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Despite an uncertain economy, food and allied product executives remain cautiously optimistic about their growth prospects, according to findings from a survey by RSM McGladrey.
Produced in conjunction with the 2008 RSM McGladrey Manufacturing and Wholesale Distribution National Survey earlier this year, the Food and Allied Products industry report polled over 960 industry executives -- including 86 food executives from 82 companies -- on such issues as cost structure, profitability, technology initiatives, operations, and globalization.
According to the survey, the percentage of respondents describing their business as "declining" has tripled over the past two years. Among all industry segments surveyed, only the food and allied products segment has remained relatively stable.
"Many food and allied product companies have continued their strong performance, despite rising prices, an uncertain economy, and decreased consumer spending," said Terry Schwartz, managing director at RSM McGladrey. "By taking several proactive measures, the industry, as a whole, has continued to maintain or improve their gross margins. As the U.S. economy begins to stabilize, the future is bright for many of these companies."
Schwartz said there are several reasons for this positive outlook, chief among them an increase in gross margins in 2008. The majority of companies surveyed -- 60 percent -- reported a margin of 20 percent or more, a slight gain over the 2007 survey. Commodity pricing, selling pricing, and internal cost-cutting measures were listed as the three most employed practices that have contributed to an increase in margins, while many other industries face more significant struggles.
As in most segments, inflation in many costs related to energy and logistics are causing executives to explore a wide variety of strategies to maintain profits and grow business. Rising prices are forecasted in several areas, with most executives surveyed seeing an increase of 6 percent or more in the costs of energy, logistics, and raw materials.
Many companies have turned to raising consumer prices as a strategy to combat increasing costs. While this tactic isn't necessarily a surprise, the level of price escalation is of note. Indeed, 45 percent of survey participants said they plan on raising prices up to 10 percent, while 49 percent of companies surveyed said they would increase prices by 10 percent or more, a spike from just 8 percent in last year's survey.
"Rising ingredient and energy expenses have led to higher costs for companies and therefore higher food prices for consumers," commented Schwartz. "The escalating prices that companies have to incur is gaining a great amount of media coverage; therefore the industry is avoiding a backlash that normally would accompany a high rate of consumer price increases."
Embracing and diversifying global business is one strategy that executives in this industry may not be taking full advantage of, according to the survey, which found that 27 of the companies surveyed "agreed" or "strongly agreed" that working globally was a part of their business strategy.
The complete RSM McGladrey 2008 Manufacturing and Wholesale Distribution National Survey is available at www.rsmmcgladrey.com/2008survey.