Industry Profiles: Food Products

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Industry Profiles: Food Products

Overview

Food production encompasses a diverse range of activities and products, and most companies within the food industry focus on just one or a few of the many specialties. Major segments of the industry include:

meats
dairy products
canned, dried, and frozen foods
baked goods
candy and confectionery
edible oils and margarine
beverages

Because fresh foods like fruits and vegetables require little or no processing before sale to the public, they are often not included in discussions of the food industry. However, a few of the largest fresh fruit and vegetable companies also participate heavily in processed food manufacturing.

In the late 1990s food manufacturing in the United States was worth more than $490 billion in sales each year, employed some 1.5 million people, and involved tens of thousands of companies. By sales value, meat packing is the United States' largest food segment, accounting for nearly a quarter of all manufactured food sales.

While some factors influence food consumption, demand for most foods is fairly stable in the United States and usually rises just slightly ahead of the rate of population growth. In the 1990s, after factoring out inflation, the real growth rate of manufactured food sales hovered around 1 percent each year. Fads or social change, such as a trend toward eating low-fat foods, may influence the relative popularity of certain foods. Likewise, general economic prosperity often leads to somewhat higher per-capita consumption rates. Overall, though, the United States is a mature market for food, meaning that in order to boost sales manufacturers usually must convince a consumer to purchase one product instead of another.

As a result of these tight market conditions at home, many large manufacturers have sought expansion overseas. They do so either by exporting products made in the United States to foreign countries or by establishing operations in another country and producing locally. U.S. exports of manufactured food totaled an estimated $32 billion in 1998, while imports trailed at about $29 billion. The value of U.S.-company food operations abroad, however, was much greater, at more than $100 billion.

History of the Industry

Food manufacturing's history is as varied as the foods the industry produces. Many of the innovations that led to the modern industry occurred in the second half of the nineteenth century. During this period emerged such common mass-production techniques as canning, meat packing, large-scale baking, and soft drink bottling. Before such technologies were born, comparable foods were purchased from small-scale local producers, made at home, or, in the case of soft drinks, unavailable.

Many of the early forms of food mass production were greeted with mistrust from consumers. Some people, for example, feared that food in tin cans could be spoiled. Similarly, since meat preparation was historically grounded on strict principles of sanitation and immediate use or curing, many consumers hesitated to buy packaged meats.

Advances in refrigeration, both for home and industrial use, thus had a significant impact on the industry. Refrigerated railcars meant that foods prone to spoilage, particularly fresh meats, fruits, and vegetables, could be distributed greater distances from their point of origin. It also prolonged the useful life of these foods, and made consumers more willing to purchase items that weren't produced locally—a necessary step toward establishing national brands—because refrigeration lessened their fears of buying unsafe foods. Moreover, mechanical refrigeration eventually gave rise to completely new genres of manufactured food, such as precooked frozen vegetables and prepared frozen foods.

New forms of packaging represented a second key development in the history of food manufacture. Tin cans and glass bottles were first used in canning in the early nineteenth century, and their use became commonplace by the latter half of the century. Canning significantly increased the useful life of many foods, especially fish, vegetables, and fruits. As glass and metal packaging grew more reliable and easy to produce, a canning industry began to form. The U.S. Civil War (1861-65) helped spur demand for canned foods, which were used to feed the soldiers. Refinements in bottling late in the nineteenth century made possible the distribution of soft drinks such as Coca-Cola, a beverage sold at first only from soda fountains.

In the twentieth century numerous enhancements in packaging helped improve the distribution process and the cost efficiency of producing many foods, as well as extending the shelf life of processed foods. Most significant among twentieth-century developments was that of plastics in food packaging. Plastics came to be used in everything from simple bread wrappers to structural cartons to highly engineered coatings on metal surfaces and foils. Air- and moisture-proof plastic packaging helped protect foods from deterioration or contamination and provided for cheaper, more efficient production.

Significant Events Affecting the Industry

While overall food consumption is fairly stable for a given-sized population over time, the specific kinds of foods preferred by large segments of society may grad-ually—and, sometimes, very quickly—change. Since the 1960s the most significant changes in U.S. food consumption have been the rise of health-conscious eating habits and demand for foods that are fast to prepare and eat. Secondary trends have included a shift away from traditional "American" cuisine and toward foods with ethnic or exotic themes, in particular, Mexican- and Asian-inspired items.

Healthy eating has been a boon to poultry companies, as U.S. per-capita chicken consumption has nearly doubled since the mid-1970s. Consumers sought chicken because of its lower fat content than most other meats, and consequently per-capita consumption of beef and pork by the mid-1990s was down from the historic highs of the 1960s and 1970s. Nutritious, low-fat food demand also led to the introduction of numerous product lines directed at health-conscious consumers. In the 1990s these included the Healthy Choice and SnackWell's lines of diverse food offerings from cereals to frozen entrees to yogurt to crackers. Interest in health foods also helped fuel sales of new fruit juices and bottled water in the 1990s.

Demand for convenience has also reshaped the food industry. In the 1980s many companies rolled out microwave-ready foods to coincide with the popularity of fast-cooked meals, and a number of companies continued to develop easy-to-prepare meal kits into the late 1990s. Convenience has also driven fast sales growth and product-line extensions of ready-to-eat snack foods like tortilla and potato chips.

By the late 1990s one of the faster growing convenience trends was that of buying freshly cooked, hot en-trees from grocery stores or restaurants for in-home consumption, a practice known in the industry as home meal replacement. This represented both an opportunity and a challenge to food manufacturers because at that stage the food was usually not branded as the manufacturer's product, but as the store's. In order to participate in the emerging market, which could potentially erode sales of their traditional brands, manufacturers needed to market their products as ingredients for store-prepared meals or to establish co-branding deals in which both their products and their brand names were associated with such meals.

Key Competitors

Each segment of the food industry typically has many competitors, and the industry as a whole boasts over 70 U.S. companies with annual sales above the $1-billion mark. Listed below are a few of the largest and best known.

Philip Morris Companies Inc. Philip Morris is the United States' largest foodmaker, principally through its well-known subsidiaries, Kraft Foods, Inc. and the Miller Brewing Company. Combined food and beverage sales accounted for 44 percent, or $31.9 billion, of Philip Morris's $72.0 billion in 1997 sales. Tobacco accounted for almost all of the rest. The company, which traces its origins to a London tobacco store in the mid-nineteenth century, began acquiring food businesses in the 1970s to insulate its sales from the maturing and increasingly contentious tobacco business. By the 1980s it stepped up its pace and bought out two of the United States' largest food companies, General Foods Corporation and Kraft. The two were later merged. Among Philip Morris's many food brands are Oscar Mayer, Post, Jell-O, Kool-Aid, Maxwell House, Breyers, Louis Rich, and Stove Top. These and many other labels place Philip Morris as a major contender among makers of dairy products, lunch meats, coffee, beer, cereal, light beverages, prepared frozen meals (especially pizza), and food condiment and sauce mixes. In 1997 the company employed 152,000 workers around the world, and held major shares of various food segments in parts of Europe as well.

ConAgra, Inc. Originally known as Nebraska Consolidated Mills, ConAgra's expansion to its present status as a leading diversified food producer began in earnest with its development of the Duncan Hines brand cake mix in the 1950s. The company, which is still based in Omaha, Nebraska, became a multifaceted food provider in the 1960s and 1970s, establishing a number of poultry processing plants to complement their growing flour mill business. In 1971 the company changed its name to ConAgra and continued its expansion into a variety of manufacturing industries. The company's acquisitions have included United Agri Products (1978), Banquet Frozen Foods Corp. (1980), Armour Food Company (1983), and Beatrice (1990), as well as a number of other businesses. Regarded as the number two U.S. food company, ConAgra offers over 50 brands, including Hunt's, Wesson, Armour, and Butterball, and operates more than 200 retail outlets. It also owns the Healthy Choice label, which it also licenses to other companies for use on their products. ConAgra's product line includes meats, canned goods, oils, and a variety of frozen prepared vegetables, fish, and entrees. The company also has a thriving food ingredients business that sells to other manufacturers. Its sales for the fiscal year ended May 1998 totaled $23.8 billion, and that year it employed over 82,000 people.

The Coca-Cola Company Founded in 1892 (although an early soda fountain version of its product dates back to 1886), the Atlanta-based Coca-Cola Company is the world's largest soft drink maker, claiming an estimated 50 percent of the world market. Its flagship brand is sold in virtually every nation on earth. Coca-Cola distributes its products mostly via independently owned bottling franchises, usually by geographic region, that purchase their ingredients from Coca-Cola. The company's other soft drink labels include Sprite, Tab, and Diet Coke; it also produces drinks under the Minute Maid, Fruitopia, and Hi-C trademarks. In 1997 the company, which employed a labor force of 29,500, brought in $18.9 billion from all of its operations.

Mars, Inc. Mars possesses one of the largest U.S. candy businesses by marketing the likes of Snickers, Mars, M&M's, and 3 Musketeers candies. It competes head on with Hershey Foods Corporation and Nestle of Switzerland for leadership of the U.S. sweets market. Its Snickers bars were the top-selling U.S. candy in the mid-1990s. The McLean, Virginia-based private company also makes pet food. The company doesn't release its sales figures to the public, but its 1997 sales were estimated at $15 billion. That year the company employed an estimated 28,500 persons.RJR Nabisco Holdings Corp. Another tobacco-food conglomerate, RJR Nabisco combines the tobacco business of the number two U.S. tobacco concern, R.J. Reynolds Company, with the food operations of the United States' top cookie and cracker baker, Nabisco Holdings Corp. The two were united in 1985. Originally the National Biscuit Company, formed by an 1898 merger of two leading bakeries, Nabisco markets such well-known brands as Fig Newtons, Chips Ahoy! and Oreo cookies, Ritz crackers, and the SnackWell's line for the health conscious. The Nabisco Holdings Corp. food business trades separately from the parent company's stock, although RJR Nabisco still owns about 80 percent of it. With $8.7 billion in 1997 sales, Nabisco faced slowing sales in the 1990s that prompted investor attempts to spin Nabisco off fully from R.J. Reynolds. These efforts failed; however, Nabisco began to undertake a reorganization to cut its costs and revive sales.

Global Presence

The U.S. industry has a large and expanding presence in foreign markets. In each year since 1989, the value of U.S. manufactured food exports (which exclude raw agricultural products) has surpassed the value of imports. In 1998 this trade surplus was estimated at $3.26 billion. A much greater source of international revenue, though, comes from U.S. manufacturers' operations in foreign countries, which contribute 3 to 4 times as much in annual sales as do exports shipped from the United States. This type of transplant operation is described by economists as "foreign direct investment," and is achieved either by buying stakes in existing foreign companies or by setting up or acquiring manufacturing facilities in which to produce new products. In the mid-1990s revenues from U.S. foreign food holdings surpassed $100 billion, and these businesses were among the fastest growing for U.S. manufacturers.

Employment

With over 1.52 million people on its U.S. payroll, the food products industry is one of the country's largest employers. The size of the U.S. work force crept up gradually between the early and mid-1990s, but entering the 2000s it was expected to stall and possibly decline as large U.S. companies continued to focus on boosting domestic efficiency and expanding overseas. Nearly three-quarters of the industry's labor force are production workers, or non-management employees. The entire industry's payroll exceeds $40 billion annually, which amounts to an average annual compensation of around $27,000 per employee, which is somewhat lower than the average wage for manufacturing employment.

Industry Projections

In the tight U.S. food market, even the largest of companies must approach the market aggressively in order to maintain their sales volume. ConAgra provides a good example. Though highly diversified across different food segments, ConAgra in the late 1990s obtained the vast majority of its sales from the United States. When prices on commodity items like beef began to slide due to high capacity, ConAgra began to see its net sales lose ground as well. After peaking in 1996, the company's sales declined in 1997 and were expected to drop both in 1998 and 1999 in addition—barring acquisition of another company to pad its coffers. Sales were expected to rebound only in 2000 given market conditions as of 1998. While not all companies faced ConAgra's plight, a number of the leading companies used to more rapid sales growth found themselves in stagnant waters in the late 1990s.