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Food Processors Target Niche Markets

Posted on: Tuesday, 6 September 2005, 03:01 CDT

In order to meet growing global competition, food processors are investing in niche markets as well as the latest technology, including sensors, robotics, and RFID.

VIRTUALLY ALL INDUSTRIES today are facing the challenges of increased worldwide competition, and the food processing industry is no exception. Through good times and bad, food processors operate on typically narrow margins. Sales volume is normally enough to generate profits, but when competing products from outside sources vie for market position, it can be a different story.

Margins of domestic food processors are under intense pressure these days as a result of increased competition from foreign producers. It's reflected in American supermarkets, which routinely carry a variety of foreign-produced food products. These include peaches from Africa or Greece, tomatoes from Italy, tomatoes and olives from Spain, garlic and pears from China, strawberries from Mexico, and bananas from Ecuador and Guatemala among others.

According to Ed Yates, president and CEO of The California League of Food Processors, Sacramento, "The bottom line is price, and [the foreign producers] can produce more cheaply than we can." However, Yates points out that foreign producers don't have the levels of environmental excellence, worker protection, and, in some cases, food safety as U.S. producers. "They don't spend money on clean water, clean air, worker safety, and health benefits, and they pay lower wages. They also benefit from subsidies. In the European Union, for example, there are some direct subsidies paid to growers of tomatoes," he continues.

Niche Market Products

One way domestic food processors are meeting foreign competition is through the development of niche market products. Examples of these include tomato paste and diced tomatoes as ingredients in remanufactured products; single-serving fruit cups; higher-end fruits in old-fashioned glass jars; single-serving, ready-to-eat soups; dried plums; and dry-roasted ingredients.

Tom Gillpatrick is executive director of the Oregon State University Food Industry Leadership Center, Portland, which maintains academic programs for careers in the food industry and provides executive education for food-industry managers. He says food processors are seeking ways to differentiate themselves by developing something unique. He cites liquid soups in shelfstable packages; fresh pastas that can be just heated up; and ethnic foods, which he believes processors are trying to take into the mainstream. These include Hispanic or Mexican products and more varieties of bread. "If you're selling canned green beans, good luck," he adds.

Craig Wyvill is division chief of the Food Processing Technology Division, Georgia Tech Research Institute, Atlanta. The division is engaged in systems development designed to make the food-processing industry more efficient, profitable, and competitive. Wyvill cites innovations in packaging such as liquid coffee in cans, which is heated by pushing a button that creates a chemical reaction in the shell of the can. "The push is on for ready-to-eat convenience foods that require more preparation at the plant level and more work in packaging," he observes.

Gillpatrick points out that one of the new frontiers is organic foods - those grown without chemical fertilizers or pesticide applications. Brian Todd, president of the Food Institute, Elmwood Park, N.J., mentions foods with less transfats and increasing emphasis on organics - function foods with health benefits. All are increasing their market share. John Exner, president and legal counsel of the Midwest Food Processors Association, Inc., Madison, Wise., agrees that the trend is toward healthier foods, ready-to- go, and convenience packaging.

As food processors hone their competitive edges by developing improved products, what are the factors involved in site selection? Gillpatrick says, "It depends on what you're looking for. If it's a niche, you go to that market."

Market Access Is Vital

One factor on which industry sources agree is the criticality of access to market. David Zepponi, president of the Northwest Food Processors Association, Portland, Ore., comments: "Products need to be moved quickly from primary processors to value-added processors." That requires a commodity plus a value-added component or components. For example, potatoes need onions and cheese to be turned into au gratin.

Yates remarks, "Processors need to get close to crop-growing areas and transportation centers to reduce trucking costs. They should avoid urban areas."

Exner concurs: "It's important to be close to operating centers and markets because distribution is a large share of costs. You need a strategic location close to transportation hubs," he says.

In terms of geography, Wyvill notes that the Southeast has become a favored region for food processors. It has an edge over some other regions because of lower labor costs and land prices, plus good transportation networks, he explains.

Other regions, though, say they also offer advantages for food processors. Exner cites the Midwest's climate as not too hot or too cold for crop production and the region's proximity to operating centers and markets. His association represents food processors in Illinois, Minnesota, and Wisconsin.

Further west, Yates lists California's advantages of "a Mediterranean climate, great soil, an ample supply of water, lots of transportation arteries, support industries, and educational services." He says California food processors grow, produce, pack, and ship 45 percent of the world's supply of processed tomato products; 100 percent of the U.S. supply of canned peaches and fruit cocktail; and 100 percent of the U.S. supply of black ripe olives.

Zepponi, whose organization represents processors in Idaho, Oregon, and Washington, cites proximity to California and Asian markets, availability of land for expansion, the ability to attract high-quality labor, energy costs among the lowest in the nation, and a relatively uncongested environment. He also mentions the Columbia Basin irrigation project, which takes water out of the Columbia River in the peak periods of March and October and distributes it to grower fields and for hydropower. "With our sunlight, you don't worry about mildew or mold," he adds.

Yet another candidate in the site selection sweepstakes is southern Idaho. As one might expect, potato processing is the area's largest food industry sector.

Technology Drives Improvements

In addition to niche marketing, food processors are also sharpening their ability to compete in world markets through technology. Yates remarks, "We're trying to automate, streamline, and become as efficient as we can."

Zepponi says food processors are employing a comprehensive system called Enterprise Resource Planning (ERP), which applies information technology to production processes. It consists of software, not hardware, designed to optimize the flow of information in food processing. "The bottom line is using technology to improve our efficiency and, by so doing, our productivity," he explains.

Wyvill's Georgia Tech Research Institute also places emphasis on information technology to cut expenses and control margins for food processors. The institute focuses on four primary areas:

1. Sensor technology to control manufacturing processes through use of vision cameras, infrared, and ultraviolet technology;

2. Robotics, used on a stand-alone basis and in conjunction with manufacturing to increase efficiency;

3. Environmental product recycling to provide mechanisms for ingredients used in product manufacturing to be recycled, such as water, marinades, and brine, and;

4. Radio frequency identification (RFID) - This newcomer on the technology front promises to have a far-reaching effect on product monitoring and supply-chain management. It replaces bar coding with radio frequency ID tags or chips, enabling the product to be traced and monitored throughout the supply chain, even back to its manufacturing origins.

The worldwide RFID tag market will grow from $300 million in 2004 to $2.8 billion in 2009, according to The Food Industry Report's Jan. 31, 2005 edition. The key drivers of the projected growth will be shipping cartons and other supply-chain elements, expected to account for 35.1 percent of the RFID market by 2009.

Wal-Mart has been one of the early leaders in use of this technology, which has a direct tie-in with food security. Every major food and beverage manufacturer has to control the security of its products from point of origin to the final consumer destination. That requires sophisticated supply-chain and tracking systems to ensure that bioterrorists or other outside sources haven't interfered with the products. The objective is to get products to consumers in a manner that minimizes inventory, spoilage, and waste.

Zepponi says RFID is part of the whole trend toward better sensing and monitoring of the production processes. "As far as security is concerned, most processors have sophisticated security systems in place ."Terrorism is a concern, but not a major concern. We \need to do what we do already and be more vigilant. The biggest threat is internal rather than external, from disgruntled employees who may try to damage the system," he comments.

Mergers and Acquisitions

Food processors continue to be active in the area of mergers and acquisitions. While some companies expand, others merge or acquire additional firms. The Food Institute reports a total of 351 mergers and acquisitions in the food sector in 2004, compared with 368 in 2003, a 5 percent decline.

However, Todd points out that activity was on par if one counts the 17 major acquisitions announced but not completed in 2004. The most notable of these was the William Wrigley Jr. Co.'s announcement that it plans to acquire the Altria Group, Inc., Kraft Food's Life Saver and Altoids business. Valued at $1.48 billion, it was the largest deal announced last year. Following are other major transactions as reported by the Food Institute:

* Hormel Foods Corp., Austin, Minn., is acquiring pork processor Clougherty Packing Co., Los Angeles, in a $186 million deal.

* Connors Bros. Income Fund, New Brunswick, Canada, seafood processors, announced plans to acquire Bumble Bee Seafoods LLC, San Diego, Calif., in a $385 million deal that creates the largest branded seafood company in North America.

* Constellation Brands Inc., Fairport, N.Y. - the world's largest wine producer - bought the entire Mondavi Co. for $1.03 billion, ending a plan to split apart Mondavi's brands.

* Hershey Foods Corp., Hershey, Pa., confectioners, is acquiring the Mauna Loa Macadamia Nut Corp., Irvine, Calif, in a transaction valued at $130 million.

* JM Smucker Co., Orville, Ohio, multiproduct processor, is acquiring International Multifoods Corp., Minnetonka, Minn., for $840 million plus $340 million in assumed debt.

* SYSCO Corp., Houston, Texas, food service distributor, is acquiring food service distributor International Food Group, Plant City, FIa., for undisclosed terms. IFG distributes to chain restaurants in international markets including South America, Europe, Asia, and the Middle East.

* Roll International Corp., Los Angeles, a diversified firm with food industry interests, is acquiring FIJI Water LLC, Basalt, Col.

What's ahead for the food processing industry? Zepponi says, "We have to change our ways of doing business to overcome the issue of globalization and competition from China and South America." Gillpatrick adds, "In our extremely competitive market, you have to be unique and different. Find a market niche because if you don't, you'll be out of business."

There's new emphasis on information technology - including radio frequency identification - to cut expenses and control margins for food processors.

Copyright Halcyon Business Publications, Inc. Aug/Sep 2005

Source: Area Development Site and Facility Planning

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