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Food Companies Margins Healthier Now

Food companies have battled margin compressions for the last 18 to 24 months with high commodity costs. And although commodity costs continue to drive furrowed brows in the food industry, many lessons were learned in 2008-09 causing food companies to continue to focus on tightening their belt and capitalize on consumer trends.

In its fourth semi-annual survey of chief financial officers and key decision makers of middle-market food, beverage and agribusinesses, major lender GE Capital found that 40% of the 100 surveyed expect profit margins to increase this year versus 32% in the first quarter.

GE Capital surveyed seven major industries, but the food, beverage and agriculture segment was the only sector which expected a higher level of increased revenue expectations this year with 65% today compared to 51% earlier this year. Food CFOs are the most aggressive with plans to raise prices at 69%, compared with the overall average of 56%.

Twenty-seven increased use of in-store promotions and coupons. Less than a quarter (21%) lowered prices in reaction to shifts in consumer spending and preferences, compared with 44% in the first quarter of 2010.

Dennis Krause, GE Capital senior vice president industry, says he feels major retailers have protected consumers in the timing of price increases. When commodity market prices shifted upwards, there was a pushback from these retailers for an immediate reflective price increase. However, as commodity prices have stayed fairly high, U.S. retailers are more receptive to price increase by the market leaders, Krause notes.

Many of the companies who provided ingredient prices were at the whim of major market leaders. But as the surveyed showed food companies are aggressive in future strategies to increase prices, it again shows the commodity prices top the list of concerns for the industry (73%), a consistent trend through all the previous survey findings.

"Margins are getting healthier now in food companies," Krause says. "This is a function of both finally getting some price relief from retailers and being able to pass some of those prices on and working on tightening the belt."

Improving efficiencies

To lower costs in 2011, 89% of CFOs plan to improve their operational efficiency and another 38% plan to streamline distribution.

When questioned what action companies' are considering to improve operational efficiencies, 47% say they're looking to replace old equipment with more efficient models. Close behind at 41% was reducing waste created during processing and then 34% by increasing automation (see chart).

Reducing packaging materials and package contents remains a small way CFOs are looking to cutback costs, although each have slipped slightly over recent surveys.

Krause says there has been quite a bit of lending for replacing old equipment and improving software. Food safety is the number two concern for decision makers at 56%. Many of the food safety upgrades through traceability software has streamlined operations, while also helping alleviate some of the concerns over complying with food safety legislation.

Outlook

Thirty percent of FB&A chief financial officers say they believe the U.S. economy will grow over the next 12 months, down sharply from 61% in the first quarter of 2011. Only 32% expect their own industry to expand, compared with 38% in the previous survey.

Karuse says he does not expect another economic downturn to affect the food category as much as other segments of the U.S. economy. As seen in the most recent major recession, organic food sales continued to thrive. "Even in the economic downturn, health and wellness products continued to be in great demand if there was a good value for them," he says.

Value and health & wellness were seen as the top consumer preferences influencing new product offerings in 2011 by 35% of food CFOs; convenience (24%) and sustainability (24%).

He was encouraged to see that 30% of food companies implemented sustainability initiatives over the past year in reaction to shifts in consumer spending and preferences. "Consumers are obsessed with reading labels to know what's in their food and whether it's good for the environment. Savvy food companies are responding to that and taking real sustainability initiatives," Krause states.

Merger and acquisition activity is also alive and well with strength expected to continue, Krause says. Since the food category continues to feature a global footprint, more than ever before companies are seeing accelerated growth in emerging economies. China, India and Eastern Europe offer "huge opportunities to capitalize on middle market consumers." If companies can service economies that are growing robustly it also creates opportunities for expansion and M&A activity.