2010 Capital Spending Outlook: Pent-Up Demand Causes an Explosion in Projects

After last year's drop in capital expenditures, budgets for the Food Processing Top 100 survey group are up 19 percent for 2010.

By Dave Fusaro, Editor in Chief

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With an improving economy and pent-up demand for plant improvements, capital spending in the food & beverage industry this year should be up a whopping 19.3 percent, according to Food Processing research. That comes on the heels of an 8.7 percent decline in actual spending in 2009, the first drop we detected in the five years we've been doing this annual outlook.

Our survey of the 32 public companies in our Top 100© list turned up a total of $13.644 billion in capital expenditures budgeted for 2010, up from the $11.439 billion the same companies actually spent in 2009.

A couple of huge companies accounted for a couple of huge increases – PepsiCo, for instance, raised its industry-leading 2009 outlay by 71 percent to $3.6 billion, and Tyson Foods' budget is up 63 percent. But it's not just a few biggies: of those 32 top companies we track, 24 were budgeting increased capital spending for 2010; only three were forecasting decreases.

The reason for the PepsiCo increase is twofold. "First, we spent less in 2009 than in 2008 or 2007. Second, we completed the mergers with our two largest bottlers, PepsiAmericas and Pepsi Bottling Group, earlier this year and we are a bigger company now -- nearly $60 billion," says a spokesman. "In 2010, we do plan to invest in our business, particularly in the areas that will support growth -- such as fleet, coolers, and SAP. We also have a strong focus on emerging markets."

"A lot of people didn't pull the trigger on big projects last year," says John Gunst, packaging design manager at Power Engineers (www.powereng.com/food), Boise, Idaho. He said his company saw the turnaround coming long before the end of 2009, "and it shows no signs of slowing down."

Capital Spending Top Projects in 2010

Our annual report last year at this time foretold the first budgeted decrease in capital expenditures that we had seen. At the time of our report, it was just a 2.9 percent decline. But as the recession deepened, more and more discretionary projects were put on hold. The result was an 8.7 percent decline in actual 2009 spending versus 2008. In fact, 2009 actual spending was 5 percent below what those companies budgeted for the year.

For example, Tyson, which has a fiscal year starting Oct. 1, originally budgeted $600 million for its FY2009, but asked us last April to pencil in a figure of $500 million; the company ultimately spent $368 million.

Fourteen of the companies for which we have a complete set of figures spent less than they budgeted last year; only five spent more.

The first hints of a recovery in food & beverage manufacturing came when we took our annual Manufacturing Trends Survey between Thanksgiving and Christmas; results were in our January issue. Sixty-eight percent of respondents predicted some increase in production this year, and 16 percent foresaw an increase of 20 percent or more. Sixty-six percent expressed optimism coming into the new year. Fifty-five percent of those who knew the figures said their company's capital spending budget would be increasing over 2009 funding. And 60 percent of those familiar with the situation said their plants had deferred important capital projects in 2009 because of the economy.

Despite the fresh memory of the recession, there appears to be a surprising number of greenfield plants on our list this year – and most of those were started during the dark days of 2009. Maybe it was cheap capital or government incentives, but some heroic food & beverage companies continue to build.

Financial incentives played a significant role in ConAgra's decision to build a $155 million plant in Delhi, La. (it's projected to cost $200 million with scheduled upgrades). It will turn local sweet potatoes into foodservice fries for ConAgra's Lamb Weston division.

Louisiana also landed what may be the world's largest sugar refinery, a $120 million joint venture among Imperial Sugar, Cargill and local cooperative Sugar Growers and Refiners Inc. It's being built adjacent to an existing but aging Imperial facility in Gramercy. The project has created 500 construction jobs and should employ 145 when it comes on line in early 2011. It's equally owned by the three partners and was subsidized by federal and state funds to help the region recover from Hurricanes Katrina and Rita.

Coca-Cola Bottling Co. of Shreveport, La., began construction on a $10 million warehouse and distribution center to replace its existing facility there.

Elsewhere, Sara Lee is building a $130 million plant in Kansas City, Mo., to process deli meats for both retail and foodservice under the Hillshire Farm and Sara Lee brands. The 187,000-sq.-ft. facility, which will employ more than 250, should be running in 2011.

With two years of independence under its belt, Dr Pepper Snapple Group is completing its first major capital project, a $120 million bottling and distribution center for the West Coast, in Victorville, Calif. A former Air Force base there is being developed into a distribution hub for a number of companies. The Dr Pepper plant will be 300,000 sq. ft. with 550,000 sq. ft. of warehouse and shipping space.

It may only be an expansion, but it's a big one: Unilever is spending $100 million to enable its Covington, Tenn., plant, which has been producing Slim-Fast products, to make ice cream and frozen novelties (Breyers, Klondike, Good Humor and Popsicle products). The expansion will include the construction of 32,000 sq. ft. of freezer space. Slim-Fast and ice cream in the same plant -- ironic?

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