Capital Spending On the Rebound
February 9, 2011
by Dan Malovany
Once in a while, a little optimism isn’t a bad thing. After a new global meltdown, a financial market collapse, two years of tough economic sledding, protracted declining housing prices, unprecedented high unemployment and continued uncertainly about the future, a little good news and a change in sentiment might be a welcome change for the baking and snack industries.
Last year, Baking & Snack’s annual capital spending survey anticipated a rebound in spending in 2011, and that’s exactly what’s expected to happen this year. Following what many described as a successful International Baking Industry Exposition (IBIE) last fall, bakers and snack producers indicated that they’re stepping up their capital investments, but they also wanted a shorter return on investment. If the projections hold out, bakers will turn out to have been doing a lot more than window shopping during IBIE 2010 in Las Vegas.
Those are the top-line conclusions from Baking & Snack’s recently concluded capital spending survey conducted by Cypress Research Associates, Kansas City, MO. Perhaps most significantly, 58% of baking and snack company executives who responded to the survey indicated that their businesses will increase their 2011 capital spending budgets compared with 2010’s real spending. Moreover, capital spending budgets are projected to rise an average of 56% in 2011, compared with what companies spent in 2010, according to the survey.
While overall spending is projected to increase significantly, don’t expect 2011 to be a total “breakout year” with unbridled enthusiasm, according to Marjorie Troxel Hellmer, president of Cypress Research Associates, which conducted the survey in November. Rather, many of those surveyed expected this year to be more of a big-time rebound than a slam dunk.
Although nearly 90% of executives reported a positive industry outlook for 2011, Ms. Troxel Hellmer described the executives as having “cautious optimism.” Granted, many signs point to an improving economy and increasing customer demand for new products, but she explained the outlook for the future has been tempered by lingering economic issues, rising commodity prices, pending regulatory concerns and margin pressure from value-oriented retailers that are seeking deeper discounts to cater to price-sensitive consumers.
That said, baking and snack executives also indicated they need to step up their strategic investments to seize opportunities from new customers as well as lower their costs to be more competitive in today’s value-intensive marketplace. Specifically, many bakers and snack companies have ventured into private label or contract manufacturing to bolster production volumes, eliminate excess capacity or expand their business base. Others manufacturers are jumping into new distribution channels such as supplying food service or in-store bakeries that is necessitating renewed capital investment in 2011.
That’s not to say 2010 was a bad year. In fact, 40% of those surveyed reported their companies spent more than they initially budgeted for capital expenditures for last year and 31% stayed within their established budgets, while 29% invested less than they had originally projected.
Additionally, a rebound in spending in 2011 seems to reflect a strengthening of many companies’ balance sheets as their management teams took measures last year to respond to a changing economy.
“Executives reported an improvement in their company’s financial positions over 2009 levels,” Ms. Troxel Hellmer said. “Some 42% of those surveyed in 2010 reported that their company was ‘firmly in the black: we’re seeing no ill effects of the recession,’ up from just 27% in 2009.”
FOCUS ON EQUIPMENT.
What are these companies planning to buy? Primarily equipment. The survey reported that 88% of executives are targeting new processing equipment and 82% are looking to buy new packaging equipment, followed closely by upgrading existing facilities (70%), maintenance and replacement parts (66%), and improvements in system integration and automation (64%). Only 40% budgeted for new buildings, while a similar percentage indicated they are investing in warehousing and distribution.
From an investment perspective, the survey suggested that larger baking companies and snack manufacturers will fare better than smaller ones in 2011. In fact, 63% of those companies with annual revenues of $25 million or more plan to increase spending this year. Unfortunately, 57% of businesses with less than $25 million in annual sales reported their capital spending budgets will decline this year.
These trend lines should not be unexpected in the current economic market. The data reflect that larger companies have the cash flow and the ability to invest, while smaller, more vulnerable and cash-sensitive bakers and snack manufacturers continue to hunker down and reduce their investments this year, according to Ms. Troxel Hellmer. She added that the majority of smaller businesses, or those with less than $25 million in annual revenue, tend to have budgets that are $500,000 or less, while the larger companies spend the big bucks.
So how much are the companies budgeting for this year? According to the survey, 49% of executives responded that their companies will spend $1 million to $9.9 million in 2011, and another 6% said between $10 million and $19.9 million. Lumped together, that’s more than half (55%) of all companies surveyed. Another 24% will spend $30 million or more. On the opposite side of the spectrum, 22% expect to spend less than $1 million. The numbers add up to more than 100% because of rounding.
From a historical perspective, capital investing returned to levels that were similar to those of pre-recessionary spending this past year, and 2011 will rebound even more. Still, there is room for improvement, especially among the biggest of spenders, according to Ms. Troxel Hellmer. “Reported 2010 capital expenditures were similar to 2007 pre-recessionary spending levels, with some recovery still needing to be seen at the upper spending levels of $70 million or more,” she said. “Executives are projecting increased spending in that higher category of $70 million or more for the year 2011.”
Industry executives reported that new products (31%) and economic pressures (29%) most affected their companies’ capital spending plans during the past two years, followed by high commodity prices (22%).
“Looking ahead to 2011, the introduction of new products is anticipated to be the single most important influence on capital spending plans, cited by 43% of executives surveyed. The impact of economic pressures on capital spending is expected to remain fairly steady, with 26% of respondents indicating the economy will continue to be a significant influence on their capital investments,” Ms. Troxel Hellmer explained.
Download the charts from the survey (includes extras not featured in print)
Read more on the subject:
Companies demand a fast payback
Seizing the Moment