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Month 2012 1
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May 2013
Food Industries’
Healthy Margins
By Jeffrey Cohen
New health foods, falling commodity prices and production efficiencies
are helping consumer food producers expand already-wide profit margins
Ice cream, candy
and chocolate
producers
average profit
margins of
nearly 19.0%
As Americans become increasingly
concerned about the negative health
effects of certain foods, manufacturers
are introducing a greater variety of
healthier products. This move has
expanded profit margins throughout the
food industries because health-conscious
consumers are generally willing to pay
more for food that they believe is healthy
for them. In particular, large companies
that have been providing Americans with
foods for years have established brand
loyalty, so when they introduce healthier,
more-expensive products, they typically
do not experience significant declines in
demand for their products because
people view them as high-quality brands.
As such, these companies can realize
higher profit margins than companies
that do not have well-established brands.
Food producers must purchase a
variety of commodities, such as feed,
corn, milk, wheat and sugar, to produce
their goods. The prices of these
commodities help determine how
producers in a variety of food industries
price their goods. So when the price of a
commodity fluctuates rapidly from year
to year, the cost of manufacturing
products becomes volatile. Volatility, in
turn, leaves producers less able to
anticipate cost increases and often they’ll
pass these costs on to consumers in the
form of higher product prices. Although
this move does not bode well for
consumers, many will still pay the higher
prices, especially for foods that are
staples in their diets. And producers end
up benefiting because the higher input
prices aren’t eating into their profit
margins, while demand from consumers
stays steady.
Americans embrace
health consciousness
The number of Americans with
preventable afflictions, such as diabetes
and heart disease, has reached an
all-time high. Because diseases like these
have been linked to certain foods, such
as those with high sugar content and red
meat, more Americans have become
concerned with the types and quality of
food they put into their bodies. In
addition, thanks in part to the media,
Americans are growing more informed
on health matters and know that
diseases like these can reduce the quality
and longevity of life, so they have
become more wary of how foods affect
their health.
As more Americans become health
conscious, they are seeking out new and
healthier versions from their favorite
brands, instead of giving up the foods
they love altogether. In line with this
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May 2013 2
Food Industries’ Healthy Margins
shift, producers in the Candy
Production industry, Cereal Production
industry and Chicken and Turkey Meat
Production industry are increasingly
promoting products based on health
claims or their nutritional content. For
example, Kraft Food Group’s subsidiary
Cadbury PLC launched Strike Spark, a
chewing gum that is advertised to
contain about 25.0% of a person’s
recommended daily intake of vitamins
B6 and B12. And Kellogg’s heavily
advertises its healthier foods, such as
its Kashi cereal line, which contains
whole grains and protein. These and
other efforts have been met with
success, evidenced by producers’
expanding sales and profit margins
throughout various food industries.
During the next five years, as the media
continues to highlight the negative
health effects of eating certain types of
foods, Americans will continue to place
pressure on manufacturers to produce
healthier foods.
Brand loyalty and technology
benefit producers
Within the top 10 most profitable food
industries, larger and well-established
producers are typically more profitable
than lesser-known small to mediumsize producers. For instance, in the
Cereal Production industry, Kellogg’s
and PepsiCo generate profit margins of
17.9% and 19.0%, respectively, which is
well above the industry average of
13.3% of revenue. Because these
companies invest a lot of money in
advertising and have prominent
displays in grocery stores throughout
the United States, they experience a
high volume of sales for their products.
In addition, they are typically better
able than smaller companies to pass
rising commodity costs on to
consumers in the form of higher
product prices. The result is much
smaller margins for the smaller
companies, even forcing some to exit
the industry altogether when
commodity prices spike.
Food producers, particularly larger
ones, are also able to expand profit
margins by investing in technology, such
as equipment and machinery used in the
production process. Technology helps
companies lower production costs
through greater efficiency and
automation in the production process,
allowing them to expand profit margins.
Similarly, investing in technology allows
Most profitable food producers
Industry
Chicken & Turkey Meat Production
Ice Cream Production
Sugar Processing
Candy Production
Chocolate Production
Cereal Production
Seasoning, Sauce and Condiment Production
Meat, Beef & Poultry Processing
Snack Food Production
Cookie, Cracker & Pasta Production
Total revenue; weighted averages of profit and risk
2013 revenue
($m)
Average profit
(%)
Overall risk
(%)
29,237.0
8,715.9
9,921.6
7,328.8
15,739.2
11,694.9
18,259.0
221,800.0
31,447.9
23,533.9
377,678.2
23.0
23.0
18.5
17.2
16.4
13.3
13.0
12.6
12.2
9.4
13.86
5.17
5.15
4.41
5.31
5.26
5.01
5.84
4.24
4.73
4.74
4.57
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May 2013 3
Food Industries’ Healthy Margins
some producers to reduce the need for
workers while increasing levels of
production, enabling them to reduce
wage costs.
Commodity prices to
become less volatile
Commodity prices are expected to be less
volatile during the next five years, which
presents even more opportunity for
producers to expand their profit margins.
Most notable is the price of corn, which
is an input in all 10 of the most profitable
food industries. During the five years to
2018, the price of corn is anticipated to
decline at an annualized rate of 2.6% to
$5.71 per bushel, reversing its 6.7%
annualized ascent from the past five
years. Consequently, producers will be
able to increase the volume of products
they manufacture and price them more
favorably for consumers.
Declines in the price of corn will also
make the price of feed less volatile
during the next five years since corn is a
primary input into feed for livestock.
Lower feed prices will help producers in
the Chicken and Turkey Meat Production
industry and the Meat, Beef and Poultry
Processing industry cut costs related to
producing animals for slaughter. As a
result, the industries’ respective profit
margins are expected to expand to 23.3%
and 12.8% in 2018.
The price of sugar is also an important
commodity in several of the most
profitable food-producing industries and
it is expected to be less volatile during
the next five years compared to the past
five. This trend is expected to especially
benefit producers in the Candy
Production, Chocolate Production and
Ice Cream Production industries. In fact,
lower sugar prices are expected to help
industry profit margins expand to 18.0%,
17.2% and 24.1% of revenue,
respectively, in 2018.
Lower volatility in the price of sugar
will allow producers to more effectively
anticipate price increases from year to
year, and as a result, they will be better
able to pass on slight rises in commodity
costs to consumers in the form of higher
product prices. In addition, as per capita
disposable incomes improve over the
next five years, consumers will be more
able to afford higher product prices from
these confectionary industries as well as
from other food industries that
experience input price increases. For
sugar in particular, many of the top
food-producing industries are key buyers
for the Sugar Processing industry. So if
the price of sugar increases, snack and
food producers can pass on these
increases without drastically hampering
demand for their products.
Profitable but moderately risky
The top 10 most profitable food
industries have a risk rating ranging
from low to medium-high in 2013, with
an average weighted overall risk score of
4.57 out of 9 (with 9 representing the
highest risk). The primary drivers
affecting risk in these industries include
demand from supermarkets and grocery
stores and the price of commodities.
Because consumers’ incomes are
improving, they will be more likely to
purchase goods from supermarkets and
grocery stores, including discretionary
goods, which is driving demand for food
manufacturers.
The price of corn is expected to
decline 2.6% over 2013, which will help
producers cut costs associated with
production and expand profit margins.
The price of sugar, however, has been
volatile and has actually raised the cost
of manufacturing many food products.
Additionally many of the industries have
high levels of competition, which makes
it more difficult for smaller companies to
compete and realize the high profit
margins that larger, well-established
companies achieve. Competition,
combined with contrasting trends in
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Food Industries’ Healthy Margins
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demand and input prices, are largely
responsible for the sector’s moderate risk
rating overall.
Conclusion
Food producers aim to strike a balance
between providing Americans with the
food that they love at a reasonable price
and maximizing company profitability.
During the next five years, profit margins
in these already-profitable food product
industries are expected to expand as
commodity prices become less volatile
and operators cut costs associated with
production. In addition, if prices do rise,
they will be better able to pass off cost
increases in the form of higher product
prices to consumers because disposable
incomes are improving in line with the
economy. In particular, larger and
well-established companies produce
brands that millions of Americans are
familiar with and loyal to. Still,
Americans will look to their favorite
brands to introduce healthier food
products as they strive to live healthier
lives. Producers that introduce and
advertise healthier products are likely to
be rewarded with greater sales, thus
benefiting margins further.
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