Healthy and robust, the food processing industry takes up a considerable piece of our industrial output pie—over one-sixth to be precise. Generating over $700 billion in sales annually, it's one of the biggest industrial sectors—but that doesn't mean that it's been a cakewalk.

Indeed, in the production and distribution of food and beverages, companies face stiff competition, fickle consumer tastes and fast-changing market trends. There are hundreds of product categories, and to compete, firms must constantly innovate. Even industry giants can't afford to sit back.

For example, when Minneapolis-based General Mills did not live up to earnings expectations in its fiscal 2002 third quarter, CEO Stephen Sanger placed some of the blame on insufficient innovation—noting that only a "mere" 23 new products were introduced during the quarter. To boost earnings, he said the company would launch 40 new products each quarter during the first half of fiscal 2003, and such new offerings would include more Yoplait yogurt varieties, a new breakfast cereal line and convenience foods.

But introducing new products is tricky and failure-prone. Many become, well, "toast." In fact, only 2% of ideas make their way to the marketplace and of those, 80% flop, including line extensions, according to Scott Lutz, formerly of Minneapolis-based 8th Continent, a joint venture between DuPont and General Mills.

While others like Valerie Skala, vice president of analytic management and development at Chicago-based Information Resources Inc. (IRI), put the failure rate at a less daunting 50%, the fact remains—launching a new product is difficult. Yet it's imperative. According to Skala, new product introductions now account for 50% of manufacturer sales—up from 33%, five years ago.

Luckily, manufacturers can look to a few prominent trends to guide them. One market movement is toward convenience. According to Skala, consumers will dish out two or three times as much money for a more convenient version of a product.

Such convenient products include grab-and-go snacks and "value-added" foods, such as microwaveable beef and pre-marinated chicken cuts. Egging on this value-added trend are producers—farmers and ranchers—who are playing a bigger part in processing and marketing finished products. By adding value to goods, they are protecting themselves from volatile commodity prices, says Leonard Teitelbaum, a managing director in Merrill Lynch's New York City office.

"If I'm selling whole chickens, the marginal producer can set that price," he says. "On the other hand, if I (the processor) give you a value-added product like pre-marinated poultry or hot wings, I can get a higher price, and the overall price of chicken has less influence. Every manufacturer wants to get out of the commodity business and generate demand for value-added products."

From the consumer standpoint, value-added, heat-and-eat foods are appealing because they cut down food preparation time. But while many households today are short on time, they are long on disposable income—a fact that is driving some other major trends.

Specialty food categories such as gourmet cheeses, specialty breads, organic foods and "ethnic" foods are flourishing because of this income boost. "Consumers have greater disposable income than in the past and are placing more emphasis on enjoying food as entertainment, which means they are willing to spend a little extra money," says Robert Price, a senior site selection consultant in Lockwood Greene Consulting's Somerset, NJ office.

In addition, organic or natural products are popular because the healthy/functional food trend that began in the mid-1990s still endures. This functional movement is behind up-and-comers, such as energy drinks and anti-aging and weight loss foods.

"Boutique manufacturers" which make specialty foods are growing. For example, the largest natural foods distributor in the country, United Natural Foods Inc. of Connecticut is expanding, having recently acquired Iowa-based Blooming Prairie Cooperative, the largest natural foods distributor in the Midwest.

Such acquisitions also point to another major trend in the industry—M&A (mergers and acquisitions) activity. Like many other industries, the food processing sector has witnessed a lot of consolidation—especially among large companies. But such activity has been slowing down since its heyday in the late 1990s. This is because most of the industry's big players have already been involved in some kind of merger or acquisition, says Merrill Lynch's Teitelbaum.

In fact, the 2002 tally for M&A deals among food processing companies was only 101—the lowest figure since 1996, says the Food Institute, a New Jersey-based non-profit information and reporting association that tracks M&A activity in over two-dozen food categories. Deals in the food processing category were responsible for 24% of the transactions in the entire food industry last year.

Still the impact of consolidation remains strong, leading to the closing of several food processing plants around the country. "There has been restructuring in virtually every large company in the industry," says Teitelbaum.

Also, another food processing plant trend is the trek southward, mirroring long-term population growth patterns. "The southern part of the U.S. is still a favored area because of (relatively cheap) land prices and the ability to serve populous areas" from regional distribution centers, says Teitelbaum. Many food companies in North America are also building plants and gaining a foothold in the markets of developing nations, particularly in Asia and South America.

When planning where to build food processing facilities, companies are chiefly concerned with logistics because perishability is a huge issue in bringing raw materials to processing plants and in moving finished products to market. In fact, proximity to markets is more influential in plant planning in the food processing industry than in most types of manufacturing, says Don Schjeldahl, director of the facilities location group for The Austin Co.

Food processing companies also ensure speedy time to market by retrofitting existing facilities instead of building from the ground up. "In many cases, they're willing to trade off locating at the optimum center of a market in favor of an existing facility somewhere else," says Price from Lockwood Greene Consulting. "It may not be an optimum location, but it can affect their time to market."

Aside from time to market, a pressing concern for food processors is food safety. According to Food Processing's 2003 Manufacturing Survey, which polled thousands of industry professionals, food safety far outweighs any other concern. Half of respondents—a percentage even more pronounced than last year—indicated that food safety was the most crucial issue for them. In addition, 64% said their company has either established new food safety and sanitation initiatives or is planning to do so.

Indeed, a lot is brewing in the food processing industry from constantly changing consumer preferences and trends to food safety concerns and countermeasures. It certainly takes one tough cookie to survive in this competitive sector. Says Price, "Given the fickle taste of the American consumer, there's a growing need for these companies to be agile and lean."

Primer Links

Government Agencies

Food and Drug Administration http://www.fda.gov/

Government Food Safety Information http://www.foodsafety.gov/foodsafe.html

United States Department of Agriculture http://www.usda.gov/

Organizations

American Association of Meat Processors http://www.aamp.com/

American Meat Institute http://www.meatami.com/

American Frozen Food Institute http://www.affi.com/

Chocolate Manufacturers Association, National Confectioners Association http://www.candyusa.org/

National Food Processors Association http://www.nfpa-food.org/

National Soft Drink Association http://www.nsda.org/

Resources

The Food Institute http://www.foodinstitute.com/

Food Manufacturing http://www.foodmanufacturing.com/scripts/default.asp

Food Processing Magazine http://www.foodprocessing.com/fp/index.html

Food Product Design http://www.foodproductdesign.com/index.html

Food Quality http://www.foodquality.com/

Food Technology http://www.ift.org/publications/docshop/ft_shop/ftindex.shtml

Sources: Safety Tops Concerns for Coming Year
Steve Ennen
Food Processing, Jan. 1, 2003
http://www.foodprocessing.com/Web_First/fp.nsf/ArticleID/SENN-5JPSU9/

Industry Outlook: Food Processing
Dan Emerson
Plants Sites & Parks, Nov. 2002
http://www.bizsites.com/2002/november/article.asp?id=177

A True Desert Adventure
William A. Roberts, Jr.
Prepared Foods, Dec. 2002
http://www.preparedfoods.com/archives/2002/2002_12/1202npcrecap.htm

2002 Food Industry M&A Activity Lowest Since Early 1990s
The Food Institute, Press Release
http://www.foodinstitute.com/pressreleases.cfm#merg2002