2015 Capital Spending Report: Expansion on the Menu

Companies with products in tune with today’s food trends and demands are investing a lot of capital. Our annual analysis predicts an 8 percent increase in capital spending this year.

By Kevin T. Higgins, Managing Editor

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Horace Greeley’s “Go West, young man” advice wasn’t about direction, it was about opportunity. If Horace was advising today’s food and beverage industry, something more along the lines of “Go gluten-free” would be his suggestion of where to invest capital.

Threshold levels of spending are necessary simply to stay in the game, and even the most financially stressed food and beverage companies commit one or two percent of sales to capital expenditures each year. Investments in big-ticket projects, on the other hand, go where the opportunities lie, and today’s opportunities are different than yesterday’s. The changes are reflected in the greenfield plants being built.

Craft beer, Kentucky bourbon and the only white meat are on Americans’ shopping lists, and capital is flowing to projects involving all three.

Our analysis of financial statements from 45 of the largest food and beverage companies turns up more than $21 billion in capital spending budgeted for 2015. That's 8 percent more than those same companies spent last year ($19.7 billion) and about the same as they budgeted – meaning, as a group, they underspent, which is not uncommon. Eight seems to be a magic number, as this group spent about 8.7 percent more in 2014 than they did in 2013.

Lactose intolerance and dairy-free milk are other dietary hot buttons, and the divergent fortunes of Whitewave and Dean Foods are a stark example of how that impacts capital spending.

Plant-based foods of all types and organic milk are fast growing categories, and WhiteWave’s capital expenditures are increasing at double-digit rates. Dean, on the other hand, was left with the fluid milk side of the business when WhiteWave was spun off in 2012. Milk sales are declining almost as fast as plant-based milks are growing, as reflected by the dozen dairies Dean has closed in recent years, with more to come. Dean’s ratio of capital spending to sales revenue is among the industry’s lowest.

Some of the biggest projects currently under way involve poultry. These processors are coming off a banner year, thanks in part to a moderation in feed costs but also because of shortages of other proteins. Porcine epidemic diarrhea virus severely impacted breeding programs and resulted in a shortfall of 8-9 million pigs coming to market in 2014, estimates William Sawyer, a food and agribusiness analyst with Rabobank International, New York.

Pork processors have put the problem in the rearview mirror, and America’s supermarkets soon will be awash in hams and pork chops. In the mean time, high beef prices are helping sustain chicken as a popular option for America’s dinner tables.

Today’s poultry building boom ends several years of inactivity. When market conditions soured in 2012, Sanderson Farms scrapped a greenfield poultry project in North Carolina. The firm recently opened a $124 million complex in Palestine, Texas, and announced a $139 million project in southeastern North Carolina.

An even more ambitious poultry project is under way in Arkansas, where Peco Foods is building a $165 million feed mill, hatchery and processing facility. And a $100 million brownfield in Millsboro, Del., involving a 470,000-sq.-ft. facility is awaiting a green light from Allen Harim LLC, a division of a Chinese holding company that acquired an old-line Delaware poultry processor four years ago. Natural and organic chicken supplier Bell & Evans is finalizing details of a construction project in Fredericksburg, Pa., that will double capacity by 2017.

Automation and market trends are sparking major investments in bourbon production. In the run-up to last year’s acquisition by Japan liquor giant Suntory, Jim Beam invested heavily in increased capacity and warehouse modernization and expansion. Brown-Forman Corp. did the same, more than doubling capital expenditures from 2012 to 2014, much of it going to its Jack Daniels Distillery. Tourism on the bourbon trail also was booming, and some of the funds went to visitor centers.

About half of U.S. distilled spirits are produced in Kentucky. Smaller bourbon producers in the state also are lavishing capital on capacity expansion and automation. The Sazerac Co., a private distiller associated with downscale brands like Fireball cinnamon whiskey, is plowing $71 million into warehouses equipped with automated storage and retrieval systems at Buffalo Trace and Glenmore, two of its Kentucky distilleries, plus capacity expansion at the Barton distillery. A $2.2 million expansion of the Buffalo Trace visitors center and tasting area also is in the works.

Less visible are the investments in boutique bourbon production. Ten-fold growth in craft distilling has occurred in the last decade, with hundreds more in the pipeline. “They’re buying historic buildings, converting them to boutique distilleries with a tasting room and gift shop,” reports Tyler Cundiff, senior manager-food and beverage business development at Lexington, Ky.-based Gray Construction. Likening it to the craft brewing segment, Cundiff views it as the perfect complement to the growth of major bourbon makers. “It has been explosive for the last few years,” he says, “and it’s not slowing down.”

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