Standard & Poor's projecls thai inflation-adjusted Gross Domestic Product (GDP) w i l l in- F O O D , BEVERAGCS,

A N D
crease 2.8 percent, year to year, ín 1995, foliowing a 4.1 percent rise in 1994. Although TOBACCO
slowing. thc U.S. econoniy appears fo remain in fairly good shape. inereasing the likelihood ANALYST
of a "soft-iaading" rather iban a recesa ion. Nonfarm employment is expecled to increase by
cióse to one m i Ilion jobs m 1995 and personal disposable income is forecast lo risc 6 per-
cent, siightiy outpacing the prior year's rale o í growlh. Although consumer expenditures
for food tend to remain steady during periods o f boíh recession and prosperity, continuing
gains in disposable income should nevertheless contribute to an estimated 1 percent infla-
tion-adjusled increase in food spending in 1995.
Spending for food consumed bolh ai home and away from home in the United States to-
talled $588 billion in 1994. according to the U.S. Department o f Agricultura { U S D A ) , up an
infialion-adjusted 3.0 percent from the prior year. The increase In real spending in 1994 was
primarily a retlection o í growth in the U.S. population, and, to a lesser extent, the willingness
of consumers to spend a bit more al thc grocery store. Spending for food eaten al home by tam-
ules and individuáis totaled S389 billion in 1994, up 4. í percent, year lo year, whiíe spending
for meáis and snacks eaten away from home rose to $ 199 billion, a year-to-year gain o f 6.2 per-
cent, ín real terms {adjusted íor retail food price increases), spending for food away from home
rose 4.4 percent in 1994, well abovc íhc 1.2 percent increase in expenditures for food al home.
Greater spending íor food eaten away from home is attributable lo a number o f long-
term trends: the inereasing aniouní o f Lime that many o f loday's workers spend away from
home on business íravel, the ongoing entry o í women into the work forcé; and the inereas-
ing afflucncc o í the U.S. population. The trends suggest that growth in spending for food
consumed away from home w i l l continué to rise over the iong-term, although short-term
fluctuations in spending w i l l still oceur in response to the ups and downs o f the economy.
Spending on meáis away from home tends to drop quickly in troubled eeonoraic times.
For example, during 1992's ecouomic slump, spending for food consumed at home rose
slightly more than food away from home. Families may eat at home more often during un-
certain eeonomic times in order to save money, while corporations might spend less on busi-
ness meáis in order to pare costs. ín 1995, we expect total food expenditures lo grow 3 per-
cent to 4 percent, paced by an approximate 2 percent to 3 percent increase in spending for
food al home, and a 4 percent lo 5 percent increase in spending for food away from home.

food companies b e n e í i t e d from iow ingredienl cosls and an improving economy in 1994.
Through the first half o f 1995, however. the opposite appears Lo be true: most cosí compo-
nenls are on the rise, especially for agricultura! commodities and packaging, and the econ-
omy is showing signs o f slowing. As a resull. ít is likeiy that aggregate food industry sales
and profits w i l l increase only modestiy in 1995.
Over the year, most o f the major U.S. packaged food and beverage companies nave
eífeelively broadened their sales base to include operaíions around the w o r k l , therehy re-
ducing their dependence on the ups and downs o f the U.S. economy. Thus, U.S.-based com-
panies with substanlial internalional operaíions w i l l probably fare best in 1995, as favor-
able eeonomic conditions abroad offset sluggish eeonomic growth at home. Weakness in
the U.S. dollar vis-á-vis certain foreign currencies may also benefit American companies
w i t h inlernational operaíions.
The longer-term prospeets for the internalional operaíions o f U.S.-based food and
beverage manufacturers are bright and w i l l benefit from population growlh and rising per
C—604 T FOOD ÍNDUSTRY NOTR

: i e
' -' - . " - ' . - r f f i ? f f i ^ . - ^ F o O Í S-mre Y' Invo^se

DKSPOSARI.K AWAY •
í-'RÜM
:v :•.:= .-vr w ) \ 3 i IIOM1-: TUTU
1994 1.959.6 •"•388:2 • •. ' '4.0 ' 11.9
1993 1.688.7 561.3 ":. 8.0 • .. '4 q . ?20
1492 •4.505.» • 558.;s -. - 8.0 • 3.9 12.0
1991 4.236.5 ; :
\í; 3él:^i: ^y'^\'i.72;í :• 8.5 4.1 • 12.6

1
Shiü'cl : Burviui i>¡' Si;i:i-.:¡i:-¡.

eapila income in developing naíions around the woríd. Over a period of many years, major
U.S. food and beverage companies, such as H.J. Heinz and Coca-Cola, nave successfully
expanded i rito reiatively untapped markets around the globe. Greater liberalization of trade
polícies and the g r o w í n g adoption of progressive eeonomic systems around the world w i l l
also benefit large U.S. food and beverage makers.

P r o c e s s e d f o o d s . Shífling demographics and inereasing ethnic diversity offer today's

U.S. food companies significant opportunities in this reiatively mature industry. In addition,
changing patterns of consumplion and lífestyle open new markets. particularly for food prod-
ucís that are conveníent to prepare, high in nutriliona! valué, o r b o l h . While overa!! índustry
growth prospeets in the United Staies are generally tied to gains in populations, greater access
lo markets outside the United Stales w i l l present new opportunities for growth.

as reudy-lo-drink teas and coffees. fruil juices, botlled water, and sports drinks, and con-
tinued growth in underdeveloped global markets shouid help offset slowing growth in ma-
luring market segments. New labeling laws may cause a shift in consumplion trends.

Alcoholic beverages. C o n s u m é i s ' health concerns and governmenl efforts to reduce

the number of alcohol-related deaths w i l l continué to forcé this contrae ting industry into fur-
ther decline. The ability to increase share in this mature market w i l l remain the key to growth.

Tobacco. The declin i ng social acceptance of tobáceo use, and of cigarettes in parti-
cluar, w i l l c o n t i n u é to challenge U.S. t o b á c e o manufacturers in domestic markets. Growing
opposition to t o b á c e o use and the influence of ihis opposiíion on tobáceo excise tax u l -
ereases w i l l c o n t i n u é lo pose significant chalienges to this shrinking U.S. industry for years
to come. Prcscní slrong clemand for American-blend cigarettes internationally, however,
shouid partiaily offset weakness in the U.S. marketplace.

Buoyed by a healthy U.S. economy, consumer spending for food eaten both al home and
away from home rose 4.0 percent, year to year, in 1994. Although disposable personal i n -
come was up 5.8 percent, year to year, food spending as a percentage of disposable income
cíeclined to 11.9 percent in 1994 from 12.0 percent in 1993. Food spending liad accounted
 FOOD ÍNDUSTRY NOTE T C—605

Food Away
40 _ From Home

35-

30- V

25-

20-

15- C P I - A l i ítems

10 | 1 I 1 I 1 1 i I i M I i 1 1 i i M M I i i 1I
1967 69 71 73 75 77 79 81 83 85 87 89 91 93

Souiee: Department of Labor.

17.0
16.5 -
16.0 -
15.5-
15.0 -
14.5 -
14.0 -
13.5 -
13.0 -

12.5- \
12.0 1 I I I I I 1 I I 1 I I I I I 1 I I I 1 I I i" M
1970 72 74 76 78 8» 82 84 86 88 90 92 94

Souice: Department of Commeree.

for 14.8 percent o f disposable income as recently as 1980. This steady decline reflects the
inelastic nature o f the aggregate demand for food; Le., as income rises, the proportion o f
that income spent for food declines.

FOOD I P B I C E S PC>ST S L Í G M Y IÍ^GP.EASES Consumer food priees for food

eaten both at home and away from home rose an average o f 2.4 percent, year to year, in
1994. The increase was slightly helow the 2.6 percent rise in the Consumer Priee Index
(CP!) for all goods and services i n 1994 and was the fourth consecutive year that food i n -
flation rose at a slower pace than the CPI.
Food pnces at supermarkets and other grocery stores rose faster than at eating places
for the second year i n a row in 1994. Food pnces at grocery stores rose 2.9 percent. year to
C—606 • FOOD INDUSTRY NOTE

1111111

Source: Tire Food Instilóte.

1985 1986 1987 1988 1989 1990 1993 1994 1995

Sources: Departínenl of Agrienllure: Department of Labor.

year, due primarily to higher prices for fresh fruits. cercáis, and bakery goods, while prices
for restaurant meáis advanced only 1.8 percent, the same as the gain in 1993. The modesi
rise ín restaurant prices in 1994 was the smallesl increase since 1964 and was attributable
in part to lower beef prices, which enabied hamburger chains like McDonald's and Burger
K i n g to cut prices and offer lower-priced " v a l u é m e á i s . " This, in turn, torced fast-food
restaurants that serve tare such as pizza and chicken to hoid down their prices as well.

Agriculture ( U S D A ) , labor remained the largesl componenl of food production costs in

1994. Labor costs for the U.S. food processing industry totalled approximaiely $ 189 billion
and represented about 37 cents o f every consumer dollar spent for food. Labor costs rose
6.5 percent, year to year, in 1994, moderately fas te r than in 1993. The increase in 1994 re-
flected growing industry employment as w e l l as higher wages and increased benefits.
 FOOD ÍNDUSTRY N O T E • C—607

MeaK • Í04.8 • 117.0 113.5 106.7 110.6 104.7

Poultrv 120.4 113.6- • 109.9 109.0 111,7 1147
Ftsh 142.9 147.2 149:5 156.1 156.6 161.5
119 6 117.6 .110.7 94.1 105.9 97.8
Dairy • • •- - - 110.6 .117.2 • .114.6 11.7.9 118.2 119.5
Fafs & Oils 116.6 123 2 116.5 115.1 12235 138.6
Prac.-Fruits & Yeg. -: • 119.9- - 124.7 119.6 120.8 118.2 121.2
Silgar.&:Sw.eets- \ 120.1 123.1 128.4 127.7 Í27.9 132.5
Cereal & Bakery Procís. 131.1 134.2 137.9 144.2 147.6 151.1
•Beverages - . . 118.4 120.8 ' 124.1 124.4 ¡24.8 127.7
Áll Food . 117,8 323.2 ' 122 2 120.9 123.7 125.1
industrial Gommodities . -1.11.6 115.8 .116.5 117.4 1Í9.0 120.7

Source: Department of Labor.

!()()!) AT K O O l ) AWAY AI.I, ITEMS

YEAR IDO!) HO.MK i ROM HOMK \ U . ITKMS LKSS KOOH
,1994, . -2.4' 2.9 1.8 2.6 2.6
1993 • 2.2. 2.4 1.8 3.0 3.1
.1992 : -1,2 . . 0.7 2.0 3.0 3.5
1991 2.9- 2.6 3.4 4.2 4.5

Source: Bureau-of LaborStatístícs.

Commodities, the food processing induslry's second-largesí expense, accounted for

21 percent of total costs in 1994. down from 22 percent in 1993. Commodity costs as a per-
centage of total food processing costs have declined steadily for more than two decades. In
¡ 9 7 0 . for example. commodili.es accounted for 32 percent o f food processing costs.
The steady decline in the proporíion of commodities costs relalive to overall produc-
ü o n costs is due lo the inereasing amount of spent on marketing. (The US D A defines mar-
keting expenditures as those costs not relaled to commodities. Thus. under the U S D A , mar-
keting includes not jusf advertising and other promotion. but also labor, packaging, and the
like.) The ongoing increase in marketing expenses shouid c o n t i n u é to reduce the cost of
commodities as a proporíion o f total food production costs.
Packaging remained the íhird-íargesl food nianufacluring cost in 1994. Packaging
costs for the U.S. food processing industry totalled $41 billion in 1994, accounting for
about eighí cents of every food dollar spenl by consumers. The price o f food containers and
packaging materials rose about 4 percent, year to year, in 1994, iargely due lo increased use
of shipping boxes, food containers, and plástic malcriáis. The combination of greater pack-
aging and container use and m o d é r a t e price increases in the cost of packaging drove pack-
aging costs up during the year.
FOOD INDUSTRY NOTE

1992 1993
A.1.1. Food 2.4
[
Food at Home 0.7 2.4 2>
Meáis (¡A) 3.0 0.5
Beef and Veal {(). 1 ¡ 3.6 Í0.S)
Pork (4,7) 3.1 1.7
Poultry (0.1) 4.2 3.4
Fish and Seatood 2.3 3.2 4.5
Eggs (10.6) 8.1 S24)
Dairy Products 2.7 0.7 2.0
Fresh. Fruíts (5.0) 2.5 6.6
- Fresh Vegetables 2.3 6.6 2.3
Proeessed Fruils and Vegetables 2.7 (1-6) 2.7
Cereals and Bakery Products 33) 3.4 4.1
Sugar and-Sweets 2.0 0.2 1.4
Fats and Oils (1.4) 0.2 2.7
Nonalcoholic Beverages 0.2 0.3 7.5
Other Prepared Foods 2.6 2.6
Food Away from Fióme 2.0 1.8 1.7

Sources: Rurcau o í Labor Statístícs; Econormc Research Service.

Transportation costs Lotalicd S23 billion in 1994 and accounted for about 4.5 percent
of food manut'aclurers' total expenses for the year. Grain shippers were torced to pay higher
barge rales, which increased about 10 percent. year lo year. in 1994, due lo e q u í p m e n t short-
íiges. Manufacturers o f finished food producís, on the other hand. which reí y more heavily
on truck and rail íransportation. fared beíler. Truek rales were down modcsíly in 1994, aided
by ongoing industry dcregulation. Railroad freighi rales also declíned modesíly.

P i í M O G W . í . ^ ' H S C S Sl-HIP! N E W P s i c i C j I I C T S Continued growth in the number o f

two income fainilies has ied to a varicty o f new food producís and marketing lechniques
over íhe pasí 15 years. Roughly three-quarters o f all American families are headed by two
wage earners or by a single working parení. Dual-income and single parcnl families tend to
buy more expensive prepared meáis, ín addition. the time constraints with which such fam-
ilies must cope have increased the demand for foods that are casy to prepare and serve. Food
marketers eslimaíe that the average American is w i l l i n g lo spend no more than 15 minutes
preparing an ordinary meal, a estímate thal would seem to be supported by another staiis-
tic: 86 percent o f American households own a microwave oven.
During the 1980s. food manufacturers responded tí) the rise o f dual-income and sin-
gle-parent families by introducing producís tailored to thc inereasing demand íor conve-
nienee. nutrition. and variety. Traditional offerings, such as frozen dinners, were expanded
lo include frozen brcakfast and lunch foods. Producís specifically designed for microwave
cooking have also proliferated. So-called "shelf stable'" meáis, foods packaged in aseptic
material that keeps contents Ircsh for long periods o f time wilhout preservativos or refrig-
eration. were introduced as a eonvenieuee to busy families.
 F O O D JNDUSTRY Non-: • C—609

% Oí'
¡THOUS.Í
Under 5 Yrs. 19,553 18,908 6.9 18,959 6.6
5 to 14 Yrs. 38,120 14.5 3^82 14.5 40.086 14.0
15 J O i 9 Y r í . I*»2-¿ 6.9 í 9,758 7.2 20.982 7.3
20 to 24 Yrs. 17.SK5 í\8 18.161 6.6 19,845 6.9
25 !o29 Yrs. 18.994 7.2 17,836 6.5 18,072 6.3
30 to 34 Yrs. 21.850 8.3 19.580 7.1 18.423 6.4
t
35 io 39 Yrs, 22,267 8.5 22,168 8.1 1 >.S94 6.9
40 to 44 Yrs. 20.233 7.7 22,494 8.2 22.390 7.8
45 ío 49 Yrs. 17.440 6.6 19,824 7.2 22.041 7.7
50 Us 5~iYr>. 13,642 5.2 17,230 6.3 i 9.569 6.8
55 ío 64 Yrs. 21.153 8.1. 23.988 8.7 29,647 10.4
65 Yrs. & Over 33.594 12.8 34.886 12.7 36,414 12.7
A l l Ages 262.755 100.0 274.815 100.0 186.322 100.0

•"íocíudes Armed Forces abroad.

Source: Department of Commerce, Popuiaüon Scr?cs P-25.
L

Aithough eonvenience, r m í n ü o n . and variety remaní priorities. valué is al leas!

equally importan! íbr the '90S consumer. The reeession o f íhc carly 1990s broughl thc free
speiiding 1980s to an abrupt halL Warehouse club stores sprung up to caíer (o this decade'.s
more value-conscious consumen Manufacturers o f ali manner o í brand namc consumer
producís, inciuding íbod manufaclurers. are a ü e m p ü n g io sutisfy consumers that demand
more Ibr Ihcir money,

rrneesseo food makers continúe to intro-

e-conseious consumer. Soup is
une segmem uiai. wiuic uaiuiy aew. is popular w í u i consumers beeause o f its nutrid ve valué
and ease o f preparation. Spicc Lsland's Ottick Meal d c h y d r a í e d soup mix is among the most
sueccssíuí new soup brands. H.<unhun;er Helper, an oíd favorito o f frugal cooks that re-
manís quite popular íoday. has led to une extensions. sueh as General JVfiüs's Betíx Crocker
Helpers. whieh are available íbr tuna and chicken dishes.

Food makers are introdueing

important and grovving segment o f the U.S. pop-
ir currently represen! only about i 2 percent o f the
pwpuiuuun. uta meir ra¡ih.s are eommumg io swell. This group is expected lo comprise 20
percení o f the p o p u l a ü o n by íhc year 2030. an increase of 65 percent over ihc nexl 35 years.
according to the American Association o f Relired Persons and the Administration on Aging.
í'br older shoppers, nutrítion is a high priorify. The amount o f salí and sirgar in a food
product is among this group's lop concerns, as are cholesíerol and fat levéis. Cereal niar-
keíers have been the most aggressive in their efforts to serve this markel over the years and
have iníroduced coreáis and other new produets that are high in fiber and low in sugar. salí,
and í'at.
C—610 T FOOD ÍNDUSTRY NOTE

Baby food v5 53 7 45 542 9

: n product:. •1,631 L508 1.420 1,636 15.2
Bakirg mgiedier.í- 335 345 383 544 42 0
Beverages 1.367 1,538 1.842 2,250 22.1
Breakfssí cereal ÍOM 122 • 99 130 11.1
Gv.uly. gimi, snaeks 1.885 2.068 2,043 2.461 20.5
Condiments 2,787 2.555 3,147 3.271 3.9
1,111 1,320 1,099 1.323 20.4
124 158 215 36.1
Entrees 808 631 694 10.0
Fruits & vegetables 356 276 407 487 19.7
Pet food 202 179 276 361 (41.7)
Processed meat 798 785 453 565 24.7
Side dishes . 530 560 680 980 44.1
Soups 265 211 248 264 6.5
(2.402 12,312 12.893 15,006 16.4

Sui^ce- Pnpíitcd F{<oii\ m a s a / m e

.. I Food
auuJaciUi^i.i b e h c w tfua the muusT.:; may be on the verge o f an exciting new era in
processed food. For decades, the proccssed food industry has fortified producís w i t h vita-
mins and other nulrients and has capitalized on trends in healthy eating by offering prod-
ucís that are high in fiber and low in fací. According to í o d a y ' s food makers, the next step
may be to compele w i t h íhe pharmaeeutical industry and to offer what the industry dubs
"nulriíionai foods'", processed food producís that would fake the place o f vitamin supple-
ments and oíher diefary aids and that, the industry hopes one day to prove. can acíually pre-
vent or reverse diseases.
Judging by the indusíry's curren! research, food markelers have some lofty goals.
Food companies are currently examining the role that soy proteins play in inhibiting cán-
cer and hearí discase. O í h e r companies are investigating a potential link belween íhe an-
íioxidant viuunins—vitamin C. vitamin E. and beta c a r o í e n e — a n d the prevention o f cán-
cer, cardiovascular discase, and caíaracts. Although such links have yeí to be demonstrated,
ñor is ií olear that the Food & Drug Adminislration would ailow food companies to claim,
for example. that a particular food w i l l prevent c á n c e r or heart disease, food companies are
clearly quite exeited about the prospects o f this new and p o t e n ü a l l y lucrative niche and be-
lieve that such producís w i l l have broad appea! w i t h an aging American population.

P r O I T I S fiilXSSJ I A í 1 S 9 4 The U.S. food induslry's results were mixed i n 1994.

Food processors cnjoyed a sírong year in 1994. (For the purpose o f this analysis, we define
processors as firms engaged in íhe processing o f raw grains and/or live a n i m á i s for sale to
others.) Record U.S. corn and soybean harvesls in íhe íall o f 1994 resulted in a sharp de-
 ;
OOD ÍNDUSTRY NOTE

MmmMMim m
mm
•••• « • I

' Household Income Before Taxes

Average Nurnbcr o í Persons

per Uotisehoki A A '. .AA2,5/ • 1.8 • . ' ' . ; 2.3 2.7

Household Income Atler Taxes ;.AA 31,890 7 367

S •; " • ' 1 6 J Í 3 31,953

Armiml híH'tl pendil ure-. A 4,520 2,564 •" 3,505 • 4,706

Food ai Home A'":'-'. 2,784 1.974 2,465 • 2,802
Cereal Producís 162 110 152 167
• .Bakery Producís A AA279 i.88 "'• ' 224' 285
• • • lieef.' ;
: ^''A-';227 159 ' . ' 219. ' 227
Pork 15-1 .126. ' 168 • 1.32
• • OLherMónt • 99 .74 • . 91. 97
Pouhry 129 105' 103' 119
1
I-'ish aüd Sea food •'.'•;'. 88 58 • • ' 82 81
..A-';-V'.-; at :
'25. ' 35 34
Frcsh \-!iik and Crea ni A 132 .'•95 • •. 1'24- 1.39
OÜier Dairy Producís 472 103 y 152'. 184
Fresh Fruii. -•A/ 140 .100' 110 135
Fresh Vügeiahles -98 . ' 129 123
Procesad Frui! 98 : 64 ' 7 9 96
Processed Vencíanles 80 • 71 " 74 77
:
Sugar and Sweels • •'../' 419 141 105 123
•Fais and Oils 79 • 63: . 81 85
MNceüaneous Food A ' 381 '.226 ; 505 409
Nonalcoholic líeverage» 252 .,.156 205 243
Food Awav l'roiii Home i .756 . 590: 1,040 1,904

S liare o!' lijcome SOL-I r¡ tbr Food ('.* > 34.8 21.0 14.7

S : m « v : iisir-.-üK o!' ¡ . . ¡ ' n ú M : ! l U l ¡ ! . - - .

cune in the prices o f both ofthe.se importan! grains in late 1994 and into carly 1995. Areher-
Daniel-Midland Co ( A D M ) , a major processor o f grains Ibr use in the producíion of con-
sumer íbods and beverages, was among the major b e n e ñ e i a r i e s o f the drop in corn and soy-
bean prices. the eompany's two most important raw malcriáis. As a result, A D M A profiís
have risen sharply since mid-1994.
Lower grain prices were ai so a boon to companies in the oieat and pouhry segment.
Failing prices í b r corn and soybeans. the primary ingredients in animal feed, lowered feed
costs, encouragmg ranchers to expand their herds. The result was plentiful supplies o í uve
cattle. IBP, Inc., the world's largest meat packer, was able to opérale its beef and pork pro-
eessing facilities at nearly ful i capacity during 1994. The company's oet income more than
doubled ín 1994 and profits in 1995 are expected to rise another 40 percent. Profits tbr
Tyson Foods. Inc., the United States' largest chicken processor. also benefited subslanliaily
from lower feed costs.
C-612 FOOD INDUSTRY NOTE

50

10 F T T I I M I I I I I 1 I I M I 1 I I M t M I I
1967 69 71 73 75 77 79 81 83 85 87 89 91 93

Source: Standard & Poor's Corp.

Food packagers enjoyed a m o d e s í l y positive year in ) 994. (For the purpose of this
anaiysis, we define food packagers as firms that produce finished food ilems for the retail
consumer.) AUhough commodity costs feií during the year, the effect on total costs was not
dramatic due to the ongoing decline in the cost of commodities relative Lo overall food pro-
cessing costs.
Limited pricing flexibility restrained profit growth for packaged food companies in
1994. due in pari Lo the growth of warehouse club stores i n recent years. As a result, mar-
keters of branded food p r o d u c í s have been torced to keep price increases lo a m í n i m u m ,
íhcreby pressuring profit margins. This margin pressure has caused many of the major U.S.
food manufaeturers to cut costs over the past few years. In 1994, sales growlh for most of
thc major U.S. food manufaeturers was limited io the mid-single digils. Net income (before
speciaí ítems) grew at about a 10 percent rate in 1994. Earnings grew at a slightly faster rale
than sales, due largely ío cosl-culling efforis. A m o n g U.S. companies w i t h significant i n -
ternalional operations, such as Kellogg. Wrigley, and Sara Lee, sales and profit margins in
1994 also benefiled from favorable curreney Lranslalions due to the weak U.S. dollar.
Most food manufaeturers benefiled from generally favorable agricultural commodity
cosls. recent cosl-culíing actions. and, íor those companies w i t h significant international
sales, favorable curreney exchange translations in the first half of 1995. Food companies
are expecíed to face inereasing pressure from rising grain costs in the latter half of 1995,
which, combined w i t h higher packaging costs and a slowing economy, w i l l make it diffi-
cull for food makers lo increase prices. Although continued attention to productiviíy en-
hancement w i l l be a key í h e m e , profit growth for U.S. food companies in 1995 may síow
lo íhe mid-single digils.

operalional leverage in the mature U.S. food industry, packaged food companies wenl on a
coilecíive shopping spree in íhe 1980s. Consolidation, however, failed to produce the re-
sidís that íhe indusíry had anticipated, due largely to a severe loss o f pricing flexibility. As
a result, the food packaging indusíry reversed course in íhe 199()s. Today, packaged food
companies believe that the best way to sustain profitable growth is to maintain a portfolio
of exceptiona! brand ñ a m e producís. Companies that have jumped on the "rightsizing"
bandwagon in 1994 include General M i l l s , which spun-off of its Darden Restaurants sub-
 FOOD INDUSTRY Non-;

COMPANY 1993 - 1994 % CHC

i . Philip Morris Cos. 34,526 35,966 4.2
2. ConAgra Inc. 16,499 - 18,í 19 9.8
3. PepsiCo 15,665 - 17,952 14,6
4. Coca-Cola 13,937 . . 16,140 15.8
5. IBP ínc. 11,671 - 12.075. .3.5
6. Anheuser-Busch 10.792 - 11,364 5.3
7. RJR Nabisco 7,025 7.699 . 9.6.
8. Sara Lee 7,206 7,562 - 4.9
9. H J . Heinz 7,103 7.047 (0.8)
10. Campbell Soup 6,586 : 6,691 1.6
U . Kellogg 6,295 6.562 4.2
12, CPC International 5.636 . . 6,203 10.1
13. Quaker Oats " 5,731 ' ' 5,955 3.9
14, Seagram Co. 5,227 5,563 6.4
15. General M i l l s 5,397 5,554 ' 2.9
16." Tyson Foods 4.707 5.110 8.6
17. Chiquita Brands 4.083 3,962 (3.0)
•iS^Hershey Foods- . - - 3.488 3,606 3.4
19. Dole Foods 3,108 3,498 12.5
20. Procter & Gamble - - -3.271 3,290 0.6
21. Hormeí Food 2,854 3,065 7.4
22. Dean Foods 2,243 2,406 7.3
23. Multifoods . 2,224 2,225 0.0
24;Ralston Purina ••• • - -..4,526-- 1,794 . (60.4)
25. Coors Co. . 1,582 1,663 5.1

-Sotirce: Prepared Foods:

sidiary. Quaker Oats shuffled its business portfolio, acquiring Snapple Beverage Corp.
while shedding its pet food, chocolate, and canned beans operations. H . j . Heinz decided lo
focus on only four dislinct global businesses—baby food, írozen food, peí food. and condí-
ments-—by purchasing a number of "add on" businesses ío bolster these sectors.
We e x p e c í the packaged food industry lo c o n t i n u é to rightsize through the remainder
of this decade, By focusing only on market-leading brands, a food processor gains both the
pricing flexibility necessary to succeed in an incrcasingly competitivo industry and the
high-profile shelf space a product requires in order to caten the fickle consumer "s eye.

vis eertain foreign currencies has made invostment in American food companies highly at-
tractive to companies based outside the United States. ín 1994, direct foreign inveslmenl in
the U.S. food industry toíalled $20.9 b i l l i o n . up from $8.3 billion only a decade earher.
The European Union (EU) collectively held the largest inveslmenl stake in U.S. food
companies, which, aeeording to the U.S. Department o f Commerce, was valued at $11.1
billion in 1994. Companies based in the Netherlands account for about half of all E U i n -
vestmenís in U.S. food makers. Netherlands-based Unilever N.V., the world's third-largesl
c •614 FOOD INDUSTRY NOTE

However. U.S. food manufacturers beiieve that demand

FasMood restaurants have so farfaiied to capitaiize
o » this growth ¡n the number of young vegetarians.
ín 1993, for exampie, both McDonald's and Burger
King tested meatiess hamburgers with little success.
for foods withoui mea! wil! continué to rise, driven by
heaitn-conscious baby boomers and eiderly adults who
are watching their fat and cholesterol ¡ntake. Grand
Metropolitan Pic's Pilisbury subsidian/, for example, has
been successfuiiy marketing The Green Giant Harvest
Burger, a írozen vegetarían burger patty, since 1991.
Food processor ConAgra introduced a line of frozen
meatiess dishes cailed "Life Choice." which were devel-
oped upon the recornmendations of a cardiologist who
was retained as a consulíant by the company. Other food
manufacturers are likeiy to monitor the saies of these and
other vegetarían producís ín order to determine whether
or not to particípate in this market.

food processor aíter Nestie S.A. and Ihc Philip Morris Cos., has aequired numerous U.S.
assets and interesís over the years. Unilever owns such popular and familiar brands as
ÍJptoii tea. Rügn spaghetti sauce, and Wishbone salad dressing.
Investment in the U.S. food processing industry by European eountries that are not
par! of the EU was valued at $2.3 billion in 1994. Major non-EU companics witli signifi-
catil invesiments in íhe United Slates indude Switzerland"s Nestie S.A., maker of such
widely known producís as Stmtffers frozen foods, Nestie candy bars. and Carnution instan!
breakíast drink producís. Canadian companies hold $7.4 billion in assets of U.S. food com-
panics. Companies based in Japan asid in other Asian and Pacific R i m eountries aeeount for
the remaming investment in U.S. food makers.
Foreign investment in U.S. food m a n u í a c l u r i n g is likeiy lo c o n t i n u é lo grow in the
íuiure, in parí hecause such coni])anies dcsire access to ihe Uniled States" large and com-
parad vely well-hecled consumer base. A disproportionate share of investment in U.S. food
processing companies lias been made by íirms based in the United Kingdom. which can
write o f f g o o d w ü l wíthout an impact on eavnings. U.S. companies. on the other hand. must
dilule reported earnings íbllowíng an acquisition. British-bascd Grand Metropolitan Pie.
for example, owns a variéty of consumer franchises, iucluding Smirnoff vodka and
Pillshurx food producís, as well as the Burger King restauran! chain. The company has con-
sisíently aequired U.S. food assets over many years. Grand Met's most recen! investment
was the January 1995 acquisition of Peí Inc. for $2.6 b i l l i o n . Pet Inc. makes a wide array
of grocery ítems, including the Oíd El Paso line of Mexican foods and Progresso carmed
Sí)üps. Prior to the Pet Inc. investment, Grand Met's last major acquisition in the United
States was the S5.7 billion purchase of Pilisbury Co.

Reprimid by permisión of Standard & l'oor's Corp., a división oí McGravv-Hül Companies.