Healthy prospect for consumer spending


  • Business
  • Friday, 17 Dec 2004

IN 2005, interest will centre on the consumer sector, which has been going strong for a number of years now. NESTLE (M) BHD managing director Sullivan O'Carroll sees a promising year ahead for the food industry. Greater demand is expected from health conscious consumers. 

BRITISH AMERICAN TOBACCO (M) BHD managing director Andrew Gray expects strong economic growth to continue. In today's CEO Outlook 2005, Gray also speaks at length on the three challenges facing the cigarette manufacturing industry. 

Theo de Rond, managing director of Guinness Anchor Bhd, cautions that spending may not be as robust as in the boom years. He mentions that an exceptionally high increase in excise duty has impacted prices of beer and stout. Within Guinness, there are efforts to vastly improve effectiveness and efficiencies. 

SULLIVAN O’CARROLL 

Managing Director 

Nestlé (Malaysia) Berhad  

What is your expectation of consumer spending next year? 

As far as the food industry is concerned, Nestlé is positive that prospects remain promising. With higher disposable incomes and increased awareness of health and nutrition, consumers tend to be more sophisticated and continually look for new, improved products that will add value to their lives and offer the highest consistent nutrition, quality, reliability and convenience. 

As part of the largest food group in the world, and tapping on extensive R&D resources, Nestlé Malaysia is well placed to cater to these needs with support from key brands like Milo, Nescafé and Maggi, which are market leaders in their respective categories. Our various business excellence initiatives will provide the company with improved efficiencies and the necessary information and tools to compete in a complex global environment. 

Is there any particular segment of the business where you expect to see greater demand? 

From our consumer insights, Malaysians are becoming increasingly health conscious and look for food and beverage products with added health benefits but without compromising on taste. With the increasing rate of obesity and related conditions such as diabetes and cardiovascular diseases, consumers shop for healthier options – food with less fat, less sugar, less salt, etc. At Nestlé, we continuously innovate and renovate our products to meet consumer expectations. 

This health-conscious market creates a demand for nutritious products that support and improve the quality of life. Efficiency in R&D is optimising scientific know-how and nutritional knowledge to develop products that promote well-being and good health. Capitalising on our global network, we are able to tap on a wealth of expertise and competencies in our R&D activities to develop products that will bring our consumers their desired state of nutrition, health and wellness. 

Convenience foods or food-on-the-go is also on the rise, particularly among working people and youth. Nestlé helps meet these needs by providing convenient cooking options with our Maggi culinary range, 3-in-1 beverages, Nestlé Breakfast Cereals and more. 

Beyond homes, Nestlé Food Services supplies hotels, restaurants, airlines, vending machines, quick-serve restaurants and even the humble mamak stalls to bring Malaysians their favourite beverage or tasty meals. Nestlé Food Services is a great partner to the out-of-home segment, providing innovative solutions that guarantee high quality services and products, from complete integrated beverage systems to award-winning culinary expertise, wherever, whenever and however.  

What do you see are the challenges in your sector for 2005? 

The food industry is a relatively competitive one with every company vying for a slice of the market. The emergence of more food SMIs makes the sector all the more dynamic. With the increased competitive environment, we must be able to anticipate consumer trends and create demand for our products. Nestlé views this competition in a positive light, ensuring that we harness our competitive edge and remain relevant to our consumers. 

Efforts in the introduction of new products, renovation and innovation of existing product lines, trade and consumer promotions, marketing strategies, and improvements in distribution yield positive results for the respective product categories. 

Nestlé has an advantage over other food companies as the products we offer cover a wide range of categories, from milks, beverages, culinary products and breakfast cereals to confectionery, ice cream, yoghurts and yoghurt drinks as well as out-of-home solutions provided by Nestlé Food Services. Through innovation and renovation, the company will continue to develop products that meet consumers’ real needs and add value to their lives. 

We also conduct extensive consumer insights to gauge current taste profiles and preferences of the different consumer targets such that we are able to develop products that consistently meet the expectations of our consumers.        

Nestlé was also the first food multinational in Malaysia to have all its products certified halal by the religious authorities when halal certification was first introduced in 1997. With this strong commitment to halal, Nestlé not only addresses the needs of its Muslim consumers but is more than able to penetrate the global halal food industry worth more than US$150bil, which presents a viable business potential.                

In view of rising commodity and product prices, what do you expect of profit margins in 2005? 

The rising prices of commodities and packaging materials, coupled with sustained marketing expenses, may put margins under a slight pressure. However, persistent efforts in several initiatives and effective control of the overall fixed costs will result in the positive evolution of gross margins. 

Some cost reduction initiatives in manufacturing and administrative procedures started in previous years, such as the measurable savings programme Target 2004+ and Business Excellence with the second year of operation under the GLOBE (Global Business Excellence ) programme, have continued to bear fruit. Some of the benefits realised have enabled the company to cope with the impact of price increases, and contributed to improved overall performance and gross margins. 

The company as far as possible tries to absorb the input price increases by increased internal efficiencies and not pass on the burden to our consumers by increasing our product prices. However, raising prices becomes necessary should market forces apply and should it make better business sense for the company.  

Do you expect any changes in the industry landscape next year? 

We do not foresee the food industry going through any drastic changes but would expect competition to be tighter with more new players and the established ones all competing for a share of the shopping basket. 

As the world’s leading food company and with over 90 years of doing business in Malaysia, Nestlé will continue to contribute towards the well-being of Malaysians through safe, high-quality, convenient and nutritious products. In line with Nestlé’s position as a respected and trustworthy food, nutrition, health and wellness company, we are focused on nourishing Malaysians to achieve overall well-being and delivering on our promise to bring “Good Food, Good Life” to all members of society.  

THEO DE ROND 

Managing Director 

Guinness Anchor Bhd  

What is your expectation of consumer spending next year? 

Growth in consumer spending can be expected to continue into the new year. Notwithstanding that, consumers generally are expected to be more cautious with their spending than in the boom years. 

This expected continued growth in consumer spending is, however, not likely to have a bearing and direct impact on our industry. In view of the exceptional circumstances of our industry, we can expect consumption to be flat at best.  

Is there any particular segment of the business where you expect to see greater demand? 

Growth in demand can be expected to be flat in our industry. The exceptionally high excise duty imposed on beer and stout effective Sept 18, 2004, has resulted in an increase in the retail prices of beer and stout. 

The extent of the impact of the higher retail prices on demand is not clear at this point of time as the decline in sales volume experienced in the past few months could be a result of clearing the remaining stock from the pre-Budget speculative mop up. A clearer picture of demand would likely evolve in the run-up to the Chinese New Year.  

What do you see as the challenges in your sector for 2005? 

The exceptionally high increase in excise duty has resulted in the retail prices of beer and stout being among the highest in the region. 

While the increase in retail prices is likely to affect consumption, what is of greater concern are the new and additional competitive pressures that will be added to an already challenging market environment. 

The high retail prices will further widen the price differentiation of beer and stout with that of other markets in the region. This will fuel smuggling activity. Smuggling of beer and stout, therefore, can be expected to be on the uptrend.  

In addition to the competitive pressures caused by smuggling, the price differentiation will also make it attractive for cheaper priced beer from the region to be imported.  

Cheaper imported beer already can be found on the shelves of supermarkets and retail outlets and what is intriguing is that some of these products are priced at even below the excise duty! 

Therefore, it is not only shrinking consumption that we have to contend with but also cheaper priced beer due to smuggling that makes it extra challenging for us.  

In view of rising commodity and product prices, what do you expect of profit margins in 2005? 

In view of the highly competitive market environment, it is incumbent upon us to step up promotional and marketing activities.  

This inadvertently will put a squeeze on margins and will have an impact on our profitability. 

On the one hand, we will have to contend with shrinking consumption and, on the other, with smaller market share as contraband beer and cheaper imports eat into our market. This will add up to put pressure on profitability.  

It will be difficult for us to repeat the remarkable financial performance for the year ended June 30, 2004.  

However, by redoubling our efforts in organisational effectiveness and operational efficiencies, we should be able to surmount the challenges of competitive pressures and difficult business environment.  

Coupled with the strength of our portfolio of brands, we should be able to post satisfactory financial results.  

Do you expect any changes in the industry landscape next year? 

Last year, the duty-paid malt liquor market (MLM) broke out from several successive years of sluggish growth to record a consumption level equal to that of 1997.  

However, the wind has been taken out of the sails this year by the hefty excise duty increase. But it is not just the high excise duty that is going to curtail good growth of the MLM; the inequitable increase in excise duty will be another major contributory factor.  

The increase in excise duty is based on the ordinary volume index instead of alcohol content, resulting in relatively lower taxes on products with higher alcohol content and higher taxes on beer and stout, which have lower alcohol content but higher sales volume.  

Smuggling can be expected to rise in view of the widening price differential between the prices of duty-paid and contraband beer.  

It is our hope that the Government will step up enforcement to curb smuggling. We, on our part, will extend our co-operation to help the Government curb smuggling. 

ANDREW GRAY 

Managing Director 

British American Tobacco (M) Bhd  

WHAT is your expectation of consumer spending next year? 

2004 has seen the Malaysian economy grow by some 7%. We expect that trend to continue into 2005. Consequently, our expectation is that consumer spending will show growth in many categories. 

In the tobacco sector, cigarette prices have increased at a much higher pace than inflation due to the large tax increase announced in Budget 2005. Consumer spending on legitimate cigarettes will increase in monetary terms as a result, while the actual amount of legitimate cigarettes purchased and consumed will probably decline. We expect to see consumer spending on smuggled cigarettes rise as a result of the large tax increase.  

Is there any particular segment of the business where you expect to see greater demand? 

The cigarette market in Malaysia has traditionally been dominated by the premium segment. However, the recent cigarette tax increase, from RM58 per kilo to RM81 per thousand cigarettes, is expected to stimulate consumer demand in the value for money segment.  

We expect to see brands like Pall Mall doing better next year, as some consumers will inevitably switch to brands that offer good quality at an affordable price when faced with higher priced premium brands. 

The illicit trade segment for cigarettes is currently estimated to be 20% in Malaysia and we are forecasting this to grow due to the recent tax hike.  

What do you see are the challenges in your sector for 2005? 

We have three main challenges in 2005 concerning combating illicit trade, restructuring the domestic tobacco growing sector to remain competitive and the development of sensible tobacco regulations. 

Combating illegal cigarettes is the main challenge for both the tobacco industry and the Government in 2005. This segment constitutes approximately 20% of the Malaysian cigarette market, causing over a billion ringgit of lost tax revenue to the Government.  

The burgeoning illegal cigarette market has been fuelled by the substantial tax increases announced in Budget 2005. Large tax increases tend to encourage consumers to switch from legitimate (i.e. tax-paid) cigarettes to contraband. The effect on tobacco consumption is likely to be only modest. Cigarettes in Malaysia are now among the most expensive in the Asean region and this means that there is a huge incentive to purchase cheap cigarettes in nearby countries for smuggling to Malaysia. 

Due to the huge volume of international shipping these days, it is very easy for criminals to deliberately mis-describe consignments of cigarette products shipped to Malaysia masquerading as items that attract lower duty. 

High taxes generate a serious problem with smuggling even in countries with very effective law enforcement. Unfortunately, cigarette smuggling may also lead to increased criminality and the creation of criminal organisations that smuggle other products as well. 

Experience in many countries has shown that customs enforcement measures have only limited impact while large tax differentials persist, so the answer in future lies in gradual and steady increases in cigarette taxation as opposed to large and sporadic increases. 

In 2005, the illicit cigarette problem may also be exacerbated by the withdrawal of the sale of legitimate small packs of cigarettes (packets containing less than 20 sticks). Consumers of legitimate small cigarette packs may be encouraged to switch to widely available cheap illegal cigarettes when they can no longer purchase legitimate small packs at a low price. This may also result in some consumers increasing their daily per capita consumption of cigarettes as the option to moderate consumption via the purchase of small packs is removed. 

With regard to restructuring the domestic tobacco growing sector, as the demand for legitimate cigarettes is reduced, there will be a consequent decline in the demand for Malaysian-grown tobacco. This puts a lot of pressure on the tobacco farming sector, which is already obliged to cut costs and improve efficiency if it is to compete on a level footing with imported Asean tobacco post-2008. 

Looking forward, the current schedule of tariff reductions under Afta-CEPT translates into cheaper tobacco leaf sourced from Asean countries compared with leaf produced in Malaysia in 2008. As such, it is imperative to accelerate the restructuring of the tobacco growing sector to meet the effects of liberalisation under Afta-CEPT. We believe the Malaysian tobacco leaf growing sector can be competitive. Members of the Confederation of Malaysian Tobacco Manufacturers have submitted a proposal to restructure the leaf producing sector under Afta-CEPT to the Government, and we are confident the Government will determine the appropriate direction for the industry in due course. 

Finally, the tobacco sector is becoming increasingly regulated. Given that there are real risks of serious diseases associated with tobacco use, we believe tobacco should be regulated.  

At BAT we seek to engage with the Government, other regulatory bodies and other tobacco companies on tobacco regulation that can tackle real issues in workable ways. We are committed to working with the Government to reduce the health impact of smoking, and we welcome opportunities to participate, in good faith, to achieve real progress. The important factor to bear in mind is that any regulation should be workable and sensible, and we would also call for a balanced approach that takes into account the needs of smokers and non-smokers alike.  

In view of rising commodity and product prices, what do you expect of profit margins in 2005? 

Our expectation is that the cost of Malaysian grown tobacco will be steady next year. Our manufacturing and supply chain will focus on benchmarking costs and efficiencies with other world class operations and will put in place appropriate productivity initiatives to ensure that we remain competitive.  

Do you expect any changes in the industry landscape next year? 

It is possible that the Government may choose to introduce further regulation for the tobacco sector.  

We support sensible tobacco regulations and we hope to be given the opportunity to engage with the Government in constructive dialogue with a view to jointly developing tobacco regulations that can help to reduce the impact of tobacco on public health whilst ensuring that adult consumers are able to continue to make informed choices about consumption of a legal product.


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