US confectionery and bakery sectors benefit from national tax cuts

Ed Zwirn, Keith Nuthall, and Sarah Gibbons report on the major revamp of tax systems in the US that are set to impact on the confectionery sector

The sweeping overhaul of the United States tax code which took effect this year has offered a boost to American companies of all sectors, with companies that produce and sell confectionery being among those garnering the benefits.

The drop in the US corporate tax rate, from 35 per cent to 21 per cent, along with a provision that allows US companies to repatriate foreign earnings at a one-time cost, net of foreign tax credits, of 15.5 per cent, is expected to shore up corporate cash positions.

To encourage companies to commit to capital expenditures, as opposed to giving this money back to shareholders, businesses for the next five years will be able to take a 100 per cent tax deduction, greatly reducing the after-tax cost of expanding capacity, improving operational productivity through technology and digitalisation, or making other investments in the quest to capture new markets.

US-based confectionery companies are supporting the tax reforms and are applying some of their gains toward expanding production.

“Mars welcomes the passage of corporate tax reform legislation,” said company spokesperson Kimberly West. “The reformed corporate tax policies will make Mars, as a US-based company, more competitive globally and provide us with additional capital to reinvest in our associates, our facilities and continued growth.”

The strategic communications leader for Mars rival Hershey, Jennifer Sniderman, said: “Certainly, it’s proving to be a bit of a windfall.”

The confectionery giant reported shortly after passage of the US Tax Cuts and Jobs Act, last December (2017), that the legislation would have “a favourable impact on the company’s net income, earnings per share-diluted and cash flow,” and updated its 2018 adjusted tax rate estimate down to approximately 20 per cent, from 30.3 per cent in the fourth quarter of 2017.

A portion of this tax gain, some $25 million, is expected to be set aside as increased capital spending, bringing total spent on 2018 capital additions, including software, to $355 million to $375 million.

Robb MacKie, president and CEO of the American Bakers Association (ABA) said that while it is “a little early” to gauge the extent to which the tax code changes will be a game changer for sweet bakeries, this should become more apparent by the time third quarter 2018 reports come out. In the meantime, he predicts that the companies will take “full advantage of the 100 percent depreciation of capital investment.”

He added: “A lot of bakers already have continuous capital expansion plans over a five-year period,” he said. “At that point, if you haven’t modernised your production, you’re not going to.” The creation of a new commercial bakery, he pointed out, is “at least a $60 million to $80 million outlay.”

Other welcomes came for the package from the Grocery Manufacturers Association (GMA), whose president and CEO Pamela G Bailey hailed it as “a tax reform bill that will help American manufacturers stay competitive and fuel the purchasing power of our nation’s consumers.”

Meanwhile, the USA Food Marketing Institute, representing food retail and wholesalers, stressed that the reform would help it members because they are “low margin, high tax industries that have been waiting for just this type of relief to spur investment and create jobs”. Its chief public policy officer Jenifer Hatcher said that as well as reducing tax rates, the law increases expensing levels, “which should help fuel improvements in technology and job growth within our industry”.

Of course, not all confectionery and sweet bakery companies will benefit the same. The key gainers will be American companies with significant exposure to the domestic market, such as JM Smucker (owner of brands such as baking line Pillsbury). Others with more international sales, will benefit less, especially given that the new system includes a tough repatriation tax on past foreign earnings that the USA Internal Revenue Service (IRS) thinks have in the past been under-taxed.

A good example here would be global giant Mondelēz International, owner of such brands as Toblerone, Oreo cookies and Alpen Gold. But even here, the reform is far from being a hard knock. In its 2017 results, Mondelēz said the reform in December 2017 delivered a “discrete net tax benefit” of $59 million in the fourth quarter. Coca-Cola, maker of ‘innocent’ smoothies, would see its global tax rate fall from 24 per cent to 21 per cent, as a result, said a company note.

John Buhl, spokesman for the US Tax Foundation, said economic analysis showed that by lowering the corporate tax rate and allowing businesses to write off capital investment costs up front, the reforms would encourage new investment in the US for all types of industries.

“If confectioners are looking to increase production, the law now makes it more profitable to do so, and those investments will help create more jobs and raise wages,” he told Confectionery Production.

And for sure, market researchers are predicting growth in the US confectionery market. The retail value of the US chocolate confectionery market, for example, was $18.94 billion in 2017, according to Euromonitor International, which also predicted a 1.5 per cent increase in sales to $19.2 billion this year and a similar annual rise until 2020 when it forecast that the market would be worth $19.77 billion.

And the sector has been demonstrating the value of investment, which the tax reform should help boost. In its most recent report, published just prior to the tax reform announcement last November, Euromonitor said there was a new focus on the “fun and unique experience” of shopping for chocolate confectionery for adults, not just children.

“While candy stores have always appealed to children, innovative new retailers like Sugarfina, IT’SUGAR and Lolli & Pops have thrived by creating a fun shopping experience for adults,” the report said.

“Recognising this potential,” Hershey announced in June 2016 that it was replacing its 200 square metres store in New York’s Times Square with a new location three times as large, the report noted.

All this aside, however, the tax reform was not enough to stop Nestlé from announcing the sale of its American confectionery business to Italy’s Ferrero for $2.8 billion in January – part of the Swiss giant’s shift towards selling more food in the nutrition, health and wellness segments.

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