“Volume cures all ills,” quips O'Neal's Dixon, “and that generally drives you to a large plant” that can deliver the lowest cost of goods sold.
Automation is the enabler for lower unit costs. Kraft Heinz estimates the facility will operate with a staff of 500. The plant it replaces, also in Davenport, employed 1,010 workers two years ago.
“Many processors may not be prepared to make the capital investment necessary to fully automate,” notes Brian King, president of A.M. King, a Charlotte, N.C., contractor with a food-plant specialty. However, “they will typically consider some level of automation,” often in material handling and packaging.
That scenario is playing out at Tribe 9 Foods, a Madison, Wis., organization formed two years ago with the acquisition of three companies playing in the gluten-free and natural products space. Two of those purchases came with manufacturing capability, and both shut down recently with the commissioning of a 50,000-sq.-ft. facility that will also provide copacking and private label services.
Both start-up companies and major brand owners rely on copackers, and manufacturing investments like Tribe 9’s are increasing. “Comanufacturing is continuously strengthened,” says Dixon. “That’s always an active sector,” and some of the leaders have lowered unit costs of production to the point where brand owners can save money by outsourcing manufacturing to them.
New plants are investments in the future, but there’s considerable uncertainty about what the future will look like. Cundiff cites the Amazon effect: with the e-commerce retailer greatly enhancing its ability to deliver perishable foods to people’s homes, food manufacturers are questioning what role their facilities will play in a shortened supply chain. And with shoppers demanding products that not only are allergen free but also absent GMO ingredients, pesticide residuals and other components, manufacturers need to devise better segregation systems for raw materials and ingredients
Chaotic U.S. immigration policies are aggravating chronic workforce shortages, observes Dixon, nudging food companies toward equipment investments that reduce necessary labor inputs. “Consumer tastes are fluid,” adds King, putting a premium on production environments that can be quickly modified to produce new products. “This flexibility may be partially achieved through the purchase of certain pieces of equipment.”
“Equipment manufacturers have been able to come up with safer, faster and more cost-effective ways to process and package foods,” seconds Cundiff. Advanced machinery enables both major facility upgrades and more modest investments.
The need for speed to capitalize on product opportunities is growing stronger, whether it involves equipment procurement or a new or renovated facility. AE firms have compressed new-plant timelines to seven months, assuming extensive upfront planning and a smooth permitting process. Likewise, purchases of technologically advanced equipment require long lead times unless a shortcut can be found.
“Sometimes you buy equipment off the trade show floor” to shrink the timeline, Dixon says. Auctions are another fast-track option. The former Quaker Muller Greek yogurt factory in Batavia, N.Y., provided such an opportunity. The facility, a joint venture between Pepsico and Germany’s Theo Muller Group, was in production only 18 months before it shut down a few years ago. HP Hood purchased the plant for one-fourth its original cost but had no need for the like-new fillers and other equipment, which were sold at auction in September.
Opportunities like that are few and far between, however. For the most part, years may pass before a major plant investment begins to really pay off.
Food companies that closed their books at the end of 2017 in most cases reported a financial windfall from the Tax Cuts and Jobs Act, which Congress passed Dec. 22. Kraft Heinz pegged the savings at $7 billion. ADM estimates the act lowered its effective tax rate to 0.4 percent in 2017 from 29.3 percent the prior year.
B&G Foods projects a more modest $133.4 million reduction in tax liability, but capital expenditures are expected to go down. A chunk of that spending will leave B&G with less manufacturing capacity: $2.5 million will be used to move equipment from its Green Giant plant in Belvidere, Ill., to a copacker’s facility.
One AE professional scoffed at the suggestion that tax cuts would spur more capital projects. “I usually find out, in a quiet conversation, that none of my corporate clients pay any taxes,” he confided.
Costs for materials of construction, on the other hand, can determine if a project moves forward or is shelved. Should a trade war incites new tariffs on carbon steel and stainless steel, look for some planned projects to be cancelled.
The directors of several publicly-traded food corporations approved stock repurchase plans soon after the tax cuts were approved. Capital spending plans, however, are unaffected. Those projects typically are funded through cash flow, revolving credit facilities and similar instruments.
After all, why invest in manufacturing unless you are pursuing a new opportunity?