With the sweeping changes in the tax code last year, bakers and snack producers received new incentives if they install a new line, expand a facility or make other qualified capital expenditures.
“Those tax savings are pretty significant,” said Robb MacKie, president and chief executive officer of the American Bakers Association.
Starting in 2018, the first-year bonus depreciation increased to 100% of the qualified asset purchase price for the next five tax years. It can be used for new and used equipment as long as it is put into service and into an operation during the tax year, and that can improve cash flow for other investments. (See an accountant for those fine-print details with the new tax law).
“We already have a strong base when it comes to capital expenditures,” Mr. MacKie said. “The tax code changes add further incentives.”
The changes could have an impact on how bakers approach the 2019 International Baking Industry Exposition (IBIE), which runs Sept. 7-11 in Las Vegas.
“It will be fascinating to see if people literally show up with shopping lists,” he said. “I have a funny feeling that they will. Many bakers went to iba (trade show) in Munich last year to do the research phase, and many will come to IBIE to buy.”
The wave of consolidation that has changed the face of the industry for decades seems to have been replaced by a greater emphasis on capital spending in recent years.
“I think we’ll look back at this period and say, ‘Wow. This was a big uptick in investment,’” Mr. MacKie predicted.
Recently, Kansas City-based Cypress Research conducted an analysis of the Economic Census of Manufacturing data that provides the most complete information on the commercial baking industry every five years. Additionally, Cypress Research supplemented its findings with statistics from the Annual Survey of Manufacturers (A.S.M.).
The data, which provides a historical, long-term perspective dating back to 2002, offers comprehensive information about the entire category. In addition to framing the state of the industry, the report lays the foundation for identifying those mega trends and underlying factors that have been impacting industry sales and capital expenditures over the long run.
Historically, about 85% of capital expenditures targeted machinery and buildings, with the bulk spent on equipment in the overall commercial baking industry, according to the analysis by Cypress Research. Overall, census data showed that total investment rose steadily to $2.37 billion in 2012 compared with $1.86 billion in 2002, despite the impact of the Great Recession and financial crisis that made it nearly impossible for businesses to borrow money from 2008 to 2010.
Looking forward, Cypress Research projected that cap spending may reach $3.03 billion in 2022 and approach $3.89 billion by 2032. Marjorie Hellmer, president of Cypress Research, noted those conservative projections are based on the average annual growth rate between 2002 and 2012 of 2.3% for machinery/equipment and 4.9% for buildings.
“Given the historical trends, earmarking an annual average increase of 2% for capital expenditures in commercial baking seems viable during the next 13 years,” Ms. Hellmer said. “A 2% annual increase in capital expenditures certainly isn’t a declaration of bullishness on the industry’s part. It plays on the industry’s reputation for conservative investments in plants, reflecting the strategy to enable facilities to make products that are in demand.”
But there is reason for greater optimism because bakers and snack producers have better tools to determine and even justify the return on investment (R.O.I.) for equipment purchases, said Dave Van Laar, senior adviser to A.B.A.’s president and c.e.o., and longtime veteran of the cookie and cracker industry.
Since 2012, he observed, more sophisticated — and user-friendly — data management systems are allowing operations to pinpoint bottlenecks, reduce downtime and garner higher yields that achieve a quicker R.O.I. than in the past. In addition to replacing aging capacity with new technology, companies are investing to enhance food safety processes through Global Food Safety Initiatives and to comply with the onslaught of requirements from the Food Safety Modernization Act.
Once an afterthought, Mr. Van Laar noted, sanitary design has become front-of-mind to control allergens, avoid recalls and streamline cleaning and maintenance procedures.
“Procedures in plants today are incredible,” he said. “It starts in the front where the product is sourced all the way until it leaves the bakery’s shipping area. It’s amazing to me what we do as an industry today compared to what we used to do.
Perhaps the greatest emerging need involves recruiting and retaining skilled employees.
“It’s labor, labor, labor,” Mr. Van Laar said. “It’s the shortage of labor, the turnover of labor, the churning of labor and the education of labor. We know labor issues overshadow the entire industry. From an operations standpoint, it’s probably the biggest factor that we deal with.”
Cypress Research’s analysis indicates employment in the commercial baking industry has slipped from 295,000 in 2002 but has held steady at around 250,000 since 2007. About 180,000 of them work in production.
While employment has leveled off, Mr. MacKie noted the labor issue goes beyond numbers.
“Twelve years ago, a lot of investment was made to reduce headcount,” he said. “Today, it’s spurred in part by the workforce gap.”
That abyss is expected to widen.
“We’re on the cusp of what is going to be pretty significant turnover in the next five or six years,” Mr. MacKie said. “I talked to half a dozen bakers last year who said part of their strategy for capital spending is to allow their companies to automate pieces of the baking process that enables them to retrain and reinvest in their employees in higher value activities.”
Mr. Van Laar noted investment in education definitely adds value to the company. After examining the Cypress Research’s analysis, he made a few calculations about how the cookie and cracker segment has changed from 2002 through 2016. His overall conclusion is the payback in training can be substantial.
“We have had a 60% increase in production per employee — and that’s huge — and that was in the past 15 years,” he said.
When it comes to seeing the big picture, a look at the past allows companies to see how far they’ve gone and how the industry can prepare for what’s to come.
This article is an excerpt from the March 2019 issue of Baking & Snack. To read the entire census feature, click here.