Food Processing: Maintaining Heat in a Chilly Economy
A trend toward home food preparation and a continuing interest in sustainability and natural products are helping the food processing industry maintain heat in a chilly economy.
Mark Crawford, Contributing Editor,  (Aug/Sep 09)

Although it has taken some hits, the food processing industry is holding up well in this tough economic climate. According to the Grocery Manufacturers Association's (GMA) 2009 performance report, even though median shareholder returns were down for the industry in 2008, they still outperformed the median returns posted by both the S&P 500 and the Dow Jones Industrial Average indexes.

Food processing is a big part of the $2.1 trillion food, beverage, and consumer packaged goods industry (CPG), which employs 14 million workers and contributes over $1 trillion in added value to the nation's economy. The five key segments to food processing are meat and poultry, fruits and vegetables, beverages, bakery, and dairy. CPG manufacturers maintained a median sales growth of 10 percent in 2008, only slightly lower than 2007, which reflects the stable nature of the industry. Top companies like General Mills and the Hershey Company saw solid results across their brand portfolios in 2008 and into 2009.

"Companies that have more diversified portfolios are generally doing better than those who don't," says Stephen Sibert, senior vice president of industry affairs for GMA. "We are seeing more companies trying to adjust their portfolios to include more affordable products."

One reason food processors have benefited from the recession is that more people are buying groceries and eating at home. "We're seeing growth in our baking divisions that we haven't seen in years, because not only are people trading down to the grocery store, they are also trading down within the grocery store," says Don Mulligan, executive vice president and CFO for General Mills. "For example, instead of going to the in-store bakery and buying a ready-made cake, they are buying our Betty Crocker mix. In some cases, they are economizing even more by buying flour - our retail flour."

Of course, the economy is still challenging for the industry. Half the respondents to a recent poll conducted by FoodProcessing.com said that the recession had not affected their business; the other half, however, answered they were considering cutting back on production, laying off workers, cutting salaries, and closing plants or consolidating operations. In that same poll, 27 percent of respondents reported that their companies were growing and 40 percent indicated they were holding steady.

Food Safety Is Top Concern
Food safety continues to be the number-one priority for food processors, especially with the ongoing controversy regarding contaminated ingredients from China and other countries, food-borne illnesses, and undeclared allergens. Each year, about 75 million people are sickened by contaminated food, hundreds of thousands are hospitalized, and about 5,000 die. To lessen these numbers the food processing industry wants the federal government to become more involved in regulating both foreign suppliers and U.S. importers. At present, the Food and Drug Administration (FDA) physically inspects only about 1 percent of the over 9 million batches of food imports that enter the country every year and about 5 percent of domestic food-processing plants.

The Food Safety Enhancement Act of 2009 is currently making the rounds in Congress. The proposed legislation is intended to give the FDA greater authority to regulate the food industry's suppliers and manufacturers, review business records, and establish a national food tracing system. Some supporters are also calling for annual registration fees for all facilities that store, process, or manufacture food products.

"The GMA is also working to develop technological applications our members can use to improve safety, from the first step in the supply chain to the last step of stocking the shelf," says Sibert. GMA is researching track-and-trace systems, methods of recall, best practices for removing and destroying contaminated products, and how to get products back on the shelf and regain consumer confidence.

Green and Natural
FoodProcessing.com estimates that 85 percent of food and beverage CPG manufacturers utilize environmental sustainability practices, from plant production to packaging/distribution to promotion. Even with the economic downturn, 62 percent of the publication's poll respondents indicated that sustainability efforts are becoming more important; however, more than two-thirds also said they would not be implementing any new alternative energy initiatives (solar, wind, biodiesel) in their operations in 2009.

"Some companies such as Sara Lee, Pepsi, General Mills, and Frito Lay are very aware of the need to incorporate sustainability into the new facilities they construct," says Sibert. Despite the economy, manufacturers are expected to continue developing "earth-friendly" products, packaging, and promotional programs.

"We need to focus on the different sustainability aspects of the products we offer and articulate their benefits," says Jeffrey Hogue, vice president of corporate sustainable development for Danisco, which recently received an A+ for its sustainability reporting under the Global Reporting Initiative. "We see many customers asking for that information."

"Consumer interest in this topic is still relatively high," says Steven J. Swartz, an analyst for McKinsey & Company in Chicago. "This is very important for stakeholders, who still expect corporations to live up to the sustainability commitments they made in the past. There are no free passes being given to companies to miss commitments because of the economic downturn." The "greenness" of a company's supply chain is also a top concern. Swartz indicates that about 90 percent of the negative environmental impacts that ultimately affect a food company's operations and reputation occur somewhere in the supply chain. "This means," says Swartz, "that most food companies, if they really want to have impact in this area, must create an `influence model' to determine how they are going to drive change across their supply chains."

In April of this year, Whole Foods Market announced a comprehensive energy commitment that more than triples the number of stores with solar panels, extending its commitment to offset 100 percent of its use of non-renewable electricity by using wind energy and retrofitting existing stores with energy-efficient lighting, equipment, and mechanical components. The company has also installed a hydrogen fuel cell at its Glastonbury, Connecticut, store. The fuel cell, a first for a supermarket, generates 50 percent of the electricity and heat and nearly 100 percent of the hot water consumed by store operations.

"We will be avoiding half, to almost all, of the power needed by traditional grid sources in several locations by using fuel cells and waste-to-electricity technologies," says Kathy Loftus, Whole Foods' global leader of sustainable engineering, maintenance, and energy management. "We have saved in excess of 15 million kilowatt-hours of electricity in the past two years, reducing energy consumption up to 20 percent for certain stores."

Organic food sales enjoyed another strong year in 2008, although growth has slowed down so far in 2009. The Organic Trade Association reported that U.S. sales of organic foods products grew by 15.8 percent in 2008, reaching $22.9 billion. Swartz says that while the organic segment is still growing, it doesn't represent enough consumers to warrant its own segment, but instead is categorized with a group of shoppers that focuses more broadly on sustainability. This "green segment" represented about 9 percent of the population we researched last year. "CPG companies continue to introduce green products at a rapid pace," says Swartz. "Recently there has been a massive spike in green product launches, and many retail companies are also pushing the introductions of green products in their private brands."

Key Locations
Illinois, Texas, Arkansas, Iowa, Washington, and Oregon all have strong food processing industries that contribute significantly to their state economies. In fact, food processing is one of the few industries in the Pacific Northwest that is actually creating jobs. "Overall, our food processing industry is doing very well in this tough economy," says David Zepponi, president of the Northwest Food Processors Association (NWFPA), which represents Washington, Oregon, and Idaho. "Most of the new manufacturing jobs in the Northwest are in food processing. In April, we added 1,300 new jobs."

NWFPA is very proactive in representing its members and has initiated several cutting-edge energy efficiency initiatives through its Innovation Product Center that have reduced costs, saved jobs, and developed new technology. "We are the first industry group in the country to evaluate our emissions and measure our energy consumption to create an energy intensity index," says Zepponi. "This will help our members save resources, enhance their communities, and be more attractive to investors."

The Tri-Cities area of Washington - Kennewick, Richland, and Pasco - is the fourth-largest and fastest-growing MSA in the state. Located in one of North America's most fertile growing regions, it supports over 200 varieties of fruits, vegetables, grains, and berries. Pasco is the region's gateway to the agriculturally-rich Columbia Basin, where production agriculture generates about $800 million annually. In the past seven years food-processing employment has increased 85.7 percent. Major producers are Wyckoff Farms, ConAgra, Tyson Foods, Broetje Orchards, Douglas Fruit, Tree Top, and Twin City Foods.

South Dakota is another food-processing stronghold. A recent corporate location study by New Jersey-based Boyd Company compared how much it would cost to operate a functional food and nutritional beverage facility in 35 U.S. and Canadian cities. The lowest-cost site was Sioux Falls, South Dakota ($12.6 million in annual operating costs), followed by Saskatoon, Saskatchewan; Salt Lake City, Utah; Winnipeg, Manitoba; and Des Moines; Iowa. Nationally-recognized food processing companies such as Cargill, John Morrell, Jolly Time Pop Corn, Sue Bee Honey, Curly's Tyson Fresh Meats, and Well's Dairy have major operations in Sioux Falls.

Sioux Falls is part of "Siouxland," the tri-state MSA of Iowa, Nebraska, and South Dakota. "This area has one of the most stable employment rates in the nation," says Chris McGowan, executive vice president for The Siouxland Initiative, a private-sector regional economic development organization. "Unemployment as of May 2009 was 5 percent and has increased by less than a percentage point during the recession."

The cost of electricity and natural gas is very competitive in Sioux Falls, which keeps energy costs low. The City of Sioux Falls has also upgraded its water treatment facilities and increased its industrial capacity to attract more business investment. "As a major producer of foods, especially products considered to be staples in many U.S. households, as well as renewable energy, Siouxland has generally seen less volatility in its economy than other regions," says Joseph Wright, vice president of technology transfer for The Siouxland Initiative. "Not one of the 30 food-processing companies we interviewed in the first half of 2009 reported a decline in sales volume. In fact, 77 percent of them confirmed increases in their sales."

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