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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Changing tastes and trends

The trend at some of the industry’s most venerable companies is less positive. Dwindling category-wide sales of chewing gum led to Wrigley’s recent announcement it would shutter is Toronto manufacturing facility in March 2016, with production shifting to Gainesville, Ga. H.J. Heinz also is rationalizing production in the wake of its acquisition by Berkshire Hathaway and 3G Capital [although before its announced merger with Kraft], with six announced plant shutdowns so far. One is a former Ore-Ida facility in Pocatello, Ida., which closed in June. Speaking of Kraft Foods, it plans to shutter a Woburn, Mass., facility by year end.

When one door closes, another opens. Americans may be french-fried out (a $100 million McCain Foods project in Idaho is on hold), but their appetite for natural and organic vegetables is increasing. The ammonia compressors in Pocatello had barely cooled when Amy’s Kitchen announced it would invest $76 million in the 500,000-sq.-ft. facility to produce frozen vegetarian meals. Production resumed in December.

Maxed out on capacity, Amy’s is riding one of the most aggressive growth curves in the industry. Last year’s sales far exceeded projections and would have been up 30 percent if the company could have kept up with orders. Besides the Idaho facility, the California-based company leased an additional 56,000 sq. ft. of production space in Santa Rosa, Calif., and added 130,000 sq. ft. to its Medford, Ore., plant. Amy’s also is building a greenfield in upstate New York, with a late 2016 start-up targeted.

Moving into Amy’s Idaho neighborhood will be Clif Bar & Co., an organic energy snack company that is building a bakery in nearby Twin Falls. A new-age food company, Clif Bar has followed a familiar path since its founding in 1992, functioning as a marketing organization without any manufacturing capacity. That will change next year, with the new facility providing greater product consistency, lower production cost and faster speed to market of innovative new products, according to spokesman Keely Wachs. Construction was scheduled to commence April 1.

While fast growth in both organic products and bar products should keep Clif’s bakery busy, mainstream industrial bakeries are struggling. The supermarket bread aisle is where flour goes to die. The president of George Weston Ltd. acknowledged as much in a recent conference call, saying the Toronto-based baker intends to shift focus from white bread and toward artisan and indulgent products sold through in-store bakeries. The firm intends to spend $470 million in 2015-16, primarily on “a couple of new greenfields” in the U.S., according to President Pavi Binning.

For multinational food companies, capital is being directed outside North America. A third of Hershey Co.’s capital expenditures this year will go to a new plant in Malaysia, bringing total investment in the facility to $265-275 million. The corporation’s total capital spending last year was $345.9 million.

Mondelez International continues to invest in North America. A greenfield opened in Salinas, Mexico, recently, and a new line in a Virginia mega-plant is expected to start up this month. But the real action is on other continents as the organization focuses on “changing our network around the world,” as Daniel Myers, EVP-integrated supply chain, told investors at a recent conference in Boca Raton, Fla.

By the numbers

New machinery and modern facilities are necessary for any manufacturer to remain competitive and to grow. Funding improvements typically rely on cash generated from operating activities. At all publicly traded companies and most private ones, capital expenditures compete with dividend payments, financing activities, acquisitions and other needs. Based on analysis of those 45 corporate financial reports, public food companies expended an average of 4.4 percent of sales on capital expenditures last year, ranging from 1.3 to 15.7 percent (download the chart for more information).

Process improvements rely on those fiscal line items. Those projects are far ranging and plant-specific, but a number of dairy processors are investing in whey process improvements. Isolation of specific elements adds significant value.

Glanbia Foods is adding whey protein isolate capabilities to its Idaho manufacturing complex. Davisco boasts of a novel processing solution in Jerome, Idaho, that will yield a 10-fold increase in 90-percent pure Alpha-lactalbumin. Calling it “an engineering marvel that required a substantial capital investment,” a spokesman says the high purity and tryptophan levels will allow Davisco to meet some of the accelerating demand for the ingredient from infant formula and nutritional beverage makers.

Shifting consumer expectations and market uncertainty are keeping many capital projects on hold, observes Mark Redmond, president of Cincinnati-based Hendon & Redmond Engineers. “There’s not much growth for the sake of growth anymore,” he says, but when profitable opportunities emerge, “the medium-size guys are a little more nimble” in seizing them.

Some of those opportunities: Same-store sales are declining at McDonald’s while Five Guys and other burger purveyors gobble market share. That creates an opportunity for bun bakers and other suppliers outside McDonald’s supply chain. They tend to be middle-market food companies.

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