Megatrends impacting the Dutch agrifood industry

14 Pages·2014·0.38 MB·English

www.pwc.nl
Megatrends
impacting the Dutch
agrifood industry
Towards a cleaner,
healthier, safer, fairer,
smarter and stronger
sector
26 May 2014
Table of contents
Executive summary 3
The agrifood sector 4
Food safety 5
Sustainability 6
Financing 7
Doing business in the Netherlands 8
Acting globally 9
Six questions towards the future of agrifood 10
PwC experience 12
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Executive summary
Agrifood chain Impact
The Netherlands ranks as the world’s second-largest Demographic change and lower consumer spending
exporter of agricultural products, with key trading have put pressure on retailers and food companies to buy
partners Germany, Belgium, France, the UK and Russia. meat at lower prices on the one hand, while avoiding
As the agrifood sector contributes substantially to the food safety incidents on the other. Resource scarcity of
Dutch economy in terms of GDP, jobs and innovation, natural gas will in the long run change the energy supply
it has been identified by the Dutch government as a of greenhouses, while greenhouses have invested in CHPs
‘top sector’ together with horticulture and agricultural to improve their sustainability. The shift in economic
input materials. The agrifood value chain spans power drives demand for Dutch dairy products, while
suppliers of seeds, fertilizers and animal feed to farms the financing of dairy farm enlargement requires new
and greenhouses, via traders and logistics to retailers – approaches. The shift in economic power has also driven
and us, consumers. The sector’s activities are strongly Dutch food majors to act globally, challenging their
connected with other parts of the economy: energy, operational and fiscal structure. Last but not least, doing
banking, and education as well as national and local business in The Netherlands is not the default for major
government. firms. Other countries increasingly compete as domicile
of preference, requiring The Netherlands to maintain an
Megatrends attractive business climate through its fiscal, logistics and
The agrifood sector is undergoing dramatic change. intellectual infrastructures.
PwC identified five megatrends that heavily impact each
link of the sector’s value chain to explore the drivers of Six questions
this change and the long term outlook for the sector. The sector’s future depends on answering six key
Demographic change leads to an aging workforce and questions:
fewer students opting for a career in farming and food
engineering. In addition, consumers spend less and 1. Agrifood firms rely on fossil fuels in greenhouses,
spend differently – for example on healthier foods, or on trucking and refrigeration – which alternatives can
smaller packages for singles. Accelerating urbanisation make the sector cleaner?
brings expanding cities and farming in closer proximity,
shifting the sector’s focus in stakeholder management 2. More and more consumers opt for a healthier
from ministers to mayors. Cities also face logistical issues lifestyle – what food items will support them?
how to bring food in – and waste out. Technological
advances increased yields and reduced use of energy 3. As the agrifood value chain spans the globe its
and water, while food processing extended shelf complexity limits transparency – how can food be
life, reduced waste and widened variety of products. safer?
Logistics enable year-round availability of fresh
products. Consumers share recipes on social media – 4. Global sourcing calls for a fairer impact of
and concerns on food safety. Resource scarcity contests companies on ecologies and societies – how can they
the way we produce, source and consume. Phosphate distinguish themselves?
for fertilisers, energy for greenhouses, or cocoa for food
manufacturers abundance is not obvious. Also, the way 5. Human, financial and intellectual capital are the
we ship, store, sell and dispose food needs rethinking. lifeblood of agrifood companies, while access to
The shift in economic power increases living standards these types of capital is no longer certain – what
in high-growth markets, providing opportunities roads are open for smarter approaches?
for agrifood companies to further expand their non-
European footprint. 6. Growth and profitability depend on the appreciated
value added – how can the sector gain a stronger
position in a global market? Therefore, this report
explores the challenges and opportunities for the
sector.

Towards a cleaner, healthier, safer, fairer, smarter and stronger sector 3
The agrifood sector

A key sector to an aging workforce and fewer students opting for a
The Netherlands ranks as the world’s second-largest career in farming and food engineering. In addition,
exporter of agricultural products. It has gained consumers spend less and spend differently – for
this position based on its long history in farming, example on healthier foods, or on smaller packages
moderate climate, fresh water supplies and excellent for singles and elderly. Accelerating urbanisation
logistics. The sector is strongly driven by exports, with brings expanding cities and farming in closer proximity,
Germany, Belgium, France, the UK and Russia as most shifting the sector’s focus in stakeholder management
important trading partners. The sector contributes from ministers to mayors. Cities also face logistical
to the Dutch economy in terms of GDP, jobs and challenges how to bring food in – and waste out.
innovation. Therefore it has been identified by the Dutch Technological advances in seeds, fertilizers, and
government as a ‘top sector’, together with horticulture animal feed as well as in farms and greenhouses have
and agricultural input materials. As the domestic market increased the yield per hectare, while reducing the use
is small, policy and investments focus on strengthening of energy and water. HPP1, PEF2 and cold plasma have
the sector’s international position. extended shelf life, while nanofiltering increased the
yield of fermentation. Social media helps consumers
Its value chain share their favourite recipes and brands, as well as
From farm to fork, the agrifood value chain spans their scorn on animal welfare and food safety incidents.
suppliers of seeds, fertilizers and animal feed to farms Resource scarcity on the other hand, continuously poses
and greenhouses, via traders and logistics to retailers – challenges to the way we produce, source and consume.
and us, consumers. The sector’s activities are strongly Whether it is phosphate for fertilisers, natural gas for
connected with other parts of the economy: energy greenhouses, or cocoa and soy for food manufacturers
(natural gas), banking (capital), education (R&D and – abundance is no longer obvious. Similarly, the way we
future staff) as well as national and local government ship, store, sell and dispose our food needs rethinking
(regulation, policy and legislation). as well. The shift in economic power increases living
standards around the world – providing opportunities
Five megatrends for agrifood companies to expand their footprint further
Notwithstanding its crucial role in the Dutch economy beyond the Netherlands and Europe.
and leading position globally, the agrifood sector
is undergoing dramatic change. PwC identified five Impact
megatrends that heavily impact each link of the sector’s So how will the agrifood sector develop? Demographic
value chain. The following selection of examples change and lower consumer spending have put pressure
illustrates these changes. Demographic change leads on retailers and food companies to buy meat at lower
prices on the one hand, while avoiding food safety
incidents on the other. Resource scarcity of natural
As the #1 European exporter, the Netherlands is a key player in the global agrifood gas will in the long run challenge the energy supply
supply chain
of greenhouses, while the shale gas boom in the short
30 run endangers the investment greenhouses made in
CHPs to improve their sustainability. While the shift
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4 Megatrends impacting the Dutch agrifood industry
Food safety
Megatrends slaughter houses, as companies work with low-educated
Food safety tightly links with both the shift in economic temporary staff, lack of supervision by veterinarian and
power and demographic change. Let’s take the meat a high processing speed. The board also reports that
industry as an example. Brazil surpassed the EU as one while carcasses are examined and marked when safe for
of the world’s largest meat exporter – only second to consumption, access to the stamps used for marking is
the USA, and has become the #3 meat supplier to the not always restricted. Similarly, the Board reports that
Netherlands in value. With meat imports at the level in particular horsemeat documentation (the so-called
of a third of meat consumption, domestic producers paardenpaspoort) is easily forged. In addition, labels
face severe competition. Demographic change on the are forged to change meat types and waste meat is
other hand, saw higher unemployment and fewer salary relabelled as fit for human consumption. Lastly, inter-
increases, resulting in lower consumer confidence national traders know that Border Inspection Posts
and spending. With stable volumes since 2008, Dutch (BIPs) differ in thoroughness of their checks. Importers
retailers mainly grow revenue and profits through price therefore select a less strict BIP to ship their meat
increases. Their other profitability lever is costs. Over through (so-called BIP shopping). The Board points out
the past five years, the two largest Dutch supermarkets that the government used the increase in supply chain
grew their joint market share by acquisitions from a quality systems as an argument to reduce supervision.
third to almost half of the market. This increase in scale It was assumed that private regulation would suffice.
has grown their power towards suppliers and enabled This has not happened, and the reduction in public
them to pass some of the pressure on to meat producers. supervision has therefore been premature.
Conversely, domestic producers are unable to increase
their prices towards retailers, despite rising costs of raw While costly, compliance offers
materials. chances
The recent scandals in the food industry have reduced
Food safety incidents consumers’ trust in food products. In particular, trust
Since 2013, meat producers have increasingly made in fish, meat and packaged meals is low. This lack of
the headlines with fraud, in particular with cases in trust has been spreading fast, facilitated by social media
which horsemeat was sold as beef. In March 2014, such as Facebook, Youtube and Twitter. Compared to
regulator NVWA warned against malpractices in the other industries (e.g. oil, fashion), food retailers have
meat industry. A subsequent report by the Dutch Safety been quite responsive to consumer opinion. Consumers
Board heavily criticises both the industry as well as the expect government and food companies to improve
regulator. The Dutch Safety Board identified several key their governance. Traceability following the farm-to-
risks to food safety. Hygiene is under pressure in Dutch fork paradigm is the key principle to enhance food
safety standards. Companies have to be aware of the
origin of raw materials and provide assurance that the
Producers of pork meat products are unable to pass higher costs to consumers food they import complies with national and European
legislation. This requires an increased due diligence
of foreign suppliers. In order to ensure chemical and
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me microbiological safety and high quality in Europe’s food
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or addressing the integrity of the food chain and new
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Towards a cleaner, healthier, safer, fairer, smarter and stronger sector 5
Sustainability
Megatrends show signs of decrease. Joint programs of the national
Sustainability, climate change and resource scarcity government and the sector include the program “Kas als
are closely intertwined with the triad water, energy Energiebron”. This program conducts strategic research
and food. The production of food will continue to on the possibilities of using solar energy for greenhouse
require water and energy, especially when the world production. While the ambitions are to build all new
population is rapidly growing. Let’s consider the greenhouses in 2020 in a climate neutral way and to
greenhouse industry. In terms of resource scarcity, use 20% of sustainable energy, technologies still require
Dutch gas production is forecast to decline fivefold substantial advances in both their performance and cost.
towards 2035. As natural gas is the prime source of
energy in agriculture – especially for greenhouses, this Sourcing
presents a challenge. To improve their energy efficiency, At the same time, sustainable sourcing requires food
greenhouses heavily invested throughout the 2000’s in companies to invest in their supply chain. Dutch food
Combined Heat and Power plants (CHPs). Technological majors report they have reduced water consumption,
advances in renewable energy and shale gas extraction power consumption, CO emissions and waste
2
have deteriorated the profitability of gas-fired power production per tonne of production. As the world’s
plants, pushing them downward in the merit order. As a largest cocoa bean importer, the Netherlands also
result, greenhouses lose money on their new CHPs and plays an important role in the position of farmers and
have shut them down. Rentability of greenhouses has rural communities in leading cocoa exporters such as
been structurally low since 2004 and currently hovers Côte d’Ivoire and Ghana. Research by PwC and the US
around break-even, while bankruptcies are on the rise. Grocery Manufacturers Association (GMA) shows that
on average, companies reporting on their sustainability
Production performance have generated higher shareholder return
Sustainable production in the Netherlands may than non-reporting companies.
become challenging as energy and water consumption On a more local level, accelerating urbanisation may
is persistent. The wider Dutch agrifood sector relies prove a mixed blessing. With households living in
heavily on natural gas, which does not show signs of closer proximity, the ‘last mile’ from the store to the
decrease. Also the use of water is rising, in particular home may in fact become a lot shorter. This can help
for raising livestock. Lastly, the use of fertilizers does reduce CO2 emissions and energy consumption as more
shoppers travel a shorter distance to their store, while
in-home delivery of groceries ordered online may also
Natural gas is the prime source of energy in agriculture – especially for greenhouses become more efficient. However, urbanisation presents
increasing challenges to the flow of goods into sprawling
cities – and the flow of waste in the opposite direction.
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The self-sufficiency ratio of cities is low for staple food
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ce: and meats. While urban farming may partly provide an
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an important obligation to buy in line with their actual
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needs – rather than trash non-consumed food.
6 Megatrends impacting the Dutch agrifood industry
Financing
Megatrends maintenance, as well as a high fixed-assets-to-workforce
Financing interlinks with the shift in economic power ratio. Combined with limited financial resources – as
and resource scarcity. When examining the dairy individual members have limited financial resources and
industry, this becomes apparent. The shift in economic banks are decreasing their exposure – the increasing
power has resulted in ties with new countries: Russia working capital requirements are challenging to fund.
is now the #1 dairy trade partner outside the EU. Working capital will grow further as dairy exports are
Growing demand for dairy products drives milk prices, expected to grow, due to low-turnover inventories,
expectedly resulting in breakeven for dairy farms in with a seasonal nature and tough supplier payment
2014 after a long period of losses. At the same time, terms. Therefore, cooperatives deal with significant
emission restrictions limit the number of dairy cows structural financing needs, while traditional sources of
in the Netherlands due to their production of manure. funding are not always sufficient anymore to meet those
As regulation couples emissions with land, land is requirements. Nonetheless cooperatives have several
becoming a scarce resource. This limitation triggers alternative financing options. Financing from outside the
consolidation of dairy farms into larger farms. However, cooperative could include alternative sources of funding,
the number of bankruptcies in the agricultural sector amongst others high yield bonds, equity investors, as
has been high since 2009. Combined with tighter bank well as private placements. As individual farmers have
regulations, access to financing is a growing issue. more difficulty attracting bank debt due to tighter bank
regulations, cooperatives could play an intermediary
Cooperatives role. Cooperatives could consider attracting debt at
As one of the most ‘cooperativised’ countries, many the level of the cooperative, rather than at the level of
Dutch farmers are members of one of the large their members. For lenders, this would diversify their
cooperatives. Traditionally, cooperatives are partially risk across a larger number of agricultural firms. For
funded by contributions from members, including members, this could result in a lower cost of funding. In
capital investments and retained earnings. Similarly, order to achieve this, cooperatives would need to set up
financing from outside the cooperative typically a risk management and supervisory framework. Lastly, a
consists of traditional bank loans and state subsidies. cooperative could also change its legal status, converting
Farming is a capital-intensive activity, with high capital the cooperative into a partially publicly owned company.
expenditures on costly specialized equipment and However, an initial public offering (IPO) does involve
managing the interests of different stakeholders.
Russia is now the #1 dairy trade partner for The Netherlands outside the EU Food companies and retailers
A number of major food companies and retailers are
el) investing in their international expansion, requiring
uiv 45 20% additional capital. Based on their investment-grade
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chap 40 39,0 18% credit rating, several of these companies have access to
cts alternative sources of financing. While corporate debt
odu 35 16% in the Eurozone is mainly borrowed from banks, this is
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ce: 14% expected to gradually converge towards the American
our 30 29,1 model where public capital markets and institutional
n kg (s 25 24,7 12% DRuustcshia c (hmelens kege)xport to investors play a more significant role. Since the onset of
ml 10% % of Dutch export the financial crisis, risk premiums for investment grade
a in 20 % of Russian import corporates and financial institutions have reversed.
Russi 18,3 16,6 8% These corporates can now attract debt capital at more
o 15
ort t 11,8 6% attractive rates than banks. While new to cooperatives,
ese exp 10 8,0 4% caoltrepronraattivees .a lso have private placements or an IPO as an
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2000 2005 2008 2009 2010 2011 2012
Towards a cleaner, healthier, safer, fairer, smarter and stronger sector 7
Doing business in the Netherlands
Megatrends box is 5%. It is also possible to include profits from
The Netherlands is proactively dealing with both an intangible asset derived in the period between the
the shift in economic power as well as technological patent application and the granting of the patent in the
advances. Continuously building on its strengths in innovation box regime. The Netherlands has 89 double
fiscality, logistics and R&D, the Netherlands has become tax treaties in force and benefits from EU directives.
a key player in the global agrifood supply chain. While These treaties generally have favourable conditions
this supply chain is increasingly global, Dutch imports regarding foreign taxation. If no treaty is in place, the
of cocoa, soy and palm oil have a significant share of Dutch tax system has regulations to unilaterally lower
world production. Conversely, the Netherlands is the #1 Dutch taxes to account for foreign tax obligations.
European exporter of agricultural products, worldwide
only second to the USA. Dutch agrifood companies R&D
invest heavily in R&D, joined by national government, The Netherlands provides an excellent climate for
resulting in a world-class agrifood R&D hub. agrifood R&D, through a tight-knit network of world
class companies and institutes. Food companies heavily
Tax invest in food processing R&D. They continuously
Dutch Tax Authorities have developed supportive conduct research on new food processing technologies,
fiscal procedures, complementing the attractive Dutch resulting in breakthroughs in longer shelf life, reduction
logistics, customs, banking and living environment. The of waste and energy consumption, and facilitating
Dutch tax system enables discussing the tax treatment distribution, in addition to compliance with regulatory
of certain operations or transactions in advance. demands and product differentiation. The Netherlands
Upfront approval can be obtained from the Dutch has the 2nd-highest private R&D investment rate as %
Tax Authorities. The Dutch Tax Authorities conclude of GDP in agrifood, with twelve out of the worlds’ fourty
Advance Pricing Agreements (APA) as well as Advance largest food and beverage companies having major
Tax Rulings (ATR). While the standard corporate income production sites or R&D facilities in the Netherlands.
tax rate is 25%, in the innovation box the taxpayer may Leading Dutch research institutes in agriculture include
opt, under certain conditions, for the application of Seed Valley, Top Institute Food and Nutrition (TIFN)
a lower effective rate on taxable profits derived from and Wageningen University. Seed Valley comprises
intangible assets. The effective tax rate of the innovation companies specializing in breeding, production and
sales of high quality seeds and plant raw materials. It
has a worldwide reputation in the field of innovation,
Dutch government supports agrifood R&D by providing budget the mechanization techniques developed here are used
by companies worldwide. TIFN is an organization that
700 aims for interdisciplinary research in food and nutrition,
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otin its partners are key players in the global food industry,
Rijksbegr 600 2165 rUensievaerrcshit iyn hstaist uat esps eacnidfi cu fnoicvuesr soitnie hse. aWltahgye fnoiondg eann d
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ml 53 innovation in food. Globally Wageningen University
ood R&D in € 430000 142902 117 214437 FAFCoonoooimmddpa ssel aethifcteeiuvatryelittnhyess rSparpnoevkcisidfi aecssa tlfhloyer t a#od 2sdt aiimtgioruinlcaautlle ti unRrc&aelnD st,ci vtiehenes. cD eCu ointncsdhtiu ttcuatxtien s.g y sRte&mD
agrif 82 125 112 Innovation activities on applied new technology is subsidized by
et for 200 a reduction of wage tax. An additional R&D deduction
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ent 100 222244 225 209 187 expenses directly related to R&D activities. Lastly, an
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8 Megatrends impacting the Dutch agrifood industry
Acting globally
Megatrends less internationally – through further consolidation
Dutch companies across the wider agrifood value the Dutch market as well as expansion in Central and
chain are responding to the growing demand due to Eastern Europe.
the twin impact of the shifts in economic power and
demographics. The world’s fastest growing economies Global operations
have entered the list of the world’s largest economies, A recent report by PwC and MIT illustrates the
with China as a prominent example. Similarly, some of challenges and risks of a more global supply chain.
the fastest growing populations are entering the list of When a company expands from a local or regional
the world’s largest populations. presence to a more global one, the operations and
tax strategies need to be adjusted to align with the
The top-25 importers of agricultural products are changes: that’s when operations become more complex.
increasing their imports, as their inhabitants have Transportation and logistics become more challenging,
more money to spend on food. Besides Brazil, Russia, lead times lengthen, costs increase and end customer
India and China, these countries also include Vietnam, service can suffer. With a more global footprint, different
Malaysia, Poland and Turkey. products are directed to more diverse customers via
While Dutch agricultural products are foremost exported different distribution channels, which require different
to other EU-members, Russia has already become supply chains.
the #5 importer of Dutch agrifood and is growing its
imports – with geopolitical implications as well. Growth PwC and MIT identified seven factors that enable
in emerging markets is elusive, although major Dutch stronger capabilities in both supply chain management
food companies increasingly shift their footprint beyond and risk management. Based on these seven factors,
Europe. companies can enhance their supply chain performance.
Despite being headquartered in the Netherlands, for More mature capabilities lead to better operational
several food companies the Dutch – or even European performance, in two distinct groups. The cost-efficient
– market is no longer their largest market. Asia and group consists of mature companies that selected cost or
the Americas have become the companies’ largest efficiency as their key supply chain value driver, while
markets, while Africa and the Middle East are growing. the flexible-response group contains mature companies
Supermarket operators are faced with low growth in that selected flexibility or customer service levels as their
the Netherlands as well, but expand their revenues key supply chain value driver.

The top-25 importers of agricultural products are increasing their imports
20%
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Towards a cleaner, healthier, safer, fairer, smarter and stronger sector 9
Six questions towards the future of
agrifood

In the previous sections the impact of the megatrends on the various links of the agrifood value chain have
been explored. As the megatrends are multidimensional in nature and their impact on the sector is manifold,
this report contains a selection from our research - illustrating the breadth and depth of this impact. So where
is the sector headed? Let’s take a look at six questions that help explore the future of agrifood.
Cleaner We believe accelerating urbanisation may prove a mixed
blessing. With households living in closer proximity, the
Agrifood firms rely on fossil fuels in greenhouses, ‘last mile’ from the store to the home may in fact become
trucking and refrigeration – which alternatives can make a lot shorter. This can help reduce CO emissions and
2
the sector cleaner? energy consumption as more shoppers travel a shorter
We believe that public-private initiatives to invest in distance to their store, while in-home delivery of groceries
technological advances will need to expand. Joint ordered online may also become more efficient.
programs of the national government and the sector
include the program “Kas als Energiebron”. This However, urbanisation presents increasing challenges
program conducts strategic research on the possibilities to the flow of goods into sprawling cities – and the
of using solar energy for greenhouse production. While flow of waste in the opposite direction. Potentially,
the ambitions are to build all new greenhouses in 2020 urban farming may provide an answer. Nonetheless,
in a climate neutral way and to use 20% of sustainable calculating the self-sufficiency ratio of cities for food
energy, technologies still require substantial advances in staples such as dairy, eggs, vegetables, fruits and meats
both their performance and cost. will continue to be a sobering experience. This implies
that cleaner solutions for logistics will need to be
Further down the value chain, food companies and developed and deployed, in order to connect cities and
retailers are making steps in reducing their consumption their corresponding sites of food production.
of power, water and raw materials, while reducing their
production of CO and waste. Nonetheless, trashing of
2
food that is no longer fit for sale by retailers or fit for
consumption by households will remain an issue.
Cleaner
Agrifood firms rely on fossil fuels in greenhouses, trucking and
refrigeration - which alternatives can make the sector cleaner?
Cleaner
Stronger
Healthier
Growth and profitability depend on the
value added by the agrifood sector - Stronger Healthier A growing group of consumers opts
for a healthier lifestyle - what food
how can the sector strengthen its
products will support them?
position in a global market?
The future of
agrifood
Smarter
Safer
Human, financial and intellectual
ctharpoiutaglh aoruet tthhee liafegbrilfoooodd ovfa cluoem cphaaninie.s Smarter Safer Agsl othbee aitgs riinfocoreda vsainluge c cohmapinle sxpitayn lsim thites
Access is no longer certain - what transparency - how can food safety
roads are open for smarter approaches? be assured?
Fairer
Fairer
Global sourcing and production call for a fair impact of
companies on ecologies and societies - how can they
distinguish themselves?
10 Megatrends impacting the Dutch agrifood industry