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Trends in Food Processing and the Impact on Corporate Site Selection

31 Dec, 2008

By: Suzanne Davis

Today’s business climate offers the agriculture and food processing industries great opportunities and great challenges. Opportunities for new product development have never been greater as consumer preferences continue to evolve. Innovation is spurred by sophisticated research and development and new production methods.

 
At the same time, there are a number of challenges brought on by uncertainty in the global economy that must be carefully navigated. Rising energy and commodity prices, new energy policies and environmental regulations, foreign competition and growing concerns about food safety and health are challenging the industry everyday. As companies evaluate growth and expansion plans, the site selection process is complicated by all of these factors.
 
The food processing industry is a major component of the U.S. economy. In 2007, total food sales topped $1.16 trillion. The industry employed well over half a million people in all corners of the country.  The impact of this important industry is global, with foreign competition playing an increasing role in domestic production and decision making. U.S. communities, faced with manufacturing job losses in autos and durable goods, are aggressively pursuing food processing facilities.
 
TRENDS IN CONSUMER PREFERENCES
 
Trend 1
Each year, Food Processing magazine names top trends in the industry. Currently, organics is number one. While consumer trends come and go quickly, industry experts seem to agree that interest in organics is here to stay. USDA regulations must be met in order for a product to be labeled “organic.” Generally, this means that the product must be grown without toxic and persistent fertilizers and pesticides. However, organics are not limited to produce items such as tomatoes or lettuce. Meat, dairy, condiments, wine and beer have all shown growth in the organic sector. The movement of consumers toward “green” products is also driving the organics movement.
 
Site Selection Impact
The growing impact of consumer demand for organic foods is demonstrated by the decision of Really Cools Foods, a leading natural and organic prepared foods company, to locate a new $100 million national production and distribution center in Cambridge City, Indiana. When completed, the new complex is expected to employ 1,000 people. The facility will supply Really Cool Foods’ growing network of food retailers across North America. The central location of Cambridge City, which is within a one-day drive of two-thirds of the U.S. population, helps decrease distribution costs for the company. The first phase of the project, which opened in 2008, is a 78,000-square-foot USDA certified organic commissary.
 
The value to this type of project to a local community is demonstrated by the significant incentives pledged to Really Cool Foods to support the project. The Indiana Economic Development Corporation committed up to $3.05 million in performance-based tax credits, up to $165,000 in training grants and a $200,000 grant to assist Cambridge City with needed infrastructure improvements to support the project. Local officials offered the company 50 acres of land, $165,000 in grants and a 10-year property tax abatement.
 
Trend 2
The second trend identified by Food Processing magazine is health and wellness. This includes products that include an ingredient that targets a certain condition, such as high cholesterol. Botanicals, antioxidants, phytochemicals, oils and whole grains may be included in health and wellness products. As the population continues to age and become more aware of their daily choices on health, these products will continue to be popular with consumers. The science behind these products is sophisticated, allowing producers to charge higher prices for these value-added items.
 
Site Selection Impact
Food processing companies that engage in significant research to support new product development should consider utilizing the Research & Experimentation federal tax credit. The credit was designed to encourage manufacturing companies to make technological improvements to products and processes. The credit has been in effect since 1981 and has evolved over the years.
 
A four-part test is used to determine eligibility. To qualify, expenditures must support research that is:
1)         Technological in nature – research must rely on science
2)         Eliminates uncertainty – intent of research must be to make process more reliable
3)         A process of experimentation – developing, testing and refining hypotheses
4)         New or improved functionality – activities should relate to better performance, reliability, quality, etc.
 
The net tax benefit of the credit is approximately 6.5 percent of qualified research expenditures. State tax credits are also commonly available and should also be considered. It is advisable to talk to an accounting professional in order to determine applicability of any federal or state tax credit.
 
Trend 3
Other top consumer trends include age awareness and portion control products. Age awareness products address the nutritional needs of both children and seniors. Portion control products, such as 100-calorie packs of snack foods, make it easy for consumers to monitor calories while eating on the go. In most cases, these products are produced simply through modifications to labeling and packaging, increasing the attractiveness of the product without increasing product development costs.
 
PRODUCER CHALLENGES
 
Challenge 1
Producers are faced with finding ways to meet ever-changing consumer desires, while at the same time controlling costs and maintaining high quality and safety standards. The greatest challenge currently facing the industry is the increase in energy prices. Higher energy costs have impacted the food processing industry both coming and going.
 
At the most basic level, higher gasoline prices are translated directly to food production through the tractors and combines used on family farms to produce corn, soybeans, wheat and other grains that are the building blocks of the U.S. food supply. Gasoline prices have also impacted the cost of getting these products to market for further processing. 
 
Higher oil prices have also increased demand for biofuels in Europe and the United States. New mandates have been put in place for renewable fuels, with trade restrictions in the U.S. preventing the full utilization of the large potential for ethanol production in Brazil. The share of global maize production used for ethanol was 2.5 percent in 2000, 5 percent in 2004, and 11 percent in 2007. This diversion of food products to the production of biofuels has driven up prices.
 
Efficient grain production is also dependent of fertilizer. According to the World Bank, fertilizer prices have increased rapidly, almost tripling in the first half of 2008. The weakness of the dollar has compounded the situation for internationally-traded commodities. While commodity prices are expected to decline for record highs, they will remain higher than the average for recent years.
 
Site Selection Impact
Higher fuel prices are driving food processing companies to apply greater scrutiny to location decisions. Proximity to both suppliers and consumers is more important than ever. A location directly on a major interstate highway will trump a location further from major transportation arteries. Early in the site selection process, a thorough analysis of inbound and outbound freight requirements and shipping methods should be undertaken. Alternative transportation methods such as rail and air should be included.
 
Proximity to a labor pool large enough to support on-going labor needs is also important as employees strive to reduce commute times. A comprehensive labor study, including projected labor availability, cost, competition, skill levels and commuting patterns, should be completed for each site under consideration.
 
Food processors should follow the efforts of some U.S. regions to promote biofuel production based on non-food feedstock. For example, woody biomass is a viable option in the southeastern United States, an area rich in pine forests and underbrush.  As local communities begin to incent these types of renewable energy projects, pressure on the food supply may decrease.


Challenge 2
Increasing cost pressures on the food processing industry may also lead companies to make location decisions that increase efficiency by utilizing existing relationships, supply and distribution chains, and infrastructure. Manufacturers may be inclined to expand at an existing location rather than look for a new site.
 
Site Selection Impact
Nestle USA recently announced plans to expand its new facility in Anderson, Indiana before the facility was even open.  The company plans to invest an additional $200 million for increased beverage production and distribution capacity at the 880,000 sq. ft. facility. The company cited a strong response from the local workforce and local utility capacity as vital factors in the decision. The facility produces Nestle Nesquik Ready-to-Drink and Nestle Coffee-mate Liquid.
 
Significant state and local government incentives were offered to support the project. The Indiana Economic Development Corporation pledged up to $1.325 million in performance-based tax credits and up to $50,000 in training grants. The City of Anderson offered property tax abatement, construction of two water towers and employee recruitment assistance.
 
The decision to expand in Anderson, Indiana marks the fourth major facility investment in Indiana by Nestle since 2006. The company has announced projects in Greenwood, Fort Wayne and Anderson, Indiana.
 
Challenge 3
Producers must also address growing consumer concerns about food safety. According to the Food Marketing Institute, consumer confidence in the food supply dropped to 66 percent in 2007, down from 82 percent in 2006. Contamination, product tampering and terrorist threats were considered the top areas of concern. While consumers surveyed acknowledged a personal responsibility to ensure that the foods they eat are safe, a large number also believed that contamination often occurs in the manufacturing process. Producers must ensure the complete safety of their manufacturing operations and maintain a stellar safety record to succeed in the long term.
 
Site Selection Impact
As companies invest in upgraded technologies to ensure food safety, incentives such as personal property tax abatement can help reduce costs. In most states, some form of personal property tax relief is offered to companies that invest in new manufacturing equipment. Most states also offer training grants to help companies prepare employees to effectively utilize new technologies.
 
Challenge 4
Global competition is also playing a role in the U.S. food processing industry. Recent scares about product quality in China have driven many consumers to avoid non-domestic products.  Increasingly, consumers are aware that the low-cost provider may not be the best choice when food quality and safety are concerned. U.S. producers have an opportunity to emphasize the strong oversight and safeguards of the domestic food industry and position themselves as preferred providers.
 
However, products that have a commodity focus will find it increasingly difficult to compete with foreign firms. Labor cost advantages encourage some producers to move operations offshore or to import raw materials that can be produced at a lower cost in other locations.
 
As cost pressures increase, companies will be looking for new growth strategies. International trade may provide such opportunities, especially for niche and specialty products. Emerging markets such as China and India will experience increased demand as wealth increases. Companies should explore these options as part of their overall growth and expansion plans.
 
Site Selection Impact
Most states provide assistance to companies interested in importing and/or exporting. Typical assistance programs include trade missions, company matchmaking, export counseling, international trade show assistance and services provided by foreign trade offices. For example, the State of Florida has international offices in 13 countries that provide assistance to companies interested in trade and investment opportunities.
 
 
VALUE OF THE INDUSTRY
 
The food processing industry, a major contributor to the U.S. economy, has many reasons to be optimistic. As companies evaluate new locations and make site selection decisions, they should be aware of the many programs available to support and assist them. State and local governments see the value of the industry and are eager to attract new investment to their communities.

 

About the Author

Suzanne Davis

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