Top 100: Grow Focused

Bigger is no longer necessarily better. That’s perhaps the clearest consensus of industry analysts and consultants when asked to name the best-managed food and beverage companies

A handful of names spring readily from most industry watchers as they peg the best-run companies: Pepsico, Kellogg Co., Wm. Wrigley Jr. and — despite the fact that it divested much of its food and beverage business — Procter & Gamble Co.

A few more make many but not all lists, such as General Mills, Hershey Foods and McCormick. Others get more sporadic mentions, including Unilever, Nestle, Dean Foods, Sara Lee, Smithfield, Hormel, J.M. Smucker and Anheuser-Busch.
Even Coca-Cola Co. (No. 15 on our list), after taking a recent media lashing over its tortuous CEO succession, gets high marks from some. “There’s a lot of bench strength,” says Dan Raftery, president of Raftery Resource Network, Antioch, Ill. “It’s not all just about who the CEO is.”

But one name surprisingly and conspicuously absent from virtually all the “best run” lists, at least the ones that we culled from interviews for this report, is the big kahuna itself: Kraft Foods.

Only three years ago, having just completed the takeover of Nabisco Foods and having trained the management talent that took the helm at Hershey, Campbell Soup Co. and Gillette Co., Kraft’s name could not have been more stellar. Today, after management shakeups and several quarters of disappointing analysts and investors, observers are more likely to look the other way for leadership. “I don’t want to say anything bad,” says one consultant, “but the problems are real.”
“Kraft came out with a superior growth model when it launched its [initial public offering] but hasn’t lived up to it,” says Christopher Growe, analyst for A.G. Edwards, St. Louis. “Kraft looked like it would be one of the pacesetters, but it has become, at least for now, just another slow-growth food company.”
It’s neither secret nor surprise that the food industry has been growth-challenged for years. In the face of commodity price hikes, dieting fads and other current issues, getting bigger hasn’t really proven to be much of an advantage in tackling those problems.

Acquisitions with focus
Indeed, focus is the key to success for many of the best-run players. “For Kellogg, the key has been a very single-minded focus on adding value to the cereal and snacks business, going back to their basics,” says Sara Lee veteran Timothy Ramey, now analyst with D.A. Davidson & Co. Kellogg has weathered both commodity and dietary storms by adding more value and innovation to its cereals, including developing the premium-priced Kashi line that helps insulate it from margin pressures, he says.

Kellogg is notable “for the sustainability of their program and their pricing profitability – they’ve been able to add both volume and value,” adds Growe.
There are other examples of well-aimed acquisitions. Ramey gives Smithfield (No. 13) credit for growth through “some bold and risky acquisitions.” He notes, however, these additions actually have helped it focus on pork processing, including backward integrating into hog processing business and thus giving Smithfield the ability to control much of its market.

Hormel (No. 22), somewhat against the focus grain, has succeeded by “planting little seeds of innovations with lots of small businesses that may one day be big,” Ramey says, such as ethnic foods, as well as branding the fresh meat case.
No. 3 Pepsico gets credit from analysts and consultants for its ability to focus on its key beverage and snack businesses despite integrating Quaker Oats in 2001. It’s as well-positioned as perhaps any player in the quality of its brand portfolio, says Art Cecil, buy side analyst with T. Rowe Price.

“The diversified approach many companies took five years ago really has not panned out as a way to participate in the food business,” Cecil says. Dilution of management focus, product proliferation and exposure to broad risk hamper these multiple line companies, he says. “Being the largest food company [for Kraft] means they can’t get away from industry problems.”

Kraft managers may not have helped Kraft recently, but they have helped Hershey, says Christopher Hoyt, president of Hoyt & Co., Scottsdale, Ariz. “They got beyond parochial management,” he says, “and brought in people from Kraft who knew what they were doing.”

The big, hairy issues
As for the rest of this year and into next, the big issues appear to be commodity price increases, the risk and volatility inherent in recent fad diets and obesity concerns, and the growing power of Wal-Mart.

“Dealing with commodity prices will be challenging, especially since we haven’t seen a significant [food] price increase that sticks,” says Growe — although in the days after his interview, Kraft and General Mills said they would raise the prices of some products to deal with ingredient and energy costs.

Low-carb is at least not the overwhelming issue that so many quarterly reports make it out to be. “Growth and innovation are still the big issues facing the industry. Low-carb doesn’t count,” says Ken Harris, partner with Cannondale Associates, Evanston, Ill. “The reason low-carb took off like a shot is because there’s been so little real innovation lately and it was the latest thing. It was not the right trend; it was the right-now trend. In the absence of anything better, they did this.”

“Low-carb dieting hasn’t impacted Hershey,” notes Growe, although he is not surprised. “Consumers seem to be counting carbs in their main meals but not in their snacking.”

All agreed that the real issue, and a critical one for the industry to deal with, is obesity. In the eyes of analysts, low-carb and obesity are indicative of deeper financial issues.

“The industry is subject to new risks based on consumer dietary concerns that may have been there before but are more evident now,” says Erin Smith, analyst with Argus Research.

The obesity issue is a sign that companies can no longer count on growth by increasing volume in developed markets, says Cecil. They will have to grow either by finding new ways to add value or by taking share from competitors.

And the Wal-Mart effect is not new, but it certainly is not abating ... especially in a year in which the company’s top suppliers will have to initiate radio frequency identification programs to aid the giant retailer’s inventory. The underlying issue is margin compression, Cecil says. Big buyers and limited-assortment formats have the clout to get food manufacturers to deal on price, thus pressuring their profit margins.

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