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
http://online.wsj.com/article/SB10001424052970203804204577014010166288138.html

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