May 9/Western Europe Food and Drinks Insights -- In recent years, the main driver of growth in the Western Europe food and drink industry has been consumers purchasing products with more added value. This has been driven by an increased demand for convenience products, increased health consciousness and a greater demand for premium and indulgence products. Multinational food and beverage companies, with their high research and marketing budgets, have been able to launch many new products to take advantage of these trends and have seen their revenues and profits rise accordingly.

With volume sales of many food and beverage products fairly stagnant across many Western European markets, encouraging consumers to trade up to higher-value products remains the key way for multinational food and drink firms to grow their sales in this region. However, relying on this trend puts firms in a precarious position, as consumers are also able to trade down when they are feeling stretched financially. This means that the Western European food and drink producers are in no way immune to the effects of a global economic downturn.

Business Monitor International's (BMI) U.S. Deep Recession scenario attempts to examine the impact a severe and prolonged economic downturn in the U.S. during 2008 and 2009 would have on the global food and drink industry. Although this event is not part of BMI's core scenario, it remains a possibility and is worth modelling as the effects would be so sizable and far reaching.

In the demand-driven food and drink industry, the effect on food and drink consumption is expected to be pronounced. States dependent on trade with the U.S., or even dependent on trade with the U.S.'s leading trading partners, are expected to be most affected. Although the rapid growth of emerging markets means that Western European countries are less dependent on the economic prosperity of the U.S. than they once were, there is little doubt that a severe U.S. recession would still have a knock on effect in every country in the region.

In general a slowdown in economic growth, due to a loss of trade with the U.S. or simply weak investor confidence, will translate to lower disposable incomes for consumers. A severe U.S. downturn looks set to have the most severe impact on countries that have the biggest trading links with the United States. In Western Europe, this translates to the largest impact being felt in Germany and the United Kingdom.

Germany's economy is particularly dependent on exports, and the U.S. is Germany's second largest export market. In addition, a recession in the U.S. is likely to reduce demand for Germany's exports across the world, especially in countries that are also heavily reliant on trade with the United States. BMI forecasts that a deep recession in the U.S. would mean that by 2012 consumers in Germany would have purchased 11.96 billion euros less food and drink than they would have otherwise. This translates to an 11.2% reduction in the amount spent on food and drink over the period, and a reduction on this scale would significantly impact on the revenues that manufacturers and retailers can expect to achieve.

The U.S. is the U.K.'s biggest export market, making the U.K. also very reliant on the economic prosperity of the United States. In addition, the U.K. economy is very reliant on the financial services industry, and this is a sector that is likely to be very hard hit by a long deep U.S. recession. The U.K. food and drink market is, therefore, forecast to be the most affected in the whole of Western Europe by a U.S. recession with consumers purchasing 15% less food and drink (in value terms) over the five-year forecast period than they would under the core scenario.

France, which is also a major exporter to the U.S., is the food and drink market forecast to be the next most impacted by a U.S. recession, followed by Italy, Spain and Greece. In every country the impact is expected to be short and sharp, with consumption stagnant or declining in 2009 but then returning to reasonable levels of growth in the following years.

So far, despite a moderate slowdown in the U.S. economy, consumers in most Western European countries do not seem to have stemmed their spending on food and drink; in all of the main economies, the major food and drink retailers are continuing to report strong revenue growth. This comes despite a reduction in spending in many other sectors, including clothes and electrical equipment. This underlies the food and drink sector's position as a non-cyclical industry and suggests that the trends driving growth in the Western Europe food and drink industry -- convenience, health and indulgence -- are now so ingrained that consumers are willing to forgo other products to maintain there level of spending on food and drink.

Although food and drink consumption has held up so far, a deep U.S. recession is likely to jolt consumers out of their comfort zone and make people a lot more aware about the amount they are spending on food and drink. Products where there is a cheaper and easily accessible alternative are likely to be the hardest hit. This includes premium alcoholic drinks, which can easily be replaced with sub-premium and mass-market alternatives, and convenience foods, where consumption can be reduced by cooking more meals from scratch using raw ingredients.

From the May 12, 2008, Prepared Foods e-Flash