ANYONE IN THE FOOD INDUSTRY who fondly recalls 2005 either has amnesia or is even more fearful of 2006.
The previous year was painfully impacted by rising costs for energy, raw materials and employee benefits. And don’t forget a couple of Gulf Coast hurricanes. But at least interest rates were low.
|To access the table (a 2-page PDF) that lists our Top 100 companies and compares their 2005 and 2004 sales and income figures, click the Download Now button at the end of this article.
So far, 2006 has most of the same bad news, with rising interest rates replacing the hurricanes. So far.
Against this challenging backdrop, it was difficult for food companies to turn in stellar financial performances in 2005. Among our top 10 companies, seven reported sales (as we count them) increases, but eight reported net income decreases.
“The group is coming off a very weak fourth quarter where stock returns for the large-cap food group were down pretty much across the board [in aggregate, down 5 percent] and the group underperformed the market by a wide margin,” says Christopher Growe, analyst for A.G. Edwards, St. Louis, and a member of our editorial advisory board.
“Year 2006 is shaping up as a ‘Tale of two halves,’ where the first half of the year featured the worst of the commodity cost inflation and negative foreign exchange, and the second half [should] feature some earnings acceleration and the majority of the margin expansion we forecast for the year,” he continues. “After a period of intensive commodity cost inflation in 2004-2005, the food companies face a similar risk in 2006. We estimate only a selective round of price increases occurring due to the recent fuel/resin inflation. Volume growth should suffer a bit at the hands of higher pricing.”
Indeed, as the summer sun scorched much of the grain belt, drought conditions were causing USDA officials to forecast the highest prices in a decade for corn and wheat. Some of the shortage of corn is due to its increasing use for E85 ethanol motor fuel. And sugar prices earlier this year hit a 25-year high.
“As we exit this period of rampant cost inflation – we still have a few quarters to go – and margins ideally start their upswing, we have little doubt that earnings trends will improve,” Growe continues. “However, we believe the growth profile of the large-cap food group will not allow for much more than 7-8 percent earnings per share growth.”
A look at our list
The top 100 food and beverage processing companies in the U.S. and Canada are profiled in this annual feature. Find company contact information, major brands, key executives and main product areas. See Profiles #1-#25 here and Profiles #26-#50 here. Access processor profiles #51-#100 here.
There was no change at the top of our annual Top 100© list of the largest food and beverage manufacturers in the U.S. and Canada. But with No. 1 Tyson having an off year and runner-up Kraft experiencing a year of domestic growth, the gap between 1 and 2 was a scant $600 million – still, bigger than 13 companies on this list.
Its fiscal 2005, which ended Oct. 1, 2005 for Tyson, was not kind to the world’s largest animal protein company. “This year has been especially challenging for international beef exports,” Chairman Don Tyson wrote in the annual report. “[Import bans in] Japan, South Korea and Taiwan … resulted in a loss of an estimated $800 million in beef export sales in fiscal 2005. We are encouraged by recent developments in export market access, but fiscal 2006 will present only gradual recovery in beef as those markets stabilize and cattle supplies improve.”
Indeed, anybody selling beef or poultry was hurting because of the worldwide worry of disease. No. 10 Swift saw North American sales dip slightly, although more than offset by higher Australian sales (which we don’t include in our computations). Nevertheless, it recorded a $777,000 loss for its fiscal 2005. In footnotes to its annual report, the company says it still hasn’t recovered from the mad cow discovery of late 2003, “as approximately 15 percent of the historical revenue derived from the animal were generated from export sales of beef and beef by-products, many of which have no domestic market.” On the other hand, Swift’s pork revenues have picked up as a result of the mad cow scare and the more recent worldwide fear of avian influenza in the poultry market.
Despite the sales increase, it was a difficult year for Kraft, too. Just ask Roger Deromedi, who was fired in June after 29 years with Kraft or predecessor companies and five years (2½ years as lone CEO) of heading the worldwide behemoth. He was replaced by Irene Rosenfeld, chairman/CEO of Frito-Lay, who prior to joining that PepsiCo division spent 20 years at Kraft.