Food Engineering’s annual State of Food Manufacturing survey finds an industry cautious about the economy as it maintains slow and steady growth.

The cold, hard numbers paint a reasonably warm picture of America's food and beverage industry. The U.S. job market may languish, the investment community is in disarray, general manufacturing remains a basket case, but food sales continue their steady, albeit slow, growth. Times may be hard, but people stubbornly insist on eating.

That's good news for the men and women who operate the plants that produce food and drink. Food Engineering's 2002 State of Food Manufacturing survey found that almost half--48 percent--of engineers, operations and production managers and other respondents expect production to increase 6 percent or more this year at their facilities. The proportion anticipating a decline in output was only 9 percent, down from 12 percent last year.

On the other hand, the expectation that they do more with less has never been more true. Facility budgets for production, packaging and process control equipment can best be described as stingy. One in seven respondents report a reduction in budgeted dollars for equipment purchases this year, and 9 percent say no dollars have been allocated, up sharply from only 1 percent who reported zero budgets last year.

Alan Greenspan's comments not withstanding, the economy is flat, manufacturing is still in a funk and food processors are feeling their colleague's pain, sometimes all too sharply.

The food industry was spared the devastation that afflicted manufacturing segments such as textiles, telecommunications and apparel in the last two years. Overall, manufacturing remains depressed, with analysts split over whether it is beginning to recover or has simply bottomed out. The Institute for Supply Management (ISM) forecasts a 2.8 percent bounce in overall manufacturing revenues in 2002's second half, and food is among the stronger growth categories. But food lags the other categories in production capacity growth, and that is one of the triggers for new plants and equipment, more hours worked with existing personnel and the replacement of old equipment with technically advanced equipment.

Mercifully, food and beverage companies have escaped the capital expenditure reductions that continue to afflict many manufacturing segments. Overall, purchasing and supply executives in the ISM survey expect an 8.7 percent decrease in capital expenditures this year. In food and beverage, spending continues to grow, though slowly.

Analysis of capital spending at 32 publicly traded food and beverage companies shows a 1.79% increase in capital spending this year, up slightly from last year's increase. Those firms are signaling analysts that they will be opening their checkbooks for a spending spree next year. Even if actual spending increases at only half the rate they claim, America's processing plants are in line for some significant capital infusions.

The profits certainly are there to support investment. Net profitability at the major food corporations is increasing faster than sales, and sales are growing quite nicely. Mergers and acquisitions played a role in last year's 15.6 percent sales spurt among the majors, but this year's 8.9 percent expectation primarily represents organic growth.

Consolidation? What consolidation?

Blockbuster deals were all the rage in American business in the late 1990s--take WorldCom, for example--and the food industry participated in the trend. Getting bigger with available cash and leveraged stock was an easy way to grow, and food companies got in line to play "Let's Make a Deal."

Mergers involving food processors and soft drink bottlers peaked in 1999, when the 259 deals tracked by Elmwood Park, N.J.-based The Food Institute almost doubled the number from three years earlier (see chart). But the pace slowed as the stock market waned, and last year's 160 mergers was down 38 percent from the peak. The first half of this year saw only 55 acquisitions, compared to 98 in 2001's comparable period.

Blockbuster deals continue to be struck. South African Breweries purchase of Miller Brewing created a new No. 2 in the global beer business, and Hershey Foods was put into play at the same time that the stock market had reached its nadir. But with capital markets in disarray, the buyout free-for-all of the recent past is unlikely to return in the near term.

The consolidation slowdown isn't reflected in Food Engineering's survey. Asked what structural changes had occurred at their companies in the last year, 26 percent indicated mergers, acquisitions or both. In 2001, 25 percent cited M&A activity. For those firms, consolidating manufacturing operations and integrating legacy IT systems remain hot buttons.

The most glaring differences between last year and this involved expansion or renovation of existing plants and beefed up manufacturing staffs. Only 36 percent reported their firms added capacity to plants in the last 12 months, compared to 49 percent in 2001. The relative gap in staff expansion was even greater: this year, 18 percent reported added manufacturing personnel, compared to 29 percent last year.

While plant improvements and upgrades have lagged, the outlook is improving. Asked about the current year's budget, 39 percent of survey respondents indicated budgets for plant improvements and upgrades are up, compared to 31 percent last year. On the other hand, those with bigger budgets this time around have smaller increases with which to play: only 63 percent received increases of 10 percent or better, compared to 82 percent last year; one in eight saw their budgets grow by less than 5 percent.

The companies that help food firms expand, renovate and build new facilities point out there can be a gap between budgeted and actual spending. Many projects that had been approved were in start-up limbo in the first half of 2002, with plant managers and vendors cooling their heels until the go-ahead was received. "People are having to go through more formal purchasing procedures than they did in the past," observes a specialist in statistical process control. "We started to see a little release of funds at mid-year, but people are having to go for review at smaller expenditure levels than they have in the past."

A supplier of fruit and vegetable processing equipment notes plant updates and new construction is on the up-tick on the West Coast. A seven-year boom-bust cycle has characterized that market, and the industry is now in the second year of a build-up phase.

The outlook is murkier in other industry segments. After decades of growth, per capita consumption of poultry has stalled at 80 lbs., and process improvements that have boosted yields have created "fairly stagnant conditions," a specialist in protein foods says. Aggravating the situation was the product glut created by the closing of the Russian market to U.S. poultry products in March. Even with the resumption of exports, inventories figure to be, out of balance for a while.

Mr. Fix-it

If the corporate treasury is hesitant to spring for a new line or processing and packaging equipment, better maintenance of the equipment on hand is imperative. That's reflected in a huge boost in spending on predictive/preventive maintenance software programs this year. More than 22 percent of survey respondents said they would purchase CMMS packages this year, up from less than 5 percent in 2001.

A quarter of last year's respondents said there was a great need for better maintenance systems at their plants. Management must have been listening, because 27 percent of this year's respondents report a bump in maintenance-related automation budgets. The mean increase is 18 percent.

The same trend is evident in equipment vendors' aftermarket sales. "A couple of years ago, some major customers weren't spending anything for maintenance," confides one supplier's sales director. "That has changed significantly, and they are spending money on maintaining their existing equipment to optimize performance and increase flexibility."

Conversely, 24 percent of last year's respondents saw no need for improved maintenance systems, and some of them got their wish: 6 percent of this year's survey participants indicated budgets for maintenance-related automation were slashed, with three out of five saying budgets were reduced 25 percent or more.

Talk about supply-chain integration software turned into action this year, with one in five respondents saying their plants will expend funds on that type of automation. In contrast, only 2.1 percent of last year's sample was moving in that direction. Lower software prices are helping galvanize the industry, and plant engineers are more confidant about how to collect data, store it securely and tie supply chain systems to the plant floors. "After struggling with those issues in recent years, managers feel more comfortable about the integration challenges," a controls specialist says. "It's less scary."

EDI for order-capture and key-account invoicing is being executed at 27 percent of respondents' companies, 23 percent are implementing supply-chain integration software and 24 percent are providing customers with Web-enabled access to their orders. On the other hand, half the respondents say their firms are doing little or nothing to improve supply-chain integration.

The PLC long has been on the front lines of plant automation, and despite computer experts' predictions that it will be replaced by the PC, this automation workhorse shows no signs of giving ground. Almost four out of five survey participants indicated they intend to purchase PLCs this year, up from 64 percent in 2001. Instead of replacing the PLC, the personal computer is coexisting on the shop-floor with it. Engineers keep buying PLCs because they are proven technology that has the added benefit of not crashing.

Energy costs are an across-the-board concern in manufacturing. Food and beverage processors are among the nation's biggest energy consumers, and they are taking steps to lower their vulnerability to price hikes and service interruptions. Almost one in five survey participants said they will purchase energy management software this year, up from 13 percent the prior year.

Asked what is needed to increase productivity at their plants, better equipment and better process control were the most frequently cited initiatives, with more than four out of five respondents indicating there was great or some need. Process control spending is scheduled to go up this year for 27 percent of participants, though three-quarters of the increases are less than 15 percent. Only 6 percent are experiencing a reduction in process-control budgets, but cuts tend to be draconian. Two-thirds of those food professionals report cuts of 25 percent or more.

Increased flexibility on existing lines and better maintenance systems are rated as great needs by one in five; even more respondents tab better communication between marketing and production and better integration of the plant floor with sales and forecasting as high priorities if productivity is to improve.

Three out of four say expanding or retrofitting their facilities is a priority if productivity is to continue trending up. The good news is that the proportion of facility budgets designated for improvements and upgrades is up somewhat from last year, with half the plants dedicating 10 percent or more for those purposes. The bad news: three in 10 will get less than 5 percent of facility budgets for improvements, up from one in five last year.

Increased automation, consolidation of production and proliferation of packaging types are among the trends that are reshaping manufacturing operations, as food professionals indicated in an open-ended survey question. "Higher demand for high-speed, automated equipment [to cope with] employee cutbacks" and "more effective time management with maintenance, downtime and preventative work" were the major challenges cited by one respondent. "Consolidated production with fewer, more flexible lines" and "on-line blending and the elimination of batch processing" were mentioned by another.

The woes of American manufacturing and the general economy were exacerbated by the terrorist attacks of Sept. 11, a watershed event that prompted the Bureau of Economic Analysis to restate 2001 manufacturing performance estimates. Curiously, a majority of survey participants say those events had no impact on their plants' operations. For the others, plant security was the biggest residual effect, and it is manifested in a number of ways. More employee screening, tamper evident packaging, bio-security awareness and closer scrutiny and monitoring of raw materials were among the most frequently mentioned changes.

A drop in business also was part of Sept. 11's fall out. Canceled orders and lower sales affected many shops. "Heavily dependent on restaurant business--our volume dropped significantly," one respondent wrote. "Sept. 11 affected the stock market, which caused uncertainty for shareholders, which in turn slows growth for a period of time," offered another. "This affects profit margins, wages, raises and incentives," though he adds, "things are returning to normal."

From a mid-2002 perspective, normal is a good thing. As the rest of America slowly pulls out of its funk, food manufacturers are growing more confident. Caution still prevails, but economic recovery and the need to adapt plants to shifting market demands will eventually force management to give plant operators new tools to remain competitive.

Who participated in the survey?

Questionnaires for this year’s State of Food Manufacturing Survey were mailed to 2,000 Food Engineering readers in May. 190 individuals completed and returned them.

Operations and production managers constituted the largest group of respondents, accounting for 37.6%. Engineers made up 25.6% of the sample, followed by administrative managers (23.1%).

Respondents were segregated into 11 product categories, with dairy the largest at 18.1%. Bakery followed at 17%, and meat and flavors/food ingredients each represented 16.4%.

Almost one in four worked at plants with 100 to 249 employees. Another 27% were at facilities with 500 or more employees, and the balance was at plants with fewer than 100 workers.