What's Driving Profits in the Food Industry?

June 20, 2007
Executive-level results of the Food Processing-Grant Thornton 2007 Food and Beverage Survey

"Better for you products" offer the greatest growth potential for food processors, baby boomers are the most coveted demographic and food processors are planning for a pretty good 2007, according to results from the Food Processing-Grant Thornton 2007 Survey of  U.S. food and beverage companies.

When asked which types of foods offered the greatest growth potential, food processors said organic foods and premium foods are 10 percentage points behind "better-for-you" products (at 54 percent). Products addressing weight control are, perhaps surprisingly, in sixth place at 19.4 percent.

Besides boomers (at 54.5 percent), other consumer groups perceived to hold the most growth potential are ethnic groups (38.3 percent) and generations X and Y (33.3 percent). Seniors and teens both are below 20 percent. Children are below 10 percent.

Finding new customers in existing markets was the biggest strategy for improving profitability, cited by 67.5 percent. Fifteen points back in second place were new services or new products, and operations improvements were a close third.

"Food and beverage companies are continuously looking for ways to increase market share by adding new products or product extensions and by developing more innovative promotional advertising," according to Dexter Manning, Grant Thornton national food and beverage practice leader. "However, what's really new is the effort being placed on operations improvements including procurement sourcing and greater use of technology."

The web-based study was conducted by a third-party organization in December 2006 and January 2007, sent to a select database of Food Processing readers and Grant Thornton clients and contacts. It was a heavily financial and executive-level survey. There were 131 valid responses, with 14 coming from companies with annual revenues of $1 billion or more, 29 between $100 million and a billion, 43 from companies between $10 million and $100 million and 52 from firms smaller than $10 million a year.

More than 71 percent plan to increase their output in the U.S. during 2007. Other geographies where processors plan to grow via increased sales, acquisition or new construction:

  • Canada 46 percent
  • Mexico 29 percent
  • Europe 37 percent
  • China 16.5 percent
  • Elsewhere in Asia 27 percent
  • South and Central America 21.5 percent

Fifty-seven percent increased prices to customers by a modest 1-5 percent, and only 14.3 percent were able to get more than 5 percent. Nearly 22 percent reported no change, and 6.7 percent had to lower prices.

Overall commodity costs increased for 85 percent, and labor costs went up for 71 percent. But the biggest cost increase -- no surprise -- was logistics/transportation: 47 percent saw it increase 1-5 percent, and 41.2 percent felt more than a 5 percent bump. Half saw other energy costs increase by more than 5 percent.

Fuel/energy costs and commodity prices were cited as the greatest threats to profitability by 60.7 and 52.7 percent, respectively.

Is your company a market leader? Just 2.4 percent responded yes to that question, but 35.5 percent think they've made significant progress in that direction, and 48.4 percent report at least some progress.

"High quality" is the "go to market strategy" employed by the most firms (70.6 percent), although customer service was not far behind at 61.9 percent (multiple answers were allowed). As for outsourcing, nearly half outsource all or some maintenance functions; 38 percent farm out production operations and 30 percent contract out R&D.

There are numerous financial and performance benchmarks/metrics -- on sales per employee, level of spending on six different functions, gross and net profit margins and plenty more -- that we can't go into sufficient, much less individual, detail here. But you can see them for yourself. Anyone interested in a copy of the report should e-mail [email protected], call 866-728-5264 or visit the Food Processing-Grant Thornton Industry Knowledge Center.