Packaged foods in a grocery basket
Moody’s has raised its packaged food industry outlook to positive.

NEW YORK — The outlook for the packaged foods industry has improved to “positive” from “stable,” according to an analysis from Moody’s Investors Service.

Despite little prospective improvement in top-line growth, Moody’s said successful efficiency initiatives across the food industry have brightened the industry’s outlook. The analysis was published in a Sept. 30 report, “Going positive as cost cutting fuels margin and cash flow growth.”

“Although top-line sales growth continues to limp along, more companies are starting to see a bigger pay-off from large-scale cost savings strategies,” the ratings agency said. “As such, we now expect core operating income to rise 4.5% to 5.5% from our previous call of 4% to 4.5% for the next 12 to 18 months, excluding Mondelez International, Inc.  (Baa1 stable) and Kraft Heinz Foods Co. (Baa3 stable). When including these two, our operating income forecast rises significantly, to 8% to 9% growth.”

Moody’s estimated that 65% of the food industry’s operating profit growth is accounted for by Mondelez and Kraft, and that the two companies are in the midst of major restructuring efforts.

Mondelez and Kraft-Heinz products
Moody’s estimated that 65% of the food industry’s operating profit growth is accounted for by Mondelez and Kraft Heinz.

“Even when excluding Mondelez and Kraft Heinz, the majority of companies in our rated universe are generating stronger margins through efficiency improvements,” Moody’s said. The agency said benefits from cost cutting will become significantly more apparent in 2017.

Pressures on sales growth are not expected to let up, Moody’s said. Projecting 1% to 2% growth over the coming 12 to 18 months, the agency said drags will include weak agricultural commodity prices, a lack of new product innovation and intense price competition.

“While we expect that U.S. consumer spending will continue to benefit from higher employment, low inflation and a strong dollar, we also expect that incremental discretionary consumer spending will be directed disproportionately to savings or other consumer sectors such as health care, home improvement and automobiles,” Moody’s said. “Within the food sector, flat away-from-home dining will not contribute much benefit to food makers and could become a headwind. Falling food prices and healthier eating trends have encouraged more consumers to prepare their meals at home from scratch using lower margin less processed ingredients.

“Our forecast for low commodity price inflation reflects continued sluggish growth in the global economy, especially in emerging markets — in contrast to a gradually-strengthening U.S. economy. U.S. companies that generate sales overseas will continue to face weak export volume and foreign exchange exposure challenges, reflecting faster U.S. GDP growth relative to most developed markets and slowing growth rates in emerging markets.”       

Mergers and acquisitions are expected to remain a significant tool for food companies seeking to reposition their portfolios in the year ahead, Moody’s said. Expected are shifts away from mainstream brands and conventional processed foods in favor of products perceived by consumers as fresh, healthy and convenient.