fat and high-calorie foods. In 2004,the UK Department of Health said that they hoped foodadvertisers would take a more responsible attitude to foodpromotion to children, with a threat that this may beregulated if the situation has not improved by 2007.11

● Food producers may have to focus their R&D efforts onhealthier and functional foods in order to keep andexpand their client base. New natural and organicproducts could also stimulate sales volume and createpricing power for companies.

● Consumers, press, governments and regulators areincreasingly focused on health with reference to therole that food companies play. This has led to a numberof food producers being sued on false health claims andwould require companies to allocate budget to dealingwith lawsuits.

● Potential restrictions on advertising to children mayresult in lower sales growth and diminished brand equity,whereas honest marketing could translate intosustainable sales growth and margin expansion.12

● Potential new regulation concerning labelling mayresult in higher costs for the food industry (e.g. R&Dcosts could increase in order to support European FoodSafety Authority (EFSA) approval12), and brands could beweakened by requirements to make the nutrition labelsbigger on packaging.

● Consumers are increasingly aware of dangers of microbial contamination as the most important threatto food safety. According to the World HealthOrganisation, major foodborne illnesses from micro-organisms such as salmonella, e.coli and listeriosis areamong the greatest risks. These can occur at any timeduring harvest, storage, processing, distribution,handling, or preparation of food items.

● Fears related to food production have been heightenedby recent food safety shocks, such as cattle infectedwith Bovine Spongiform Encephalopathy (BSE).Consumers assume that food products reachsupermarket shelves via a production and processing

system that is hygienic and ensures product safety.13

However, one weak link in the chain can result in unsafefood, which may cause serious hazards to consumers andconsiderable cost to food chain suppliers.

● Most European consumers state that they do not wantgenetically modified food ingredients in products theybuy, partly due to fears about unknown consequences ofthese ingredients on consumers’ health and partly due toconcerns of possible dangers to the environment.

● The success of food processing companies is dependenton the loyalty of the consumer to each individual brandand product. In turn, loyalty relies on the consumer’strust in the quality and safety of products.14

● While the food industry follows many rigorous qualityassurance procedures, market opportunities exist forcompanies that favour partnerships with suppliers,transporters, wholesalers and retailers, as well as with theconsumer and the catering industry, which are no lessresponsible for the preparation of safe meals.13

● Food traceability in the supply chain is becoming moreand more important to consumers. Industry analysts

calculate that in 2000, American companies spent $1.6trillion on supply-related activities, including themovement, storage, and control of products across thesupply chain. Supply management, traceability and goodlong-term relationships with suppliers are increasinglyimportant areas of competition.15

● Manufacturers of food products face increased exposureto food safety and nutritional claims, so the threat oflitigation is very real. The potential legal consequencesand catastrophic losses, both directly on sales andindirectly on reputation, of making or distributingcontaminated food products that might cause illness ordeath could be very costly to companies.

● The food industry is heavily dependent on reliablesupplies of fresh water. About 70% of the world’s freshwater is consumed by agriculture activities. This figuresapproaches 90% in Asian countries such as China andIndia, which rely on extensive irrigation.16

● Land degradation, soil erosion and deforestation arethreatening the world’s croplands. The food industry isunder constraints to try to intensify the use of landalready under cultivation without further damaging theenvironment, while slowing the expansion of agricultureinto currently forested or grassland areas.17

● Climate change is a potential threat to the food industryas it affects farming productivity. An increase intemperatures, drastic changes in precipitation patternsand an escalation of extreme weather (e.g. hurricanes)could severely hurt crop production, and thus gravelyimpact companies in the food sector.

● Failure to address water shortage issues could lead tohigher food prices and expensive food imports for waterscarce countries. This may create conflicts of demandbetween local communities and world food producers.

● Food companies that engage with agricultural suppliersin order to find solutions to pressing environmentalissues facing the sector should be able to maintainproductivity and improved long-term supplierrelationships and may avoid costs associated withlitigation and remediation of environmental impacts.

● A positive public environmental image can help createmarket opportunities with consumers who value moresustainably produced food.

● The rising trend towards using biofuel may divert cropcultivation away from food production creatingcompetition between automobile owners and foodconsumers. This has already resulted in drastic increasesin food costs, particularly for the world’s poorest people.

Safety of FoodProducts

Land Use & Water Shortage

● Many leading food production companies have operations in countries where freedom of association isrestricted or even forbidden (e.g. Columbia, Philippines, Kenya,Brazil, China, etc.). Unionised workers in these countries mayface intimidation and pressure from their companies making itdifficult for employees to exercise this basic right.

● Food processing jobs often consist of repetitive tasks thatlead to cumulative trauma disorders. This sector has one of thehighest incidences of injury and illness among employees.Injury rates however vary among specific food manufacturingindustries, ranging from a low of 1.8 per 100 workers in retailbakeries to 12.9 per 100 in animal slaughtering plants, thehighest rate in food manufacturing.18

● Women hold an estimated 18% of low-skilled and low-paid jobs in the food, drink and tobacco industries (2004figure), and there has been little, if any, improvement intheir position in recent years. Women currently compriseone third of all workers, but earn about two-thirds thewages of men in comparable jobs.19

● Farm work is one of the world’s most hazardousoccupations and is often associated with violations of coreILO labour standards. For example, 70% of the world’schild workers are employed in agriculture. Over 90% ofhired farm workers do not have their work place rightsenforced by labour inspectors, and fewer than 10% of theworld’s hired farm workers belong to unions.20

● There have been several cases of alleged maltreatment of temporary workers and discrimination at leading foodprocessors. These could lead to increased legal fees forfood companies, as well as a damaged reputation.

● Food companies could improve difficult workingconditions by creating ergonomic programs that wouldcut down on work-related accidents and injuries. Newtechnology is increasingly being applied to variousfunctions, including inventory management, packingand inspection. However this should be properlyimplemented to avoid massive lay-offs.

● Poor relationships with workers and discriminatorygender treatment may impact a company’s ability toretain and motivate employees. Companies demonstra-ting superior employee management practices could berewarded with undisrupted production and reducedoperating costs.21

● Food producers could increase sales through an improvedreputation and better consumer loyalty by engaging inFairtrade practices. 50% of adults recognise this brand inthe UK, up from 39% in 2005. Globally, Fairtradebenefits nearly 5 million people - farmers, workers andtheir families – in 49 developing countries.23

Labour Standards& Human Rights

10 World Health Organisation, “World Health Report 2002”.11 UK Department of Health, public health White Paper “Choosing Health?”, 2004.12 JP Morgan, “Obesity: Reshaping the global food industry”, October 2005.13 Economic Research Service, “New Directions in Global Food Markets”, February 2005.14 European Food Information Council, “From Farm to Fork”, June 2006.15 United States Department of Agriculture, Economic Research Service, “Food Traceability: One Ingredient in a Safe and Efficient Food Supply”, April 2004.16 Shah & Strong, “Food in the 21st Century: from science to sustainable agriculture”, October 1999.

17 Earthtrends: the environmental information portal: http://earthtrends.wri.org/features/index.php?theme=8.18 www.ilo.org/public/english/dialogue/sector/sectors/food/safety.htm.19 www.ilo.org/public/english/dialogue/sector/sectors/food/gender.htm.20 www.ilo.org/public/english/dialogue/actrav/new/agsymp03/index.htm.21 Goldman Sachs Global Investment Research, “Global Food & Beverages: Integrating ESG”, February 2007.22 www.fairtrade.org.uk

Consumer Health & Nutrition

food2 #212 2/07/07 10:01 Page 2

Sector Report - 5th in a series

T his Eurosif sector report describes the major social and environmental challenges facing the foodproduction industry, and the associated risks and opportunities these pose for long-term returns.The food sector can be divided into “upstream” activities prior to industrial processing

(e.g. agricultural industries) and “downstream” activities (e.g. food processing). This report concentrates onthe “downstream” activities, including packaged foods but not alcoholic beverages.

FOOD OVERVIEW● The food industry is made up of fresh (€395 billion) and

processed (€1.2 trillion) products. Market sizes, as indicatedby the value of retail sales, are much larger in high-incomeareas such as the European Union, the United States andJapan, however market growth has generally been fasteramong emerging markets.1

● The food production industry is relatively concentrated withthe top 4 players (Nestlé, Unilever, Kraft and Groupe Danone)

accounting for more than 50% of the global marketcapitalisation of the top 30 global food companies.2

● Health and nutrition are key drivers of sales growth in thefood sector and offer significant pricing power and marginopportunity.3 Food products considered to be healthy includethose which, for example, are organic, fortified with vitaminsor minerals, contain reduced levels of sugar or fat, are high-fibre, soy-based or gluten/lactose-free.4

CASE STUDIES

“Only take short showers and stopironing your clothes or the lights will goout.” This was the message from theBrazilian government in 2001, urging itspeople to cut energy consumption by20%. Brazil depends almost entirely onhydropower for their electricity and thelights had begun to flicker because ofdrought.

Unilever’s top management in LatinAmerica were determined that the

company would play its part to relievethe crisis. They issued this challenge toUnilever food factories in the region:“cut your water use by a million cubicmetres in two years,” which was about16.5% of their water consumption in2002.

This challenge marked the begin-ning of Project Medusa. At the Goiâniafactory, water is used to wash and cookfresh tomatoes, clean equipment and

cool machinery. In the past, the waterthat evaporated during cooking wassent directly to the water treatmentplant, but it is now used for cooling andto wash equipment. Project Medusa hasachieved a reduction in total waterconsumption of 7.9% and a 14.7%reduction in the load per tonne ofproduction.

Source: www.unilever.com

FOOD TRENDS● Emerging markets are attractive for food producers due to an

increase in population as well as increases in per capita foodconsumption. Changes in diet, made possible by income growth,are expected to double demand for meat by consumers in theseemerging markets by the end of 2020.8 This increase in meatconsumption however creates a tug of war on the demands forarable land to grow crops versus grazing land to feed livestock.

● The food industry is critically dependent on natural resources.Access to arable land, fertile soil and reliable water supplies isbecoming more and more difficult due to unsustainableagricultural practices, the effects of climate change, deforestation,and competition between land for food versus land for biofuel.Additionally, the correlation between increasing consumer wealthand demand for meat is already putting constraints on watersupplies, as the production of one kilogram of beef requires around16,000 litres of water.9

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1 Economic Research Service, “New Directions in Global Food Markets”, February 2005.2 Goldman Sachs Global Investment Research, “Global Food & Beverages: Integrating ESG”,February 2007.3 JP Morgan, “Obesity: Reshaping the global food industry”, October 2005.4 Bernstein Research, “Big Thinking on Small Caps: Healthy Eating Trends Fortify Growth in PackagedFoods, but Exposure Increases for Smaller Cap Companies”, March 2007.5 Functional food, or medicinal food, is any fresh or processed food claimed to have a health-promo-ting and/or disease-preventing property beyond the basic nutritional function of supplying nutrients.

6 European Commission, “Green Paper: Promoting healthy diets and physical activity: aEuropean dimension for the prevention of overweight, obesity and chronic diseases”,December 2006.7 Somo, “The Profit Behind Your Plate: critical issues in the processed food industry”,December 2006.8 Economic Research Service, “New Directions in Global Food Markets”, February 2005.9 Compared to 1000 litres of water needed to produce 1 kilogram of cereal. (Water for Life– Water for Food, 2007).

● Fast-paced lifestyles create an increase in demand fromconsumers for more timesaving and ready-to-eat food products.Higher income brackets tend to ask for healthier options orfunctional food5 choices, which may cost more, whereas in lowerincome countries people are eating more affordable processedfoods, which may contain high levels of fat and sugar. Thiscontributes to the alarming growing levels of obesity worldwide.

● The EU estimates that obesity currently accounts for up to7% of health care costs and is expected to rise.6 Governments arereceiving pressure from international health organisations to bringthis figure down, posing a challenge for the food industry, which isbeing asked to adapt to these changes.

● Food retailers are placing more and more pressure on foodproducers to be competitive. Supermarkets want to deal with asfew suppliers as possible and are reducing products on their shelvesto 3 or 4 leading brands, often alongside their own private label.7

Challenging factories to save water: Unilever

While the United States, theEuropean Union and Japan currentlyaccount for about two-thirds of globalfood sales, emerging markets anddeveloping countries account for overthree-fourths of total global foodconsumers. Groupe Danone is especiallykeen on expanding into emergingmarkets, and has adapted their productsand strategy to do so. Their recentinitiative launched in Bangladesh with

Grameen Bank (Grameen Danone FoodsSocial Business Enterprise inBangladesh) allows Danone to developand distribute products in partnershipwith local NGOs, thus bringing dailyhealthy nutrition to low income, nutri-tionally deprived populations. GrameenDanone will predominantly rely on solarenergy and biogas energies for itsoperations as well as the use ofinnovative, environment friendly packa-

ging solutions for its products. Theinitial focus will be the launch of aneasily affordable dairy product, whichhas been specifically developed to fulfilthe nutritional needs of children inBangladesh by bringing them thebenefits of milk and other micro-nutrients they lack.

Source: www.danone.com

Adapting to emerging markets: Groupe Danone

Nutrition is an integral part ofNestlé’s corporate strategy as evidencedby the commitment of Mr. PeterBrabeck-Letmathe, CEO of Nestlé:“Nestlé will evolve from a respected,trustworthy Food Company to a res-pected trustworthy Nutrition, Healthand Wellness Company.” Nestlé’s jointventure programme with General Mills

(Cereal Partners Worldwide) is workingto reduce levels of sugar and salt incereals incrementally. Since 2004 thesalt in breakfast cereals has beenreduced by 30%. Nestlé has reduced saltlevels in overall products by 5,000tonnes since 2002 and aims to bring thesalt level down to 75% of the quantityin the original recipes by 2010. They are

also working on lowering sugarquantities in products by 16% before2012. These reduction programmes willcontinue as long as consumer prefe-rence and product safety (since salt isan important preservative) is sustained.

Source: www.ir.nestle.com

Making healthier products: Nestlé

Eurosif wishes to acknowledge the support and direction provided by the Food Sector Report Steering Committee:Bank Sarasin & Co. Ltd

Crédit Agricole Asset ManagementSAM Group

Société Générale Asset ManagementSchroders

This sector report, created with the support of the European Commission, has been compiled by:

11 avenue de l’Opéra • 75001 Paris, FranceTel/Fax : +33 (0)1 40 20 43 38

contact@eurosif.org • www.eurosif.org

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or s

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as a

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dors

emen

t of

any

par

ticu

lar

com

pany

, org

anis

atio

n or

indi

vidu

al.

Market Capitalisation of Top Food Companies Obesity (BMI* > 30 kg/m2) increase in adults from 2005 to 2015

May 2007

Food Producers

EU companies *BMI: Body Mass Index

food2 #212 2/07/07 10:01 Page 4