KPMG recently conducted its 4th Annual Food & Beverage Industry Outlook survey, in which the company polled 103 food and beverage executives in the United States. Food Manufacturing spoke with Patrick Dolan of KPMG about the survey results and what food manufacturers can expect regarding capital spending, hiring practices and economic trends.
Q: According to the survey, 68 percent of respondents said they have significant cash on the balance sheet, and 47 percent indicate their companies’ cash positions have increased from last year. Will food manufacturers start spending this extra money soon, and if so, on what will they be spending it?
A: Many food and beverage companies are in strong capital positions, and 59 percent of executives in this year’s KPMG Food & Beverage Outlook survey say their companies will increase capital spending over the next year. In fact, more than a third of executives say they are already making these strategic capital investments or will do so before the close of 2012. The highest priority investments include the development of new products or services, acquisitions, and information technology, such as cloud computing and data analytics.
In particular, data analytics was cited by executives as a key aspect of their business strategies. In our experience, companies that embrace data analytics as a business imperative can gain a competitive advantage in the rapidly evolving global digital economy. Harnessing the vast amount of data that resides in a company can drive the insights that will allow it to interact with consumers more effectively, help to optimize operating models and rationalize portfolios, as well as potentially reveal information related to new markets and strategies.
Q: Sixty-two percent of executives surveyed said their companies are likely to be involved in a merger or acquisition in the next two years. Is this a growing trend, and why are there so many mergers and acquisitions happening in the food industry right now?
A: In recent years, companies focused primarily on cutting costs, remaining profitable and maintaining strong shareholder value. They are now looking for ways to create revenue growth in an economy where consumer demand and confidence remain weak. Mergers and acquisitions present attractive options for growth as companies look to enhance product portfolios, and access new markets and customers. With many companies having significant cash on hand, we anticipate more aggressive mergers and acquisitions activity in the sector.
Q: More than half of those surveyed reported their companies’ revenues are up from the previous year and that they have increased their number of U.S. employees. Will hiring continue to grow in the food industry as the country emerges from the recession?
A: The food and beverage sector has experienced some positive momentum in the past year, and according to our survey, that momentum will continue into next year. Seventy-two percent expect revenue will continue to rise over the next 12 months, and 53 percent say their companies will increase the number of U.S. employees during that time.
Q: Despite saying that they planned to hire more employees, 31 percent indicated that worker headcounts would never return to pre-recession levels. Why do you believe this is?
A: Concerned that decreased consumer confidence, continued high national unemployment and increased government regulation are hindering a full sector recovery, executives are tempering expectations. Despite their focus on growth, in this environment companies must continue to find ways to reduce costs and improve operational efficiencies. This includes managing the delicate balance between needed manpower and production demands. I also think businesses are operating in a “new normal,” and that some of the jobs lost to the recession may never return because companies have successfully restructured and improved processes to the point that they can effectively operate with fewer resources.
Q: Nearly 60 percent of respondents said they don’t expect a full economic recovery until at least 2014, indicating that food companies may still be struggling financially due to the recession. Are there any particular areas where the food industry has been hit especially hard by the recession?
A: Many of the companies in this sector continue to experience pricing pressures, volatile input costs and the limited ability to pass on increased prices to consumers. Consumers remain price sensitive when purchasing food and beverage products, and private labels and store brands continue to have a large impact on the sector as sales continue to rise across all retail segments.
However, there are segments that continue to grow as companies are leveraging demographic changes and focusing on specialty trends such as free trade and organic food and beverage products, ethnic foods and products considered to help promote health and wellness. Companies taking advantage of these niche segments are hoping to help increase share-of-wallet and top line revenues in an otherwise slow-growth market.
Q: Are there any other hiring or financial trends that you believe may impact food companies in the next few years?
A: Compared to last year’s survey results, respondents are more focused on talent management and retention initiatives, increasing their emphasis on compensation and training. Additionally, the number of executives who cited a lack of qualified labor as the most significant growth barrier facing their companies over the next year more than doubled year over year — 16 percent in 2012 versus just 7 percent in 2011.
This year’s survey results also indicate companies are proactively addressing changes in the regulatory environment, such as the Food Safety Modernization Act, as well as federal tax policies and healthcare reform. Companies are exploring opportunities to take advantage of tax cash savings and available government credits and incentives to benefit the bottom line. Examples include exploring state and local incentive opportunities for expansion and relocation, capturing eligible R&D tax credits, and tax credits related to supporting energy-saving or environmentally sensitive upgrades to facilities, physical plants and equipment.
Interview by Lindsey Coblentz, Associate Editor