Global packaged-foods industry prepares for growth, says report

Commenting on the report, Packaged-Foods Industry Shifts Priorities​, Brian Weddington, the company's vice president-senior credit officer, told FoodNavigatorUSA.com: “The global packaged-foods industry is shifting focus from protecting shareholder value through internal restructuring, cash conservation and organic growth toward enhancing shareholder returns through acquisitions, stock repurchases and cash dividends​.”

External investments​

Also the internal investment focus and cash conservation that helped packaged-foods companies whether the recession is giving way to external investments and higher cash distributions.

Over the past four years, cash balances at rated packaged-foods companies have risen by 34 percent to $14bn in September 2010.

But a renewed emphasis on external investment could lead to pressure on credit ratings, he warned. “An increased emphasis on external investments and shareholder payouts creates event risk and could lead to more credit rating downgrades in the packaged foods sector​.”

The pace of economic recovery will be slow next year and rising commodity prices will mean sluggish organic sales and earnings growth, warns the report. Consequently, many food firms will search for global growth opportunities through acquisitions, but will be cautious about overpaying. Firms will supplement shareholder returns through share repurchases and dividend increases. After two years of cash conservation, food companies’ balance sheets can tolerate a higher level of shareholder distributions.

The industry went into what Weddington describes as “a defensive crouch,”​ during the recession, with big share repurchases and blockbuster acquisitions of the boom years giving way to cost cutting, restructuring and cash conservation.

“Now, companies with solid balance sheets are gazing outward again. The focus is shifting toward rewarding shareholders with cash distributions and accelerated growth through M&A​ (mergers and acquistions),” he said.

Performance culture​

Weddington picked out Kraft Foods Inc. as a good example of change. “When the recession officially began in December 2007, the company was already in the midst of a major three-year internal restructuring program launched in early 2007 that focused partly on leveraging its existing scale, reframing its core brands, and sharpening its performance culture.​

“In September 2009, the company decided to shift gears and launch a bid for British candy giant Cadbury Plc. The $19 billion deal completed in February 2010 launched Kraft into the candy and gum business and accelerated its expansion in developing markets​, ”he said.

The report, Packaged-Foods Industry Shifts Priorities​, is available from Moody's (www.moodys.com​).