Trouble in Venezuela Worries U.S. Food & Beverage Companies

By Dave Fusaro, Editor in Chief

Apr 21, 2017

The Venezuelan government's seizure this week of a General Motors plant in that country probably has foreign, especially American, food & beverage companies fretting but not surprised.

Since the fall of oil prices and following decades of governmental financial mismanagement, Venezuela's economy began collapsing early in this decade. The results were triple-digit inflation, interference with foreign investment and even a few seizures of foreign-owned business assets.

Over the past 2-3 years, American firms of all types have been dealing with their end of that crisis, writing down assets, "deconsolidating" those operations from financial reports and declaring their businesses in that country are beyond their control, at least for the time being.

Decades of state ownership of key businesses, unfettered spending, government subsidies and domestic price controls were paid for by government-owned oil exports. Venezuela has the world's largest oil reserves. But when the price of oil collapsed – from $156 a barrel in June 2008 to $29 in January 2016 – the entire nation's economy began to collapse, too.

GM's plant was not the first foreign-owned factory seized as the government tries to control its financial collapse. The first may have been a vacant Heinz ketchup plant, all the way back in 2005. A Cargill pasta plant was taken over temporarily in 2009, and a Cargill rice plant was seized in 2014. 2015 saw the seizure of a warehouse jointly used PepsiCo, Nestle and Polar -- the last being Venezuela's largest private company and largest food company. The building was converted into public housing.

Between 2016 annual reports, which are just being published, and CEOs' statements at the Consumer Analysts Group of New York meeting in February, most American food & beverage companies are distancing their Venezuelan operations from the rest of the company and preparing for the worst.

PepsiCo in 2016 took $1.3 billion in impairment charges relative to its business in the South American country and, while it continues to operate there, has "deconsolidated" its financial results.

"Our success depends in part on our ability to grow our business in developing and emerging markets," PepsiCo said in its 2016 10k SEC filing, a statement that probably applies to all big U.S. food & beverage companies. But "As a result of these factors, we concluded that, effective as of the end of the third quarter of 2015, we did not meet the accounting criteria for control over our wholly-owned Venezuelan subsidiaries, and we no longer had significant influence over our beverage joint venture with our franchise bottler in Venezuela. Therefore, effective at the end of the third quarter of 2015, we deconsolidated our Venezuelan subsidiaries" -- meaning the investments there were being accounted for using other accounting practices and were not included in the company's ongoing financial reports.

Elsewhere in that PepsiCo 10k: "Conditions in Venezuela, including restrictive exchange control regulations and reduced access to U.S. dollars through official currency exchange markets, have resulted in an other-than-temporary lack of exchangeability between the Venezuelan bolivar and the U.S. dollar. The exchange restrictions and other conditions have significantly impacted our ability to effectively manage our businesses in Venezuela, including limiting our ability to import certain raw materials and to settle U.S. dollar-denominated obligations, and have restricted our ability to realize the earnings generated out of our Venezuelan businesses. We expect these conditions will continue for the foreseeable future."

Coca-Cola Co. also took hundreds of millions of dollar in impairment charges and other write-downs over the past several years.

Kellogg and Mondelez also "deconsolidated" their operations in the South American country and took substantial charges or write-downs.

General Mills in 2016 sold its Venezuelan business "to a third party" and recorded a loss of $38 million on the sale.

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