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Current Environment ............................................................................................ 1 Industry Profile .................................................................................................... 10 Industry Trends ................................................................................................... 12 How the Industry Operates ............................................................................... 32 Key Industry Ratios and Statistics ................................................................... 37 How to Analyze a Food or Beverage Company ............................................. 39 Glossary ................................................................................................................ 45 Industry References ........................................................................................... 47
CONTACTS: INQUIRIES & CLIENT RELATIONS 800.852.1641 clientrelations@ standardandpoors.com SALES 877.219.1247 wealth@spcapitaliq.com MEDIA Marc Eiger 212.438.1280 marc.eiger@spcapitaliq.com S&P CAPITAL IQ 55 Water Street New York, NY 10041
CURRENT ENVIRONMENT
Rebound expected in crop harvests
In 2013, we look for the US agricultural sector to benefit from improved weather conditions, following drought-related harvest shortfalls in 2012. We anticipate that increased production, especially for corn, will help inventories to build, and lead to crop prices sharply below the highs reached in the summer of 2012. According to the US Department of Agriculture (USDA), 2012 brought the most severe and extensive US drought in at least 25 years. The drought seriously affected US agriculture, affecting both the crop and livestock sectors. In the Midwest, large portions of major field crops, particularly corn and soybeans, were destroyed or damaged, resulting in lower supply. Higher farm prices for field crops affected various parts of the food supply chain, including animal feed for livestock. In the contiguous US, the JanuaryAugust 2012 period was the warmest such period on record since 1895, breaking the previous record set in 2006 by 1F (Fahrenheit). July 2012 was the hottest month ever, with temperatures reaching 77.6F, breaking the previous record of 77.4F set in July 2006 and 3.3F above the 20th century average, according to the National Oceanic and Atmospheric Administration (NOAA), a unit of the US Department of Commerce. As of June 2013, the USDA was forecasting that US corn production would reach a record 14.0 billion bushels in the 201314 marketing season, up 30% from an estimated 10.8 billion bushels in 201213. This included a projected 27% rise in the yield per acre. For soybeans, the forecast was for 3.4 billion bushels in 201314, an increase of 12%, year to year, primarily due to increased yield. We expect corn and soybeans to be the largest US field crops in terms of both acreage and dollar sales.
US COMMODITIES PRICES
- - 2009 - - - - - - - - 2010 - - - - - - - - - - - - - - - - 2011 - - - - - - - - - - - - - - - 2012 - - - - - - - - - - - 2013 - OCT. AGRICULTURE INPUTS APR. OCT. APR. OCT. MAR. SEP. APR.
Wheat (/bushel) Corn (/bushel) Soybeans (/bushel) Soybean oil (/lb.) Sugar (/lb.) Milk ($/cw t)
PACKAGING INPUTS
806.5 640.8 1,181.6 51.7 27.8 20.0 1,030.0 920.0 93.2 3.6
765.0 643.0 1,347.2 53.4 24.7 17.2 1,030.0 920.0 103.0 2.2
982.5 758.0 1,681.5 53.8 19.6 19.7 1,030.0 880.0 92.2 2.8
880.0 675.8 1,416.4 49.3 17.7 19.3 1,025.0 905.0 93.5 4.1
Crude oil ($/barrel) 77.0 86.2 81.4 113.9 Natural gas ($/mil. Btu) 3.5 3.9 3.5 4.2 Sources: US Department of Agriculture; Pulp & Paper Week; Wall Street Journal.
With significantly higher production, the USDA was looking for inventories to rebound from droughtreduced levels. US corn stocks were projected to more than double from a forecast 17-year season-ending low in 201213. Similarly, the US soybean inventory was estimated to more than double in 201314, following an estimated drop of 26% in 201213. However, US wheat production was expected to decline 8.3% in 201314, with less harvested acreage and a decline in yield per acre from the record estimated for 2012. Season-ending US wheat stocks for 201314 were projected to be down 12%, but still sharply above where they were at the end of the 200708 season.
INDUSTRY SURVEYS
However, as of June 2013, along with forecasts of increased production, the USDA expected the price of corn to average $4.40$5.20 per bushel in the 201314 marketing season, versus an estimated $6.75$7.15 per bushel for 201213. For soybeans, the USDA forecast a price of $9.75$11.75 per bushel in 201314, compared with an estimated $14.35 per bushel in 201213.
Meanwhile, the USDA was forecasting that the price of US wheat would average $6.25$7.55 per bushel in 201314, Corn Soybeans down from an estimated $7.80 per bushel *Ending stocks. E-Estimated. in 201213. Although US wheat Source: US Department of Agriculture. production was projected to decline in 201314, higher production in the rest of the world was forecast to bring record world output.
0 2007-08 '08-09 '09-10 '10-11 '11-12 E'12-13 E2013-14
Size of the harvest remains vulnerable to weather conditions For agriculture, weather is an important factor. According to a report published by the United Nations Intergovernmental Panel on Climate Change, global warming has led to change in some extremes in the weather since 1950. Further, according to a report published by the House Committee on Natural Resources and the House Committee on Energy and Commerce titled Going to Extremes: Climate Change and the Increasing Risk of Weather Disasters in September 2012, nine of the top 10 warmest years globally have occurred since 2000. While the expectation for this year is for a record production of crops, the size of the harvest remains vulnerable to weather conditions. For instance, cold, wet weather from Nebraska to Ohio delayed US corn plantings this spring. While the rains tapered off in time for the pace of planting to pick up, we think wet weather has already dampened optimism for the 201314 season. Large Brazil corn harvest expected in 2013, but logistics an issue We anticipate relatively large crops in 2013 from South America, where the production cycle is different from that in the US, with much of the harvesting taking place in the spring. However, we think Brazil has been facing logistical issues due to a lack of a more adequate infrastructure to handle its bumper crops. USDA forecasts for meat and chicken In 2013, we look for a modest rise in US livestock production. The USDA projected in June 2013 that US production of beef would decline by 1.8% in 2013, while pork production would rise 0.7%. For broiler chickens (a type of poultry bred for its meat and which have a faster breeding cycle), the USDA projected a 2.0% production increase for 2013. We think the prospect of lower grain prices has improved the economic outlook for livestock production. We anticipate that roughly 20% of US beef, pork and chicken production in 2013 will go to export markets. We think that rising incomes are leading to higher per capita consumption of animal protein in developing international markets, especially in Asia. Based on April 2013 USDA forecasts, the US would account for a leading 19.8% of world beef and veal production tonnage in 2013, followed by Brazil (16.5%) and the European Union (13.4%). Meanwhile, China would account for a leading 50.1% of world pork tonnage, followed by the European Union (21.0%) and the US (9.9%). Also based on May 2013 USDA forecasts, the US would account for 20.1% of
2 FOODS & NONALCOHOLIC BEVERAGES / JUNE 2013 INDUSTRY SURVEYS
world broiler production in 2013, followed by China (16.6%) and Brazil (15.2%). In addition, China was projected to account for about half (50.7%) of the worlds pork consumption, and the US was expected to be among the largest exporters of pork.
Canada, China, and Mexico among major export markets In May 2013, the USDA said that agricultural exports to China (likely excluding Hong Kong) totaled about $23.4 billion in fiscal 2012, constituting 17.2% of total agricultural exports. Exports to Canada and Mexico totaled $20.0 billion (14.7%) and $18.9 billion (13.9%), respectively. US FOREIGN TRADE IN FOOD PRODUCTS
(In billions of dollars)
140 120 100 80 60 40 20
The significance of China to trade has increased sharply. In fiscal 2002, US agricultural exports to China were valued at $1.8 billion, or less than one-tenth of the total for fiscal 2012. Meanwhile, agricultural imports from China to the US totaled $4.3 billion in fiscal 2012, up from $1.0 billion 10 years earlier.
In fiscal 2012, in dollar terms, soybeans were the top US agricultural export, at 0 $19.8 billion, followed by corn ($11.2 2003 04 05 06 07 08 09 10 11 2012 2012*2013* billion) and unmilled wheat ($8.4 billion). Imports Exports Other exported products included pork *Through March. ($5.0 billion) and chicken ($3.9 billion). Source: US Department of Agriculture. The leading agricultural commodity imports in fiscal 2012 were coffee products ($7.8 billion), miscellaneous horticultural products ($5.7 billion), and wine ($5.0 billion). Safety issues and trade barriers can be an issue In June 2013, a report from the Organisation for Economic Co-operation and Development (OECD), an international group that focuses on improving economic and social well-being. and the Food and Agriculture Organization of the United Nations (FAO) said that global agricultural production is expected to average 1.5% annual growth in the decade ahead, versus annual growth of 2.1% from 200312. However, the report indicated that farm commodity supply should keep up with global demand, with prices remaining relatively high. We see world trade being a key factor in moving food supplies to where they are needed. Trade barriers (i.e., protectionism) remain a prospective threat to agricultural trade. In February 2013, Russia announced a ban on beef imports from the US because it suspected such beef contained ractopamine, a feed additive used to promote lean muscle growth. According to the US Meat Export Federation, a trade group, exports to Russia were at record levels in 2012. Further, in February 2013, China asked a third party to verify if pork shipped from the US was free of such additives as ractopamine. On a more favorable note for US beef producers, Japan and Hong Kong have eased CHANGE IN CONSUMER PRICE INDEXES FOR FOOD restrictions on imports of US beef. (Year-to-year percent change)
2010 2011 2012 2013*
Food at home 0.0 Cereal & bakery products (1.0) Meats, poultry, B01: fish & CHANGE eggs 1.4 CONSUMER Dairy & related IN products 0.7 Fruits & vegetables (0.1) PRICE Nonalcoholic beverages (1.1) INDEXES FOR Sugar & sw eets 2.4 FOOD Fats & oils (0.9) Other prepared foods (0.6) Food aw ay from home 1.5 All Food 0.7 *Data through April. Source: US Bureau of Labor Statistics.
4.8 3.9 7.4 6.8 4.1 3.2 3.3 9.3 2.3 2.3 3.7
2.5 2.8 3.5 2.1 (0.6) 1.1 3.3 6.1 3.5 2.8 2.6
3.5 3.7 4.5 3.0 2.4 1.3 2.4 5.7 4.1 4.3 3.8
INDUSTRY SURVEYS
to the USDA. Looking back over a longer period, retail food prices have been relatively benign, rising about 2.5% annually, on average, from 1997 through 2009. However, volatility has increased in recent years. The carbonated beverages category continued its longer-term trend of decline and market share loss in 2012, after gaining share as consumers traded down to lower-cost options in 2009. According to the Beverage Marketing Corp., a beverage industry consulting firm, the US liquid refreshment beverage market (a category that includes bottled water, carbonated soft drinks, energy drinks, fruit beverages, ready-todrink coffee and tea, sports beverages, and value-added water) rose 1.0% in volume in 2012, but carbonated beverages lost 1.8%. Higher-priced and sometimes healthier categoriessuch as energy drinks (up 14.3% in 2012), ready-to-drink coffee (+9.5%), bottled water (+5.8%), ready-to-drink teas (+4.9%), and sports drinks (+2.3%)all accelerated, and outperformed the overall beverage industry in 2012. Of note, the more economically sensitive and profitable single-serve and fountain business has improved for the beverage companies. We expect these trends to continue as the economy rebounds.
INDUSTRY SURVEYS
Private label products have appeal We think a price-gap advantage for private label products should work particularly well in a weak economy. According to the 2013 Food & Health Survey released in May 2013 by the International Food Information Council (IFIC) Foundation, price is almost as important an influencer of purchase decisions as taste: 71% of consumers said price influenced their decision to buy, although 89% of consumers still consider taste as the top consideration. According to Information Resources Inc. (IRI), a research and consulting firm, private label products were priced 29% lower, on average, than nonprivate label brands. With the price advantage already in place, we think that increased sampling and favorable quality impressions of private label goods in recent years will bolster sales of such products. Apart from pricing, we think the number and variety of organic, natural, and higher-end products by the private labels, plus more colorful packaging, have boosted demand for such products. However, we also think that branded food companies have had success defending against private label with increased marketing, as well as product innovation. In doing so, we see such companies differentiating their products and bolstering brand loyalty among consumers. The Private Label Manufacturers Association, a trade group representing manufacturers and suppliers of store-brand food products, reported that for 2012, store brands (i.e., private label products) accounted for about 23.1% of all unit sales and about 19.1% of all dollar sales for products purchased at supermarkets. Overall, we think the balance of power has shifted toward large retailers (away from large manufacturers), with likely pressures including price rollbacks. In beverages, we see more value-size offerings, particularly at the all-important $0.99 per unit level, as manufacturers look to rejuvenate growth in the more profitable and impulse-driven convenience channel, as well as more special multipack offerings. In September 2011, Coca-Cola launched an even smaller size at $0.89 per unit. We think that manufacturers prefer promotions (which are one-time events) to longer-term price reductions, to ease pressure on the perceived value of their brands. Companies have also become more sensitive to the paycheck cycle: PepsiCo, for example, has tilted its more aggressive promotions toward the end of the month, when consumers have less in their wallets. Meanwhile, Wal-Mart should have major influence, as it accounts for 10%20% of sales for various packaged food manufacturers. In our view, the long-term growth of private label reflects diminishing loyalty to higher-priced nationally branded food products, and puts additional pressure on manufacturers to protect market share through such means as promotions or product innovation. In general, we would expect private label brands to pick up more market share from second- or third-tier branded food companies than they do from the category leaders. One reason, in our view, is that top-tier branded companies have more financial resources including increased marketing dollars and new product development outlaysto protect their market share. We think many nonprivate label manufacturers are looking toward new products that emphasize health and wellness in home-based eating and drinking. In our view, spending on product innovation and marketing are two key ways that such companies can try to fend off competition from private label products. Promotional activities such as lowering prices are a competitive option for non-private label manufacturers. However, although such measures can bolster sales volume, there is a risk of hurting the perceived value of the product. Further, a reduction in price can also squeeze the profit margin for the manufacturer. In addition, not all categories of food and beverage products are equally threatened by the shift toward private label brands, in our view. Based on information from research firms Nielsen and IRI, we think private label tends to fare better in categories such as dairy products and bread, but other areas, such as ready-to-drink tea/coffee and carbonated soft drinks, are much less affected by store brands. Greater economic pressure on middle- and lower-income consumers We think the economic downturn and persistently high unemployment levels have put greater cost pressure on middle- and lower-income consumers, who spend a larger percentage of their income on food and beverages. Participation in the federal governments Supplemental Nutrition Assistance Program (SNAP), which allows lower-income consumers to purchase food at lower cost from authorized stores, has increased
6 FOODS & NONALCOHOLIC BEVERAGES / JUNE 2013 INDUSTRY SURVEYS
significantly in recent years, standing at 47.6 million (preliminary) in February 2013, up from 19.1 million in 2002. Lower- and middle-income consumers may feel pressure if a new farm bill reduces spending on SNAP. We also see an increased preference toward coupons and store loyalty programs. The REDcard Rewards program by the discounter Target Corp., for instance, has gained in popularity with shoppers. The card offers a 5% discount on in-store and online purchases. Similarly, Big Lots Inc. launched its Buzz Club Rewards program in the fall of 2009, which had over 15.3 million members at the end of 2012. These loyalty programs could be good for both the discount stores and the customers. We think some consumers are likely to be showing greater preference for smaller package sizes. Buying smaller units of beverages and/or food products reduces the strain on the wallet. Smaller package sizes also lower the potential calorie intake, which we think is gaining in importance among Americans. As an example of new packaging, Coca-Cola introduced a 12.5-ounce bottle priced at $0.89 in September 2011, following the launch of a $0.99 16-ounce bottle in 2010. The company has also reduced the size of its cans in the eight-can pack from 8.0 ounces to 7.5 ounces to bring the calorie count below 100. Many US adults live alone, and if this number increases, it builds a case for the move toward smaller package sizes. Impact from higher US payroll taxes, delayed tax refunds In January 2013, US consumers received a tax increase when the Social Security payroll tax rate returned to 6.2%, following two years at the 4.2% rate. Furthermore, the cap on earnings subject to such tax was increased to $113,700 from $110,100. As a result of these changes, US consumers are ending up with lower take-home pay. In addition, annual tax refunds for some 660,000 US taxpayers were delayed due to a software glitch.
also planned to open a research and development plant in Shanghai that would help in developing products tailored to local tastes. Risks to conducting business in foreign countries Companies looking for growth overseas face certain risks, such as trade barriers, issues related to food safety and quality, and foreign currency fluctuations. For instance, in May 2013, the European Union advised its member states to test certain wheat shipments from the US due to the discovery of unapproved genetically modified wheat in an 80-acre field in Oregon. Japan and South Korea had already suspended wheat imports from the US on the same grounds. Russia has stopped beef imports from the US as it found some residues of the livestock feed additive ractopamine. Foreign currency fluctuations also pose a risk to companies looking for overseas growth. A rise in the value of the dollar relative to a foreign currency will make it more expensive for a foreign country or company to import US agricultural products. Further, US companies investing in another country would see a fall in their investments if the currency of that country falls.
INDUSTRY SURVEYS
S&P sees more product line extensions that offer health benefits, such as more natural ingredients, fewer calories, and other enhancements, where consumers are likely to pay more for more value. Sellers of low-end or less expensive products are likely to benefit from ongoing consumer trade-down and price sensitivity, while we think sellers of high-end products should continue to be helped by upper-income customers being mostly less sensitive to economic softness. In general, we expect sellers of mid-tier products to fare less well. We think that gasoline prices being higher than they were a year ago is a limiting factor, especially for more discretionary consumer purchases. We view strength in the US dollar relative to foreign currencies as generally being unfavorable to sales and earnings prospects for the multinational food and beverage companies. A stronger dollar should make US goods less affordable in markets with weakening currencies, and should also cause international results for US multinationals to be translated back into fewer US dollars. However, the direction of currency exchange rates varies around the globe; thus, while the dollar is strengthening against one currency, it may be weakening against another. The impact of currency fluctuation on various companies will depend on a number of factors, including what their most important international markets are, and to what extent US companies have hedges in place (e.g., through futures contracts), which can help them to lock in exchange rates. Also, currency devaluations (e.g., Venezuelas most recent devaluation of its currency in February 2013) can hurt profits. Overall, we expect currency fluctuations to be modestly unfavorable to US food and beverage companies in 2013. Longer term, we believe the packaged food and beverage industry will focus on consumer lifestyles, tastes, health considerations, and demographics, including both opportunities in developing international markets and the interests and needs of an aging US population. We think industry growth opportunities will include introduction and distribution of products that appeal to consumers interest in healthier eating.
INDUSTRY SURVEYS
INDUSTRY PROFILE
Foods and beverages: a global industry
Food and beverage choices abound for the US consumer. Taste, comfort, and nutrition are just a few of the factors that influence the manufacture and purchase of numerous consumable items, most of which are sold to consumers through retail channels. US SPENDING ON FOOD PRODUCTS
(In billions of dollars)
- - - - FOOD EXPENDITURES - - - - - - - % OF TOTAL - - - AWAY AWAY B35: US YEAR FROM SPENDING ON AT HOME HOME TOTAL FOOD AT HOME FROM HOME
2011 654.4 588.9 1,243.3 PRODUCTS 2010 617.5 561.8 1,179.3 2009 600.4 541.4 1,141.8 2008 603.0 543.7 1,146.7 2005 530.1 469.9 1,000.0 2000 428.8 359.2 787.9 1995 357.1 280.2 637.3 1990 312.9 222.3 535.2 1980 179.7 103.1 282.8 1970 74.8 33.8 108.6 1960 50.3 16.2 66.5 Source: US Department of Agriculture.
52.6 52.4 52.6 52.6 53.0 54.4 56.0 58.5 63.5 68.9 75.7
47.4 47.6 47.4 47.4 47.0 45.6 44.0 41.5 36.5 31.1 24.3
For 2012, retail sales from food and beverage stores totaled an estimated $634.3 billion, up 3.3% from 2011, according to the US Department of Commerce. Consumers also spent an estimated $529.6 billion at food service and drinking locations (e.g., restaurants), up 7.3% from 2011. Overall, the spending in these two food-related categories totaled $1.16 trillion, or about 23.8% of the overall $4.9 trillion of estimated consumer spending on retail and food services in 2012. However, we think that the food store retail sales numbers include a significant amount of non-food items. (Note: Category totals from the US Department of Commerce and the US Department of Agriculture may vary, due in part to different definitions; for example, USDA food sales data exclude alcoholic beverages.)
China 8,314 25,964 Canada 14,062 20,570 Mexico 12,692 US 18,906 B10: LEADING Japan 10,159 13,497 AGRICULTURAL European Union 10,057 EXPORT 8,754 South Korea 3,528 6,037 DESTINATIONS Hong Kong 1,168 3,409 Taiw an 3,097 3,219 Indonesia 1,542 2,492 Philippines 1,112 2,348 Total, top 10 64,428 106,500 World total 89,990 141,342 Source: US Economic Research Service.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
212.3 46.3 49.0 32.9 14.9 71.1 191.9 4.0 61.7 111.1 65.3 57.1
From the above estimates, we can see that growth in developing markets such as China, India, Russia, and Brazil are expected to far outpace the growth in developed markets such as the US and Japan. Further, according to a report published in March 2012 by the Worldwatch Institute, a global environmental research organization, demand for meat, egg, and dairy products is rising in developing markets. With rising income levels in countries like China, Brazil, and India, we think spending on higher-protein food like milk, eggs, and meat has increased. Related to this, we think production and consumption of animal products has been rising in emerging markets.
While demand for agricultural food is growing with the rising demand from increasing world population and production of biofuels, production needs to keep pace to ensure food security. According to a United Nations report released in October 2012, some 870 million people in the world suffer from chronic malnutrition. An estimated one-third of agricultural produce each year is lost due to drought, flooding, pests, and waste. In addition, an estimated 12 million hectares of land is lost annually due to degradation.
10 FOODS & NONALCOHOLIC BEVERAGES / JUNE 2013 INDUSTRY SURVEYS
In order to have long-term food security, the Commission on Sustainable Agriculture and Climate Change (CSACC), a global agriculture research group, has suggested seven measures, such as asking for changes in policies, eating choices, finance, crop-growing patterns, development aid, and waste reduction, as well as investment in knowledge systems for supporting these changes. One way of increasing food security is to reduce food waste. While an estimated 870 million people in the world go hungry in the developing countries, consumers in the developed countries discard 220 million metric tons of food every year, according to the United Nationsequal to the entire food output of subSaharan Africa. If this wasteful pattern were replicated all over the world, the demand for natural resources would be unsustainable. According to the FAO, the world population will reach nine billion by 2050; to feed that population, world food output will need to increase by about 70%. While making food pricier in the developed countries may reduce some waste, it makes life difficult for the poor people in these countries. We think the best way to deal with waste is through education.
MAJOR PUBLICLY HELD FOOD & BEVERAGE COMPANIES (Ranked by latest fiscal year reported sales, in millions of dollars)
PACKAGED FOOD & LATEST - - - - - BEVERAGE SALES - - - - - - COMPANY FISCAL YEAR- END PREV. YEAR LATEST YEAR % CHG.
Dec-12 1. PepsiCo Inc. 66,504 2. The Coca-Cola Co. TABLE B28: Dec-12 46,542 MAJORDec-12 PUBLICLY 3. Mondelez International **35,810 4. Tyson Foods Inc. Sep-12 & 32,266 HELD FOOD 5. General Mills May-12 14,880 BEVERAGE 6. Kellogg Dec-12 13,198 COMPANIES 7. ConAgra Foods May-12 12,303 8. Smithfield Foods Inc. Apr-13 13,094 9. Dean Foods Dec-12 13,055 10. Hormel Foods Oct-12 7,895 11. Pilgrim's Pride Sep-12 7,536 12. Coca-Cola Enterprises Dec-12 8,284 13. Campbell Soup Jul-12 7,719 14. The Hershey Co. Dec-12 6,081 15. Dr Pepper Snapple Group Dec-12 5,903 16. Dole Food Co. Dec-12 7,224 17. Hillshire Brands Jun-12 **4,019 18. McCormick & Co. Nov-12 3,698 19. Mead Johnson Nutrition Dec-12 3,677 20. Fresh Del Monte Produce Dec-12 3,590 ** Restated. NA-Not available. Source: Company reports.
65,492 48,017 35,015 33,278 16,658 14,197 13,263 13,221 11,462 8,230 8,121 8,062 7,707 6,644 5,995 4,247 4,094 4,014 3,901 3,421
(1.5) NA (2.2) 3.1 11.9 7.6 7.8 1.0 (12.2) 4.2 7.8 (2.7) (0.2) 9.3 1.9 (41.2) 1.9 8.5 6.1 (4.7)
Although the largest manufacturers have significant presence in the marketplace, especially in specific product categories, the food and beverage industry remains quite fragmented. Based on historical US Census Bureau data, we believe that there are more than 20,000 businesses manufacturing food, beverages, and tobacco products. Most of these US producers are fairly small and employ relatively few workers. However, the largest food and beverage companies employ many thousands of people.
They tend to place less emphasis on regional products and preferences, except in international markets. The largest among them (based on sales for their latest reported fiscal year) are PepsiCo Inc. ($65.5 billion), Coca-Cola ($48.0 billion), Mondelez International Inc. (formerly known as Kraft Foods Inc.; $35.0 billion), Tyson Foods Inc. ($33.3 billion), and General Mills ($16.7 billion). Major foreign-based food and beverage competitors include Nestl S.A. (Switzerland), Unilever PLC (UK), and Groupe Danone (France).
TOP 10 CARBONATED SOFT DRINK BRANDS (Ranked by 2012 sales)
BRAND COMPANY - - MARKET SHARE (%) - - VOLUME 2011 2012 CHG. % CHG.
1. Coke Coke 17.0 17.0 2. Diet Coke Coke 9.6 9.4 3. Pepsi-Cola Pepsi 9.2 8.9 TABLE B04: TOP 10 4. Mt. Dew Pepsi 6.7 6.8 CARBONATED SOFT 5. Dr Pepper DPS 6.4 6.5 DRINK BRANDS 6. Sprite Coke 5.7 5.7 7. Diet Pepsi Pepsi 4.9 4.7 8. Diet Mt. Dew Pepsi 2.0 2.1 9. Fanta Coke 1.9 2.0 10. Diet Dr Pepper DPS 1.8 1.8 Source: Beverage Digest.
TAKE-HOME CARBONATED SOFT DRINK MARKET SHARES2012
BRAND MARKET SHARE (%) SHARE CHANGE
CHANGE (%)
TOP 10 0.2 Coca-Cola Co.TABLE B02: 35.6 CARBONATED PepsiCo 31.9 SOFT (0.3) DRINK BRANDS Dr. Pepper Snapple 20.7 0.4 private labels 8.5 (0.5) All others 3.2 0.1 NA-Not available. Source: Beverage Digest.
In terms of market share, the nonalcoholic beverage industry is highly concentrated. In the carbonated soft drink segment, for example, we believe that about 88% of US retail sales are represented by the beverage brands of just three companies: the Coca-Cola Company, PepsiCo, and Dr Pepper Snapple Group.
However, we have also seen fragmentation in the beverage market, with smaller niche categories and limited-edition products, which are more profitable. Thus, we see the market requiring more flexibility and increased ability to respond quickly to changes.
INDUSTRY TRENDS
Consumers have become increasingly demanding of food and beverage products in recent years, often expecting meals and snacks that go far beyond the basic need of satisfying hunger and thirst. Today, consumers often expect that food and drink, in addition to tasting good, should offer some or all of the following characteristics: be low in calories; provide supplemental vitamins and minerals; create energy; and offer other health benefits. In response, we see major food companies refocusing their best product lines and acquiring brands in encouraging new areas. They are selling off or discontinuing products that dont resonate with consumers.
Corporate cost-reduction programs focus on a variety of areas. We see a particular emphasis on what socalled supply chain improvementsmore efficient or less costly ways of getting products to customers. These can range from centralized, more economical purchasing of commodities to better utilization of manufacturing plants. In some cases, when energy prices are very high, companies may look to lower their transportation costs by moving manufacturing or distributions facilities closer to their customers. Beverage companies are also working on increasing productivity and focusing growth initiatives on highervalue, healthier products in which they can charge premium prices. Consumers have been willing to pay more for beverages with perceived health or other functional benefits. In addition, bottlers such as Cott Corp. have been seeking to offset costs by investing in production lines with lighter-weight plastic bottles that also reduce the environmental impact of their products. Merger and acquisition activity picks up Within the food and beverage industry, we have seen a recent pick-up in acquisition activity, which we think has been bolstered by the appeal of the industrys global nature, and by a relatively attractive financing environment. We see acquisitions offering geographic and product diversification. In addition, mergers can boost opportunities for profit growth, including costs reductions (e.g., duplicate expenses, economies of scale) and higher revenue (e.g., better leveraging of distribution systems). In June 2013, H.J. Heinz Co. was acquired for more than $23 billion, by a consortium comprised of Berkshire Hathaway and an investment fund affiliated with 3G Capital. We think that what attracted these firms to Heinz included the strength of its Heinz ketchup brand, and the companys active investment in markets outside the US and Western Europe, including China and Brazil. Based on dollar value, this is one of the largest deals ever completed in the US food industry. In May 2013, a merger agreement was announced under which Smithfield Farms would be acquired by Hong Kongbased Shuanghui International Holdings Ltd. for about $4.7 billion. Subject to regulatory approval, we look for the acquisition to close by year-end 2013. Although we believe Smithfield is the largest US hog producer and pork processor, we do not expect concerns about foreign ownership to block the deal. In April 2013, it was announced that an investment group led by Joh. A. Benckiser GmbH (JAB), a privately owned affiliated group of companies, had conditionally agreed to buy D.E. Master Blenders 1753 NV, a coffee and tea company whose brands include Douwe Egberts and Pilao, for what we expect would be close to $10 billion. JAB chairman Bart Becht indicated that the purchase of D.E. Master Blenders, which was spun off by Sara Lee Corp. last year, would provide a platform for growth in the coffee and tea categories. Between October 2012 and January 2013, JAB had acquired US-based coffee chains Peets Coffee & Tea Inc. and Caribou Coffee Co. for a total of about $1.3 billion. In April 2013, Itochu Corp., Japans third-largest trading house, acquired Dole Food Co.s worldwide packaged foods and Asia fresh produce businesses for $1.685 billion. Doles packaged food business produces canned fruits and juices, while the Asia fresh produce business grows, sources, and distributes fresh fruit and vegetables mainly in Asia. The two businesses had combined revenue of $2.5 billion and adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) of $190 million in 2011. The remainder of Dole is a fresh fruit and vegetables company with annual revenue of about $4.2 billion. In January 2013, ConAgra Foods acquired food company Ralcorp Holdings Inc. for about $5.1 billion. We expect the combined company to have annual sales of about $18 billion, including private label sales of approximately $4.5 billion. With the acquisition of Ralcorp, we look for ConAgra to be the largest privatelabel packaged foods company in North America. Private label or brand (sometimes called store brand) products often are less expensive than competing goods, which can increase their appeal to cost-conscious consumers. ConAgra indicated that prior to acquiring Ralcorp, its private-brand business was about 7% of total sales. Over time, we expect revenue-related and cost synergy benefits from the Ralcorp acquisition. In December 2012, Swiss company Nestl S.A. acquired Pfizer Nutrition for $11.85 billion, increasing Nestls position in the child nutrition market. Nestl estimated the acquired business 2012 sales at $2.4
INDUSTRY SURVEYS FOODS & NONALCOHOLIC BEVERAGES / JUNE 2013 13
Berkshire Hathaw ay, and an investment fund affiliated w ith 3G Capital ITOCHU Corp. ConAgra Foods Nestl SA Kellogg Co. PepsiCo General Mills
H.J. Heniz
23.58
Jun-13
billion, and said that 85% of Pfizer Nutritions sales are in emerging markets, including many with large, fast-growing populations. We are also seeing acquisition activity that we think is aimed at boosting the presence of US companies in international markets. For example, Archer Daniels Midland Co. is seeking to acquire GrainCorp Ltd., which is a leading Australian agribusiness company. The transaction has an indicated value of about A$3.4 billion (approximately US$3.6 billion). Subject to regulatory approval, we look for the acquisition to be completed by December 2013. In January 2013, Hormel Foods agreed to buy the Skippy peanut butter business from Unilever for $700 million. We think the acquisition will help Hormel diversify away from meat products and expand in overseas markets such as China, where Skippy is the leading peanut butter brand. Hormel expects annual sales from Skippy of about $370 million, with almost $100 million outside the US. In early 2013, Hormel acquired the US-based Skippy business, and we expect Hormel to acquire the China-based Skippy business by fall 2013.
Funds affiliated w ith Kohlberg Kravis Roberts & Co L.P., Vestar Capital Partners, and Centerview Partners PepsiCo
Dole Food's packaged foods and Asia 1.69 fresh produce businesses Ralcorp Holdings *4.75 Pfizer Nutrition 11.85 Pringles 2.70 Russian food and drink company Wimm- 5.10 Bill-Dann 51% controlling interest in Yoplait 1.20 S.A.S. and 50% interest in Yoplait Marques S.A.S. Del Monte Foods Co. 4.00
Mar-11
66% of Russian food and drink companyWimm-Bill-Dann Coca-Cola Coca-Cola Enterprises North American bottling business Corn Products International Table National B03:Starch MAJOR Ralcorp Holdings American Italian Pasta Co. MERGERS AND Kraft Foods Cadbury plc ACQUISITIONS Nestle Kraft Food's North American frozen pizza business PepsiCo Pepsi Bottling Group and PepsiAmerica J.M. Smucker Procter & Gamble's Folgers coffee business Mars Inc. Wm. Wrigley PepsiCo/Pepsi Bottling Group 75.5% of JSC Lebedyansky Ralcorp Holdings Inc. Kraft Foods' Post cereal business Ospraie Special Opportunities ConAgra Foods' commodity trading and merchandising operations Kraft Foods Danone Group biscuit business Danone Group Numico Nestl Gerber JBS SA Sw ift & Co. Nestl Medical nutrition business of Novartis Coca-Cola Energy Brands Inc. (Glacau) Pilgrim's Pride Corp. Gold Kist Inc. The Blackstone Group L.P. Pinnacle Foods Group Inc. Kraft Foods United Biscuits' Spanish and Portugese units Cadbury Schw eppes Plc Dr Pepper/Seven Up Bottling Group American Foods Group Inc. Rosen's Diversified Inc. Wrigley Kraft Foods confectionery brands Cadbury Schw eppes Plc Adams (Pfizer's chew ing gum
3.80 12.30 1.30 1.20 18.50 3.70 7.80 3.53 22.00 1.40 1.65 2.10 7.70 17.80 7.70 1.47 2.50 4.10 1.10 2.27 1.07 1.18 NA 1.48 4.20
Feb-11 Oct-10 Oct-10 Jul-10 Jun-10 Mar-10 Feb-10 Dec-08 Oct-08 Oct-08 Aug-08 Jun-07 Nov-07 Nov-07 Aug-07 Jul-07 Jul-07 Jun-07 Jan-07 Jun-05 Sep-06 May-06 Jun-05 Jun-05 Mar-03
NA- Not available. Note: Some ac quisition pric es may be approximate or rounded. Also, some transac tions may be mergers in whic h there is some ambiguity regarding what party is or may be the ac quirer or ac quiree. * Net of c ash ac quired. Sourc e: Company reports.
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INDUSTRY SURVEYS
In May 2012, Kellogg acquired the Pringles snack food business from Procter & Gamble in a transaction valued at about $2.7 billion. In our view, the Kellogg transaction was announced after it appeared that a Diamond Foods bid to acquire the Pringles business was falling through. We think the acquisition has significantly expanded Kelloggs snack food business, including giving the company more of an international presence. Separation plans becoming more common In addition to making acquisitions, we have seen companies reshape themselves through various forms of split-ups. In our view, there are various potential motivations for this, including a goal of boosting shareholder value, or the market value of the companys stock. Also, in making a divesture, a company may be choosing to put more of a future focus on core, faster-growing, and/or profitable businesses. Below we discuss several companies engaged in recent split-up transactions. Kraft Foods. In October 2012, Mondelez International Inc. (formerly known as Kraft Foods Inc.) spun off ownership of a large North American grocery food business. The spun-off company, which is named Kraft Foods Group Inc., includes brands such as Kraft, Maxwell House, Oscar Mayer meats, and Philadelphia cream cheese. Meanwhile, Mondelez (the remaining part of the old Kraft Foods) is a global snacks company, including brands such as Cadbury, Jacobs, LU, Milka, Nabisco, Oreo, Tang, and Trident. [Regarding the name Mondelez: Kraft says that monde is derived from the Latin word for world, and delez is an expression of delicious.] We think the snacks business has better long-term growth prospects, and that the North American grocery foods business will be more of a dividend payer. In addition, we see Krafts 2010 acquisition of confectionery company Cadbury plc offering strategic value for Mondelez, including the opportunity to boost its presence in developing international markets. Dean Foods. This major dairy company has been divesting assets or ownership interests. In May 2013, it spun off a majority equity interest in WhiteWave Foods, a supplier of organic and soymilk products. We believe that Dean retained about a 19.9% equity interest in WhiteWave, which we expect will be divested within the next 18 months. Earlier, in October 2012, Dean had sold about a 13% ownership interest in WhiteWave through an initial public stock offering (IPO). In addition, in January 2013, Dean sold its Morningstar Foods division, a manufacturer of dairy and non-dairy extended shelf-life and cultured products, to Canada-based dairy company Saputo Inc. for $1.45 billion. Net proceeds, after taxes and expenses, were expected to be $887 million. The Morningstar Foods business had sales of $1.3 billion in 2011, including private label products. Sara Lee Corp. This company completed the spinoff of its international coffee and tea business in June 2012. The spun-off business is known as D.E. Master Blenders 1753, which we think was intended to highlight the history and heritage of the Douwe Egberts coffee brand, especially in Europe. The new publicly traded company is domiciled in the Netherlands. In conjunction with the separation, Sara Lee issued its shareholders a special dividend of $3.00 per share. The remainder of Sara Lee, now known as the Hillshire Brands Co., includes various North American operations, including meat products sold under the Ball Park, Hillshire Farm, and Jimmy Dean brands, and sales to foodservice operators. Ralcorp Holdings. In February 2012, Ralcorp Holdings Inc. completed the separation of its Post Holdings Inc. business through a tax-free spinoff. Ralcorp shareholders received one share of Post common stock for every two common shares held. Furthermore, in September 2012, Ralcorp exchanged the remaining 6.8 million Post shares (about a 20% interest), in settlement of nearly $200 million in outstanding debt. Ralcorps full ownership of the Post business was relatively short-lived: it acquired the US and Canadian operations of the Post Foods cereals business from Kraft Foods Inc. in 2008. We think Ralcorp may have been under pressure to bolster its stock price while fending off an acquisition attempt in 2011. Chapter 11 bankruptcy for Hostess Some of the most familiar US snack food brands are coming under new ownership, following the liquidation of Hostess Brands Inc., a US manufacturer of bread and snack cakes. In January 2012, Hostess filed for Chapter 11 bankruptcy. The company said in its filing that it owed more than $1 billion to
INDUSTRY SURVEYS FOODS & NONALCOHOLIC BEVERAGES / JUNE 2013 15
creditors. In November 2012, Hostess announced that the US Bankruptcy Court for the Southern District of New York had approved a motion for an orderly wind down of its business and sale of assets. The company said that Judge Robert Drain approved the motion after Hostess and the Bakery, Confectionary, Tobacco, and Grain Millers Union (BCTGM) were unable to reach an agreement through mediation. As of April 2013, Hostess Brands had received US Bankruptcy Court approval for five transactions totaling about $860 million in proceeds. This included the sale of most of Hostesss snack cake businessincluding the Hostess and Dolly Madison snack cake brandsto affiliates of Apollo Global Management LLC and Metropoulos & Co. for $410 million. Related products include Twinkies, Ho Hos, and Ding Dongs snack cakes. Based on press reports, we look for Twinkies to be back in stores in the summer of 2013. Also approved was the sale of most of Hostesss bread business, including its Wonder brand, to affiliates of Flowers Foods Inc. for $360 million. PepsiCo restructures At the end of February 2010, PepsiCo completed the acquisition of the remaining shares it did not already own of its two largest bottling companies, Pepsi Bottling Group Inc. and PepsiAmericas Inc., for a total price of close to $8 billion. The PepsiCo bottling acquisitions effectively reversed the spinoffs of Pepsis bottling assets 10 years ago, which we believe was done in an effort to increase shareholder value. Although we see some merits to the acquisition of the bottling businesses now, we do not believe a deal was vital to PepsiCos growth prospects, as we still see significant opportunities for PepsiCo to expand internationally. However, the bottler deal targets the changing beverage landscape in North America, as noncarbonated beverages increasingly dominate market growth. PepsiCo views a bottler combination as speeding innovation and go-to-market efforts. In the beverages industry, there had been speculation that PepsiCo Inc. may consider a spinoff of its beverage and snack businesses. However, with the formation of the Power of OneAmericas Council in September 2011, the likelihood of a spinoff declined. This council was formed to align the two businesses across North, South, and Central America. The company believes that the food and beverage businesses are complementary across the operations in the value chain and better coordination among them will result in synergies. Further, Pepsi observes that snacks and beverages are usually bought and consumed together. Along with the formation of this council, a Global Snacks Group (GSG) was formed, which is responsible for innovations pertaining to its global snack foods brands. The company also has in place a Global Nutrition Group and a Global Beverages Group. In November 2011, to build its snacks business, Pepsi acquired privately held Grupo Mabel, a Brazilian cookie company, for approximately $500 million. In April 2012, to revive its fortunes, the company said that that it wants to be judged on its overall beverage portfolio, rather just the carbonated beverages. Further, according to an article published on April 19 2013 in the Wall Street Journal, Nelson Peltzs Trian Fund Management has accumulated shares worth $1.4 billion in both PepsiCo and Mondelez International Inc. This has led to speculation that the investor could push PepsiCo to split its snack and drink businesses or merge with Mondelez, or both. PepsiCo has been looking to restructure its North American drinks business, which has underperformed the snacks business. PepsiCo has said that it held meetings with Trian to discuss and consider their ideas and initiatives as part of our ongoing evaluation of all opportunities to drive long term growth and shareholder value. However, with the beverage division showing improved performance in recent quarters, we think there is less pressure for PepsiCo to make a move in the short term, although we do not rule out a transaction involving the spin-off its bottling division in the longer term. Additionally, the snack and beverage businesses share numerous functions, which would add complexity to a separation of the businesses. Beverage deals focus on international, healthier products Coca-Cola. In early 2009, we saw the Chinese government block Coca-Colas $2.4 billion bid to acquire China Huiyuan Juice Group Ltd., Chinas largest juice manufacturer and distributor. However, we believe that Coca-Cola will continue to look to bolster its position in the noncarbonated arena worldwide. With more than $20 billion in free cash flow generation likely in the next three years, according to our estimates,
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we think Coca-Cola will seek to take advantage of an acquisition and investment environment where other companies may be handicapped by stringent capital markets. In 2009, Coca-Cola took a minority stake in British smoothie manufacturer Innocent, a fast-growing top brand that markets its healthy ingredients and social commitment. Innocent was one of the first consumer brands launched in Britain to gain a large following through ethical marketing. It gives 10% of its profits to charity and uses recycled bottles. We think that Innocents recycling expertise could be valuable to Coke, while Coke could provide Innocent further access to other noncarbonated markets, particularly in Europe. In April 2010, Coca-Cola raised its stake in Innocent to 58%. In March 2011, Coca-Cola acquired the remaining stake it did not own of Honest Tea, a leading organic bottled tea company. Since the initial investment from Coca-Cola three years ago, the company has introduced a plastic bottle that uses 22% less material and has doubled the number of offerings, as well as the sale of organic, zero-calorie drinks. In May 2013, Coca-Cola announced four global business initiatives to contribute to healthier, happier, and more active communities. First, it plans to offer low or no-calorie beverage options in all of its markets. Second, it plans to provide transparent nutrition information on the front of all packages. Third, it will support physical activity programs in all countries. Finally, it made a commitment to market responsibly, including no advertising to children under the age of 12. Coca-Colas purchase of Energy Brands in 2007 was criticized at the time for its price tag of more than $4 billion. However, this deal increased Coca-Colas distribution in both the US and Great Britain, and appears to have helped the company outperform the noncarbonated beverage category in 2008 and 2009. Wider international distribution began in 2010 and continued through 2011 and 2012. PepsiCo. PepsiCo has also focused on building its international presence in some faster-growing categories. In 2008, the company purchased Britains V Water, a maker and distributor of enhanced waters, and, along with Pepsi Bottling Group, acquired Russias top juice manufacturer, JSC Lebedyansky, for $1.4 billion. In February 2011, PepsiCo completed the acquisition of 66% of the outstanding shares of WimmBill-Dann Foods OJSC, Russias leading branded food and beverage company, for approximately $3.8 billion; in September, it increased its stake to 100%. Wimm-Bill-Dann is a leader in traditional and valueadded dairy products, with a strong position in the juice market; it is expected to make PepsiCo a leader in the food and beverage market in Russia as well as build its position in Eastern Europe and Central Asia. Pepsi is also taking steps to boost its nutrition portfolio. For example, in late 2011, the company entered a joint venture with the German dairy company, Theo Mller Group, to introduce a new yogurt brand in the US. Pepsi, which had no dairy business in the US, wanted to capitalize on the rapidly growing yogurt market there. In July 2012, the joint venture company started selling yogurt in the Northeast and mid-Atlantic states. While initially the company will sell the product manufactured in Europe, it plans to construct a state-of-the-art facility in Batavia, New York, with an investment of $206 million. The plant, which will create 186 new manufacturing and support jobs and was expected to be online in 2013, will churn out five billion cups of yogurt every year. This is a part of the companys plan to double its revenues from nutritious drinks and snacks to $30 billion by 2020. In line with this plan, Pepsi in September 2011 acquired WimmBill-Dann Foods, a Russian company producing dairy products, juices, baby food, and mineral water. In November 2011, PepsiCo agreed to sell its bottling operations in China to Tingyi-Asahi Beverages Holding Co. and give the joint venture exclusive rights to manufacture and distribute PepsiCos trademark beverages in exchange for a 5% stake. The deal gave Pepsi a new platform for expanded distribution in China and has re-invigorated it business in China, making it a stronger competitor to Coca-Cola Co.
Improved agricultural productivity. A boost in agricultural productivity caused by advancement in technology over time can help improve supply. New farm equipment, disease resistant varieties of seeds, and similar developments can improve the output level for various crops. According to the September 2012 issue of Amber Waves, a quarterly publication by the USDA, evidence points towards healthy but uneven agricultural productivity growth globally. More efficient global distribution/allocation. With a better international infrastructure in place, and new free trade agreements being signed among countries, global distribution should become much more efficient, leading to better allocation of the food supply in the long term. Amount of land and water resources available. The amount of arable land and water available for irrigation is an important factor affecting the long-term supply. According to the FAO, expansion in the land resources available for cultivation will account for around 20% of the growth in agricultural produce until 2030.
Among the longer-term factors affecting food demand, we see: Growing overseas demand due to higher incomes and changing lifestyles. As populations in developing countries become wealthier and more urbanized, demand for packaged foods should rise. Demographic profile in developed markets. With an aging population in developed markets such as the US and Western Europe, we think demand for healthier, more nutritious, food is on the rise. Meanwhile, in some other countries, fertility or birth rates are much higher, which can both contribute to population growth and boost demand for food. Bio-energy markets. Crops such as corn, sugar, and rapeseeds are increasingly being used to produce ethanol to generate energy. Shorter-term factors affecting food supply and demand Short-term factors affecting food supply may include the following: Climate change or extreme weather. Agricultural produce is prone to suffer from excessive rain or drought conditions. Poor harvests are especially likely to affect prices when inventory levels of a crop are relatively low. Trade restrictions. These include export bans or tariffs. Changes in food stocks/inventories. Lower inventory generally increases the likelihood of price volatility. Feed costs for livestock. Crops such as wheat, oat, barley, and canola are used mainly as feed for livestock, and changes in their prices add to food price volatility. Short-term factors affecting food demand may include the following: Economic conditions. Recent economic difficulties made consumers increasingly conscious about their spending; many have traded down to lower-cost product categories. In addition, consumers may be less likely to keep extra food in their pantries when money is tight. Fluctuation in currency exchange rates. A weaker US dollar can boost international demand for US crops as it gives foreign buyers more purchasing power.
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at 15 million. We think increasing obesity is bolstering demand for relatively low-calorie products such as protein shakes. Another emerging trend is gluten-free food, which can benefit the millions of people who are sensitive to gluten (a protein in wheat, rye, and barley) and is especially important for people suffering from celiac disease, a group that may total at least three million in the US and has quadrupled in the last 50 years. In September 2011, Euromonitor International forecast that sales of gluten-free foods would total $2.67 billion globally in 2011 and $1.31 billion in the US, with the latter rising to $1.68 billion by 2015. According to a survey conducted by the NPD Group Inc., a market research firm, in January 2013, nearly 30% of Americans wanted to cut down or eliminate gluten in their diet. Corporate health initiatives With increased consumer and government focus on the heath impact of what people eat and drink, we think many food and beverage companies today are facing the challenge of making their food products healthier while also maintaining the taste of these products. We see various manufacturers aiming to reformulate products, and to reduce the amount of such ingredients as sodium and saturated fat. Manufacturers are constantly innovating and coming out with healthier products. Some new products listed on the website foodprocessing.coms New Food and Beverage Rollout section for October 2012 included the following: Tabatchnick Fine Foods Oatmeal Singles line of singleserve frozen oatmeal, which has high fiber and low calorie and sugar content, and YoCrunch Breakfast Blends, a nonfat vanilla yogurt with a topping of Post Fruity Pebbles cereal. During its investor conference in March 2010, PepsiCo outlined its goals for the next 10 years, including cutting average added sodium per serving by 25% in key global food brands in important markets by 2015 and adding more whole grains, fruits, vegetables, and low-fat dairy to its products. PepsiCo also outlined a commitment to display calorie count and key nutrients on food and beverage packaging by 2012 and aims to increase sales from its Good for You portfolio of healthier products to $30 billion in annual sales from $10 billion. In recent years, Pepsi switched from frying its Lays potato chips in trans fats to sunflower oil. In January 2013, PepsiCo announced that it would stop the use of brominated vegetable oil in Gatorade after consumers complained. Studies have suggested that the possible side effects of the ingredient include neurological disorders and altered thyroid hormones. More recently, in response to consumer desires to eat healthier, we see PepsiCo moving to make half of its snacks sold in the US with only natural ingredients (though it is not clear that making snacks with natural ingredients makes them healthier). Many of these products are already in stores. PepsiCo is removing monosodium glutamate and about three dozen other artificial ingredients in more than 60 snack varieties in the Lays, Tostitos, SunChips, and Rold Gold brands. In May 2013, Wm. Wrigley Jr. Co. temporarily halted production and sales of Alert energy gum as the US Food and Drug Administration (FDA) investigates the safety of caffeinated-food products. The FDA in March 2013 said that it is taking a fresh look at the effects of caffeinated products on children and adolescents, after doctors asked the FDA to limit the amount of caffeine in energy drinks. In a move to educate consumers, companies such as Coca-Cola Co., PepsiCo Inc., and Dr Pepper Snapple Group have decided to start displaying calorie content for their drinks in vending machines. Government health initiatives In April 2011, an inter-agency working group (IWG), which included the Federal Trade Commission, the FDA, the Centers for Disease Control and Prevention, and the USDA, proposed voluntary principles that the industry can refer to as a guide for marketing food to children (defined as those under 18 years of age). The two basic principles outlined were as follows. First, food advertising and marketing to children should encourage them to make healthy food choices such as vegetables, fruit, whole grains, fat-free or low-fat milk products, fish, poultry, eggs, nuts or seeds, and beans. Second, saturated fat, sugar, and sodium levels in foods marketed to children should be at levels that will restrict the adverse impact on childrens health. However, we think there was concern from food and beverage companies and advertising trade groups about marketing guidelines being overly strict. In October 2011, the proposed IWG guidelines were modified.
INDUSTRY SURVEYS FOODS & NONALCOHOLIC BEVERAGES / JUNE 2013 19
The final guidelines included a 350-calorie limit on foods marketed to children (defined as those under the age of 12). These voluntary guidelines cap the sugar level in cereals marketed to children at 10 grams. We have also seen the Obama Administration and First Lady Michelle Obama pursue various food-related initiatives, including a focus from the First Lady on childhood obesity and home gardens. Lets Move!an initiative launched in 2010 by the First Ladyis aimed at addressing childhood obesity. President Obama created a Task Force on Childhood Obesity to review programs and policies relating to child nutrition and physical activity, and to develop a national action plan to maximize federal resources and set benchmarks toward the First Ladys national goal. The Task Force recommendations include providing healthy food in schools; improving access to healthy, affordable foods; and increasing physical activity. In December 2010, President Obama signed the Healthy, Hunger-Free Kids Act of 2010, which gives the USDA the authority to set nutritional standards for all foods regularly sold in schools during the school day, including vending machines. The legislation also provides additional funding to schools that meet updated nutritional standards for federally subsidized lunches. Under the terms of the Act, the USDA in February 2013 established nutrition standards for all foods sold in schools. The Smart Snacks in School proposed rule is a step forward in the process of creating national standards. The rules limit the amounts of sodium, sugar, and calories in snack items. Snack items are limited to a maximum of 200 calories and a maximum of 200 milligrams of sodium per portion. There are two alternatives for sugar, one a maximum 35% of calories or the other a maximum of 35% of weight, with exemptions for fruits and vegetables packed in juice, extra-light syrup, and for certain yogurts. In the case of beverages, schools are allowed to sell water and low fat or fat-free milk and 100% fruit/vegetable juice. Elementary schools are allowed to sell up to 8ounce portions, while middle schools and high schools can sell up to 12-ounce portions. In January 2012, the US government announced a major overhaul to school meals. According to the new rules, fresh tomatoes and chef salads will replace breaded patties and canned fruits. The rules were different from the 2011 draft in that they require more fruits and food rich in whole grains, instead of a meat or meat alternative. Starting in 201415, schools would have to offer only whole-grainsrich products, while they can serve tofu as an alternative to meat. The schools have started to implement the guidelines by providing more whole grains, while limiting protein and calories. We believe that the diets of children and related obesity issues are of growing concern. Under new federal healthcare legislation (the Patient Protection and Affordable Care Act), various restaurant chains will be required to provide calorie information on products they offer. According to FDA Commissioner Dr. Margaret A. Hamburg, Americans consume about one-third of their calories from foods prepared outside the home. If consumers pay more attention to such data, we expect that it will influence some purchase decisions, though we do not expect availability or demand for indulgent foods to disappear anytime soon. States have started campaigns against obesity. New York State, which has 23% of its population classified as obese, has launched a $500,000 ad campaign encouraging people to eat and drink less. In September 2012, New York City health officials voted to ban the sale of sugary drinks larger than 16 ounces in restaurants, mobile food carts, delis, and concessions at movie theaters and stadiums in order to curb obesity. The ban, which is effective from March 2013, will not apply to juices, milk shakes, or sweetened lattes, and grocery and convenience stores are exempt. Beverage companies and restaurants oppose the ban and have filed suit against it in the State Supreme Court in Manhattan, arguing that Board of Health cannot ratify the new rules unilaterally. In November 2012, two cities in California that are facing budget deficitsRichmond and El Monteput a referendum to tax sugary beverages on the ballot, proposing a penny-per-ounce tax on sugar-sweetened drinks. The American Beverage Associationa soft-drink industry trade group that has been an outspoken foe of the New York City soda ban and the proposed taxesspent $2.5 million in Richmond and $1.3 million El Monte in campaigning against the taxes (it was the most expensive campaign ever in El Monte). The proposal was roundly defeated in both cities, with only 23% of voters in El Monte and 33% in Richmond in favor.
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distribution process, or by the way food is handled or stored in the home. A number of US-produced foods have been affected by product recalls related to bacterial contamination. Energy drinks/caffeinated products draw regulatory scrutiny In November 2012, the FDA said that it had received reports of 13 deaths since 2008 possibly related to the use of 5-hour Energy shots and that it was investigating the situation. Earlier the agency had confirmed that it was investigating the deaths of five people since 2009 who may have died after consuming Monster Beverage Corps energy drinks. According to research presented at the American Heart Associations Epidemiology and Prevention/Nutrition, Physical Activity and Metabolism 2013 Scientific Sessions, energy drinks may increase blood pressure and disturb the hearts natural rhythm. The researchers analyzed data from seven published observational and interventional studies to determine the impact of energy drinks on heart health. In March 2013, a group of doctors, which included doctors from centers like Johns Hopkins University School of Medicine and the University of Maryland School Of Public Health, asked the FDA to limit the level of caffeine because of health risks, particularly to children. In the US, energy drinks avoid the kind of FDA scrutiny that foods and beverages face because they are marketed as dietary supplements, which are given special status under a 1994 law that exempts them from FDA approval and rules requiring nutritional labeling information. However, the European Union requires drinks with more than 150 mg of caffeine per liter to be labeled as having high caffeine content. The British Soft Drinks Association, a trade group, recommends labeling energy drinks as not suitable for children or pregnant women. In March 2013, energy drink makers Monster Beverage and Rockstar Energy decided to market their drinks as beverages instead of dietary supplements. Consumers have taken notice of the recent adverse publicity, leading to a significant slowdown in growth for the category to single-digit percentage growth from previous double digits. Cola recipes changed over cancer alerts Coca-Cola and PepsiCo have decided to change the ingredients of their colas after California added an ingredient used in Coke and Pepsi to its Proposition 65 list of substances that can cause cancer. This ingredient, 4-Methylimidazole (4-MEI), is a component of the caramel used to give Pepsi and Coke their brown color. In California, businesses that manufacture or sell products that cause exposures to significant amounts of 4-MEI must provide a warning. However, state scientists have developed a safe harbor number for 4-MEI (a level of exposure that does not cause a significant cancer risk), and products that expose the public to less than the safe harbor level do not require warnings. Both Coca-Cola and PepsiCo have asked their suppliers to reduce the level of 4-MEI used in caramel. Increased focus on food labels We think Americans are increasingly feeling the need to be more informed about the food that they buy in order to make better food choices. Nutrition Keys is a program started in January 2011 by the Grocery Manufacturers Association (GMA) and the Food Marketing Institute (FMI) that places nutrition information (e.g., calories, saturated fat, sodium, and total sugar content) on the front of packages. In September 2011, the GMA and the FMI announced Facts Up Front as the theme for a consumer education campaign. The Institute of Medicine (IOM) has recommended a simplified labeling program whereby the front of the package would provide nutrition and ingredient-related informationin the forms of stars and checks, along with the number of calories per servingthat could help consumers assess the healthiness of a product. The number of stars or checkmarks, ranging from zero to three, would depend on simple criteria to indicate what is present in the food product (e.g., levels of saturated fats, sodium, and added sugars). While this labeling system could be easier for consumers to comprehend (e.g., a three-star product would be viewed as better than a two-star product), some food or beverage products, such as candy and sweetened soft drinks, might always be labeled with zero stars. The GMA planned to go ahead with its own Facts Up Front labeling plan.
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Calorie labels. The nonalcoholic beverage companies have undertaken a calorie label initiative. The calorie counts for packages containing 20 ounces of fluids and containers larger than 20 ounces of fluids are to be labeled per 12-ounce serving for all beverages. (100% juices and juice beverages are an exception to this rule; the FDA requires them to be labeled per eight-ounce serving.) As a part of this initiative, members of the American Beverage Association (ABA) have decided on using a calorie label, which would be uniform in its design and location. The presence of very few calories in diet carbonated soft drinks (CSDs) can result in a large gap in calorie count with respect to other CSDs. In diet CSDs, juice and citric acid can add a few calories. As per the labeling regulations, if the calorie count for the beverage ranges between five and 49.9 calories, it has to be rounded off to the nearest five-calorie increment and if the beverage contains more than 50 calories, it is rounded off to the nearest 10-calorie increment. While the purpose of labeling is to help consumers, regulations such as these could lead to some misunderstanding or confusion. We think that food labeling is getting increased attention, as consumers and regulators focus both on ingredients and any health claims that food companies make. In April 2011, the FDA proposed rules that would require fast food chains and restaurants to disclose the calorie content of their foods. These rules would also be applicable to vending machines, coffee shops, convenience, and grocery stores, but will exclude movie theaters, bowling alleys, and airlines. The focus of these rules will be on food chains, which serve standardized items, rather than on stand-alone restaurants that customize their offerings. In February 2013, the FDA proposed a regulation that would require storeowners to label prepared, unpackaged foods found in salad bars and food bars, soups, and bakery items. According to the storeowners, the proposed rule will overburden them to the tune of $1 billion in the first year, as testing the foods for nutritional data will require either expensive software or off-site laboratory assessments, which are costly. Nutrition labels. Nutrition claims are increasingly coming under challenge in the beverage arena. In July 2010, a federal judge allowed a lawsuit to proceed over health claims made by Coca-Colas Vitaminwater. The suit was filed by the Center for Science in the Public Interest, which claimed deceptive and unsubstantiated health claims on Vitaminwater labels. In September 2010, the FDA warned Dr Pepper Snapple Group Inc. and Unilever for making misleading statements on labels about green tea. We expect this kind of scrutiny to continue as authorities balance a desire to protect the public and companies rights to communicate information on the attributes of their products. The FDA intends to develop standardized, science-based criteria on which front-of-package nutrition labeling must be based. The FDA has noted that, although nutrition-related front-of-package and shelf labeling are currently voluntary, they are subject to provisions that prohibit false or misleading claims and restrict nutrient content claims to those defined in FDA regulations. The FDA said that it would consider enforcement actions against clear violations. GMOs. We see the production and consumption of genetically modified foods (GMOs) as being controversial, including some concern about possible side effects, including the environmental impact of increased amounts of herbicide. We expect there will be continuing efforts to require labeling on food, providing consumers with more information about whether various items have been grown with genetically modified seeds. As of October 2011, consumer groups had filed a petition requesting the FDA to ask for compulsory labeling of genetically modified products. The FDA has rejected the labeling of genetically modified products since 1992. The Center for Food Safety has asked the FDA to revise its old policies on the matter. Currently, the FDA is in the process of deciding whether to approve genetically modified salmon and the labeling of that item. A proposal that would have made California the first state in the country to require labeling of foods that contain genetically modified ingredients was defeated on November 6, 2012, with 53.1% of voters against it. The Right to Know Genetically Engineered Food Act (Proposition 37) would have required that such foods be labeled as partially produced with genetic engineering. A month before the vote, polls indicated that 60% of voters favored the proposal, but support declined after a series of ads against it by food and biotech companies. According to MapLight, an organization that tracks campaign contributions, food and biotech companies raised $46 million to defeat the measure against $9.2 million raised by its proponents.
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Some other states like Washington are considering a ballot initiative that would require labeling foods containing genetically engineered ingredients. According to the New York Times, some of the major food companies and Wal-Mart Stores Inc. have been discussing lobbying for a national labeling program. In March 2013, Whole Foods Markets Inc. became the first retailer in the US to require labeling of all genetically modified foods sold in its stores. According to the company, the new labeling requirement was in response to consumer demand and would be in place within five years. We view food and beverage labels as a significant source of portion and calorie information, as well as other data that could have a bearing on disease management or prevention. Looking ahead, we expect increased pressure and requirements for food companies to provide evidence of third-party scientific studies that support claims that various foods or ingredients offer significant potential for improved health. We anticipate that food manufacturers will be more cautious about the language they use to publicize the prospective health benefits of their products. We think that increasing research and development costs, along with the need to meet more regulatory requirements, will become an accepted part of doing business for food and beverage companies that want to benefit from the health and wellness needs of the US consumer. What is natural? We believe that Americans today are more conscious of their food habits, of the kind of food that they eat, and many people clearly prefer healthier food options. According to the International Food Information Council (IFIC), Americans consider the nutritional value of food as the third most important factor while making their purchase decision after taste and price. In the wake of this rising consciousness, we think organic or natural food is growing in popularity among consumers. To cash in on this popularity, manufacturers are selling food products ranging from ice cream to potato chips under the natural label, although we think there is a lack of an official definition of what can be considered natural. In May 2013, Groupe Danone (France) agreed to buy Happy Family, a US maker of organic baby food, to strengthen its fast-growing infant-nutrition division. The FDA, responsible for regulating packaged food and beverages, put forth a loose definition of natural about 20 years ago. Several products are involved in a lawsuit relating to a claim of being natural; however, certain of their ingredients may not justify the claim. Corn sugar is also becoming a point of contention between sugar companies and corn processors. In April 2011, sugar companies sued corn processors, claiming that the industry is incorrectly using the term corn sugar in place of high fructose corn syrup (HFCS), which is an ingredient in various snacks and fruit drinks. According to the sugar companies, the practice of labeling HFCS as corn sugar is misleading consumers. Last year, the FDA approved the corn refiners request to replace HFCS with corn sugar while labeling packages. This request by corn refiners might have come up due to declining sales of HFCS and its being associated with the national obesity problem. We think many consumers prefer sugar to HFCS, as they believe sugar is natural and thus a healthier option. Affordability important In addition to safety, access to affordable products is another aspect of food security. In our view, the increased volatility of food prices puts additional pressure on governments to have affordable supplies available to their people. In some cases, to conserve domestic inventories and gain more control over prices, governments will take actions such as banning food exports or imposing quotas. In 201011, we think that social unrest in parts of Africa were fueled, at least in part, by food shortages or higher prices. We see affordability also being an issue in the US, where the number of people receiving aid under the Supplemental Nutrition Assistance Program (SNAP, more familiarly known as food stamps), totaled 47.6 million in February 2013, which we estimate represented about 15% of the US population. The total number of people receiving assistance was up 34% from four year earlier. In February 2013, the average monthly benefit per person was $132.55. According to the USDA, the American Recovery and Reinvestment Act of 2009 increased SNAP benefit levels and expanded eligibility for jobless adults without children. However, a new federal farm bill is expected to cut SNAP spending and may reduce eligibility.
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In addition, we see a focus in the private sector on improving access to food. In May 2011, eight foundations launched AGree, a new initiative to address long-term food and agriculture policy issues, which we expect will include a focus on natural resource limitations and environmental challenges. According to AGree, the worlds population is expected to increase by 2.6 billion (38%) over the next four decades, and there are currently 925 million people suffering under-nutrition or hunger. The organizations funding AGree are the Ford Foundation, the Bill & Melinda Gates Foundation, the William & Flora Hewlett Foundation, the David and Lucile Packard Foundation, the W.K. Kellogg Foundation, the McKnight Foundation, the Rockefeller Foundation, and the Walton Family Foundation. Frito-Lay (a unit of PepsiCo) has decided to create different snacks for different markets. For higher-end consumers, the company has introduced products like Olive Coast, kettle-cooked chips with a Mediterranean twist; for value consumers, theres Taqueros, a low-priced tortilla chip. Companies like Coca-Cola are moving to smaller package sizes as more consumers start counting their calories and their money. After introducing a 16-ounce bottle at 99 cents in 2010, it introduced a 12.5-ounce bottle at 89 cents in September 2011.
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Beverage companies are stepping up their efforts in no- and low-calorie sweeteners after recent launches of drinks with the natural zero-calorie compound Reb-A (rebiana, derived from the leaves of the Latin American herb stevia, which is reported to be several hundred times sweeter than sugar). In August, PepsiCo and Senomyx Inc., a company focused on using proprietary technologies to discover and develop flavor ingredients for the food, beverage, and ingredient industries, signed a four-year collaborative agreement to develop and commercialize sweet enhancers in lower-calorie PepsiCo beverages. To mitigate criticism leveled against food makers for the rising obesity rates in the US, companies have raised the profile of their healthier products through advertising and new packaging. For example, manufacturers have found success with 100-calorie portions of snacks, which have proven popular with consumers looking to enjoy a treat without consuming too many calories. However, as noted earlier, we think that manufacturer labeling is going to receive increased scrutiny, and we expect that there will be growing pressure to document or validate health claims related to food or beverages. Childhood obesity has received considerable attention, and there have been efforts to restrict childrens access to less nutritional or higher calorie foods and beverages in schools. Over time, as lifestyles change overseas, we expect that obesity will be receiving increased attention in other countries as well. Stevia makes inroads Playing into obesity concerns, the beverage industry has been intensifying its focus to include new products such as the stevia-based sweetener Reb-A. We think interest in stevia has been heightened by recent calls for taxes on soda, in the belief that new beverages containing natural diet sweeteners might help quell the demand for such taxes. Coca-Colas version, Truvia, was jointly developed with Cargill Inc. PepsiCos PureVia was developed with Whole Earth Sweetener Co., a unit of Merisant Worldwide Inc. Rather than emphasizing the no-calorie aspect of these beverages, we believe the companies will appeal to consumers based on the products natural formulation and, perhaps, functional benefits. Stevia has been used commercially in Japan for more than three decades and represents approximately 40% of that countrys low- or zero-calorie sweetener market, according to Cargill and Coca-Cola. It has already been approved for use in foods in 12 countries, including Argentina, Brazil, China, and Peru. In the US, stevia is currently approved (and sold) as a dietary supplement, and a tabletop version of Truvia is currently on the market. Some research suggests that stevia may improve health. Two Chinese studies found that it can reduce blood pressure among those with mild hypertension, and Danish researchers showed that stevia reduces blood glucose levels in patients with Type 2 diabetes. However, those effects were seen in doses much greater than those used in the sweetener. Conversely, some animal studies have suggested that stevia may cause cancerous mutations or reproductive problems, though the studies methodologies have been criticized. The FDA has approved both Truvia and PureVia for GRAS (generally regarded as safe) status. The acceptance of new products with this compound will depend on the extent that consumers like the taste. Some have said stevia has a licorice-like taste, indicating that it would perform better in noncarbonated beverages with heavy flavors or in lightly sweetened drinks. Others say that Reb-A is more highly refined and does not have such a strong taste. According to some estimates, sweeteners made from this compound had taken about 10% of the US consumer market for tabletop sugar substitutes only nine months after being approved by the FDA. PepsiCo and Coca-Cola are adding stevia-based sweeteners to many of their products being sold in US and European Union countries. New stevia-containing products launched so far include Pepsis zero-calorie SoBe Lifewater and reduced-calorie Trop 50, Tropicanas new light orange juice product. Stevia is also used in Pepsis new Gatorade product, G2 Natural, which is being initially sold in Whole Foods, according to industry sources. The Coca-Cola Co.s efforts include Sprite Green (a reduced-calorie version of Sprite), Vitaminwater 10 (with 10 calories), and some Odwalla juice drinks. In March 2012, Coco-Cola added Truvia to Sprite and Nestea in France. Truvia said that there are hundreds of Truvia-sweetened products in the works, the latest of which is a light yogurt launched in January 2012 by Tillamook, a dairy-farm cooperative based in Tillamook, Oregon.
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So far, consumer reception has been strong for these new products, and we see strong momentum for new product launches that include this compound. Massimo dAmore, CEO of PepsiCo Americas Beverages, has talked about an increased commitment to a stepped-up use of stevia-based PureVia in both carbonated and noncarbonated beverages. Other sweetener developments Industry sources indicate that other substances are being examined for future use as sweeteners, including monatin, which is also derived from a plant, and other derivatives of the stevia plant, including Reb-D. Cargill filed a patent for usage of monatin in beverages in 2005. Some think Reb-Ds taste profile could be better than that of Reb-A. However, new products with these substances are unlikely to reach the market for several years due to the lengthy approval process. Consumers focus on healthier lifestyles has also led to a number of prominent drink makers replacing highfructose corn syrup (HFCS) with sugar. Research has linked HFCS with obesity and diabetes. Dr Pepper Snapple Group reformulated its Snapple teas to take out HFCS and changed its logo to All Natural Snapple. PepsiCo has marketed sugar-sweetened versions of Pepsi and Mountain Dew under the Throwback brand, which comes with vintage packaging. In September 2010, PepsiCo relaunched Sierra Mist as Sierra Mist Natural, made with real sugar and nothing artificial. For its 125th anniversary, Dr Pepper Snapple Group rolled out Dr Pepper Made with Real Sugar for a limited time in summer 2010. Imperial Sugar Co. anticipates that sugar will surpass HFCS as the sweetener of choice in the US. However, this switch is unlikely to affect the overall problem of obesity in the US. Launch of mid-calorie offerings Beverage companies are coming up with beverages that lie in the mid-calorie category. The mid-calorie offerings are an attempt to strike a balance between the sugar and calorie content of the drink and its taste, and some are marketed to appeal to groups that typically avoid diet drinks. For example, in October 2011, Dr Pepper Snapple Group launched a new drink, Pepper Ten, a 10-calorie soft drink (with two grams of sugar) aimed at men, who company research has found avoid diet drinks, believing them not manly enough. In comparison, the regular Dr Pepper drink contains 150 calories and 27 grams of sugar. In December 2011, the company said that it would launch a 10-calarie variant for five more drinks in its portfolio. In March 2012, PepsiCo launched Pepsi Next, which contains half the calories of a regular Pepsi. The drink, which contains only 60 calories per can, caters to consumers who want to reduce their sugar consumption, but do not drink diet drinks because they do not want to compromise on taste. Taste is an important factor for these consumers, as they shift away from diet cokes to other options (such fruit juices and water) when they dont like the taste of these zero-calorie drinks. The sweetener that PepsiCo uses in Pepsi Next is a combination of high fructose corn syrup, aspartame, acesulfame potassium (a no-calorie sweetener marketed as Sweet One), and sucralose (Splenda). In May 2012, Coca-Cola began a very limited tested of soft drinks using a new formulation of sweetener that will lower the calories of its beverages. According to a report in the New York Times, Cokes new sweetener uses a combination of sugar, Truvia (the stevia-based sweetener) and erythritol (a sugar alcohol). Enhancements Beverages and dietary supplement companies are introducing citicoline, which is thought to enhance brain function, in their products. An organic molecule found in the body, citicoline is believed to speed up formation of brain cell membranes and may increase the production of neurotransmitters essential for the functioning of the brain. However, efforts to get FDA approval failed, as clinical trials showed citicoline to be no better than placebo. Nevertheless, companies such as Nawgan Products LLC have continued to promote their product as a brain function enhancer. Coconut water A particularly hot area recently is coconut water, which is the clear liquid inside young green coconuts (and is different from coconut milk). Celebrities such as Madonna have made coconut water famous. Coconut
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water is seen as providing functional benefits similar to sports drinks, but naturally: it is low-calorie, but with high potassium and less sodium than sports drinks such as Gatorade and Powerade. Already a popular drink in Brazil, coconut water has surpassed sales of orange juice. In August 2009, PepsiCo agreed to buy Brazils largest coconut water producer, Amacoco, for an undisclosed amount. Shortly after, in September, Coca-Cola bought a stake of less than 20% in coconut water producer, ZICO Beverages LLC, for less than $15 million. In March 2011, ZICO Beverages signed Boston Celtics Kevin Garnett as an endorser; the deal included both cash and an undisclosed equity stake. Sales of coconut water are still relatively small, and hard data are not readily available, but some industry estimates peg the US market at $400 million in sales currently. Sales of coconut water have increased sharply since the products US introduction in 2005. Some believe sales of coconut water sales could match those of niche drinks and exceed $2 billion in the next 10 years.
In a project begun by a foundation affiliated with Sabritas, its Mexican snack foods division, PepsiCo has begun working directly with small farmers in Mexico rather than middlemen to save transportation costs and improve access to corn and sunflower oil better suited to its products. PepsiCo guarantees the price it will pay for the crops upfront and allows small farmers to access credit to buy seeds, fertilizer, crop insurance, and equipment. Besides potentially improving profitability and demand, the program has raised farmer income and raised nutritional and educational standards, and likely, reduced illegal immigration. Local food movement The local food movement is on the rise in the US, with the direct-to-consumer marketing accounting for over $1.2 billion in sales annually. Farmers markets and community-supported agriculture are rising, as consumers shift to local food systems in an effort to find healthier, tastier, environmentally conscious, and energy-efficient alternatives to packaged food. According to an online survey conducted for Whole Foods Market in September 2012, consumers increasingly preferred local produce over organic food. The survey found that 47% of the people are willing to pay more for locally produced fruit, vegetables, meat, and cheese, while only 32% would pay more for food without artificial ingredients. Factor such as higher fuel prices are also forcing the consumers to source their food locally.
access to coupons are some of these factors. Channels such as retail stores are experiencing a decline in customer visits as more customers are opting to shop online or at discount stores and warehouse clubs. Even if consumers are not buying online, a majority of them are using online tools to gain information on the best price at which they can buy a certain product. With consumers showing a greater interest in online coupons, the competition in this industry is also heating up. Google Offers, a competitor to sites such as LivingSocial and Groupon, has partnered with 14 other deal providers such as Gilt City, PopSugar Shop, Plum District, and Juice in the City to offer daily discounts on various products and services. In November 2011, Google launched a Google Offers mobile app for Android phones. The app will alert consumers on any deals that are of interest to them and will let consumers look up, use, and redeem deals through their mobile device. LivingSocial and Groupon had each launched their own mobile apps earlier. Farm yields may be boosted by genetically modified crops With agricultural technology coming of age, many innovative products have been introduced over the years, such as fertilizers and pest and disease control formulations. In addition, a number of crops are being modified with the use of chemicals and radiation to raise farm yields. According to an August 18, 2011, article in the New York Times, steps such as these have resulted in an almost tenfold increase in the agricultural output per acre of land cultivated in the past century. A number of new molecular methods have helped to protect plants from pests in a more environmentally friendly and a more effective manner than conventional methods. The genetic method of doing this is viewed as more effective because the crop is made resistant to pests via induction of an extra gene, which imparts resistance in the crop against certain insects, thus requiring fewer pesticides. Precision technology helps farmers Precision agriculture is a farming management concept that relies on a collection of farm-level information technologies. These technologies work toward a judicious use of inputs and curtail the harmful impact of fertilizers and pesticides on the environment. Four key technologies that have been adopted include yield monitors, variable-rate application technologies, guidance systems, and GPS maps. Among these, yield monitoring is the most popular: more than 40% of US grain crop acres being monitored, according to the USDA. Farmers using variable-rate technologies for corn and soybean fertilizer applications have seen lower fuel costs per acre. Further, guidance systems that tell farmers the exact field positions of their equipment are showing a strong growth in usage, with 35% of wheat producers having adopted it by 2009. Application of GPS maps and variable-rate input technologies still needs to pick up pace.
Energy drinks Ready-to-drink coffee Bottled w ater TABLE B07: CHANGES IN US Ready-to-drink tea Sports drinks BEVERAGE CONSUMPTION Flavored & enhanced w ater Carbonated soft drinks Fruit beverages Total Source: Beverage Marketing Corp.
As we had expected, carbonated soft drink trends reversed in 2010 as the economy improved: sales fell 0.8% in 2010 1.7% in 2011, and 1.8% in 2012, and the category lost overall share in the liquid refreshment beverage market. The volume of all liquid refreshments sold rose 1.2% in 2010, 0.9% in 2011, and 1.0% in 2012, after slipping 2.8% in 2009, according to Beverage Marketing Corp. After a double-digit percentage fall in 2009, sports drinks rebounded strongly, rising 9.4% in 2010, 8.8% in 2011, and 2.3% in 2012. Smaller categories, such as ready-toINDUSTRY SURVEYS
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drink teas, energy drinks, and ready-to-drink coffee, performed well, jumping 4.9% in 2012 (4.8% in 2011), 14.3% (14.4%), and 9.5% (9.5%), respectively. However, these three categories, in aggregate, accounted for no more than a mid-single-digit percentage share of total US beverage volume. Bottled water had been one of the fastest growing beverage segments in recent years. After advancing 10.8% in 2005 and 9.5% in 2006, volume growth for bottled water slowed to 6.1% in 2007, then fell 1.0% to about 8.7 billion gallons in 2008, and dropped another 2.7% in 2009. Growth then resumed, with volumes up 3.5% in 2010, 4.1% in 2011, and 5.8% in 2012. We expect that bottled water will continue to grow in the long term, assuming that concerns about the safety of municipal water supplies, a general interest in healthy living, and the populations increasing affluence more than offset environmental concerns about plastic bottle usage. In addition, manufacturers are continually launching new products that drive bottled water consumption, especially in the flavored or enhanced water categories, including products with fruit flavors or the addition of vitamins. While there is clear growth in the noncarbonated beverage market for developed economies, this trend is also showing up in emerging markets. According to a study by Euromonitor, a market research and analysis firm, the noncarbonated beverage market in India is expected to grow faster in 2011 than the carbonated beverage market (around 14% versus 5.6%). Just as in the developed markets, consumers in emerging markets are becoming conscious about their health and have concerns over the presence of pesticides in carbonated beverages. These reasons justify the move toward noncarbonated beverages. Sports and energy drinks gain in popularity Sports and energy drinks have become increasingly popular, which we attribute, in part, to an interest in improved physical fitness and to the busy lifestyles that many people maintain. In contrast to the US carbonated soft drink industry, which is dominated by the three top franchise companies (Coca-Cola, PepsiCo, and Dr Pepper Snapple Group), in this segment, three of the top 10 companies based on market share for 2010 are smaller businesses with an energy drink emphasis. The increase in the consumption of bottled water and sports and energy drinks has contributed to a market share loss for traditional carbonated beverage manufacturers in the total liquid refreshment beverage market. Coca-Cola is still the worlds largest beverage company, but it is also the most vulnerable to losing share as consumers buy more noncarbonated beverages. The company added noncarbonated drinks to its portfolio later than some of its competitors did; until 2008, Coca-Cola had been less successful in the category. In our view, Pepsi had a more well-rounded beverage portfolio that includes the bottled water brand Aquafina and is complemented by a large snacks business. However, S&P believes that in recent years, boosted by its purchase of Energy Brands glacau products, Coca-Cola gained share as Pepsis system retrenched in the competitive water market and Gatorade weakened. Looking ahead, we expect further focus on functional foods, aimed at helping consumers to meet specific goals. This could include products meant to satisfy peoples hunger, without actually adding many calories. Such satiety foods could increasingly be used in efforts to reduce weight. However, as with other food offerings that potentially overlap into the area of consumer health, we expect that product success will at least partly depend on research efforts, including documentation of what impact, if any, a given food has related to both specific objectives and overall health.
In addition, we see packaged food makers trying to sell products that consumers can eat away from home. Companies have developed portable foods such as cereal bars, drinkable yogurts, and snacks in individual size packages. In addition, we think there is a growing trend among consumers to have a number of small meals each day, rather than three larger meals, because of a lack of time. Internationally, in the developing markets, growing urbanization is likely to further boost the demand for packaged and ready-to-eat foods. In developing economies, a relatively higher percentage of the total food consumed is food-at-home; however, with changing lifestyles, the trend towards packaged food as a foodat-home category is gaining strength.
INDUSTRY STRUCTURE
Domestic food companies generally fall into two groups: those engaged in the early or middle stages of making a processed food product, and those involved in the later stages. The US nonalcoholic beverage industry is generally divided into franchise or syrup companies and bottlers. Portions of the food and beverage industries are quite concentrated, largely due to strong brand names, successful product development, and acquisition activity. For example, products from Coca-Cola Co. and PepsiCo Inc. account for more than 70% of US carbonated soft drink sales. Other categories with a relatively high concentration, or a large portion, of sales in the hands of a few companies include ready-toeat cereals, candy, soup, and baby food. Food: early- to middle-stage firms Referred to as agribusinesses, companies that concentrate on the early to middle stages of food production tend to engage in such activities as the harvesting, milling, or processing of raw agricultural commodities. They also may plant and raise crops, although they primarily buy these commodities from farmers. Agribusiness end products generally are sold to processors and food packagers, which use the ingredients to make finished consumer food products. Agribusiness companies, such as Archer Daniels Midland Co., Bunge Ltd., and privately owned Cargill Inc., process and merchandise raw grains like corn, wheat, and soybeans. Their end products include oils, syrups, starches, and meals used in the foods and feed industries, as well as corn sweeteners used in soft drinks. Other food companiessuch as meat packers Smithfield Foods Inc. and Tyson Foods Inc., and poultry processor Pilgrims Pride Corp.slaughter and process livestock and chickens for retail sale. Late-stage firms Companies engaged in the late stages of consumer food production are generally referred to as food manufacturers or food packagers. These companiesincluding Kellogg Co., H.J. Heinz Co., Hershey Co., and Kraft Foods Inc.sell their finished goods to food retailers, which in turn sell the products to consumers. We have recently seen a shift toward consumers spending a larger portion of their food dollars for eating at home. However, we believe that food manufacturers will continue to experience growth opportunities from offering portable products for consumption by time-constrained, on-the-go consumers out of the home.
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INDUSTRY SURVEYS
BEVERAGE COMPANIES
Franchise companies (or brand owners) are mainly in the business of making soft-drink concentrates flavored syrups that are mixed with carbonated water to produce various beverages. These franchise companies both manufacture and sell products themselves, or they appoint bottlers to sell, distribute, and, in some cases, manufacture these products under licensing agreements. Brand owners, such as Coca-Cola Co. and Pepsi-Cola (PepsiCo Inc.s beverage unit), generally own both the beverage trademarks and the secret formulas for their concentrates. They manufacture and sell the concentrates to licensed bottlers, and develop new products and packaging for use by their bottlers. Other important functions include developing national marketing, promotion, and advertising programs to support their brands and brand image, as well as coordinating selling efforts with respect to national fountain, supermarket, and mass merchandising accounts. They also provide local marketing support to their bottlers. Bottlers are generally responsible for manufacturing, selling, and distributing products under brand names licensed from brand owners in an exclusive territory. For carbonated soft-drink products, a bottler buys the brand owners soft-drink concentrate, which it combines with sweeteners and carbonated water, packages it in bottles or cans, and sells to wholesalers or retailers. Bottlers usually handle the brand owners fountain accounts as well. These accounts are licensing agreements between the brand owner and restaurants, stadiums and arenas, or school cafeterias. The bottler combines the brand owners soft-drink concentrate with sweeteners to yield syrup, which it delivers to fountain customers. In the noncarbonated beverages category, the bottler either manufactures and packages such products or purchases them in finished form and sells them through its distribution system. Bottling networks There are three major soft-drink bottling networks in the United States and Canada. The largest is the CocaCola system, which includes Coca-Cola Refreshments and Coca-Cola Bottling Co. Consolidated, as well as other independent Coca-Cola bottlers. The next largest is the PepsiCo system, which includes Pepsi Bottling Group and PepsiAmericas Inc. The parent company of the third bottling networkmuch smaller than the first twois Dr Pepper Snapple Group Inc. In May 2008, ownership of this soft drink business was spun off from candy company Cadbury Schweppes PLC, with its successor business now known as Cadbury PLC. The major North American bottling systems are not necessarily exclusive. Some Coke or Pepsi bottlers may also handle Dr Pepper Snapple products, for example.
Lower sensitivity to commodity prices The financial results of packaged food companies are less sensitive to changes in raw material costs than are those of agribusiness companies, the major buyers of such commodities. The processing of agribusiness commodities is a low-margin, low-value-added business. By comparison, there is more value added at the packaging and marketing level; therefore, costs are less commodity-based and margins are easier to maintain from year to year. Marketing costs, which constitute a high proportion of total input costs for packaged food products, tend to be relatively stable. The packaged food producers active use of hedging techniques helps to limit their exposure to commodity price fluctuations. Their growing reliance on global sourcing of important raw materials helps further limit the impact of raw material shortages in a given geographic region. Typically, we think there is likely to be a lag effect in a companys ability to pass along its higher commodity costs to consumers. In our view, rising ingredient costs have placed additional pressure on packaged food companies to operate their businesses efficiently, a focus that we see reflected in restructuring programs that include activities such as the consolidation of manufacturing facilities and reductions in the work force.
category, though penetration rates vary. Going forward, we anticipate that private label offerings will increasingly become available in higher priced product categories, including the growing organic food area.
companies initially entered foreign countries through joint ventures with local companiesa relatively lowcost way to participate in overseas markets that requires less initial investment than an outright acquisition. Through a joint-venture relationship, a US company can learn from its partner about the markets unique customs, tastes, and regulatory issues. Once they have this market knowledge, many US companies acquire their joint venture partners and build on their businesses through more joint ventures or acquisitions. Low volatility in business cycles Companies in the processed food and beverage industries make products that are staples, and thus generally are less sensitive to declines in business activity than are companies in other industries. Because people must eat, they purchase food and drinks frequently; demand does not fluctuate significantly. As a result, food and beverage companies are considered defensive in nature and have historically been safe havens for investors during domestic economic downturns.
REGULATION
Almost all food and beverage products in the United States are subject to regulations administered by the US Food and Drug Administration (FDA), or, for products containing meat and poultry, by the USDA. Among other activities, these agencies enforce statutory prohibitions against misbranded and adulterated foods, establish ingredients and/or manufacturing procedures for certain standard foods, set standards of identity for food, determine the safety of food substances, and establish labeling requirements for food products. In addition, individual states can be involved in the regulatory process. States may license and inspect food and beverage production facilities located within their borders. They may also enforce federal and state standards for identifying and grading products. Some impose their own labeling requirements. Many regulate trade practices concerning the sale of certain types of products. Many food commodities on which food and beverage businesses rely are subject to governmental agricultural programs. These programs, which can have substantial effects on prices and supplies, are subject to congressional review. Looking ahead, we expect that a growing emphasis on marketing the prospective health benefits of foods will place increased pressure on regulators to review and monitor the characteristics and labeling of such products.
year rise as of May 2013 included a 30% increase from slaughter chickens, and a 22% rise from raw milk. Wheat and corn were up 15% and about 12%, respectively. Ending stocksto-use ratio for agricultural crops. This is a way to look at inventory levels for agricultural crops, relative to recent use levels. For example, if at the end of a crop season, ending stocks totaled 10 million bushels, and the use of that crop in the most recent season was 50 million bushels, the leftover crop equaled 20% of recent use. A relatively low ending stocks ratio may set the stage for upward price pressure on future crop prices, especially if the upcoming harvest is disappointing. However, year-end inventories may exclude some early production from the new season. Interest rates. The level and direction of interest rates may influence how active a company will be in making acquisitions and in other uses of cash, such as capital expenditures, dividends, and stock repurchases. High or rising interest rates increase the cost of borrowing; this in turn may reduce companies willingness to make big outlays, such as those needed to undertake a sizable facility expansion or a share repurchase program. The reverse is also true: low or falling interest rates decrease the cost of borrowing, thus making capital expenditures and the like more affordable. Longer-term US interest rates can be influenced by various factors, including credit demand, foreign investors interest in owning US debt, and the US inflation rate. As of June 2013, Standard & Poors Economics was projecting the interest rate on three-month Treasury bills (a proxy for short-term interest rates) would average 0.1% in both 2013 and 2014, following an average of 0.1% in 2012. The yield on 10-year notes (a proxy for longer-term rates) was projected to average 2.0% in 2013 and 2.5% in 2014, versus 1.8% in 2012. Currency exchange rates. The exchange rates between the US dollar and foreign currencies are increasingly important, given the rising proportion of US food and beverage industry sales derived from markets outside the United States. For companies with significant operations in foreign markets, a decline in the value of the US dollar compared with foreign currencies generally boosts reported profits that are denominated in US dollars. This is because the foreign profits are translated into more dollars after foreign currency exchange rate translations. The reverse is also true: an increase in the value of the dollar relative to foreign currencies generally hurts the amount of reported dollar-denominated profits. Most of the long-established US food and beverage companies have sizable operations in Japan, the United Kingdom, and Europe, making the exchange rate of the US dollar against those regions currencies (the yen, pound, and euro, respectively) particularly important to reported industry profits. However, the impact of currency translation on dollar-denomination profits does not necessarily reflect a significant change in the underlying health of the company. In general, strengthening of the dollar is likely to adversely affect reported revenue and profits from foreign markets, while a weaker dollar is beneficial. However, the impact can be limited by hedging in the foreign currency markets. As of May 27, 2013, according to currency website www.xe.com, the value of the US dollar relative to the euro had strengthened about 3.3% in the previous 12 months. Relative to the British pound, the dollar was up about 3.6% from where it was one year earlier, and against the Japanese yen, the dollar was up about 21.2%, year to year. Imports and exports. Agriculture, food, and nonalcoholic beverages are global industries, and there is a considerable amount of related trade between various geographic regions. US food and beverage companies may have opportunities for growth in foreign markets that exceed their prospects in the US, due to such factors as rising income levels overseas. Alternately, we see the diversity of the US population leading to a growing interest in ethnic foods, some of which may already be more significant product areas in foreign cultures and markets. A monthly US Department of Agriculture report on agricultural imports and exports is at http://www.ers.usda.gov/data/FATUS/monthlysummary.htm.
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INDUSTRY SURVEYS
QUALITATIVE ISSUES
It is important to consider how well a company is positioned and managed. Analysts making such assessments ask various questions. How big is the company, and does it exploit the potential advantages of being either large or small? Can it raise the capital needed to maintain its operations and to grow? Has the company differentiated itself from its rivals in ways that give it a competitive advantage? What is the likelihood that other companies will turn up the competitive heat in its particular markets? Product mix When studying a packaged food or beverage company, one of the most important things to note is its product mix. Ideally, the company produces hard-to-copy goods with leading market shares and premium prices in growing categories. That situation is more often the exception than the rule, but it should be an important goal of any company that wants consistent sales and profit growth in the highly competitive food and beverage industries. One way that a company can differentiate its products in the minds of consumers is to develop wellrecognized and highly regarded brand names. Effective brand management fosters all-important consumer loyalty, which in turn creates the opportunity for market share growth and above-average pricing flexibility and profitability. A strong brand name also creates an opportunity for product line extensions and, in some cases, licensing fees and royalties. Business mix Observe the trends in a companys business mix. Has the company been acquiring or divesting businesses? It is important to learn what is behind such activity. In some cases, a company can create synergies by combining similar businesses, with benefits including increased purchasing power, capacity utilization, and more products to send through an existing distribution network. However, acquiring multiple businesses with little in common can spread a companys financial and managerial resources too thin. In addition, overpaying for acquisitions that do not contribute to a companys earnings in the near term can be a strain on profit margins and finances. We also advise looking at a companys product development efforts. How much is it spending on research and development, both in absolute dollars and as a percentage of sales? To what extent are new products contributing to overall sales? Regulatory environment With the growing interest in and popularity of organic and enhanced (e.g., with added vitamins) foods, and with concerns about food safety, we view the regulatory environment as increasingly important for food and beverage companies. We advise monitoring whether a company has incurred significant product recalls, and whether governmental or safety groups are calling attention to safety concerns related to a companys products. However, in our view, one should keep in mind that a product recall does not mean there is a problem or a concern related to all of a companys products. Information or definitions related to organic food can be found at the US Department of Agricultures website, at http://www.nal.usda.gov/afsic/pubs/ofp/ofp.shtml. Geographic diversity A companys current geographic reach and its plans for international expansion are also important. Over the years, many major US food and beverage companies have fueled growth by expanding into international markets. We see a growing emphasis on developing markets such as Russia, China, and India. Some food and beverage companies now receive much of their current income from abroad.
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Diversification can help smooth earnings trends, as growth in one market can offset weakness in another. For some companies, however, international expansion can include sizable investments (acquisitions, new manufacturing facilities), which can hurt near-term earnings and do not guarantee an eventual payoff. Sometimes, in an effort to facilitate growth in a new market, a US company may work with a local joint venture partner that may already have established infrastructure and relationships. Keep in mind that fluctuations in foreign currency values can influence the way that financial items (e.g., sales and earnings) are reported in US dollars. For companies with significant operations in foreign markets, a decline in the value of the US dollar compared with foreign currencies generally boosts reported US dollar profits. This is because the foreign profits are translated into more dollars after foreign currency exchange rate translations. The reverse is also true: an increase in the value of the dollar relative to foreign currencies generally hurts the amount of reported dollar-denominated profits. Moreover, remember that the impact of currency rate fluctuations on dollar-denominated profits does not necessarily reflect a significant change in the underlying health of the company. For example, if the US dollar appreciates relative to the euro, sales made in various European countries would translate into fewer dollars for US companies, even if sales measured in the local currencies are looking better. Information on foreign currency rates can be found on the financial pages of various periodicals, and on a number of websites. Although we think the long-term outlook for international sales is generally favorable, companies with business outside the US can also be affected by various trade factors, including tariffs, quotas, or even bans on some of their products. Management S&P Capital IQ looks favorably on seasoned management teams that have performed well, compared with their peers, in both good times and bad. However, some executives may be particularly good at containing costs, while others are better at creating new products or managing expansion. In evaluating a company, it is a good idea to look at top managements track recordeither at that company or at other firmsand to assess whether the skills demonstrated in the past match up well with the companys current needs or goals. Financial strength In assessing a companys financial strength, it is important to look at whether it is likely to have enough cash to operate its business well. We advise comparing the companys cash interest costs with the amount of operating cash flow (before interest costs) that the business is expected to generate. It is also important to determine if a company is likely to seek additional funds (e.g., offering debt or equity) in the future, either to finance current operations, refinance existing debt, or to grow. A companys financial strength affects its access to funds. We advise investors to look at whether a companys debt has been rated by one of the major credit agencies, such as Standard & Poors Ratings Services or Moodys. In general, debt instruments with a higher credit rating carry a lower interest rate than do those issued around the same time with a lower credit rating. However, once debt has been issued, the rating agencies may raise or lower their assessments in response to changes in business conditions.
QUANTITATIVE MEASURES
When assessing any company, it is important to analyze income statement, cash flow, and balance sheet data. The measures of particular importance to food and beverage companies are described below. Analyzing the financial statements Looking at financial statements is important. Sources of information include quarterly and annual reports to shareholders, filings with the Securities and Exchange Commission (SEC), and reports put out by advisory firms (such as S&P Capital IQ and Value Line) and brokerage companies. Investors are increasingly able to hear corporate managements talk about their businesses, via conference calls or company-provided Webcasts, often around the time that they release their quarterly earnings. Sometimes there are presentation slides available at company websites. There are various significant
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financial considerations one should be aware of when analyzing a food or beverage company. We describe these considerations below. Sustainability of revenues and earnings When looking at both revenues and profits, try to determine whether contributions to the current results are likely to recur in future periods. If one-time factors have either inflated or depressed results in a prior period, these should be examined as well. For example, earnings may be unsustainably high due to a gain from an asset sale; conversely, they may be unusually low because of a restructuring charge or a one-time write-down in the value of an asset. Other items that can cause peculiarities in reported profits include unusual tax rates or the cumulative effect of an accounting change. If a particular earnings report contains a significant amount of one-time items, it is advisable to adjust the reported numbers to what would be considered normalized levels. This may provide a better base from which to project future levels of earnings. However, we advise looking at one-time items as well. The size, nature, and frequency of restructuring charges, write-downs, and asset sales gains can reflect strategic changes by management. In addition, such measures as return on overall investment (including the benefits or charges related to assets that were divested) show how well a company has been managed over time. One-time items can have significant implications for future results as well. For example, a restructuring charge can lead to cost savings in subsequent periods. In addition, while future operating results are likely to depend primarily on results from continuing operations, the companys level of profit and loss from discontinued operations provides a view of how earlier investments have fared. Furthermore, some ongoing costs of doing business can change significantly due to macroeconomic and industry factors, or world events. For example, agricultural costs could rise due to drought conditions, or higher energy costs could result from political changes. While Wall Street often focuses on short-term profits, we believe that longer-term performance (five or 10 years) also should be assessed during a company evaluation. Normalized results (which exclude financial items generally expected to be nonrecurring, such as gains on asset sales and restructuring charges) should be considered, along with results that reflect all profit and loss factors, including one-time items. Accounting items to review There are various corporate accounting issues to consider. For example, an analyst should consider if the company has significant pension or employee benefit plans, and if it is accounting for them in a realistic and conservative manner. Also, keep in mind that a change in accounting standards can affect year-to-year comparisons when calculating growth rates for key items such as earnings. Looking at the income statement When analyzing a food or beverage companys income statement, there are a number of important items to assess. Sales, profit margins, and earnings per share are among the major items, which we discuss below. Sales. In reviewing sales, growth is good to seebut it is also relative. A companys sales growth rate should be compared with those of both its markets and its competitors. It is important to determine what is behind any sales growth. Does it come from price increases or volume gains? Has the company made acquisitions? Is the company gaining market share, or is it just riding market growth? For many companies (especially beverage companies), it is also important to look at sales growth over a full year or on a year-over-year basis, rather than making sequential (quarter-to-quarter) comparisons. Seasonal factors can influence sales in any given quarter. Sales in quarters with warmer months typically constitute a greater proportion of total sales than sales in quarters with colder weather. Profit margins. Profitability ratios or margins are measures of how successful a company is in turning revenues into profits. When analyzing profitability ratios, the analyst should compare a company against its own past performance and against the performance of similar companies. In our view, trends in profit
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margins should be evaluated. A number of factorsincluding acquisitions, fluctuations in necessary raw material costs, and changes in pricingcan cause significant volatility. A companys cost structure should be examined. How important are costs of raw materials (e.g., ingredients) and labor? If raw materials are significant and their costs can be volatile, we advise trying to learn if the company has locked in a price on some of the costs for the year ahead. (Locking in a price is sometimes known as hedging.) If the companys cost structure is significantly subject to fluctuations in commodity prices, it is a good idea to keep an eye on the level and direction of such prices. Details on current and expected prices can be found in the financial pages of such periodicals as the Wall Street Journal and the New York Times, and on various websites. A companys gross profit margin, which largely reflects manufacturing costs, will depend largely on the product mix and how it runs its business. Companies such as Coca-Cola and Kellogg Co. have among the highest gross profit margins in the food and beverage industries, helped by their strong brand names and high market share positions. A companys operating margin performance includes selling, general, and administrative expenses. Marketing tends to be a significant cost for food and beverage companies, and is likely to influence sales growth. If a company has a good marketing plan, an investment in advertising and promotion should help enhance and bolster future sales. If a company scrimps on marketing outlays, longer-term growth prospects may diminish. If a company has provided good support for its brand and has a product that consumers like, this should help it to charge a premium price for a branded product and raise prices when necessary without causing a proportionate reduction in demand. In comparison, so-called private label products (typically store brands) are likely to receive less brand support, but tend to sell at lower prices. We advise keeping an eye on a companys overall operating profit margin. If it starts to narrow, this could be a warning signal that the companys cost structure is deteriorating. However, keep in mind that sometimes a company will incur additional short-term costs from which it expects to receive longer-term benefits. A companys attention to cost containment can also be reflected in restructuring efforts, which often involve such actions as employee reductions, plant closings, and/or divestitures. We advise looking at whether a companys restructuring efforts seem to be directed at a logical and favorable strategic result. The net profit margin reflects net income divided by sales (i.e., how much of each sales dollar ends up as after-tax income). For some processors of commodity-oriented food products, such as vegetables and livestock, net profit margins over the long term are likely to be relatively lowabout 1% to 4%. Archer Daniels Midland Co. and Tyson Foods Inc. are two companies in this category. For some packaged food producers, such as Kellogg and H.J. Heinz, net profit margins have typically ranged from 6% to 12%. A similar dichotomy is seen among beverage companies. For bottlersthe beverage companies that principally bottle and distribute the final productnet profit margins are relatively low; the common range is 2% to 4%. This reflects the high level of amortization of goodwill charges and acquisition-related interest expenses inherent in operating such a business. However, for companies such as Coca-Cola and PepsiCo Inc., which produce the syrups used in soft drinks, net profit margins are typically much higher. Earnings per share (EPS). Earnings per share can be analyzed in a number of ways. Be on the lookout for special (sometimes called extraordinary or nonrecurring) items, such as asset sales and restructuring charges (e.g., for plant closings or employee layoffs) that can significantly affect the reported EPS. Adjusting EPS to exclude special items may provide a more meaningful growth comparison between different quarters or years. In addition, adjusted EPS can be an important benchmark for valuing the companys stock against those of its peers, as well as against companies outside the industry. However, keep in mind that special charges may occur regularly over a multiyear period, and this should be considered when assessing the business. US accounting standards give companies substantial flexibility to prop up per-share earnings, at least for a short time. For example, this can be accomplished by repurchasing stock or by stretching out a depreciation
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schedule. In addition, year-to-year results may be affected by a more extensive accounting change, such as using a different method for valuing inventory. Cash flow analysis Reported earnings do not always provide a clear reflection of cash flow generation or financial strength. It is important to evaluate businesses based on how much cash they generate and absorb. These figures may differ substantially from reported earnings. To analyze sources and uses of cash, we advise consulting a companys consolidated statement of cash flows. When looking at the income statement, be mindful that some expensessuch as depreciation, amortization, and write-downs in asset valuesare likely to be noncash items (which do not require an outlay of cash). These noncash items tend to make a companys pretax operating cash flows higher than its reported operating profit. However, companies frequently have cash outlays that are not included on the income statement, such as capital expenditures on new construction and renovations, debt repayment, and dividends to shareholders. These items, which appear on the cash flow statement and are reflected on the balance sheet, are sometimes discretionary and should be considered when evaluating a companys cash flow. Most large US food and beverage companies have excess cash that can be used for things other than just maintaining existing equipment. It is important for a company to find the optimal balance between reinvesting surplus cash in its businesses and using the cash to reward present shareholders. In recent years, most US food and beverage companies have allocated a relatively large portion of their excess cash to shareholders return, through stock buybacks and dividends. A companys dividend policy and stock repurchase activity may be affected by a variety of factors, including how much cash it generates and what the tax laws are. In our view, it is important to consider the liquidity (access to cash) of the company itself, as well as that of its suppliers and customers. The ability to produce a product could be hurt if a supplier experiences cash flow difficulty, and is unable to supply needed ingredients or materials. Financial problems for a distributor or a retailer could also affect a companys ability to get paid in a timely manner for a product shipment. Balance sheet analysis Balance sheet ratios may offer a view of a companys financial health. They also may indicate how well a company is putting its assets or capital to work. Book value measures the balance sheet value of a companys assets minus its liabilities. Particular attention should be paid to tangible book value, which gives credit to assets like land, buildings, and equipment, but excludes items such as goodwill (which may include a portion of the purchase price of previous acquisitions). Keep in mind that balance sheet valuations may not reflect assets replacement cost or their worth to someone else. In addition, the extent to which intangible assets (like a brand name or customer loyalty) contribute to a companys worth may not be adequately reflected in a companys book value, even though they may add greatly to the companys worth. Also, look for non-core assets that could possibly be divested, generating proceeds that may be used to reduce debt, repurchase stock, or invest in other businesses. When considering significant potential divestitures, it is advisable to take into account whether an asset sale likely would lead to a sizable tax bill. It is also advisable to consider whether a companys physical assets are being adequately maintained or refreshed. For companies that own properties, a portion of capital spending typically goes toward maintaining or refreshing their facilities. This is sometimes known as maintenance capital expenditures, the level of which (actual or expected) may be detailed in company news releases or conference calls. Other capital expenditures may be oriented toward expansion or growth (expanding manufacturing capacity). Keep in mind that a company may own less than 100% of some of its assets. In cases where a company has a majority ownership interest in an asset or business, the smaller ownership stake of its partner(s) may be reflected on the liability side of the balance sheet in a line item known as minority interest. Alternatively,
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if a company owns less than 50% of an asset or a business, this may be reflected on the companys balance sheet in a line item related to investments. A companys success in investing its capital is indicated by ratios like return on assets (ROA) and return on equity (ROE). In these calculations, annual net income is typically divided into an average asset or equity level during the year being examined. Balance sheet ratios should be examined to spot possible cash flow problems. A significant change in a companys current ratio (the ratio of current assets to current liabilities) can signal a potential drain in the capital needed to run the business. An unusual inventory increase could lead to an asset write-down (because accounting rules require that product inventories be carried as close to their market value as possible) or a slowdown in production. The rate of inventory turnover (measured by the ratio of inventory to sales) can reveal productivity changes and production bottlenecks. The ratio of long-term debt to total capitalization varies considerably among the major food and beverage companies. However, companies with strong and relatively stable cash flow should generally be able to accommodate higher relative debt levels. In general, we see leading US food and beverage companies averaging a ratio of long-term debt to total capital in the area of 30% to 40%. The optimal amount of long-term debt depends on numerous variables; therefore, it is difficult to arrive at an exact figure. Analysts must weigh the benefits of higher debt, which could leverage EPS growth and shareholder returns, with the benefits of a cleaner balance sheet, which is likely to provide a higher degree of safety and more ready availability of funds. Too much debt increases financial risk, but too little might mean missed opportunities. Also, consider whether the company has any commitments or prospective liabilities that are not included on its balance sheet. This could include a conditional guarantee to repay debt of another firm (such as a franchisee) or a commitment to buy back, upon request, some of its own debt at a future point. Try to determine the existence or likelihood of any triggering events (e.g., weaker operating results) that could cause debt holders to demand early repayment.
VALUATION MEASURES
Valuation measures are used to determine how much a company or its stock is worth. Common measurements include multiples of cash flow and earnings, with growth rates being used as a tool in deciding which multiple to pay. Keep in mind that valuations depend on various factors, including overall investor sentiment, industry conditions, the level of interest rates, and the extent to which future earnings seem predictable. As is the case with other measures, valuations of a particular company should be compared with those of similar companies in the same industry. Price/earnings (P/E) ratio. When valuing a companys stock, a good place to start is the basic investment ratio of stock price to earnings per share, called the price/earnings ratio. This ratio (or multiple) is useful in judging a companys performance relative to firms in the same industry, as well as in other industries. In recent years, the major US food companies have tended to command higher P/E ratios than companies in other mature industries. This is attributable to the industrys relatively good earnings performance, aboveaverage financial health, and low investment risk profile during this time. Cash flow multiples. Companies may also be valued at a multiple of historical or projected cash flow. In an environment where there is considerable acquisition activity occurring, it may be helpful to look at prices that are being paid for companies. However, the acquisition environment may change: just because one company has been acquired, does not mean that another one will be purchased.
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GLOSSARY
AntioxidantA substance found in various foods that may protect against an acceleration of the aging process, and the onset or development of some diseases. Foods thought to contain antioxidants include various types of berries and beans, broccoli, garlic, and soy. CaffeineFound in many leaves, seeds, or fruits, caffeine can be a nervous system stimulant. Common sources include coffee, cola nuts, tea leaves, and cocoa beans. CalorieThe amount of energy needed to raise the temperature of one gram of water, from a standard starting point, by one degree centigrade. Energy drinksBeverages that contain relatively high levels of caffeine and may also include ginseng. Well-known examples include Red Bull and Rockstar. Enriched foodsFoods with vitamins or minerals added to replace those lost when the food was processed. FiberWith food, this typically refers to parts of fruits, vegetables, grains, nuts, and legumes that cannot be digested by humans. High-fiber diets may reduce risks of some disease. Fortified foodsFoods with additives (typically minerals or vitamins) that are intended to provide a benefit, such as combating a deficiency in the body or preventing disease. Functional beveragesAlso called new age beverages, this category includes all-natural juices and iced herbal teas. Manufacturers seek to distinguish this category from traditional soft drinks by emphasizing health benefits and using innovative packaging designs. Functional confectioneryConfectionery items (such as cough drops and chewing gum) with decongestant, analgesic, antacid, or teeth-whitening properties. Functional foodsThese are foods or ingredients that may provide health benefits that go beyond basic nutrition, such as lowering or preventing the risk of some disease. Genetically engineered (or modified) foodTo produce such food, foreign genes are inserted into the genetic code of a natural item, such as a plant or an animal. Going greenA philosophy or process in which businesses or individuals emphasize renewable resources, conservation, and concern for the natural environment. In the food industry, this may include reducing energy usage, carbon emissions and waste, and using recyclable materials. Natural foodTypically, foods that are minimally processed and have no preservatives. Unlike organic, however, which has been defined by the USDA, natural has no official or certified USDA definition when applied to foods, and thus is not interchangeable with organic. NutraceuticalsSometimes considered synonymous with functional, nutraceuticals are ingredients or foods that may provide health benefits that go beyond basic nutrition. This may include enhancing the bodys digestive system, and preventing, treating, or reducing the risk of disease. Examples include beta-carotene (found in carrots and various fruits); insoluble fiber (e.g., wheat bran); prebiotics or probiotics (found in yogurt) and soy protein. Nutraceuticals may also refer to products taken from foods and sold in medicinal forms. NutrientA substance (e.g., proteins, carbohydrates, and vitamins) that can be metabolized by an organism to provide energy and build tissue.
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Omega-3 fatty acidsEssential fatty acids found in certain fish and vegetable oils; possible benefits of eating Omega-3 fatty acids are thought to include reducing the risk of cardiovascular disease. Organic foodsThese foods are typically produced by farmers who emphasize the use of renewable resources and the conservation and quality of soil and water. In the US, there are USDA standards for a food to be certified as organic. For example, organic meat, poultry, eggs, and dairy products are expected to come from animals that are given no antibiotics or growth hormones. In addition, according to the USDA, organic food is produced without the use of most conventional pesticides, fertilizers made with synthetic ingredients or sewage sludge, bioengineering, or ionizing radiation. Farms and processors that handle organic food must undergo a USDA-related certification process. However, the USDA makes no claims that organically produced food is safer or more nutritious than conventionally produced food. A product that carries the USDA Organic seal must be at least 95% organic. PET (polyethylene terephthalate)A thermoplastic polymer resin of the polyester family that is used to make containers for foods, beverages, and other liquids. Private labelProducts that are often marketed and sold under a retailers own brand, or under the brand of a distributor or wholesaler. Many supermarket chains sell products under their own labels. These goods may be produced by a companys own facilities or by another manufacturer. Private label goods are likely to be sold at less expensive retail prices than non-private label products from national brand food manufacturers. However, private label goods also may receive considerably less advertising support. ProbioticsDietary supplements that contain potentially beneficial bacteria, yeast, or microorganisms; may be found in foods such as yogurt, cereal, and cheese. Possible benefits include helping with digestive problems. Prebiotics are non-digestible carbohydrates that act as food for probiotics and encourage the growth of generally beneficial bacteria in the intestines. Ready mealsPrepackaged meals that are canned, frozen, dried, or fresh and are meant to be consumed immediately as is, or at the convenience of the customer following minimal reheating at home. Slotting feeFees charged by retailers to secure premium shelf positioning in stores. Manufacturers that pay slotting fees may have their products placed at favorable positions within store aisles; those that do not will have their products placed on less prominent shelves. Stockkeeping unit (SKU)An individual product with a separate universal price code (UPC), a number given to every item to distinguish it from other merchandise for inventory and accounting purposes. Stocks-to-use ratio (S/U)For any given commodity, S/U is the level of carryover stock as a percentage of the total use of the commodity; it is a measure of commodities supply and demand interrelationships. Sustainable agricultureA food-growing process that is thought to be relatively healthy or favorable for consumers, animals, and the environment. Techniques used include conservation and preservation of land and other natural resources, crop rotation and minimal use of chemical pesticides, good care for animals, and fair treatment of workers. Trans fatsFats that may raise bad (LDL) cholesterol levels and reduce good (HDL) cholesterol levels. Trans fats are naturally found in such foods as beef, butter, and milk, but are also found in processed foods such as margarines and frying fats, snacks, and baked goods. Whole grainsComplete grain seeds/kernels (including the bran, germ, and endosperm), the consumption of which is thought to reduce the risk of cardiovascular disease. The whole grains most familiar to consumers include wheat, corn, oats, brown rice, barley, buckwheat, millet, quinoa, and rye.
46
INDUSTRY SURVEYS
INDUSTRY REFERENCES
PERIODICALS Beverage Digest http://www.beverage-digest.com Biweekly newsletter; covers trends, news, and issues in the US beverage industry. Beverage Industry http://www.bevindustry.com Monthly; covers trends and issues in the US beverage industry. Beverage World http://www.beverageworld.com Monthly; covers trends and issues in the US beverage industry. Food Processing http://www.foodprocessing.com Monthly; covers strategic and technological issues facing the US food packaging industry. Milling & Baking News http://www.bakingbusiness.com Biweekly; covers the US milling and baking industry. Prepared Foods http://www.preparedfoods.com Monthly; follows trends in the US packaged food and beverage industries. Progressive Grocer http://www.progressivegrocer.com Trade magazine providing information to the retail food industry; published 18 times a year. Supermarket News http://www.supermarketnews.com Weekly trade magazine covering the food distribution industry. TRADE ASSOCIATIONS American Beverage Association http://www.ameribev.org Trade association for US nonalcoholic refreshment beverage industry. Grocery Manufacturers of America http://www.gmabrands.com Trade association of food, beverage, and consumer products companies.
INDUSTRY SURVEYS
International Dairy Foods Association http://www.idfa.org Group seeking to represent the nations dairy manufacturing and marketing industries and their suppliers. National Confectioners Association http://www.candyusa.org Association seeking to represent the confectionary industry. Organic Trade Association http://www.ota.com Membership-based business association for the organic industry in North America. Private Label Manufacturers Association (PLMA) http://www.plma.com Trade association for the private label product industry. Organizes trade shows, publishes a newsletter and yearbook, conducts market research, and represents the industry in Washington. GOVERNMENT AGENCIES Bureau of Labor Statistics (BLS) http://stats.bls.gov Principal fact-finding agency for the federal government in the broad field of labor economics and statistics; a division of the US Department of Labor. The Food and Agriculture Organization of the United Nations (FAO) http://www.fao.org Seeks to help developing countries modernize and improve agriculture, forestry, and fisheries practices, and ensure good nutrition. A source of information related to food and agriculture. US Department of Agriculture (USDA) http://www.usda.gov Government agency charged with providing key statistics on the US agricultural industry. US Department of Commerce http://www.commerce.gov Cabinet-level department providing key statistics on the US industry; its mission is to ensure and enhance economic opportunity by working with businesses and communities to promote economic growth.
47
MARKET RESEARCH AND OTHER INFORMATION Beverage Marketing Corp. http://www.beveragemarketing.com Provider of consulting, financial services, and data to the global beverage industry. Datamonitor plc http://www.datamonitor.com http://www.food-business-review.com http://www.drinks-business-review.com A provider of news, data, and analysis related to various industries, including food and beverages. EDGAR Database http://www.sec.gov/edgar/searchedgar/webusers.htm A site maintained by the US Securities and Exchange Commission that provides access to corporate documents, such as 10-Ks and 10-Qs. Euromonitor International http://www.euromonitor.com A provider of data and analysis of industries, countries, and consumers. The Food Institute http://www.foodinstitute.com Membership association providing news and information on the food and beverage industries.
FoodProductionDaily.com http://www.foodproductiondaily.com Online news service available as a free website; provides daily and weekly newsletters, with news stories and data intended to be of value to decision-makers in food and beverage production in Europe. Information Resources Inc. (IRI) http://www.iriworldwide.com Supplier of food industry sales data; also provides analytics, software, and professional services The International Food Policy Research Institute (IFPRI) http://ifpri.org Organization seeking solutions for ending hunger and poverty, supported by the Consultative Group on International Agricultural Research, an alliance of various governments, private foundations, and international and regional organizations. Packaged Facts http://www.packagedfacts.com A site that provides research on the food, beverage, consumer packaged goods, and demographic sectors
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INDUSTRY SURVEYS
A A D D
12,454.6 531.5 2,414.9 A 14,691.3 500.3 1,056.4 A 5,132.8 13,212.0 D 6,754.9 629.4 12,822.0 NA 980.9 D 3,176.6 A 2,882.4 42,201.0 D NA 1,723.6 1,280.7 12,487.7 3,757.9 A 852.5 496.0 1,500.7 26,862.0 D NA
13.3 8.9 21.9 4.9 6.1 9.3 (13.6) (19.7) (52.8) 7.7 5.9 4.3 8.9 7.9 11.7 5.5 NA 0.0 5.6 NA 1.7 NA 12.4 7.1 NA 16.2 11.5 3.4 NA 3.6 NA 3.8 NA 0.7 6.6 8.7 7.6 (1.8) 3.8 8.6 6.1
(1.2) (35.6) NA (1.0) 10.1 20.6 3.4 1.1 NA NA 18.5 16.2 2.0 13.5 4.3 NA 6.7 (1.0) 3.3 6.4 3.1 12.4
WWAV WHITEWAVE FOODS CO (THE) SOFT DRINKS KO [] COCA-COLA CO CCE [] COCA-COLA ENTERPRISES INC DPS [] DR PEPPER SNAPPLE GROUP INC MNST [] MONSTER BEVERAGE CORP PEP [] PEPSICO INC AGRICULTURAL PRODUCTS ADM [] ARCHER-DANIELS-MIDLAND CO DAR DARLING INTERNATIONAL INC INGR INGREDION INC
INDUSTRY SURVEYS
49
Operating Revenues
Million $ Ticker Company Yr. End 2012 2011 2010 2009 2008 2007 2002 CAGR (%) 10-Yr. 5-Yr. 1-Yr. 2012 Index Basis (2002 = 100) 2011 2010 2009 2008
OTHER COMPANIES WITH SIGNIFICANT PACKAGED FOOD OPERATIONS CQB CHIQUITA BRANDS INTL INC DEC 3,078.3 D DOLE DOLE FOOD CO INC DEC 4,246.7 A,C FDP FRESH DEL MONTE PRODUCE INC DEC 3,421.2 PPC PILGRIM'S PRIDE CORP DEC 8,121.4 UN UNILEVER NV -ADR DEC 38,304.5 OTHER COMPANIES WITH SIGNIFICANT SOFT DRINK OPERATIONS COKE COCA-COLA BTLNG CONS DEC 1,614.4 KOF COCA-COLA FEMSA DE C V -ADR DEC 11,396.5 A,C COT COTT CORP QUE DEC 2,250.6 A FIZZ NATIONAL BEVERAGE CORP # APR NA
D D A D
(8.0) (1.9) (9.3) (41.2) 0.3 (4.7) 1.3 7.8 1.7 12.3
OTHER COMPANIES WITH SIGNIFICANT AGRICULTURAL PRODUCTS OPERATIONS BG BUNGE LTD DEC 60,991.0 A,C 58,743.0
45,707.0
41,926.0
52,574.0
37,842.0
14,074.0
15.8
10.0
3.8
433
417
325
298
374
Note: Data as originally reported. CAGR-Compound annual growth rate. S&P 1500 index group. []Company included in the S&P 500. Company included in the S&P MidCap 400. Company included in the S&P SmallCap 600. #Of the following calendar year. **Not calculated; data for base year or end year not available. A - This year's data reflect an acquisition or merger. B - This year's data reflect a major merger resulting in the formation of a new company. C - This year's data reflect an accounting change. D - Data exclude discontinued operations. E - Includes excise taxes. F - Includes other (nonoperating) income. G - Includes sale of leased depts. H - Some or all data are not available, due to a fiscal year change.
50
INDUSTRY SURVEYS
Net Income
Million $ Ticker Company Yr. End DEC OCT # MAY JUL # MAY DEC JUL DEC # MAY SEP JUN DEC JUN OCT SEP DEC DEC JUN NOV DEC DEC SEP OCT # MAR # APR # APR DEC DEC DEC SEP DEC 2012 59.3 17.1 NA 774.0 NA 115.0 (86.3) 136.1 NA 362.6 94.2 660.9 (22.0) 500.0 54.1 961.0 1,642.0 95.8 407.8 604.5 1,540.0 49.9 53.9 41.4 NA 544.2 59.1 52.0 88.4 583.0 111.2 2011 50.2 11.1 89.7 805.0 467.8 (1,579.2) 26.6 123.4 1,567.3 199.5 55.0 629.0 338.0 474.2 55.1 1,231.0 1,839.0 106.4 374.2 508.5 3,527.0 (361.3) (127.1) 11.3 361.3 459.7 38.3 43.9 94.4 750.0 130.9 2010 32.4 17.8 60.8 844.0 828.5 86.5 26.2 137.0 1,798.3 79.5 28.6 509.8 635.0 395.6 48.4 1,247.0 1,887.0 115.0 370.2 452.7 2,470.0 92.0 134.8 17.7 521.0 479.5 2.5 53.7 90.9 780.0 NA 2009 17.4 13.6 67.8 732.0 747.3 240.2 23.7 130.3 1,530.5 55.9 (24.7) 436.0 364.0 342.8 41.3 1,212.0 NA 89.1 299.8 399.6 3,021.0 NA 82.3 48.4 (101.4) 494.1 35.8 53.5 81.3 (536.0) NA 2008 9.7 7.7 79.5 671.0 646.4 184.8 14.8 119.2 1,304.4 22.3 41.2 311.4 (41.0) 285.5 27.9 1,148.0 NA 48.4 255.8 393.9 1,849.0 NA (43.1) 18.8 (242.8) 266.0 17.7 38.8 28.6 86.0 NA 2007 17.8 7.3 151.9 823.0 518.7 130.5 8.4 94.6 1,294.7 12.8 47.5 214.2 426.0 301.9 32.1 1,103.0 NA 64.7 230.1 422.5 2,590.0 NA 78.8 8.0 139.2 170.4 23.8 51.6 41.7 268.0 NA 2002 15.2 6.9 12.2 525.0 840.1 267.8 NA 6.1 917.0 6.0 3.0 403.6 1,010.0 189.3 18.1 720.9 NA 91.9 179.8 NA 3,394.0 NA 28.8 9.1 26.3 96.3 19.9 66.4 NA 383.0 NA 10-Yr. 14.5 9.4 NA 4.0 NA (8.1) NA 36.4 NA 50.8 41.3 5.1 NM 10.2 11.6 2.9 NA 0.4 8.5 NA (7.6) NA 6.5 16.4 NA 18.9 11.5 (2.4) NA 4.3 NA PACKAGED FOODS & MEATS BGS B&G FOODS INC CVGW CALAVO GROWERS INC CALM CAL-MAINE FOODS INC CPB [] CAMPBELL SOUP CO CAG [] CONAGRA FOODS INC DF DMND FLO GIS GMCR HAIN HSY HSH HRL JJSF K KRFT LANC MKC MJN MDLZ POST SAFM SENEA SFD SJM LNCE TR THS TSN [] [] [] [] [] [] [] [] [] [] DEAN FOODS CO DIAMOND FOODS INC FLOWERS FOODS INC GENERAL MILLS INC GREEN MTN COFFEE ROASTERS HAIN CELESTIAL GROUP INC HERSHEY CO HILLSHIRE BRANDS CO HORMEL FOODS CORP J & J SNACK FOODS CORP KELLOGG CO KRAFT FOODS GROUP INC LANCASTER COLONY CORP MCCORMICK & CO INC MEAD JOHNSON NUTRITION CO MONDELEZ INTERNATIONAL INC POST HOLDINGS INC SANDERSON FARMS INC SENECA FOODS CORP SMITHFIELD FOODS INC SMUCKER (JM) CO SNYDERS-LANCE INC TOOTSIE ROLL INDUSTRIES INC TREEHOUSE FOODS INC TYSON FOODS INC -CL A CAGR (%) 5-Yr. 27.2 18.4 NA (1.2) NA (2.5) NM 7.5 NA 95.1 14.7 25.3 NM 10.6 11.0 (2.7) NA 8.2 12.1 7.4 (9.9) NA (7.3) 38.9 NA 26.1 19.9 0.1 16.2 16.8 NA 1-Yr. 17.9 54.1 NA (3.9) NA NM NM 10.3 NA 81.8 71.4 5.1 NM 5.5 (1.7) (21.9) (10.7) (9.9) 9.0 18.9 (56.3) NM NM 267.9 NA 18.4 54.4 18.4 (6.4) (22.3) (15.0) 2012 389 247 ** 147 ** 43 ** 2,223 ** NM 3,171 164 (2) 264 299 133 ** 104 227 ** 45 ** 187 458 ** 565 297 78 ** 152 ** Index Basis (2002 = 100) 2011 330 160 735 153 56 (590) ** 2,016 171 3,342 1,851 156 33 250 304 171 ** 116 208 ** 104 ** (441) 124 1,374 477 192 66 ** 196 ** 2010 212 257 498 161 99 32 ** 2,238 196 1,332 963 126 63 209 267 173 ** 125 206 ** 73 ** 467 195 1,981 498 13 81 ** 204 ** 2009 114 197 555 139 89 90 ** 2,128 167 936 (832) 108 36 181 228 168 ** 97 167 ** 89 ** 285 535 (386) 513 180 81 ** (140) ** 2008 64 112 651 128 77 69 NA 1,947 142 374 1,387 77 (4) 151 154 159 NA 53 142 NA 54 NA (150) 207 (923) 276 89 58 NA 22 NA
WWAV WHITEWAVE FOODS CO (THE) SOFT DRINKS KO [] COCA-COLA CO CCE [] COCA-COLA ENTERPRISES INC DPS [] DR PEPPER SNAPPLE GROUP INC MNST [] MONSTER BEVERAGE CORP PEP [] PEPSICO INC AGRICULTURAL PRODUCTS ADM [] ARCHER-DANIELS-MIDLAND CO DAR DARLING INTERNATIONAL INC INGR INGREDION INC
334 446 65
INDUSTRY SURVEYS
51
Net Income
Million $ Ticker Company Yr. End 2012 2011 2010 2009 2008 2007 2002 10-Yr. CAGR (%) 5-Yr. 1-Yr. 2012 Index Basis (2002 = 100) 2011 2010 2009 2008
OTHER COMPANIES WITH SIGNIFICANT PACKAGED FOOD OPERATIONS CQB CHIQUITA BRANDS INTL INC DEC (403.0) DOLE DOLE FOOD CO INC DEC (0.1) FDP FRESH DEL MONTE PRODUCE INC DEC 143.2 PPC PILGRIM'S PRIDE CORP DEC 174.2 UN UNILEVER NV -ADR DEC 3,343.5 OTHER COMPANIES WITH SIGNIFICANT SOFT DRINK OPERATIONS COKE COCA-COLA BTLNG CONS DEC 27.2 KOF COCA-COLA FEMSA DE C V -ADR DEC 1,028.5 COT COTT CORP QUE DEC 47.8 FIZZ NATIONAL BEVERAGE CORP # APR NA
NM NM 54.8 NM 7.1
NM 24 46 (3,465) 177
NM 52 71 (1,062) 168
NM 93 78 NM 232
6.5 10.2 NM NA
119 420 81 **
OTHER COMPANIES WITH SIGNIFICANT AGRICULTURAL PRODUCTS OPERATIONS BG BUNGE LTD DEC 406.0 942.0
2,354.0
361.0
1,064.0
778.0
278.0
3.9
(12.2)
(56.9)
146
339
847
130
383
Note: Data as originally reported. CAGR-Compound annual growth rate. S&P 1500 index group. []Company included in the S&P 500. Company included in the S&P MidCap 400. Company included in the S&P SmallCap 600. #Of the following calendar year. **Not calculated; data for base year or end year not available.
52
INDUSTRY SURVEYS
WWAV WHITEWAVE FOODS CO (THE) SOFT DRINKS KO [] COCA-COLA CO CCE [] COCA-COLA ENTERPRISES INC DPS [] DR PEPPER SNAPPLE GROUP INC MNST [] MONSTER BEVERAGE CORP PEP [] PEPSICO INC AGRICULTURAL PRODUCTS ADM [] ARCHER-DANIELS-MIDLAND CO DAR DARLING INTERNATIONAL INC INGR INGREDION INC
INDUSTRY SURVEYS
53
OTHER COMPANIES WITH SIGNIFICANT PACKAGED FOOD OPERATIONS CQB CHIQUITA BRANDS INTL INC DEC NM DOLE DOLE FOOD CO INC DEC NM FDP FRESH DEL MONTE PRODUCE INC DEC 4.2 PPC PILGRIM'S PRIDE CORP DEC 2.1 UN UNILEVER NV -ADR DEC 8.7 OTHER COMPANIES WITH SIGNIFICANT SOFT DRINK OPERATIONS COKE COCA-COLA BTLNG CONS DEC 1.7 KOF COCA-COLA FEMSA DE C V -ADR DEC 9.0 COT COTT CORP QUE DEC 2.1 FIZZ NATIONAL BEVERAGE CORP # APR NA
OTHER COMPANIES WITH SIGNIFICANT AGRICULTURAL PRODUCTS OPERATIONS BG BUNGE LTD DEC 0.7 1.6
5.2
0.9
2.0
1.5
3.7
9.7
1.4
4.7
3.5
8.1
23.5
4.1
16.1
Note: Data as originally reported. S&P 1500 index group. []Company included in the S&P 500. Company included in the S&P MidCap 400. Company included in the S&P SmallCap 600. #Of the following calendar year.
54
INDUSTRY SURVEYS
Current Ratio
Ticker Company Yr. End DEC OCT # MAY JUL # MAY DEC JUL DEC # MAY SEP JUN DEC JUN OCT SEP DEC DEC JUN NOV DEC DEC SEP OCT # MAR # APR # APR DEC DEC DEC SEP DEC 2012 1.6 1.1 NA 0.9 NA 1.6 1.3 1.3 NA 2.5 2.2 1.4 1.2 3.0 3.8 0.7 1.3 5.4 1.1 1.5 1.1 1.7 2.9 3.7 NA 2.7 2.1 3.2 3.1 1.9 1.2 2011 2.1 1.1 3.1 1.0 1.4 1.1 1.2 1.4 1.0 2.4 2.2 1.7 1.1 2.6 3.4 0.9 1.3 4.4 1.2 1.6 0.9 1.0 3.9 4.6 2.9 2.7 2.5 3.6 2.7 2.0 1.6 2010 3.5 1.3 3.3 0.8 1.8 1.3 1.4 1.3 1.1 2.1 2.3 1.5 1.4 1.7 3.1 0.9 1.4 4.1 1.2 1.5 1.0 2.0 3.2 2.1 2.7 3.4 1.7 4.1 2.2 1.8 NA 2009 3.4 1.3 2.9 1.0 1.9 1.1 1.5 1.5 0.9 4.3 2.6 1.5 1.3 2.3 3.1 1.1 NA 3.0 1.2 1.2 1.1 NA 3.1 4.0 2.8 2.6 1.9 3.8 2.5 2.2 NA 2008 3.3 1.4 2.3 0.7 2.1 1.0 2.2 1.3 1.0 2.1 2.7 1.1 1.2 1.8 2.7 0.7 NA 2.6 0.9 1.1 1.0 NA 3.4 3.1 2.2 1.3 1.5 3.2 1.9 2.1 NA 2012 55.3 9.8 NA 62.6 NA 81.9 57.0 37.3 NA 17.0 26.7 58.8 80.0 8.1 0.1 67.4 72.1 0.0 30.9 95.6 28.8 37.6 19.8 38.5 NA 27.7 33.0 1.1 39.2 22.6 43.3 PACKAGED FOODS & MEATS BGS B&G FOODS INC CVGW CALAVO GROWERS INC CALM CAL-MAINE FOODS INC CPB [] CAMPBELL SOUP CO CAG [] CONAGRA FOODS INC DF DMND FLO GIS GMCR HAIN HSY HSH HRL JJSF K KRFT LANC MKC MJN MDLZ POST SAFM SENEA SFD SJM LNCE TR THS TSN [] [] [] [] [] [] [] [] [] [] DEAN FOODS CO DIAMOND FOODS INC FLOWERS FOODS INC GENERAL MILLS INC GREEN MTN COFFEE ROASTERS HAIN CELESTIAL GROUP INC HERSHEY CO HILLSHIRE BRANDS CO HORMEL FOODS CORP J & J SNACK FOODS CORP KELLOGG CO KRAFT FOODS GROUP INC LANCASTER COLONY CORP MCCORMICK & CO INC MEAD JOHNSON NUTRITION CO MONDELEZ INTERNATIONAL INC POST HOLDINGS INC SANDERSON FARMS INC SENECA FOODS CORP SMITHFIELD FOODS INC SMUCKER (JM) CO SNYDERS-LANCE INC TOOTSIE ROLL INDUSTRIES INC TREEHOUSE FOODS INC TYSON FOODS INC -CL A
WWAV WHITEWAVE FOODS CO (THE) SOFT DRINKS KO [] COCA-COLA CO CCE [] COCA-COLA ENTERPRISES INC DPS [] DR PEPPER SNAPPLE GROUP INC MNST [] MONSTER BEVERAGE CORP PEP [] PEPSICO INC AGRICULTURAL PRODUCTS ADM [] ARCHER-DANIELS-MIDLAND CO DAR DARLING INTERNATIONAL INC INGR INGREDION INC
587.8 NM NM 0.0 NM
NM 357.5 NM 0.0 NM
71.4 NM 195.0
INDUSTRY SURVEYS
55
Current Ratio
Ticker Company Yr. End 2012 2011 2010 2009 2008 2012
OTHER COMPANIES WITH SIGNIFICANT PACKAGED FOOD OPERATIONS CQB CHIQUITA BRANDS INTL INC DEC 1.4 DOLE DOLE FOOD CO INC DEC 1.9 FDP FRESH DEL MONTE PRODUCE INC DEC 2.6 PPC PILGRIM'S PRIDE CORP DEC 2.1 UN UNILEVER NV -ADR DEC 0.8 OTHER COMPANIES WITH SIGNIFICANT SOFT DRINK OPERATIONS COKE COCA-COLA BTLNG CONS DEC 1.1 KOF COCA-COLA FEMSA DE C V -ADR DEC 1.6 COT COTT CORP QUE DEC 2.2 FIZZ NATIONAL BEVERAGE CORP # APR NA
NM 151.6 179.4 NA
NM NM NM 0.0
OTHER COMPANIES WITH SIGNIFICANT AGRICULTURAL PRODUCTS OPERATIONS BG BUNGE LTD DEC 1.5 1.9
1.6
1.9
1.6
24.3
22.0
17.2
27.2
26.9
61.9
54.2
43.9
64.9
59.4
Note: Data as originally reported. S&P 1500 index group. []Company included in the S&P 500. Company included in the S&P MidCap 400. Company included in the S&P SmallCap 600. #Of the following calendar year.
56
INDUSTRY SURVEYS
NM - NM 79 - 22 25 - 18 17 - 14 85 - 24 30 22 38 17 19 20 17 29 14 14
NM - NM 22 - 16 24 - 13 16 - 11 20 - 14 17 - 11 NA - NA 17 - 10 16 - 12 26 - 13 15 - 10 NA - NA 12 7 95 NM - NM 15 8 25 - 16 30 - 20 16 - 10 NM - NM NA - NA
31 - 14 32 - 23 NM - NM 20 - 12 24 - 16 19 - 13 NA - NA 25 - 16 21 - 14 NA - NA 28 - 20 NA - NA NM - NM 16 - 10 NM - NM 18 44 50 35 81 12 29 31 21 18
0.0 - 0.0 2.6 - 2.1 68.8 - 15.0 2.2 - 1.9 1.1 - 0.8 3.8 1.2 2.2 2.5 2.0 4.1 NA 1.9 0.0 0.0 2.9 3.0 3.8 0.0 1.1 0.0 3.0 1.0 1.8 1.9 1.4 2.4 NA 1.2 0.0 0.0 2.3 2.4 2.8 0.0 0.8 0.0
17 - 14 NA - NA 19 - 14 18 - 15 31 - 22 19 - 15 NA - NA NM - NM 32 - 19 11 8 20 43 39 25 11 15 30 30 18 8
17 - 14 NA - NA 15 - 11 17 - 13 29 - 20 23 - 19 NA - NA 10 6 23 - 15 74 16 - 13 NM - NM 32 - 25 21 - 14 10 6 NA - NA
49 - 28 25 - 16 24 - 15 96 NA - NA 18 31 33 27 13 30 14 25 24 19 9 22
3.1 - 2.5 27.6 - 16.2 1.4 - 1.1 0.0 - 0.0 1.3 - 0.8 NA NA
16.9 - 11.1 3.9 - 2.5 1.5 - 0.9 0.0 - 0.0 3.6 - 0.8 NA NA
WWAV WHITEWAVE FOODS CO (THE) SOFT DRINKS KO [] COCA-COLA CO CCE [] COCA-COLA ENTERPRISES INC DPS [] DR PEPPER SNAPPLE GROUP INC MNST [] MONSTER BEVERAGE CORP PEP [] PEPSICO INC AGRICULTURAL PRODUCTS ADM [] ARCHER-DANIELS-MIDLAND CO DAR DARLING INTERNATIONAL INC INGR INGREDION INC
NA - NA
NA - NA
20 14 15 43 19 -
17 11 12 20 16
19 13 16 30 18 -
16 10 12 16 14
13 17 18 23 17 -
10 10 12 10 15
20 14 14 19 17 -
13 7 5 12 11
26 - 16 NM - NM NM - NM 39 - 18 24 - 15
51 28 45 0 54
50 22 44 0 50
34 565 41 0 48
56 20 7 0 47
61 NM NM 0 51
3.6 - 2.7 55.1 - 32.7 3.4 - 2.2 0.0 - 0.0 3.2 - 2.8
18 17 12 -
13 12 8
12 13 11 -
7 8 7
11 26 21 -
8 13 12
12 17 59 -
9 6 32
17 26 15 -
5 5 5
37 0 16
20 0 12
19 0 25
20 0 127
18 0 14
INDUSTRY SURVEYS
57
OTHER COMPANIES WITH SIGNIFICANT PACKAGED FOOD OPERATIONS CQB CHIQUITA BRANDS INTL INC DEC NM - NM 14 6 DOLE DOLE FOOD CO INC DEC NM - NM 34 - 18 FDP FRESH DEL MONTE PRODUCE INC DEC 11 9 18 - 14 PPC PILGRIM'S PRIDE CORP DEC 12 6 NM - NM UN UNILEVER NV -ADR DEC 20 - 16 19 - 16 OTHER COMPANIES WITH SIGNIFICANT SOFT DRINK OPERATIONS COKE COCA-COLA BTLNG CONS DEC 24 - 19 KOF COCA-COLA FEMSA DE C V -ADR DEC 29 - 18 COT COTT CORP QUE DEC 17 - 12 FIZZ NATIONAL BEVERAGE CORP # APR NA - NA
14 8 NM - NM 25 - 19 32 - 13 17 - 13
10 2 98 12 5 NM - NM 19 - 10
NM - NM NA - NA 16 5 NM - NM 16 9
NM NM 16 0 63
0 0 19 NM 68
0 NM 5 0 56
0 0 0 NM 63
NM NA 0 NM 46
25 25 23 19 -
16 17 15 13
16 20 14 18 -
12 13 8 12
14 19 920 -
9 7 1 10
63 - 32 29 - 12 NM - NM 19 - 12
34 38 12 NA
32 50 0 0
25 26 0 261
24 15 0 190
101 22 NM 0
OTHER COMPANIES WITH SIGNIFICANT AGRICULTURAL PRODUCTS OPERATIONS BG BUNGE LTD DEC 29 - 22 12 9
5-
33 -
17
17 -
41
15
36
1.9 -
1.4
1.8 -
1.3
1.9 -
1.2
2.1 -
1.1
2.6 -
0.5
Note: Data as originally reported. S&P 1500 index group. []Company included in the S&P 500. Company included in the S&P MidCap 400. Company included in the S&P SmallCap 600. #Of the following calendar year.
58
INDUSTRY SURVEYS
WWAV WHITEWAVE FOODS CO (THE) SOFT DRINKS KO [] COCA-COLA CO CCE [] COCA-COLA ENTERPRISES INC DPS [] DR PEPPER SNAPPLE GROUP INC MNST [] MONSTER BEVERAGE CORP PEP [] PEPSICO INC AGRICULTURAL PRODUCTS ADM [] ARCHER-DANIELS-MIDLAND CO DAR DARLING INTERNATIONAL INC INGR INGREDION INC
INDUSTRY SURVEYS
59
OTHER COMPANIES WITH SIGNIFICANT PACKAGED FOOD OPERATIONS CQB CHIQUITA BRANDS INTL INC DEC (8.75) 1.25 DOLE DOLE FOOD CO INC DEC 0.00 0.44 FDP FRESH DEL MONTE PRODUCE INC DEC 2.47 1.57 PPC PILGRIM'S PRIDE CORP DEC 0.70 (2.32) UN UNILEVER NV -ADR DEC 1.95 1.82 OTHER COMPANIES WITH SIGNIFICANT SOFT DRINK OPERATIONS COKE COCA-COLA BTLNG CONS DEC 2.95 KOF COCA-COLA FEMSA DE C V -ADR DEC 5.11 COT COTT CORP QUE DEC 0.51 FIZZ NATIONAL BEVERAGE CORP # APR NA
OTHER COMPANIES WITH SIGNIFICANT AGRICULTURAL PRODUCTS OPERATIONS BG BUNGE LTD DEC 2.53 6.20 16.20
2.24
8.11
65.09
68.02
70.99
54.77
44.82
74.00 -
56.20
76.13 -
54.03
74.04 -
45.36
72.98 -
38.75
135.00 -
27.60
Note: Data as originally reported. S&P 1500 index group. []Company included in the S&P 500. Company included in the S&P MidCap 400. Company included in the S&P SmallCap 600. #Of the following calendar year. J-This amount includes intangibles that cannot be identified.
The analysis and opinion set forth in this publication are provided by S&P Capital IQ Equity Research and are prepared separately from any other analytic activity of Standard & Poors. In this regard, S&P Capital IQ Equity Research has no access to nonpublic information received by other units of Standard & Poors. The accuracy and completeness of information obtained from third-party sources, and the opinions based on such information, are not guaranteed.
60
INDUSTRY SURVEYS