Dive Brief:
- Moody’s Investors Service has upgraded its outlook for the packaged foods industry from "stable" to "positive," Food Business News reported.
- The Sept. 30 report recognizes limited potential for top-line growth in this sector, but also notes how manufacturers' cost-cutting initiatives have contributed to margin and cash flow growth industry wide.
- "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," the Moody's report says.
Dive Insight:
Despite cries from certain investors, Mondelez and Kraft Heinz have been clear leaders in the industry's cost-cutting and margin expansion efforts. The two account for about 65% of the food industry’s operating profit growth, per Moody's estimate. Both companies are pursuing major restructuring efforts, whether that's slimming down post-merger or retooling a global snack and confectionery empire.
In both cases, zero-based budgeting has played a role in the companies' cost-cutting successes, and the strategy is becoming more common across the industry. But experts warn against adopting zero-based budgeting without clear goals and parameters in mind or else risk limitations on innovation, marketing and other top-line growth drivers.
Moody's credits "weak agricultural commodity prices, a lack of new product innovation and intense price competition" for why packaged food manufacturers face such steep challenges with achieving and maintaining top-line growth going forward, according to Food Business News. Company earnings reports corroborate this sentiment, though manufacturers are increasingly investing in innovation to remain competitive and on-trend.
Acquisitions, VC investments and startup accelerators have also been key to manufacturers' attempts to promote top-line growth, and Moody's predicts that trend will continue. With levels of brand loyalty declining, legacy brands and their parent companies have to seek out the next disruptive startup or brand that will turn around sales declines and keep major manufacturers relevant in today's constantly evolving food landscape.