According to Moody's Investors Service 2017 outlook, the coming year will be positive for the U.S. packaged foods sector. Although consumer spending on food will be relatively flat at 1% to 2%, cost-cutting will improve companies' profitability and cash flows, as will plant rationalization. In 2017, product innovation will give way to renovation, which will include upgrading packaging, ingredients, flavoring and labeling.
Among companies that face near-term changes or challenges are Kellogg, with no significant growth in sight for its U.S. cereal business, while performance in snacks is mixed, which ups the stakes for achieving targeted "Project K" cost savings. In the coming year, TreeHouse Foods will face integration challenges with Private Brands as key operating and IT systems are taken in-house. Chobani Holdings, CSM Bakery and Del Monte Foods will all need to significantly improve their operating performance to sustain their current credit profiles, Moody's said. M&A in general will be slow in the packaged food business, though companies including Kraft-Heinz, Tyson Foods, Pinnacle Foods and Mondelez International could look to make strategic purchases.
The outlook for global beverage companies will be stable, Moody's said. Sales of premium brands will continue to be strong, though growth in some developed markets will remain challenged and in emerging markets it will continue to be slow. Industry EBIT is expected to increase 4% to 5%.
Among companies, Constellation Brands Inc. will continue to deleverage after investing in glass and further capacity expansion at its Mexican brewery. Diageo's credit metrics should strengthen on the back of improved performance and weakness in the British pound. And Kirin's profitability will remain weak due to strong competition in the Japanese market and losses from its Brazilian business.
Click here to access the full Moody's report, "Consumer Products, Durables, Food and Beverages - 2017 Outlook - Positive for most subsectors." The report is part of a series of 2017 Credit Outlooks that provide insight into next year's credit conditions across all sectors. See more at www.moodys.com/2017outlooks.