2007 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

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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.
To view the
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.

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