Following hot year for frozen foods, Germany braces for cold sticker shock: the German retail market was up in 2008, with A-brand ready meals sales posting gain of 20%. That was well ahead of private label's +8%. But with prices rising, what's next?

Higher prices coupled with tighter supplies for numerous raw materials, plus rising costs of production make for challenging times ahead for food producers and consumers alike in 2008. One thing that is certain in today's marketplace is that end users in Europe and around the world will continue to pay more at the store for all kinds of products.

By now, the drumbeat of unsettling news about rising commodity prices for everything from wheat and corn to fish and fowl has prepared shoppers for sticker shock in the shop. What remains to be seen is to what extent consumers will change their buying patterns to cope with inflation.

The chief executive officer of a Tenglemann Group-owned food retailing chain in the USA, Eric Clas of A&P, has pegged food price inflation in that country at 8% since just the beginning of this year--that on top of a cumulative 4% rise in 2007. Nonetheless, he waved a cautionary yellow flag rather than a red flag of danger during an interview on March 30.

Noting that people tend to shift buying decisions to adjust to rising prices, Clas commented: "The trend is for food prices to continue to rise. But consumers are savvy. If the price of chicken goes through the roof, they will buy pork."

On the other side of the Atlantic, that may not exactly be music to the ears of Dietmar Vosskotter, even though his Ostbevern, Germany-headquartered company sells mini-pork schnitzels in addition to a much wider menu of value-added frozen chicken products.

"The problem is that chicken, pigs and cattle all feed on corn, which like wheat and soybeans, has become more than twice as expensive to purchase in the last 18 months," said the managing director of Yossko-Tiefkuhlkost GmbH. "But while our costs are rising, some buyers at retail chains still resist reality and decline to pay producers enough to keep up with costs. This can't last indefinitely, though."

Unlike the frozen potato, vegetable and fishery sectors, which have had greater success passing on escalating costs to retailers, intense competition in the international poultry segment has resulted in less flexibility on the buyer's side of the table.

Still, the launch of interesting new products ranging from microwaveable Skewered Chicken containing just 1% fat, to Hawaii-style Medallions has kept customers coming back to Vossko for more. Volume sales last year rose by 10%, while value advanced at a 15% clip. So far this year (as of early March), volume was up 6% compared to 18% for value.

Why was volume growth trending down, Quick Frozen Foods International wanted to know. "Because competitors are offering unrealistically lower prices to buy business," replied Mr. Vosskotter.

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Generally speaking, 2007 was a good year for most players in the German frozen food industry despite rising commodity costs.

Bremerhaven-headquartered FRoSTA AG, which is engaged in the production and marketing of ready meals, fish dishes, vegetable and fruit products, reported a 13.5% increase in sales over the previous year, at 349 million euros. Pre-tax profits rose by 2 million euros to 16.6 million. Post-tax profits, meanwhile, advanced by 1.8 million euros to 12.2 million, according to the corporate annual report released on March 28.

Private label product turnover advanced to 219 million euros, while catering, home delivery and industrial sales rose by six million euros to 64 million.

This writer met up with Felix Ahlers, who runs the company's branded products operation and oversees foreign markets, earlier last month at the FRoSTA Bistro in Hamburg, where the menu features everything from Thai Green Curry and India Tandoori to Wild Salmon Fillets with Spinach and Paella. All items are from FRoSTA's retail product range, and are microwave oven-prepared for customers on the premises.

"We are quite happy with ready meal sales, which grew by almost 15% last year," said Mr. Ahlers, noting that many new products are first consumer tested at the FRoSTA Bistro before being launched.

Among product segments, the annual report spelled out that ready meals ranked "the strongest with a growth of 30%, and is clearly more dynamic than the whole market." Fish products came in second with a 12% increase in sales, followed by a 4% growth rate for frozen vegetables.

One-third of the company's turnover was generated abroad, where sales climbed by 24% to 123 million euros. FRoSTA's presence outside of Germany extends from the UK and France to the Netherlands, Italy and Central Europe. Recent television advertising campaigns have further enhanced its profile in Poland, Hungary and the Czech Repubhc. In fact, it is the market leader for frozen fish products in Poland.

On the home front, brand turnover increased by 6.5% to 49 million euros. "In Germany," noted the annual report, "five years after its introduction, FRoSTA's 'Reinheitsgebot' (the German term for 'Purity Ordinance') continues to prevail with an increasing recognition for the unique concept of consequently relinquishing the use of any taste enhancers, aromas or food coloring."

With a share of 23% in December of 2007 and 26.5% in February of this year, as calculated by A.C. Nielsen, FRoSTA retains market leadership in the frozen ready meals category. Four of its dishes--Bami Goreng, Nasi Goreng, Paella and Tagliatelle Wildlachs--are rated among the top five best sellers of frozen food products in Germany, according to Nielsen.

But with the perennial presence of Iglo and the introduction of apetito products into retail cabinets several years ago, QFFI wanted to know Mr. Ahler's thinking about rising competition among A-brand producers in the frozen food aisle.

"There may be a place for more than one brand," he replied, rather diplomatically. At the moment, a rising tide of demand for convenience frozen food products seems to be lifting a number of ships.

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What has the FRoSTA executive most concerned at the moment is maintaining growth during a time when rising raw material costs show no sign of retreating.

"Prices for our ingredients are going up all the time," he stated. "Alaska pollock alone was up by 30% last year, and this is something that can't be negotiated away. For this reason, further price increases for consumers are unfortunately inevitable."

Costa and apetito Join Forces

Another company all too aware of the climbing cost of fishery products is Costa Meeresspezialitaten GmbH & Co. KG (Phone: +49 21/96 13-16), which was acquired by Rheine-headquartered apetito (www.apetito.info) from Dr. Oetker last Nov. 1. The frozen fish and seafood specialist imports raw materials from around the world--ranging from pollock blocks and squid to shrimp and salmon--for further processing into value-added products at its factory in Emden.

Managing Director Conrad Bless, when giving QFFI a guided tour of the state-of-the-art plant on March 8, pointed that it produces upwards of 50 different products. Among the myriad of retail offerings are Salmon with Dill and Lemon in 250-gram boxes, Tuna Fillets in 265-gram packages, Pacific Prawns in 500-gram bags, and Shrimp Rings in 210-gram boxes.

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Joining the tour were Manfred Rinderer and Matthias Mertens, who respectively are directors of apetito convenience GmbH & Co. KG. Marketing and public relations specialist Ruth Fislage was also on hand.

No doubt apetito made the investment in buying Costa to move more deeply into a sector with expanding demand for frozen ready-made fishery products, as the market in Germany grew by 8.7% last year to 761 million euros. The segment is second to pizza's overall sales of 861 million euros, and Costa is involved there too as a producer and marketer of seafood-topped pizzas. Only the bakery sector had a higher percentage increase in 2007, +8.1%, with 496 million euros in turnover. The overall frozen food category's gain--excluding Aldi retail sales, ice cream, wild game and poultry--was 4.9% on sales of 297,345 million euros, according to A.C. Nielsen.

Mr. Rinderer, who is in charge of sales and marketing, said that quality branded products such as Costa and apetito are steadily gaining ground. This is partly at the expense of private labels or store brands, which claim a large share of the market.

"We had a good year in 2007, enjoying a 40% increase in retail product sales," he was pleased to report. "And prospects for 2008 remain bright, with continued healthy growth during the first two months."

Sales of frozen food A-brands were up a solid 20% in Germany last year, compared to just 8% for private labels and a negative -9% performance for B- and C-brands, which don't generally invest in advertising and promotion, pointed our Mr. Mertens.

The apetito marketing team, which spent a double-digit budget in the millions of euros last year on national television and radio commercials and print advertising to burnish it brand image and support new rollouts such as the Pasta e Basta range of prepared dishes, will continue the push this year. Another double-digit budget has been approved for ongoing efforts.

"We are working hard to build on last year's achievements, which included a 63% gain in turnover, a 56% improvement in market share, a 30% advance in customer satisfaction, and a 24% increase in weighted distribution, said Mr. Mertens, quoting statistics from A.C. Nielsen.