Top Food and Beverage Companies for 2009: Licking the Recession

N-E-S-T-L-E-S … Nestle make the very most … food sales.

Food Processing Top 100© Report for 2009

We've attached a PDF of the Food Processing Top 100© Report for 2009 to the online version of this article; however you can access the Food Processing Top 100© lists for both 2009 and 2010 on our interactive chart at www.foodprocessing.com/top100

For those of you old enough to remember that jingle, Nestle a few decades ago was largely a chocolate company. (The jingle ended “Nestle makes the very best … chocolate.”) Chocolate and candies remain, but they’re a shrinking part of the giant Swiss company which, at about $104 billion, claims to be the world’s largest food company.

The official corporate emphasis the past few years has been on nutrition, health and wellness. “Since Henri Nestlé [a pharmacist] developed the first milk food for infants in 1867, and saved the life of a neighbor’s child, the Nestlé Co. has aimed to build a business as the world’s leading nutrition, health and wellness company based on sound human values and principles,” the corporate web site states.

“I attribute our strong 2008 performance to two key things: Nestle employees, which give us our competitive advantage, and our relentless focus on the consumer,” says Brad Alford, chairman & CEO of Nestlé USA. “We are focused on anticipating and responding to consumers’ needs, including making more nutritional choices.”

The strategy is working. With sales up nearly 14 percent in the past year (we combined U.S. and Canadian sales), Nestle USA & Canada completes its multi-year climb to the top of our Top 100© list.

The Swiss parent also did well. More important than the 2 percent rise in sales (to 109.9 billion Swiss francs) was a 69 percent leap in profit (to 18 billion Swiss francs).

If 2008 was the start of the current recession, you can’t tell it from at least the sales activity of the leading food & beverage companies. In what was undeniably a year full of challenges, the industry did fairly well. Only one of the 27 largest companies on the Food Processing Top 100© reported a decrease in sales, and 16 reported increases in net income, as well. Which, of course, means 11 were flat or worse off than they were in 2007.

Whether you take that as good news or bad news, the undeniably bad news is that five of those companies recorded net losses for 2007, the most we’ve seen in at least six years.

It’s difficult to figure how much the severe global recession affected the food & beverage industry in 2008, because technically the “perfect storm” did not hit until the fourth quarter of that year. But it seems everybody felt the recession coming, even before it was announced. Skyrocketing commodity and energy costs and then the sudden tightening of credit contributed to the general malaise. While the food & beverage industry weathered the storm better than most, the recession undeniably took its toll.

““I attribute our strong 2008 performance to two key things: Nestle employees, which give us our competitive advantage, and our relentless focus on the consumer. We are focused on anticipating and responding to consumers’ needs, including making more nutritional choices.””

- Brad Alford, chairman & CEO of Nestlé USA

All the headline financial troubles of the past year came together to undo Pilgrim’s Pride (No. 12). The company filed for court protection under Chapter 11 of the bankruptcy code just days before unveiling a $999 million loss for its fiscal 2008, which ended Sept. 27, 2008 – and that despite increasing sales by nearly a billion dollars.

It was not a good year to be one of the largest chicken companies in the U.S. and Mexico. First of all, it got so big with an aggressive purchase (in January 2007) of its chief rival, Gold Kist, for $1.1 billion, following a year in which both companies recorded net losses. Some of the debt for that transaction got caught up in the credit crunch that coincided with the start of the current recession.

Plus, “Over the past year, Pilgrim’s Pride has faced a number of significant challenges including high feed-ingredient costs, an oversupply of chicken, weak market pricing and softening demand,” said President/CEO Clint Rivers, who was forced to resign days after the bankruptcy filing. “After careful consideration of all available alternatives, the company’s board of directors determined that a Chapter 11 filing was a necessary and prudent step.”

Days later, Don Jackson, president of another competitor, Foster Farms’ poultry division, took over the combined duties of Rivers and COO Robert Wright.

The story was much the same at No. 8 Smithfield Foods. “Fiscal 2009 was a year of unprecedented challenges,” President/CEO C. Larry Pope wrote in the annual report. “The combination of record input costs, an oversupply of hogs, a worldwide recession and A(H1N1) influenza led to our first annual loss in more than three decades.”

The other top companies recording losses for 2008 all had different reasons: Sara Lee (No. 16) was still reorganizing. Sophomore Dr Pepper Snapple Group (No. 20) was still getting started. Maple Leaf Foods (No. 23) was devastated by a food recall.

On the other hand, No. 37 Interstate Bakeries Corp. emerged from four years of bankruptcy protection on Feb. 3 of this year. Despite its $144 million loss in its fiscal 2008 (which ended June 2, 2008), the baker of Wonder Bread and Hostess Twinkies got concessions from its unions (in return for some stock) and a buyout by private equity firm Ripplewood Holdings and possibly other investors. On next year’s Top 100© it will show up as a private firm.

There are some new names on this list. Anheuser-Busch adds InBev to the end of its name, the result of the biggest merger/acquisition of 2008. SAB Miller and Molson Coors combined their U.S. operations into No. 27 MillerCoors. Because of its large Canadian component, Molson Coors remains on our table, but SAB Miller is gone.

Wm. Wrigley Jr. Co. (last year No. 53) was acquired in October by Mars Inc. While Wrigley has disappeared, since it was not required to file an annual report, Mars’  gures on the table do not include Wrigley sales. The U.S. bakery businesses of Canada’s George Weston Ltd. were sold in January 2009 to Mexico’s Grupo Bimbo, which debuts at No. 29. Weston remains, although a little smaller at No. 52.

With its December 2007 acquisition of FPI Ltd., High Liner Foods. doubled in size and bows this year at No. 97.

Acquisitions Slowed in 2008

Source: The Food Institute The full report, “Food Business Mergers & Acquisitions 2008,” can be previewed and bought from the Food Institute at www.foodinstitute.com/manda.cfm.

To no one’s surprise – and following two consecutive years of growth -- merger and acquisition activity in the food industry declined approximately 8.5 percent in 2008, with 35 fewer mergers completed last year than in 2007, according to the Food Institute.

However, activity by true food processors actually increased by a third, to at least a six-year high of 129 deals, with 11 more announced but not completed by year end. The Food Institute defines the food industry broadly, including in its analysis agricultural cooperatives, packaging and equipment suppliers, restaurants, retailers and other categories. In 2008, as in most years, food processors were the busiest.

Within the food processor category, multi-product companies effected the most mergers and acquisitions (also an annual leader), totaling 30, followed by brewers/distillers/wineries with 11 deals and meat companies with 10.

There was a sharp drop in investment firms and banks buying food companies, also probably no surprise given their instability, the global recession and the tightness of credit.

“It is difficult to estimate how much the severe global financial troubles affected the merger and acquisition activity within the food industry in 2008, particularly because the floor did not drop until the fourth quarter of the year,” said the report. “Also … many deals were already in the works prior to November, and to cancel any deals may have resulted in substantial monetary penalties.

“Skyrocketing commodity costs also may have contributed to apprehension on the part of purchasers involved with food industry merger and acquisition activity. Though it is impossible to clearly draw connections between the economic turmoil of 2008 and its effects, it is evident that investment firms and banks, which cast a large shadow on the food industry in 2007, exhibited a diminished presence in 2008,” according to the report.

Among food processors’ subcategories, four engaged in fewer deals in 2008 than in the previous year: dairy, multi-product, poultry and snack food segments.

Bakery activity was up significantly. One of the year’s biggest deals involved the sale of a George Weston Ltd. subsidiary’s U.S. fresh bread and baked goods business to Mexico-based Grupo Bimbo, one of the world's largest baking companies. The deal was made for gross and net cash proceeds of approximately $2.5 billion. The assets include the Arnold, Brownberry, Entenmann's, Freihofer, Stroehmann and Thomas' brand names. Flowers Foods also made two acquisitions, Butterkrust Bakery Inc. and Holsum Bakery Inc.

But the biggest deals of the year involved brewers. Global but Belgium-based InBev bought Anheuser-Busch Cos. For a whopping $52 billion. The combined company was renamed Anheuser-Busch InBev and is the world’s largest beer company, passing SABMiller.

In order to better challenge Anheuser-Busch InBev on American soil, SABMiller PLC and Molson Coors Brewing Co. – themselves both recently merged companies -- on June 30, 2008 created joint venture MillerCoors, combining America’s No. 2 and 3 brands.

For confectioners, 2008 was the second year of M&A growth, with two more deals completed than 2007’s five. The most noteworthy was Mars Inc.’s foray into the chewing gum category with the $23 billion buy of Wm. Wrigley Jr. Co. -- the second most expensive single deal listed in 2008. Wrigley will retained its Chicago headquarters and will operate as a separate business segment, alongside the existing Mars’ business units of chocolate, pet care, food, drinks and symbioscience.
Also of note in the category was the closing of the sale of Godiva Chocolatier Inc. by Campbell Soup Co. to Yildiz Holding A.S. of Israel. The deal, which was announced in 2007 but not completed until last year, was for $850 million.

Other notable deals:

• JBS S.A. bought Smithfield Beef Group.
• J.M. Smucker Co. bought the Folgers coffee business from Procter & Gamble.
• Ralcorp bought the Post cereals business from Kraft.

In the Dairy segment, mergers and acquisitions activity was more in line with 2006 and 2005 totals, totaling seven completed compared with 2007’s 11 mergers. Agropur made some noise in 2008, acquiring Trega Foods and Schroeder Milk, after remaining quiet in the U.S. market and making only one other deal since 2002. Cal Maine Foods, the largest producer and distributor of fresh shell eggs in the U.S., also made news by acquiring the majority of the assets of Zephyr Egg Company and increasing its stock with approximately two million laying hens in modern, in-line facilities.

Top-Line Growth, Bottom-Line Erosion

Most food and beverage manufacturers were glad to bid farewell and good riddance to 2008. Increases in fuel and commodity prices wreaked havoc on profit margins during the year. Because of general declines in consumer demand, most manufacturers were not able to pass these increases on in the form of price increases.

While in many cases, top line revenues increased, profits [as a percent of revenue] declined almost across the board. As commodity prices increased during the early part of 2008, demand declined which ultimately brought commodity prices down during the latter part of 2008 giving many manufacturers a needed respite. This decrease in commodity prices has continued in 2009 along with sagging demand. If manufacturers can hang on to their top line revenue, 2009 might end up being a good year for them.

Generally, food & beverage companies have beaten the market over the past two years, with food companies down approximately 20 percent compared to the broader market being down 38 percent. Although many of the food companies in the survey experienced declines in their gross profit margins as a result of higher fuel and commodity prices, they fared much better than other industries, with most of the companies remaining profitable in a very tough economic environment.

For example, Kraft’s 2008 gross profit margin was approximately 33.2 percent compared to its five-year average gross profit margin of 34.9 percent. Tyson, which is still struggling with higher interest costs, had a gross profit margin of 4.6 percent compared to an average of 5.6 percent. PepsiCo’s 2008 margin was 52.9 percent compared to its five-year average of 54.9 percent. Smithfield Foods, which is struggling to stay in the black, had a gross profit margin of 5.1 percent compared to a five-year average of 9.9 percent. All of these companies experienced top-line growth and bottom-line declines.

The winners for 2008 were those companies that effectively addressed their internal cost structures and managed their commodity costs. For the companies that were successful in doing so, 2009 should be a very promising year with higher gross profit margins due to lower commodity and fuel costs. They should emerge from this economic downturn much more efficient enterprises. Those companies that are not successful in reducing costs or that entered this economic downturn with too much debt on the books may cease to exist or be taken over by more efficient enterprises.

Lean manufacturing principles also received a boost in 2008. More than half of all U.S. manufacturing plants have implemented lean principles, according to a survey of U.S. manufacturers. There is still room for improvement as many countries are not as far along as the U.S. in adopting lean. Most manufacturers are working hard to increase productivity measured by production per employee or sales per employee.

There are also many dangers on the horizon such as more regulation of the food supply expected in 2009 and the other governmental proposals such as health care reform. The added cost of compliance with new mandates may very well offset the lower commodity costs expected for 2009.

— By Dexter Manning, National food & beverage industry leader, Grant Thornton LLP

The Fruits and Vegetable food producer segment posted similar results to its 2007 totals, with one more completed acquisition this year. The deals made in the category were mostly made between fruit and vegetable processors such as the Taylor Fresh Foods and Foxy Foods’ fresh produce processing operations and the Driscoll’s Strawberry Associates shareholdings increase in Driscoll’s of Chile. Other notable deals included the J.R. Simplot Company purchase of retail agricultural business H & R Ag. Inc. and the acquisition of Sunrise Growers-Frozsun Foods by an affiliate of Sun Capital Partners, Inc.

For Meat processors, 2008 was a blockbuster year compared with 2007. After only two completed acquisitions in 2007, the category saw 10 completed in 2008. Cargill Value Added Meats made two acquisitions, acquiring the assets of Willow Brook Foods and its brands as well as the purchase of Carneco Foods LLC from Lopez Foods, Inc. and Tyson Foods/IBP. Tyson Foods sold its Jordan’s, Deutschmacher, Kirschner, Essem, Tasty Bite and Willams of Vermont brands to privately owned and operated Kayem Foods Inc. of New England. JBS S.A. was involved in two very large deals with very different outcomes, first acquiring Smithfield Beef Group Inc. from Smithfield Foods Inc. The proposed acquisition of National Beef Packing Co. by JBS S.A. fell apart, however, after the company encountered fierce opposition by the U.S. Justice Department, which filed a lawsuit in federal court along with 13 states seeking an order against the deal. The lawsuit claimed the acquisition would create the largest U.S. beef packer, responsible for the slaughter of 35% of U.S. cattle. The JBS S.A. deals follow the 2007 acquisition of Swift & Company by J&F Participacoes S.A. which created the world’s largest beef processor.

Reporting the most mergers and acquisitions in the Food Processor category in 2008, Multi-Product processors registered a total of 30 completed deals, two less than the previous year and the second consecutive year the number decreased. The company with the largest presence among multi-product processors involved in M&A activity was The J.M. Smucker Co., which made three deals in 2008 after making two in 2007. In the Canadian market, Smucker entered into an agreement, through a subsidiary, to acquire Europe’s Best Inc., a Montreal-based privately owned frozen fruit and vegetable marketer. Smucker also acquired the Knott’s Berry Farm food brand from ConAgra Foods, Inc., and most significantly merged Procter & Gamble’s Folgers coffee business into The J.M. Smucker Company, its 10th No.1 brand in North America.

However, it was The Kellogg Company that was most active among multi-product processors, making four deals over the course of 2008. Expanding its presence in China, Kellogg acquired substantially all of the assets of Zhenghang Food Company Ltd. (Navigable Foods). Kellogg also made another international deal with the acquisition of Australia-based Specialty Cereals PTY Limited. In the U.S., Kellogg acquired Indybake Products LLC and Brownie Products Co. as well as the trademarks and recipes of Mother's Cake & Cookie Co. after Archway/Mother’s declared bankruptcy.

The Seafood Processor category posted three more acquisitions in 2008 than in 2007, but also three less than in 2006. All deals in 2008 were among seafood processors. The most significant deal of 2008 was the sale of Del Monte Corp.’s seafood business, which includes Starkist, for aproximately $359 million to the Dongwon Group, which produces about 75% of South Korea’s canned tuna. Also noteworthy was Trident Seafoods Corp.’s acquisition of Bear & Wolf Seafood Co. and its processing facility in Cordova, AK. Trident is a vertically integrated harvester, processor and marketer of seafood from Alaska, the Pacific Northwest and around the world.

While there was one less deal completed in the Snack Food processor category through 2008, the total was still significantly more than the totals reported in 2004 through 2006. PepsiCo closed an incomplete deal from 2007 by acquiring Brazilian snack company Comercio de Doces Lucky Ltda, and further expanded itself internationally by purchasing Penelopa, a Bulgaria-based producer and seller of branded nuts and seeds with a plant in Sliven. PepsiCo made three deals with global scope, including acquiring Spitz International Inc. of Canada. One notable trend in the snack food category was the acquisition of companies that manufacture healthy snacks such as granola, seeds and nuts. As more health conscious consumers look to purchase less processed and more natural snacks, larger food processors are looking at acquisitions to reach that market without making changes to their operations.

Finally, in the “Other Processors” category, an increase of 11 mergers and acquisitions was observed over 2007’s totals, and none was left unclosed. The Monsanto Co. sold its Posilac bovine somatotropin brand and related business to Eli Lilly and Co., while McCormick & Co. purchased the assets of Lawry's from Conopco Inc., an indirect subsidiary of Unilever N.V. Nutracea made two acquisitions in 2008, purchasing Irgovel, the largest rice bran oil processing facility in South America, and a production facility in Phoenix, AZ. Also notable was the purchase of Archer Daniels Midland Co.’s malting division by Malteurop, the world’s third largest malting company.  

A couple notes about how we arrive at these figures:

For all the foreign-based companies, we convert foreign currencies to U.S. dollars as of Dec. 31, unless otherwise directed by the company. Currency fluctuations can distort these companies’ real performance in their home currencies. The Canadian dollar was an extreme example. It actually was worth more than a U.S. dollar ($1.02) on Dec. 31, 2007; it was back to 82 cents at the end of 2008, which may make the 2008 figures of many Canadian companies seem low. One euro was worth $1.47 on Dec. 31, 2007; it got you $1.41 at the end of 2008.

And we attempt to count only value-added, consumer-ready products processed in U.S. and Canadian facilities. So all grocery store/packaged foods are included and even beef patties sold to McDonald’s … but not raw meat or even ground beef sold to another food processor, nor ingredients. Exports are OK, but not products manufactured overseas.