Strategies for product line expansion, enhanced distribution, and new product development are top priorities for growing food and beverage companies. To meet the fast growing demand for their products, niche food companies require updated and efficient production assets as well as investment in the expansion of their facilities.
If the budgets of some of the food and beverage industry’s largest companies are any indication, capital spending budgets this year are 10.4 percent higher than what was actually spent last year. According to the PMMI 2017 Trends in Food Processing Operations study, nearly half of those surveyed will be spending more on capital equipment in the next 12 to 24 months.
New Consumer Trends = Growth Opportunities
Hardly any other industry rises and falls more on consumer trends, than the food and beverage marketplace. Being able to respond quickly to changing consumer preferences is essential for successful food and beverage companies. As politician Alan Simpson once stated, “If you’re in the game long enough, you’re going to be the toast of the town one day, and the next day you’ll be toast.”
Consumers today are favoring health and wellness and what they choose to put in their bodies reflect that trend. Shifts in eating patterns, cravings for new flavors, exotic choices as well as convenience and fresh food options continue to grow across a broad spectrum of consumers. And even though healthy consumption is "in", the desire for snacking has never subsided. Packaged food companies consistently turn to the snack category as an avenue for growth, with nearly 60% of new snack launches positioned as “healthy” (Innova Market Insights).
Bean-based snack food company Beanitos was on the leading edge of innovation in healthy snacking. Launched in 2010, Beanitos tapped into the consumer preferences of high fiber, gluten free and non-GMO. As the company scaled, it looked to CapX for growth capital to fund their own manufacturing lines and thus to be able to control its growth and improve operating margins. Today Beanitos are sold in over 90% of all natural food stores and the majority of supermarkets nationwide— proof that American consumers love to snack and are happy to support brands that they believe are healthier options.
Food Processing Equipment – Leasing vs. Owning
For many companies, leasing becomes a much more cost-effective solution for the balance sheet, in addition to addressing the need to respond quickly to consumer trends. And according to PMMI, today’s equipment buyers are not necessarily the companies themselves. ‘Since the Great Recession, sales of equipment that was then leased grew more than double the rate of machinery purchased by food companies for their own use’ stated PMMI.
When CFOs assess asset allocation and return on investment, the lease-versus-buy analysis becomes critical in growth industries. As one director of manufacturing and engineering stated, “we would like machines that give us the flexibility to be more agile in the production process and allow us to be more reactive to retail changes in real time.” Half of the companies need processing equipment, and 75% will be looking for packaging equipment, with food and beverage companies accounting for three-fifths of packaging machine purchases, according to the PMMI study.
Another valued CapX portfolio company, Gehl Foods, had procured new attractive long-term business from a few substantial new customers. The immediate next challenge was to plan for the needed plant expansion and improved efficiencies to serve the new customers. The long-term contracts and associated predictable future cash flows associated allowed the company to choose a lease structure over dedicating its own capital to own the assets. By deferring ownership in the asset, Gehl retained valuable liquidity for its working capital and has the flexibility to return the equipment should the business not continue.
Growth Sectors & Leasing – Like a Knife & Fork
The growing sectors of food and beverage require companies to be equipped with resources and assets that are flexible and can withstand volatility. Moving from concept stage to expansion can tempt small food and beverage companies to raise large amounts of capital – both equity and debt. While at times it is prudent to raise one or both, turning to equipment leasing can preserve equity dollars and match useful life assets to functions or contracts. Proven concepts with strong expansion and sales growth can lead the company to be the main course of a large food company acquisition – then it’s dessert time!