Moody's sees stable U.S. packaged foods sector in 2016

by Keith Nunes
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Moody's said U.S. packaged foods sector operating profits will grow 4% to 5% in 2016.

NEW YORK — Moody’s Investors Service said U.S. packaged foods sector operating profits will grow 4% to 5% in 2016, and sales will grow 1% to 2%. Short-term cost reduction will drive higher early profit gains for many companies after which growth will moderate, according to the service’s 2016 Outlook report released Dec. 2.

Despite an improving economy, the report said stronger consumer financial health will not translate into higher packaged food spending.

Brian Weddington, senior credit officer for Moody’s

“We expect packaged food sales growth will be zero to 2% next year — close to population growth,” said Brian Weddington, senior credit officer for Moody’s. “Benign agricultural commodity price inflation will keep a lid on food inflation; consumers will remain cautious spenders and vigilant about value grocery shopping; food preferences will continue to move to the perimeter of the store where packaged food processors have less of a presence; and away-from-home dining will benefit more than packaged foods.”

Two additional issues identified in the report were the trend toward renovation over innovation and the fact that the pace of mergers and acquisition will slow. Higher interest rates will dampen M.&.A. and shrink purchase multiples as investors turn to higher quality investments, according to the report.

Despite the slowing overall pace of activity, Pinnacle Foods, Post Holdings and Kellogg Co. all were identified as being acquisitive during the year. In addition, the report said Mondelez International may explore the divestiture of its non-snack European operations during the year.

With regard to the focus on product renovation vs. innovation, Mr. Weddington said it may be viewed as a positive.

“It reflects a greater focus on maximizing return on investment in a slow-growth environment,” he said. “If global economic growth picks up, it makes sense to develop new product platforms, but not so much at this time.”

Three companies highlighted in the report as being best positioned to perform during the year included General Mills, Campbell Soup Co., and Mondelez.

 Moody's said General Mills is positioned to perform during the year.

“General Mills has one of the strongest portfolios in the industry in terms of category diversification and top-tier market shares within its core categories,” Mr. Weddington said. “General Mills also has historically steered away from heavy-spending on new food trends until they are proven to be lasting — a strategy that is particularly apropos in today’s environment where consumers tastes and preferences are shifting more rapidly.”

Campbell Soup has moderated its efforts to reinvigorate the soup category and that is viewed as a positive.

“Its latest approach is more pragmatic in that it reflects the growth limitations of the soup category due to shifting consumer demand toward other competing convenient meal choices such as snack bars and yogurt,” Mr. Weddington said. “The company’s focus on improving ingredient lists and highlighting the health credentials of its products is a more efficient way of supporting the top line, and its cost-cutting and operational streamlining will accelerate growth on the bottom line.”

He added that Mondelez benefits from its large global scale and increased focus on the snacks category, which is growing faster than the overall food industry.

“We also have confidence that the margin expansion resulting from its restructuring efforts since the spin-off of the North American grocery business is permanent and likely to improve further,” Mr. Weddington said.

Four companies identified in the report as in the midst of major transformations include ConAgra Foods, TreeHouse Foods, Kraft Heinz Co. and B&G Foods.

ConAgra is in the midst of selling its Private Brands business to TreeHouse and spinning off its commercial foods business. Kraft Heinz was highlighted because it is in the early stages of a heavy cost-reduction effort through zero-based budgeting, and B&G Foods is in the midst of integrating the Green Giant business it acquired from General Mills.

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