Top Food and Beverage Companies for 2008: Succeeding in a Difficult Year

Tyson returns to the top, PepsiCo, Nestle turn in stellar years in our annual ranking of the largest food and beverage companies in the U.S. and Canada.

By Dave Fusaro, Editor in Chief

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In a testament to management and to the hard work of thousands of employees, most of our Top 100© food companies turned in respectable years in 2007. Despite all the grousing over how tough the past year was, all of our Top 10 companies saw sales increases, and seven out of the 10 improved profits as well.

Much as we try not to turn this into a footrace each year, it’s difficult not to acknowledge the shuffling of the top three finishers on our list and the remarkable sprint of the North American operations of No. 4 Nestle.

Tyson Foods returned to the No. 1 position, which it held in our 2005 and 2006 reports. More importantly, the big animal protein company erased a $196 million loss in its fiscal 2006. PepsiCo had such a good 2007 (sales up 10.4 percent) that it leapfrogged Kraft into the No. 2 spot.

While the U.S. and Canadian operations of Nestle remained in fourth, the position those divisions have held for several years, the North American chunk of the world’s biggest food company recorded a 12.6 percent sales increase.

Kraft in various incarnations had been the U.S. and Canada’s biggest food and beverage company for the first 30 years of this annual report. In its first full year of independence from Philip Morris Cos., the Northfield, Ill.-based packaged foods company performed admirably. Despite some divestitures, Kraft’s U.S. and Canadian-based sales rose 3.5 percent in 2007, and overall, global sales rose 8.4 percent. Net earnings were down 15.4 percent, however.

After a disappointing fiscal 2006, in which it suffered a $196 million loss, Tyson came back strong in its fiscal 2007. “Tyson had an outstanding turnaround in 2007,” with sales up 9.5 percent, President/CEO Richard Bond wrote in the company’s annual report. “Following one of the most challenging years in the company’s history, we are back on solid footing and on track to achieve our long-term goals.”

At PepsiCo, “What makes me particularly proud is that our 2007 performance was strong — not just measured by these short-term metrics — but also with the long-term equally in mind,” wrote Chairman/CEO Indra Nooyi. “We increased capital expenditures in plant and equipment worldwide … We added several tuck-in acquisitions in key markets and segments … We created the chief scientific officer position to ensure our technical capabilities … We funded incremental investment to explore breakthrough R&D opportunities … We maintained focus on building next-generation IT capabilities.”

Nestle, especially in North America but also worldwide, was aided by the 2007 acquisition of baby-food company Gerber, bought from Novartis AG. But it wasn’t all based on acquisitions. “The Food, Beverages and Nutrition business, with … an increase of 9.2 percent, was the main contributor to growth,” said the company’s annual report. “It achieved organic growth of 7.1 percent, with real internal growth of 4 percent and pricing of 3.1 percent. This relatively high level of pricing, compared with recent years, reflects our success in passing on raw material cost pressures and is a testament to the strength of our brands.”

The biggest growth (17.1 percent) of any of our top 10 companies belongs to Dean Foods. The Dallas-based company became the biggest fluid milk supplier in the world by acquisitions, and it made a big one in early 2007: Friendship Dairies, one of the largest dairies in the northeastern U.S. But raw milk prices rose faster than sales, and every consumer knows what happened to milk prices. Raw milk prices in the second half of 2007 averaged more than 80 percent higher than in the prior year, so it was no surprise that Dean’s sales soared even as profits dipped -- for the second year in a row.

But the biggest sales increase on our chart belongs to Pilgrim’s Pride. Its $1.2 billion purchase of Gold Kist Inc. in December 2006 created the world’s largest chicken company and aided its 45 percent sales growth. More importantly, after losing money in 2006, Pilgrim's Pride returned to profitability in 2007.

Trends for the current year

The past year saw the beginning of two main trends that had huge impacts on the sales and the bottom lines of our Top 100 companies: changes in consumer spending patterns and soaring agricultural commodity prices. Those trends are continuing into 2008 unabated.

First, consumer spending is changing as a result of a stumbling economy and rising energy prices. Unemployment is high and mortgages are dicey, but people are not giving up their homes or their cars. What they are doing is eating out less often and being a little more careful how they spend their money, yes, even their food dollars.

There’s speculation during this current year of the disappearance of second- and third-tier brands. Devoted brand-followers will continue to spend a little more on their favorites but may turn to private label or economy brands whenever they perceive little or no difference in quality.

“For the first six months of 2008, the producer price index for ‘intermediate foods,’ the food products used in the production of final food products, rose 15 percent, following a 14 percent jump in 2007,” says Kevin Flaherty, senior vice president and senior research analyst with GE Commercial Finance. “That’s the most severe inflation since the 1973-74 period.”

He also notes that, in the first half of 2008, retail food store sales growth outpaced restaurant sales growth for the first time since 1993, when the U.S. Census Bureau began tracking those metrics.

There are a couple of new names on the list … but only new names for old companies.

Swift, which was owned by a holding company, in the past reported some figures to the Securities and Exchange Commission that were public record. But since its mid-2007 acquisition by Brazilian meat processor JBS S.A., and subsequent renaming to JBS Swift & Co. (sometimes referred to as JBS USA), the U.S.’ third largest meat packer has been mum about financials. Following its organic growth in the general press, we assigned it only slight growth for the past year. But next year its sales should climb significantly with the pending purchases of National Beef Packing, Smithfield Foods' beef operations and Five Rivers Ranch Cattle Feeding.

Also semi-new is Dr Pepper Snapple Group. The North American beverage operations of Cadbury Schweppes PLC were spun off into an independent company on May 7. They accounted for $5.7 billion of what last year was $7.6 billion in U.S. and Canadian-based sales of Cadbury Schweppes.

Mergers & Acquisitions: Up and Down

Mergers and acquisitions in the broad food industry increased 5.4 percent in 2007 to their highest level in five years, but activity among true food processors dipped to 94, the same level as 2005 and down from 110 in 2006. In the Food Institute’s annual report, food processors remained the most active category, although just barely outpacing the interest by investment firms and banks. (The 266-page report “Food Business Mergers & Acquisitions” can be previewed and bought from the Food Institute at www.foodinstitute.com/manda.cfm.)

In 2007, the institute’s broad “food industry,” which includes restaurants, retail stores and even suppliers, saw 413 transactions completed during the year and an additional 60 agreed upon but not closed by the end of the year. That’s the highest number since the 487 deals closed in 2001.

Twelve of the categories tracked by the Food Institute saw increases in merger activity, while 11 saw a decrease and four were flat.

For many years, the Food Institute, Elmwood Park, N.J., has published Food Business Mergers & Acquisitions. The institute annually tracks merger and acquisition activity in 27 categories. Most are detailed in the table below, although we have deleted packaging & equipment suppliers and subcategories within restaurants & foodservice, retailers, and wholesalers & distributors.

Within the food processing ranks, multi-product manufacturers again was the busiest sub-category, with 32 deals, down from 43 in 2006. Dairy, brewers-distillers-wineries and “other” also were active subcategories.

Although investment firms mostly targeted restaurants (39 of the 89 transactions), there were some notable acquisitions within the food processing sector. The Blackstone Group, through its affiliates, acquired Pinnacle Foods Group Inc. (Duncan Hines baking mixes, Vlasic pickles, Hungry Man and Swanson frozen dinners) for approximately $2.16 billion in cash. SIG Strategic Investments LLLP acquired substantially all of the assets of U.S. Mills Inc., which markets cereal and snack food brands, including Uncle Sam, Erewhon, Farina, New Morning and Skinner’s.

Some of the biggest deals of 2007:

  • The still-brewing merger of the U.S. and Puerto Rican operations of their respective subsidiaries, Molson Coors Brewing Co. and SABMiller PLC – essentially a merger of brands Miller and Coors. The result will be a $6.6 billion company.
  • In meat & poultry, JBS S.A., the largest beef processor in Latin America, bought Swift & Co. for $1.4 billion. Smithfield Foods acquired Premium Standard Farms, for $800 million. Pilgrim’s Pride Corp. became the world’s largest chicken company by production by getting Gold Kist Inc. for $1.1 billion
  • Ralcorp Holdings Inc. on Aug. 4 completed the acquisition of the Post cereals business from Kraft Foods in an all-stock transaction valued at approximately $2.6 billion.
  • In confectionary, Switzerland-based Barry Callebaut sold its U.S. business, Brach's, to Farley's & Sathers Candy Company Inc.; Campbell Soup Co. sold its Godiva business to Yildiz Holding; and The Topps Co. was bought by Tornante Company LLC and Madison Dearborn Partners LLC.

The Food Institute report also noted the trend of larger conglomerates purchasing smaller, health-focused companies and brands -- namely, Coca-Cola Co.’s purchase of glacéau and Fuze, PepsiCo’s purchase of Naked Juice, and Kellogg’s purchase of Bear Naked granola.

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