Food manufacturer profits in Canada increased 13 percent last year, says the George Morris Centre, despite the recession that dragged down profits in the general manufacturing sector.
Part of the reason is that food manufacturers paid 16 percent less for raw commodities than they did the previous year.
Senior market analyst Kevin Grier said the food industry fares better in a bad economy than manufacturers of more discretionary goods.
“(The food sector) is far from recession proof, as consumers do tend to trade down to lower-margin items and cut back on discretionary items,” he wrote.
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“Nevertheless, the industry is less vulnerable to economic downturns than the manufacturing sector in general. While this makes sense, it is difficult to understand why food industry margins should actually increase during a recession.”
He cited lower raw product costs as a major part of the reason. While food manufacturers saw revenues fall by one percent, operating costs fell 10 percent, and lower material costs are responsible for a large share of the decline.
Grier said labour costs are also a factor.
“Food manufacturing wages are significantly lower than all goods industries,” he said.
“Over the four year period (2006-09), food manufacturing wages averaged nearly $6 per hour less than all goods manufacturing industries.”
As well, food manufacturers increased plant use rates, which further reduced costs, while at the same time general manufacturers faced a sharp drop in demand for their products and a rise in under-used facilities that increased production costs per unit.
However, Grier said the outlook for the industry in 2010 is less rosy, even as the economy pulls out of the recession.
Costs are rising, including commodity prices and wages. At the same time, the aggressive entry of low-price Wal-Mart into the food retailing business means it will be difficult for food manufacturers to pass on costs through higher prices.
“If food companies are able to pass along their higher costs, retail food prices will climb between 2.5 percent and four percent this year, according to a range of estimates by economists,” Grier wrote.
“If consumers resist higher prices, however, the food sector will struggle.”
He said the general goods manufacturing sector should begin to rebound from last year’s losses, but food manufacturers could be heading in the opposite direction.
