Profit margins of food businesses in the United States are expected to remain stable in 2016.
Market performance at a glance
- The demand situation for the US food sector remains good, with increasing demand especially in the organic and healthy food segments. Food companies benefit from lower raw material/packaging and transportation costs, although some of these benefits have to be largely passed on to the consumer in more competitive segments. Distributors, in particular, are seeing pressure eased a bit against their already tight margins. Overall, profit margins of food businesses are expected to remain stable in 2016. In the retail and food service sectors, competition is very high and companies are prone to undercutting others' prices to gain market share.
- Many food companies, particularly distributors, are very highly leveraged but supported by capital markets given positive cash flow. However, the cost of financing rises as leverage increases. There are many mergers and acquisitions in the food industry, with banks mostly willing to provide financial support due to the benign economic environment. Private equity companies are investing heavily in the food market.
- The average payment duration in the US food industry is 15-60 days, depending on the items sold (e.g. perishable goods or packaged goods). The number of non-payments and insolvency cases has remained stable over the last six months, and no increase is expected in the coming months. Given the recent high level of mergers and acquisitions, companies are being bought and sold - which should result in fewer insolvencies and further efficiencies due to increased synergies.
- As a result of the generally satisfying credit risk and good business prospects, our underwriting stance continues to be open for food producers and retailers in general. However, in light of a recent Avian Flu epidemic in the US, we are more cautious when reviewing single meat companies that could be affected. In the dairy subsector we more closely monitor export-dependent businesses, as exports have weakened while domestic demand remains strong.