2013 Capital Spending Outlook: Processors Invest in the Tools of Production, Not Brick and Mortar

Balance sheets look strong, but food companies are holding the line on capital projects, projecting only a 5.4 percent increase this year.

By Kevin T. Higgins, Managing Editor

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Food safety is a big driver, particularly among protein processors, seconds Kurt Warzynski, process engineering manager at Jacksonville, Fla.-based Stellar. "There's also heavy growth in beverages now," and his firm is engaged in a number of projects for makers of energy drinks, all-natural refreshments and meal-replacement drinks. Indeed, one of the largest capital projects this year among publicly traded food companies is a $27 million beverage line relocation to Campbell Soup's Paris, Texas, plant.

Low-cost suppliers

In addition to food safety and capacity increases, a desire to be the low-cost provider drives many capital projects. The majority of AB-Inbev's capital expenditures are targeted at production improvements at its facilities, which now include four China breweries purchased in September for $400 million.

Many mid-market processors also are investing in their facilities to become or maintain their stature as the low-cost supplier in their segment. Red Gold, one of the last tomato canners still standing in a state that once boasted hundreds of operations, has poured more than $200 million into its three Indiana plants in the past 10 years. Automated, high-speed filling lines were installed in all three facilities in the past three years to help Red Gold take more share in foodservice and private label, where it is a supplier of ketchup, canned tomatoes, salsa and pasta sauces.

The financial crisis wreaked havoc on many small and mid-sized firms' balance sheets, but most have recovered and are able to borrow again to fund plant efficiency projects, according to Brad DeNoyer, leader of Baker Tilly's food and beverage lending portfolio. "There are some record profits being generated at all levels," says DeNoyer, who is based in the lender's Milwaukee office. "If their balance sheets are shored up, banks are ready to start lending again."

Baker Tilly takes a less favorable view of brick and mortar projects than investments for food safety upgrades, capacity expansions and initiatives designed to capture a bigger market share. Increasingly, those share gains are realized globally. The export market, DeNoyer notes, "is no longer just for the big guys. The world is really shrinking."

Exports were nonexistent seven years ago at CK Products, a niche supplier of pastry decorating supplies in Fort Wayne, Ind. Today, the company is shipping icings and other products to 62 countries, with Australia, Japan and the UK accounting for most of the activity. Exports now account for 20 percent of sales, and general manager Steve Burdick expects exports to accelerate as global customers discover CK's hard-to-source inventory. "We're like the Grainger of cake decorating," he boasts.

Mid-market companies on the East and West coasts and the Southeast are very active in export sales, "and it's the smaller guys who are driving California exports," suggests U.S. Bank's Hund. "Everybody is looking outward."

That includes U.S.-based multinationals, particularly protein processors who are leveraging the nation's farming efficiencies and world-class supply chain, she adds. Some countries require domestic production, and a common tactic is to partner with a local food company, learn the market and then acquire the partner.

That was Kellogg Co.'s approach in Turkey and China, two of the emerging markets that generate $2 billion in annual sales for the purveyor of breakfast foods and snacks. At a recent investment presentation, Kellogg pegged foreign sales at 14 percent of its total, behind the shares of pacesetters Kraft Foods (25 percent), H.J. Heinz (21 percent) and McCormick and Co. (16 percent).

Offshore production isn't always possible. To slake foreigners' taste for Kentucky bourbon, Beam Inc. is budgeting a double-digit capex increase for greater distilling capacity and more oak barrels. Superior raw materials availability prompted Oberto Brands to repatriate production a few years ago. The decision, along with the return of the Atkins diet, helped the Kent, Wash., maker of beef jerky double its sales. As a result, a second plant is opening this year in Nashville, Tenn.

Diet fads drive many consumption shifts and capacity expansions, some of which require facility expansions. In the coming years, those consumption shifts increasingly will occur in other countries, with U.S. food companies meeting the demand. Exports are growing despite the strength of the U.S. dollar.

"Right now, we're the prettiest dog in the pack," says Hund, but when foreign currencies gain strength, American-made food will become even more affordable overseas. That will drive food companies to install more high-speed lines, likely inside existing buildings.

This article originally appeared in the April 2013 issue of Food Processing Magazine.

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