Moody's Raises its Outlook on Packaged Food Sector

Oct. 5, 2016
Moody’s Investors Service has upgraded its outlook for the packaged foods industry from "stable" to "positive," according to its latest analysis.

Moody’s Investors Service has upgraded its outlook for the packaged foods industry from "stable" to "positive," according to its latest analysis.

Though there has been little prospective improvement in top-line growth, the food industry's overall successful efficiency initiatives have brightened, Moody's noted in a Sept. 30 report. While top-line sales growth is still dragging, it says, "more companies are starting to see a bigger pay-off from large-scale cost savings strategies. As such, we now expect core operating income to rise 4.5-5.5 percent from our previous call of 4 percent to 4.5 percent for the next 12 to 18 months, excluding Mondelez International Inc. (Baa1 stable) and Kraft Heinz Foods Co. (Baa3 stable). When including these two, our operating income forecast rises significantly, to 8 percent to 9 percent growth," the report says.

Mondelez and Kraft Heinz have been clear leaders in the industry's cost-cutting and margin expansion efforts. Moody's estimates that the two account for about 65 percent of the industry’s operating profit growth. Both companies are said to be currently pursuing major restructuring efforts.

Mondelez and Kraft Heinz aside, most companies in Moody's ratings universe are building stronger margins through efficiency improvements, the agency said, adding that benefits from cost cutting will become significantly more apparent in 2017. Sales growth pressures aren't expected to ease up, according to reports. The agency projected 1-2 percent growth over the coming 12 to 18 months, adding that drags will include weak agricultural commodity prices, a lack of new product innovation and intense price competition.

Mergers and acquisitions will remain a significant tool food companies will use to reposition their portfolios going forward, Moody’s expects. Reports say consumers likely will continue the shift away from mainstream brands and conventional processed foods to what they find as fresh, healthy and convenient foods.

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