Food Industry

Few foodservice outfits could introduce new products and get the kind of attention Starbucks is getting for its introduction, first reported by the Wall Street Journal, of a fresh-fruit smoothie and a “sweet, ice beverage” developed with the help of “an Italian company.”

Neither the names nor the prices of the drinks were revealed, nor was the identity of the Italian company. The new lines are part of Starbucks’ push into healthier beverages and non-coffee drinks, which the chain hopes will get more people into its stores. The company has struggled as the consumer economy has weakened. The timing of Wednesday’s Journal article may have been tied to Wednesday’s release of Starbucks’ second-quarter earnings, which were 28 percent below last year’s second quarter. As it released earnings, it also announced it would cut back its plans for new store openings in the United States through 2011 and concentrate more on offshore growth. Last week, the company said it was facing the worst economic climate in its history.

The new drinks, according to Douglas McIntyre of Bloggingstocks.com, “won’t save it.” The company “does nothing to differentiate itself by coming to market with products that are easy to come by elsewhere. It is also a move away from its core coffee franchise.”

Au contraire, Starbucks’ vice president Rob Grady earlier told the Journal. The smoothie is “what we believe to be a huge differentiator” and consumers “cannot get [them] from any fast-food establishment.” But as McIntyre noted, you can get them at Baskin-Robbins and any number of other places

Yesterday’s announcement that Burlington, Vermont’s Magic Hat Brewing Company plans to acquire Seattle’s Pyramid Breweries, Inc. may help the West Coast brewer turn a profit for the first time since 2002. Saddled by almost $1 million in annual costs associated with being public, Pyramid reported a $1.8 million loss in its fourth quarter and $488,000 loss overall in 2007. Magic Hat CEO Martin Kelly is well familiar with the burden on the company’s bottom line: he was Pyramid’s CEO from 1999 to 2004. According to Beer Marketer’s Insights, as reported on the Brew Blog, the combined company could be the sixth- or seventh-largest craft brewery.

Besides combining complementary portfolios, the deal could expand each brand’s distribution to the opposite coast. Magic Hat plans to double its brewing capacity to 300,000 bottles per year this year, leaving open the possibility that the combined company’s beers will actually be brewed on both coasts. Although, as beer writer Lew Bryson points out, “it’s a question whether either company really has the reach to meet in the middle.”

The rising costs of barley and grain and the increase in craft beers from major breweries (see Miller’s forthcoming national launch of a line of craft beers under the Miller Lite brand) are forcing small and mid-sized crafts to take a hard look at whether they can stay independent and stay competitive. The soon-to-be-completed Widmer-Redhook merger and Pyramid-Magic Hat mergers will likely pave the way for more consolidation within the craft brewing industry.

Archer Daniels Midlands‘ ethanol business is down, and its costs are growing. Costs are also squeezing its mainstay corn syrup operations and its oilseeds-processing business. And yet on Tuesday, it released third-quarter results showing profits up by 42 percent and sales up by 64 percent.

That’s because ADM plays both sides of the market. It’s a huge buyer of grains, to be sure. But through its agricultural services unit, it’s also a major player on the supply side. The company operates 350 grain elevators from which it ships grain to itself and other buyers.

ADM’s “global, diversified, fully integrated value chain is an enormous undervalued asset in the current agriculture operating environment,” wrote Morgan Stanley’s Vincent Adams in a report on Monday. The “current agriculture operating environment” is one of volatile, most soaring, grain prices.

“The ADM trading desk played this volatile market like a Stradivarius violin,” wrote the Motley Fool’s Choy Leng Yeong.

Still, Wall Street wasn’t as wowed as you might think. Traders sent the company’s stock a few points lower. That seems to be in part because of the weak ethanol business, and because of ADM’s declaration, during a conference call with analysts, that its plans to build $2.5 billion worth of ethanol plants have faced “substantial” delays due to weather and other problems.

But the company is still banking on ethanol. Pat Woertz, the chairman and chief executive, lashed out during the conference call at the recent backlash against the government’s ethanol policies, which include subsidies, mandated production, and import tariffs. Critics say the government-driven demand for biofuels is helping to drive up the price of food.

Ms. Woertz was having none of it. Higher fuel costs, the falling dollar and rising global demand, she noted, are the chief reasons for the spike in grain prices. And that’s true. But then she went on as if biofuels haven’t also played a big part, without directly mentioning the government largess ADM enjoys.

“I actually find it’s sad and maybe even a little ironic that these misguided attacks on biofuels is directed at the one alternative, we actually have today to transportation fuel,” she said. “Retreat from biofuels is wrong, it’s foolish I think it’s dangerous, it’s a mistake.”

Further, retreating from biofuels (or from subsidies and protectionism, which is really what’s at issue) is an “anti-gesture” that “won’t fill anybody’s stomach and won’t fill any gas tanks.”

An October 2000 cover story in BusinessWeek magazine caused quite a stir. Chicago is a “great, livable city,” the magazine declared, but it was losing its status as a global business center.

That was five years before the takeover of the storied retailer Marshall Field by Macy’s and eight years before Monday’s news that an even more iconic Chicago company, Wm. Wrigley Jr. Co., would be taken over by Mars. Inc.

Such deals carry a lot of symbolic weight, of course, but that doesn’t mean they are meaningless. As Reuters pointed out Monday, the $23 billion deal “also chips away at Chicago’s claim that it is the chocolate and candy capital of the United States, after losing such nationally recognized brands Fannie May and Brach’s.”

A look back at that BusinessWeek article makes it clear that this is part of a pattern. Once, Chicago was the rail capital of the country. No more. It was arguably the king of retail cities. No more. Once a money center, Chicago has lost bank after bank, as well as industrial giants such as Morton International and Inland Steel, which have either gone away or been taken over. Such massive departures are far worse than the admittedly sad prospect of the Wrigley Building being renamed or the Cubs playing anywhere but in a place called Wrigley Field. (On the other hand, the South Side White Sox never won a World Series while it played in Comiskey Park, but they did after they started playing in the hideous monstrosity with the horrifying name “U.S. Cellular Field.”)

As for food, Chicago still boasts several big names, among them Kraft Foods, McDonald’s, and Sara Lee. But even those companies have been struggling, to one degree or another.

Still, Chicago still has many strengths, some of them glossed over by BusinessWeek and other doomsayers. Chiefly, its economy is highly diverse, which in some respects puts it ahead of such industry towns as Hollywood or Silicon Valley. Its manufacturing and service sectors are broad and deep, and have maintained their strength. The city might lose big names, but the small and medium-sized ones tend to take up the slack.

And certainly, Warren Buffet seems to like investing there. As Crain’s Chicago Business pointed out Monday, Mr. Buffett, who teamed with Mars on the Wrigley deal, has put big money into Kraft Foods Inc., USG Corp. and Marmon Group, as well as private companies like Pampered Chef and Precision Steel Warehouse.

Mr. Buffett, who has a particular liking for food companies that fit his investment criteria – well-known brands, solid management, good cash flows – might also be interested in Sara Lee or Tootsie Roll Industries, Crain’s speculated.

Now that food riots are breaking out around the world, there are serious moves being made to get the federal government to cut back on the subsidies it gives to ethanol producers, and to retire the laws mandating ethanol production.

Ethanol is increasingly taking blame for pushing up the price of corn and other crops. In the United States, higher prices have led to soaring costs for many food processors, and higher retail prices for everything from Coca-Cola to chicken cacciatore. In some developing countries, it has led to widespread protests and even violence.

On Friday Texas Gov. Rick Perry asked the Environmental Protection Agency to waive half of the so-called renewable-fuel standard for ethanol in his state. In a letter to the EPA (pdf), he called it the “best, quickest way” to put the brakes on food costs.

Ethanol isn’t the only cause of rising food prices, but it is increasingly seen a a major component. And it should be borne in mind, of course, that Perry represents the state that produces the most oil in the country.

But he’s hardly alone. The voices calling for an end to the government’s nutty ethanol policies are swelling into a chorus. The Center for American Progress, along with other groups, has mounted a full-court press on the matter. None of the three presidential contenders is beholden to the farm lobby, and none of them have pledged to continue government support for the product.

“After a decades-long courtship, the marriage between ethanol and Washington is teetering on an ugly divorce,” concluded a particularly meaty CNBC article.

Beyond the political pressure, and even the riots, economics might be what finally changes people’s minds – which is ironic since the entire ethanol industry is built on attempts to subvert economic laws. But despite all the meddling, ethanol prices are rising, making it less of an “alternative” to gasoline in terms of cost. CNBC noted that the “real” cost of ethanol-blended gas when mileage is taken into account (it’s less efficient than gasoline) is actually higher than ethanol-free gas. More people are realizing that as they whip out their credit cards at the fuel pumps.

Early reaction to the takeover of Wendy’s International by the particularly active activist investor Norman Peltz, announced Thursday, is coming in.

The Wall Street Journal’s Deal Journal blog is reporting that Peltz’s Triarc, which owns 9.8 percent of Wendy’s, was pushed into closing the deal by a rumored rival bid from Kelso & Co. Triarc heard about the Kelso bid after making a “lowball” offer of $900 million last week, according to the blog.

Nonetheless, at $2.34 billion in stock, Peltz got a great price. After rejecting two earlier bids last summer — each worth between $3.6 billion and $3.8 billion – Wendy’s board, under shareholder pressure and facing a possible proxy battle, relented to the latest offer, which represents a premium of just 5.7 percent based on Wednesday’s closing price.

“So,” asks the New York Times’ Dealbook blog, “are Wendy’s shareholders getting burned?”

Yes and no, the blog answers. It’s a bargain-basement price, but some shareholders may be happy “considering that the stock was already being supported by expectations of a sale.”

Wendy’s has struggled since the death in 2002 of founder Dave Thomas. Peltz has been agitating for change – in the form of spinoffs and cost cuts – for more than two years. Wendy’s has succumbed to many of his demands, but both earnings and the stock price have continued to lag.

Pam Thomas Farber, daughter of the founder, told the Associated Press that it is “a very sad day for Wendy’s, and our family. We just didn’t think this would be the outcome.” If her father were alive “he would not be amused” by the deal, she said.

Marketwatch, the Wall Street Journal’s sister site, said that Triarc, which also own the Arby’s fast-food chain, will have a tough time turning Wendy’s around, but if “there’s anyone qualified to take on the challenge, it’s Peltz.”

Peltz, Marketwatch notes, is “known as a wizard in the food industry and a fearsome foe in the boardroom.”

One of his recent conquests was a major restructuring of H.J. Heinz. He was also instrumental in getting Cadbury Schweppes to split off its U.S. soft drinks business. And he has agitated for Kraft Foods to dump weak brands.

Burger King, apparently as part of its effort to recast itself in Europe, and specifically England, as a “premium” eatery, said on Wednesday that it planned to offer a cheeseburger costing 85 pounds, or about $170, in some upscale London neighborhoods and suburbs.

The burger will contain Kobe wagyu beef and will be topped with foie gras and rare bleu cheese, according to The Sun, a British tabloid. (Indeed, British tabloids — a notorious collection of publications of varying degrees of trustworthiness — seem to be the only news outlets that have done any reporting on this. The Daily Star, however, claims that it talked to a Burger King spokesperson, who confirmed only that the company is planning an expensive burger for the British market.)

It’s a blatant PR move, of course. All the profits from the cheeseburger will go to charity. It should be interesting to see whether Brits will buy in — not to the burger, but to the concept of Burger King as “upscale.”

Judging by the reader response on Brand Republic’s Web site, some will and some won’t.

A reader identifying himself as Gavin Sutcliffe wrote that Burger King marketers are “cobblers,” and threw in some offensive slurs to boot. And he wondered why Brand Republic would “bother gnoshing on this story in the first place … toss pots.”

Highly amusing Britishisms aside, Mr. Sutcliffe may simply be expressing with anger the reactions that many Brits will have toward the high-end cheeseburger. Others may employ sarcasm, like Jacquie Bowser.

“I’m saving up my £85 as we speak!” she wrote. “Can’t think of a better place to spend my hard-earned cash — sitting on a plastic seat, eating on a plastic tray, looking at my paper cup, while listening to screaming kids. Sounds lush!”

Others may be more direct, like Ian Maggs.

“Surely the correct way to meaningfully raise perceptions of BK premiumness is to modify a core component of the basic food offer,” he wrote. For example, “organic buns or potatoes, instead of simply introducing a single mindlessly expensive product.”

But The Sun quoted Lucy Barrett, of Marketing Magazine, as saying: “The idea of a burger that no one buys is not as ludicrous as it seems. Burger King will use it to promote a gap in perception between it and McDonald’s. It could lead consumers to reassess the quality of the brand.”

Correction: This post was updated 5:18 pm PST on April 25, 2008, to remove a misleading translation.

Another correction: This post was updated again at 6:08 p.m. on April 28, 2008, to remove some quoted British slang that the post’s writer thought to be merely a bit dirty, but which turned out to be an ugly slur.

Corn Products International posted first-quarter results on Tuesday showing that its net income soared 29 percent over last year, while net sales rose 22 percent. Furthermore, it boosted its profit estimates for the full year.

How is it that a corn processor is able to report such good news as grain prices are going through the roof and the economy is flagging? Largely, it has to do with how Corn Products does business.

The company offers its customers two types of contracts. In the first type, it buys a futures contract on corn on the same day as it strikes an agreement to sell a corn-derived product (such as high fructose corn syrup) to a customer. In the second type – a so-called tolling contract – the customer buys the corn, and simply pays Corn Products to process it.

The first type of contract allows the company to base its pricing on something approaching real costs of inputs (and it doesn’t hurt that Corn Products owns a piece of CME – owner of the world’s biggest grains-futures exchange). The second type foists the input cost off on the customer.

And it plays the futures markets in a similar way when it comes to natural gas, a huge amount of which is used in processing corn.

In this way, Corn Products can not only weather hard economic times, but can actually thrive during them. Up to a point, anyway – but given that the company’s has just reported its best first quarter ever, and the ninth straight quarter of profit growth, that point may yet be far off.

Surely, the company’s pricing strategy isn’t the sole reason for its stellar quarter. During a conference call with analysts on Tuesday, Cheryl Beebe, vice president and chief financial officer, cited “strong pricing actions and improved product mix in our North and South American businesses, along with favorable currency translations” as the main reasons for the results.

Kroger has spent several years expanding its selections, particularly of ethnic foods. Now, it has created a new management position and hired Angel Colon, a veteran of Goya Foods and Kellogg, to head “multicultural business development.”

Colon “will be responsible for enhancing Kroger’s approach to serving its diverse customer base,” according to a Kroger news release.

The question is how much emphasis Kroger will put on its product mix, and how much it will put on appealing to demographic groups. Since Americans of all ethnicities are increasingly attracted to ethnic foods of all kinds, a good balance is called for – it would be a mistake to market Hispanic foods only to Hispanic shoppers, for instance.

Kroger, though, has a decent record in that regard. Unlike some other mainstream grocery chains, it tends to spread ethnic foods throughout its stores, rather than ghettoize them all in a single aisle.

A poster named “Kitty,” decided in 2005 that she liked her local Kroger store in Athens, Ohio, so much that it deserved a review on Yahoo’s local pages. “An extensive variety of produce and ethnic foods in addition to a fish and meat market and sushi bar!” she wrote.

It’s hard to know Kitty’s ethnicity, but Athens is a pretty typical, All-American town — meaning that it’s mostly white, but has burgeoning minority populations. And if Athens is like most such towns, most residents of all demographic groups are interested in a greater choice of ethnic fare.

Colon held similar jobs at Kellogg and Goya, and has 16 years of executive experience in the food business.

What’s causing that creaking sound under the skates of Reddy Ice? Is it the lawsuits filed against it alleging that the company is involved in an “international conspiracy” to fix prices? Is it the state and federal government probes of similar accusations? Is it the buyout deal that fell apart in January? Is it the company’s anemic earnings and equally anemic stock price? Is it the relentless pressure from an activist investor bent on changing the company’s management and governance?

The nation’s largest distributor of packaged ice is under siege, and so far it’s less than clear when or whether it will be able to free itself from its problems, many of them self-imposed.

It does seem to be trying, though. On Thursday, Reddy announced that it had added two new board members, both nominated by the Shamrock Activist Value Fund, which has been putting pressure on the company to change its ways.

The new board members are Christopher S. Kiper, a vice president at Shamrock, and Michael H. Rauch of the law firm Fried Frank.

Shamrock, headed by Roy Disney (son of Walt), demanded that Reddy hire an outside firm to help it find a new CEO to replace Jimmy Weaver, who resigned in December. Reddy also announced on Thursday that it had relented to that demand.

Shamrock owns about 15.6 percent of Reddy.

In January, a tentative deal for GSO Capital Partners to buy Reddy out collapsed. Reddy initially had called the offer of $31.25 per share “grossly inadequate,” then relented before the deal fell apart. On Friday, the stock was trading at $13.73.

Though its fourth-quarter earnings were disappointing, the company has forecast that it will beat expectations in 2008.

But that forecast came before the company announced that it is aware of at least 37 lawsuits against it that are seeking class-action status. Ridge Plaza, a convenience store in Milwaukee, filed suit last month in U.S. District Court in Minneapolis against the Dallas-based Reddy, Arctic Glacier International of West St. Paul, Minn., and Home City Ice of Cincinnati.

The suit alleges the three companies acted in an “international conspiracy” to fix prices and divide the country in to regions that each would control in selling cubed, crushed, block and dry ice – a $1.8 billion industry.

The “international” bit seems to be related to the fact that a Canadian firm owns Arctic Glacier. Ridge Plaza is seeking to consolidate other suits in a class action.

The Justice Department has confirmed that it is investigating possible anticompetitive practices in the ice industry, which is dominated by the three companies, but has given no details.

On March 31, the Florida Attorney General’s office announced that it had launched its own investigation. Reddy says it is cooperating with the probes.