Annual Capital Spending Outlook: Spend now to save later
Some of the biggest food companies are budgeting capital expenditures for multi-year programs meant to reduce costs in the long run.
By Dave Fusaro, Editor in Chief | 03/26/2007
Last year was a blockbuster year for capital spending, not as great as we predicted, but just a hair short of a 10 percent increase. So with some trepidation we predict a 7.6 percent increase this year, at least according to 26 of the largest publicly held food companies.
At this time in 2006, we surveyed most of the public top 50 food companies and, based on their budgeting for the new year, predicted a whopping 11 percent increase in capital projects. For several firms, unanticipated market changes set in and they scaled back. But comparing the same group’s actual 2006 and 2005 capital expenditures, overall they did spend 9.6 percent more last year than they did in 2005.
Of the 21 top 50 food companies for which we have complete figures going back several years, 15 underspent their 2006 capital budgets. Only Smithfield Foods, in the midst of a plant construction spree, overspent by a significant amount: $192 million more than it allocated, or 96 percent. Coca-Cola spent $107 million more than planned, but that was only an 8 percent overdraft.
This year, 16 of our 26 reporting companies are projecting increases, three of them upping the ante by 24 percent or more. Six are scaling back their budgets — five of those by double digits, including Molson Coors (by 28 percent) and Tyson (by 25 percent).
Just fully opened in March, Tyson’s Discovery Center houses 18 test kitchens, a 48,000-sq.-ft. pilot plant and office space. Total square footage is 285,000, including a four-story office building of 174,000 sq. ft.
In all, we’ve identified $12.3 billion in budgeted new construction or expansion activity, up from $11.4 billion actually spent for the same companies in 2006.
The biggest project of this year is a whopping $359 million factory and distribution center for Nestle Beverages in Anderson, Ind. Work began last fall on the 880,000-sq.-ft. facility, which will make Nesquik flavored milks and Coffee-Mate liquid products. The combined operation will employ 300 and should open in the spring of 2008.
For the third straight year, a cheese plant is at or near the top of the list. Plans sound a little sketchy, but Blue Ribbon Cheese Co., a subsidiary of American Dairy Parks LLC, a sustainable agriculture company, plans for a $225 million facility somewhere in California’s San Joaquin Valley — apparently a precise site hasn’t been chosen. It should employ 250 and process 6.8 million lbs. of milk daily into American-style cheeses.
And because those two are private or foreign-owned companies, they’re not even on the master table. Another $200 million plant broke ground in January in Texas County, Okla. Smithfield Food’s Beef Group and New York-based ContiGroup created a joint venture to build this 650,000-sq.-ft. beef processing plant, which may create 3,000 jobs after it opens in mid-2008. The two parties called it “the first [plant] of its size in more than 20 years.”
You gotta spend money to save money
While the projects are as disparate as a Mexican chocolate plant and new software, a common theme among many food companies is they’re spending money now to save money in the future. As always, there are companies undergoing reorganizations because of market failures or changing philosophies. But there also are several using capital budgets for multi-year, wide-ranging supply chain and capacity utilization overhauls meant to dramatically cut operating costs, and change their looks, in the future.
Click to view the "Some Big Spenders" chart, which provides a snapshot of food industry capital spending.
The biggest gainer, in dollar terms, is Pepsico. Budgeting half a billion more for CapEx than it spent in 2006, the Purchase, N.Y.-based beverage and foods company says some of that will be spent rolling the SAP enterprise resource planning system, already implemented at the corporate level, into divisions Quaker, Tropicana and Gatorade. But this year also will see more investment in Pepsico International, particularly in developing and emerging markets, and North American capacity increases for Gatorade and other noncarbonated beverages.
Last year’s increase in capital spending over 2005 also primarily reflected increased investments at Pepsico International and in the North American Gatorade business, as well as increased support behind the company’s ongoing Business Process Transformation initiative, in which SAP plays a big part.
SAP also is the biggest single planned capital expense this year for Campbell Soup Co., Camden, N.J.
In percentage terms, ConAgra takes the prize, increasing its budget by 71 percent to $450 million. That’s not that great an increase over the $400 million budgeted for projects last year, but the Omaha, Neb., company only spent $263 million. “During FY2006, there were a number of strategic decisions made (e.g., selling off several non-core businesses, developing a new strategy for supply chain, etc.) that came after we had already shared our original capital expenditure estimate,” explained a spokesman.