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Germany Food and Drink Report Q3 2008
Business Monitor International, July 2008, Pages: 68
Demand for Germany’s technologically-advanced exports in rapidly industrialising emerging markets has pushed Germany’s rate of GDP growth above 2.5% over the past two years. This is much higher than the recent average and there are now signs that this relatively strong economic performance is starting to feed into consumer confidence and push up spending on food and drink products, which in real terms had been in long term decline. However, these phenomena may be short lived as rapid inflation and the significant slowdown in the US economy are both likely to damage confidence and could curtail spending.
Unlike in previous years Germany’s Mass Grocery Retailers (MGRs) generally reported strong results for 2006 and 2007. In April the country’s largest retailer, Edeka, reported that its revenues climbed by 4.4% in 2007 and Edeka’s chairman claimed that 2007 was the most successful year in the firm’s history. The country’s second largest retailer Rewe is also expected to report strong growth for 2007 in keeping with its results for 2006 when it reported growth of 4.3%. This growth in 2006 can be compared to the period between 2002 and 2005 when the firm’s domestic growth averaged a measly 0.3%.
Per capita food consumption in Germany has therefore returned to growth after a long period of stagnation and this trend has prompted retailers to stock more products that cater to consumers willing to pay premium prices. For example Rewe has launched a new premium private-label brand with the name ‘Rewe Exklusiv’ and has announced that all of its full-range supermarkets will stock more regional products which will appeal to upmarket shoppers interested in eating local specialities.
So far in 2008 this rate of spending has held up; however, two factors look like they could undermine the sector’s recent strength. Firstly the global rise in food prices threatens to undermine consumer confidence. The very high levels of price competition in Germany mean that both retailers and producers are already working with wafer thin margins and therefore neither has the ability to shield consumers from the recent commodity price rises. This has meant that the rate of food inflation in Germany has been the second highest in Europe behind only Spain. If prices continue to rise at this rapid rate demand for premium quality food and drink products is likely to fall away as consumers again start to focus purely on price.
A second, perhaps more serious, issue is the recent decline in the US economy. Germany’s economy is particularly dependent on exports and the US is Germany’s second largest export market. In addition a recession in the US is likely to reduce demand for Germany’s exports across the world, especially in countries that are also heavily reliant on trade with the US. There are already signs that Germany’s rate of economic growth in 2008 will be much lower than in 2006 and 2007 and this will surely have an affect on consumer spending. If the US manages to avoid a recession and returns to a reasonable level of growth by 2009 then Germany’s food and drink producers may escape relatively unscathed. However, if the US does enter a sustained period of economic contraction then the recent strength of Germany’s food and drink sector is likely to be severely undermined.
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