Investing in baking and snack operations requires a little luck, a lot of preparation and an even greater trust in a company’s ability to play its cards right to minimize risk and guarantee rewards. During the past three years following the Great Recession, several businesses such as Mexico City-based Grupo Bimbo and Flowers Foods, Thomasville, GA, continued to place some of the biggest bets by making major acquisitions coupled with significant capital spending strategies to secure their positions as the respective No. 1 and No. 2 players in the industry.
While capital spending strengthened during the past three years, the industry as a whole is still looking for that big breakout year, according to Marjorie Troxel Hellmer, president of Kansas City, MO-based Cypress Research Associates, which conducted Baking & Snack’s 20th Annual Capital Spending Survey.
In many ways, baking and snack companies are like sprinters stuck in a three-point stance waiting for the gun to fire. Or, as Ms. Troxel Hellmer described, they’re like a predator perched and eyeing its prey. They’re primed and ready, but in the end, signs always seem to pop up that keep them from making the ultimate leap.
“They’re like the animal that is crouched, ready to pounce but hasn’t leaped yet,” she said. “We’ve been in that posture as an industry for years. We keep thinking [the economy] is going to break out six months from now, but it remains stalled. These companies are ready to get out of that crouching position, but they keep waiting for external signs of safety.”
From a macro perspective, those conditions include high unemployment rates, slow economic recovery, political uncertainty and, most recently, the dreaded fiscal cliff. Uncertainty in tax rates, tax incentives, the overall outlook for the country and even the prospects for the global economy, Ms. Troxel Hellmer noted, make it challenging for cautious executives to take a long-term approach to their businesses and capital spending practices.
Closer to home, food companies continue to face higher commodity costs and pricing pressures. As a result, it’s not surprising that 70% of those surveyed reported their businesses as “financially sound, but profits have taken a hit” during the past year. Only 20% stated they were “firmly in the black and seeing no ill effects” from the economy while 10% cited “unstable conditions and turbulent profits.”
Confidence grows for 2013
Although many executives expressed concern about economy, they’re much more bullish about the baking industry. For the third year in a row, nearly 90% of the survey’s respondents described the outlook for the industry as positive, but there was an undercurrent to their responses. “Everyone knows they’d rather be in the baking industry than the banking industry,” Ms. Troxel Hellmer explained. “There is a lot of caution under this positive outlook, but it is positive. No doubt about that.”
The survey’s results also signaled a growing confidence in 2013, especially in companies’ ability to manage their businesses and manage their future, even though there are many factors they cannot control. “Successful companies have already made the necessary adjustments to weather the difficult economy and to absorb the commodity pressures,” she said. “Once these executives talk about their company’s standing, they indicate they’re doing pretty well, even if the economy may not be doing well.”
Such confidence is reflected in answers to several survey questions. When asked how much their companies plan to spend on capital improvements in 2013 compared with 2012, 50% stated they plan to spend more money for this year compared with 38% of respondents in the previous year’s survey. “This is a huge statement of confidence,” Ms. Troxel Hellmer said.
A cross tabulation of the data showed that 58% of businesses with more than $25 million in annual sales plan to increase their 2013 budgets from 2012’s real spending compared to 30% of companies with $25 million or less in sales.
“Larger companies are driving investments, whereas the smaller companies are still struggling,” she observed. “They’re struggling to find the money to make these investments in their facilities, and it’s a huge source of frustration for them. Those numbers have to come back at some point because these small companies — in order to survive — must start spending again. They’re still not in a very strong position to do that.”
The survey’s results also hinted that banks and other financial institutions seem more willing to lend this year, Ms. Troxel Hellmer noted, and this could be a good omen for the near-term outlook. When asked to list all of the ways they plan to cover capital purchases in 2013, seven in 10 executives noted they will use existing cash, but 39% added they would like to borrow from outside sources. That’s up significantly from the 25% of respondents who mentioned borrowing in the previous survey, suggesting that there’s more liquidity in the market. “That’s an option that wasn’t open to them in the last few years,” Ms. Troxel Hellmer said.
And most bakeries and snack manufacturers are spending money on equipment. In fact, 83% of those surveyed budgeted for new processing equipment in 2013 while 69% planned to buy new packaging equipment. Those percentages were up substantially from last year’s report. Additionally, 61% wanted to upgrade existing facilities, 60% would invest in maintenance and replacement parts, and 56% earmarked funds for systems improvement. Only 31% budgeted for new buildings.
Companies were asked what percent of their budgets they plan to spend across their business. Executives responded that 33% of their budgets will go toward new processing equipment, or more than double the 16% of available dollars they plan to spend on new packaging equipment. Only 11% of overall spending would go toward new buildings, but that amount was up from a paltry 6% in last year’s report.
What’s driving spending?
New products continue to prime the pump for capital expenditures. In fact, 45% of respondents listed product innovation as the single most important factor influencing investment strategies in 2013. That percentage was similar to survey results during the past two years. However, 23% chose “reducing changeover/driving efficiencies” as their top priority, indicating that controlling costs and eliminating waste play major roles in factoring return on investment (see “Long and short of ROI” above).
To paint a clearer picture on the decision-making process, the survey asked companies to rate their goals on a seven-point scale where seven was “very important.” On average, the top five reasons for capital spending in 2013 were to improve product quality/consistency (6.1); improve food safety/sanitation (6.0); decrease labor costs (6.0); improve process flexibility, yield and reduce changeover time (5.9); and improve production speed/capacity (5.8).
“It’s not only about decreasing labor, although that’s always a priority,” Ms. Troxel Hellmer said. “Investments are being made to reduce bottlenecks and improve efficiencies, not just to reduce the number of heads in a plant. Equipment is a big investment.”
When it comes to new products, 59% stated they will invest in new equipment with the expectation that it will bring in new business — a response rate just slightly less than the 63% who said so last year. However, 53% also noted they tend to wait to invest until new business is confirmed with a current or prospective customer. That percentage is up significantly from 41% in last year’s survey.
Overall, Ms. Troxel Hellmer explained, these results indicated that cautious optimism plays a dominant role in the decision-making process. Companies are positioning their business for future growth, but they’re also minimizing risk by making sure the initial costs are covered by incoming orders.
“They’re going for the safe bet,” she said. “The mood is significantly positive this year in getting out and making these necessary investments, but they’re also saying, ‘We’re not doing it because we want to; we’re doing it because we have to loosen the strings and update our technology and facilities, too.’ It’s all about playing the safe bet.”
Yet another factor in the purchasing process, she added, involves gauging the skilled labor needed to operate more sophisticated equipment. “Support plays a factor with new equipment and new lines,” she explained. “They may have all of this great new high-tech equipment but find they start having problems because they don’t have the people who know how to run it or fix it.”
In this tough economic environment, she said, executives noted they need to play their cards right to survive. In some cases, that can mean just squeezing a few pennies out of a product. Maybe that’s not a pounce or giant leap, but it is a step forward in the right direction.
“Executives are saying, ‘We’ve been in a holding pattern, but now we’re just going to have to spend. We cannot afford to hold on any longer. We’re going to have to make these investments,’ ” Ms. Troxel Hellmer concluded.