Industry executives are capitalizing on an improving economy.

CHICAGO — Executives leading middle market food and beverage companies, those with sales ranging between $10 million to $1 billion, said the industry continues to enjoy strong growth, but expressed concerns about an increasing cost structure driven by rising commodity prices, according to a survey conducted by GE Capital.

“From our customer’s standpoint, they feel really good about what is going on in the U.S., in general,” said Chris Nay, senior managing director of food and beverage for GE Capital. “Many said they are worried about more government regulation, more people telling them how to run their business. But from a consumer perspective, they are very comfortable where the consumer is.”

The survey, which includes responses from c-suite executives leading 50 middle market companies, underscored the complexity involved in managing a growing, profitable food and beverage company. Issues addressed ranged from commodity costs, improving operating efficiencies and understanding the changes taking place among retailers and food service operators.

“Commodity pricing is still a concern,” Mr. Nay said. “The big standout is dairy. That’s one that has been creating havoc inside operating budgets. It’s a category where you are controlling costs and you know you can’t pass it on to retailers as fast as it has gone up.

“Another inflationary commodity is sugar. The good news is grain-based (commodities) seem to have been mellow for the past 18 months.”

Eye on efficiency improvements

More than half of the companies surveyed said they plan to improve operational efficiencies in the next 12 months by increasing automation, reducing waste and replacing old equipment.

“There is an aging infrastructure out there to feed all of us,” Mr. Nay said. “The market is going through an update period. We see a strong investment in plant expansion, whether it is for food safety or to improve efficiency.”

Mr. Nay outlined the three tiers of efficiency he sees taking place in the market.

“Most people think about efficiency around a three year payback,” he said. “Three to five years is the middle ground. This is where the issue of food safety pushes the investment. North of five years, then it is a discussion; here you are talking about expansion, a significant investment.”

The pace of merger and acquisition activity in the food and beverage sector slowed in the second half of 2014, but Mr. Nay said companies are still looking to expand.

“I think one thing to watch is other parts of the world are coming in and buying U.S. players in the food space,” he said, referencing Ajinomoto’s investment in Windsor Quality Holdings and Olam’s acquisition of McCleskey Mills. “A strong dollar will slow it down, but there is still a lot of interest.

“But it is getting harder to get deals done, because of the multiples sellers are commanding. You’ve got the big guys trying to buy innovation and the global guys trying to buy technology. Those factors make it hard for a middle market company to buy something and make it work. I see M.&A. continuing, maybe not as often as it has been happening, but there is still a lot of interest.”

The strength of health and wellness

Within the realm of new product development, survey participants pointed to health and wellness, value and convenience as the attributes that are going to continue driving innovation efforts.

“It’s an interesting question about value and health,” Mr. Nay said. “In Aldi, they are looking at the value shopper, but they are also offering health and wellness (products).

“Wal-Mart and other retailers are all demanding their supply chains meet the criteria of the consumer. They still want to be attractive to the value shopper, but there is an ever increasing percentage of consumers who want to know what’s in a product.”

Value retailer Aldi introduced a gluten-free line of products in 2014.

Mr. Nay said he sees health and wellness crossing over into every broad-line retailer and that, by itself, will pose challenges for companies that rely on such raw materials as organic milk or organic soy.

“… Whoever has supply locked up is going to win,” he said. “What does it mean? It makes procurement very important.

“The consumer wants it and some are willing to pay extra for it. As a country we are fortunate because we pay 7% of our income for food and that is why (the) health and wellness side goes well. We can pay more. (In) other developed countries they pay 12% to 15%. It’s why I think the consumer is ripe for some of these more expensive products.”

He also referenced the convenience and drug store channels as retail areas where food is becoming a greater focus.

“Look at RaceTrac and Kwik-Trip — They want their own food; they want healthier food,” he said. “Walgreens is another one. I am shocked at what they are doing in some stores. They are almost doing prepared foods. It’s just coming on and I wonder how much volume they can take through those channels.”

Mr. Nay added that the trend is not isolated to retail.

“You are seeing company’s like Sysco or Boulder Brands building products around things like gluten-free,” he said. “As more people are going out to eat again, we are seeing the menu change. Places like California Pizza Kitchen (and) Applebee’s have changed (their) menus quite a bit.

The Protein Bar chain is an example of how health and wellness is taking hold in food service.

“I think they (food service operators) are going to follow where the retailers are going. We are going to see it in the Q.S.R. market with brands like Protein Bar, which has 14 stores, and is trying to grow bigger.”

The challenge, Mr. Nay said, is the supply chain.