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.
While still No. 3 on the list, PepsiCo increased sales by nearly $1.8 billion, fueled by “profitable growth across all divisions, on every continent and across both convenient food and beverage categories,” bragged Steve Reinemund, chairman and CEO, in the annual report. No. 4 Nestle’s U.S. and Canadian operations were up by more than $2 billion.
While the top four names remain unchanged, last year’s No. 5, ConAgra Foods Inc., is undergoing some refocusing. As a result of selling off some product lines, it dropped to No. 9. Its placement on this chart also may be the victim of some changes in its own financial reporting, which has shifted some of its ingredients and more commodity-based products into a division that is easier for us to exclude.
Ditto for Sara Lee. As we went to press, it began the process of spinning off its apparel business into a new and public company, Hanesbrands Inc., and also selling off a European meats business (to No. 8 Smithfield Foods). While those operations have never been included in this listing, Sara Lee also sold off a few food businesses we do count, helping to drop it four places in the ranking.
|Alphabetic index of our Top 100. Click here for a larger version of this image.
A number of companies lost food-only sales in 2005, although that was as much the result of us sharpening our pencils and deducting more non-food revenues as to declining sales.
On the other hand, a couple of companies climbed the ladder on their own power. General Mills, last year’s No. 11, landed at No. 7 with a nearly $300 million increase in sales. Campbell Soup grew by more than $400 million and was the darling of financial analysts at the annual Consumer Analysts Group of New York meeting earlier this year.
When we add up the sales of all 100 companies ($305.5 billion), they collectively experienced a 3 percent increase in sales 2005 over 2004. However, in an ominous sign, six firms reported net losses in 2005, compared with four in our report last year.
Despite some clouds, 2006 is not all doom and gloom. Less than a month after getting its new CEO, Kraft reported in late July a 44 percent profit gain in its second quarter, and it raised its full-year earnings forecast. How’s that for a quick turnaround! And No. 32 Interstate Bakeries, the maker of Wonder Bread and Hostess Twinkies, reported just its second profitable month nearly two years into bankruptcy reorganization.
How we get our numbers
Admittedly, there’s a fair amount of subjectivity and hair-splitting that goes into this ranking. Despite financial accounting standards, every company does things a little differently. Sometimes we have to make an educated guess at what sales to include and which to exclude.
Our goal is a table that shows the 100 largest value-added food and beverage processors in the U.S. and Canada, the top producers (not necessarily marketers) of grocery store-ready packaged food products, as well as those products sold in semi-final – merely uncooked – form into the foodservice channel.
That means not counting the simple collection or transportation of agricultural commodities – which greatly reduces the figures of agrifood giants and dairy cooperatives such as Cargill and Dairy Farmers of America. That’s why you won’t even find Archer Daniels Midland on this chart. It also means focusing only on sales that come from U.S. and Canadian plants of multinationals – thus only the U.S. and Canadian operations of Nestle and Unilever are included.
That’s also why PepsiCo’s figure has been significantly cut from its worldwide total. On the other hand, we are forced to use net income figures from total operations, nonfood and worldwide sales included, because so few companies report profitability by segment or geography. We use the most recent fiscal years available. In all cases that was at least calendar 2005, although we were able to squeeze in some 2006 fiscal years before our deadline.
ACQUISITIONS CONTINUE TO DECLINE
Mergers and acquisitions in the food processing industry declined in 2005 for the second year in a row to the lowest number since 2000, according to figures from the Food Institute, Elmwood Park, N.J.(see table below).
Food processors closed 94 deals, the most in the Food Institute’s broader “food industry,” which includes everything from agricultural cooperatives to retailers. But the number is a far cry from the 168 mergers announced in 2000, the busiest year in the institute’s annual report “Food Business Mergers & Acquisitions 2005.” Another 21 deals were announced but not completed.
In the first half of 2006, the food processing segment picked up the pace slightly, closing 49 deals with 13 more pending. The Food Institute has been tracking mergers and acquisitions for 25 years.
Within the food processing segment in 2005, the two busiest categories showed increases. Multi-product companies were the busiest with 33 deals, up from 20 in 2004. Brewers, distillers and wineries also showed an increase, to 13, the most this category has experienced in the six-year history of this current report. Bakers, previously a quiet category, also recorded an increase (to nine transactions).
The categories of confectioners, dairy, fruits & vegetables, meat and “other” all decreased by about half.
Some of the bigger food processing deals included:
The food processing number was in line with the aggregate numbers of the Food Institute’s broader food industry and most of the categories. Overall, 323 mergers and acquisitions closed in 2005, down 8 percent from the previous year and the fifth straight year of overall decline.
“[Overall] activity may have declined compared to previous years, but there were a number of significant transactions in several categories,” says Danielle Breuel, research and education director at the Food Institute.
The 166-page report can be purchased from the Food Institute web site (www.foodinstitute.com) or by calling 201-791-5570 ext. 16.
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 below.
Read about the Top 100. Access processor profiles ranked 1-25 here. Access processor profiles ranked 26-50 here. Access processor profiles 51-100 here.