Cost appreciation to take bite out of company coffers as consumers tighten belts
OTTAWA—Faced with a lackluster labour market, Canadian consumers are notching their belts a little tighter and restraining themselves from sinking their forks into meat and processed food. Though their sodium levels may thank them, Canadian food manufacturers are less likely voice their appreciation.
Following a slow start to 2015, the industry is expected to expand by only 1.1 per cent this year, while company profit margins will also weaken, thinning for the fourth time in five years, according to a new Conference Board of Canada report.
“Throughout the first half of 2015, the Canadian economy was hit hard by the plunge in oil prices and by various ‘one-off’ factors, including a colder-than-usual winter, shutdowns for retooling at two of Canada’s largest auto plants, and wildfires in Alberta,” the report says. “Together, these factors weakened consumer confidence, as well as real spending on food and non-alcoholic beverages.”
Real spending on food and beverages slipped 0.2 per cent in the first quarter of 2015, the first quarterly drop since 2013, and it happened despite disposable income growth among consumers. Though the short-term outlook remains relatively unimpressive – especially compared to strong food manufacturing results in 2014, where the industry’s output rose by 4.9 per cent – forecasts predict a pick-up by 2016, driven by a stronger job market.
“The softer growth in disposable income means limited gains in consumer discretionary spending and per capita spending on processed foods,” the report says. “With consumers keeping an eye out for cheaper food options and items on sale, food manufacturers will find it difficult to pass their cost increases on to retailers and consumers.”
A significant drop in pork and beef consumption along with appreciating costs are also expected to contribute to the industry’s slow growth and slimming profits in 2015. Meanwhile, Canadian industry player will continue to face increased competition from international companies.
Like much of the manufacturing sector, however, food processors will get a boost from the weakened Canadian dollar. The languishing loonie, as well as a stronger U.S. economy – unsurprisingly the main recipient of Canadian food exports – will help grow the industry’s sales abroad. The report also noted that the weak dollar will aid domestic manufacturers’ market share within Canada.
Though it will be a less than stellar year for food manufacturers, the Conference Board of Canada expects the industry’s prospects to improve shortly, with profits to return to their 2014 all-time high by 2017.