When You're Catching Up, You're Ahead.

With the world becoming seemingly smaller everyday with faster means of transportation and constant ways to stay in contact with people all over the world, it's not a surprise that globalization separates the boys and girl from the men and women in the business world. Globalization is vital in today's competitive markets, and outsourcing is no exception. The food and tobacco industry is moving a massive amount of their factories, and with them the manufacturing jobs, to developing economies such as those in Brazil, India, and China. Coke has recently announced that they will be investing $2 billion in manufacturing in India over the next five years, which will add to the already existing 25,000 Coke employees in India already. Pepsi and the makers of Sprite also have both stated that they would be building new plants over in India over the next couple of years. India's fast growing catch up economy is appealing to manufacturing companies because the labor is not as expensive and also the growing middle class is causing a large demand for jobs. These developing nations are reminiscent of America in the 40's and 50's with satisfaction and speedy economic growth coming from a large manufacturing sector. Of course, once these catch up economies do, in fact, catch up, it will be interesting to see if they too follow the course of America and begin to focus more on specialized career choice and switch over to a service economy. For the time being, however, there are little signs of slowed growth and manufacturing jobs will continue to be provided there.

With all these manufacturing jobs going overseas, plants are being closed here. Mass job loss has been experienced in the United States over the past couple of years as plants of all varieties have been closing, leaving thousands jobless. Smithfield Foods is now planning on closing it's largest plant early in 2013, affecting more than 425 employees. With all these manufacturing jobs leaving the country, new jobs are becoming available. Not quite enough to make up for the massive job loss, but more than nothing. As America continues its love affair with higher education, specialized research jobs are becoming available in the industry. Research on how to increase shelf life, on how to reduce waste emissions, on how to reduce packaging costs, etc is opening up job opportunities around the country as innovation becomes vital to a corporation's success over its competitors.

http://online.wsj.com/article/BT-CO-20111114-708617.html

http://online.wsj.com/article/BT-CO-20111110-711569.html

Putting the pieces together

In certain industries, manufacturing and labor takes a large portion of the revenue. In others, a majority of costs are focused on marketing the product and expanding into new markets or developing distribution chains. I will focus on two subsets of the food, beverage, and tobacco industry that I have been in our blogs and those are the soda production industry and the chips, cracker, and pasta production industry. First, I will focus on the soda production industry. In this industry labor costs comprise about 12.2% of revenue, which is near the average for all beverage manufacturing industries. This proportion has fallen over the five years to 2011, from an estimated 13.9% in 2006. This is due to stagnant wages for manufacturing jobs as well as industry layoffs. This trend is expected to continue through 2016. Because of recent purchases of bottling companies, both Pepsi and Coke experienced lower bottling costs and can now focus more of their revenue on advertising and promotions. Labor costs such as wages and salaries are estimated to make up about 10% of revenue, which makes it the second largest cost. Wages comprise a relatively low proportion of costs, as production has become increasingly automated to increase productivity. Major players such as Kellogg and Kraft have consistently increased their capital expenditure to upgrade technology and equipment, also helping to lower labor costs. In 2008, Kellogg spent $681 million, a 13.3% increase from the previous year. Over the same period, Kraft Foods spent $1.4 billion in the modernization of its production facilities. This increase principally occurred because unusually high production cost periods resulted in revenue declines, which negatively skewed the wages to revenue ratio. Branding is also a major cost for companies in this industry. Companies in the industry, especially major players, invest heavily in aggressive advertising, marketing and promotional activities, in order to increase customer loyalty. These strategies include expensive media advertisements, point-of-purchase tasting and displays, and related promotional costs. In 2011, such costs are estimated to account for 8.5% of sales. Overall, we can see that in terms of proportion of total revenue, labor is a relatively small cost compared to things like advertising and purchasing. In this industry, it is not all about the details and intricacy of a product, but instead about developing brand awareness and customer loyalty, something companies such as Coca-Cola, Kraft, and Pepsi have done well.

http://clients.ibisworld.com.proxyau.wrlc.org/industryus/competitivelandscape.aspx?indid=265

http://clients.ibisworld.com.proxyau.wrlc.org/industryus/competitivelandscape.aspx?indid=285

Influential Leaders

 Who have been some influential leaders (Founders, CEOs) in the industry over the past 20 years?

Indra Nooyi is the current Chairman and CEO of PepsiCo.  She joined the company in 1994 and after just 7 years, became the president and CFO in 2001.  By 2007, she became the CEO.  As the company’s chief strategist, she restructured the company’s global strategy and direction.  Seeing that there was less opportunity in fast food, she began focusing on better-for-you products.  She had the company sell KFC, Pizza Hut and Taco Bell in 1997.  According to US News (2008), she betted on beverages and packaged food by acquiring Tropicana in 1998 and merged with Quaker Oats Company in 2001. 

According to BusinessWeek, since she started as CFO in 2000, the company’s annual revenues have risen 72% and net profit more than doubling to $5.6 billion in 2006.  The Wall Street Journal listed her as the one of the top 50 women to watch in 2007 and 2008.  She was among Time’s Most Influential People in the World in 2007 and 2008.  Forbes ranked her as number 3 most powerful woman in 2008.  Fortune ranked her as the number 1 most powerful woman in business in 2009 and 2010.  Forbes magazine ranked her as the 6^th most powerful woman in the world. 

            John MacKey is the CEO and co-founder of Whole Foods Market.  He is one of the most influential advocates for organic food.  According to the Guardian, MacKey started SaferWay, but after he started to merge with local natural-food stores to form Whole Foods, it became America’s fourth-largest chain store and the world’s most profitable organic grocer.  Whole Food was the first grocery chain to set standards to treat animals humanely.  According to the New York Times (2011), as of 2010, the company owns 299 stores in the United States, Canada, and the United Kingdom. 

http://www.usnews.com/news/best-leaders/articles/2008/11/19/americas-best-leaders-indra-nooyi-pepsico-ceo?PageNr=2

http://www.time.com/time/specials/2007/article/0,28804,1595326_1615737_1615996,00.html

http://www.istockanalyst.com/article/viewarticle/articleid/4311403

http://money.cnn.com/2006/09/29/magazines/fortune/mpw.femaleCEOs.intro.fortune/index.htm

http://topics.nytimes.com/top/news/business/companies/whole_foods_market_inc/index.html

http://www.guardian.co.uk/lifeandstyle/2006/jan/29/foodanddrink.organics

Breaking Through

Depending on the industry one focuses on, becoming a relatively major player is extremely difficult. However, there are some industries in which becoming a player at all are near impossible while others have relatively easier barriers to entry. I will focus on two subsets of the Food, Beverage, and Tobacco industry in which most of our example companies fall. I will be focusing on the Soda production sector which houses Pepsi and Coke and the Cookie, Cracker, and Pasta production sector which incorporates Kraft and Nestlé.

First, I will describe the factors that influence a potential emerging company in the Soda production sector. Entry into this market may be difficult because of market saturation by older and established companies. New entrants must find a way to significantly differentiate themselves from other products because who would choose some knock off dark soda over a good old fashion Coca-Cola. Another possibility for these companies would be to find specific niches or market sectors to operate in but it seems apparent that the major brands like Coke and Pepsi and Dr. Pepper are not defined by a specific geographic area or income level but that all different types of people enjoy these brands. In addition, many of the more established brands have access to distribution channels that would not be accessible by a newcomer to the sector. This allows the established companies to keep prices low because establishment of new distribution channels is costly. Also, some capital is necessary in the production of soft drinks. Producers that are established are going to have lower average costs of production because they have reached economies of scale. Established producers keep their costs low by merging bottling plants and using whole sale retailers. Because these companies see high profits on their products, much is spent on branding and marketing of their already extremely established products. Additionally, established companies like Coke have exclusive agreements between themselves and factors of production such as syrup producers which makes it extremely difficult for new companies to even start up. Due to the multitude of reasons, barriers of entry into the soda production market are high and steady.

Now, I will describe the factors that influence the potential emerging companies in the cookies, cracker, and pasta production sector. In contrast to the soda industry, barriers to entry in this industry are relatively low. Besides an initial capital investment, there is little to stop an emerging company. The biggest threat facing potential new companies is the established position of older companies which includes strong brand awareness and customer loyalty. However, loyalty differs among products. For example, people are much more likely to exhibit brand loyalty to their favorite cookie than to dry pasta. Also, enormous advertising budgets allow them to pursue product promotion through media outlets that are simply inaccessible to new emerging companies. Also, as we saw before, lower average costs of production, diversified product lines, and better technology allow the established companies huge advantages. However, because raw materials are easily accessible and training knowledge and skills are available, companies can be successful with low-priced, non-branded goods and small regional markets. The barriers to entry in this sector are medium but increasing.

In conclusion, the markets in this industry vary in terms of barriers to entry. The most common thread throughout has been that it is much easier for established companies to produce and advertise their goods because of the advantages they have in production costs and exclusive deals, but it is possible for emerging companies to succeed.

http://clients.ibisworld.com.proxyau.wrlc.org/industryus/competitivelandscape.aspx?indid=265

Current News: Kraft and PepsiCo

What are some current events in your industry? What is the impact of these events on the industry?
     In current news, due to a combination of marketing and introduction of new products, Kraft was highly successful in pass on rising commodity costs (up to unprecedented 14%)  to the consumers.  As a result, Kraft’s third quarter net profits increased 22%.  According to the Wall Street Journal, “Kraft has navigated this environment by raising prices ahead of most competitors, and complementing that with spending on marketing and innovation. Kraft is running new advertising campaigns like for its namesake Macaroni & Cheese and Philadelphia Cream Cheese, while also introducing products like MiO, a liquid that adds flavor to water, which is on track to generate $100 million in sales this year.”  The question remind on how successful Kraft is able to maintain this temporary profit before the market catches up.  Kraft’s stock has a history of remaining stagnant, and this is indicative of the corporation’s performance.  However, as a result of this profit increase, shares of Kraft has gone up 1%.  The question here remains whether the split would be beneficial to expand and retain that profit, as there is much speculation as information are slow in release.  What investors had been told is that the North American grocery line would keep the name, Kraft, while the international business’ name would be decided by the stockholders.  However, rising commodity costs is still one of  the biggest challenge the food industry will face in the upcoming years.  

    In other news, PepsiCo is expanding its market products through a product-extension merger/acquisition with Brazilian cookie maker, Grupo Mabel.  The deal costs PepsiCo $520 million.  As a result, this year, the financial statements may not be looking so good with cash flow going out and inquiring debt for this purchase.  However, PepsiCo is looking to seek growth in the emerging market in the long run.  According to the Wall Street Journal, “PepsiCo agreed last year to acquire dairy-products and fruit-juice maker OAO Wimm-Bill-Dann in a deal that valued the Russian company at $5.4 billion.”  Furthermore, PepsiCo is “closing in on a joint-venture with German dairy company Theo Müller Group that would give PepsiCo a foothold in the fast-growing U.S. yogurt market.”  With a goal to make $30 billion by 2020, PepsiCo is on an aggressive strategy to capture huge market shares.  It is worth noting on how successful these mergers/acquisitions would be.  As mentioned in my previous post, with growing consumer trend in buying healthy products, a joint-venture with Theo Müller Group could be a very good idea for PepsiCo.  

http://online.wsj.com/article/BT-CO-20111102-722954.html?mod=WSJ_qtnews_wsjlatesthttp://online.wsj.com/article/SB10001424052970203804204577014282949932296.html
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Room for Improvement

The food and tobacco industry is again made unique by its broad range of products, leaving room for a lot of innovation in the market regardless of the fact that many suppliers provide similar products. As stated in previous posts, key issues in the world right now are health, the environment, and cost efficiency; this trend leads to opportunities for innovation on those fronts. Through experimentation with recipes and different food combinations, anyone who is able to produce healthier food that is either cheaper to produce than it already is, or is higher quality than it already is will see a lot of success. By making great tasting, healthy products, one can see great success in the industry right now, and there is a lot of research going into ways to make healthier food.

The subject of health offers even greater innovation in the tobacco industry. With more information constantly going public on the dangers that come with tobacco use, there are countless ways a producer could change the industry. In recent memory, the E-cig, or electric cigarette, was a huge breakthrough in the tobacco industry. The electric cigarette allows its user to get nicotine into their body using water vapor, eliminating tobacco and additives. Not only does this significantly reduce lung damage, but also reduces second hand smoke due to the fact that nothing is actually burning (carbon monoxide is not taken in by bystanders.) Technology creating a "healthier cigarette" isn't the only place for innovation however, as many people would prefer to just stop smoking. Products that reduce withdrawals and ease the process of quitting also see constant improvements through product information. With things such as the patch and various sorts of medication, any break through that can further ease the quitting process would surely be profitable.

On the environmental front, packaging is where the opportunities lie. Companies such as Coke continue to make break throughs on making more environmentally friendly cans (85% of the containers distributed by coke containing coke products are 100% recyclable, and the remaining 15% are environmentally efficient,) and any ideas that change product packaging to better the environment will be picked up rather quickly. Also companies reducing waste emissions through production innovations will see success. In the tobacco industry there is less room for innovation on this front other than reducing carbon monoxide emissions from cigarette smoking or eliminating the frequently littered cigarette butts-- the E-cig is again a good example of this.

As far as cost efficiency goes, especially in the food industry which is suffering from rising commodity prices, there are multiple ways to make breakthroughs. By finding cheaper packaging methods, or cheaper ways to produce the food itself, there is much room for improvement. In order to save money there is also research being done on methods to conserve packaged foods for longer. When certain additives can significantly increase the shelf life of food without jeopardizing a consumer's health, it will surely cause commotion in the industry. The tobacco industry also faces issues with cost efficiency, as tobacco use is considered to be a very expensive habit. Things like the rechargeable E-cigarettes are marketed as being incredibly cost efficient, which is part of the reason it is seeing success on the market.

Whether it be in the areas of production, packaging, or health contents, it is easy to see that the food industry is no where near perfect, and will always welcome innovation with a good amount of success.

http://www.ECigarettesChoice.com/pages/Benefits.html

http://www.foodproductiondaily.com/Processing/Coca-Cola-reports-progress-in-reducing-environmental-impact

http://www.thecoca-colacompany.com/citizenship/package_design.html

On the Rise

In terms of current events in our industry, there are 2 events which stuck out to me for a few reasons. The first involves the company I have been focusing on in many of my blogs, Coca-Cola. Coca-Cola plans to acquire Great Plains Bottling for $360 million, a move the company hopes will cut production costs further. “We are always working with our independent bottlers to build capabilities and to ensure that our system is well-positioned for the future," the company said in a recent statement. "As our business in the U.S. has evolved, it became clear to Great Plains and us that this transaction was the right decision at this time." Great Plains, which is the 5^th largest independent Coca-Cola bottler in the United States, has operations in Arkansas and Oklahoma. It will become a unit within Coca-Cola Refreshments, a Coke wholly owned subsidiary. The deal is expected to be complete by the year’s end. Last year, Coke completed the acquisition of the North American operations of its biggest bottler, Coca-Cola Enterprises Inc. (CCE), in a deal valued at $12.3 billion, hoping the move would cut costs and make Coke more flexible in dealing with retailers and other customers. Coke’s biggest rival, PepsiCo Inc., acquired its two largest bottles last year for $7.8 billion. Recently, both Pepsi and Coke have been focusing on marketing and new products, such as Coke’s new bottle sizes referenced in my previous blogs. At the same time, the industry faces rising production costs because of rising commodity costs. Earlier this month, Coke reported its earnings with an increase in earnings of 8.1% as the company sold more drinks in each region and raised prices in its key North American market, which may be due to the new, smaller bottles, in which consumers pay a higher per ounce price. Shares were up 1.8% and overall 10% over the last 12 months. One of the key growth factors in the Food and Beverage industry is acquisition and that is exactly what Coke plans to do within the next year. For many years, this has been seen as the fastest way to increase growth, whether the acquisition is an add-on or some type of diversification. This headline also shows that Coke and other companies are beginning to regain confidence in the economy and investing in long-term capital such as new facilities. This is a promising sign not only for the food and Beverage industry, but the economy as a whole.

The second notable event in our industry did not involve Coke, but another producer of sugary sweet goods. Hershey Co.’s 3^rd quarter earnings rose 9.2%, citing Halloween and new products as the cause. Hershey attributed the increase in earnings to the upcoming Halloween holiday and the increased demand for their new products, while keeping operating costs at a minimum. Hershey said its seasonal volume gains were better than expected but needed to offset other volume losses, while still ending up in an overall volume drop. While the company expects increased costs in 2012, they are “very focused” on profitability. These latest numbers continue the trend of increased profitability due to high consumer demand of new products like Reese's Minis and Hershey's Drops. Higher prices also had an effect. Before last year, when Hershey's revenue turned around, the company struggled to keep costs contained and successfully develop new products. Recent troubles include higher raw material costs and increase competition with the Kraft Foods Inc. purchase of Cadbury. Hershey's posted a profit of $196.7 million, or 86 cents a share, up from $180.2 million, or 78 cents a share, 12 months earlier. Sales also increased 5% to $1.62 billion. Once again, the continued growth of this company despite rising costs points to increased consumer and business confidence. Typically within an economy, confidence or perception of the state of the economy is just as important as its realistic state. When consumer confidence increases, it leads to consumption and spending increase, thus spurring GDP growth. Overall, both of these articles point to a very bright future for the Food, Beverage, and Tobacco industry as well as the US and World economy.

http://online.wsj.com/article/BT-CO-20111027-715460.html?mod=WSJ_FoodAndTobacco_middleHeadlines

http://online.wsj.com/article/BT-CO-20111027-711807.html

Consumer Trend

What are some recent consumer behavior trends that are influencing the industry?


With rising costs in every factors, such as the rising price of oil and food, consumers’ allocation of disposable incomes for food is shrinking. First, rises in gasoline prices are affecting consumer spending on food. According to analysts Graves and Kwon (2011) from Standard and Poor's, consumers are more likely to shop efficiently by shopping closer to home to reduce fuel consumption. To further save on gas usage, consumers are more likely to eat and have fun in home instead of going out. Thus, from my point of view, this could lead to potential profit growth in frozen foods, such as TV-dinner and ready-to-eat meals. Second, with increases in food, consumers are more price consciousness. This means a few things. First, for some areas, consumers are forgoing some brand name food items for private brands. In addition, consumers are looking for “benefit from promotional sales, discount coupons, and loyalty card programs” (Graves and Kwon (2011)). So for food companies to compete for higher market shares, they must have special market promotions to encourage consumers to buy their brand. One interesting way for market promotion is to bundle food items together, but it is up to the most creative food industry to use successive tactics to recapture the market consumers. Currently, one way for the some companies to spread awareness is offering discounts on online web pages, such as Groupon or Livingsocial. In general terms, cost-conscious consumers and rising raw commodity causes will lead to slow growth in the United States.



Graves and Kwon (2011) predicted that the industry is expected to growth in emerging markets, such as Asia, Easter Europe and Latin America. As developing countries are getting wealthier, foreign consumers are expected to change their lifestyle to consuming more process goods/food. They stated (2011), “developing international markets, we expect that consumers’ diets are shifting toward protein (e.g., meat and dairy), with less of an emphasis on carbohydrate grain products. We think demand for processed foods should grow, especially in urban areas, where busy consumers seek some of the same features (e.g., convenience, healthier choices, variety, and quality) that are valued in the US. We expect that rising education levels will cause people to make more informed choices about what they eat, and we think that more women working outside the home creates a need for faster, simpler food preparation, which is likely to encourage use of processed foods.” With the rise of industrial workers in developing countries, process food is becoming more of a choice for foreigners. Thus, companies with frozen entrees as one of their product line are in good standing. One thing to note that as consumers get wealthier, they are leaning towards healthier options. Thus, this trend would most likely be profitable to those companies that are able to produce healthier and more nutritious goods than their competitors.

http://www.netadvantage.standardandpoors.com.proxyau.wrlc.org/NASApp/NetAdvantage/cp/companyIndustrySurvey.do?task=showIndustrySurveyByTicker

Competitive Landscape in the United States

The food and tobacco industry in the United States is incredibly large. There are many different companies in many different niches. There is the high end food market, the inferior goods, bulk goods, the restaurant industry, which ranges from fast food to expensive gourmet meals, to even an industry for natural, healthy foods. That doesn't even take into the account beverage or tobacco companies.

Companies begin to differentiate themselves, at the most basic level, by deciding which of these sub-industries they are going to enter. Once that happens advertising becomes a big way companies can differentiate themselves and also make a name for themselves. Mascots are very prominent in the Food and Tobacco industry. Whether it be a snack food such as Cheetos with the Cheeto Cheetah, a beverage company such as Coca-Cola with the Coke polar bears, or even a tobacco company such as Camel with Camel Joe, popular food and tobacco companies often try to put faces to their products. Pepsi Co. is known for having pop culture celebrities featured in their advertisements to increase appeal. Once a reputation is acquired, especially markets for things like soda, fast food, and packaged foods, brand loyalty is very prominent in the industry. The famous Coke-Pepsi competition or McDonals-Burger King are excellent examples of this. Most smokers also display brand loyalty.

Companies in the industry also divide themselves using quality and price. If a food is expensive, it differentiates itself by promoting its quality whereas companies who can't claim they have best quality advertise their products as being affordable. In one of my recent blog posts I mentioned Domino's new marketing strategy to appeal to a larger audience. Dominos unveiled a new product line, along with their original pizza product line, of a new artisan recipe being sold for a higher price. Now Dominos is marketing their regular recipe as affordable and the new artisan line as higher quality pizza.

Companies also differentiate themselves with their values. Whether it be sponsoring a charity or changing a container to a more environmentally responsible model, companies show their morals and hold themselves as environmentally responsible to gain public support and increase their image.

A market for health food has also seen a sudden rise in popularity. Two factors attribute to this: the obesity scare in America and parent's efforts to keep their children and families active while the general population begins making changes in life styles; and the rise in globalization in the industry and the new concern for knowing where your food is coming from. Stores now focused on selling health food products, such as Whole Foods, are seeing increased sales as consumer habits in the United States change.

http://online.wsj.com/article/SB10001424052970204346104576638873048420558.html

Key Player's State of Affairs

The key players in the food and tobacco industry are all obviously quite well established companies that consistently preform at high productivity rate. Recently Coca-Cola Co. third quarter earnings rose 8.1% with an increase in sales from every region, displaying it's current advantage over its major competitor Pepsi Co. While Coke is doing very well right now (reported $2.22 billion profit from this quarter with a total revenue of $12.25 billion) it appears that there may be rough times ahead. Not only are commodity costs projected to rise $8oo million this year, but also, due to the tumultuous state of the European Union's economy, the dollar is strengthening. Coca-Cola's marketing strategy in the past in regards to rising commodity prices was to exploit favorable exchange rates; however, with the dollar strengthening, this strategy could take a hit during next quarter. Coca-Cola's success can still be seen when held in the light of their competitor Pepsi Co. Coke saw a mere 1% sales drop after raising their soda prices as opposed to Pespi's 5% drop.

Domino's witnessed a 33% increase in profit recently. Domino's sales in the U.S. saw a 3% increase as opposed to the 3% drop experienced by Yum Brand's Pizza Hut. Domino's success is due in large part to innovative menu changes and a large amount of international growth. In 2009 Domino's changed their Pizza recipe and it seems to have been for the better as customer loyalty is growing for the Pizza chain. Domino's has also branched out a bit from its niche by now offering other products such as pasta bowls and chicken wings. Domino's is also continuing to stay on top by taking marketing it's pizza as cheap; therefore, in the market of penny pinchers Domino's has managed to make a name for itself. Recently, however, Domino's has again branched out, and while still undercutting competition with their original recipe have launched a new line of Artisan pizzas which trade price for quality. Along with keeping themselves attractive to multiple consumer demographics, Domino's has expanded globally and is now enjoying advantageous foreign currency exchange rates.

Yum Brands, while taking hits from competition such as Domino's and the industry wide rise in commodity prices has also now run into trouble in China--one of it's largest markets. Inflation in China is forcing Yum to raise its prices much faster than it had hoped, and citizens are starting to turn to cheaper alternatives. A portrayal of how sudden the unfortunate situation is in China for Yum can be seen when noting that last quarter Yum experienced a 19% rise in sales in China, however after this sudden inflation Yum's restaurant margin fell 3.9% and is expected to fall 1.3% more by the end of the year. In an early blog I mentioned Yum's exceptional success in China, but the situation has taken a sudden turn for the worse. With one of it's largest markets depreciating on top of the rising commodity prices Yum may have to do some quick thinking in order to continue growth.

http://online.wsj.com/article/SB10001424052970204346104576638873048420558.html

http://online.wsj.com/article/SB10001424052970203388804576612963541585884.html

http://online.wsj.com/article/SB10001424052970204346104576638762665675094.html

Current Events: Splitting Company and Yogurt

    Recently, Kraft decided to split its company into two parts: the North American grocery brand—Kraft macaroni and cheese, Philadelphia cream cheese, and Maxwell House coffee—and the global candy and snacks brand—Oreo, Trident, and Tang. According to the Motley Fools (2011), the decision behind Kraft's split is to “unlock shareholder value.” The grocery brand has a bigger market share in North America with the trade off of slow growth. It is estimated that it will generate $16 billion in revenue (Wall Street Journal, 2011). Ms. Rosenfeld (2011), chief executive of Kraft, said, “The North American grocery business has a remarkable set of iconic brands, industry-leading margins and the clear ability to generate significant cash flow.” Thus, I think with such brand awareness and loyalty, that grocery brand will generate consistent cash flow for Kraft to support the global snack venture. Contrastingly, Kraft market strategy for the global snack brand is high growth in the risky emerging markets. According to New York Times (2011),“the new snacks company will combine units in Europe and the developing markets as well as the North American snacks and confectionery businesses. Annual revenue for the group...is expected to be $32 billion, with three-quarters coming from international operations and 42 percent from emerging markets.” Thus, shareholders hope to receive dividends would invest in the North American brand, while growth investors looking for higher profit, with higher risk, would invest in the global snacking brand.

    It is interesting to note how will the Cadbury purchase will impact with the global snack brand, and how the global snack brand will penetrate emerging markets with its market strategy while the cost of production/raw goods is increasing. It is also worth pondering of the short term cost of separation and what this means to the shareholders.

On other news, PepsiCo is preparing to enter the U.S. dairy market through a joint venture with German dairy company Theo Müller Group.  Chief Executive Indra Nooyi (2011) wants to “expand in dairy as it aims to more than double [PepsiCo’s] revenue from nutritious drinks and snacks to $30 billion by 2020.”  As of currently, most of PepsiCo’s sales remain skewed toward less healthy products (Wall Street Journal, 2011).  So it is interesting to note how PepsicCo plays the dynamics of health and unhealthy products in this new market investment.   Analyzing the last four years, the Hudson Institute (2011) found that food and beverage companies do better financially with “better-for-you (BFY)” products, such as yogurt, than peers with unhealthy snacks.  From the report, “companies with a higher percentage of sales from the BFY products had a 50% growth in operating profit (compared to 20% at companies with a below-average percentage of sales of those items), outperformed the S&P 500 by an average of 60 points (vs. 40 points) and generated higher shareholder returns than the other companies.  It finds that these foods...make up 40% of sales but generating more than 70% of the growth.”  So profits generated from this new investment in BFY might provide PepsiCo’s solution in raising production costs.

 

http://www.fool.com/investing/dividends-income/2011/08/05/is-krafts-split-up-a-big-winner-for-shareholders.aspx

http://dealbook.nytimes.com/2011/08/04/kraft-to-split-two-separating-snacks-and-grocery-businesses/

http://online.wsj.com/article/SB10001424053111903454504576487720348267828.html


http://online.wsj.com/article/SB10001424052970204002304576629391669710546.html


http://blogs.wsj.com/health/2011/10/13/report-companies-with-better-for-you-foods-do-better-financially/

Back to Business

In this article, I will be focusing on how the all mighty 2008-2009 recession affected the corporations in our industry. For this subject, it would be impossible to look at the financial information for every single corporation but instead I will focus on the company that have appeared in out write ups many times, Coke, and hopefully it will accurately represent the industry or at least similar companies. First is good old Coca-Cola. In 2007, net operating revenues were $28,857 million with profits of $18,451 million. In 2008, the year the recession first hit, the total net revenue was $31,944 million with profits of $20,570 million. As we can see the recession did not stop Coca-cola from making a huge profit, although the growth may have decreased in rate. In 2009, net revenues were $30,990 and increased to $35,119 in 2010. As we can see, revenues did indeed drop in 2009, which some consider the worst of the recession, from their 2008 numbers. However, revenue increased by about 16 percent between 2009 and 2010, signaling that whatever the management did put them back on the right track. Overall, in terms of revenues alone, the recession did hinder the company at one point, but the company bounced back, which is exactly what is expected of a 125 year old company that was in business before during and after the Great Depression. In terms of stock market numbers, in 2007, Coca-Cola was traded for $61.37* a share. In 2008 it was $45.27, showing not only a huge decline in prices but also a noticeable difference between stock prices and revenues which did not fall between 2007 and 2008. In 2009, prices were $57.00 per share, showing that stock prices actually increased in this period while revenue fell. In 2010, prices were $65.77 per share, showing an increase in price to go along with a large increase in revenue that year. From this information, we can see that the recession did hurt Coca-Cola in the stock market but just as they did with revenue, prices eventually got back on the right track.

*Stock prices recorded on closing on December 31^st of each year

http://www.thecoca-colacompany.com/investors/form_10K_2008.html

http://ir.thecoca-colacompany.com/phoenix.zhtml?c=94566&p=irol-stocklookup&t=HistQuote&control_firstdatereturned=,

Current Events: Diamond Foods

In regard to recent events within the food and tobacco industry, the Wall Street Journal recently released a piece on Proctor and Gamble (P&G). According to this article, P&G is working to combine two of its divisions, Pringles with Diamond Foods, in order to create a more efficient structure for the company. However, as Jannarone points out, “ Old business problems won’t disappear.” Within this restructuring, investors will be able to trade their shares of Pringle for Diamond Foods, the company that is attempting to purchase Pringle. The catch, however, is that investors must trade in their stock to the point that 57% of the Pringle chip division will be owned by Diamond foods.

This shift to sell P&G’s only food division comes with a few major consequences for the industry as a whole. First of all, it would enable Diamond foods to become the second-largest snack distributor next to PepsiCo. This is while it would filly eliminate P&G from the food industry so that said company could solely focus on their home products.

Although this merger may have many positive aspects, this article points out the negative aspects to Diamond’s walnut business and aims to have P&G customers question the decision to trade in their stock. According to the WSJ, Diamond Foods has been paying growers of walnuts less than that of other companies, even though prices of this food item has continued to climb. Despite these low payments, the company has moved to provide growers with varied advance, or “moment” payments. Although said payments were implemented to help diamond’s growers, they could have been harmful to the company’s profits.

If this payment would have been made before the end of the company’s fiscal year, it could have hurt their overall profit. Along with this, increased pressure from the walnut growers has made the “Pringles deal all the more important for Diamond as a way to diversify away from walnuts, which account for nearly 30% of sales.”

In regard to the food and tobacco industry, it will be quite interesting to see if this buyout occurs. If it does, it will also be interesting to see Diamond’s effect on the food industry as a whole. 

This blog post utilized the Wall Street Journal for information which can be found athttp://online.wsj.com/article/SB10001424052970204831304576595000985103090.html

Competition Overseas

What non-US companies are key players in the industry?

     Unilever is one of UK biggest food companies.  Its prime speciality in the food industry is seasoning and dressing manufacturing.  However, it also produces personal care products, such as Dove bar.  Last year, Unilever UK Food earned $227.4 million in revenue.  This is also the company that launches "I can't believe it's not butter" promotion.  The top competitors are Associated British Foods, H.J. Heinz Limited, and Premier Foods.  


    McCain Foods Limited, based in Canada, is the world number one producer of french fries.  According to Hoover, produces frozen vegetables, appetizers, juices, pizza, entrees, and desserts at some 60 plants on six continents.  The company generated $6 billion in revenue.  It is the second largest private company in Canada.  Its top competitors are ConAgra, JR Simplot, and Larsen Farms.  Hoover rated this company as low risk to invest in.  

     
     Nestle is the largest food and beverage company in the world.  It originated in Switzerland.    Its top competitors are Kraft Food; Mars, Incorporated; and Danone.  It is the one of the top leaders in selling coffee, bottled water and frozen pizza.  

                                                                 According to Hoover. 














http://subscriber.hoovers.com/H/company360/overview.html?companyId=138880000000000

http://subscriber.hoovers.com/H/company360/overview.html?companyId=42939000000000
http://subscriber.hoovers.com/H/company360/overview.html?companyId=41815000000000

American Companies Gone Global

In today's world isolation is difficult to sustain as changes in technology and communications have definitely made the world a smaller place. Many companies, in any industry, have expended and now have operations in multiple companies are the globe. Coca-Cola Co. and their bottling partner- Coca Cola Hellenic Bottling Co.- have a business plan to invest $3 billion in Russia over the course of the next five years. This investment includes the opening of the 15th Coca-Cola plant in Russia. Coke also has a 7 year contract which was started in 2008 with Capgemini and have a significant portion of workers in fields such as accounting employed in India. PepsiCo also signed a 5 year outsourcing agreement in India in 2009.

Yum Brands, responsible for Kentucky Fried Chicken and Pizza Hut, has a large involvement in China, with the Chinese market sometimes making up to 60% of their operating profit in a quarter. Yum is in trouble currently however as inflation rises in China, and Yum, who was used to the low cost of business in China, struggles to keep their low-price marketing strategy up to standards with rising prices in China. Menu prices in China for Yum Brands have gone up around 2% recently.

PepsiCo in 2008-2009 had a similar idea as Coca-Cola and invested money in India. PepsiCo, in 2007, provided around 4000 jobs in India and indirectly employed around 60,000. Pepsi's business plan involves making heavy investments in Russia and Brazil as well.

General Mills is doing very well in China with many top selling products being sold there. China isn't all however, General Mills sells its products in over 100 countries and has seen a lot of success in developing nations as of late. General Mills is predicted to see continued growth and success in the future. Kraft also signed an outsourcing deal with French company Capgemini, who, as previously stated, also has a contract with Coca Cola and seems to be doing quite well for themselves.

http://www.tampabay.com/news/business/economicdevelopment/article503815.ece

http://online.wsj.com/article/SB10001424052970204422404576594582636996232.html

http://online.wsj.com/article/SB10001424052970203388804576612963541585884.html

http://www.industryweek.com/articles/pepsico_inc-_globalization_next_17392.aspx

http://online.wsj.com/article/SB124129973577780457.html

They're everywhere

When determining which companies in our industry are the ‘most’ global, there is a large number of statistics on could use to determine the leader. Given this, I will provide a few of these statistics in order to make a more accurate assumption of which company or companies are most global. The first statistic I chose to look at was total revenue of global companies. According to the CNN money annual rankings of the world’s largest corporations, sorted purely by 2010 revenue, the highest ranked corporation in the food, beverage, and tobacco industry is Nestlé at #42 with $105,267 million in revenue, with no other corporation in the industry cracking the top 100. However, sometimes just citing revenue shows purely the amount of money poured into the corporation. If we are looking more for the success of these global companies, a better statistic to look for might be profit. In CNN Money’s annual ranking of the world’s most profitable companies, Nestlé ranks at #1 with a 2010 profit of $32,842 million and a profit increase from 2009 of 246 percent. These last two figures tell us that Nestlé is not on the most successful global corporation in terms of profit, but Nestlé continues to develop strategies that enable them to increase their profits by ridiculous amounts from last year. Coca-Cola also made the list at #31 with 2010 profits of $11,809 million and profit increase from 2009 of 73.1 percent. These figures may not be as delightful as the ones registered by Nestlé but Coca-Cola will certainly be satisfied, especially when rival Pepsi did not crack the top 50. While this may sound like good enough evidence to say that these companies are most global, sometimes pure profit and revenue are not a true indicator of the globalism of these corporations. Surely a corporation cannot operate in one or a few countries and obtain these kinds of figures, but the revenue and profit could have high concentration in just a few countries. To determine this kind of information, what better way than rankings with global criteria? In a Business Week ranking of the world’s most valuable corporations, special criteria was considered, relating to the global business effect. To even qualify for the list, each brand must derive about a third of its earnings outside its home country and be recognizable outside of its base of customers, certainly a sign of a global business. Coca-Cola topped the list while McDonald’s came in at 9 and Marlboro at number 12 and Pepsi at number 22. As you can see, due to the shift in criteria, Coca-Cola now tops the list. In terms of countries found in, both Pepsi and Coca-Cola boast there products are sold in over 200 countries while McDonald’s claims sales in 119 countries. In terms of brand recognition and brand awareness, many sites across the web consistently rank Coca-Cola’s logo as the best and most recognizable in the world. In terms of how these companies are able to achieve their success, there are a few things to notice. First, all of these corporations are relatively old. Becoming a globalized business does not happen overnight. Before a business can even think about expanding overseas, they have to be established in their original location to insure they have the ability to take on such a huge business venture. Second, these corporations have to do lots of marketing around the world to inform the new markets of their product and where it can be purchased. Synonymous with the marketing aspect is the brand name and logo. In order to be a truly successful global corporation, you have to ensure that everyone knows your bran’s name and the logo. Finally, on order to succeed in foreign markets, the corporations have to realize that marketing and pricing strategies are not cookie-cutter and that different regions around the globe respond to different techniques. To be a successful global business, you must treat each region as a separate endeavor with the purpose of not only profit but brand loyalty.

http://images.businessweek.com/ss/06/07/top_brands/index_01.htm

http://money.cnn.com/magazines/fortune/global500/2011/performers/companies/profits/

http://www.pepsico.com/

http://www.thecoca-colacompany.com/

http://www.mcdonalds.ca/en/aboutus/faq.aspx

What's the Problem?

What are some examples of ethics challenges that industry players experienced?

In an industry as personal as food and tobacco, there are naturally many ethical challenges companies face on a daily basis. There is a difference between buying clothing and purchasing food, something that you plan on putting into your body. People like to know exactly how their food was produced, what exactly goes in to it, and any other details before they sit down and take a bite. Through a bit of research, I found there are four categories which companies in this industry have to consider when looking at ethical matters. They are production of distribution, marketing, fair trade and justice issues, and the environmental effect. First, I will take a look at production and distribution in the food industry. Surely more than any other industry, the importance of sanitary conditions triumphs all other issues. If you sweatshirt was made in less than perfect sanitary conditions, that’s not too big of an issue, but if your chicken was not prepared in sanitary conditions, there is going to be a problem. Companies need to constantly monitor hygiene, quality control and health and safety of production. In the meat products industry, companies must keep a careful watch on animal welfare and treatment. In terms of produce and all things grown on farms, companies must consider the misuse of water resources and the impact on other farmers as well as the improper use of pesticides and other chemicals. Other issues include soil degradation, high transport costs and carbon emissions, and controversy over genetically modified crops.

Moving on to marketing, there are many challenges and ethical issues food and tobacco companies face. First, they must keep watch for marketing campaigns that could encourage or lead to obesity. Also, wasteful packaging or packaging that forces the consumer to purchase way more than needed. Other ethical marketing issues include aggressive campaigns toward the venerable (children) for less than healthy products. Concerning tobacco, the marketing dilemma seems obvious. These companies are promoting a product and trying to create a demand even though they know the harmful damages their products are proved to cause. With food products, it is vital that the packaging contains information pertaining to health benefits and costs. Failure to do such things could and should result in public scrutiny from the media and the consumers.

The next ethical issue in this industry is the topic of fair trade and trade justice issues. This includes paying a fair price to all input products involved in their product. This includes supporting local farmers and communities by inviting consumers to pay a slightly higher price which is passed on to these often underpaid producers. While driving down prices may be a benefit for consumers in rich developed countries but it is ethically inappropriate because it does not provide an adequate reward for the labor of the farmers and producers in underdeveloped country.

Finally on to the ethical issues associated with the environment. Companies in the food industry, which directly deal with the environment with the production of their product, should treat the environment with an attitude of respect and sustainability. This may include things such as policies that ban or evaluate the use of pesticides, antibiotics, herbicides and hormones. Other policies include those toward carbon emissions possibly with a preference toward locally grown products to decrease transportation. Companies also should avoid the destruction of traditional forests in order to create plantations. Lastly, companies in this industry need to have a respect for small farmers and their practices as well as awareness of overproduction and waste products.

In the news recently there has been an ‘event’ that pertains to ethical issues in this industry. It may be unthinkable, but one of the most delicious foods we enjoy, chocolate, comes from the labor of child slaves. Seventy to seventy-five percent of the world’s cocoa beans are grown on small farms in West Africa. There are an estimated 100,000 children working the fields, many against their will, to produce chocolate products enjoyed by developed nations. Ten years ago, US lawmakers took action to stop child labor in the industry and signed into law the Cocoa Protocol on September 19, 2001. While it is now illegal for children to work on these cocoa farms, an estimated 100,000 children are involved in the worst forms of child labor throughout Ivory Coast. Many of these children are smuggled in from Mali and Burkina Faso to work on the plantations. Because of economic problems and war throughout the region, there has been little progress on the issue in the last ten years. In reaction to these events, CNN invited 5 cocoa manufactures and 5 chocolate manufactures on air to talk about their stance on the issue. Six of them simply did not respond to the issue, including household names of Hershey and Nestle. Mars says they are deeply concerned and striving to reach a permanent solution to the issue despite the difficult task at hand. Kraft says it working with others to support the protocol. Others say the companies will release a joined statement in the days to come. A spokesperson for the company says the reductions in child labor are not enough. Through the various statements it seems like they are looking at this issue through a negative light and not with passion and desperateness to complete this task. It seems as if the companies do care about the unfair labor used to create their inputs, but are subconsciously aware of the fact that when this issue is fixed, the prices of cocoa will dramatically increase which will lead to an increase in their prices. The companies care about the issue, but almost seem to be milking the cheap labor as much as possible, considering costs more important than working conditions.

http://www.methodist.org.uk/downloads/ei_ethical_issues_relating_to_food_industry.pdf

http://thecnnfreedomproject.blogs.cnn.com/2011/09/19/the-human-cost-of-chocolate/

http://thecnnfreedomproject.blogs.cnn.com/2011/09/21/chocolate-cocoa-industries-response/