For two years in a row, capital expenditures in the food processing sector have recovered … big time. Following a dismal 2009, in which a 15 percent drop in expenditures reflected the global economic crisis, companies budgeted 19.5 percent more for physical growth in 2010 (and actually spent 27 percent more) and have allocated a 20 percent increase for 2011.
To put a finer point on the recovery, our group of 33 companies rebounded last year with actual spending of nearly $14.7 billion, nearly $1 billion higher than they had budgeted. And for 2011, they're planning to spend 17.6 billion. In light of the $13.5 billion the same companies spent in 2008, this impressive bounce-back appears to be more than a mere rebound to pre-recession levels.
To be fair, we surveyed 32 companies in 2010 and 33 for 2011 (Pilgrim's Pride, in the midst of bankruptcy reorganization, did not respond last year). But even if we remove the $179 million Pilgrim's Pride spent in 2010, the remaining companies' actual expenditures total $14.48 billion, which is still 6 percent higher than what they budgeted.
While 33 companies is an admittedly small representation of the food & beverage industry, these are 33 of the largest companies in the U.S. and Canada. We look at the same group for this report each year.
Back to the future: The sustained levels of capital spending planned for 2011 almost perfectly match our Manufacturing Trends Survey report in January. That story, based on a survey held last fall, found that of those privy to their company's capital spending budget, 64 percent foresaw at least some increase in capital spending this year.
"Food processing is the biggest part of our manufacturing industry in Georgia, and we've seen an increase in the number of those companies seeking locations or expansions over the last three years and the jobs they're creating," says Chris Cummiskey, commissioner of the Georgia Dept. of Economic Development. "That's a good indication to us that the industry is in an expansion mode."
Capex as a cost-cutter
There are various reasons for the sustained, strong comeback of capital expenditures, or capex, in this low-margin industry. Some companies simply may need to update aging facilities, while others are closing plants to consolidate under fewer, newer roofs.
"Most projects being considered are those that have been 'pipelined' for quite some time," says Bob Graham, vice president of the food and consumer products group at The Austin Co. Those who delay past a certain point reach a point of "bottoming out" and can no longer put-off production, maintenance or other projects.
Graham says his firm has "a number of projects in the food/consumer products sector -- which we have worked on for site selection and preliminary engineering/cost estimating [but] have been on hold for 12, 18, 24 months -- which are now showing signs of life after a period of dormancy."
In domestic U.S. projects, Graham sees adaptive reuse or repurposing existing structures or facilities as the trend, winning out over ground-up greenfield projects. That's "due [in part] to a large inventory of empty structures available in the marketplace at present."
Since the 2009 dip, spending attention has decidedly turned from just getting by to investing in future savings and new revenues. It's impossible to ignore the strategic nature of multi-year initiatives to reduce waste and boost efficiency in a competitive, low-margin industry.
Such initiatives are most prevalent among the largest companies. Examples include Hershey's Project Next Century, General Mills' global Holistic Margin Management (HMM) initiative and Kraft's Integration Program related to its Cadbury acquisition. For every penny spent by a leading global company, there's a reason, and it's probably linked as closely to the CFO's office as it is to the conference room where goals and shared-values exercises are carried out.
"There's not a lot of growth in packaged foods at the end of the day," says Bryan Hunt, senior analyst covering the food industry for Wells Fargo Securities.
"So for these companies to show improvements in cash flow and shareholder value, one of the big mechanisms for generating increasing returns or at least stable cash flow is to extract efficiency gains, through capex either in manufacturing or technology."
Kraft Foods' $1.8 billion capital spending budget includes systems investments and its Integration Program focused on Cadbury, for which it paid $9.8 billion last year. Costs for that program were $657 million last year, and the company foresees "total integration charges of approximately $1.5 billion in the first three years following the acquisition to combine and integrate the two businesses." In exchange for the spending, the company expects cost savings of at least $750 million, accompanied by new revenues resulting from expected synergies.
General Mills' $700 million budget for fiscal 2011 is slated for initiatives to increase manufacturing capacity for cereals and Yoplait yogurt and to expand international production capacity for Wanchai Ferry and Häagen-Dazs products. Additionally, the company is continuing its HMM initiative to root out waste and costs across all operations and throughout the supply chain.