There are a lot of mixed signals coming from the bigger half of the food and beverage industry on the subject of growth, primarily top-line growth. What makes matters worse is they come at the same time as a lot of headwinds from the general economy.
The stock market has been up and down like a ping-pong ball. President Trump has signaled he’s prepared to go to war over trade. The U.S. economy has recorded 16 consecutive quarters of gross domestic product growth, and many economists think that’s too many, that at least a small recession is due.
In this month’s issue, we take two looks at the food and beverage economy. Much of our cover story, is based on presentations at the annual Consumer Analyst Group of New York (CAGNY) meeting held every February. Balancing lower sales with aggressive cost-cutting was the theme the past two years, but this year top line sales growth was promised by every food and beverage CEO there. In fact, seven of the 25 largest companies have seen sales declines for three years in a row now, and two more eked out small upticks in 2017 after two straight down years. Not good.
Add in the anemic 2 percent increase in the capital spending budgets of at least 38 of the larger food and beverage firms, as chronicled in our annual Capital Spending Outlook. For better or worse, we’ve always seen more optimistic budgeting for capex, even if the actual spending at the end of the year is below what was budgeted. To see these companies budgeting this cautiously is worrisome.
I’m no economist, but I don’t see the kind of bubble created by the dot-coms 17 years ago, inflated housing prices or risky financial strategies of the big banks, all of which led to recessions. But I think 2018 is going to be a bumpier ride than most people and companies expect.
Figure in, too, the continuing pace of acquisitions. Every month, we report on some blockbuster. In our January issue, it was Campbell and Hershey buying their way into salty snacks. In February, Keurig merging with Dr Pepper, and Ferrero Group winning Nestle’s U.S. candy business. March had General Mills buying into pet foods. And now Smucker doing likewise.
With the exception of the Ferrero-Nestle deal, those purchases were big stretches, transformative for the acquiring companies. That’s a good thing, I guess, when you’ve been shoulder-deep in breakfast cerals and baking mixes for your entire business life and those categories are no longer growing. But it also shows an acknowledged lack of innovation and ability within your company.
More disturbing than the number of deals are the prices paid for some of these acquisitions. I still can’t believe General Mills paid $820 million for Annie’s (Homegrown) four years ago. But now $8 billion for Blue Buffalo? TreeHouse got Conagra’s private label business for a fire-sale price – $2.7 billion when Conagra had paid $6.8 billion for the business just three years earlier – and yet TreeHouse can’t seem to make product lines profitable.
Such acquisitions against the backdrop of falling sales and at least three years of cost-cutting tell me food and beverage companies are lacking the pricing power, organic growth and internal innovation to grow their companies from within. I’ll assume that’s not for lack of trying. And as we reported last month, numerous companies are using their tax reform windfall to buy back shares, which will pretty up their earnings per share but not their net profits, much less top-line sales.
What are these companies up against? People are still eating food, and probably paying more for that food. It’s just not the same kind of food certain companies have been making for the past 100 years.
An encouraging sign from our cover story is the new crop of CEOs taking over these firms. Nine of the top 25 companies have installed new CEOs since January 2017. A few more came on board late in 2016. We’ve profiled seven of the new CEOs in the cover story. Look at their ages – all in their 50s. That’s probably prime time for having the wisdom of age with the energy to still do something with all that wisdom. It will be interesting to see what they can do with some of the world’s most beloved brands.