While the US economy has struggled to shake off the effects of the recession, making consumers cautious about their spending, demand for packaged food has remained relatively stable. However, the margins of packaged food companies have come under pressure as overhead costs for such items as commodities have increased.
“Swiftly rising input costs have put packaged food companies in a situation where margins are being squeezed,” said Judi M. Rossetti, senior director at the industry analysts. “It will take time for price increases implemented by the food companies to catch up with the commodity cost inflation they are already incurring.”
Cash for takeovers
But the overall forecast from the prominent industry analysts will also be good news for packaging manufacturers who supply material to such leading companies as Heinz, Campbell Soup, Kraft and ConAgra.
“Despite the difficulties in the economy, food remains a necessity for consumers and therefore the packaged food companies tend to have relatively stable operating results and credit metrics under various economic conditions,” said the Fitch report. “Large, diversified packaged food companies generally have substantial positive free cash flow (cash flow from operations less capital expenditures and dividends), conservative capital structures, and ample liquidity.”
Companies are predicted to use their healthy cash flow for what Fitch called “bolt-on acquisitions” or share repurchases.
“Food companies continue to seek acquisitions and organic growth, particularly in the BRIC countries (Brazil, Russia, India, and China), to boost their overall growth rates,” said the group.