2017 Consumer confidence report
Consumer confidence: Check. Baking industry confidence: Check. Revenue growth: Check. After the International Baking Industry Exposition (IBIE) and after the 2016 presidential election, bakers are looking forward in a more positive climate than has been seen in quite some time.
For 16 years, Baking & Snack has conducted its annual Capital Spending Survey, and since the 2008 recession, aside from last year’s Equipment Trends Survey, the general theme has been that of cautious optimism. This year, Cypress Research Associates, Kansas City, MO, took a step back in an effort to gauge the climate of the industry on the heels of a record-breaking IBIE and an unprecedented presidential election. The result was Baking & Snack’s first-ever Baking Industry Confidence Survey.
“Everything, of course, builds on consumer confidence,” said Marjorie Hellmer, Cypress president. “And confidence levels have moved off the charts. They’re at their highest levels since 2001.”
The state of manufacturing
Gauging the health of the baking industry begins by taking the temperature of general manufacturing. And that can be delivered in a good-news-bad-news scenario: The strength of the US dollar is up, but that doesn’t necessarily bode well for US manufacturing, according to a Forbes manufacturing forecast published last May.
The report cited three overriding factors that contributed to what Forbes contributor Bill Connerly referred to as a “so-so outlook” on manufacturing: export markets, weak capital spending and lack of oil drilling. Although the dollar’s strength bodes well for US consumers, it puts a veritable choke hold on foreign buyers, according to Mr. Connerly’s report.
Couple that with manufacturing companies focusing spending on cost reduction (e.g., labor costs) rather than growth, and the impact on infrastructure that comes with low domestic oil drilling, it’s no wonder his outlook is rather bleak.
But wait … there’s more to the story. As Ms. Hellmer noted, consumers are confident, and that means they’re spending. In fact, Mr. Connerly predicted consumer spending to grow at about 4% annually. With the Consumer Confidence Index having posted at 113.7 in December, there just might be a glimmer of light at the end of the tunnel.
And then there’s the baking industry, which in many respects is a whole different animal compared with the broader US manufacturing industry of which it is a part. “Food and beverage is quite different from general manufacturing,” Ms. Hellmer said. “When you look at food and beverage, it’s a stable, if not growth, sector. The performance is pretty reliable.”
Being a mature industry, bakery growth isn’t necessarily apparent on a year-over-year basis as opposed to more digitally focused areas of manufacturing that are still on a clear — even exponential — upward trajectory. Not to mention, baking is also a very traditional, legacy-focused industry with tighter margins dictating cautious, calculated growth plans that focus more on efficiency than capacity.
So, what gives? Before we look at how bakers are investing, the first step is understanding why they choose to invest. And that starts with the how they perceive the health of the industry and where it’s headed. “I looked at these study findings asking myself, ‘Is the industry investing to produce more? Are these bakers looking to grow?’ ” Ms. Hellmer noted. “In the past, investments have been more focused on efficiency and reductions in labor costs. But if bakers move toward automation, will they loosen the purse strings instead of making do?”
Read on for more reasons to feel optimistic.
Seeing the light
After years of cautious optimism — and sometimes downright caution — the baking industry outlook is finally starting to lighten up, according to survey results. “Almost half of the industry expects performance to be stronger in 2017 than it was in 2016,” Ms. Hellmer reported. “For the second year in a row, the baking industry is looking forward with positivity … the outlook is more positive than last year and may be the most positive we’ve seen since the recession of 2008.”
In general, when asked about the outlook for the US commercial baking industry for 2017, almost 90% of respondents answered “Positive.” And more specifically, more than half (54%) said the outlook for 2017 is better than 2016.
This optimism is not entirely surprising, considering 62% reported company revenue up at the end of 2016, and 67% expected it to rise this year, as well. And while these bakeries indicated an average 7.4% revenue increase in 2016, respondents projected another 7.0% rise in 2017.
At the same time, on the other side of the ledger, company costs rose an average of 3% in 2016, and the average expected 2017 increase slipped to 2%, with 46% of participants projecting overall expenses to hold steady for 2017. “As an industry, bakers are telling us they anticipate about a 5% balanced revenue increase against costs,” Ms. Hellmer observed.
Compared with the tepid climate of general manufacturing, commercial baking is feeling pretty healthy. “It really is no surprise — baking is a steady performer,” Ms. Hellmer said. “There aren’t always huge increases, but there are typically increases.” Even in the age of health and wellness, consumers are back to spending on food — baked goods in particular.
If one looks closely enough, the optimism can also be seen in the profit margins. In 2016, 51% of the companies indicated their gross margins remained steady, and 53% expect margins to continue holding in 2017. “No change is a good thing with gross margins,” Ms. Hellmer suggested.
That said, a surprising 42% actually predicted gross margins to be up this year.
“This industry traditionally has thin profit margins,” Ms. Hellmer said. So when the study revealed that gross profit margins were up by an average of 1.6% last year, predicting an average 2.7% increase for 2017 is good news indeed.
Continue reading to find out how this report's findings will affect operations.
So, consumers are buying baked goods, and the future is finally looking bright for bakers. The question still remains: How does it affect operations?
“Any time I look at these surveys — especially as it relates to capital spending — I always ask, ‘Are companies investing in things that cut expenses, or are they expanding to build capacity?’ ” Ms. Hellmer said. “I think for many baking companies, a lot of the activity continues to focus on creating efficiencies versus building capacity or building new plants. Bakery is that kind of stable industry.”
Truth be told, the baking industry will likely never be the next Silicon Valley; companies just aren’t going to dump oodles of cash into new innovation and rapid growth anytime soon. Baking companies are nothing if not calculated. They don’t splurge on the unknown. They fix what’s broken and improve what’s working.
According the survey, the average company-wide operating capacity was just shy of 73%. “We’re seeing a little over a quarter of availability,” Ms. Hellmer said. “There’s room to increase operations with existing capacity, so companies are not yet maxed out.”
When margins are tight and operations aren’t yet at capacity, spending, while strategic, is still happening. In fact, 86% of bakers reported making major capital investments in the past two to three years, and 79% still reported planning for new ones in 2017 — 55% indicated plans to increase investments over 2016.
This year, on average, 13.8% of revenue looks to be going back into capital investments, and about half of that (47.9%) will be used for equipment, according to the survey. Specifically, the bulk of the focus is being placed on packaging (73%), mixing (61%), makeup/dividing/depositing (58%) and cooling/freezing (55%).
Considering the nature of the industry, most of the concentration for investments is naturally being seen in new equipment and upgrades, as well some expansion, rather than in new construction. If a bakery isn’t leaving its building — but it’s ready to loosen those purse strings a bit — those dollars will likely target automation and eliminating bottlenecks to max out capacity. Think robotics in packaging or digital upgrades with tools such as tablets.
At the end of the day, it’s practically impossible to gauge investment trends without a having a grasp on the health of the industry. The industry outlook creates a context to understanding the motivations behind capital spending and equipment purchasing. Lucky for bakers and their suppliers, the outlook is bright.
Between the mediocre state of general manufacturing and high consumer confidence, commercial baking seems to be sitting in the catbird seat.
“Bakers are telling us that the economy is growing,” Ms. Hellmer said. “For so many years, we’ve been hedging our bets, saying, ‘We’re not sure, yet,’ or ‘The industry is unsure.’ Finally we get to blow the horn and say bakers are actually optimistic about the future.”