Bullish 2015 Seen by Food Manufacturers

Eyebrows and optimism rose two days before Christmas when the U.S. Department of Commerce reported gross domestic product increased at a 5 percent annual rate in the third quarter, helped along by 4.5 percent export growth as imports were sliding 0.9 percent. The good news actually reflects what’s been happening all along at companies with revenues up to $1 billion, the broad middle market that includes most food and beverage firms.

Three quarters (73%) of food and beverage executives participating in GE Capital’s economic outlook survey in September reported improved financial performance, and three fifths (59%) increased staffing levels over the previous 12 months, improvements of 5% and 10%, respectively, from a similar survey conducted in March. Confidence in the U.S. economy is running high, with four-fifths expressing moderate to extreme confidence. The global outlook is less optimistic, with half expressing negative expectations.

Spikes in commodity prices have put many food companies on edge in recent years, with a 30 percent increase in butter prices a recent example, according to Chris Nay, senior managing director-food and beverage in the Chicago office of GE Capital Corporate Finance. But commodity prices generally are holding steady, and that’s feeding cautious optimism for 2015 growth. “They’re comfortable that the demand is out there,” Nay says of the survey respondents. Overall food & beverage employment is expected to grow 5.4 percent in the coming year, up from only a 2.2 percent increase found in the March survey.

Many food commodities remain at or near historical highs, forcing middle-market firms—defined as $10 million to $1 billion in annual revenues—to focus on operational efficiencies, waste reduction and more automation to boost profitability. With commodity price hikes leveling off or increasing moderately, food executives are more upbeat about 2015, Nay says. Margins are expected to grow an average of 5.2 percent.

The findings are drawn from the National Center for the Middle Market, a joint project of GE Capital and Ohio State University’s Fisher College of Business. The center regularly surveys 1,000 C-level executives from middle market firms, including food & beverage companies. The center’s September survey reports average 12-month revenue growth of 7.5 percent at mid-market firms, with projected growth of 5.5 percent over the next 12 months.

In contrast to the bullish domestic outlook, the global market is a concern, aggravated by growing dependency on a global supply chain. The China link in that chain is of particular concern. “People are having challenges over there,” particularly mid-market firms that rely on local partners in joint ventures, says Nay. “It’s on everyone’s mind.” When a venture is successful, local officials demand a higher share of revenues, constraining profitability and discouraging innovation, he adds.

Rising health care costs have troubled businesses for decades, and uncertainty about Congressional actions involving the Affordable Care Act is adding to mid-tier firms’ anxiety. However, national health spending has moderated in recent years, with 2009’s 3.8 percent increase the smallest recorded by the Centers for Medicine and Medicaid Services. Premiums for private health insurance increased only 2.4 percent in 2010 and 1.8 percent in 2011. Food Processing’s 2014 Salary & Job Satisfaction Survey concluded that 89.3 percent of food professionals receive health insurance through their employers, and 79.5 percent receive dental insurance.

“Concern about health care costs is easing, historically one of the top challenges for middle-market firms,” the center’s September survey report concluded.