Consumer Interest Rising towards ‘Clean’ Foods
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. ‘Clean’ foods: Consumer interest rising towards food safety and health
Today’s consumers increasingly want to know the origin and producer of their food products. In our view, growing consumer demand for transparency in food itself and food production processes is closely related to population aging and consumers’ expanding awareness of food’s importance to health. More and more consumers now prefer to consume foods that are low in calories and salt, high in fiber, made with few artificial ingredients, and contain little to no trans-fat or preservatives. In addition, amid rising concern towards the long-term impacts of gene modification on health, consumer checklists for food purchasing are now also concerned with GMO and organic statuses.
In line with the establishment of a new consumption trend focused on health and environmental impact, a clean label movement is emerging. In the food world, having a clean label means having few ingredients, each of which are clear with regard to origin. Food products are awarded with clean labels when they satisfy related criteria such as having no artificial ingredients, a short ingredient list, minimal processing, fresh ingredients, and clear ingredient origins. According to a Center for Food Integrity report, 75% of US consumers claim to read the nutritional and ingredient labels of food products. In keeping with rising consumer interest in food ingredients, many food producers are printing QR codes and tracking numbers on their product packaging for consumers to easily obtain detailed product information.
The US is infamous for its high adult disease incidence rate related to poor eating habits. However, it is also the US where a new consumption trend favoring environmentally-friendly and healthy food products is emerging the fastest. With an estimated obesity rate of around 30%, the US continues to rank near the top of the OECD’s obesity statistics. In order to counter this soaring obesity rate, the US government has adopted various policy measures such as the introduction of a soda tax. The NY City Health Department announced the National Salt and Sugar Reduction Initiative in 2018, which set voluntary reduction targets for sugar and salt and asks food and beverage companies to commit to meeting them. The initiative hopes to bring about a 20% sugar reduction in packaged food products by 2025. Considering that the NY City initiative has garnered passionate support from more than 100 state and city governments, as well as health authorities and organizations across the country, we expect the movement to have a substantial impact on the US health and fresh food markets.
2. Importance of eco-friendly and sustainable management growing at corporations
For many years, the primary goal of companies has been to achieve strong profits. However, nowadays, global and local firms are under growing pressure to adopt more sustainable management practices. Amid the emergence of major environmental challenges such as global warming caused by reckless industrialization, awareness of the impact of corporate activities on the global environment has risen, demanding that corporations adopt more sustainable management practices that can ensure long-term prosperity for future generations. The UN has proposed 17 sustainable development goals (SDGs) aimed at balancing the economic, social, and ecological dimensions of development. Against this backdrop, many corporations have adopted sustainable development as one of their priorities, in turn creating internal organizations to oversee their social and environmental activities. It appears that an understanding of the importance of environmental preservation for corporations’ long-term survival is firmly taking root among corporate management.
Corporate environmental activities are paying off
In particular, the adoption of environmental management practices by consumer goods companies, for which general consumers are the main clients, helps with regard to improving corporate image.
According to a survey by the government and the Korea Environmental Industry & Technology Institute on 956 companies which have obtained eco-labeling certificates, 89.1% (852) of the respondents experienced an average 20.1% sales growth following the certification. We note that Korea’s eco-labeling program exists to identify and highlight products and services that consume less energy and resources and minimize pollutant emissions throughout the production, consumption, and disposal processes. According to one research institute, over 2013~2017, eco-labeling is estimated to have effectively pushed up sales by a combined W1,198.0bn at 2,034 companies. In addition, firms have claimed that eco-labeling has helped to improve relations with clients (93.8%) and corporate image among consumers (93.7%).
3. Production, distribution, and consumption
In our view, the F&B sector is to face an accelerating trend towards higher levels of simplification, efficiency, and digitalization across all processes, from production to distribution and consumption. Consumer demand for greater convenience should only strengthen further, with firms continuing their efforts to better communicate with consumers, speed up the pace of product delivery, and improve production efficiency.
A recent survey on consumer behavior (MCR: Media & Consumer Research) confirms that convenience is one of the most important considerations among consumers when buying F&B products. Against this backdrop, companies have been developing and rolling out new products that are designed to satisfy ever-rising consumer demand for convenience. For instance, segments of the HMR product market have been widening rapidly to include stews, roasted fish, and holiday foods, with the overall quality of such offerings also improving. More recently, HMR lineups are expanding to include meal kit and fresh food offerings, as well. So far, most HMR products are refrigerated or frozen products. However, with one-day delivery taking root in Korea, domestic F&B companies are now developing new types of HMR products which are more conducive to newly-diversifying forms of delivery. We note that in line with the rapid growth of the HMR market, focus is increasing on the development of efficient packaging materials and methods for food delivery.
When it comes to production, automation has become key. As labor cost burden is rising and the pace of production is becoming more important, firms are investing to establish infrastructure to improve production efficiency. In the past, process automation was applied only limitedly to packaging processes, but at today’s smart factories, full-fledged process automation is on the rise.
In addition, the primary industries (agriculture and livestock) have been adopting mechanization and automation, as well. In particular, smart farming is expected to offer solutions to food and labor shortage issues. As the primary industries are directly exposed to climate and disease risks, and harvests depend largely on the external environment, effective control of the external environment and the prevention of disease should help to improve productivity to a large extent.
4. Government: Policy support for innovative F&B industry eco-systems
The Korean government is to provide policy support for the creation of innovative F&B industry eco-systems oriented towards customized/specialty, functional, HMR, eco-friendly, and export food products. Under the plan, the government is to offer support for workforce development, new venture startups, private investment, promotion and distribution network expansion, and safety/quality management, all aiming to nurture these five major industries to a market size of W24,850bn by 2030. The initiative is designed to grow segments with strong growth potential, create innovative industry ecosystems, and ultimately stimulate the overall domestic F&B industry.