Product and Service
Companies included in simple soups sector in food industry primarily manufacture condensed and ready-to-serve soups, broth& stocks, sauces, and vegetable beverages.
Demand for Product and Service
Consumers’ demand for condensed and ready-to- eat soups and vegetable beverages has been weak and may be declining. Weak demand with continuously increasing costs created problems for companies in this sector of how to manage their margin.
Sector’s current, trend, causes behind trend, and future
Current and Trend
- The consumers’ demand for soups and vegetable beverages had been flat with apparent downward pressure between 2014 and 2017. However, the decline seems to be accelerating in 2018 even when companies leveraged sales with price.
- Companies have experienced difficulty in raising products’ price to offset the inflation of costs and the declining sales volume made this situation even worse and significantly hurt profitability.
- Companies thus had to turn to save costs by improving productivity.
Causes behind the trend
- We think there are a couple of common factors that can help explain why many traditional food sectors have experienced downward demand. These factors come from changes in economy, demographics, and consumers’ lifestyle.
On one hand, the increasing accumulation of wealth, thanks to quantitative easing policy in the past 10 years, and expanding global trading helped increase some of consumers’ disposable incomes. And the increased disposable incomes and the increased preference in consumers for fresh, natural and healthy food are the drivers behind the current trend of consumers’ shifting away from food that currently are being produced by food manufacturer with traditional method and regular ingredients.
On another hand, consumers whose purchasing powers are most vulnerable to the challenging economy in the past 10 years are those who usually consume below premium products, which usually have lower prices and thus provide lower profits for their manufacturers.
The downward trend in demand for soups and vegetable beverages may not be able to slow down since those factors behind this trend will continue to exist and even accelerate.
Companies in this sector will have to turn to products innovation to grab more shares in US market and as well meet the demand from developing market.
General Financial Performance of Companies In the Sector
Our company data indicate that demand for soups and vegetable beverage may be declining currently as indicated by the decline in sales volume accompanying decreasing price based on data of some typical company in this sector in 2017/18. A downward trend on demand has been seen in this sector for several years and companies have experienced increasing pressure on their profitability when dealing with increasing costs in such an unfavourable market. One of the proofs is that when companies tried to raise products’ price in 2016 as a response to inflation of costs the sales volume started to drop. In order to support declining demand, in the past two years companies in this sector have to lower its price/promotion, at huge cost of profitability, to stimulate demand.
Therefore, companies have had to turn to raise productivity to offset the increased costs and decreased price. A typical gross margin for companies in this sector is around 32-33% with 18% SG&A spending as percentage of sales. Therefore, they usually have operating margins of 13-14%.
According our analysis, a typical ratio of enterprise price/adjusted EBI is 29 with interest/EBI ratio of 25%.