Although the total number of food-manufacturing mergers and acquisitions dipped slightly in 2000 for the first time since 1995, the scope and value of major deals has skyrocketed. This past year has been marked by multi-billion-dollar mega mergers not seen since there were Barbarians At The Gate (KKR's notorious $25-billion leveraged buyout of RJR Nabisco in 1989). Between June 2000 and June 2001, food mega mergers were announced in almost staccato succession:

• After acquiring Ben; Jerry's for $326 million and Slim fast Foods for $2.3 billion, Unilever on June 6, 2000 acquired Best Foods for a staggering $20.3 billion!
• Not to be outdone, Philip Morris on June 25 acquired Nabisco Holdings for $14.9 billion and merged Nabisco into its Kraft Foods unit. (On July 13, 2001, Philip Morris and Kraft launched an initial public offering of 16.1 percent of Kraft common stock, raising $8.4 billion to help finance the Nabisco acquisition.)
• ConAgra on June 23 announced it would acquire International Home Foods for $2.9 billion and closed the deal on Aug. 24.
• General Mills on July 16 said it would acquire Pillsbury from Diageo PLC for $10.5 billion. At this writing, regulatory approval was still pending.
• Kellogg on Oct. 26 agreed to acquire Keebler Foods from Keebler and majority shareholder Flowers Industries for $3.86 billion, and closed the deal in March.
• Pepsico, in pursuit of Quaker Oats' Gatorade, reached agreement to acquire Quaker on Dec. 4. On Aug. 1 this year, a deadlocked FTC allowed the $13.8 billion deal to proceed.
• On Jan. 1, 2001, Tyson Food -the nation's largest poultry packer -agreed to acquire IBP, Inc. -the nation's largest beef packer -for $4.7 billion. Tyson subsequently tried to nullify the deal based on perceived accounting irregularities at one IBP subsidiary, but a Delaware court ordered the merger to proceed. As this story went to press, Tyson's tender offer for 50.1 percent of IBP stock was due to expire Aug. 3.
• Nestle USA on Jan. 16 agreed to buy Ralston Purina for $10.3 billion.
• Suiza Foods and Dean Foods agreed on April 5 to a $2.5-billion merger into an expanded company to be called Dean Foods.
• Sara Lee announced July 2 that would acquire Earthgrains Co., the nation's second-largest bread baker, for $2.8 billion.
• After acquiring Best Foods last year, Unilever on July 30 sold Bestfoods Baking Co. (Entemann's, Freihofer, Arnold's Orowheat, Brownberry, Boboli, Thomas English Muffins) to Canada's George Weston, Ltd. for $1.8 billion.

"We have long believed that consolidation was needed in the packaged food industry, and we were thrilled to see it develop," observed Investment Analyst John McMillin, who tracks food-processing companies at Prudential Securities (NYC). "Standing still is simply not a strategic option where the winds of increased retail competition and of consumers relying on food away from home are in the face of many food manufacturers."

Sagging profits spark deals

Food manufacturers thus continue efforts to boost income and market share through acquisitions, overseas growth, cost controls and new-product development. Restructuring is continuous and has become a way of life. Major food companies annually launch new restructuring programs to cut costs and boost sagging profits.

One major motivation for food-manufacturing mega mergers is to counter the purchasing clout of recent supermarket megamergers, created in turn to compete with mass merchandisers such as Wal-Mart, Sam's and Costco. Kroger Co., for example, reported Year 2000 sales of $49 billion -10 percent of total U.S. grocery sales and 12.7 percent of U.S. supermarket sales! According to Progressive Grocer's 2001 Annual Report of the Grocery Industry, the top five U.S. food retailers -Kroger, Albertson's, Safeway, Wal-Mart and Royal Ahold -accounted for 38.2 percent of supermarket sales in 2000.

According to The Food Institute (Elmwood Park, NJ), the number of food-manufacturing mergers and acquisitions dipped slightly from a record high of 288 in 1999 to 264 last year. Most of these were relatively small transactions, as sellers shed non-strategic units that better fit the core competencies of buyers. But the sheer scope and size of the megamergers dwarf any previous value records. Presupposing the Pepsico/Quaker and Tyson/IBP deals are completed, the 11 multi-billion-dollar deals listed above total more than $90 billion!

"Whether these marriages really work to create shareholder value remains to be seen, but we think some better food companies will indeed be built," said Prudential's John McMillin. Megamergers among big food companies will likely cool, he adds, now that "most of the jewels are gone, and the big buyers all have full stomachs and need to integrate recent moves and work-down debt."

Survey explores impact

Food Engineering's 2001 Manufacturing Survey, therefore, explored the impact of consolidation on manufacturing operations.

This year, 126 readers representing top management, operations management, engineering, quality control, purchasing and R&D responded to our survey. As shown on the adjoining table, respondents represent every segment of food manufacturing. Of these, 44 percent are from plants employing up to 100 people, 41 percent are at locations employing 100 to 500 people, 13 percent at locations employing 500 to 2,500 people, and the balance (four respondents) are at locations employing more than 2,500.

Not every respondent answered every question: The percentages shown on the graphs and tables represent percentage of respondents answering the specific question.

Consolidation challenges

Consolidation, it seems, doesn't necessarily mean downsizing people. While 10 percent of respondent companies downsized their manufacturing staffs, nearly three times as many (29 percent) added manufacturing people. Nine percent downsized engineers, but 14 percent hired engineers.

When asked what manufacturing challenges are presented by merger and acquisition, 53 percent cite "consolidating manufacturing operations into fewer locations." Consolidation, of course, means musical chairs: Forty-two percent report "reassigning manufacturing management" and 27 percent "reassigning engineering management." Twenty-two percent report "downsizing manufacturing management," 29 percent "downsizing manufacturing employees," and 13 percent "downsizing engineering management."

Not surprisingly, one-third of respondents (33 percent) see "integrating legacy IT software systems" as a major challenge, and 22 percent cite "integrating legacy manufacturing systems" and "integrating IT and manufacturing software" as challenges to be resolved.

But compared to other manufacturing industries, food manufacturers seem to be giving a higher priority to integrating manufacturing with information systems. As reported earlier by Food Engineering (Jan., '01), manufacturing companies across all industries are spending far more money on integrating IT systems with each other than on integrating IT with their manufacturing plants. As shown in an adjoining table, however, more than one-third of our respondents (36 percent) say their company is giving "top priority" to integrating IT with manufacturing, and more than half (51 percent) report that the IT/manufacturing integration takes second priority. Only 26 percent, however report that integrating manufacturing systems with each other on the plant floor takes top priority. This seems to support results from Food Engineering's 2001 Best Practices study (Feb., '01), where 45 percent of respondents reported "scattered islands of control" on the plant floor.

Our survey was taken during the second quarter of this year, however, before it became apparent that the GDP had slumped to an annual growth rate of 0.7 percent. So it remains to be seen if companies will spend much soon to make these integrations.

Capital budgets constant

Capital spending plans for 2001, however, seem fairly consistent with capital spending levels of last year. Respondents report a mean 18.3 percent of their location budgets designated for purchase of production, packaging and process control equipment this year as compared to a mean of 20 percent last year. When asked by what percentage their equipment budgets have increased or decreased as compared to last year, half of our respondents (50.5 percent) report "no change," while more than one-third (35.8 percent) report increases, including 11 percent reporting budget boosts of more than 25 percent.

Following the trend toward improved automation, manufacturing hardware and software will take a high priority in allocating equipment budgets.Sixty-four percent of respondents plan to purchase PLCs this year, while 29 percent will invest in sanitation/CIP software, 27 percent in HMIs and 21 percent in SPC. Interestingly, 23 percent plan to invest in MES software, well up from 11 percent last year, probably to better integrate the plant floor with front-office ERP systems.

This year, we also asked "By what percentage has your 2001 budget for plant expansions and renovations increased or decreased?" Fifty-nine percent of respondents report no change from last year, but nearly one-third -31 percent -report bigger budgets for plant renovations or expansions. "The demand for ready-to-eat shelf-stocked foods is increasing our need to?upply better and faster response to orders," said one panelist. "(This) will require plant expansion."

We then asked, "What's needed to improve productivity at your facilities?" One-third (33 percent) cite "great need" for improved process control, and 25 percent see "great need" for better maintenance systems. Surprisingly, 76 percent see "no need" to consolidate manufacturing facilities, but 20 percent have "great need" for a new plant.

Food Engineering's annual survey of capital spending for 45 publicly-held food and beverage manufacturers is shown in the adjoining sidebar. FE estimates that total capital spending by these companies in 2001 will decline by only 1-2 percent from their actual capital expenditures in 2000.

Continued expansion abroad

We asked how companies are responding to growing global markets. Nearly half (47 percent) of respondents report that their firms are exporting products, while 20 percent have dedicated overseas manufacturing facilities and 19 percent have joint ventures with foreign partners. One respondent sees "expansion into the Chinese market" as having a major impact on manufacturing over the next several years.

Food-safety improvements

We asked employees of meat/poultry plants, where HACCP is mandated, to rate the HACCP knowledge and competence of the FSIS inspectors in their plants. Fifty-two percent report that FSIS inspectors "are well trained in HACCP and are implementing their HACCP responsibilities," while 20 percent consider inspectors "not well trained in HACCP." According to 28 percent of our respondents, HACCP has actually improved cooperation between plant personnel and inspectors, while 12 percent say HACCP has caused conflict. Sixteen percent report that HACCP has had no impact on plant/inspector relations.

FSIS tests raw meat/poultry products for Salmonella contamination to measure that leading cause of foodborne disease as well as plant sanitation. (Plants are required to conduct their own tests for generic E. coli.) According to FSIS data released April 18 (see table), poultry plants have reduced broiler samples testing positive for Salmonella from a baseline of 20 percent to 9.1 percent, and beef processors have reduced ground-beef samples testing positive for Salmonella from a baseline of 7.5 percent to 3.3 percent.

FoodNet, the Centers for Disease Control's surveillance network, recently expanded to cover 10.8 percent of the U.S. population, can be used to monitor the effectiveness of USDA's Pathogen Reduction & HACCP Rule. FoodNet's preliminary 2000 report on the incidence of foodborne diseases, published April 6, 2001, is inconclusive concerning the impact HACCP on reducing foodborne illness. "Despite year-to-year variation and regional fluctuations, the general magnitude of incidence and the relative order of pathogens have remained the same," says the report. The most encouraging news is that the incidence of listeriosis has declined since peaking in 1998, but "additional data are required to determine whether these rates represent year-to-year variation or a sustained trend," says FoodNet.

Top trends

More than 25 percent of our respondents cite improved automation and/or information integration as the major trend impacting manufacturing over the next five years. "Software and hardware¿o trace and track product, (and to) determine instantaneous yields and costing prior to shipping the product," said one respondent. "Integrated software ERP like Oracle or SAP for better financial control and reporting," added another. "Controls integration between facilities," added another. "More (line) automation to decrease labor in a tight labor market" typified several answers.

Market trends created by customer requirements and consumer demands comprise the second category of responses. Several meat processors cite "case-ready meats" as the major trend impacting manufacturing. "Custom operations based on customer specs and formulas," said one operations executive. "Customers are requiring suppliers to do the extra step to alleviate their own employees' work." A co-packer agrees: "Customers demanding lower and lower prices." Manufacturing will be impacted mainly by "how we adapt to changing consumer tastes (with) new-product innovations and (line) extensions," said one respondent. Another sees foodservice as having the major impact: "Dining out, where consumers will spend their discretionary income."

Workforce issues ranked third in number among responses. "Difficult to find qualified labor" is a common refrain. "Upgrading line personnel" implies increased training as a major trend. "Increase in employee benefits" and "increase in minimum wage" imply rising labor costs.

Consolidation comes-in fourth among the major trends cited. "Instead of 90, we need only 60 good plants," observes one executive. "The flour-mill industry has excess capacity," says a miller. "You will see old, inefficient plants shut down." Another respondent, probably in reference to supermarket mergers, sees "consolidation of distributors and fewer but larger customers."

Additional responses covered a wide range of trends including globalization, food safety, plant and equipment upgrades, improved maintenance, and management decisions. One example of the latter: A "move to contract manufacturing, to remove fixed assets from the company's books," deplores one respondent. "This happens when finance people take over manufacturing companies!"

Wish lists

Management and financial issues lead the group. "Our plant expansion falls short because of our need to obtain capitalization at an interest rate the company can afford to provide needed equipment and facilities," writes one respondent. "Need to recapitalize," echoes another. One respondent seems frustrated: Needed, he observes, is a "total reassessment of facility and staff." Others cite "leadership, "management commitment" and "customer focus" as lacking.

Improved maintenance and workforce improvements tied for the second largest number of needs. "Equipment failure, need more maintenance and new equipment," said one. "Failure to follow-up on preventive maintenance," says another. One respondent needs "dedicated engineers to work solely on PM." "Training," "lack of training," "dedicate more time to training" and "more resources with technical backgrounds" were cited as major needs.

Automation, information integration, product consistency and production consistency all ranked third among areas where manufacturing must improve. "Consistent reliable output with better systematic programs and sharing of best practices," said one. One respondent needs "engineering solutions…to optimize production quality and labor expenses." Another needs "money for a more automated line."

One respondent concisely summed-up the major needs of several: "Consistency in throughputs and yields; more uptime on equipment with better preventive maintenance; and consistent, quality labor from the staff."