Despite challenging market conditions, Fitch Ratings expects the outlook for the packaged foods sector to remain stable. The ratings service cited rising input costs, cutthroat competition and value-conscious consumers as some of the main challenges facing food processors.
"Swiftly rising input costs have put packaged food companies in a situation where margins are being squeezed," said Judi M. Rossetti, senior director at Fitch. "It will take time for price increases implemented by the food companies to catch up with the commodity cost inflation they are already incurring."
Rising input costs will challenge food companies even more because of the weak economic environment. Consumers are not likely to be as receptive to the higher retail prices as they were prior to the recession, according to Fitch.
The ratings service said it expects volumes will be impacted negatively and consumer switching to private label substitutes is expected to be prevalent. Even with price increases and cost-cutting initiatives, packaged food companies are not likely to retain the margin improvement they attained earlier this year. However, flat or slightly lower profitability in the near term is not anticipated to have a ratings impact.