The Changing Landscape in a 'World with Interest Rates' — The Double Burden of Debt and High Costs Hitting Food Companies

The transition to a ‘world with interest rates’ is weighing heavily on the management of the food industry.

While trends in mortgage interest rates tend to attract attention, the food industry has entered a phase where the burden of capital investment and debt repayment is putting pressure on cash flow. Companies that have expanded production facilities and built integrated production systems based on the assumption of low interest rates are particularly susceptible to the impact of rising interest rates and high raw material costs.

Currently, high costs for feed, raw materials, packaging materials, and energy continue. If price pass-through does not progress, even if facilities are operated, no profit will remain, and only the burden of debt repayment will increase. Cases where aggressive investment is turning from a growth driver into a fixed burden that constrains management are beginning to stand out.

Investment decisions that were rational in the low-interest-rate era

Until now, food companies have invested in labor-saving equipment, processing plants, and production bases for the purpose of responding to labor shortages, improving productivity, and strengthening their own brands.

In an environment where ultra-low interest rates and financial support measures continued, the decision to utilize borrowing to equip facilities was not unnatural. In livestock, integrated systems from breeding to fattening were promoted; in seafood processing, the enhancement of freezing and processing capabilities; and in fish paste products, the development of facilities equipped with direct sales and tourism functions.

However, the premise has changed. As interest burdens increase, the costs of feed, fish paste, packaging materials, and the like are also rising. Geopolitical risks, including the situation in the Middle East, are also likely to spill over into crude oil and naphtha-derived packaging materials, logistics, and energy costs.

Even if sales can be maintained, if the gross profit margin falls, investment recovery will be delayed. If interest payment burdens are added to that, the deterioration of cash flow will proceed all at once.

Bankruptcies with debts exceeding annual sales are on the rise

Looking at recent bankruptcy cases of food and seafood-related companies, cases where debt has ballooned significantly relative to annual sales are increasing.

Hokkaido’s beef production and sales company, Naganuma Farm, had total liabilities of approximately 1.256 billion yen against annual sales of approximately 400 million yen. Although it had been working on integrated production of its own brand beef, profitability deteriorated due to the decline in demand during the COVID-19 pandemic and the soaring price of feed, and the large amount of financial debt became a burden.

Miyagi Prefecture’s Masa Kamaboko-ten also reportedly had total liabilities of approximately 600 million yen against annual sales of approximately 400 million yen. Struggling with the soaring costs of fish paste and packaging materials, as well as competition with major companies, it sought reconstruction while proceeding with changes to repayment terms, but ultimately went bankrupt.

At Hokkaido’s Kaiou Bussan, total liabilities reached approximately 1.532 billion yen against annual sales of approximately 700 million yen. Sales channels shrank due to China’s import restrictions on Japanese seafood, and logistics stagnation and debt burdens also pressured management.

Of course, these bankruptcies cannot be explained solely by rising interest rates. There are unique factors for each, such as declining demand, high raw material costs, export restrictions, and price competition. However, what they have in common is that when the business environment collapsed, large fixed costs and debt made it difficult to rebuild management.

Three structures cornering companies that invested in facilities

First is the delay in investment recovery due to rising costs. Even if facilities are expanded, if the increases in feed, raw materials, and materials cannot be sufficiently passed on to sales prices, the expected profits cannot be obtained.

Second is the increase in financial debt and interest payments. While principal repayment continues, rising interest rates increase cash outflows. For companies whose borrowing significantly exceeds annual sales, even a slight deterioration in earnings leads directly to cash flow problems.

Third is the low liquidity of facilities. Processing plants, freezing equipment, cattle sheds, and tourist facilities cannot always be sold immediately when needed. Even if sales fall, fixed burdens such as depreciation, maintenance costs, and debt repayment remain.

In the food industry, while production facilities are a source of competitiveness, they can also become a factor that deprives companies of flexibility in the face of environmental changes.

Toward management that does not assume low interest rates

Facility expansions that were once valued as growth investments may turn into burdens that shake management due to the changing financial environment of rising interest rates.

In the processing industry in particular, capital is required for raw materials, inventory, and cold chain infrastructure. This is precisely why the impact of rising interest rates is greater than in other industries.

What is being questioned is not the scale of the facilities. It is whether a financial structure can be built that can maintain repayments and working capital within the changed financial environment.

Moving forward, management that improves profitability while simultaneously lightening the balance sheet and increasing resilience to cash flow issues will be essential.

🖊Author: Food Bulletin note Editorial Department