It’s tough to be a food company in a world obsessed with growth. ‘Let’s face it, it’s a mature industry, and it’s very difficult to get people to eat more,’ sympathizes food industry analyst William Leach of Donaldson Lufkin & Jenrette. ‘From an investment standpoint, the opportunities tend to arise more in restructuring and margin improvement rather than in trying to capture sales growth, which is pretty sluggish for most of these companies.’
Thus the recent spate of blockbuster acquisitions at the top end of the global food business. Unilever kicked off the feeding frenzy in early June, buying Bestfoods for $20.3 bn, then Philip Morris beat out rival bidders to gobble up Nabisco for $14.9 bn at the end of the month. Of the big three, that leaves only Nestle still absent from the table, and apparently content to stay there. This summer also saw General Mills strike a $10.5 bn deal to acquire the Pillsbury food division from the UK’s Diageo.
But while it’s hard to be a food company, some say it’s easy to be on the investment side of the sector. Prudential’s John McMillin, who was named number one packaged food analyst in TheStreet.com’s new analyst survey, rates the overall level of IR as ‘terrific’. ‘It’s one of the most polished categories and the companies are excellent communicators,’ he says.
In particular, McMillin credits General Mills, Quaker Oats and Sara Lee as IR standouts, as well as Campbell Soup despite a rough patch of performance. Others, such as Heinz, have made great improvements. ‘This is more than just PR; the level of disclosure has gone up terrifically, with balance sheets and cash flow statements included with most major releases,’ he says. ‘It’s an industry where there has been a high level of disclosure to begin with and the other companies are trying to keep pace. It’s an easier area to be an analyst and an investor.’
McMillin also acknowledges an IR turnaround by Kellogg Company, which he says historically had one of the weaker programs. ConAgra is still a laggard, though the hiring of a new IRO, Chris Klinefelter, ‘shows desire to improve the program.’ Then there’s Archer Daniels Midland at the bottom of the pack, but even it is rumored to be hunting for a professional IRO. As for DLJ’s Leach, he singles out Ralston Purina as the worst of the bunch.
No matter how much disclosure improves, though, McMillin admits ‘analysts are like ten year-olds in a candy store: you can give us candy, you can give us information, but we always want more. The level of Kellogg’s disclosure has gone up tenfold, but the analysts still act unhappy.’
New broom
Steve Perry, treasurer and VP of taxes at Kellogg, was put in charge of IR in December 1998 just as the company was undergoing a management transition that saw Carlos Gutierrez moving into the CEO spot. ‘There was a sense that we needed to raise our visibility with investors and analysts, helping them understand our strategies and how we were delivering against our goals,’ Perry recalls. ‘There was an effort to increase disclosure, hold more meetings and present at investor conferences.’
Now Kellogg has taken another step toward improving its IR program with the arrival of Morgan Stanley food analyst John Renwick as IRO in June. Having been on the receiving end of Kellogg’s proactive IR effort, Renwick believes it helped the company during a tough couple of years for the food industry. ‘Companies with strong IR programs tend to perform better in terms of stock price,’ he states. ‘Still, this is a company in turnaround, and the food sector has been out of favor.’
The message Renwick is sending now is that the company ‘is going back to basics, back to product innovation and marketing innovation, which the entire cereal category pulled back from in the mid to late 1990s. We continue to look for ways to reduce our cost base and reinvest those savings in marketing.’ He adds that Kellogg is looking for more international expansion, and picked up its acquisition activity in 2000. ‘The real challenge in the food industry today is achieving sales growth,’ emphasizes Renwick. ‘There is something to be said for stability of existing brands to generate consistency and provide cash flow, but the growth has to come from innovation.’
Over at ConAgra, it looks like Chris Klinefelter has been engineering a similar IR turnaround since arriving from Brown-Forman Corp in January. ‘We do care about our shareholders, and we’re trying to make an IR program that’s as user-friendly as possible,’ he says. That means making sure analysts and investors have someone they can talk to, and making management more accessible. ConAgra is also participating in as many industry conferences as it can and is ramping up mailings to investors ‘Just taking everything up a notch,’ he says.
As well as being substantially more accessible, ConAgra is trying to make sure its message is very clear. ‘There are some misperceptions about our company and what exactly we are,’ remarks Klinefelter. ‘We are a food company, but because of our roots in agribusiness some people still think of us as an agricultural company even though that is a very small piece of our overall product mix. We are trying to get the right message out: we are a value-added food company that’s moving toward higher margin operations.’
Brand power
Part of the difficulty for ConAgra is it has so many different brands in its portfolio, as does its new acquisition, International Home Foods. The likes of Nestle and Danone, on the other hand, may find it easier to imprint their identities on investors. ‘Brand is very important,’ remarks Anne Alexandre, food industry analyst for HSBC Securities in London. ‘What analysts are interested in is how brand power changes, and that is best assessed by market share and ultimately by the company financials.’
Historically food companies have been compared according to PE, but an increasing amount of attention is being paid to enterprise value compared to Ebitda. HSBC has gone one step further to develop ‘rating to economic profit’, which is return on invested capital divided by weighted average cost of capital (Wacc) compared to enterprise value divided by invested capital. Alexandre says by looking at this measure on a historical basis a target price can be projected. And while it works for different industries, it applies particularly well to the food sector because it’s a non-cyclical, growth business.
Alexandre also stipulates that product innovation is very important. ‘A company should try and stay at the forefront of product innovation,’ she says. ‘Otherwise, if the brand is associated with a commodity product rather than an innovative one that provides value, the brand is going to lose its power.’
She sees the current bout of large-scale consolidation in the food industry especially in the US as being driven by concentration in the retail sector, and she sees more on the way. ‘A lot of US-based companies realize they need to become more international,’ she remarks.
Prudential’s McMillin agrees. ‘It’s a hard industry to generate growth in, and there has been a lot of consolidation among customers the supermarkets,’ he explains. ‘As these customers build global supermarkets, they want global brands that travel. There’s a feeling that bigger can be better.’
On the subject of innovation versus stable brands, McMillin says companies need both. ‘The one complaint I have about food industry IR is that customers often know about new products a lot earlier than they’re disclosed to analysts. General Mills may show their new cereals to WalMart and other customers before I see them, and sometimes I have to get information by going to the retailer.’
Setting goals
It’s typical of food companies to provide a lot of forward-looking guidance on sales and earnings. ‘The food industry is a very stable one, so you don’t have a lot of huge surprises,’ says DLJ’s Leach. ‘On the other hand the market takes even small surprises very seriously. So there’s a lot of earnings guidance that goes on, but it tends to be pennies rather than huge changes.’
McCormick & Co, the world’s largest spice company which in June agreed to acquire France’s Ducros spice business from Eridania Beghin-Say, set specific goals for sales growth, gross margin improvement and EPS growth at the beginning of both 1999 and 2000. It tracks performance against those goals every quarter. According to assistant treasurer Joyce Brooks, McCormick started off 2000 with an EPS growth goal of 11-14 percent, then halfway through the year adjusted it to 16-18 percent based on its performance so far.
Brooks came to manage IR two years ago from other financial positions in the company and manages an active program targeted at retail investors as well as institutions. The former include many employees who hold stock through the company’s 401K, while the latter are regularly encountered at the investment conferences McCormick attends.
‘There has been an increase in food industry conferences sponsored by sell-side firms in the two years I’ve been involved with this,’ Brooks comments. ‘That’s one way to reach out to more prospects.’
The major consumer conference is still the February event held in Florida by the Consumer Analyst Group of New York (Cagny), with more than 400 investors facing off against beverage, food and tobacco companies. Exactly six months later, in Boston, Prudential holds its ‘back to school conference’ for consumer companies. Meanwhile, Goldman Sachs started an annual food industry conference in May 1999 in New York, while CSFB followed a year later; Merrill Lynch has one this September in New York; and DLJ is launching a new food, beverage and restaurant conference in New York in November.
For food company IROs, then, there are lots of new opportunities to show off an industry that may have suffered in the tech frenzy of 1998-1999, but that is bouncing back as investors turn back to stable and relatively transparent investments. It appears it’s getting a lot easier to be a food company.
