Keep Your Seat Belt Buckled

We’re in for quite a ride in this, the actual first year of the New Millennium, with a chilly economy, an uncertain political climate, and volatile consumers. But these factors don’t necessarily bode ill for the U.S. food industry. In fact, the cooler economy brought about by the fall of high-flying tech stocks in late 2000 has actually breathed new life into food company stocks. Here’s what we can expect:
• The Economy. The economy appears to be cooling off. Consequently, the Federal Reserve Board is considering interest rate cuts, and investors have shown renewed interest in the brick-and-mortar stability of food companies. “With technology stocks blowing up, there’s been a lot of rotation into food stocks and other old economy industries,” stated Jeffrey Kanter, a food industry analyst for Prudential Securities, Inc., in a December interview. “The market doesn’t want volatility right now.”

At the start of the year, the Bloomberg U.S. Food Index of the nation’s 45 leading food stocks rose to its highest level in more than a year, while the larger Standard & Poor Technology Composite dropped to its lowest point in 15 months.

In addition, any move by the Fed to lower rates will create favorable conditions for needed capital improvements and competitive pricing. In addition, it may add fuel to the merger mania that was building at the end of the year.

• Mergers and Acquisitions. While it won’t be finalized until later this year, the acquisition of Chicago-based Quaker Oats Co. by PepsiCo, Inc. was last year’s blockbuster—representing a pattern that will continue in 2001, according to several food industry analysts. To recap, Pepsi was the original bidder for Quaker in early November with an offer of about $13 billion. This was rejected, and the Coca-Cola Co. stepped in with a bid of more than $15 billion. When Coke withdrew its offer after Thanksgiving, Pepsi came back with another bid worth slightly more than the original. French giant Danone SA also courted Quaker but walked away. The final deal, and deals to come, are based on the need for scale and brand synergy. For Pepsi, Quaker’s category-leading Gatorade brand was a prime target, fitting nicely into Pepsi’s beverage portfolio and giving it added clout in its battle with rival Coca-Cola Co.

Other deals setting the tone for 2001 include Tyson Foods’ $2.8 billion offer last December to purchase IBP, the world’s largest beef processor. This tops an offer by Smithfield Foods, which indicated it may up the ante.

“We continue to expect M&A activity in 2001, although possibly at a somewhat slower pace,” writes Eric Katzman, a food industry analyst for Deutsche Banc Alex. Brown in a recent research monograph. While many of the big plums have been picked, he points to Ralston Purina and spice house McCormick & Co. as likely targets in 2001.

• Politics. Normally I would write about the impact of the new administration on food industry policy, analyze prospective appointments, and evaluate policy in this column. With the appointments still unmade as this is being written, everyone is waiting. However, one thing is sure: biotechnology standards currently have regulatory center stage. Last November, Agriculture Secretary Dan Glickman said that his department would take public comment on measures aimed at improving the tracking and detection of biotech crops to protect markets for both gene-altered and conventional foods. The Union of Concerned Scientists has pushed USDA for food labeling of products containing biotech ingredients. While the Clinton administration has rejected these proposals, it will be left to the new administration to come up with final guidelines and policy.

• Global Trade. Lower trade barriers and technological innovations that have reduced the cost of transportation and communication have led to accelerated growth in global trade, according to a World Bank report released in December. World trade volumes for all commerce are likely to increase by 12.5% this year, the highest rate of growth since before the first oil shock of the early 1970s. Food is expected to be a major component.

• Food Trends. Organic, natural, and therapeutic foods will have a big impact on the market this year. National standards for the $6-billion organic food segment will be released soon, the result of six years of development. The rules will replace the hodgepodge of state standards for organic agriculture and will “provide some certainty for marketing these products at home and overseas,” USDA’s Glickman stressed. The standards include a labeling program that has met with opposition from some food industry groups, as well as provisions for environmental policies that have met with opposition from conventional farmers and developers. Organic foods have registered a 20% average annual growth rate for the past several years, spurring a number of major food companies to acquire hot organic food processors.

Look also for the growing functional foods category to diversify and mature as new products, such as stanol and sterol ester–based spreads that lower LDL cholesterol, deliver more demonstrable use-related health benefits. Expect the term “therapeutic foods” to gain wider usage.

Enjoy the ride, but keep your seat belt buckled.

by PIERCE HOLLINGSWORTH
Contributing Editor