2013 Food Industry Outlook: 5 Things to Look Out For

Just when you thought the recession's end would bring calm, it's time to reinvent your company and meet new challenges.

By Dave Fusaro, Editor in Chief

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What it really comes down to is a pursuit perhaps as old as history itself: trying to understand our food and where it comes from. There's only one (each) Eric Schlosser and Morgan Spurlock; there are million of mothers who just want to responsibly feed their children.

By the way, we will devote our April Wellness Foods cover story to a discussion of GMOs.

This GMO debate brings us to our second challenge …

Naturality

Defining "natural" is about as difficult as defining "good." That may be most of the reason the FDA has never created a legal definition, even though the agency successfully outlined organic.

"Natural" concerns come in many forms. People worry if the growth hormones in milk are pushing their daughters into early puberty; that the antibiotics in their beef make them susceptible to an antibiotic-resistant superbug; or the synthetic ("artificial") colors in so many food & beverage products are causing autism. What about pesticides in your vegetables? Is high-fructose corn syrup natural? Even how humanely your Kentucky Fried Chicken was raised could be in some consumers' definitions of "natural."

Somewhere in the middle was the summer of 2012 dust-up over lean finely textured beef (LFTB). Sorry, but we can't help but make a quick reference to its ABC News-created pejorative "pink slime." Beef Products Inc., which perfected the process of turning trimmings into lean hamburger, nearly went bankrupt when TV chef Jamie Oliver and ABC News questioned the ground beef and especially the ammonium hydroxide antimicrobial treatment it receives.

Ammonium hydroxide is USDA approved and generally recognized as safe. But applying a term that sounds like ammonia to food for school children, well, it just didn't sit well.

FDA has never issued a regulation covering natural claims, but it has adopted an informal policy that defines "natural" as meaning "nothing artificial or synthetic, including all color additives regardless of source, has been included in, or has been added to, a food that would not normally be expected to be in the food."

Even without a regulatory definition, "natural" is always among the top-used label claims, according to several new product-watching organizations. Lately, lawsuits against processors who allegedly misuse the term are getting to be just as numerous. Something's got to give.

Read our Power Lunch guest column on p.11. We've written about frivolous class-action lawsuits before, but Thomas Hanrahan, an attorney with Sidley Austin LLP, notes that lawyers who made their fortunes suing tobacco companies have set their sights on the food industry.

The changing business climate

While every food company had to deal with the recession one way or another, now that it's over a new emphasis on profitability and repositioning is emerging. Companies that survived by being reactive are now expected to be proactive.

While there's always been a "circle of life" in this business, last year witnessed some of the most cataclysmic changes in recent memory. Venerable Kraft Foods split itself in two, its high-growth, mostly acquired, mostly international snack food businesses (Nabisco, Cadbury, Jacobs-Suchard) becoming Mondelez International, while its grocery store staples (Kraft mac and cheese, Maxwell House coffee, Oscar Mayer meats) remain part of Kraft Foods Group.

Sara Lee now is just a brand of renamed Hillshire Brands, with the mostly coffee, mostly European businesses becoming D.E Master Blenders. Ralcorp began 2012 by spinning off its Post Cereals business and ended the year being acquired by ConAgra Foods. Dean Foods will spin off to shareholders its WhiteWave-Alpro segment, which makes soy milk, and is selling its Morningstar division, which makes extended shelf-life products, to Canadian dairy Saputo. There are rumors Dole is considering some kind of split.

And Hostess Brands is out of business, although its iconic brands and products (Twinkies, Wonder Bread, Donettes) soon will be bought up by competitors.

What's it all mean?

Despite the end of the recession, "There's no doubt the bar has been raised again regarding costs," says Dexter Manning, national food & beverage industry leader for accounting and consulting firm Grant Thornton LLP. Input costs, especially commodities, are going up, as are regulatory costs. "Very few companies are not going to be impacted by the new Affordable (Health) Care Act," he says.

"It's not just about operating efficiencies anymore. It's getting harder and harder to improve margins. And with a lot of uncertainties on the cost side, companies feel they need to do something proactive before all this hits."

It sounds like post-recession hunkering down. "They're looking for a synergistic strategy," Manning continues. "They're asking, ‘What's our core? What's our value?' They're looking to focus on making more money from their core business."

Another factor is that credit remains cheap and now is becoming a little easier to come by. One measure is all the banking and financial advertisers we've carried in Food Processing recently: GE Capital, Lazard Middle Market Financial Services, PNC Bank, US Bank. They're all saying to food & beverage processors: There's money available if you want it.

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