There will be more consolidation among US packaged food companies in 2008, according to debt rating agency Fitch’s.
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The agency said today (6 December) that some companies may look to cut costs by “combining or streamlining operations” as commodity costs continue to rise.
“Packaged food companies faced high input cost inflation in 2007 and several have given even higher preliminary input cost inflation guidance for 2008,” Fitch’s said.
“Several companies within the packaged foods sector have engaged in significant restructuring programmes over the past several years, which are winding down. However, Fitch envisions further restructuring may be necessary given the high cost environment.”
The agency added: “The last major round of consolidation was in the early 2000s. Since leveraged buyout (LBO) activity subsided earlier this year, merger and acquisition (M&A) activity will more likely be conducted by strategic buyers.”
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By GlobalDataDespite industry concern about the rising cost of raw materials, Fitch’s said diversified portfolios would help major US packaged food firms ride out the storm and protect margins.
“Despite high input cost inflation, a weak housing market and a slowing economy, packaged food is non-discretionary,” Fitch’s said. “These companies tend to exhibit stable operating earnings and cash flow, as well as excess free cash flow.”
The agency said it expects most companies to post “low to mid-single digit” revenue growth. It pointed to possible higher margins at Kraft Foods and Sara Lee Corp. as restructuring lowers costs.
Fitch’s also flagged the prospect of higher expenditure on marketing. “This spending is necessary to support core categories as well as new products. Many packaged food companies are planning to invest in consumer marketing at a faster rate than sales growth in an effort to preserve and expand market share.”
The agency added: “Competition is expected to remain intense. Companies with higher margins such as General Mills, Kellogg, Campbell Soup Co. and Heinz have greater ability to invest in their brands to preserve market shares relative to competitors.”
