Product and Service
Companies included in packaged fresh vegetables sector in food industry primarily produce packaged fresh vegetables for retailers.
Demand for Product and Service
Demand for packaged fresh vegetables has been solid and supported by solid fundamentals from economy and consumers’ preference of food. However, financial data of companies in this sector implies needing stronger increase in demand than they have now to enable the increase in demand to have positive impact on companies’ margins.
Sector’s current, trend, causes behind trend, and future
Current and Trend
- Demand for packaged fresh vegetables has been solid and grown fast in the past two years.
- Growth in demand for traditional packaged products seems to be slower than higher priced packaged products. A trend that products mix is shifting to more value added products from traditional products seems apparent. And this brings higher gross margins for companies.
- Companies in this sector seem to still not be able to benefit from increased demand, in terms of their profits, due to recently increased costs.
Causes behind the trend
- Increasing awareness of consumers for healthier life is gradually changing their eating habits and preference for food, which are the long term drivers behind the demand for packaged fresh vegetables since they may be used as substitutes of meals, which are more natural and healthier, for some of consumers.
- Increased disposable income makes it realistic for many consumers to pay extra costs to exchange for extra value that are added in food as a way to improve quality of life.
- In short term, fluctuation may happen in the process of acceptance of more consumers for new eating style. At the same time, existing consumers need to be maintained with product renovation.
Intensive competition for retailers may become the key to change the whole situation in this sector. The temporary decrease in sales volume of packaged fresh vegetables will not alter the trend that demand for this type of vegetable products will continue to grow and companies will eventually benefit from the growth.
General Financial Performance of Companies In the Sector
It seems that the demand for packaged fresh vegetables has finally picked up in 2017 and 2018 (around 10% annual growth), as indicated by sales volume of some typical company in this sector. If the supply shortage partially contributed to the decrease in sales volume before 2017, the supply seems to be meeting increasing demand but at the costs of smaller margins and decreased cash flow as a result of faster increase in costs than in price in process of increasing supply.
Our data indicates that companies’ gross margins (up to 15.5% in fiscal 2017 from 12.2% of 2014) have been improved with a products mix shifting to high margin products. but went down again in 2017 and 2018 (15%) due to increased labor and other costs. And operating margins (2% 2018) have not gone up with gross margin due to the faster increased spending on SG&A% (10% 2018). The operating income seems to be primarily determined by margins for companies in this sector in current situation.
According our analysis, companies’ enterprise price/adjusted EBI is around 72 with interest/EBITDA ratio of 20%.