The constant rise in pork prices worldwide, caused by African swine fever (ASF) detected in Asia, brings several considerations and hidden realities to the meat business in general, and the charcuterie industry in particular, at the national level.
Generally speaking, regarding live pigs, we see that since the beginning of the year, their price has increased from €1,04/kilogram in January 2019 to €1,49/kilogram at the beginning of 2020 on the Lleida stock exchange (which governs the national market). This represents an increase of more than 30% in one year.
Lleida Stock Exchange – 12/31/2019
And why did the price of pork increase in this way? Because China, simultaneously the largest producer and consumer of this commodity, had to slaughter a third of its production due to African swine fever (ASF) and, therefore, resort to foreign markets to meet its domestic consumption needs.
But which markets can it turn to? It must necessarily turn to the European Union (second largest producer) and the United States of America (third largest producer). And we all know that, although the Chinese government has authorized the import of a few tons of meat from the United States, China turns to Europe most often, for several reasons: supply capacity (Europe produces roughly half of China's production but still double the American production), logistics, and politics (China-US trade war).
And this situation is set to last.
And in Portugal?
About a year ago, the FPAS (Portuguese Federation of Pig Farming Associations) stated that the sector's main goal would be to achieve self-sufficiency by 2030, meaning that we would produce domestically at least the amount of pork we consume.
We had two concrete pieces of data as a basis:
1) Consumption in recent years (2015-2017), in which national production ensured approximately 60% of national consumption, with a peak of 64% in 2016 (a year in which pork prices were historically low compared to the reality of the last 10 years).
2) Per capita pork consumption remained stable at 43,5 kilograms/year.
But to meet the remaining 40% of consumption, Portugal has to resort to foreign markets. Better yet, Spain. Let's not forget that 96% of pork imports originate from our neighboring country. This country is the second largest pork producer in Europe, surpassed only by Germany.
It should be noted that Portugal does not yet have a leading role in this matter.
Major European pork producers
It's true that, traditionally, pork is cheaper in Germany than in Spain, but the logistics process distorts the purchase prices due to the long distances involved. And there aren't pigs to fish in the Atlantic, so…
Therefore, we have to rely on imports from Spain, which puts pressure on prices (both rising and falling) and has prevented the production sector in Portugal from evolving in terms of perceived quality among consumers for years.
To help clarify, I remind you that China is paying 0,5-1 euro above EU prices, so it's normal that supplies are directed to this destination for the sake of intra-EU transactions. Spain (which, I remind you, supplies 96% of our imports) had France as its main export market, but in 2019, China bought more than twice as much from Spain as from France. And, as long as China doesn't balance consumption and production to normal levels, this pressure will continue and prices will not fall.
Portuguese producers therefore find themselves in a complicated situation due to four essential factors:
1) Pressure on international market pricing, with the global increase in pork prices due to demand from China;
2) Near-mandatory purchase of pigs and pork from Spain (different businesses, but with similar current trends);
3) Portugal began exporting to China in early 2019;
4) Difficulty in recognizing the quality of our meat, both domestically and internationally, due to the need to import 40% of our needs from Spain.
What would the reader do if they were a pig farmer and had to sell their pigs?
Everyone will know their own answer, but I believe that 99% of readers would do exactly the same as me: sell at the highest price, whether to Portugal or to China. Whether to the butcher or to the large distribution groups. Whether to the industry.
Just like us, Spanish producers will do exactly the same: they will sell to whoever pays them the most! Regardless of whether or not they honor previously signed contracts. And those who get "screwed over" are the 40% of meat that Portugal traditionally imports from Spain.
An immediate consequence is the price increase that Portuguese consumers have recently seen in pork, whether at the butcher's or in the supermarkets so prevalent in our country. This situation leads to significant price fluctuations across different consumer sales channels. These fluctuations are not daily only because of the high weight (46%) that promotional sales have in Portugal, which conditions prices according to the duration of the leaflets.
It remains to be seen what will happen when China balances the production/consumption equation. Will we, the European Union in general, and Portugal in particular, be prepared for this? What will we do with the surplus (frozen) meat we produce in anticipation of Chinese purchases? What will happen to the price of pork, and what socio-economic costs will this entail?
We all know that we are "navigating in mayonnaise," without any possible planning, without defined pricing or volume targets, in a speculative bubble, but there is no alternative except to draw up a plan A, and even a plan B, for when China stops its current pace of imports. Which, sooner or later, will happen.
Taking risks is necessary, but minimizing their impact is also important.
So, what happens to the current business model for charcuterie in Portugal?
Well, pork charcuterie depends on the supply of pork, which is always the main raw material for any product in this category. But we'll get to that part later.
“First things first,” say our old allies. I will detail some data about the category in Portugal: the charcuterie category is one of the most represented in Portuguese households, with a penetration of 90% (Nielsen data); it is also a category that is divided into private label brands (40% of the market) and supplier brands (60% of the market).
While it's easy to identify the main players in private label brands (Sonae, Lidl, Pingo Doce, Auchan, etc.), supplier brands boast an enormous diversity of suppliers from north to south, with the main ones in the north being Nobre/Campofrio, Izidoro/Damatta, Porminho, and Primor. However, only two brands have a national character: Nobre and Izidoro, which have strategically managed to work closely with consumers and the main distribution channel (modern distribution) to win this eternal battle of distribution and shelf presence (D&D – Distribution & Display).
And it is, in fact, through modern distribution channels that charcuterie is consumed in Portugal. The traditional (Horeca) and professional channels have some presence, but they are far from what is known as home consumption.
Modern distribution, including private label brands and supplier brands, accounts for approximately 70 to 75% of the charcuterie market in Portugal, according to Nielsen.
Charcuterie has always been an important sector in Portuguese consumption, as it makes up a large part of our meals, from ham sandwiches to traditional Portuguese stew. However, the World Health Organization is increasingly warning about the excessive consumption of processed meats, placing the Portuguese consumer in a position between the traditional and the healthy.
Given its high penetration rate in Portuguese households (90%), and its predominantly modern distribution network, it will be interesting to examine how the product line is divided:
As we can see, the main categories are ham, prosciutto, bacon, and sausages. While ham is the king of charcuterie, it's important to note that its consumption is currently undergoing a transition from pork to turkey and chicken.
In the delicatessen sector, private label brands are the most prominent on the shelves, holding, on average, around 40% of the market share in recent years. However, at Lidl, DIA Minipreço, Aldi, and Mercadona, their combined market share is almost 100%.
On the other hand, we have traditional distribution companies that, despite increasingly developing and diversifying their own brand, help develop manufacturers' brands, as they need them for their survival (investments) and because there are brands that always have to exist due to their importance and power to attract customers.
Considering only the brands best known to the population (Campofrio, Damatta, Izidoro, Nobre and Primor), we can say that the brands of the Campofrio Food Group (Campofrio and Nobre) occupy the largest share of shelf space (19%).
Now that we know a little more about the charcuterie market in Portugal, what does the future hold for us, given the continuous increase in the price of the category's main raw material (pork)?
Over the last 20 years, there has been a decline in the added value of the category. Price pressures caused by modern distribution, coupled with a lack of mandatory market regulation and the traditional cyclical price curve of pork, have led to a reduction in product quality in order to increase their competitiveness (mainly through promotions). Thus, products began to contain less meat and more brine injection, reducing costs and allowing them to supply modern distribution at highly competitive prices, such as the famous 25% and 20% discounts that the Portuguese enjoy so much.
In short, instead of maintaining the quality of traditional products by adjusting purchase and sale prices annually, the product's value was destroyed to maintain prices for years. And, since the Portuguese consumer was uninformed and had limited financial resources, the stable low promotional price was the purchasing paradigm.
With current technological advancements, we live in an era where information is just a click away. We can easily find out almost anything from the comfort of our homes or our workplaces. We all have more information about everything.
With more information, consumers are more curious to know what they are consuming. This is not only for health reasons, but also to evaluate the value of their money in terms of cost/benefit.
Why buy Extra Leg Ham with 70% meat when you can buy ham with 86% meat for the same price? If I want quality, how is it possible to buy ham for €4,99/kilogram, knowing the price of meat? What is the composition of the product I chose? Does this product contain lactose or gluten? What are the nutritional information for this product?
More and more Portuguese people are opting for a healthy diet, which opens doors to the growth of "free-from" products: free from sugar, artificial colors, preservatives, artificial flavors, genetically modified organisms, gluten, lactose, antibiotics, or hormones. This is a market segment that seems to have a promising future and where there is great room for innovation, and which is now beginning to be explored by the various players in the market.
Six out of ten Portuguese people say they are concerned about their health and well-being, and this concern is reflected in their food choices, according to the study "Have you met the new consumer?", conducted by Deloitte. Even better news for the food industry is that 68% of consumers say they are willing to spend more money on products that do not contain undesirable ingredients, including "free-from" products.
Another study, this one by Nielsen, shows that the Portuguese are more concerned about their health than the European average: eight out of ten consumers believe that meals prepared at home are healthier than pre-cooked meals. Eight out of ten are concerned about the long-term effects of consuming artificial ingredients. 74 out of 100 make their food choices taking into account their health and the prevention of diseases such as obesity, diabetes, cholesterol and hypertension.
Better than anyone else, modern distribution understands the shopper/consumer. After all, that's where they make their purchases and 80% of their purchasing decisions.
Taking into account the above considerations, and organizing our reasoning, we have the following facts:
1) Pork is 30% more expensive;
2) China's needs and imports with no end in sight;
3) Portuguese production is not enough to meet domestic consumption;
4) It is inevitable that Portuguese imports will be directed to the Spanish market (the second largest pork producer in Europe);
5) Inability to promote domestic production in the markets;
6) Pork is the largest component of pork charcuterie;
7) Degradation of the value chain and quality of charcuterie products over the last 20 years;
8) Charcuterie has a penetration rate of 90% in Portuguese households;
9) More informed consumer;
10) Consumer food concerns (health) combined with greater financial availability.
These are facts that are at the forefront for both distributors (private label) and manufacturers (supplier brand). And they have to adapt to a business model that no longer aligns with questionable quality, consistently low prices, strong promotional activity, and annual supply contracts.
Everyone needs to understand that the paradigm of low promotional prices at any cost is over. This is because consumers, now more informed, are willing to pay more for products that guarantee the satisfaction of their real needs, and not to buy a "pig in a poke".
The first player to understand this paradigm shift was a famous German chain that, in the last two years, has significantly improved the formulas of its charcuterie products, raising them to a level of superior quality that has not been seen in Portugal for a long time.
Simultaneously, and because they too were attentive to the consumer and the market, the remaining "players" began to change their formulas and to worry more about quality.
And the arrival of the largest Spanish retail chain has brought yet another unknown to the equation. Because there, quality and food safety are paramount.
And who should have had this clear motivation and mandatory objective? It was the charcuterie producers/suppliers who should have prepared their brands for this movement. And many did not, and therefore are now facing great difficulties in distribution and market visibility.
Even more serious is that, faced with the rising price of pork, they can't even meet their upstream needs, as there's no one selling to them at the prices necessary to fulfill the contracts they've signed. And selling at a loss isn't a solution, especially since it's illegal. Therefore, they're trying to impose new pricing on negotiated contracts, which, historically, isn't healthy in terms of good business practices.
This, therefore, is a great opportunity to create added value for the category and establish fair prices for the products. The various agents in the charcuterie supply chain (from production to distribution and final consumption) must understand that it is necessary to pay the real prices for the products offered and not pass the burden of the price onto production, which, with the increase in the price of pork, is already in dire straits.
Thus, greater price fluctuation and instability are expected in the market, along with tougher negotiations between distributors and producers, but also an increase in the quality of products available to consumers and more frequent innovation to meet consumer needs. New consumption concepts are emerging for the category: convenience is a basic rule in our daily lives, children are the future of consumption, seniors (over 65 years old) will represent 25% of the population within five years and will have the highest disposable income.
Suppliers need to develop their strategic plans taking these demographic, economic, and social changes into account.
We will move from a primacy of price to a primacy of quality and added value. It will take time (I would say two to three years), but all stakeholders will realize that it is an unavoidable reality.
Forget about setting prices with annual contracts. Prices will inevitably have to be tied to the "commodity" of pork. Only in this way can we survive.
And only the strongest will survive.
As Charles Darwin would say, “it’s the survival of the fittest”!
Pedro Matos, commercial director of Primor
*This article reflects the individual position of its author.
