PotatoPro Newsletter

Services for the Potato Processing Industry

January 23, 2008

This week there was a lot of attention for the stock markets and the fears of a recession in the United States. Although today's stock markets recovered in Asia and North America, the overall picture shows significant capital losses since the start of 2008. Fear for a recession in the US resulting from the sub-prime mortgage lenders and the credit crunch that followed are the driving factor.

Suppose it comes to a recession, what would the consequences be for the potato processing industry? I did some research and here are some of the pieces of the puzzle I came up with:

Case 1: Fast food restaurants in Japan, throughout most of the nineties:

In Japan, during the recession in the nineties, overall fast-food sales remained flat although total sales at all restaurants in Japan have increased at a low-single-digit rate at the end of the nineties, according to the Japan Food Service Association, an industry group. However, that growth has been outpaced somewhat by new openings, driving down the per-location average volumes of restaurants open more than a year, the JFSA said.

While most of Japan's foodservice industry has struggled with flat, depressed or slight gains, McDonald's Japan has continued to grow. From 1994 to 1996 the company's sales rose from 216 billion yen, about $1.9 billion, to 299 billion yen, around $2.6 billion, while the chain's number of restaurants in Japan grew from 1,171 to 2,006. In 1997 the company added about 400 additional locations and last year opened more than 100 new units.

McDonald's has not been immune to Japan's recessionary woes, however. In the summer of 1997 McDonald's Japan slashed the price of its hamburger by 50 percent and completed a system wide retraining of employees to emphasize service and attempt to capture more adult male customers.

Case 2: Frozen Foods in Germany 2001-2003

In 2001 the German economy saw a sharp downturn, followed by two years of virtually no growth. Sales of frozen potato products in 2001 in Germany rose 6.3% both in volume and value. In fact there was growth for the entire frozen food sector, which led to some speculation that the frozen food sector was not effected by the economic downturn. That proved to be too optimistic as later articles state that "the purchases of frozen potato products were down some in 2002". In this entire period reduction in consumption of French fries was partially offset by increased consumption of potato specialties.

Case 3: Snack foods

What better source to answer this question than Indra Nooyi, CEO of PepsiCo/Frito-Lay. Here is what she said in an interview last December:

Q: I have heard that you said once that even if a company like Pepsi is not recession proof, it is not recession prone. We are hearing everyday about the impact of the sub-prime mortgage crisis. Given that we are seeing the unravelling of the financial markets, what impacts do you see it having on the economy?

A: There are bulls and bears. The bulls would say we might see a small slowdown but the US economy is very resilient. If you see the recent GDP estimates for 2008, people think the growth rate will be 2.5-2.6-2.7% in that range and life goes on. Then there are the bears that say, “Hey you could see a substantial slowdown in the US economy next year, in the low 1%.” It depends on whom you talk to ‑ bulls or bears. All that we have to do as responsible stewards of a convenience food and beverages company is to make sure that whether it is a slowdown ‑ deep or shallow ‑ or there is no slowdown at all, we have to make sure we deliver our financial algorithm. We have gone back and looked at the last 4 or 5 economic slowdowns and seen how the consumer behaved in the slowdown. The good news is when the economy slows down, they still eat and drink our products because they are comfort foods. When the economy is good they still eat and drink our products because they feel good. So, we are not particularly going to be impacted too much by the recession.

Stock prices of Fast food restaurants saw already a correction (McDonald's, Wendy's), but it should be kept in mind that some (e.g. McDonalds) were near an all time high.

My overall conclusion: from these excerpts the picture emerges that the potato processing industry and related sectors seem reasonably resilient in times of a recession.

Let's hope this will not be put to the test...

Enjoy reading,

Paul van Eijck

Featured Events

A whole series of local potato conferences and exhibitions is coming up shortly or have just started: these include conferences/exhibitions in Idaho, Manitoba, Maine,The Netherlands (Aardappelwereld congres), Oregon, Washington, New Brunswick, Prince Edward Island (PEI). Visit an event in your area and stay informed! And let us know if your event is not in our list.

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It has been suggested that a recession may create a shift towards private labels. Therefore we highlight today a market research report on Private labels:

Private label has been growing at least at twice the rate of famous brands over the last 10 years. It has grown so fast because it is very much aligned with the prevailing consumer trends and its creators have been adept at aligning it with relevant consumer segments. However, it is not yet as trusted as famous brands, meaning that these two competing groups can still learn from each other.

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The Martin Lishman SMQC Potato Hot Box is an economic bruise testing device that assists with crop assessment on-farm before the potatoes go into store or for processing. It can also bring larger processing operations up to date.

The Hot Box indicates bruise levels after just 12 hours. It has an integral heavy duty fan, thermostatically controlled heater, water reservoir and timer. Separate trays allow periodic sampling throughout the work period. Different models are available to suit different size operations.

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