Annual Manufacturing Trends Survey: Squeezed

Plagued by consolidation problems and slim profit margins, most food processors are still skimping on capital spending

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The bad news is the U.S. food industry shuttered more plants last year than any other sector of manufacturing, save metals and electronics. And the good? Well, whenever a manufacturer closes a plant door these days, it opens a window of opportunity for leaner, meaner and more profitable operations or so the backpedaling company would have investors believe.

 

The trouble is, it's also a leaner and meaner world out there. Global unease and a sluggish economy may have dampened the industry's enthusiasm for new capital outlays, but they've done little to dull the razor-thin margins by which food companies either thrive or perish.

"We're still seeing a shakeout [from consolidations]," says Mark Shambaugh, president of Shambaugh & Son, a Fort Wayne, Ind.-based specialist in food plant construction. Although his company has performed feasibility studies on a number of projects, none has materialized, and probably won't "until food companies begin to see better margins," Shambaugh says.

While the overall food industry undoubtedly is taking a breather, there are some companies that are expanding.

Despite the ease of transportation in this country, some plants still seem to sprout where their sources of raw material are located. Smithfield Foods is looking at a possible $100 million expansion of a plant in Monmouth, Ill., because that's where the hogs are. The huge buildup of dairy herds the past few years in New Mexico is providing the raw material for a $200 million cheese facility for Glanbia Foods in Clovis, N.M. On the small end, American Purpac Technologies this year opened a $10 million plant dedicated to aseptic copacking in Beloit, Wis. While the investors hope to bring in raw materials and manufacturing contracts from around the country, the launching contract was to pack beverages based on the abundant cranberry crop in the immediate area.

Ten largest U.S. food plant construction projects (in cost)

Company

Location

Type

Product

Investment

Roquette Inc.

Keokuk, Iowa

Expand

Corn starch

$400 million

Glanbia

Clovis, N.M.

New

Cheese

$192

Monsanto

Augusta, Ga.

New

Powdered milk

$180

Nestle Waters

Hawkins, Texas

Expand

Bottled water

$150

Premium Pork

St. Joseph, Mo.

New

Pork processing

$130

Seneca Foods

Rochester, N.Y.

New

Food products

$125

General Mills

Murfreesboro, Tenn.

New

Yogurt

$120

Kikkoman

Lake Geneva, Wis.

Expand

Soy sauce

$100

ConAgra

Lufkin, Texas

Expand

Food processing

$72

Yukiguni Maitake

Mamkating, N.Y.

New

Mushrooms

$72

Source: Conway Data Inc.

"There hasn't been a lot of new plant construction in the food industry," admits D. Scott Eckman, chief executive officer of American Purpac. "But we talked to potential clients before we built this plant, and we think there is a need for a facility like this for short runs and trials of new products."

Maybe it's not so important where the raw material comes from as where the finished products go. According to Norcross, Ga.-based, Conway Data, which collects data relating to food plant construction, current emphasis for a lot of manufacturers is on ensuring that distribution networks tie in with those of larger retailers, most notably Wal-Mart.

More new products, quicker

According to a study undertaken by Hanscomb, Faithful & Gould, an Atlanta-based construction management and project services firm, the increasing demands to quickly bring new products to market not only impact plant locations but, increasingly, plant design, particularly as it relates to assembly line changeovers. The study also found:

* Due to shrinking profit margins, manufacturers are placing more emphasis on energy-efficient mechanical and electrical systems. Since plants can't afford downtime, redundant energy systems also are becoming more pervasive.

* Automated storage and retrieval systems with bar-coding and scanning devices are becoming crucial for rapid product delivery.

* More manufacturers are installing plant-wide information gathering and monitoring systems, including active and passive quality control systems, that provide operators with essential information for making rapid manufacturing and supplier-related decisions.

* Floor systems must provide economical solutions for wide-span floor plates, but also must consider future requirements to handle large penetrations when new assembly lines are moved or installed. Hence, choice of structural materials is becoming more crucial.

* Getting products to market requires plant site layouts that can accommodate more frequent traffic transport, including extensive aprons for trailer trucks and improved circulation planning.

Automation is one obvious solution to quickening the pace of both production and changeovers. While the food industry still lags some other industrial sectors in this area, automation is becoming a significant investment item on the shopping lists of most food companies. In our own annual Manufacturing Trends Survey [January 2004, p38], respondents ranked automation the third most important issue facing them this year, behind perennial concern food safety and in a virtual dead-heat with labor issues. Ninety percent said they were in the process of automating some component of their manufacturing processes.

Food plant construction

Greenfield vs. expansion projects

2003

 

New

Expansions

89

180

2002

 

New

Expansions

124

227

2001

 

New

Expansions

136

230

Source: conway Data Inc.

It's worth noting that although labor is the single highest expense that food manufacturers incur, food sector employment has held steady for the past several years, despite industry efforts to automate critical production processes and the national recession.

The U.S. Department of Labor has found that some tasks, particularly those involving handworkers in the meat, poultry and fish industries, simply defy attempts to automate them. Meanwhile, new automated equipment for tasks as various as packaging, inspection and inventory control simply swap out machine operators for maintenance workers and mechanics. Computers have likewise reduced employment growth among some mid-level managers but increased the demand for workers with technical skills.

Blame Wal-Mart, consolidation

While a number of factors have converged to suppress construction and capital spending activity in the food industry, skimpy margins rank high on that list. -- even with the national economy allegedly in recovery mode. Some industry analysts lay much of the blame on Wal-Mart, whose massive market presence has not only confounded its competitors, but given the retailer the clout to negotiate not-so-everyday low prices with its suppliers. Wal-Mart has wisely passed these savings on to consumers, who have rewarded the retailer with more business and an even bigger club to brandish over suppliers.

 

But that only completes half the vicious circle that has food companies chasing their tails these days. Lest anyone think Kraft is ceding its faltering cheese and cookie brands, the company plans to use funds from 20 announced plant closures to bankroll $500 million to $600 million in in-store price promotions, a tack that will likely force competitors to boost their promotional budgets , and shave profits , in order to keep pace.

Why does Kraft have so many plants to close? One reason is it's still digesting that little Nabisco acquisition of year 2000. As surely as dessert follows dinner, consolidation invariably follows a good feeding frenzy. So, it's not surprising that the number of new and expanded food plant projects in the U.S. has slid steadily since industry mergers and acquisitions activity peaked at the turn of the millennium.

Historically, food companies have sought to increase their clout via mergers and acquisitions but, as the accompanying chart shows, M&A activity in the food and beverage sectors is largely flat these days. Moreover, data from the U.S. Department of Commerce suggest that food companies have no more leverage than they previously had as a result of continued consolidations among retailers, whose top four or so players now account for 30 percent of total grocery sales. Rather than raise prices, as many expected, these ballooning behemoths have dropped them well below inflation levels, according to the Commerce Department.

So where can food companies look for growth? Some sectors, notably meat and poultry, and fruits and vegetables, are eyeing vertical integration as a means of boosting profit their margins. And usually growth in new areas does require investment. Dole Food Co., for example, has moved from simply distributing lettuce and fresh fruit to creating branded prepared foods. Smithfield Foods now does everything from raising hogs to producing branded pork chops. After all, why let other companies enjoy the biggest markups?

It would be as easy as taking candy from a baby were it still not unclear whether consumers will spend additional money for a Smithfield or Tyson value-added processed meat product. "Two years ago, we fell into the lack-of-differentiation trap by not providing the additional value needed to drive interest and sales of this underdeveloped category," Tyson marketing director Mike Stout told FOOD PROCESSING last June.

However, misbegotten ventures, particularly in evolving categories, can be costly. In the case of case-ready meats, items such as anti-microbial films, oxygen-scavenging laminates, CO2 emitters, UV-light inhibitors, and active packaging constructions all play key roles in product development, manufacturing and packaging -- and they all add up. As Tyson and Smithfield learned.

Now that the dust presumably has settled on Tyson's merger with IBP, Tyson is expanding production and storage capabilities at one of the acquired plants. A multi-million-dollar project just under way at the Storm Lake, Iowa, pork plant includes land acquisition and a two-story, 14,000-sq.-ft. addition, primarily to increase cooler space and box storage. The work, expected to be complete in October, will increase finished product volumes, including boneless pork loins and hams.

It's a similar story at Smithfield. There, too, pork processing shows no signs of slowing and capacity is strained, even with the Farmland acquisition of late last year. So plans are moving forward on an addition to Farmland's Monmouth, Ill., plant.

General Mills apparently is dealing with its acquisition of Pillsbury in a different, racier way. Big G recently closed manufacturing facilities in Minneapolis, Lithonia, Ga., and Johnson City, Tenn., in order to improve distribution, trim excess production capacity and consolidate operations. But, as one company executive put it, supply chain management at General Mills ultimately relies less on closures and consolidations than good, old-fashioned innovation in this case, some quality time with NASCAR crews.

That's right. In an effort to reduce product changeover time at a Betty Crocker plant in Lodi, Calif., the cereal maker dispatched an operations team to work with a Winston Cup pit crew. The result was a significant savings in product changeover time , from 41/2 hours to 12 minutes. The time-saving changes have since been implemented throughout General Mills' manufacturing network, saving the company "millions and millions of dollars," Randy Darcy, senior vice president of General Mills' supply chain operations, told the Associated Press.

Intent on saving no less than $800 million in the next 10 years, General Mills currently is studying the techniques of the mechanics who fix stealth bombers. Who says it isn't rocket science?

Sidebar:

Who's Building?

Food's 20 biggest construction spenders in 2003

1. Kraft Foods, Northfield, Ill.

2. Pepsico Inc., Purchase N.Y.

3. General Mills, Minneapolis

4. Tyson Foods Inc., Springdale, Ark.

5. Anheuser-Busch Cos., St. Louis

6. Archer Daniels Midland Co., Decatur, Ill.

7. Sara Lee Corp., Chicago

8. Campbell Soup Co., Camden, N.J.

9. Coca Cola Enterprises, Atlanta

10. ConAgra Foods, Inc. Omaha, Neb.

11. Kellogg Co., Battle Creek, Mich.

12. McCormick & Co., Sparks, Md.

13. Adolph Coors, Golden, Colo.

14. Smithfield Foods, Smithfield, Va.

15. Hormel Foods Corp., Austin, Minn.

16. Del Monte Foods Co., San Francisco

17. Pilgrims Pride Corp., Pittsburg, Texas

18. Smucker Co., Orrville, Ohio

19. Dreyers Grand Ice Cream Holdings, Oakland, Calif.

20. Ralcorp Holdings Inc., St. Louis

Source: ENR Magazine. Rankings are based on construction in progress and the capitalized amount for construction that has not been completed during the year.

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