This is not going to be an easy year for anyone. With the recession, the federal budget deficit measured in trillions of dollars, global uncertainty affecting supply and movement of goods and services, a domestic unemployment rate above 7% and an outlook that things will get worse before they get better, is there a light at the end of the tunnel? Is there an end to the tunnel at all? Of course there is, and those responding to this year’s capital spending survey and participating in in-depth interviews confirmed situations are tight but their companies are in for the long haul. Overall indication from respondents showed a downward shift from anticipated spending in 2008 to what was actually spent and a further prediction for this year to be consistent with last year’s actual spending. There also appeared to be a pullback from new equipment purchases in favor of vendor-refurbished and used equipment or at least greater consideration of these categories when bakers address current equipment concerns. Survey results indicated that 42% of companies will purchase processing and/or packaging equipment this year, a drop of 10 percentage points compared with last year’s survey. Also, 18% will invest capital in maintenance and replacement parts. This is up from 12% reported last year. The survey and exclusive interviews with industry executives were conducted by Cypress Research Associates, Kansas City, MO.


As with any budget, capital spending projects are reviewed and revised throughout the year as situations affecting each company change. From shifting scope to kiboshing an entire project or even halting a project midstream, hard and often frustrating decisions must be made. And this year’s survey numbers reflect that. For example, nearly 33% of respondents to last year’s survey predicted projects in the less-than-$10 million range. This year, when asked to report actual 2008 spending, nearly 80% reported spending in this range. Keeping in mind it is a different survey set, this is still an incredible change from anticipated to actual. There was the predictable opposite shift when looking at large capital projects ($70 million or greater), where 17% predicted this level last year, yet only 6% reported this year to have actually spent in that range. With 2008 actual spending in mind, respondents were asked to predict spending for this year. Numbers showed little shift from last year’s actual — indicating conservative thinking — and it will be at least one year before better indicators are reflected in projected capital budgeting. Nearly 81% predicted spending less than $10 million, and only 4% anticipated spending more than $70 million this year. What was interesting is the difference between large (annual sales of $25 million or more) and small companies (annual sales of less than $25 million) in this year’s budgets and comparing them with last year’s expenditures. Last year, no company — large or small — predicted no capital spending. However, this year nearly 15% of small companies reported spending no money in 2008 on capital projects. For 2009, 16.4% of small-company and 1.6% of large-company respondents indicated they had no capital expenditures budgeted. More than 19% of large-company respondents reported actual spending in the $10 million to $50 million range in 2008. This compared with 23% of respondents budgeting this range for 2009. Further, whereas 23% of large companies reported spending big capital dollars, greater than $50 million, in 2008, only 14% had budgeted that amount this year. "I think everyone is a little conservative, and there are issues with getting loans," said John Khoury, president, Custom Foods, DeSoto, KS. "But I think people want to grow their businesses. There are numerous companies that haven’t been able to keep up with the commodities issues. With volatile prices in the first half of 2008, it seems that we’re through the worst of it for now." Terry McDaniel, c.o.o., The Inventure Group, Phoenix, AZ, added, "Based on what we did against efficiency and continuing to look for innovations in our products, we expect to continue to invest in our business. We feel very strongly about investments in 2009." Baptista’s has been in an intense capital investment mode for the past two years, adding numerous production and packaging lines based on capacity and customer needs. "In the past two years, our business has doubled," said Tom Howe, president of the Franklin, WI-based company. "Our priorities are new product development, then contract manufacturing, in that order. We’ve been fortunate with our business partners that there have been some mutual opportunities that have made us successful." With that in mind, Baptista’s will continue to invest into the first portion of 2009, according to Mr. Howe. "In the latter part of 2009, subject to new development projects being successful, we will need to increase capacity at that point taking us into the beginning of 2010." These comments mimicked an interesting and very significant set of figures from the survey showing a glimmer of optimism. When asked if their company’s 2009 capital spending budget was increasing, decreasing or staying the same, more than 40% reported same spending, and there was an even split of those budgets increasing and decreasing. Of the 60% reporting a budget shift, up or down, the average increase was 84%. Decreases averaged 40%, for an overall 14.2% increase in spending dollars. While these results seemed contrary to earlier numbers, they compared actual 2008 spending to 2009 budgeted numbers, indicating a positive and hopeful outlook.

Respondents reported on the areas of their enterprises requiring capital improvement and expenditure. As in past years, the majority of needs were in production. However, maintenance and parts and facility upgrades were also noted by a large percentage of respondents. While systems improvements, which included automation and integration, was the smallest category within the group, large companies indicated this need nearly three times more than small companies. A significantly lower number of respondents mentioned new buildings and warehousing as areas of needed expenditures. A critical question each year is the actual allocation of capital funds for the different areas of the plant. Here, respondents spread their overall number by percent to the various categories. There was a 10 percentage point drop in allocation dollars to processing and packaging equipment, compared with 2008 indications. However, of the 42% of allocated dollars to these types of equipment, smaller companies budgeted for new processing equipment significantly more than large, while large companies appeared more inclined to purchase new packaging equipment. Other notable changes compared with 2008 allocations were the overall doubling of percentage of dollars for upgrading existing facilities and the six percentage point drop in maintenance and replacement parts. When these categories were broken down between large and small companies, however, there was an interesting diversity of needs. As noted, small companies were more in need of processing equipment, 35% to 20%, compared with large companies. Opposing this was larger companies’ needs for packaging equipment, 20% compared with 16%. The last significant difference between large and small companies was their budgets for systems improvements. Large companies were allocating 12.5% of their budgets to this area, while small companies forecast spending less than 5% in this area. Both groups planned on allocating 6% to new construction and 8 to 9% toward warehousing improvements.

Although spending will be cautious and allocations have shifted, labor cost reduction and increased product quality and consistency continued to rank highest as company goals. This was consistent between large and small companies. Large companies ranked "improved process capacity and flexibility" significantly higher than did smaller companies, while small companies saw a greater need to spend capital dollars toward developing and producing new products. "It’s capacity and efficiency — a combination," said Mr. McDaniel. "We’re looking at being more efficient in the way we produce products. We’re also looking at supporting our growth. In some cases, there are safety components where new equipment has aspects that older equipment doesn’t. For a company to remain viable, you have to invest back in your business. When our employees see us bringing in new equipment, morale is boosted because we’re investing in the business, and they feel more stable in their jobs." At the low end of the ranking, both large and small companies saw minimal need this year for allocating dollars to track and trace systems or to create more sustainable operations with some exceptions. However, large companies ranked these consistently higher than did small companies. Food security and defense ranked significantly higher than both track/trace and sustainability but significantly lower than the other categories. Production speeds, food safety, repair costs and product and energy waste all remained important in the ranking but comparatively in the mid-range of importance when measured against the other categories noted. Also, these ranked goals were in line with respondents’ indications of fund allocations and areas of need. Several baking professionals interviewed echoed comments made last year, noting that all these areas are intertwined and improvements to one area impact all others areas to some extent.

Do you buy new or used? If used, from where? Has the economy affected such decisions for the coming year? All these were asked of survey respondents, and while the answers may be predictable, differences between large and small company were not. A new question was placed in this year’s survey asking about bakers’ preferences for new equipment vs. used or refurbished. We asked bakers what they typically seek when looking to purchase or improve equipment. "Typically" referred both to purchasing habits in the past and/or what was done the majority of the time. As you might expect, nearly 56% of all respondents typically purchased new equipment only, with 72% of large companies and 42% of small companies indicating this category. Nearly 21% bought used equipment from recognized dealers. Here, a much larger percent of small companies (32%) indicated this practice compared with large companies (8.3%). Vendor-refurbished equipment was typically sought by 14% of respondents (17% small and 11% large). The remaining 9% of respondents reported typically buying used equipment from auctions, with only one percentage point difference between small and large companies. Not surprising were the responses to whether the economic downturn was affecting these purchase decisions. Nearly two-thirds reported "yes," with 71% of small companies and 56% of large companies answering as such. We further queried how the economy and the current concerns will affect purchasing going forward. Nearly 41% reported they will purchase more used equipment from recognized dealers. Small companies reported this much more than large, 45% vs. 35%. "We’ve started buying some used equipment in the past few years," Mr. Khoury said. "Until then, we always bought new equipment. I think there are strong players in the used equipment market who are marketing better than they did in the past." Close to 37% noted purchasing more vendor-refurbished equipment, with 50% of large companies citing this approach and 28% of small companies. Auctions were mentioned as an increased purchasing avenue by 26.5% of all respondents with little difference between small and large companies.

Survey results indicated an overall reluctance to sustainability projects unless they were part of a greater expansion or renovation or had a rapid return on investment (ROI). Although sustainability is a buzz word throughout the world, the baking and snack industry remained wary of spending too much money, time and effort implementing isolated green programs. Although several companies showed great initiative in going green with fuel-cell technology, wind and solar use for power and heat, and silver and gold LEED certifications, this year’s survey indicated little change in the overall number of companies having a formal sustainability program compared with last year. In fact, the same percent of respondents reported having a full or partial program in place — 46.5% this year vs. 47% last year. "At Golden Flake, we go the extra mile in some product categories with our sustainability measures," said Dave Jones, executive vice-president of operations and production at Golden Flake Snack Foods, Birmingham, AL. "Not because it always pays off for us financially but because it’s the right thing to do. For example, when we remove starch out of the water, we sell the starch to the market. When we have products that don’t meet quality standards, we sell them to a pet food company. Wet waste, potato peelings and corn granules — we have a local farmer who feeds this material to his cattle and hogs." These programs were all low-cost initiatives but resulted in reduced waste and a bottom-line reduction in cost of goods sold. When asked about specific types of sustainability programs in place, almost all the survey numbers declined, compared with last year’s results. Internal recycling programs in place were reported by only 61% of respondents compared with 74% last year. However, 31% reported such plans were in development and discussion compared with only 18% reporting this last year. Water treatment as a reason for capital investment decreased for in-place and in-development categories, 40% from 54% and 23% from 35%, respectively. The same was true for alternative energy systems, where in-place and in-development categories decreased from 2008 numbers. However, in-development was down only 6%, perhaps indicating such programs were developed but put on hold. A new subcategory was added to the questions this year: energy-efficient lighting. Interestingly, 54% indicated having implemented a program, and 38% said plans were in development or on hold. From discussions with bakers during the past year, energy-efficient lighting has one of the shortest ROIs of all the tangible energy reduction programs. Other programs reported in discussion or development included ingredient tracking, solar energy and heat recovery from ovens to feed tray washer water and radiators. Even composting was mentioned by several respondents. Collectively, these other elements were indicated by 32% of respondents compared with only 8% last year. The survey included a question asking what single sustainability initiative provided the best ROI. Besides lighting, noted above, and recycling cardboard, companies indicated new or refurbished equipment to reduce waste and energy use. Other companies redesigned packaging to improve cube weight and utilization of trucks. Other companies noted having backup propane tanks as a thermal supply or diesel generators available as an energy supply during voluntary brownouts.

There have been several intriguing shifts in what survey respondents believed had the most influential impact on capital spending during the past two years. Last year, more than 43% of respondents noted new products to meet health and wellness trends as most important, but this year, only 23% forecast this as the top trend. However, just the opposite was true for high commodity prices. Nearly 35% of 2009 respondents saw this as having the most influential impact on capital spending during the past two years, to the extent that projects were put on hold or cancelled because of funds being diverted. Last year, only 23% believed this impacted spending during the previous two years. "For us, the factors that most influence our recent and future investments are to support our growth and to ensure we remain efficient," Mr. McDaniel said. "With the cost of commodities this past year, that efficiency factor has certainly been something we consider as we look to invest. It’s great to be in the food industry because people continue to eat and people snack about six times a day, but we have to do business efficiently." Economic pressures together with excess volume and other factors combined to have 40% of respondents report this as the most influential impact on spending during the past two years, compared with only 27% seeing this as most impactful in last year’s survey.

Looking ahead, the picture was mixed. Economic pressures were cited by more than 50% of respondents as being the most influential driver of new capital spending plans going forward. However, new products to meet current trends will also be a driver, cited as most important by 29% of respondents. One positive result was that commodity prices had dropped, and so had the belief by respondents of its influence on spending going forward — 14% vs. 33% last year. There continues to be concern about the economy, noted Mr. McDaniel. "Some might hold back for the next six months to see how things turn out. So, as an industry, our capital investing may not be as strong in 2009 as in 2008. Even people who had money stopped spending it until they saw how the situation turned out." "I think turmoil in the credit market will limit spending for the short term," Mr. Jones added. "But we’ll continue to invest and be competitive. We’re in a good sales environment right now, and the last thing you want to do is not invest in keeping your company competitive." Cordia Harrington, president of Tennessee Bun Co., Dickson, TN, summed it up: "It’s a juggling act because the banks, financial advisers and CPAs advise us to hold onto cash and be very conservative. On the other hand, you have customers who are going through tremendous trials, commodity issues and losing customer counts. They are dealing with huge issues, and we find ourselves in the middle. We continue to look at our customers and take care of them so they can take care of the consumer. It’s interesting times, and we’re lucky to be part of it. There’s no right answer about how to approach this. I’m just glad I’m part of the baking industry and not the banking business." Overall, there will be spending this year, but it will judicious. Bakers and suppliers alike are entering a new paradigm of decision making that requires creativity, added services and innovation. --------- This year’s survey was conducted online, with a response rate close to 10%. Demographic information indicated 46% of respondent companies had sales of less than $25 million, 21% with sales between $25 million and $100 million, and the remaining 33% indicated sales of $100 million or more. The numbers of plants operated by participants shifted this year to better reflect the industry as a whole and allowed analysis to include aggregate data as well as separately compare and analyze large and small companies (using a break point of $25 million). Slightly less than 45% of respondents were from companies operating single plants, and 38% operate between two and 10 plants. Primary products produced at plants of respondents included 34% making bread and buns; 13% cookies and crackers; 18% cakes and sweet goods; 8% frozen dough; 6.5% snacks; 5.5% tortillas; and 11% pasta, waffles, wafers and other items such as cereal, breading and mixes. In addition, seven prominent members of the baking and snack industry and representatives of engineering and consulting firms shared their personal perspective of the current state of the industry. END

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