Last year I began the survey recap by stating that 2009 was not going to be an easy year for anyone. For the vast majority of baking companies that was a very true statement. While most did “alright” and a minority had a “very good” 2009, finding anyone who described the past year as stellar was hard to come by.
Economists state the recession has been over for months. Yes, commodity prices have subsided and stabilized, and overall economic pressures have diminished. Yet unemployment continues to rise (10% compared with 7% last year), and securing credit continues to be difficult. Consumers have traded down to simpler, lower-cost comfort foods and snacks. However, despite that change, they still demand value, still expect to be “wowed” by flavor and texture, are much more cognizant of health and wellness and demand nutrition in their products. Bakers who met these requests had a successful year and spent capital dollars to keep up with demand or introduce new product lines. And they expect to continue to do so this year.
However, survey results for 2010 reveal the vast majority of companies are only now acting to adjust their courses of action and will spend this year developing and introducing new products, packaging ideas and marketing schemes to attract new consumers and gain market share. Only after they navigate through those waters will they confidently spend significant capital dollars for infrastructure and production expansion. The survey and exclusive interviews with industry executives were conducted by Cypress Research Associates, Kansas City, MO, which also assisted in the results analysis.
Comparative results of projected spending in 2010 and actual spending in 2009 and 2008 showed similar numbers of respondents indicating spending less than $1 million this year as last year, both significantly higher than 2008. The number of respondents planning to spend between $1 million and $10 million was slightly higher than in 2009 but still significantly lower than 2008. No significant changes were seen in spending at the $10 million to $50 million level (10%), and only a 1 percentage point increase was found in 2010 for projects of $50 million or more (12%). When these numbers are broken down between large ($25-plus million in sales) and small (less than $25 million in sales) companies, there are telling signs.
Small companies are on the move. Those indicating capital spending greater than $10 million doubled, from 1.8% to 3.6%, while planned spending less than $1 million also increased 2 percentage points, with a 3.6 percentage point decrease in midsize projects ($1 million to $10 million).
Those spending zero capital decreased from 28.6% that actually spent $0 in 2009 to only 19.6% that projected no spending in 2010. Discarding the “zero” spending level, those spending up to $1 million for capital projects showed a dramatic increase from 58% in 2009 to 69% this year. This reveals smaller companies will be spending this year; although, the projects will not include large outlays of capital.
Large company plans indicated a decrease in $10-plus million spending from 9.4% in 2009 to 6.5% this year, with that drop coming specifically from the $70-plus million project level. The significant switch was the 11 percentage point drop in small ($1 million or less) projects and similar increase (12 percentage points) in midsize projects. However, the spending level shift came from respondents raising project-cost expectations from just below to just above the $1 million mark, indicating a modest increase in project size for large companies.
The survey asked about specific areas of spending within the plant. Respondents were allowed to check all categories that applied. On the aggregate level, there will be an increase in new building activity in 2010 as there was also in the 2009 survey. These results are reflected in Baking & Snack’s construction report (see September 2009, Page 28). However, all other areas indicated decreases in capital outlay. Aggregate results predicted an overall capital spending decrease of about 10%.
The survey further looked at the spending spread — percents of total capital budget in specific areas. A good indication that large companies have done all they can, or are willing to do, to improve infrastructure and ancillary systems was the decrease across the board comparing 2009 with 2010 spending. Upgrading facilities decreased from 15.4% to 7.8%. System improvements dropped from 12.4% to 8.9%, and only half the respondents indicated spending for warehouse improvements. On the increase were processing and packaging equipment spending — 20.1% to 32.2% and 16.2% to 19.5%, respectively.
Just the opposite was reported by smaller companies. While facility upgrades decreased 2 percentage points, systems improvements jumped from 4.7% to 9%. Money allocated for maintenance and replacement parts increased from 15.7% to 21.1% and physical expansion rose from 6% to 10.2%. The big decreases were seen in processing and packaging equipment purchases — 35% to about 30% and 12.2% to about 9%, respectively.
As far as themes and indicators leading to these capital spending survey results, Baking & Snack articles throughout 2009 tracked trends affecting spending as did comments from bakers interviewed for their perspectives.
We were privileged to interview Autumn Bayles, Tasty Baking; MJ Sparks, Ellison Bakery; Dave Watson, Pepperidge Farm (Campbell Soup Co.); Cordia Harrington, Tennessee Bun; and John Khoury, Custom Foods, for their specific perspectives on capital spending.
All five expected to remain steady or increase their spending this year. With Tasty’s $252 million new plant in the ramp-up stage, the senior vice-president of strategic operations plans steady spending to bring all lines to optimum performance. Messrs. Watson and Sparks forsaw modest increases, while Mr. Khoury had specific plans for a new production line.
Each was asked how “healthy” they believed the wholesale baking industry to be from a capital spending perspective or a willingness to invest in physical and human resource infrastructure. Taking into account the various segments, opinions differed. According to Ms. Bayles, “During an economy like this, people still eat. Companies that provide value within this perspective do well. If you look purely at economics, I think the food industry has done pretty well.
“We’ve had unusual events such as Bimbo buying George Weston, IBC emerging from bankruptcy, our company building a new factory and Flowers Foods that continues its steady expansion through acquisition and new construction,” she continued. “The industry seems healthy relative to other segments.”
A more cautious opinion was provided by Mr. Sparks. “There are a lot of reservations because of the economy,” said the national retail sales manager. “Most companies are reserved with capital spending in the near future. With regard to Ellison, we have a specific purpose for our capital spending plans. We recently launched a new brand for retail and have experienced a lot of regional success in the past four months. This has given us opportunities other companies may not be experiencing right now. We’re taking this brand national. Our conservative nature for many years has enabled us to expand now. Because of recent capital investments, we have a lot of capacity now.”
Ms. Harrington was extremely optimistic. “I think it’s great,” the company president said. “I believe it’s difficult to get loans, but that ability is also reflective of a particular company’s balance sheets and ratios; we just launched a new product line with no problem. There is plenty of money to lend, but your business has to be healthy to get a loan. Compared to all other industries, the baking industry is in a healthy position.”
Messrs. Watson and Khoury were cautiously optimistic about the coming year. “Top-line growth is difficult with the focus on improved margins and earnings,” said the vice-president of engineering international and bakery technology at Campbell Soup Co. “Capital investment targeted at productivity and cost-reduction programs is driving capital plans.”
Customs Foods’ president noted, “Regarding Custom Foods specifically, we’re putting in some equipment in 2010, whereas, we didn’t do that in 2009. We’re adding production capacity. As an industry, I think companies are apprehensive to spend because everyone is shell-shocked from the past few years. Everyone is being conservative. But I think as the economy improves, purses will loosen and spending will happen if only to replace equipment or put money back in companies to make them profitable.”
When asked about mid-range and higher projects, Ms. Harrington, noted Tennessee Bun added a new biscuit line in 2009 and plans to add another line this year. Prior to that, it had muffin, hearth bread and high-speed bun lines along with an English muffin griddle line, frozen dough line and now a biscuit line. “We hope to add an additional line this year,” she said. “We just started the biscuit line in late 2009. We also completely upgraded our mixer system at Nashville Bun this past year. Additional conveyers and packaging will also be added in 2010.”
Custom Foods is adding a production line to its operation. “It’s very competitive out there in terms of keeping current customers and picking up new ones,” Mr. Khoury said. “It’s the most competitive time I’ve seen in years with customers looking to save money wherever they can. I don’t know if it’s the same for other companies, but if you want to pick up customers as they’re looking to save money where they can, you need to spend money to gain these new customers. We’re adding production capacity to bring on new customers.”
Ms. Bayles stated, “Unless there’s a pretty good return on a project, it probably won’t get done. It’s a difficult climate to get money. So only companies in that ‘well positioned’ status will continue to cautiously invest.”
Ellison is in a unique position. “We had a relationship with a national brand that claimed bankruptcy a year ago and thus freed us up to expand our operation now,” Mr. Sparks said. “Specifically, there will be big expenses for us to accomplish our goals. We’re expanding capacity within existing facilities. Several years ago, we expanded our facility in size quite a bit but didn’t actually use the space. Now we are expanding capacity inside our current footprint.”
SECTOR OR STRUCTURE
We asked members of our industry panel where they see spending being directed this year, whether in a specific sector, action or operational area. Mr. Watson quickly pointed to the OSHA-led phase out of R-22 and other ozone-depleting refrigerants that begins this year. Ms. Harrington noted packaging as an area for spending capital. “From an industry perspective, someone needs to figure out a different way to package than delivering with bakers’ trays. We then have to come back to our customers to pick up the trays, take them back to our facilities and wash them before going through the same process all over again,” she said. “Corrugated trays aren’t an environmentally friendly alternative, but some different packaging and delivery system is needed to both retail and wholesale customers. There has to be a better way. These trays are labor intensive. I don’t know what we need to do, but there’s an opportunity there.”
With an ever-increasing number of sophisticated consumers, Ms. Bayles sees healthy bread products that meet consumer trends as a growth area. “What I call family-friendly whole grains will remain popular as long as they still taste good, are soft and convey value. Consumers have high demands and expectations in taste, nutrition and value,” she said.
Ms. Harrington mentioned flat breads and wraps. “Those areas have real growth potential. I think tortillas are still growing really well,” she said.
The drive for new customers is a recurring theme, and capital outlay is an important factor to consider. Mr. Sparks sees saw a lot of growth opportunities. But unless companies learn how to innovate they’ll miss growth opportunities, he said. “By innovate I mean truly creating something new and different that consumers haven’t seen before. I am referring both in terms of packaging that no one has ever heard of, or snacks that exist but have completely new flavor profiles. For example, fruit flavors haven’t reached their potential. We’ve gotten accustomed to reaching for the ‘lowest-hanging fruit’ options — we need to start thinking more outside of the box.”
Ms. Bayles added that the greatest motivation for spending was the project justification and return on investment. “Sometimes it’s about efficiency or innovation or growth potential,” she said. “We have to make a business case that makes sense. If it’s investment on a new product line, we spend cautiously since we are allocating money for things where we may not get an immediate return. However, if a project guarantees to eliminate 60 hours a month in changeover, that makes sense to me. That’s a much more guaranteed investment.”
Mr. Watson noted capacity for core products, innovation, productivity and planned equipment upgrades were primary reasons for major investment projects.
BACK AND FORTH
We then asked the baking executives to name the single external influence that has most impacted their company’s capital spending during the past two years, then expand their comments. All except Mr. Watson noted new products to meet health and wellness trends. For Pepperidge Farm, commodity prices topped the ranking. “The need to offset high inflation on commodities and fuel prices with other cost-reduction projects drove capital investment programs over the past few years,” Mr. Watson said.
For Ellison Bakery, one of its biggest investments was related to a new product line. “We bought new equipment to enable us to do that — not related to health and wellness trend,” Mr. Sparks noted.
Mr. Khoury said that Custom Foods was customer driven in regard to capital spending. “We have spent money to bring in new equipment because we have new products to manufacture, and we look to get the biggest bang for the buck and do it most efficiently,” he said.
We then asked them to state the single influence they expect to drive their company’s capital spending plans in 2010. Across the group, new products to meet health and wellness trends ranked No. 1. Messrs. Watson and Sparks and Ms. Harrington all noted similar thoughts. “Capital spending will continue to be driven by new products, productivity and cost-reduction programs, and projects that support top-line growth,” Mr. Watson said.
Ellison Bakery’s plans are tied to the new indulgent product it’s launching, Mr. Sparks added. “We have plans to introduce some healthy products scheduled for late 2011,” he said.
Ms. Harrington said, “New products/new customers. We expect our new-product growth will be within that staple food category for consumers.”
Although new products will be on the agenda for Tasty Baking, Ms. Bayles noted relocation and reallocation of capabilities within its operations as other spending motivators. “There is some drive related to the new plant, where we’re shifting around production,” she said. “We may have older plants producing some products that will move to the new facility. We had some production at existing plants that we moved to other existing plants to better align the products to the appropriate location.”
The term continues to be a buzz word in the manufacturing world. However, is this now the 800-lb gorilla that companies have pushed to the backseat in lieu of more pressing issues, or does improving sustainability continue to be prioritized by companies?
“Sustainability has actually been a big part of our new plant,” Ms. Bayles said. “We have applied to be a LEED-certified plant with our construction. If we become LEED certified, we would have the largest LEED-certified bakery in the US — possibly globally. We built into our design the ability to become LEED certified. Some of our largest customers are very interested in this, and we also get operational benefits from it. We may potentially be using some solar energy from panels on the roof of our new plant to supplement our electrical power.”
“Corporate social responsibility, which includes sustainability, is one of the core pillars of Pepperidge Farm’s strategy,” Mr. Watson noted.
Ellison Bakery also realizes sustainability is part of growth. “We see sustainability as a by-product of growth and innovation within our facilities,” Mr. Sparks said.
“I absolutely believe that sustainability is woven into every decision we, and other manufactures, make every day,” Ms. Harrington concluded. “We have replaced high-energy boilers with more efficient ones or get audits with our lighting and replace bulbs, for example. There were at least 20 initiatives last year that we signed up for to become more green and efficient. Every week there is talk and action that align with sustainability. We want to have a smaller carbon footprint and make the best use of the gas and electricity we use. That’s the new way of doing business, and it’s the right thing to do. It is not on a back burner but very top of mind. In fact, I sent two people to a sustainability summit in December to learn ideas from other bakers that will take us to the next level.”
Mr. Khoury was a bit more reserved when considering sustainable measures and the capital they require. “You have to run your business profitably and are always looking to operate it more efficiently, which is about reducing costs, resulting in sustainability,” he said. “There are some things that require capital spending to be more ‘green’ — those are the ones that have to be weighed to see if the time to do them is now. Everyone is playing things conservatively.” (see “Engineer-Speak,” below.)
With these comments in mind, we queried the overall industry on the importance of specific goals. Every capital project requires justification and must have defined goals. Although various levels of management may be authorized at different levels of capital outlay without formal submission of proposal, projects must show results and managers provide justification of expenditure. This year’s survey asked industry representatives their thoughts as to specific goals of capital projects planned for this year. Respondents were asked to rate 11 areas with a “7” indicating very important. While there are seldom drastic shifts in year-to-year results, subtle shifts and trends reveal themselves when comparing past results. The 11 areas can be split into operational (production speed, labor cost, quality/consistency and capability/flexibility); supportive (maintenance cost, new products, environmental/sustainable and waste/energy); and safety (food safety, food security and track/trace).
Looking at shifts in aggregate levels from 2009 to 2010, there were no significant up or down moves in any area. Most were down with only slight upticks for process capability, food security and track-and-trace. The most important goal area for 2010 will be improved product quality and consistency, although this averaged one-tenth of a point lower than 2009.
While trends followed similar paths when respondents were broken down between large and small companies, there were some significant differences. Small companies indicated significantly less importance will be placed on improving production speeds, developing new products, reducing waste and improving food safety. Before throwing these results out as bogus or trying to fathom why small business was no longer concerned with these issues, readers should consider these shifts more likely indicated these tasks had been accomplished to a level that was clearly acceptable to customers. The goal area that increased for small companies was process flexibility — getting more efficient, improving yield and allowing more products to be run on the same lines or at the same plants. Although respondents indicated a slight downtick in the importance of decreasing labor cost compared with 2009, it was still the highest-rated goal for small companies.
There was less shifting of goal importance when looking at responses from large companies, although such companies bucked aggregate shifts in several categories. The largest drop was in the goal of labor cost reduction where importance rating dropped a significant three-tenths of a point from 5.9 to 5.6. Product quality, process capability, new products, environmental and food safety all shifted in the opposite direction of the aggregate numbers. Rated most important as a goal for 2010 was improved product quality and consistency, topping process capability improvement by two-tenths of a point, 6.0 compared with 5.8.
Taking a step back and comparing the most recent numbers vs. 2008, there was a large uptick in new product importance as a capital allocation goal from 5.2 in 2008, to 5.7 and 5.6 in the past two years. There has also been a significant decrease in importance given to increasing production speed from 6.1 in 2008 (the highest rated goal that year) to 5.7 and 5.6 in the past two years.
An alternative way to group and analyze importance of capital allocation goals is to look at the respondents who rated a goal with a “6” or “7.” Looking at the goal to increase production speeds, there were dramatic and steady drops in how respondents viewed this was an allocation goal. However, the opposite was true when respondents considered the area of new products, with a large jump from 2008 to 2009 and 2010.
The goal rated a “6” or “7” by the most respondents (72%) was product quality and consistency. A drop in importance was seen in decreasing labor costs. With recent recalls and food safety issues throughout the food industry it was not surprising this area jumped in importance in 2009 and remained strong this year.
While some comments may contradict with specific survey results, the industry is very diverse, and the conclusions should only be used as a guide to the themes and directions for the coming year. ?
Methodology Reveals Diversification
This year’s online survey had a response rate close to 10%. Demographic information indicated nearly 50% of respondents companies had sales of $25 million or less, 22% with sales between $25 million and $100 million, and the remaining 28% indicated sales of $100 million or more.
The numbers of plants operated by participants well reflected 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.
Primary products produced at plants of respondents included 66% producing fully baked or par-baked bread and buns; 29%, cookies and crackers; 41%, cakes and sweet goods; 13%, frozen dough; 9%, snacks; 13%, tortillas; and 5%, pasta, waffles, wafers and other items such as cereal, breading and mixes. With similar response rates as 2009, there was a relevant diversity of products.
In addition, several key figures of prominent baking and snack companies and representatives of engineering firms shared their perspective of the current state of the industry.
“I do not see the US economy making a rapid turn around in 2010,” said Darryl Wernimont, Haskell, Jacksonville, FL. “Capital expenditures will be tightly monitored. Recent acquisitions and plant closures, as well as the economy, have impacted capital spending, with the majority of available funds being directed toward facility upgrades, plant consolidations, line extensions and line relocations. Mike Steur, Hixson, Cincinnati, OH, noted projects focused on cost reduction, increased productivity and automation. “There has been interest in infrastructure modification and dust mitigation because of pending legislation,” he said. “But the industry is still very cautious.”
David Dixon, Burns & McDonnell, Kansas City, MO, also predicted continued consolidation and rationalization within companies, saying, “I am seeing inquiries for adding flexibility, smarter packaging equipment and a large emphasis on sanitary design and wet cleaning — the meat industry approach being applied to bakeries.”
Mr. Steur agreed. “Food safety and sanitary design will only grow more important leading up to the Baking Expo,” he said. “Fortunately, the industry is committed to resolving the issues before the government steps in.”
Mr. Dixon noted, “Companies are getting ready for other pending regulations by conducting studies and analyses and forming capital plans to reduce carbon footprints.” He also sees the growing concern over dust mitigation, the Occupational Safety and Health Administration looks to issue regulations within the next 18 months.
Hixson has seen a significant increase in sustainability projects. “It is mostly related to energy since that has the most tangible and rapid return on investment,” Mr. Steur said. “However, these projects must compete with other projects such as new products, and there is only so much capital available. So companies are doing a lot more measurement and monitoring of energy, product throughput per kilowatt and other tasks.”
Mr. Wernimont agreed that sustainability efforts will not take priority over existing operations. “It is important to note that 80 to 90% of the clients I speak with are now knowledgeable on the subject and feel that some level of sustainable initiatives need to be a part of their programs going forward,” he said. “In 2010, I don’t expect ‘green’ to be a major investment driver; however, I do expect it will remain on the table in 2010 and most likely become more active over the next two years.”