Cooperation is becoming as common as competition among the industry's leading corporations.
The cross-ownerships and interdependencies of the leading food companies illustrate the real meaning of the global economy. Not too many years ago, firms competed on the international stage simply by establishing a sales office or setting up a plant in another corner of the world.
No longer. As the activities of Food Engineering's Top 100 Food and Beverage Companies makes clear, the lines between international competitors have blurred. Unwanted pieces of one corporation's portfolio still migrate to another organization that views it as a strategic addition. But instead of a cash transaction, the buyer and seller become alliance partners, as was the case when H.J. Heinz Co. (No. 24 on Food Engineering's list) transferred eight factories and several brands worth $1.1 billion in sales to Del Monte Foods Co. (No. 92) earlier this year. It wasn't simply a sale but "a reverse acquisition," as Del Monte explained it, with Heinz stockholders joined at the hip with the reconstituted Del Monte, holding three-quarters of the company's common stock. A similar transfer occurred last year when Procter & Gamble (No. 69) sent its Jif and Crisco brands to J.M. Smucker Co.
P&G and Nestle SA (No. 1) are regarded as two of the most alliance-savvy corporations in the global economy. They are part of a corporate cadre that is eschewing the merger and acquisition (M&A) route to geographic expansion in favor of an alliance-heavy approach. Those who pursue this strategy most aggressively were found to deliver shareholder returns four times greater than other corporations in a recent management report from McKinsey & Co.
Consider these other examples:
- As they chase Nestle in the fast growing bottled water business, Coca-Cola Co. (No. 9) and Groupe Danone (No. 13) created CCDA Waters LLC, a distribution partnership to expand U.S. market reach.
- ConAgra Inc. (No. 8) put its meat-processing plants into a joint venture with Hicks, Muse, Tate & Furst in exchange for cash and long-term supply agreements.
- A similar supply arrangement has been forged between agribusiness giant ContiGroup Companies Inc. (No. 100) and ConAgra. The partnership hinges on just-in-time delivery from ContiBeef feedlots and feedback data for continuous-improvement.
- Breakfast cereal produced by General Mills Inc. (No. 18) is finding a market outside of North America with the assistance of Nestle's distribution network.
The M&A route to global growth is less well trodden, but firms are still digesting earlier deals while pursuing additional opportunities. The full impact of the Miller Brewing Co. purchase from Philip Morris USA hit South African Breweries' books in the fiscal year ending Dec. 31. As a result, SABMiller plc (No. 23) more than doubled in size. The multinational brewer reported a 123 percent sales spike of $4.6 billion, second only to Nestle in dollar growth. The acquisition of Bass Holdings Ltd. in February 2002 lifted sales for Adolph Coors Co. (No. 62) 58 percent.
Bunge Ltd. (No. 98) is one of six new faces on this year's Top 100 roster. The edible oils and bakery ingredients powerhouse benefited from April's acquisition of Cereol SA to become the world's largest oilseed processor.
Privately held Schreiber Foods Inc. (No. 90) used a mix of acquisitions and organic growth to boost cheese sales 53 percent. Its biggest deal was for Raskas, America's second biggest maker of cream cheese. Italian pasta king Barilla SpA (No. 57) enjoyed a 90 percent growth spurt, or almost $1.9 billion. There were 13 companies with sales increases of 30 percent or higher and 18 with growth of $1 billion or more.
The flip side of acquisition is divestiture. Chiquita Brands International Inc. drops out of the industry's top echelon as it divests operating units to stave off liquidation. An alliance of sorts resulted from June's sale of Chiquita's vegetable canning operations to Seneca Foods. Besides assuming debt and providing cash, Seneca also gave Chiquita 20 percent of its stock. Bankruptcy reorganization also will spell the end of Farmland Industries' (No. 43) status as an elite processor. Beef packing operations were sold in August to U.S. Premium Beef Ltd., Kansas City, and negotiations are ongoing for the sale of its pork operations.
Litigation woes
As much as major corporations would love to focus on integrating new business units and building alliances with other food companies, they are increasingly preoccupied with legal rear-guard actions. Concerns that processors would face obesity-liability lawsuits like McDonald's Corp. have mutated from minor annoyance to major distraction. Big companies make big targets, and J.P. Morgan Chase & Co. ranks the five most at-risk food companies as Hershey Foods Corp. (No. 54), Cadbury Schweppes Ltd. (No. 27), Coca-Cola Co., PepsiCo Inc. (No. 4) and Kraft Foods Inc. (No. 2).
Everything from tighter regulations and new taxes on processors to class action lawsuits are being advocated by groups who cite the public health costs attributed to major increases in American obesity rates. "Anti-obesity measures will curb (food manufacturers') ability to grow revenues in the future," warn investment analysts at UBS Warburg.
John Banzhaf III, a George Washington University law professor and a key litigant in suits against major tobacco firms, is preparing action directed at Kraft. Banzhaf is focusing on nutritional labeling on products targeting children, maintaining the use of adult dietary guidelines on those packages is deceptive and a contributor to escalating child obesity rates.
Switching from defense to offense, companies are announcing initiatives such as Kraft's planned cap on single-serve portion sizes and tighter marketing and advertising guidelines for nutritional information. PepsiCo's Frito-Lay division voluntarily amended nutritional labels to include trans fat information while eliminating the ingredient entirely in some of its fried snacks.
The healthy eating debate has moved far beyond fringe groups. Last year, U.S. Surgeon General David Satcher fortified the tobacco link, warning "obesity may soon cause as much preventable disease and death as cigarette smoking." Trans fatty acids and their link with coronary disease has put baked goods on the hot seat. Last month, U.S. Sen. Peter Fitzgerald (R-Ill.) proposed legislation to shift dietary oversight to the U.S. Department of Health and Human Services, charging, "The USDA food pyramid probably has more to do with diabetes and obesity than Krispy Kremes."
In adversity lies opportunity, however, and some leading food companies are enjoying significant success with products that cater to carbohydrate-conscious consumers. That group includes an estimated 17.1 million diabetics and followers of nutritional plans like the Atkins Diet, an audience that includes three in ten Americans.
Low-carb beer has become the hottest segment of the brewing industry, with Anheuser-Busch Inc. (No. 12) enjoying huge success with Michelob Ultra. Light beers account for about 45 percent of the $56 billion domestic beer market, and while caloric counts don't vary significantly, carbohydrate content in the lights ranges from Ultra's 2.6 grams to Bud Light's 6.6. Miller Light already has shifted ad emphasis to its low carb content, and Interbrew's (No. 29) Labatt USA division rolled out Rock Green Light in October to replace a Rolling Rock light beer.
Even ice cream manufacturers are getting on the low-carb bandwagon. The Good Humor-Breyers unit of Unilever plc (No. 3) introduced CarbSmart versions of ice cream and frozen novelties in September. The products have one-fourth the carbohydrates of regular versions. The company estimates 30 million to 50 million Americans want to cut carbs from their diets.
Enron aftermath
A straight comparison of revenue figures reported a year ago by publicly traded U.S. food companies and revenue figures reported this year would suggest Americans are adopting strict fasting as their dietary answer to bulging waistlines. In reality, corporate accounting scandals such as Enron and WorldCom led to restatements of prior-year income figures. In some cases, the restatements are dramatic.
For seven of the corporations on this year’s Top 100 list, prior year’s income was revised downward a cumulative total of $10.3 billion. The biggest adjustment was at Kraft, where 2001 revenues were reduced $4.6 billion. Vendor payments that previously were reported as revenue were removed to bring Kraft’s financial statements in line with new guidelines from the Financial Accounting Standards Board’s (FASB) Emerging Issues Task Force.
The task force is the accounting industry’s response to criticism it failed to properly disclose revenues and liabilities in corporate financial statements. Much of the heat is generated by the Sarbanes-Oxley Act, which has far-reaching implications in the way companies recognize revenues and expenses.
“Life under Sarbanes-Oxley is a new environment,” according to FASB’s Sheryl Thompson, “and the SEC is certainly cracking down on corporate accounting.”
With everyone on the same page and an apples-to-apples comparison possible, this year’s Top 100 companies reported income of $710.1 billion, a 5.2 percent increase over their 2002 financials. Given the continuing global economic malaise, companies in other industries might want to rethink head-to-head competition to achieve a similar growth record.
