By analysing the business case behind the merger through a case study, the context that the companies operate within becomes important. The overall framework of PEST is used to ana-lyse the first research area of the thesis and create an overview of the factors that impact the industry, namely the Political, Economic, Social and Technological factors (Petersen & Plen-borg, 2012, p.188). While PEST touches upon each factor, the thesis focuses mostly on the trends with the most impact.
The European meat industry which both Danish Crown and Tican is a part of is expected to be supported by strong demand on the world market, primarily driven by improved economic conditions (European Commission, 2013b). Growth in the industry is driven by growth in disposable income, but the industry is also highly influenced by political relations, such as the Russian embargo.
Page 30 of 131 6.2.1 Political factors
Tican and Danish Crown both sell globally and political instability could impact exports and pose a big risk to the companies. Looking at the political context that the companies operate within, it is relevant to focus not only on major political events such as the Russian embargo, but also briefly touch upon the key institutional factors with major influence on the industry.
The key European institutions with influence on the market for fresh meat and processed meat is the European Commission which enforces the Common Agricultural Policy (CAP) through the Commissioner for Agriculture and Rural Development and secondly the European Food Safety Authority (EFSA) who legislates on food safety, which is a key competitive parameter for both Danish Crown and Tican. The CAP on the other hand decides the EU agricultural subsidies, which ultimately subsidies the production of the cooperative members. The CAP also provides a number of mechanisms or safety nets to prevent economic, health or weather related crises from destroying the production and to ensure viable production throughout the EU (European Commission, 2013a).
In February 2015, the European Commission introduced private storage aid for pig meat, in attempt to ease the pressure on prices in the European pig meat market, with pig prices having dropped more than 15% below the 5-year average for a period longer than 6 months primarily due to the Russian import ban – see appendix 7. The private storage removes products from the market and effectively puts a floor under the market. Russia banned imports of livestock, fresh pork and a number of pig products coming from the European Union in January 2014 after cases of African Swine Fever were identified in Lithuania and Poland, and the ban was extended following the West’s economic sanctions due to Ukraine (Globalmeatnews.com, 2014). With pork meat exports to Russia in 2013 being worth 1 billion euros, the effect has been quite significant (Euractiv, 2015). The current import ban in Russia has been prolonged until 6th of August 2016, but is expected to continue until the end of 2016 (European Com-mission, 2015). In any case trade is not expected to resume to previous levels due to increased risk, worsened economic conditions in Russia, but also increased self-sufficiency in Russia. In fact, Russia has gone from being one of the largest importers of pork to being an exporter (Meditsky, 2016).
While the CAP mechanisms are rarely used, it shows show the willingness at European level to aid the agricultural producers in case of external shocks and sharp changes on the market, thus somewhat decreasing the riskiness of the producers and making it more attractive to con-tinue engaging in agricultural production. In contrast agriculture is often criticized for the environmental impact and animal welfare, with regulations and directives being introduced
Page 31 of 131 that both farmers and slaughterhouses have to conform with increasing complexity in the in-dustry (Landbrug & Fødevarer, 2013).
Food safety is another factor largely determined by the political context. Both Danish Crown and Tican are renowned for high quality and high standards of food safety in the products, both those sold in domestic markets of production (Denmark, Poland, and the UK etc.) as well as export markets. The EU legislates on food safety, but often, as in the case of Denmark, the domestic legislations exceed that of the general EU legislation (Danish Agriculture and Food Council, 2016). However, food safety is result of safety across the entire value chain, with each process being managed with regard to all types of risk, be it biological, chemical or physical and thus a more holistic approach to the issue is beneficial. The degree of integration in both Danish Crown and Tican enables a high degree of control over the various processes rather than a private company purchasing raw materials from external suppliers and thus en-forces the high standards on the political as well as consumer agenda.
6.2.2 Economic factors
Given the high levels of export for the companies the global economy should be considered when looking at the market attractiveness and the economic factors.
Studies show a strong positive correlation between the level of income and the consumption of animal protein with consumption of meat, milk and eggs increasing at the expense of stable foods (WHO, 2003, p. 77). Economic development is not the only driver behind consumption, e.g. population growth, cultural influences and consumer preferences, however disposable income is a large driver in meat consumption. The level of income per capita in the current key markets for Danish Crown and Tican is shown in appendix 8, GDP per capita is forecast-ed to grow for all major markets, in particular in countries such as China whereas Russia, Po-land and Japan is forecasted to have relatively stable levels of GDP per capita with only minor growth (IMF, 2015).
Looking directly at consumption, consumption has grown across all major agricultural com-modities, although the growth in meat consumption is lower than growth in cereals and milk.
The projected level of consumption of meat in kg per capita for some of the key markets is shown below. Consumption of meat on the world market is expected to grow, albeit at a de-creasing rate. In high income countries, consumption has reached saturation, while others have cultural and religious patterns decreasing the level, such as the consumption of fish in both Japan and Norway. Russia and China is however expected to consume more meat per capita whereas European consumption per capita is expected to be stable.
Page 32 of 131 Table 6-3: Consumption of meat, kg per capita, selected countries (OECD, 2015).
Consumption of meat, kg/capita BRICS China EU28 Japan Russia USA World
2004 26.3 39.1 66.2 33.1 38.8 99.9 30.4
2014 32.9 49.9 64.8 35.7 60.8 90.0 34.0
2024 35.4 55.0 65.0 36.3 68.0 94.1 35.5
However, rather than looking only at meat consumption in total, it is also relevant to look at the split between various meat types as seen for the European and World market in Table 6-4.
On both the world market and in the European Union poultry is expected to grow, indicating that poultry is driving the majority of the global growth. In contrast, beef consumption per capita is decreasing in Europe, indicating a shift to poultry. Pork consumption is expected to be relatively stable with a minor decrease in Europe, however globally pork consumption is expected to increase.
Another important factor in the macroeconomic environment is currency effects. Given the high share of exports, currency effects can have a large impact on both the level of export in terms of volume and the value received. When the DKK increases against a foreign currency, the possibilities for export will be impacted. An example of this is Japan, where the yen in 2013 fell relative to the euro and DKK causing the revenue earned on the Japanese market for both Tican and Danish Crown to negatively impacted.
Table 6-4: Meat Consumption (kg per capita) in EU 28 and the World (OECD, 2015).
Consumption of meat, kg/capita Beef Pork Poultry
EU World EU World EU World
2004 12.12 6.62 32.57 11.62 18.98 10.56
2014 10.46 6.54 30.89 12.58 21.61 13.19
2024 9.65 6.54 30.36 12.49 23.14 14.60
6.2.3 Social factors
Social factors refer to the socioeconomic environment of the industry, more specifically the key trends, attitude and demographics. Consumer trend is one social factor with potential to impact the industry, especially in a long term perspective. Generally, consumption of meat has increased on a global scale as mentioned above, but with changes in the consumption mix, moving towards more poultry. Another trend is the rise of organic and special meats such as anti-biotics free meats as part of an overall increased focus on health (MarketLine, 2015).
Demographics also play a key role in the market, with a rising middle class having not only higher disposable income and thus consumption, but also an increasing interest in quality,
Page 33 of 131 production, food safety and animal welfare. This can lead to improved opportunities for ex-port for the Danish and European food production.
6.2.4 Technological factors
Lastly, the technological factors relate to how technology can either positively or negatively impact the industry. Technological development is very relevant for the industry, by enabling higher levels of efficiency and productivity in the production. Currently there is an increase in the number of animals which are exported to before slaughter, to countries such as Germany where the salaries are lower (Landbrug & Fødevarer, 2015)
In order to be able to compete with lower-wage countries, investments in production are nec-essary to achieve high efficiency. With the pressure on prices, companies have generally in-vested in efficiency improvements such as new plants, e.g. Danish Crown’s cattle slaughter-house in Holsted or pig slaughterslaughter-house in Horsens (Danish Crown, 2014b).