F&B Industry (2): Key Drivers of F&B Industry Changes

The authors are analysts of NH Investment & Securities. They can be reached at mj27@nhqv.com, jack.baek@nhqv.com and kyeongkeun.kang@nhqv.com, respectively. – Ed.

1. Demographic changes: Population is aging; workforce is shrinking

Ongoing population aging is to lead to major changes in the ways in which we produce and consume food. According to the UN’s “World Population Prospects: The 2019 Revision,” the world’s population is projected to rise from the current 7.7bn to 8.5bn by 2030, to 9.7bn by 2050, and to 10.9bn by 2100. Meanwhile, the growth in the number of people aged 60 or above is outpacing that of other age groups. The report indicates that while the number of people aged 60 or above totaled 0.96bn (12% of overall population) in 2015, the figure is forecast to rise to 3.14bn (28% of overall population) by 2100. Of note, Joseph Chamie, an independent consulting demographer and a former director of the UN Population Division, sees the demographic turning point at which the number of children (0 to 14 years) in a population becomes less than the number of elderly (65 years and older) as representing a ‘historic reversal.’ In 2075, the world’s population (excluding Africa) is to go through such a historic reversal point, with the number of elderly to exceed the number of children for the first time in human history.

Labor productivity weakening in line with population aging

Of note, population aging not only results in a decrease in employment rates but also lower productivity, in turn leading to a decline in per capita GDP. According to the National Bureau of Economic Research (NBER), a 1% widening in the portion of elderly population translates into a 0.55% drop in per capita GDP. Against this backdrop, taking into account the UN’s data for population aging, we expect population aging to cut the world’s per capita GDP by 20.5% over 2010~2020, and by 18.6% over 2020~2030. Of note, the NBER indicates that out of the above-noted 0.55% decline in per capita GDP, 0.17%p is attributable to a decline in employment rates and 0.38%p to lower labor productivity.

Population aging leading to higher consumer interest in healthy foods

Meanwhile, in a society where population aging is progressing at a fast pace, consumers’ interests in health issues tend to rise. Expanding consumer awareness towards healthy products and food safety is likely to accelerate the development of health functional foods catering to individual needs as well as food products targeting senior citizens. All in all, in order to lead a healthy lifestyle, consumers are likely to increasingly focus upon healthy food products.

2. Climate change: Unusual weather patterns and infectious diseases are both on the rise

According to the Intergovernmental Panel on Climate Change (IPCC)’s Sixth assessment report, the world’s temperature is predicted to increase by 1.9~5.2°C on average by 2050, with sea level rise estimated at up to 110cm. Of note, climate change results from both natural and artificial causes. Natural causes include: 1) changes internal to the climate system, such as atmospheric circulation and ocean currents; and 2) external causes such as volcanic eruptions (which lead to aerosol emissions), the Earth’s orbital changes, and solar variations. Artificial causes include greenhouse gas emissions and artificial aerosol emissions from the surface to the atmosphere.

A recently released climate strategy report predicts that Korea’s temperature will rise by 3.2°C by 2050, making the country become a subtropical zone. In this case, the amount of rainfall is likely to rise by 15%, leading to prolonged heavy rain periods. We note that global warming and environmental pollutions accompany unusual and dramatic weather patterns such as El Niño and La Niña—such patterns have become more frequent over the recent years, threatening the global ecosystem. Of note, El Niño refers to a massive warming off the coastal waters of Peru and Ecuador, and La Niña to persistent colder-than-normal (0.5°C or greater) sea surface temperature anomalies across the central and eastern equatorial Pacific.

Climate change significantly affects F&B industry

Climate change raises the volatility in precipitation, in turn weighing upon grain production—a factor which could significantly threaten human life, as grain represents a major food category. We note that global grain prices (including those for wheat and corn) skyrocketed when Australia was hit by a severe draught. All in all, climate change leads to an upcycle in agricultural commodity prices (including grain prices), in turn pushing up food product prices.

Climate change destroying ecosystems

Climate change destroys ecosystems, which sheds light on food safety issues. Species vulnerable to climate change are likely to face extinction, whereas harmful insects are greater likely to survive. Changes in fish species and their habitats resulting from climate change are to degrade the marine environment.

Also worth noting, global warming is emerging as a major driver of infectious disease, either by expanding the footprint of malaria or defrosting prehistoric pathogens from Siberian permafrost. Amid prolonged summer seasons, both humans and animals are becoming increasingly exposed to various deadly epidemics, with related death tolls rising. Of note, a 2~3°C increase in the world’s temperature translates into a 5% increase in the population exposed to Malaria (estimated at around 40mn), and a 10% rise in those exposed to diarrheal disease.

Animal disease outbreaks growing more frequent over recent years

A series of animal disease outbreaks over the recent years have also raised people’s awareness of the importance of food safety. In order to minimize exposure to harmful diseases, people are increasingly paying attention to food safety, as foods can either trigger diseases or prevent them. In addition, as eating healthy foods is an important part of leading a healthy lifestyle, demand for health functional foods is likely to expand moving ahead.

3. Consumption/distribution trends changing; shift to digital channels accelerating

Contactless services to expand

Expanding demand for contactless services represents another factor leading to shifting consumption patterns and consumer lifestyles in the F&B sector. In response to such changing consumption trends, F&B players are seeking to readjust their business strategies across all value chains, encompassing production, sales, delivery, customer management, and marketing. Marshalling their digital capabilities, companies are developing new business models, products and services. They are beefing up their digital communication/sales channels and strengthening the competitiveness of their online products/services. While a major advantage of offline stores is that they enable consumers to actually touch and feel the products, such an advantage has become somewhat meaningless these days as inter-personal contacts are being minimized. Against this backdrop, F&B firms are now seeking to replace a large part of conventional offline services with contactless services. Given such, we expect contactless purchasing and payment activity to increase moving forward.