Making a meal of Europe’s food-and-drink business

Making a meal of Europe’s food-and-drink business

The McKinsey Quarterly, 2000 Number 1

Policy relevance:

Following a series of disastrous food crises in Europe, the EU has created strict food safety rules and mechanisms for rapid response in case of new epidemics. The new European Food Safety Authority will be operational before the end of the year. These new stricter rules will have a serious impact on the food industry which will have to adapt to them. This article gives some insight into the structure of Europe’s food-and-drink industry.

Main conclusions:

• While many industries in Europe are consolidating, one of the largest and most fragmented sectors-the manufacture of food and drink-has been relatively untouched. McKinsey research, however, suggests that consolidation could create more than $100 billion in net present value for industry participants, making an imminent restructuring almost inevitable.
• The leader in any national market typically earns margins up to twice those of competitors half its size. Even a relatively modest increase in concentration could therefore easily add a percentage point to the overall profitability. For the European food-and-drink industry’s more than $1 trillion turnover, the net present value at stake from consolidation could be higher than $100 billion, generated by economies of scale in almost every function, from sourcing and manufacturing to customer management, marketing, and administration.
• National leadership isn’t the only winning strategy in the food-and-drink business. However, successful niche strategies (strong brands or positions in high-margin subcategories, such as Bacardi’s in spirits) can be very profitable too. In some categories, geographic niches, remain attractive as well. Aiming for pan-European leadership may also prove a successful strategy, but for many companies, the advantages of leadership in one or two countries are canceled out by poor performance in others. Nonetheless, experience suggests that multinational leadership can create value in many or even most categories.

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• EURACTIV:LinksDossier on European Food Safety Authority