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The Art and Science of Locating a New Food Plant

By identifying critical factors up front, food companies position themselves to succeed in a new market.

Q2 2015
Locating your perfect food manufacturing facility — it’s a simple project, really. That is, if you have ample time, capital, and numerous other resources at your disposal.

Large- Versus Small-Cap
The process can appear routine for the large-cap company. For example, your long-term business expansion plans contemplate increasing market share in target regions, balancing proximity to raw goods contracts and suppliers, as well as to customers and clients receiving finished products. Your logistics studies identify a small geography where all supply-chain factors appear to balance optimally. Labor analysts work closely with economic incentives consultants to further finesse your top markets of choice.

Of course, there are no existing “state-of-the-art” buildings available, so you begin to evaluate design-build engineers and contractors. The project focus becomes identifying the ideal parcel of land. Over the course of multiple years, you work aggressively with teams of experts, including real estate professionals, site selectors, engineers, architects, contractors, zoning professionals, and economic developers to drive the project from concept to completion. States, counties, and municipalities compete for your business through tax abatements, rebates, job training, assistance with variances and impact fees, and infrastructure improvement programs.
The addition of a new plant to a small- or mid-cap company’s network means major growth potential but also major risk.
For the rest of food companies, particularly in the small- and mid-cap sectors, finding your next plant is an imprecise science of balance and compromise. The addition of a new plant to a small- or mid-cap company’s network means major growth potential but also major risk. Such projects frequently have the potential to fundamentally shift a company’s market share, sometimes doubling or tripling production capacity. As your company grows from a local to regional player, or a regional to national player, company structure and processes around real estate and site selection often take shape concurrently. As a result, your company can find itself contemplating critical factors late in the process, or even after the plant is completed and in operation.

In our business, we work with food companies at all points of the business continuum, from introduction through growth and maturity, and occasionally through change or decline. We have the unique opportunity to analyze business needs and costs associated with new food plants. In doing so, we can help companies avert potentially disastrous, opportunistic investments, or at least to avoid missteps that others have made. Frequently we are also engaged to restore operations to idled or failing food plants where the business concept, labor market, supply chain structure, raw goods resources, or other factors have fallen short. Across all scenarios, understanding the attributes and shortcomings of a food plant and its location is indispensable to long-term sustainability of a future food operation.

New Versus Retrofit
In contrast to the large-cap companies, on average, small- and mid-cap companies commence the real estate search process with the need to be in operation within 6–12 months. There is typically a catalyst such as a client-driven demand, or market-driven trend prompting the need for more production capacity. Private equity directives, new customer contracts, and other growth initiatives also fuel short time lines. Companies often begin with the vision of building a new plant to discover (they hope quickly) that the timeline for site identification, site inspections, permitting, design, construction, and equipment installation is not viable. Realizing the time constraints, food companies either search for existing food plants that are adaptable to the company’s specific use or other suitable buildings that lend themselves to retrofit.
After eliminating ground-up construction as an option, the next step is usually to survey existing food plants within a broad regional geography. This is where food companies sometimes go wrong.
After eliminating ground-up construction as an option, the next step is usually to survey existing food plants within a broad regional geography. This is where food companies sometimes go wrong. The hope is to find an existing food plant configured for compatible food production, within the target size range, and with a workable production layout. Usually the aforementioned scenario has the lowest acquisition costs. New food plant construction can be four to seven times the cost of a viable second-generation plant, prior to production-specific reconfiguration and improvements. The appeal of a “turnkey” option (or at least one requiring minimal alterations) appears to be the path of least resistance.

Supply Chain, Labor, and Incentives
Overall, transportation and labor costs outweigh real estate and occupancy costs within the supply chain. Allured by the ease of readily available plants, however, food companies can encounter unnecessary and unanticipated operations costs as their newly established production lines begin to churn out product.

As we work with food company clients to locate new production facilities, we advocate thorough examination of the costs of doing business before contemplating real estate. These costs include proximity to growers and raw goods; inbound and outbound trucking costs, including viability of back-hauls; time sensitivity of the transportation of perishables; interstate access and efficiency of routes; and weather and topography constraints.
A community may readily welcome a new plant to the community, supplying an initial burst of available labor, but what happens when the company decides to expand the plant, add three production lines, and triple its workforce?
In conjunction with supply-chain analysis, labor analytics are crucial to the sustainability of a food manufacturing operation. Current cost and supply of labor are vital to a start-up; however, attrition rates, projected supply of labor, and wage growth over time are imperative to underwriting location risks. A community may readily welcome a new plant to the community, supplying an initial burst of available labor, but what happens when the company decides to expand the plant, add three production lines, and triple its workforce?

When evaluating current and future labor, it is also important to assess specific skillsets of the workforce, as well as community businesses that will compete for labor. For example, a food plant may vie for the same labor sector as an oilfield services firm; however, food companies generally cannot compete on wages with oilfield services. Significant gaps within the above mentioned sectors could greatly outweigh the savings of an inexpensive second-generation food plant that may lack adequate labor or that does not fit well within a company’s supply chain.

Once we have identified workable areas (or eliminated the unfeasible), existing real estate and community incentives come into play. Within suitable geographical limits, a plant’s existing refrigeration, utility infrastructure, building systems, and processing equipment may offer substantial value to a food company, driving cost savings and speed to market.
Sometimes the pairing of an optimally located warehouse with an aggressive community willing to participate actively in the expense of transforming a more basic industrial facility into a food plant can win out to an existing food plant.
Community incentives may also serve to overcome some plant deficiencies. For example, beyond typical economic incentive packages, communities can offer food-industry-specific education and job training, assist in structuring competitive supplier contracts, and fund construction of surrounding infrastructure improvements as well as upgrades to water, sewer, and electric utilities. Sometimes the pairing of an optimally located warehouse with an aggressive community willing to participate actively in the expense of transforming a more basic industrial facility into a food plant can win out to an existing food plant.

Realizing “the Perfect Plant”
Over the past 10 years, we have witnessed increased sophistication and intentionality among food companies in their planning for new food plants. Every food manufacturer has highly unique requirements that impact the building and location. By identifying critical factors up front, food companies position themselves to succeed in a new market, based on the success of their business operation.

As we work with food companies, we work to hedge against external factors that could negatively impact the long-term success of a plant. The art of identifying a food plant is no longer exclusive to the large-cap company. Sure, there are time and cost barriers to the mid-cap and small-cap companies; however, by thoroughly evaluating and understanding labor, supply chain, and economic incentives in the context of analyzing the intricacies of existing food plants and retrofit candidates, mid-cap and small-cap companies can also realize “the perfect plant.”
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