Mid-Tier Food Companies Eye Margin Bonanza

Conventional wisdom holds that food processing is a slow- to no-growth business, particularly in a country where obesity is a major public-health concern. But a recent survey of food companies with sales in the $10 million to $1 billion range uncovered remarkably bullish expectations for margin growth and an appetite for hiring more workers and investment in their operations.

In its May 23 food price outlook, USDA’s Economic Research Service held to earlier forecasts of a 2.5-3.5 percent increase in prices for both retail and foodservice products in 2014. The service does not forecast overall changes in wholesale prices, but changes in finished consumer foods prices in 2012 and 2013 were within one-tenth and two-tenths of a point of the changes in food’s consumer price index. Wholesale dairy prices are expected to increase 4-5 percent this year, while wholesale wheat flour is expected to decline 3-4 percent and wholesale fats and oils down 4-5 percent.

 Midsized food companies, on the other hand, are anticipating an average margin increase of 6.4 percent, according to a survey conducted in late March by GE Capital Corporate Finance. Almost as many companies expect their margins to increase as those anticipating flat margins. About one in five expect tighter margins.

 The optimistic outlook has less to do with droughts and commodity prices than the innovative and targeted new products the mid-sized companies are rolling out, according to Chris Nay, senior managing director-food & beverage at GE Capital. Those products target younger Americans, the so-called Millennials, the largest demographic cadre since the Baby Boomers. “The Millennial crowd is simply demanding innovative new products and new delivery mechanisms,” says Nay, citing the example of craft beer, a category that continued to post double-digit growth throughout the 2008 recession and beyond. While only 1 out of 25 Baby Boomers drink craft beer, 1 in 6 Millennials pay the premium for craft, he says.

 “The consumer is willing to pay for innovative products,” he adds, and middle market processors are “more nimble and effective in getting those products out the door. The ones that are thriving and growing know how to compete and position their products in the consumer’s mind.”

 Companies in the GE survey averaged $86.2 million in revenues and 769 employees. Both those figures are going up, with respondents anticipating an average staffing increase of 2.2 percent this year. Only 1 in 25 expect to reduce staff size. Half plan to commit more capital to automation in 2014.

 Multi-billion-dollar mergers involving major food companies dominated the business pages this spring, but a quieter changing of the guard is occurring at small to mid-sized firms. “A lot of family-owned companies in the middle market are either transitioning to the next generation, bringing in a new management team, or selling,” observes Nay. Predictably, Boomer owners resist going quietly into the retirement night: some are maintaining a minority share of their companies. “They want to keep the culture that they built going,” reasons Nay.

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