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Click the image to watch a short video of Dave Fusaro explain the results of the survey.
The general economic weakness present at the beginning of 2008 blossomed into a full-blown, worldwide financial crisis by the end of last year. Ongoing uncertainty over when the U.S. will emerge from recession makes it difficult to forecast capital spending for 2009. Further, the caustic financial environment has dampened the appetite among many U.S. food and beverage processors for new plants and facilities and the debt those projects often require.
The numbers in our annual capital spending survey are a mixed bag. Eleven of the 20 largest publicly held food & beverage companies are budgeting more in capital expenditures this year. Only seven anticipate a decline. But the size of the minuses far outweighs the sum of the pluses.
Among those 20 companies, we’ve identified $9.560 billion in new spending, down 2.9 percent from the $9.845 billion those same companies actually spent last year. Those seven companies that are budgeting less capital spending are cutting it an average of more than 28 percentage points. As a means of comparison, last year 15 of the largest food companies expected to increase capital spending.
It’s a case of acquisitive companies versus those in tough market segments. For instance, the companies budgeting the biggest increases are doing so largely because they made blockbuster acquisitions last year that greatly increased the size of their companies. That was the case with Ralcorp (www.ralcorp.com) (capital expenditure budget up 130 percent), which increased sales by about 50 percent by acquiring the Post cereals business from Kraft. Ralcorp, previously only a private-label cereal producer, also is benefiting from some consumer downshifting to less costly store brands.
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(www.smuckers.com) plans to increase its capital spending by 55 percent, largely to maintain the huge Folgers coffee business it acquired last year from Procter & Gamble.J.M. Smucker Co.
While Tyson (www.tyson.com) first budgeted a 47 percent increase (to $600-650 million) for this year (its fiscal 2009 started back on Sept. 28, 2008), recent public statements are ratcheting that figure down to below $500 million. In addition to its core businesses, Tyson’s spending on recent acquisitions in Brazil and China and its alternative fuels joint venture plant.
Not all increased spending was due to acquisitions. Campbell Soup Co. (www.campbellsoup.com) plans a 34 percent increase in capital expenditures in 2009, even though it sold off Godiva chocolate last year. However, it underspent its budget by 25 percent last year.
Those hearty increases in capital spending could not offset budget cuts of 57 percent at Smithfield Foods (www.smithfieldfoods.com), 52 percent at DelMonte (www.delmonte.com), 39 percent at Molson Coors (www.molsoncoors.com) and 32 percent at Hershey Co. (www.hersheys.com) Actually, all four of those companies budgeted capital investment decreases last year, but then greatly overspent.
“While many larger companies are forging ahead with modest capital expenditure plans – due in large part to growth associated with more consumers cooking at home and ongoing initiatives aimed at increasing operating efficiencies – companies operating in more discretionary product categories have been hit hard by the deepening recession,” says Tony Perazzo, audit partner in Grant Thornton’s Greater Bay Area offices. “This, coupled with difficulty accessing credit in the current economic environment, is causing many companies to be cautious in 2009 capital spending. Many companies are postponing capital projects to 2010, in anticipation of a slow economic recovery.”
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Animal protein companies appear to be particularly hard hit. Most saw margins fall last year as increasing supply met with weakening demand, all of which collided with soaring feed costs – the last of which was exacerbated by loss-making hedges when corn prices started to decline.
The worst victim is Pilgrim’s Pride (www.pilgrimspride.com), which declared bankruptcy in December 2008 because of market conditions and debt incurred in its 2007 acquisition of Gold Kist. While normally a key component of our capital spending index, the company has suspended its duty to file reports.
Smithfield Foods forecasts its second annual double-digit decline in capital spending (although it overspent last year). The company also plans to close six plants and shed 1,800 jobs in 2009, according to a recent report in The Wall Street Journal. The world’s largest pork processor (by revenue), Smithfield is planning to cut production by 10 percent in 2009.
While the percentage change is small, PepsiCo (www.pepsico.com) budgeted a large capital expenditure cut in dollar terms ($170 million) from its previous year’s capital spending, reversing its trend toward higher capital expenditure forecasts. Interestingly, the company spent $300 million dollars less on capital expenditures in 2008 than it had originally forecasted.
Projects in focus
The shift in consumer spending has a silver lining for some food companies, as consumers opt for home cooking. This trend might explain the optimism among the few companies that are moving forward with new plants and expansions.
Baby food apparently is a hot category. Beech-Nut Nutrition Corp. (www.beechnut.com), subsidiary of Switzerland’s Hero AG, is nearing completion of a $124 million, 635,000-sq.-ft. headquarters and manufacturing plant near Florida, N.Y. The combined buildings, which should be operational later this year, should maintain 356 jobs from other Beech-Nut facilities plants in the area and create another 135 jobs. The company’s headquarters was in St. Louis. Beech-Nut is applying for Leadership in Energy and Environmental Design (LEED) certification for the new buildings.
Gerber Products (www.gerber.com), now a unit of Nestle SA, plans to expand its baby food production facility in Freemont, Mich.
A Delphi Corp. automotive parts plant in Coopersville, Mich., once valued at nearly $33 million apparently has been bought for $4.4 million and will be converted to a cheese plant.
Arizona Maricopa Associates LLC, a dairy conglomerate with milk and cheese operations in the Southwest, successfully bid on the 300,0000-sq.-ft. former factory, according to the Grand Rapids (Mich.) Press. The factory was built by General Motors Corp. in 1980 and became part of GM-affiliate Delphi Corp., which closed the building nearly two years ago. The plant once employed 680. Delphi is now under bankruptcy protection.
Nestle (www.nestleusa.com), meanwhile, just this March started up its largest ready-to-drink aseptic products (Nesquik and Coffee Mate) plant in the world. When fully operational in 2011, Nestle will have spent $529 million on the 880,000-sq.-ft. facility (it’s also a distribution center) in Anderson, Ind., the largest single capital investment in the Swiss company’s history. It, too, is seeking LEED certification.
Heinz (www.heinz.com) is building a new manufacturing facility in Florence, S.C., to support its “high-growth frozen meals business” in North America (Weight Watchers, Smart Ones and Boston Market frozen entrées). According to county documents the initial investment in the plant will be $105 million. The new 225,000-sq.-ft. factory that will create 350 new jobs and should open in the third quarter of this year.
General Mills (www.generalmills.com) will expand its breakfast cereal plant in Albuquerque, N.M., at a cost of $100 million. It employs 190, but should add another 60 workers and 160,000 sq. ft. by the first quarter of 2010.
Flowers Foods (www.flowersfoods.com) is spending $6.1 million to continue building a 200,000-sq.-ft. bakery in Bardstown, Ky.