Food processing industry analysts know one thing for sure despite an economic downturn, people still have to eat. That indisputable fact might translate into slow and steady progress in capital spending on the stainless steel machinery used to process food.
"Clearly this economy affects everybody, including food manufacturers," said Dennis Krause, GE Capital Corp.'s senior vice president and industry leader for the food, beverage and agribusiness. "But people have to eat. There is a heavier emphasis on value, whether it be private-label foods or more value-driven foods purchased at retailers rather than in restaurants."
Automation has been emphasized lately as a way of becoming more efficient, he said. "A lot of that includes installing new metal machinery throughout the plant, whether it's automatic palletizers using robotic technology or something else. We're noticing more and more innovation and automation along those lines."
The food industry's only inhibitor to continuing its automation investments is access to capital, Krause said. "And in today's tight credit environment, that has become more and more difficult to obtain."
Mariann Montagne, senior equity analyst with Thrivent Asset Management LLC, Minneapolis, said the story is all about capacity utilization and maximizing assets.
"Food processors are making existing assets last longer, doing longer runs at larger plants and eliminating smaller plants," she said. "But in terms of putting up new production for expansion, I don't see it as an increasing trend." For example, Purchase, N.Y.-based PepsiCo Inc. recently indicated it would lower its capital expenditures for next year, while General Mills Inc., Minneapolis, said it was focused on wringing productivity out of its existing asset base.
Cereal and dry dinner mixes are up strongly as people move away from outside dining to saving money by eating at home, but food processors will raise output rather than install new production lines, Montagne said. "The big focus is on conserving cash and minimizing capex. That's not good news, but I think because there's so much more demand for these at-home products it might be kept level as opposed to being on the decline."
Food Processing magazine does an annual survey detailing the nation's largest food processing companies' capital expenditures. Dave Fusaro, the magazine's editor, in April 2008 revealed that companies were projecting a 7-percent spending increase for last year. "But there's been a trend over the last two or three years that collectively they spend a little less than they budget," he said.
Results detailing actual spending for last year aren't yet available. And while Fusaro isn't sure such a high spend number will occur in 2009, he's optimistic there will be an increase. "The food industry is pretty recession proof," he said. "Even in a bad year, (manufacturers' capital expenditures) go up 2 percent."
Companies can make money by embellishing existing products, like putting red filling in Oreo cookies for the Christmas holiday, Fusaro said. "But food companies want to hit a home run with a new product," he said. "And new products often mean new machinery."
But in a year like the one economists are predicting, "I can see people not buying anything unless it breaks," Fusaro said, adding that even if a company has a new product ready to go, it might opt to hold back.
"I can see them thinking, 'If we have to spend capital to tool up for it maybe this isn't the year for it. Maybe 2010.'
Fusaro said he knows of no material that is taking the place of stainless despite the product's record-high prices 18 months ago. "Anything that touches food has to be stainless," he said. "Anything they can do for the sake of food safety, almost regardless of cost, they're willing to make that investment. If microbes are getting stuck in a weld in a line, if you can replace that with something not welded that's even better. Even if it doesn't require stainless, they're erring on the side of stainless. It's still not as expensive as a billion-dollar product recall or people dying." MARIA GUZZO