Annual Manufacturing Trends Survey: Squeezed

Plagued by consolidation problems and slim profit margins, most food processors are still skimping on capital spending

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* More manufacturers are installing plant-wide information gathering and monitoring systems, including active and passive quality control systems, that provide operators with essential information for making rapid manufacturing and supplier-related decisions.

* Floor systems must provide economical solutions for wide-span floor plates, but also must consider future requirements to handle large penetrations when new assembly lines are moved or installed. Hence, choice of structural materials is becoming more crucial.

* Getting products to market requires plant site layouts that can accommodate more frequent traffic transport, including extensive aprons for trailer trucks and improved circulation planning.

Automation is one obvious solution to quickening the pace of both production and changeovers. While the food industry still lags some other industrial sectors in this area, automation is becoming a significant investment item on the shopping lists of most food companies. In our own annual Manufacturing Trends Survey [January 2004, p38], respondents ranked automation the third most important issue facing them this year, behind perennial concern food safety and in a virtual dead-heat with labor issues. Ninety percent said they were in the process of automating some component of their manufacturing processes.

Food plant construction

Greenfield vs. expansion projects

2003

 

New

Expansions

89

180

2002

 

New

Expansions

124

227

2001

 

New

Expansions

136

230

Source: conway Data Inc.

It's worth noting that although labor is the single highest expense that food manufacturers incur, food sector employment has held steady for the past several years, despite industry efforts to automate critical production processes and the national recession.

The U.S. Department of Labor has found that some tasks, particularly those involving handworkers in the meat, poultry and fish industries, simply defy attempts to automate them. Meanwhile, new automated equipment for tasks as various as packaging, inspection and inventory control simply swap out machine operators for maintenance workers and mechanics. Computers have likewise reduced employment growth among some mid-level managers but increased the demand for workers with technical skills.

Blame Wal-Mart, consolidation

While a number of factors have converged to suppress construction and capital spending activity in the food industry, skimpy margins rank high on that list. -- even with the national economy allegedly in recovery mode. Some industry analysts lay much of the blame on Wal-Mart, whose massive market presence has not only confounded its competitors, but given the retailer the clout to negotiate not-so-everyday low prices with its suppliers. Wal-Mart has wisely passed these savings on to consumers, who have rewarded the retailer with more business and an even bigger club to brandish over suppliers.

 

But that only completes half the vicious circle that has food companies chasing their tails these days. Lest anyone think Kraft is ceding its faltering cheese and cookie brands, the company plans to use funds from 20 announced plant closures to bankroll $500 million to $600 million in in-store price promotions, a tack that will likely force competitors to boost their promotional budgets , and shave profits , in order to keep pace.

Why does Kraft have so many plants to close? One reason is it's still digesting that little Nabisco acquisition of year 2000. As surely as dessert follows dinner, consolidation invariably follows a good feeding frenzy. So, it's not surprising that the number of new and expanded food plant projects in the U.S. has slid steadily since industry mergers and acquisitions activity peaked at the turn of the millennium.

Historically, food companies have sought to increase their clout via mergers and acquisitions but, as the accompanying chart shows, M&A activity in the food and beverage sectors is largely flat these days. Moreover, data from the U.S. Department of Commerce suggest that food companies have no more leverage than they previously had as a result of continued consolidations among retailers, whose top four or so players now account for 30 percent of total grocery sales. Rather than raise prices, as many expected, these ballooning behemoths have dropped them well below inflation levels, according to the Commerce Department.

So where can food companies look for growth? Some sectors, notably meat and poultry, and fruits and vegetables, are eyeing vertical integration as a means of boosting profit their margins. And usually growth in new areas does require investment. Dole Food Co., for example, has moved from simply distributing lettuce and fresh fruit to creating branded prepared foods. Smithfield Foods now does everything from raising hogs to producing branded pork chops. After all, why let other companies enjoy the biggest markups?

It would be as easy as taking candy from a baby were it still not unclear whether consumers will spend additional money for a Smithfield or Tyson value-added processed meat product. "Two years ago, we fell into the lack-of-differentiation trap by not providing the additional value needed to drive interest and sales of this underdeveloped category," Tyson marketing director Mike Stout told FOOD PROCESSING last June.

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