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