Media

Substantial consumer price increases among strategies to remedy increasing costs

MINNEAPOLIS – (August 28, 2008) – Despite an uncertain economy, Food and Allied Product executives remain cautiously optimistic about their growth prospects according to a survey released today by RSM McGladrey. Through proactive strategies to offset the rising costs of doing business, many companies project an increase in gross margins, illustrating that such optimism is warranted.

The Food and Allied Products Industry Report was produced in conjunction with the 2008 RSM McGladrey Manufacturing and Wholesale Distribution National Survey earlier this year. Over 960 industry executives, including 86 food executives from 82 companies responded to the survey pertaining to critical industry issues such as cost structure, profitability, technology initiatives, operations and globalization.

In the annual survey, the percentage of respondents describing their business as “declining” has tripled over the past two years. Among all industry segments surveyed, only Food and Allied Products has remained relatively stable.

There are several reasons for this positive outlook; chief among them is an increase in gross margins in 2008. The majority of companies surveyed – 60 percent – reported a margin of 20 percent or more, a slight gain over the 2007 survey. Commodity pricing, selling pricing and internal cost-cutting measures were listed as the three most utilized practices that have contributed to an increase in margins while many other industries face more significant struggles.

“Many Food and Allied Product companies have continued their strong performance, despite rising prices, an uncertain economy and decreased consumer spending,” said Terry Schwartz, managing director at RSM McGladrey. “By taking several proactive measures, the industry, as a whole, has continued to maintain or improve their gross margins. As the U.S. economy begins to stabilize, the future is bright for many of these companies.”

As in most segments, inflation in many costs related to energy and logistics are causing executives to explore a wide variety of strategies to maintain profits and grow business. Rising prices are forecasted in several areas, with most executives surveyed seeing an increase of 6 percent or more in the costs of energy, logistics, and raw materials.

Many companies have turned to raising consumer prices as a strategy to combat increasing costs. While this tactic is not necessarily a surprise, the level of price escalation is of note. Forty-five percent of Food and Allied Product executives plan on raising their prices up to 10 percent, while 49 percent of companies surveyed said they will increase prices by 10 percent or more, a spike from just 8 percent in last year’s survey.

“Rising ingredient and energy expenses have led to higher costs for companies and therefore higher food prices for consumers,” commented Schwartz. “The escalating prices that companies have to incur is gaining a great amount of media coverage, therefore the industry is avoiding a backlash that normally would accompany a high rate of consumer price increases.”

Embracing and diversifying global business is one strategy that executives in this industry may not be taking full advantage of, according to the survey. Whether exporting products, importing supplies or by moving production or services offshore, moving into the global economy can cut costs and open new doors for potential business. However, only 27 of the companies surveyed “agreed” or “strongly agreed” that working globally was a part of their business strategy. Fifty-nine report that they are importing supplies while 44 responded that they are exporting products for sale, but the extent of importing and exporting was not disclosed.  

Some additional opportunities that RSM McGladrey has identified as possibly under-utilized according to the survey include:

• Capitalizing on available tax planning strategies such as pass-through entities (Sub S and LLC), last-in first-out inventory valuation, as well as state and local opportunities
• Improving supply chain management, including exploring opportunities that may be available by adopting lean manufacturing strategies
• Increasing green initiatives, such as reducing water consumption and non-recyclable waste and considering alternative energies
• Taking full advantage of the capabilities of IT systems
• Looking into available risk management options, including enterprise risk management
  

Research Methodology
In the spring of 2008, RSM McGladrey distributed its third annual manufacturing and wholesale distribution survey to industry executives across the U.S. This survey was designed to assess the current state of the industry and to ascertain what steps CEOs, CFOs and other executives are taking to grow their business and stay competitive. More than 960 surveys were completed, providing a strong, statistically representative sample of responses.

The complete RSM McGladrey 2008 Manufacturing and Wholesale Distribution National Survey is available at www.rsmmcgladrey.com/2008survey.

RSM McGladrey:
RSM McGladrey is a leading professional services firm providing accounting, tax and business consulting. RSM McGladrey operates in an alternative practice structure with McGladrey & Pullen LLP, a partner-owned CPA firm that delivers audit and attest services. Through separate and independent legal entities, they work together to serve clients’ business needs. Together, the companies rank as the fifth largest U.S. provider of accounting, tax and business consulting services (source: Accounting Today), with 8,000 professionals and associates in nearly 100 offices. RSM McGladrey Inc. and McGladrey & Pullen LLP are member firms of RSM International, an affiliation of independent accounting and consulting firms. RSM McGladrey is the official accounting, tax and business consulting firm of The PGA of America.