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.
Hershey Foods also is estimating a huge increase, 50 percent over last year. If most of it is spent, the $275 million merely will bring the Hershey, Pa., company back to its 2003 level, when $219 million was spent. Projects include a joint venture plant near Shanghai, China, expected to be on line this summer, and a "flexible, cost-effective production facility in Monterrey, Mexico," not yet beyond the drawing board, designed "to meet current and emerging marketplace needs."
That Mexico plant actually is part of a "comprehensive, three-year supply chain transformation program," just approved by the company's board of directors this February and continuing through December 2009. Meant to "greatly enhance our manufacturing, sourcing and customer service capabilities," the program will:
- Significantly increase manufacturing capacity utilization by reducing the number of production lines by more than one-third;
- Outsource production of low-value-added items, and
- Result in a reduction of 1,500 positions (about 11 percent of manpower) across the Hershey supply chain over the next three years.
Click to view the "Major Projects for 2006" chart, which lists companies that are building or renovating facilities as well as the costs of those projects.
"We will source finished products from fewer facilities, each one a center of excellence specializing in our proprietary product technologies," Hershey said in its 2006 annual report. The program should result in annual savings of $170-190 million. But those kinds of savings don't come cheap. In addition to write-offs and project implementation costs, the plan will require $300-310 million in capital investments. On the other hand, capital spending should drop to $140-160 million per year after 2010.
And then there are companies simply enjoying growth. With an annual sales growth rate of 8-9 percent, yogurt looks like a bright spot. France's Danone is funding a multiyear project at its Stonyfield Farm subsidiary in Londonderry, N.H. Processing, production, storage and distribution areas all will be expanded and a "new high technology cooling tunnel system" will be installed, all in an effort to double capacity.
Dannon USA also is expanding. Beginning in 2006, Dannon initiated a capital investment plan of more than $200 million that will more than double its U.S. capacity within four years. Examples of this include physical expansions at plants in Minster, Ohio, and West Jordan, Utah, and the addition of processing capacity, high-speed lines and improvements in cooling and refrigeration at several plants.
Yoplait yogurt and Nature Valley bars saw production increases last year at Minneapolis-based General Mills. While ratcheting up its budget by 18 percent this year to $425 million, Big G will only be about even with its 2005 capital spending and far below the $750 million spent in 2003, the first full fiscal year after its acquisition of Pillsbury. 2006 also saw "numerous projects designed to generate cost savings in 2007 and beyond," according to company documents. This year will see more of the same, plus spending to increase supply chain efficiency.
Kellogg's CapEx budget includes funds for construction of a new manufacturing facility in Belleville, Ontario, which represents approximately 15 percent of the company's 2007 capital plan. "This facility is being constructed to satisfy existing capacity needs in our North America business, which we believe will partially ease certain … logistics and inventory management issues which we encountered during 2006," according to the company's annual report.
However, not everybody's spending more. The companies with the biggest drops:
- Tyson, down 25 percent to $400 million -- That reflects both the completion of major capital projects and some cost-management efforts. Last year, Tyson completed a major beef processing expansion at its Dakota City, Neb., complex, opened a case-ready meats plant in Sherman, Texas, and nearly completed its new R&D facility, Discovery Center. But as sales fell through the year, some capital projects were put on hold. "The best thing I can say about fiscal 2006 is it's over," CEO Richard Bond said in a year-end financial report.
- Molson Coors, down 28 percent to $320 million -- Last year's figure was high because the company was completing a new Coors brewery in Shenandoah, Va., at a cost of $200 million, which just opened this March.
- Ralcorp, down 18 percent to $48 million.
Animal protein's wild ride
Smithfield Foods Inc., based in Smithfield, Va., is in the middle of a multi-year program to become more of a value-added processor of animal proteins (with a particular emphasis on cooked products) and to improve the efficiency of its plants. The company's building more than just that $200 million joint-venture beef plant.
In the third quarter of 2006, Smithfield opened what it called "the largest and most efficient ham cooking facility in the world," a $100 million, 180,000-sq.-ft. facility in Kinston, N.C., its second in that city. The company also is expanding a ham plant in Elton, N.C. It will nearly double the plant's capacity and add 40 new employees.
Smithfield's Patrick Cudahy unit began a $13.5 million expansion of its Sioux Center, Iowa, plant to accommodate three more microwave bacon lines. Meanwhile, at year-end 2006, Smithfield shut down its Bedford, Va., pork processing facility, idling 139, and did likewise to a plant in Valleydale, Va., in May 2006. Both plants were very old, with production being shifted to more efficient plants.
Toronto-based Maple Leaf Foods also is moving toward more value-added processing ... which has meant good and bad news for capital spending. Last year the company refurbished a 185,000-sq.-ft. building in Brampton, Ontario, to manufacture a major new line of refrigerated meat entrees under the new Maple Leaf Simply Fresh brand.
On the other hand, the company decided not to proceed with construction of a new primary pork processing facility in Saskatoon, Saskatchewan, which we reported in last year's capital spending report. Instead, fresh pork processing is being consolidated into a two-shift plant in Brandon, Manitoba, and Maple Leaf says it will "sell, convert or close" its remaining processing plants over the next two to three years.
Even while it was being acquired by Pilgrim's Pride Corp., Atlanta-based Gold Kist Inc. in October cut ribbons on a $70 million, 180,000-sq.-ft. expansion of its Live Oak, Fla., poultry processing plant. The company calls it the largest single investment it's made in a facility, doubling capacity, adding 100 jobs and supporting growth of retail customer Publix Super Markets.