Assignment 2: Operations Decision

Anonymous
timer Asked: Nov 1st, 2017

Question Description

Assignment 2: Operations Decision

Due Week 6 and worth 300 points

Using the regression results and the other computations from Assignment 1, determine the market structure in which the low-calorie frozen, microwavable food company operates.

Use the Internet to research two (2) of the leading competitors in the low-calorie frozen, microwavable food industry, and take note of their pricing strategies, profitability, and their relationships within the industry (worldwide).

Write a six to eight (6-8) page paper in which you:

  1. Outline a plan that will assess the effectiveness of the market structure for the company’s operations. Note: In Assignment 1, the assumption was that the market structure [or selling environment] was perfectly competitive and that the equilibrium price was to be determined by setting QD equal to QS. You are now aware of recent changes in the selling environment that suggest an imperfectly competitive market where your firm now has substantial market power in setting its own “optimal” price.
  2. Given that business operations have changed from the market structure specified in the original scenario in Assignment 1, determine two (2) likely factors that might have caused the change. Predict the primary manner in which this change would likely impact business operations in the new market environment.
  3. Analyze the major short run and long cost functions for the low-calorie, frozen microwaveable food company given the cost functions below. Suggest substantive ways in which the low-calorie food company may use this information in order to make decisions in both the short-run and the long-run.

TC = 160,000,000 + 100Q + 0.0063212Q2
VC = 100Q + 0.0063212Q2
MC= 100 + 0.0126424Q

  1. Determine the possible circumstances under which the company should discontinue operations. Suggest key actions that management should take in order to confront these circumstances. Provide a rationale for your response. (Hint: Your firm’s price must cover average variable costs in the short run and average total costs in the long run to continue operations.)
  2. Suggest one (1) pricing policy that will enable your low-calorie, frozen microwavable food company to maximize profits. Provide a rationale for your suggestion.

(Hints:

  • In Assignment 1, you determined your firm’s market demand equation. Now you need to find the inverse demand equation. Having found that, find the Total Revenue function for your firm (TR is P x Q). From your firm’s Total Revenue function, then find your Marginal Revenue (MR) function.
  • Use the profit maximization rule MR = MC to determine your optimal price and optimal output level now that you have market power. Compare these values with the values you generated in Assignment 1. Determine whether your price higher is or lower.)
  1. Outline a plan, based on the information provided in the scenario, which the company could use in order to evaluate its financial performance. Consider all the key drivers of performance, such as company profit or loss for both the short term and long term, and the fundamental manner in which each factor influences managerial decisions.

(Hints:

  • Calculate profit in the short run by using the price and output levels you generated in part 5. Optional: You may want to compare this to what profit would have been in Assignment 1 using the cost function provided here.
  • Calculate profit in the long run by using the output level you generated in part 5 and cost data in part 3 and assuming that the selling environment will likely be very competitive. Determine why this would be a valid assumption.)
  1. Recommend two (2) actions that the company could take in order to improve its profitability and deliver more value to its stakeholders. Outline, in brief, a plan to implement your recommendations.
  2. Use at least five (5) quality academic resources in this assignment. Note: Wikipedia does not qualify as an academic resource.

Your assignment must follow these formatting requirements:

  • Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.
  • Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.

The specific course learning outcomes associated with this assignment are:

  • Analyze short-run and long-run production and cost functions.
  • Apply macroeconomic concepts to changes in global and national economies and how they affect economic growth, inflation, interest rates, and wage rates.
  • Evaluate the profit-maximizing price and output level for given operating costs for monopolies and firms in competitive industries.
  • Use technology and information resources to research issues in managerial economics and globalization.
  • Write clearly and concisely about managerial economics and globalization using proper writing mechanics.

ASSIGNMENT 2 INSTRUCTIONS ECO550 From Assignment 1 • From Assignment 1, you will use the following information: Qs = -7909.89 + 79.1P Qd = 38,650 – 42P P = 384.48 cents and Q = 22,502 units Question 1 • Outline a plan that will assess the effectiveness of the market structure for the company’s operations. Note: In Assignment 1, the assumption was that the market structure [or selling environment] was perfectly competitive and that the equilibrium price was to be determined by setting Qd equal to Qs. The market structure in the first assignment was competitive. This means that the firm does not have control over the price and it has to charge the equilibrium price. You are now aware of recent changes in the selling environment that suggest an imperfectly competitive market where your firm now has substantial market power in setting its own “optimal” price. Question 1 Instructions • Since the company has control over the price, it has to decide how much to charge and how much to produce to maximize profit. • The profit-maximizing/loss-minimizing quantity and price can be determined by setting the MR = MC. This involves the following. o Find the total revenue: TR = P x Q o Find the marginal revenue by calculating the derivative of the total revenue function. o Set MR equal to the provided MC function and solve for Q, and then for P. • Based on the results, the company should make a decision to continue producing or shut down. Question 2 • Given that business operations have changed from the market structure specified in the original scenario in Assignment 1, determine two (2) likely factors that might have caused the change. Predict the primary manner in which this change would likely impact business operations in the new market environment. Question 2 Instructions • Consider the change in the degree of competition. • Review the sections “Industry Performance” and “Competitive Landscape” in the IBISWorld report provided. • Factors that might have caused change could be for example consolidation of the industry, i.e., firms become bigger and have now some control on the price. Also, firms can differentiate their product from the products of their competitors, which again results in more control over the price. Firms' actions are interdependent and now their decisions are affected not just by the demand and supply conditions, but by what moves their major competitors make. These are just examples. You might come up with other factors. Question 3 Analyze the major short run and long cost functions for the low-calorie, frozen microwaveable food company given the cost functions below. Suggest substantive ways in which the low-calorie food company may use this information in order to make decisions in both short and the long-run. TC = 160,000,000 + 100Q + 0.0063212Q2 VC = 100Q + 0.0063212Q2 MC= 100 + 0.0126424Q Question 3 Instructions • To maximize profit, the firm has to find ways to maximize its total revenue and minimize its cost. You should also consider the difference between short and long run. In the short run, at least one of the costs is fixed. In the long run, all costs can be changes, i.e., all costs are variable. A review of the IBISWorld Industry Report on the frozen food production in the US can also help you answer this question. The cost functions affect the profit. The cost functions are to be used to answer question 4 as well. Question 3 Instructions • Using the provided cost data for the firm, determine whether the firm is making a profit or a loss by charging the equilibrium price determined in Assignment 1. o Calculate the total revenue. o Calculate the total cost. o Find the difference between TR and TC, which is the profit or the loss. o Review the section “Cost Structure Benchmarks” (p. 22) in the IBISWorld report. Question 4 • Determine the possible circumstances under which the company should discontinue operations. Suggest key actions that management should take in order to confront these circumstances. Provide a rationale for your response. • Hint: Your firm’s price must cover average variable costs in the short run and average total costs in the long run to continue operations. Question 4 Instructions • Here, you have to find the profit maximizing or loss-minimizing quantity and price. Then, determine whether the company is making a profit. To find the value of Q and P, you should use the marginal rule MR = MC. • MC function is given. • You should calculate MR by using the demand function from Assignment 1: Qd = 38,650 - 42P. o First, inverse the demand function to show the price in terms of quantity: P = 920.238 - 0.0238Q. o Then, find the TR function, which is equal to price times quantity TR = (920.238 - 0.0238Q)*Q = 920.238Q - 0.0238Q2. o Finally, find MR which is the derivative of TR with respect to quantity, i.e., MR = 920.238 - 0.0476Q. Question 4 Instructions • Next, set MR equal to the MC given in the second assignment and solve for the profit maximizing or loss minimizing Q and P. • When you find the values of Q and P, you can plug in the number for Q into the TR function to find the TR and in the TC function, to find the TC. Question 4 Instructions • Then, subtract TC from TR to find the total profit. o If you get a negative number, the firm is making a loss. o If the number is positive, the firm is making a profit. o If the firm is making a loss, you should figure out whether the firm should continue to produce at a loss in the short run, or shut down. To answer this question, you should compare the TR with VC, or price with AVC. If the firm is making a loss and the TR is higher than VC or the price is higher than the AVC, then it would be better off producing rather than shutting down because it will be able to cover some of its fixed cost. But if TR is smaller than VC, or if price is smaller than AVC, the firm will be better of shutting down. Question 5 Suggest one (1) pricing policy that will enable your low-calorie, frozen microwavable food company to maximize profits. Provide a rationale for your suggestion. Question 5 Instructions Hints: • In Assignment 1, you determined your firm’s market demand equation. Now you need to find the inverse demand equation. Having found that, find the Total Revenue function for your firm (TR is P x Q). From your firm’s Total Revenue function, then find your Marginal Revenue (MR) function. • Use the profit maximization rule MR = MC to determine your optimal price and optimal output level now that you have market power. Compare these values with the values you generated in Assignment 1. Determine whether your price higher is or lower. • Use the profit-maximizing rule MC = MR to find the price and quantity that maximize profit. Question 6 • Outline a plan, based on the information provided in the scenario, which the company could use in order to evaluate its financial performance. Consider all the key drivers of performance, such as company profit or loss for both the short term and long term, and the fundamental manner in which each factor influences managerial decisions. Question 6 Instructions Hints: • Calculate profit in the short run by using the price and output levels you generated in part 5. Optional: You may want to compare this to what profit would have been in Assignment 1 using the cost function provided here. • Calculate profit in the long run by using the output level you generated in part 5 and cost data in part 3 and assuming that the selling environment will likely be very competitive. Determine why this would be a valid assumption. • You can also review the section “Key Statistics” on p. 38 of the IBISWorld Industry Report Report. Question 7 Instructions Recommend two (2) actions that the company could take in order to improve its profitability and deliver more value to its stakeholders. Outline, in brief, a plan to implement your recommendations. • Review the sections “Industry Performance” and “Products and Markets” in the IBISWorld report.
Frozen Food Production in the USNovember 2013   1 WWW.IBISWORLD.COM Keeping cool: Revenue will grow marginally as producers focus on convenience and health IBISWorld Industry Report 31141 Frozen Food Production in the US November 2013 Hester Jeon 2 About this Industry 17 International Trade 34 Revenue Volatility 2 Industry Definition 19 Business Locations 35 Regulation & Policy 2 Main Activities 2 Similar Industries 21 Competitive Landscape 3 Additional Resources 21 Market Share Concentration 38 Key Statistics 21 Key Success Factors 38 Industry Data 4 Industry at a Glance 22 Cost Structure Benchmarks 38 Annual Change 24 Basis of Competition 38 Key Ratios 5 Industry Performance 25 Barriers to Entry 5 Executive Summary 26 Industry Globalization 5 Key External Drivers 7 Current Performance 27 Major Companies 9 Industry Outlook 27 Nestle SA 11 Industry Life Cycle 36 Industry Assistance 39 Jargon & Glossary 28 The Schwan Food Company 29 ConAgra Foods Inc. 13 Products & Markets 30 H.J. Heinz Company 13 Supply Chain 14 Products & Services 33 Operating Conditions 15 Demand Determinants 33 Capital Intensity 16 Major Markets 34 Technology & Systems www.ibisworld.com | 1-800-330-3772 | info @ibisworld.com Frozen Food Production in the USNovember 2013   2 WWW.IBISWORLD.COM About this Industry Industry Definition This industry includes companies that produce frozen fruits, vegetables and juices; frozen entrees and side dishes (excluding seafood); frozen pizza; frozen whipped Main Activities The primary activities of this industry are toppings; and frozen waffles, pancakes and French toast. These products are then distributed to grocery wholesalers, retail food stores and the hospitality industry. Producing frozen fruit and vegetables Producing frozen fruit and vegetable juice Producing frozen meals, pizza and whipped toppings Producing frozen waffles, pancakes and french toast The major products and services in this industry are Frozen breakfast Frozen vegetables and fruits Prepared food Other Similar Industries 31122 Margarine & Cooking Oil Processing in the US These establishments are primarily engaged in wet milling corn and vegetables; crushing oilseeds and tree nuts; refining and blending vegetable oils; and manufacturing shortening and margarine. 31142 Canned Fruit & Vegetable Processing in the US These establishments primarily manufacture canned, pickled, and dried fruits, vegetables and specialty foods. 31152 Ice Cream Production in the US Establishments in this industry are primarily engaged in manufacturing ice cream, frozen yogurts, frozen ices, sherbets, frozen tofu and other frozen desserts. 31161 Meat, Beef & Poultry Processing in the US These establishments are primarily engaged in slaughtering animals and preparing processed meats and meat byproducts, such as manufacturing frozen specialty foods containing meat, like frozen dinners. 31194 Seasoning, Sauce and Condiment Production in the US These establishments primarily manufacture dressings and sauces; spices, table salt, seasoning, flavoring extracts and natural food colorings; and dry mix food preparations. 31199 Baking Mix & Prepared Food Production in the US These establishments primarily manufacture food, including mixing purchased dried or dehydrated ingredients for soup mixes and bouillon. Frozen Food Production in the USNovember 2013   3 WWW.IBISWORLD.COM About this Industry Additional Resources For additional information on this industry www.affi.com American Frozen Food Institute www.nfraweb.org National Frozen and Refrigerated Foods Association www.usda.gov US Department of Agriculture IBISWorld writes over 700 US industry reports, which are updated up to four times a year. To see all reports, go towww.ibisworld.com WWW.IBISWORLD.COM Frozen Food Production in the US November 2013   4 Industry at a Glance Frozen Food Production in 2013 Key Statistics Snapshot Revenue Annual Growth 08-13 Annual Growth 13-18 Profit Exports Businesses $28.4bn 2.6% $1.4bn $2.0bn Demand from frozen food wholesaling Revenue vs. employment growth Market Share 6 The Schwan Food Company 9.1% 6 4 3 2 H.J. Heinz Company 5.7% % change 9 % change Nestle SA 18.6% ConAgra Foods Inc. 7  .4% 0 −3 −6 Year 05 0.4% 523 0 −2 07 09 Revenue 11 13 15 17 19 −4 Year 07 09 11 13 15 17 19 Employment SOURCE: WWW.IBISWORLD.COM p. 27 Products and services segmentation (2013) 6.0% Key External Drivers 7.4% Demand from frozen food wholesaling Other Frozen breakfast Agricultural price index External competition for the Frozen Food Production industry Per capita disposable income 56.0% 30.6% Prepared food Frozen vegetables and fruits Time spent on leisure and sports Trade-weighted index Per capita fruit and vegetable consumption p. 5 SOURCE: WWW.IBISWORLD.COM SOURCE: WWW.IBISWORLD.COM Industry Structure Life Cycle Stage Mature Regulation Level Heavy Revenue Volatility Medium Technology Change Medium Capital Intensity Medium Barriers to Entry Medium Industry Assistance Medium Industry Globalization Medium Concentration Level Medium Competition Level Medium FOR ADDITIONAL STATISTICS AND TIME SERIES SEE THE APPENDIX ON PAGE 38 Frozen Food Production in the USNovember 2013   5 WWW.IBISWORLD.COM Industry Performance Executive Summary | Key External Drivers | Current Performance Industry Outlook | Life Cycle Stage Executive Summary The Frozen Food Production industry benefited from lower disposable income levels during the recession as consumers opted for affordable frozen food products at supermarkets and grocery stores. Industry revenue spiked in 2009, but sales declined as the economy and disposable income levels recovered. With more money to spend, consumers purchased more fresh produce over frozen varieties and dined out more frequently. Additionally, growing health concerns caused many consumers to purchase less frozen Product innovation will benefit firms, but demand for fresh foods will limit growth prepared meals, which are often perceived to be unhealthful. Operators responded by introducing products with healthier, more nutritious ingredients. As a result of product innovation, revenue is anticipated to grow an annualized 2.6% to $28.4 billion over the five years to 2013, including an increase of 2.0% in 2013. Despite revenue growth in the past five years, industry profit suffered primarily due to rising commodity prices. Marketing costs also dampened profit margins as leading producers aggressively introduced new products to Key External Drivers Demand from frozen food wholesaling Wholesalers buy frozen foods from manufacturers and resell these products to retailers, such as supermarkets and grocery stores, where consumers purchase industry products. As consumers demand more frozen foods from retailers, retailers and wholesalers buy more products from industry operators, which boosts revenue. Demand from frozen food gain market share. Further complicating the matter, many producers were unable to pass on the rising cost of inputs to downstream markets due to consumers’ sensitivity to prices during the recession. Consequently, profit fell from 6.1% of revenue in 2008 to 5.1% in 2013. As profit margins eroded, many producers laid off some of their employees and relied more on machinery and equipment. Additionally, larger companies like ConAgra found acquisitions especially attractive due to the cost savings that could be achieved from economies of scale. Over the next five years, operators will continue to develop new products that appeal to health-conscious consumers and invest in marketing campaigns to boost the image of frozen foods. As more Americans return to work and have less time to prepare meals from scratch, they will opt for the convenience of frozen meals. However, consumers are expected to purchase more fresh produce as disposable income levels continue to rise. Rising income will also allow consumers to dine out at restaurants more frequently. Finally, the growing popularity of imported frozen food products is anticipated to dampen demand from US producers. Ultimately, revenue is expected to rise an annualized 0.4% to $28.9 billion in the five years to 2018. wholesaling is expected to decrease in 2014, representing a potential threat to the industry. Agricultural price index Raw inputs such as fruits, vegetables, grains, processed meat, oils, sugar and other commodities make up the primary cost components for frozen food producers. When the cost of these inputs rises, profit becomes tight. Producers Frozen Food Production in the USNovember 2013   6 WWW.IBISWORLD.COM Industry Performance have the option to pass on rising costs in the form of higher prices to downstream buyers, but operators risk lowering demand. The agricultural price index is expected to increase throughout 2014. External competition for the Frozen Food Production industry Frozen foods are typically easier to prepare than their fresh counterparts. However, consumers may prefer fresh produce and fresh meat over frozen alternatives due to their taste and the perceived health benefits of fresh food. Industry operators also face competition from canned food producers and grocery stores that sell prepared hot food. External competition for the Frozen Food Production industry is expected to increase in 2014. Per capita disposable income While higher per capita disposable income allows consumers to purchase a greater volume of industry goods and trade up to premium products, many consumers also opt for alternative goods, such as fresh produce and fast food. Therefore, as income levels rise, demand for frozen food falls as competitive products become more popular. In 2014, per capita disposable income is expected to rise. Time spent on leisure and sports One of the primary benefits of frozen prepared meals is that they are convenient and save people time. As consumers become busier and have less time to spend on leisure activities, demand for convenient products like frozen meals grows. Time spent on leisure and sports is expected to decline in 2014, representing an opportunity for industry operators. Trade-weighted index The industry derives a growing proportion of its revenue from exports, which are sensitive to fluctuations in exchange rates. When the value of the dollar falls, domestic goods become relatively less expensive in the global market, boosting industry exports. The trade-weighted index is expected to increase in 2014. Per capita fruit and vegetable consumption Consumers’ eating habits change as their understanding of healthy living evolves. Recent studies show that certain frozen foods provide the same nutritional content as fresh ones. Therefore, an increase in fruit and vegetable consumption benefits the industry. Per capita fruit and vegetable consumption is expected to decrease slowly in 2014. Per capita disposable income Demand from frozen food wholesaling 6 4 4 2 2 % change % change Key External Drivers continued 0 −2 −2 −4 Year 0 07 09 11 13 15 17 19 −4 Year 06 08 10 12 14 16 18 SOURCE: WWW.IBISWORLD.COM Frozen Food Production in the USNovember 2013   7 WWW.IBISWORLD.COM Industry Performance Healthy products fight falling demand The Frozen Food Production industry has performed well over the past five years, particularly during the recession, when consumers turned to the frozen aisle of grocery stores for cost savings. As per capita disposable income levels eroded in 2009, Americans cut back on dining out at restaurants and sought ways to trim their grocery bills. Consequently, more consumers began to eat at home, pack lunch and purchase more affordable products at grocery stores like generic brands and frozen food. Therefore, the weak economy created a beneficial environment for frozen food producers, as consumers who traditionally did not purchase frozen products were more inclined to do so. Though the industry performed well during the recession, demand for industry goods declined when per capita disposable income levels later increased. To appeal to a range of consumers and boost demand, producers introduced healthier products such as organic, all-natural and nutrient-enhanced frozen food. These new products partially offset declining demand for this industry’s goods in the years following the recession. In addition to product innovation, new packaging technology has improved the overall quality of frozen meals. Consequently, revenue is expected to increase an annualized 2.6% to $28.4 billion over the five years to 2013. Americans have become more healthconscious in recent years, shunning trans fats and additives found in many frozen meals. Furthermore, sodium intake has been linked to high blood pressure, which is responsible for two-thirds of all strokes and almost half of all heart attacks, according to a study conducted by the Harvard School of Public Health. Consumers have increasingly become aware of the high sodium content of frozen prepared meals, resulting in decreasing demand for industry products, particularly in 2010. Major players have responded to consumers’ growing health concerns by introducing healthier products and reformulating their existing products. For instance, Nestle decreased the sodium content of Stouffer’s Macaroni and Cheese in 2010, while ConAgra introduced 15 new products in 2013 that align with their focus on heart health. These health-based innovations, along with increases in price levels, have supported revenue growth from 2011 to 2013. This shift in consumer taste is apparent in the success or failure of industry products. For example, ConAgra’s Healthy Choice Cafe Steamers is the fastest growing new product on the market. In contrast, the H.J. Heinz Company discontinued its TGI Friday’s frozen meal product line in 2012 due to struggling sales. Additionally, while the quality of frozen food products have been long perceived as inadequate when compared with fresh food, recent studies conducted by the US Department of Agriculture and Industry revenue 8 6 % change Current Performance 4 2 0 −2 −4 Year 05 07 09 11 13 15 17 19 SOURCE: WWW.IBISWORLD.COM Frozen Food Production in the USNovember 2013   8 WWW.IBISWORLD.COM Industry Performance Healthy products fight falling demand continued the UK-based Institute of Food Research have revealed the nutritional content of frozen produce is often better than that of fresh produce. Frozen fruits and vegetables are harvested when they become ripe and flash-frozen immediately, a process which locks in nutrients. However, fresh fruits and Profit and industry contraction Profit margins for frozen food producers primarily depend on the price of inputs, such as vegetables and meat. The agricultural price index, which measures the prices received by farmers for all US agricultural products, is expected to rise an annualized 6.9% in the five years to 2013. Consumers were particularly sensitive to prices during the recession, preventing companies from raising their product prices despite rising commodity costs. For instance, the price of vegetables rose 7.8% while the price of red meat spiked 18.8% in 2010. As a result, industry profit fell from an estimated 6.1% of revenue in 2008 to 2.4% in 2010. To cut costs and expand profit margins, operators invested in more machinery and equipment to automate processes and boost production efficiencies. Automation has consequently reduced the need for manufacturing workers. However, operators have increased emphasis on product innovation and marketing, leading to an increase in the number of administrative employees, whose salaries are higher than that of production workers. As a result, the number of employees grew an annualized 0.3% to 90,464 over the five years to 2013, whereas wages grew at a faster annualized 1.3% to $3.5 billion in the same period. Similar to the number of employees, the number of enterprises is anticipated to grow at a moderate average annual rate of 0.7% to 523 in the five years to 2013. This low growth rate is largely the result of consolidation as large companies have acquired smaller companies to gain market share and expand their product portfolios. For example, major player ConAgra purchased PF Chang’s frozen meals from Unilever in August 2012 as part of an aggressive acquisition strategy. Industry exports remain relatively low, primarily due to the large size of the domestic market, which accounts for about 93.1% of industry revenue. However, exports have increased at a faster rate than the industry as a whole, with an anticipated annualized growth rate of 4.0% to about $2.0 billion over the five years to 2013. South Korea has driven the increase of exports since 2012 due to the passage of a free trade agreement with the United States. During the same period, imports of frozen foods are expected to increase at an average annual rate of 3.6% to $3.0 billion, accounting for an estimated Increasing trade vegetables are harvested before they become ripe, which lowers the nutritional value of fresh produce. Consumer awareness of the nutritional benefits of frozen fruits and vegetables and a greater variety of healthy prepared meals are anticipated to help boost revenue by 2.0% in 2013. Increasing input costs could not be passed onto consumers, lowering profit margins Frozen Food Production in the USNovember 2013   9 WWW.IBISWORLD.COM Industry Performance Increasing trade continued 10.2% of domestic demand. The growth in imports is partly attributed to an appreciating dollar since 2012, which made imports more affordable for domestic consumers. The growing Industry Outlook The Frozen Food Production industry is expected to grow marginally over the next five years as rising disposable income levels allow consumers to dine out more and choose fresh produce over frozen foods. Technological developments in freezing, packaging and sorting, combined with aggressive marketing for new products, will be imperative to maintaining growth. Consumers’ growing demand for healthful food and convenience are expected to drive producers to innovate and introduce new products that satisfy the changing needs of consumers. Manufacturers will focus on offering a greater variety of attractive prepared meals, including skillet and oven meal kits, restaurant-quality pizza, handheld entrees and ethnic dishes. As a result of product innovation, IBISWorld forecasts revenue to increase an annualized 0.4% to $28.9 billion over the five years to 2018. In 2014, revenue is forecast to decrease 0.8% due to heightened competition from fresh produce and restaurants. Upstream supply and downstream demand conditions will also affect the industry’s future performance. The domestic price of vegetables is expected to rise in the five years to 2018, while consumption will continue to fall. Downstream demand from supermarkets, grocery stores and convenience stores is expected to strengthen as consumer spending recovers, with revenue from supermarkets and grocery stores projected to steadily increase in the five years to 2018. The growing importance of health and nutrition will drive consumers to make better-informed decisions when purchasing food at different retail channels. Increasing healthconsciousness will benefit producers of frozen fruits and vegetables; scientific research will demonstrate that frozen produce is more nutrient-dense than fresh produce. As industry operators use the results of this research to promote the nutritional benefits of their products, sales of frozen vegetables and fruits are expected to grow. In particular, organic frozen produce is anticipated to grow rapidly, in line with overall organic food sales. At the same time, growing healthconsciousness will cause some consumers to purchase less frozen prepared meals in coming years. Producers are anticipated to aggressively introduce new products made with fresh, nutritious ingredients that contain less fat and sodium than conventional frozen meals. While new products will help slow Food consumption trends popularity of ethnic cuisines has also spurred demand for imported frozen food products. However, growing imports have intensified the level of competition in the domestic market. Downstream demand is expected to strengthen as consumer spending recovers Frozen Food Production in the USNovember 2013   10 WWW.IBISWORLD.COM Industry Performance Food consumption trends continued the decline of this product category, frozen prepared meals will also face greater competition from substitute products at grocery stores and restaurants. As disposable income levels rise, Americans will dine out more often at full-service and fast-food restaurants. In addition to dining out more often, a growing selection of refrigerated and hot-prepared meals at grocery stores are also expected to increase the level of competition that industry operators face. Due to a competitive environment, the number of enterprises is forecast to grow minimally at an average annual rate of 0.1% to 526 in the five years to 2018. Profit expansion The Frozen Food Production industry’s profitability is expected to improve over the next five years, with profit estimated to account for 5.4% of revenue in 2018, up from 5.1% in 2013. The cost of key inputs, including vegetables and meat, are anticipated to stabilize in the next five-year period. Stable input costs will allow producers to maintain the prices they charge their downstream markets, which will help them maintain demand. Lower wage costs will also help producers maintain their profit margins as the industry relies more on automation and less on low-skilled labor. As such, the number of employees is anticipated to decrease at an average annual rate of 0.4% to 88,651 over the five years to 2018. Consequently, wages will fall an annualized 0.3% in the same period. However, as consumers demand greater variety from frozen food producers, spending on research and development for product innovation is anticipated to grow, which will partially offset the gains achieved from production efficiencies. International trade IBISWorld forecasts exports to grow rapidly as the industry’s major producers further expand their marketing and distribution efforts abroad. Demand from the leading markets, Japan and Canada, is expected to increase as evolving food trends in these countries create a favorable market for frozen food. Additionally, the free trade agreement that was passed in 2012 with South Korea will most likely increase demand for US frozen food products in that country. As such, exports are projected to increase an annualized 9.1% to $3.0 billion in the five years to 2013. Growth in the value of imports is also forecast to grow, albeit at a slower rate than exports. Despite US manufacturers’ strong domestic position, imports from Canada and Mexico are expected to Demand from the leading markets, Japan and Canada, is expected to increase increase due to low trade barriers established by the North American Free Trade Agreement. Countries including China, Chile, Peru and Costa Rica have recently emerged as popular sources of imports due to a growing demand for frozen produce that are sourced from these countries. As such, imports are anticipated to grow 6.5% to $4.1 billion in the five years to 2018. The growth of imports will cause the level of competition in this industry to increase in the upcoming years. Frozen Food Production in the USNovember 2013   11 WWW.IBISWORLD.COM Industry Performance IVA is expected to grow slower than GDP during the 10 years to 2018 Life Cycle Stage Frozen food is an almost ubiquitous staple of American diets, nearly reaching market saturation % Growth in share of economy The industry faces consolidation through mergers and acquisitions 20 Maturity Quality Growth Company consolidation; level of economic importance stable High growth in economic importance; weaker companies close down; developed technology and markets 15 Key Features of a Mature Industry Revenue grows at same pace as economy Company numbers stabilize; M&A stage Established technology & processes Total market acceptance of product & brand Rationalization of low margin products & brands 10 Quantity Growth Many new companies; minor growth in economic importance; substantial technology change 5 Soybean Farming Grocery Wholesaling 0 Frozen Food Production -5 -10 -10 Margarine & Cooking Oil Processing -5 Frozen Food Wholesaling Canned Fruit & Vegetable Processing Decline Shrinking economic importance 0 5 10 15 20 % Growth in number of establishments SOURCE: WWW.IBISWORLD.COM Frozen Food Production in the USNovember 2013   12 WWW.IBISWORLD.COM Industry Performance Industry Life Cycle This industry is M  ature The Frozen Food Production industry is in the mature stage of its life cycle. Over the 10 years to 2018, industry value added (IVA), which measures an industry’s contribution to the economy, is forecast to increase at an annualized rate of 0.2%. In comparison, GDP is projected to grow 2.1% per year on average over the same period. IVA fluctuated drastically during and after the recession, mirroring fluctuations in the profitability of industry operators. While this industry has underperformed the economy over the past five years, new product introductions and acquisition activity categorize the industry as mature. Although the industry is considered mature, companies have been developing new products to adjust to consumer trends. Health-conscious consumers have become wary of frozen meals because of their high sodium content and questionable nutritional value. Industry operators have responded by introducing healthier products. Producers also geared innovation toward improving taste and quality to make products comparable with restaurant and homemade meals. Furthermore, industry operators are expanding into new international markets to sustain growth. In the five years to 2013, larger firms have acquired smaller firms to expand their product portfolio and gain market share, a trend that will persist through 2018. For example, in 2010 major player Nestle acquired Kraft’s frozen pizza business, which added brands such as DiGiorno, Tombstone and California Pizza Kitchen to the company’s product portfolio. As the industry consolidates, competition among the leading producers of frozen food is expected to intensify. Frozen Food Production in the USNovember 2013   13 WWW.IBISWORLD.COM Products & Markets Supply Chain | Products & Services | Demand Determinants Major Markets | International Trade | Business Locations Supply Chain KEY BUYING INDUSTRIES 42441 Grocery Wholesaling in the US Grocery wholesalers make up the largest source of immediate sales for frozen food processors. 42442 Frozen Food Wholesaling in the US Frozen food wholesalers purchase products from industry operators to resell to downstream markets. 44511 Supermarkets & Grocery Stores in the US Some large supermarket chains have the purchasing power to buy directly from the manufacturer. 44512 Convenience Stores in the US Convenience stores are a modest source of immediate sales for frozen food processors. 62421 Community Food Services in the US Community food services make up a relatively minor market, but this segment does purchase some food from manufacturers. 72231 Food Service Contractors in the US Food service contractors buy frozen food to prepare meals. They are becoming an increasingly important market for frozen food producers. KEY SELLING INDUSTRIES 11111 Soybean Farming in the US Soybeans are a key ingredient for making some frozen foods (includes soybeans purchased from farming co-operatives). 11112 Oilseed Farming in the US Oilseed farmers (including oilseeds purchased from co-operatives) supply oilseeds to use in preparing food. 11115 Corn Farming in the US Corn is a key raw material required for processing some products. 11116 Rice Farming in the US Rice is a raw material required in some frozen food meals. 11117 Wheat, Barley & Sorghum Farming in the US Wheat is a key ingredient for making some frozen foods, which is purchased from farming co-operatives. 11120 Vegetable Farming in the US Vegetables are a key raw material purchased from farming cooperatives. 31121 Flour Milling in the US Processors of flour are a crucial supplier to makers of products such as frozen pancakes and waffles. 31122 Margarine & Cooking Oil Processing in the US Starches, fats and oils are crucial ingredients to some frozen meals. 31131 Sugar Processing in the US Sugar is a crucial ingredient to make some products, such as frozen waffles and pancakes. Frozen Food Production in the USNovember 2013   14 WWW.IBISWORLD.COM Products & Markets Products & Services Products and services segmentation (2013) 7.4% 6.0% Other Frozen breakfast 30.6% Frozen vegetables and fruits Total $28.4bn Prepared Food Frozen prepared food is estimated to account for 56.0% of industry revenue, making it the largest product segment of this industry. This broad segment includes a variety of meat and specialty selections that can be prepared on the stove, in the oven, or in the microwave. One of the most popular frozen food products is pizza, which accounts for an estimated 15.7% of revenue. Frozen entrees’ share of the industry has declined in recent years, primarily driven by single-serve meals. Growing health consciousness has driven the decline of this product segment as frozen prepared foods are perceived to be unhealthy and highly processed by many Americans. Furthermore, many consumers have shifted away from frozen foods in favor of fresh alternatives. However, from 2008 to 2010, low-income consumers purchased frozen dinners over pricier alternatives such as dining out at restaurants and cooking at home. That trend has largely waned since 2011, due to the recovery of employment and disposable income levels. Producers have recently introduced healthier, organic and gluten-free options that appeal to health-conscious consumers and help improve consumers’ perceptions of 56.0% Prepared food SOURCE: WWW.IBISWORLD.COM frozen foods. But the growth of these products has not been enough to offset the decline of the overall product segment. Frozen Vegetables and Fruits Frozen vegetables and fruits are expected to account for about 30.6% of this industry’s revenue, with vegetables accounting for the majority of sales. Frozen produce is particularly appealing because it has an extended shelf-life and is easier to prepare than fresh produce. Frozen vegetables are also cheaper than fresh varieties, a characteristic that enticed many price-conscious consumers to the freezer aisle of grocery stores during the recession. More recently, researchers at the UK-based Institute of Food Research have discovered that the nutritional quality of frozen vegetables are comparable to that of fresh vegetables. The results of these studies and promotional campaigns implemented by the leading producers of frozen food have helped boost this product segment’s share of industry revenue. Frozen Breakfast Breakfast food accounts for an estimated 7.4% of industry revenue. Some of the leading breakfast food items include Frozen Food Production in the USNovember 2013   15 WWW.IBISWORLD.COM Products & Markets Products & Services continued Demand Determinants waffles, pancakes and french toast. Producers have introduced new items in recent years including breakfast sandwiches, burritos and omelettes to appeal to consumers who are too busy to cook breakfast in the morning. Healthier alternatives with less carbohydrates, sugar and fat have also been introduced to satisfy the needs of health-conscious consumers. Furthermore, product innovations have helped this segment maintain its share of revenue in recent years. Other Other items that are produced by frozen food manufacturers include frozen juice concentrates and dessert toppings like frozen whipped cream. These products are estimated to account for about 6.0% of industry revenue in 2013, representing a decline from five years ago. Frozen juice concentrate used to be a staple in American households, but this product segment has declined as growing health consciousness led many consumers to be wary of consuming beverages with added sugar. The sale of frozen dessert toppings has also declined in recent years as consumers have scaled back on their consumption of sugary foods. Consumers purchase frozen food for the convenience that many products offer. For instance, frozen vegetables are usually washed, cut and ready to use, making it easier for consumers to cook with than fresh vegetables. Additionally, the primary benefit of frozen meals is that they take almost no time to prepare. Aside from convenience, frozen foods are usually cheaper than fresh alternatives and provide cost savings for consumers who are on a budget. Lower disposable income levels during the recession made frozen food items more appealing to many consumers. However, unemployment has declined thereafter and disposable income levels have improved, causing demand for frozen food items, particularly the prepared food product segment, to decline. Over the past five years, the lifestyles and attitudes of consumers and their consumption patterns have evolved. Renewed public interest in health has caused manufacturers to adapt their product lines to include more wholesome ingredients. Additionally, the introduction of more natural and organic options has helped boost the image of frozen food products and has appealed to consumers who seek premium products. The emphasis on health has stimulated an increase in the addition of fresh fruit and vegetables in frozen meals, along with developments in technology that have improved the quality, freshness and durability of frozen food products. Furthermore, product innovation has helped decelerate the decline of frozen prepared meals. Competition from substitute products, including fresh and canned food, has intensified recently. Producers within these industries have also addressed consumers’ need for convenience and nutrition by offering more all-natural and organic products, precooked and marinated meat products and single-serving varieties of packaged fruit and vegetables. As demand for these substitute products continue to increase as the economy recovers, demand for this industry’s goods will decline. Frozen Food Production in the USNovember 2013   16 WWW.IBISWORLD.COM Products & Markets Major Markets Major market segmentation (2013) 9.0% Food service establishments 6.9% Exports 15.0% Retailers 69.1% Grocery wholesalers Total $28.4bn Grocery wholesalers The majority of industry sales is derived from grocery and frozen food wholesalers which are expected to account for about 69.1% of the market in 2013. They, in turn, supply supermarkets, convenience stores and other retail channels with frozen food products in bulk. This market is the most important link in the supply chain because relationships with wholesalers largely affect the products that are eventually stocked by retailers. Wholesalers’ share of the market is shrinking as major retailers are increasingly using online ordering systems to purchase goods directly from manufacturers. This trend will prove particularly beneficial to retailers due to the cost savings that arise from bypassing the cost incurred from wholesalers. The ability to purchase directly from a manufacturer also allows for more favorable terms of trading, as retailers may be able to negotiate certain conditions that were not possible with wholesalers. This should effectively translate into lower retail prices, and thereby, boost demand from retail channels. SOURCE: WWW.IBISWORLD.COM Retailers Large supermarket chains, convenience stores and other major retailers are forecast to account for about 15.0% of the market in 2013 and serve as the single most important point of purchase for consumers. Only supermarkets with sufficient purchasing power can buy directly from manufacturers. However, with the advent of online ordering systems, more retailers have begun to bypass wholesalers and purchase directly from manufacturers. Therefore, this segment’s share of industry revenue has grown over the past five years. Food service establishments Restaurants, hotels, schools, hospitals and other catering institutions also buy a significant portion of the output generated by this industry. In 2013, this segment is expected to account for 9.0% of revenue. Although many consumers cut back on dining out during the recession, many food service establishments have switched from using fresh to frozen ingredients in recent years. For example, more fast food restaurants are using frozen baked goods rather than room temperature bread and Frozen Food Production in the USNovember 2013   17 WWW.IBISWORLD.COM Products & Markets rolls to save on distribution costs. Therefore, this segment’s share of industry revenue has remained relatively steady in the past five years. Exports Although small, the contribution of exports in this industry has steadily increased, from comprising 6.4% of revenue in 2008 to an estimated 6.9% in 2013. Exports have historically been minimal in this industry because producers usually localize manufacturing operations to minimize supply and transportation costs. Canada and Mexico are the second and fourth largest recipients of US exports, respectively, due to their proximity to the United States and the North American Free International Trade Level & Trend  xports in the E industry are Mediumand Increasing Imports in the industry are Mediumand Increasing Imports The domestic market accounts for the majority of demand for frozen food products in 2013, accounting for an estimated 89.8% of industry demand. In the five years to 2013, imports are expected to increase at an average annual rate of 3.6% to $3.0 billion, comprising about 10.2% of domestic demand. Imports increased to meet higher demand during the recession. Foreign producers are also able to take advantage of lower input costs and favorable trading conditions. Additionally, an appreciating dollar has made imported products more attractive since 2012. Canada is expected to account for 38.5% of imports in 2013, while Mexico is anticipated to account for an additional 25.9% of imports. Canada and Mexico benefit from the North American Trade Agreement (NAFTA) that is established with the United States, which reduces trade barriers and makes trade easier among these countries. In addition, the close proximity of these countries makes trade more attractive because transportation and distribution Trade Agreement, which lowers or eliminates tariffs for industry goods. However, Japan has been the leading export destination for frozen food products for over a decade, with a fast-paced lifestyle driving the demand for this industry’s goods. The demand for frozen food in Japan has increased since 2010, as more Japanese consumers have shifted from dining out at restaurants to cooking at home. Furthermore, American frozen meals that are made with noodles and bread are trending in Japan. This industry has also benefited from the passage of a free trade agreement with South Korea in 2012, which has boosted exports to this country, making it the third largest export destination. Industry trade balance 5000 2500 $ million Major Markets continued 0 −2500 −5000 Year 05 Exports 07 09 Imports 11 13 15 17 19 Balance SOURCE: WWW.IBISWORLD.COM costs are relatively low. The next largest source of imports is Brazil which accounts for about 4.6% of imports in 2013. Brazil is the largest global producer of frozen orange juice concentrate and a significant exporter of processed fruits and vegetables. Exports Exports are anticipated to grow an annualized 4.0% to $2.0 billion over the five years to 2013, accounting for an Frozen Food Production in the USNovember 2013   18 WWW.IBISWORLD.COM Products & Markets estimated 6.9% of revenue. Exports grew rapidly because of a weak dollar in 2010 and 2011, which made domestic goods relatively less expensive and more attractive in foreign markets. Rising disposable income levels and increasing acceptance of western food in developing countries also facilitated export growth. Japan is expected to be the main destination for US frozen foods in 2013, accounting for an estimated 26.0% of total exports. Fresh produce in Japan is relatively expensive, and the rising price of fresh fruits and vegetables has caused the Japanese to demand cheaper alternatives at grocery stores. International Trade continued Exports To... Additionally, frozen foods have historically been popular in Japan, and a growing tendency to cook at home has boosted demand in recent years. Canada and Mexico are the second and fourth largest export destinations, respectively. These two countries benefit from their close proximity to the United States and participation in NAFTA. Finally, South Korea is the fourth largest export destination for this industry’s goods. The Frozen Food Production industry benefited from the passage of a free trade agreement with South Korea in 2012, which boosted exports to this country by 42.9% that year. Imports From... 5% Brazil 7% 5% Chile 7% 39% Mexico South Korea 42% Other 18% Canada 26% Mexico Canada 26% Japan 26% Year: 2013 Total $2.0bn SIZE OF CHARTS DOES NOT REPRESENT ACTUAL DATA Other Total $3.0bn SOURCE: USITC Frozen Food Production in the USNovember 2013   19 WWW.IBISWORLD.COM Products & Markets Business Locations 2013 West New England AK 0.0 Great Lakes WA ND MT 6.1 Rocky Mountains ID OR 4.4 West NV 0.5 3.1 SD 0.3 WY 2.3 MN 0.9 0.2 Plains CO 1.2 KY 0.8 9 OK 0.8 NC 0.9 TN AZ NM 0.2 0.3 Southwest TX 5.5 HI 0.3 Additional States (as marked on map) 1 VT 2 NH 3 MA 4 RI 5 CT 6 NJ 7 DE 8 MD 0.2 0.9 0.2 2.8 2.5 0.5 SC Southeast 1.6 MS AL 0.2 0.6 GA 1.6 0.3 LA 0.9 FL 3.7 Establishments (%) 0.5 0.8 AR 8 0.2 1.4 15.9 7 WV VA 1.1 0.9 3.0 CA West 3.6 MO KS 1.2 OH 1.4 5.9 6 3.7 IN IL 0.3 UT PA 4.5 1.4 1.7 1 2 3 NY 4.2 5 4 MI 4.7 IA NE 0.0 WI ME MidAtlantic 9 DC 0.0 Less than 3% 3% to less than 10% 10% to less than 20% 20% or more SOURCE: WWW.IBISWORLD.COM Frozen Food Production in the USNovember 2013   20 WWW.IBISWORLD.COM Products & Markets Distribution of establishments vs. population 30 20 10 Southwest Southeast Rocky Mountains Plains New England Mid-Atlantic Great Lakes 0 West The geographic spread of frozen food production establishments is strategically dispersed in close proximity to sources of key inputs, such as establishments that are engaged in fruit and vegetable processing. Furthermore, it is also important for producers to remain within serviceable distance to large city markets and big population centers. The West is home to the largest number of industry establishments, accounting for an estimated 27.1% in 2013. California has more manufacturing facilities than any other state, with about 15.9% of all industry establishments. Furthermore, the leading frozen food producer, Nestle, is located in Glendale, CA. A large and affluent consumer base, combined with well-established infrastructure and easy access to large population centers make it ideal for frozen food facilities to be located in this region. Also, the abundance of fruit and vegetable growers, pickers, driers and processors in the West, particularly California, reduces transportation and production costs. The state’s close proximity to key export destinations such as Japan and South Korea also make it a favorable location for this industry’s establishments. The Great Lakes region is estimated to house 20.1% of all frozen food manufacturing facilities. Illinois and Wisconsin dominate the region, accounting for 5.9% and 4.7% of total industry establishments, respectively. Michigan and Ohio also account for a significant portion of regional establishments, due to the presence of favorable fruit and vegetable growing conditions. The region is also % Business Locations Establishments Population SOURCE: WWW.IBISWORLD.COM conveniently located within logistical distance to the Plains region, which is a major producer of key inputs, such as flour and processed meats. The Mid-Atlantic is estimated to account for 12.0% of total industry establishments. The region is home to some of the country’s biggest and most affluent cities, such as New York and Philadelphia, which make it very attractive for food producers. The Southeast region is estimated to account for about 13.4% of establishments. These are mainly located in Florida, North Carolina, Georgia and Arkansas, as the region has easy access to key raw materials such as starch and sugar, while large markets, such as Miami and Atlanta, can also be serviced by these producers. WWW.IBISWORLD.COM Frozen Food Production in the US November 2013   21 Competitive Landscape Market Share Concentration | Key Success Factors | Cost Structure Benchmarks Basis of Competition | Barriers to Entry | Industry Globalization Market Share Concentration Level Concentration in this industry is M  edium Key Success Factors IBISWorld identifies 250 Key Success Factors for a business. The most important for this industry are: The US Frozen Food Production industry is moderately concentrated, with the top four players estimated to account for 40.8% of industry revenue in 2013. Although the leading four firms account for a substantial share of revenue, only about 11.7% of firms employ more than 500 workers. Concentration increased slightly from 39.7% of revenue in 2008 as a result of increased growth for some major players, along with some merger and acquisition activity. Industry concentration shot up in 2010 mainly because of Nestle’s acquisition of Kraft’s frozen pizza business. In the five years leading to 2018, industry concentration is expected to increase as the leading frozen food producers continue to grow Product differentiation Successful firms are able to differentiate their products and brands to gain market share. Ability to adapt to change Firms must be able to anticipate and respond to changes in consumer preferences and input costs in a timely manner. Ability to pass on cost increases Given the volatility of commodity and energy prices, successful firms are able to pass on unexpected cost increases to downstream markets to maintain profitability. Supply contracts in place for key inputs Firms generally have reliable contracts with suppliers of commodities, such as Enterprises by employment size (2013) No. of employees No. of enterprises Share (%) 1 to 4 5 to 9 10 to 19 20 to 99 100 to 499 500+ Total 94 58 73 129 82 58 494 19.0 11.7 14.8 26.2 16.6 11.7 100.0 SOURCE: US CENSUS BUREAU COUNTY BUSINESS PATTERNS through advanced technology, acquisitions and their ability to bypass wholesalers and sell directly to retailers. flour, corn, wheat, potatoes and sugar, to considerably reduce supply volatility. Guaranteed supplies at fixed prices minimize supply costs and aid production planning. Economies of scale and scope The scale and breadth of production largely determine marginal costs and affect the volume that a producer is able to supply, which is a key determinant of market share. Effective quality control Successful producers in this industry implement effective quality controls to ensure that their products are safe to consume. Tainted frozen food products can lead to food-borne illnesses and significantly damage a company’s image and trustworthiness. WWW.IBISWORLD.COM Frozen Food Production in the US November 2013   22 Competitive Landscape Cost Structure Benchmarks Cost structures vary depending on the size of the manufacturer, scale of production and level of technological investments. Over the past five years, the Frozen Food Production industry has consolidated, which has increased the market share concentration of the leading producers. Typically, the larger the firm, the lower the unit cost of production because they are able to achieve cost savings from economies of scale. Profit Profit, or earnings before interest and taxes, is estimated to account for 5.1% of revenue in 2013, down from 6.1% in 2008. Profit margins have fluctuated over the past five years, primarily due to fluctuations in the cost of inputs. The agricultural price index, which represents the prices of all agricultural products, rose an annualized 6.2% in the five years to 2013. Skyrocketing input costs lowered the profitability of firms from 2009 to 2011. Although consumers turned to frozen food as an affordable alternative to dining out during this time period, many firms were unable to pass on cost increases in the form of higher prices, causing profit to fall to 2.4% of revenue in 2010. Furthermore, producers invested more in product innovation and marketing to combat negative perceptions of frozen food products, which also negatively impacted profit margins. However, as disposable income levels began to recover in the years following the recession, allowing consumers and retail customers to spend more on this industry’s goods, profitability has recovered. Many producers have also achieved cost savings by implementing various initiatives to reduce transportation costs, decrease downtime at manufacturing facilities and improve efficiency at all levels of the production and distribution processes. Purchases Purchases account for about 55.1% of revenue in 2013, constituting the largest portion of costs for the Frozen Food Production industry. Purchases of vegetables, meat, oil, salt and other ingredients are necessary to produce frozen meals. This segment’s share of revenue grew over the past five years due to rising commodity costs. For example, the price of vegetables is expected to grow an annualized 2.8% in the five years to 2013 while the price of red meat is anticipated to increase 6.9%. Producers also purchase a significant amount of plastic to create safe packaging materials that can withstand both cold and hot temperatures. Many industry operators have mitigated the rising cost of plastic by reducing the size of their products, while an increasing number of producers are using a combination of plastic and paperboard to decrease the cost of inputs. Wages Wages account for about 12.4% of revenue in 2013, down from 13.2% of revenue in 2008. This decrease is primarily a reflection of operators trying to contain costs in the face of eroding profit margins. Producers have consequently begun to rely more on machinery and equipment to automate processes and improve operating efficiencies, which reduces the need for manual labor. However, major companies have also expanded their research and development teams as consumers have demanded more innovative products in recent years. These professionals require higher wages than employees involved in the production and distribution of products. Therefore, the number of employees is expected to rise at an average annual rate of 0.3% in the five years to 2013. WWW.IBISWORLD.COM Frozen Food Production in the US November 2013   23 Competitive Landscape Other Other expenses account for about 18.2% of revenue in 2013. This includes administrative, legal, research and development, marketing and overhead expenses. This segment’s share of revenue has remained stable over the past five years. Depreciation is anticipated to account for 3.4% of revenue in 2013, which represents an increase from 2008. Operators have become more dependent on machinery to automate processes and to improve operating efficiencies. Furthermore, as firms increasingly rely on equipment and machines, depreciation as a share of revenue will increase in the upcoming years. Marketing accounts for about 3.0% of revenue in 2013. Well-known industry players such as Nestle, Schwan and ConAgra devote a larger share of revenue to marketing to drive brand recognition. Over the past five years, spending on marketing campaigns has increased and focus more on the healthfulness of frozen food products. Marketing expenses include expensive media advertisements, point-of-purchase displays and related promotional costs. Sector vs. Industry Costs Average Costs of all Industries in sector (2013) Industry Costs (2013) 6.9 10.5 5.1 12.4 59.3 55.1 100 ■ Profit ■ Wages ■ Purchases ■ Depreciation ■ Marketing ■ Rent & Utilities ■ Other 80 Percentage of revenue Cost Structure Benchmarks continued 60 40 20 2.6 3.0 16.4 1.4 3.4 2.8 3.0 18.2 0 SOURCE: WWW.IBISWORLD.COM WWW.IBISWORLD.COM Frozen Food Production in the US November 2013   24 Competitive Landscape Basis of Competition Level & Trend  ompetition C in this industry is Mediumand the trend is S  teady The US Frozen Food Production industry is characterized by a medium level of competition, primarily due to the prevalence of small- to medium-sized producers that serve a diverse marketplace. Competition in this industry is principally based on product price, quality and differentiation. A producer’s relationship with both upstream and downstream markets is also important because these relationships can determine the cost of inputs or the price that producers charge their downstream customers. Internal competition Price is one of the most important determinants of competition. The price sensitivity of consumers varies among product segments. Although the market has many well-established brand names, consumers become more sensitive to price levels during economic downturns. Furthermore, the growing popularity of inexpensive private label brands intensified price-based competition during the recession. The perceived quality of a particular product or brand largely determines the price consumers are willing to pay. The quality of frozen foods is especially important because factors such as freshness and taste impact demand. Developments in packaging technology and the use of fresher ingredients vastly improved the quality of frozen foods in recent years. However, tainted products that cause food-borne illnesses can permanently damage the image of a brand and even the industry as a whole. Therefore, it has become even more important for frozen food producers to elevate the perceived quality of their products. The ability to be innovative and differentiate a product and brand also forms a key basis of competition. Considering the limited opportunities for growth within the industry, it is imperative for manufacturers to distinguish themselves in order to maintain market share and stimulate demand. Changing consumer tastes and dietary trends have instigated the innovation of products, packaging and marketing. For instance, the recent success of single-serve frozen meals is reflective of the importance of responding to lifestyle changes. Developing and maintaining strong relationships with upstream and downstream suppliers is also critical to remain competitive in this industry. Guaranteed access to high-quality inputs and ingredients at a reasonable price allow producers to maintain the price they charge their downstream markets. Also, the ability to secure optimal shelf space in retail channels has conventionally set market leaders apart from their competitors. The most recognizable and strategically placed brands have the highest potential to maximize sales at the retail level. Furthermore, manufacturers have expanded their distribution networks to include convenience stores and drugstores as competition in this industry has intensified. External competition The Frozen Food Production industry faces external competition from producers of fresh food and restaurants. Consumers often substitute frozen food for fresh groceries. When the price for fresh produce, meat and grains increases at retail stores, consumers turn to frozen ingredients and frozen prepared meals as more affordable alternatives. Although fresh produce has historically been perceived to be more nutritious than frozen produce, a recent study conducted by the UK-based Institute of Food Research has revealed that the nutritional content of frozen vegetables is higher than that of fresh vegetables. While these claims are expected to WWW.IBISWORLD.COM Frozen Food Production in the US November 2013   25 Competitive Landscape Basis of Competition continued decrease the level of external competition that producers face, many consumers still believe that fresh ingredients are better than frozen varieties. In addition to fresh groceries, frozen food producers face stiff competition from fast food restaurants and retail channels that offer prepared food. Frozen meals offer consumers convenience and good taste at a low cost. However, fast food and prepared meals also offer these Barriers to Entry The barriers to entry in the Frozen Food Production industry are moderate, although the level of initial capital investment required is significant. Capital investments include expenses relating to the construction or purchase of a processing facility, plant equipment, warehousing and distribution. Prospective entrants must be able to secure enough capital to make these initial investments in addition to overhead expenses. Also, the industry exhibits a moderate level of market share concentration, with the top four companies accounting for a little over 40.0% of industry revenue. IBISWorld anticipates the level of concentration to increase as firms consolidate, which will increase the barriers to entry in the future. One of the biggest threats facing potential new entrants is the extremely well-entrenched position of the industry’s major players. These companies enjoy a high degree of brand and customer loyalty and have considerable resources to invest in advertising and promotions to grow their market share. Furthermore, the major players enjoy favorable contracts with key downstream buyers, such as grocery stores and Level & Trend  arriers to Entry B in this industry are M  ediumand Increasing qualities and can be more convenient than frozen meals. To combat the growing competition from different retail channels and restaurants, frozen food producers have diversified their prepared meal offerings to include healthier options such as gluten-free and organic food. IBISWorld expects external competition to increase in the next five years as disposable income levels rise, allowing consumers to dine out more. Barriers to Entry checklist Competition Concentration Life Cycle Stage Capital Intensity Technology Change Regulation & Policy Industry Assistance Level Medium Medium Mature Medium Medium Heavy Medium SOURCE: WWW.IBISWORLD.COM supermarkets, which may be difficult for new entrants to secure. Although this is not a barrier to entry, it may impede new entrants from obtaining contracts with major retailers. All the industry’s major producers have extensive product portfolios with well-known brands. Large advertising budgets allow these companies to aggressively promote their products through a range of media outlets that are inaccessible to new entrants. Nevertheless, some new entrants have established themselves within the low priced, non-branded segment of the industry. Other smaller players have managed to carve out regional market niches, thereby reducing direct competition from the major companies. WWW.IBISWORLD.COM Frozen Food Production in the US November 2013   26 Competitive Landscape in this industry is Mediumand the trend is I ncreasing International trade is a major determinant of an industry’s level of globalization. Exports offer growth opportunities for firms. However there are legal, economic and political risks associated with dealing in foreign countries. Import competition can bring a greater risk for companies as foreign producers satisfy domestic demand that local firms would otherwise supply. Trade Globalization 200 Going Global: Frozen Food Production 20002013 Global Export 150 100 50 0 Local 0 The industry is also globalized through its involvement in international trade. Imports’ share of domestic demand and exports’ share of revenue are moderate and have steadily increased in the past five years. Exports are expected to grow an annualized 4.0% to $2.0 billion over the five years to 2013 and account for about 6.9% of revenue. Imports also performed strongly in the same period, increasing 3.6% per year on average to $3.0 billion. Canada and Mexico are the largest sources of imports, largely due to their participation in the North American Free Trade Agreement, which reduces trade barriers in this region. 200 Export Exports/Revenue Level & Trend  lobalization G The Frozen Food Production industry exhibits a medium level of globalization. The level of globalization within an industry is determined using a number of factors, including the level of foreign ownership and trade that the industry engages in. Out of the leading producers in this industry, only Nestle SA is a foreign-owned company, but all of the remaining producers operate across the globe. For example, the H.J. Heinz Company operates manufacturing facilities on six continents and markets its products in more than 200 countries. Exports/Revenue Industry Globalization Frozen Food Production Import 40 80 120 Imports/Domestic Demand 160 Global 150 100 50 0 Local 0 2013 2000 40 Import 80 120 160 Imports/Domestic Demand SOURCE: WWW.IBISWORLD.COM Frozen Food Production in the USNovember 2013   27 WWW.IBISWORLD.COM Major Companies Nestle SA | The Schwan Food Company ConAgra Foods Inc. | H.J. Heinz Company | Other Companies Major players (Market share) H.J. Heinz Company 5.7% The Schwan Food Company 9.1% 59.2% Other ConAgra Foods Inc. 7.4% Player Performance Nestle SA Market share: 18.6% Industry Brand Names Nestle USA Stouffer’s Lean Cuisine Hot Pockets Lean Pockets DiGiorno Tombstone California Pizza Kitchen Jack’s Pizza Nestle SA 18.6% Founded in 1905, Swiss multinational company Nestle SA is the world’s largest food and beverage producer. The company employs more than 330,000 workers worldwide who manufacture a range of chocolate, confectionery, beverage, dairy and pet food products sold in more than 80 countries. The company earned revenue of $98.3 billion in 2012. Nestle participates in the Frozen Food Production industry through its prepared dishes and cooking aids segment, which is estimated to constitute about 14.5% of the company’s total revenue. Despite the company’s expansive presence around the globe, the United States accounts for 25.7% of its total revenue. Nestle USA is headquartered in Glendale, CA. Over the past five years, the company has expanded its market share in this industry, mainly through acquisitions. For example, in January 2010, Nestle scored a major acquisition in the Frozen Food Production industry by taking over Kraft’s North American frozen pizza business for $3.7 billion. The acquisition added popular frozen pizza brands, Tombstone and California Pizza Kitchen, to its portfolio. With this purchase, Nestle drastically improved its market share in the industry. The company has also altered the ingredients of its products to address consumer health concerns, namely by reducing the sodium content in many of its popular prepared frozen foods. For example, in 2010, sodium levels for Stouffer’s Macaroni and Cheese SOURCE: WWW.IBISWORLD.COM decreased from 920 milligrams per serving to 820 milligrams per serving. In addition, Nestle removed trans fats from the majority of its snack and frozen foods, including its Stouffer’s and Lean Cuisine product lines. Financial performance Nestle’s frozen foods segment performed well during the recession because these products served as inexpensive meals for families on a tight budget. Sales of frozen pizzas, such as DiGiorno, Stouffer’s and Lean Cuisine, grew. Furthermore, family-pack and value-pack products performed especially well in 2010. However, as the economy began to recover, competition from quick-serve restaurants and grocery stores’ fresh food sections have weighed down on Nestle. The company’s nutritional frozen food segment, which includes Lean Cuisine, Jenny Craig and other popular brands, has declined over the past two years. Nestle is pushing back with new additions under the Lean Cuisine brand, including Honestly Good, which are entrees containing whole grains and no preservatives. Also, the company has agreed to partner with competitors, ConAgra and H.J. Heinz, to launch a $50.0-million advertising campaign to refresh the image of frozen food in 2013. Revenue for Nestle’s US-prepared dishes and cooking aids segment rebounded from its 2008 low, rising an annualized 2.5% to an estimated $5.3 billion over the five years to 2013. In 2011, the company began reporting Frozen Food Production in the USNovember 2013   28 WWW.IBISWORLD.COM Major Companies Player Performance continued revenue earnings as net sales, removing trade figures. The company shows a large revenue decline in 2011 because of this change, although demand did not change significantly. In addition, Nestle’s revenue is reported in Swiss francs, which experienced significant volatility in recent years, causing US industryspecific revenue to fluctuate. Nestle SA (US industry-relevant segment) – financial performance Year Revenue ($ million) (% change) Operating Income ($ million) (% change) 2008 4,659.0 -13.6 653.9 1.7 2009 4,850.7 4.1 643.4 -1.6 2010 6,471.6 33.4 710.8 10.5 2011* 5,117.6 -20.9 643.5 -9.5 2012** 5,158.3 0.8 635.7 -1.2 2013** 5,261.5 2.0 648.4 2.0 *Company changed their accounting standards for reporting revenue; **Estimates Player Performance The Schwan Food Company Market share: 9.1% Industry Brand Names Red Baron Tony’s Freschetta Asian Sensations Wolfgang Puck Founded in 1952, Schwan Food Company is one of America’s largest frozen food producers. The private company employs more than 18,000 people and delivers frozen food to 2.5 million consumers in the 48 contiguous US states. With brands such as Red Baron, Freschetta and Tony’s, Schwan is well known for its SOURCE: ANNUAL REPORT AND IBISWORLD frozen pizzas, which make up about 30.0% of its revenue. Schwan produces about 350 frozen foods in total, from entrees to vegetables, which are sold in supermarkets and grocery stores. Schwan is also one of the largest frozen food suppliers for public schools and sells its products to hospitals and restaurants. Schwan’s The Schwan Food Company (industry-relevant segments) – financial performance* Year Revenue ($ million) (% change) Employees (People) (% change) 2008 2,530.0 -3.4 20,000 -4.8 2009 2,380.0 -5.9 19,500 -2.5 2010 2,450.0 2.9 19,000 -2.6 2011 2,520.0 2.9 18,000 -5.3 2012 2,530.0 0.4 18,500 2.8 2013 2,580.6 2.0 18,870 2.0 *Estimates SOURCE: IBISWORLD Frozen Food Production in the USNovember 2013   29 WWW.IBISWORLD.COM Major Companies Player Performance continued Player Performance ConAgra Foods Inc. Market share: 7.4% Industry Brand Names Healthy Choice Alexia Marie Callender’s Kid Cuisine Banquet Claim Jumper manufacturing facility in Salina, KS is the world’s largest frozen pizza manufacturing plant. Financial performance Due to lower demand for its products during the recession, Schwan Foods had to lay off employees several times over the five years to 2013. In 2011, the company laid off 60 workers at its Marshall, MN headquarters and shut down its operations in Louisiana. Sources within the company cited the state’s long distance from its headquarters as a main factor. Straggling sales in this particular state did not satisfy the high cost of distributing products. However, demand from restaurants increased in 2012 as the economy improved and more Americans visited restaurants, a trend that is expected to continue in 2013. Over the past five years, increasing fuel, energy and raw material costs have posed a challenge for the company. To boost revenue, the company focused on expanding its business through product innovation. For example, the company introduced more than 200 new products in 2011, including Bon Appetit entrees, Freschetta Simply Inspired Pizza and Schwan’s Fully Cooked Ribs with BBQ Sauce. New products introduced in the past five years are estimated to account for about 18.0% of sales. As a privately owned company, Schwan does not release public financial records; however, IBISWorld estimates that revenue has increased an annualized 0.4% in the five years to 2013, to $2.6 billion. ConAgra Foods was founded in 1919 in Omaha, NE. One of North America’s leading packaged food companies, ConAgra serves grocery retailers, restaurants and other food service establishments. The company employs more than 36,000 people in four reporting segments including consumer foods, commercial foods, Ralcorp food group and Ralcorp frozen bakery products. The consumer foods segment is the company’s industry-relevant segment, with popular brands including Healthy Choice, Marie Callender’s and Banquet. During fiscal 2013 (year-end May), the company earned $15.5 billion in total revenue. The company achieved substantial growth in recent years through acquisitions and aggressive brand and product development. For example, in 2011, ConAgra acquired American Pie LLC, a manufacturer of frozen fruit pies, frozen cobblers and frozen pie crusts under the Marie Callender’s and Claim Jumper brands. These acquisitions expanded the company’s product offering and brand collection, which benefited revenue growth. The company also purchased Unilever’s North American frozen meal business for $265.0 million in 2012, adding PF Chang’s and Bertolli frozen meals to its portfolio. The company also purchased Odom’s Tennessee Pride, which features sausages and a line of frozen breakfast meals. In addition to acquisitions, ConAgra is expanding its business through product innovations. New products, such as Marie Callender’s Fresh Flavor Steamer Entrees were introduced in 2010 to cater to consumers’ renewed interest in healthful eating. New product introductions have helped boost the company’s revenue growth. ConAgra has also invested in technological advancements that have improved the quality of their products. For instance, the company recently enhanced Marie Callender’s multi-serve meals with MicroRite technology, which the company claims to offer the taste and Frozen Food Production in the USNovember 2013   30 WWW.IBISWORLD.COM Major Companies Player Performance continued quality of oven-baked food but with the convenience of microwave cooking. Financial performance Revenue grew over the past five years thanks to high consumer demand in convenience and affordability of frozen foods during the recession and ConAgra’s aggressive acquisition strategies. However, revenue declined in 2010 as lower vegetable oil costs were passed onto consumers in the form of lower prices. Additionally, declining sales of Banquet products also hurt the company’s revenue in 2010. On the other hand, sales of the company’s stronger brands, such as Healthy Choice and Marie Callender’s, grew largely due to brand loyalty and innovation. Furthermore, new products that appeal to health-conscious consumers have contributed to revenue growth. For example, Healthy Choice’s Cafe Steamers is the fastest growing new product in frozen foods. As a result, industryspecific revenue is expected to increase an annualized 3.8% to $2.1 billion in the five years to 2013. ConAgra Foods Inc. (industry-relevant segment) – financial performance** Year* Revenue ($ million) (% change) Operating Income ($ million) 2008 1,730.0 n/a 190.9 n/a 2009 1,877.0 8.5 219.9 15.2 2010 1,826.2 -2.7 255.3 16.1 2011 1,840.5 0.8 263.1 3.1 2012 1,926.7 4.7 259.1 -1.5 2013 2,086.1 8.3 242.3 -6.5 (% change) *Year-end May, **Estimates SOURCE: ANNUAL REPORT Player Performance H.J. Heinz Company Market share: 5.7% Industry Brand Names Weight Watchers SmartOnes Hot Bites Bagel Bites Boston Market HomeStyle Meals Ore-Ida The H.J. Heinz Company was founded in 1869 in Sharpsburg, PA. The global food manufacturer is best known for its ketchup, but other principal products include condiments, sauces, frozen foods, beans, processed foods and pasta meals. Heinz services customers in more than 200 countries on six continents. Heinz’s North American operations are split into two segments, the North American consumer products segment and the US foodservice segment, both of which produce frozen food products. Companywide revenue for fiscal 2013 (year-end April) reached $11.5 billion. The North American consumer products segment produces frozen snacks, condiments, vegetables and meals under brand names like Smart Ones and Ore-Ida. Ore-Ida products make up more than 50.0% of the market share for frozen potatoes. The US foodservice segment produces branded and customized products to various commercial and noncommercial food distributors and retailers. IBISWorld estimates that frozen food products account for 15.0% of company revenue. In one of the largest food acquisitions in history, investment firms Berkshire Frozen Food Production in the USNovember 2013   31 WWW.IBISWORLD.COM Major Companies Player Performance continued Hathaway Inc. and 3G Capital finalized their purchase of Heinz in 2013. Subsequently, the investment firms made the company private. Financial performance Over the past five years, the North American Consumer Product segment grew primarily as a result of new product introductions and increased sales of its core products, such as Smart Ones frozen entrees, Ore-Ida frozen potatoes and TGI Fridays frozen meals. However, in 2012, Heinz streamlined its frozen product line and discontinued its TGI Friday’s and Boston Market premium frozen meals. Industry-relevant revenue grew in the five years to 2013 at an average annual rate of 1.3% to $1.6 billion. Heinz attributes its revenue decline in 2012 to lower sales volumes due to competitor promotional activity coupled with higher product prices in response to heightening input costs. Revenue in 2013 is expected to fall 1.8% due to the discontinuation of TGI Friday’s frozen entrees and lowered sales of TGI Friday’s appetizer frozen products. HJ Heinz Company (US industry-relevant segments) – financial performance** Year* Revenue ($ million) (% change) Operating Income ($ million) (% change) 2008 1,505.8 1.6 339.2 0.7 2009 1,568.0 4.1 362.4 6.8 2010 1,596.3 1.8 385.7 6.4 2011 1,632.9 2.3 416.4 8.0 2012 1,620.8 -0.7 406.0 -2.5 2013 1,603.0 -1.1 397.3 -2.1 *Year-end April, **Estimates SOURCE: ANNUAL REPORT Other Companies Kellogg Company Estimated market share: 3.9% The Kellogg Company, founded in 1906 and incorporated in Delaware in 1922, is the world’s largest producer of breakfast cereals and one of the largest producers of convenience food products. Kellogg services consumers in more than 180 countries, with manufacturing facilities located in 17 countries across four continents. Within the Frozen Food Production industry, Kellogg competes through several brands and products: MorningStar Farms (which includes frozen pizzas, patties, pies and burgers), Natural Touch, Kellogg’s Eggo waffles, Worthington and Loma Linda. Revenue for frozen products grew particularly well during the recession because many people with low disposable income favored frozen foods over more expensive alternatives. Consequently, revenue grew over the past five years to an estimated $1.1 billion in 2013. McCain Foods Limited Estimated market share: 3.0% Established in 1957 in New Brunswick, Canada, McCain Foods is the world’s largest producer of French fries and Frozen Food Production in the USNovember 2013   32 WWW.IBISWORLD.COM Major Companies Other Companies continued other oven-ready frozen food products. The company employs more than 20,000 workers and operates 57 production facilities across 12 countries. While the company primarily produces frozen potato products, it also produces frozen green vegetables, desserts, pizzas, juices, beverages, oven meals and entrees. Limited financial information is available due to the private nature of the company. IBISWorld estimates McCain will generate about $850.0 million industry-specific revenue in 2013. JR Simplot Company Estimated market share: 1.9% The JR Simplot Company, founded in 1923 in Boise, ID, is now one of America’s largest privately held agribusiness corporations. The company employs more than 10,200 people worldwide and has manufacturing operations in Australia, Canada, China, Europe, Korea, Mexico and Guatemala. Since the 1960s, the company has been the principal provider of French fries to fast food giants including McDonald’s, Burger King, KFC and Wendy’s. Simplot also sells its potato products to privatelabel brands. In addition to frozen potatoes, the company produces and sells a range of frozen fruit and vegetables under the RoastWorks and Simplot Classic labels. IBISWorld estimates the company will generate about $550.0 million in 2013. Frozen Food Production in the USNovember 2013   33 WWW.IBISWORLD.COM Operating Conditions Capital Intensity | Technology & Systems | Revenue Volatility Regulation & Policy | Industry Assistance Capital Intensity Level The level of capital intensity is M  edium The Frozen Food Production industry exhibits a moderate level of capital intensity. Using wages as a proxy for labor and depreciation as a proxy for capital, IBISWorld estimates that for every dollar spent on labor in the industry, $0.27 will be spent on capital in 2013. This figure represents an increase from $0.20 in 2008. Capital expenditure in this industry is used for machinery that is used to automate the cooking, processing, packaging and freezing procedures used in production. Also, the cost to purchase and maintain freezers, preservative and packaging equipment is fairly high, representing a large portion of the industry’s depreciation costs. Furthermore, depreciation is anticipated to account for 3.4% of industry revenue in 2013. Capital intensity Capital units per labor unit 0.5 0.4 0.3 0.2 0.1 0.0 Economy Manufacturing Frozen Food Production Dotted line shows a high level of capital intensity SOURCE: WWW.IBISWORLD.COM However, employees are still required to operate machinery and complete other roles that must be Tools of the Trade: Growth Strategies for Success Investment Economy Recreation, Personal Services, Health and Education. Firms benefit from personal wealth so stable macroeconomic conditions are imperative. Brand awareness and niche labor skills are key to product differentiation. Information, Communications, Mining, Finance and Real Estate. To increase revenue firms need superior debt management, a stable macroeconomic environment and a sound investment plan. Traditional Service Economy Wholesale and Retail. Reliant on labor rather than capital to sell goods. Functions cannot be outsourced therefore firms must use new technology or improve staff training to increase revenue growth. Grocery Wholesaling Capital Intensive Labor Intensive New Age Economy Ice Cream Production Frozen Food Production Margarine & Cooking Oil Processing Canned Fruit & Vegetable Processing Frozen Food Wholesaling Change in Share of the Economy Old Economy Agriculture and Manufacturing. Traded goods can be produced using cheap labor abroad. To expand firms must merge or acquire others to exploit economies of scale, or specialize in niche, high-value products. SOURCE: WWW.IBISWORLD.COM Frozen Food Production in the USNovember 2013   34 WWW.IBISWORLD.COM Operating Conditions Capital Intensity continued performed manually. Consequently, wages are expected to account for 12.4% of revenue, which represents a decline from 13.2% in 2008. Wages as a share of revenue has declined as employers have become more efficient by cutting down on the number of employees per facility. As a result, capital intensity has slightly risen over the five years to 2013. Technology & Systems Operators in the Frozen Food Production industry use a variety of technologies to manufacture frozen food products. Fruit, vegetable and meat products can be processed in many different ways, depending on the type of raw material used and the end product desired. The techniques most frequently used in this industry are blanching and flash freezing. Blanching halts the aging of fruits and vegetables, while flash freezing rapidly freezes food products. The aim for both of these processes is to lengthen the shelf life of the product. There are often secondary objectives as well, such as making the product more convenient; improving the packaging, presentation and taste of a product; and producing an entirely new product. The three types of freezing equipment that are used by industry operators include tunnel freezers, spiral freezers and carton freezers. These freezers use homogeneous cold air flow to process the food in a minimal amount of time to preserve the color, taste and shape of food. Producers also use advanced packaging equipment and materials that preserve the quality of food and prevent contamination. Technology for quick freezing equipment has not changed significantly over the past five years, but developments have been made to increase the efficiency of freezing, while using less electricity. Furthermore, technological developments also focus on product quality control. The American Frozen Food Institute (AFFI) held their 18th Annual Distribution and Logistics Conference to discuss and develop technologies for a more efficient supply chain and to protect products from Listeria monocytogenes, which is a bacteria that causes food borne illnesses. Food freezing can either be done mechanically or cryogenically. Mechanical food freezing has been the standard method used by producers in this industry for decades. More recently, the invention of cryogenic freezing has become popular due to the lower setup costs involved when compared with mechanical freezing. Additionally, cryogenic freezing equipment requires less maintenance and cleaning than mechanical freezing equipment. Cryogenic freezing has also improved the quality of frozen foods because the rapid process reduces dehydration loss, which preserves the texture and flavor of food. The Frozen Food Production industry exhibits a medium level of revenue volatility. Revenue volatility for this industry is mainly a function of the fluctuations in the cost of raw materials, energy and oil prices, disposable income levels and changes in downstream demand. Commodities like flour, fruit, vegetables and processed meats represent primary inputs for producers. Therefore, a significant rise in the price of these major inputs can lower the profitability of industry operators. Rising input costs can also cause some producers to raise the price they charge their downstream markets, which would Level The level of Technology Change is M  edium Revenue Volatility Level The level of Volatility is M  edium Frozen Food Production in the USNovember 2013   35 WWW.IBISWORLD.COM Operating Conditions A higher level of revenue volatility implies greater industry risk. Volatility can negatively affect long-term strategic decisions, such as the time frame for capital investment. When a firm makes poor investment decisions it may face underutilized capacity if demand suddenly falls, or capacity constraints if it rises quickly. Volatility vs Growth 1000 Revenue volatility* (%) Revenue Volatility continued Hazardous Rollercoaster 100 10 Frozen Food Production 1 0.1 Stagnant –30 –10 Blue Chip 10 30 50 70 Five year annualized revenue growth (%) * Axis is in logarithmic scale SOURCE: WWW.IBISWORLD.COM Regulation & Policy Level & Trend  he level of T Regulation is Heavyand the trend is S  teady consequently lower the demand for their products. Additionally, while a rise in disposable income levels usually cause consumers to purchase a greater volume of goods, demand for this industry’s goods declines as consumers opt for fresh produce or choose to dine out at restaurants. Consumer tastes, which can often change quickly, also increase revenue volatility. The growth of organic, allnatural and nutritious food has prompted industry producers to offer a greater variety of products. The industry’s timely response to changing consumer tastes boosted revenue growth for some producers. Research and studies conducted by medical professionals can also cause demand for frozen food products to fluctuate. For instance, scientists around the world have recently discovered how frozen vegetables are equally or even more nutritious than fresh vegetables. Such scientific discoveries can cause demand to spike or remain stable. The Frozen Food Production industry faces a great deal of public policy aimed at protecting consumers’ health and well-being. Various federal, state and local governments have passed more laws and regulations pertaining to the ingredients and methods used by manufacturers of food products. The government’s involvement in the food sector has risen in recent years due to the growing prevalence of health complications among Americans, including obesity, diabetes and heart disease. Food and Drug Administration The Food and Drug Administration’s (FDA) mission is to promote and protect the public health by ensuring that safe and effective products reach the market in a timely manner. The FDA governs the food processing industry via the Federal Food, Drug, and Cosmetic Act (FD&C) and the Fair Packaging and Labeling Act. The Nutrition Labeling and Education Act, which amended the FD&C, requires most foods to bear nutrition labeling and requires labels to be accurate and truthful. The FDA also instituted the Food Ingredient Safety Program that Frozen Food Production in the USNovember 2013   36 WWW.IBISWORLD.COM Operating Conditions Regulation & Policy continued governs and evaluates ingredient and nutrition claims made by manufacturers. The United States and its consumers are demanding more stringent rules relating to food labeling, advertising, packaging and other nutritional claims. Failure to abide by these laws can seriously impair a producer’s credibility, result in expensive product recalls, and make producers liable to civil or criminal penalties. Pending enforcement of new FDA regulations has created new opportunities for food manufacturers to differentiate themselves from competitors. Producers that respond proactively to regulations can boost their company image and earn credibility and trust among consumers. Environmental Protection Agency The Environmental Protection Agency (EPA) and state governments enforce Industry Assistance Level & Trend  he level of Industry T Assistance is Mediumand the trend is S  teady The Frozen Food Production industry receives a moderate level of assistance from import tariffs. Tariffs imposed on processed frozen food products varies depending on the inputs used for the final product. For example, fruit juices and vegetable juices such as frozen orange juice incur an import tariff of 7.85 cents per liter, whereas imports of frozen string beans incur a tariff of 4.90 cents per kilogram. The industry also receives indirect assistance from associations, such as the American Frozen Food Institute (AFFI). The AFFI is the national trade association representing the frozen food industry supply chain, including manufacturers, distributors, suppliers and packagers. The AFFI offers various assistance programs to frozen food producers such as research and development, technical assistance, and public and trade relations. The AFFI also advocates for trade agreements that allow the United States to export more products. For environmental laws pertaining to producers of frozen food. Various federal environmental regulations and statutes, such as the Clean Water Act (CWA), Clean Air Act and Pollution Prevention Act (PPA) changed the way processing facilities handle their products and dispose waste to reduce pollution. The CWA’s increasingly rigorous regulations for discharging wastewater are the primary regulatory drivers for the food processing industry. Unless located in remote areas, most food processing facilities pretreat and discharge wastewater directly to a publicly owned treatment plant. When a facility discharges waste to the environment, they are required to have a National Pollutant Discharge Elimination System permit as mandated by the CWA. Key Tariffs Goods Meat products (cents/kg) Vegetables (percent/kg) Juice (cents/kg) Low Rate High Rate 0.7 3.2 1 17.6 11.2 7.9 SOURCE: USITC example, the association was a critical voice in passing the free trade agreement with South Korea, which went into effect in March 2012. The association also provides workshops for industry operators to help improve the quality of their products or educate them about new food handling techniques. The National Frozen and Refrigerated Foods Association (NFRA) works closely with the AFFI. The NFRA represents the interests across every segment of the Frozen and Refrigerated Foods industry including manufacturers, Frozen Food Production in the USNovember 2013   37 WWW.IBISWORLD.COM Operating Conditions distributors, retailers, wholesalers, suppliers and sales agents. The association provides assistance with marketing, promotion, research and development and new product innovation. Frozen Food Production in the USNovember 2013   38 WWW.IBISWORLD.COM Key Statistics Industry Data 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Sector Rank Economy Rank Revenue ($m) 22,042.0 23,710.9 24,321.4 25,041.2 25,000.0 26,428.2 26,421.9 26,967.2 27,804.1 28,361.2 28,134.3 28,893.9 29,153.9 28,833.3 28,948.6 58/411 308/1312 Annual Change 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Sector Rank Economy Rank Revenue (%) 7.6 2.6 3.0 -0.2 5.7 0.0 2.1 3.1 2.0 -0.8 2.7 0.9 -1.1 0.4 237/411 802/1312 Key Ratios 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Sector Rank Economy Rank IVA/Revenue (%) 21.73 21.93 21.34 22.01 22.01 20.14 18.01 20.06 22.73 20.92 20.73 21.24 20.40 20.37 20.80 297/411 992/1312 Industry Value Added ($m) 4,789.8 5,199.0 5,190.7 5,510.8 5,502.0 5,322.0 4,759.3 5,408.7 6,320.0 5,934.3 5,832.9 6,138.5 5,946.6 5,873.4 6,020.7 64/411 388/1312 Establishments 697 681 670 655 644 642 664 665 671 667 666 670 675 671 669 119/411 851/1311 Enterprises Employment 532 88,022 526 89,873 528 90,231 513 86,553 505 89,181 502 85,607 521 89,075 522 89,183 527 90,186 523 90,464 523 89,907 525 89,098 529 89,454 527 89,186 526 88,651 121/411 35/411 836/1311 367/1312 Exports ($m) 979.8 1,010.6 1,184.0 1,378.3 1,602.9 1,427.4 1,574.6 1,866.2 1,917.0 1,950.4 2,102.3 2,332.8 2,529.8 2,842.3 3,021.4 101/381 120/440 Imports ($m) 1,708.5 1,885.1 2,026.8 2,506.7 2,511.8 2,202.0 2,324.3 2,726.4 2,759.1 2,998.6 3,221.9 3,493.6 3,693.8 3,986.9 4,111.1 114/381 125/441 Wages ($m) 3,290.9 3,420.6 3,561.1 3,332.2 3,302.0 3,287.0 3,464.7 3,467.1 3,511.8 3,523.6 3,497.8 3,480.3 3,497.7 3,480.2 3,473.3 57/411 391/1312 Domestic Demand 22,770.7 24,585.4 25,164.2 26,169.6 25,908.9 27,202.8 27,171.6 27,827.4 28,646.2 29,409.4 29,253.9 30,054.7 30,317.9 29,977.9 30,038.3 65/381 76/440 Agricultural Price Index 118.6 114.4 115.0 136.0 149.2 130.8 141.1 178.2 191.2 201.3 211.7 207.4 220.8 219.4 231.9 N/A N/A Industry Value Added (%) 8.5 -0.2 6.2 -0.2 -3.3 -10.6 13.6 16.8 -6.1 -1.7 5.2 -3.1 -1.2 2.5 389/411 1272/1312 Establishments (%) -2.3 -1.6 -2.2 -1.7 -0.3 3.4 0.2 0.9 -0.6 -0.1 0.6 0.7 -0.6 -0.3 285/411 1008/1311 Enterprises Employment (%) (%) -1.1 2.1 0.4 0.4 -2.8 -4.1 -1.6 3.0 -0.6 -4.0 3.8 4.1 0.2 0.1 1.0 1.1 -0.8 0.3 0.0 -0.6 0.4 -0.9 0.8 0.4 -0.4 -0.3 -0.2 -0.6 277/411 231/411 989/1311 924/1312 Exports (%) 3.1 17.2 16.4 16.3 -10.9 10.3 18.5 2.7 1.7 7.8 11.0 8.4 12.4 6.3 236/381 271/440 Imports (%) 10.3 7.5 23.7 0.2 -12.3 5.6 17.3 1.2 8.7 7.4 8.4 5.7 7.9 3.1 70/381 86/441 Wages (%) 3.9 4.1 -6.4 -0.9 -0.5 5.4 0.1 1.3 0.3 -0.7 -0.5 0.5 -0.5 -0.2 256/411 951/1312 Domestic Demand (%) 8.0 2.4 4.0 -1.0 5.0 -0.1 2.4 2.9 2.7 -0.5 2.7 0.9 -1.1 0.2 190/381 215/440 Agricultural Price Index (%) -3.5 0.5 18.3 9.7 -12.3 7.9 26.3 7.3 5.3 5.2 -2.0 6.5 -0.6 5.7 N/A N/A Imports/ Demand (%) 7.50 7.67 8.05 9.58 9.69 8.09 8.55 9.80 9.63 10.20 11.01 11.62 12.18 13.30 13.69 275/381 302/440 Figures are inflation-adjusted 2013 dollars. Rank refers to 2013 data. Exports/ Revenue (%) 4.45 4.26 4.87 5.50 6.41 5.40 5.96 6.92 6.89 6.88 7.47 8.07 8.68 9.86 10.44 297/381 337/440 Revenue per Employee ($’000) 250.41 263.83 269.55 289.32 280.33 308.72 296.63 302.38 308.30 313.51 312.93 324.29 325.91 323.29 326.55 262/411 567/1312 Wages/Revenue (%) 14.93 14.43 14.64 13.31 13.21 12.44 13.11 12.86 12.63 12.42 12.43 12.05 12.00 12.07 12.00 235/411 901/1312 Employees per Est. 126.29 131.97 134.67 132.14 138.48 133.34 134.15 134.11 134.41 135.63 135.00 132.98 132.52 132.92 132.51 34/411 64/1311 Average Wage ($) 37,387.24 38,060.37 39,466.48 38,498.95 37,025.82 38,396.39 38,896.44 38,876.24 38,939.52 38,950.30 38,904.65 39,061.48 39,100.54 39,021.82 39,179.48 352/411 879/1312 Share of the Economy (%) 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.05 0.04 0.04 0.04 0.04 0.04 0.04 64/411 388/1312 SOURCE: WWW.IBISWORLD.COM Frozen Food Production in the USNovember 2013   39 WWW.IBISWORLD.COM Jargon & Glossary Industry Jargon COUNTER-CURRENT EXTRACTION (CCE)By allowing producers to separate multiple liquids with differing proportions, this process that can increase yields by up to 60% when compared to conventional forms of processing. PROBIOTICSDietary supplements of live microorganisms that are thought to be healthy for the host organism. FLASH FREEZINGA freezing technique in which water contained inside a food source is subjected to temperatures well below its freezing point. IBISWorld Glossary BARRIERS TO ENTRYHigh barriers to entry mean that new companies struggle to enter an industry, while low barriers mean it is easy for new companies to enter an industry. CAPITAL INTENSITYCompares the amount of money spent on capital (plant, machinery and equipment) with that spent on labor. IBISWorld uses the ratio of depreciation to wages as a proxy for capital intensity. High capital intensity is more than $0.333 of capital to $1 of labor; medium is $0.125 to $0.333 of capital to $1 of labor; low is less than $0.125 of capital for every $1 of labor. CONSTANT PRICESThe dollar figures in the Key Statistics table, including forecasts, are adjusted for inflation using the current year (i.e. year published) as the base year. This removes the impact of changes in the purchasing power of the dollar, leaving only the “real” growth or decline in industry metrics. The inflation adjustments in IBISWorld’s reports are made using the US Bureau of Economic Analysis’ implicit GDP price deflator. DOMESTIC DEMANDSpending on industry goods and services within the United States, regardless of their country of origin. It is derived by adding imports to industry revenue, and then subtracting exports. EMPLOYMENTThe number of permanent, part-time, temporary and seasonal employees, working proprietors, partners, managers and executives within the industry. ENTERPRISEA division that is separately managed and keeps management accounts. Each enterprise consists of one or more establishments that are under common ownership or control. ESTABLISHMENTThe smallest type of accounting unit within an enterprise, an establishment is a single physical location where business is conducted or where services or industrial operations are performed. Multiple establishments under common control make up an enterprise. EXPORTSTotal value of industry goods and services sold by US companies to customers abroad. IMPORTSTotal value of industry goods and services brought in from foreign countries to be sold in the United States. INDUSTRY CONCENTRATIONAn indicator of the dominance of the top four players in an industry. Concentration is considered high if the top players account for more than 70% of industry revenue. Medium is 40% to 70% of industry revenue. Low is less than 40%. INDUSTRY REVENUEThe total sales of industry goods and services (exclusive of excise and sales tax); subsidies on production; all other operating income from outside the firm (such as commission income, repair and service income, and rent, leasing and hiring income); and capital work done by rental or lease. Receipts from interest royalties, dividends and the sale of fixed tangible assets are excluded. INDUSTRY VALUE ADDED (IVA)The market value of goods and services produced by the industry minus the cost of goods and services used in production. IVA is also described as the industry’s contribution to GDP, or profit plus wages and depreciation. INTERNATIONAL TRADEThe level of international trade is determined by ratios of exports to revenue and imports to domestic demand. For exports/revenue: low is less than 5%, medium is 5% to 20%, and high is more than 20%. Imports/domestic demand: low is less than 5%, medium is 5% to 35%, and high is more than 35%. LIFE CYCLEAll industries go through periods of growth, maturity and decline. IBISWorld determines an industry’s life cycle by considering its growth rate (measured by IVA) compared with GDP; the growth rate of the number of establishments; the amount of change the industry’s products are undergoing; the rate of technological change; and the level of customer acceptance of industry products and services. NONEMPLOYING ESTABLISHMENTBusinesses with no paid employment or payroll, also known as nonemployers. These are mostly set up by self-employed individuals. PROFITIBISWorld uses earnings before interest and tax (EBIT) as an indicator of a company’s profitability. It is calculated as revenue minus expenses, excluding interest and tax. Frozen Food Production in the USNovember 2013   40 WWW.IBISWORLD.COM Jargon & Glossary IBISWorld Glossary continued VOLATILITYThe level of volatility is determined by averaging the absolute change in revenue in each of the past five years. Volatility levels: very high is more than ±20%; high volatility is ±10% to ±20%; moderate volatility is ±3% to ±10%; and low volatility is less than ±3%. WAGESThe gross total wages and salaries of all employees in the industry. The cost of benefits is also included in this figure. www.ibisworld.com | 1-800-330-3772 | info @ibisworld.com At IBISWorld we know that industry intelligence is more than assembling facts It is combining data with analysis to answer the questions that successful businesses ask Identify high growth, emerging & shrinking markets Arm yourself with the latest industry intelligence Assess competitive threats from existing & new entrants Benchmark your performance against the competition Make speedy market-ready, profit-maximizing decisions Who is IBISWorld? We are strategists, analysts, researchers, and marketers. We provide answers to information-hungry, time-poor businesses. Our goal is to provide real world answers that matter to your business in our 700 US industry reports. When tough strategic, budget, sales and marketing decisions need to be made, our suite of Industry and Risk intelligence products give you deeply-researched answers quickly. IBISWorld Membership IBISWorld offers tailored membership packages to meet your needs. Disclaimer This product has been supplied by IBISWorld Inc. (‘IBISWorld’) solely for use by its authorized licensees strictly in accordance with their license agreements with IBISWorld. IBISWorld makes no representation to any other person with regard to the completeness or accuracy of the data or information contained herein, and it accepts no responsibility and disclaims all liability (save for liability which cannot be lawfully disclaimed) for loss or damage whatsoever suffered or incurred by any other person resulting from the use of, or reliance upon, the data or information contained herein. Copyright in this publication is owned by IBISWorld Inc. The publication is sold on the basis that the purchaser agrees not to copy the material contained within it for other than the purchasers own purposes. In the event that the purchaser uses or quotes from the material in this publication – in papers, reports, or opinions prepared for any other person – it is agreed that it will be sourced to: IBISWorld Inc. Copyright 2013 IBISWorld Inc

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