Food Industry

Chiquita Brands International lost $49 million last year, and so CEO Fernando Aguirre got no cash bonus. Nonetheless, he managed to nearly double his total compensation for the year to $5.4 million, according to documents filed this week with the Securities and Exchange Commission.

That comes thanks in part to a new employment agreement he signed in April, which doubled the number of restricted shares he holds. Top executives got no cash bonuses because the company failed to reach net-income goals and benchmarks on revenue from new products. They did, however, get a total of $7.3 million in stock awards. That includes $1.2 million for Aguirre in restricted-share grants held over from 2006, as well as $1.6 million more in grants bestowed in 2007.

Robert Kistinger, who left his position as president of the Chiquita Fresh Group in October, got $3.2 million for the year, including $1.7 million from his retirement agreement.

The combination of rising commodities prices and the weak economy is putting a lot of food and beverage companies in a bad position. But there are exceptions, and Coca-Cola Co. is one of them. The company on Wednesday reported first-quarter results that substantially exceeded expectations. It helps that three-quarters of Coke’s sales come from overseas markets.

It also helps that Coke has aggressively moved into non-carbonated drinks. Worldwide sales of soda rose a relatively anemic 3 percent. Sales of non-carbonated drinks soared by 17 percent.

Coke is a huge buyer of corn (in the form of high fructose corn syrup), one of the commodities that have seen the biggest price gains. While that has put a dent in the company’s domestic profits, the weak dollar has helped it greatly in foreign markets, particularly in Mexico, China, and India. Unit sales in those countries rose in the quarter by 10 or 11 percent each.

The push into non-carbonated beverages like juice, tea, and bottled water makes Coke that much less dependent on corn. And it puts it into markets – both domestically and globally – where demand is burgeoning. That push has helped it particularly in Mexico, where total unit sales rose 11 percent in the quarter, helped in large part by its acquisition in November of juice-maker Jugos del Valle.

Revenues in the United States were flat – hurt by a decline of 4 percent in fountain and foodservice sales. This is where Coke is really playing it smart. Rather than simply cut prices, it plans to use its profits to increase its marketing, largely of non-carbonated drinks – what the industry calls “still beverages.”

In a conference call with analysts Wednesday morning, Muhtar Kent, Coke’s president and chief operating officer, noted that the Coke is “the fastest-growing still beverage company in North America and our still beverage portfolio is outperforming the industry.”

If the company can build on that growth, the only real weak spot left would be declining or flat domestic sales, and rising costs, of its core products – corn-fed soft drinks.

For a chief executive who just finished presiding over a breathtaking corporate downfall, Brent Willis, the recently ousted CEO of Canadian soft-drink maker Cott, is taking home a nice chunk of money.

The company filed documents with the Securities and Exchange Commission revealing that Mr. Willis will go home with nearly $3.5 million. As per his employment agreement, that includes twice his annual base salary and an annual bonus for 2007, a month’s pay in lieu of notice of termination, proceeds from stock options, a buyout of his medical benefits, and even a pro-rated bonus for 2008.

Late last month, Cott fired Mr. Willis and appointed a board member, David Gibbons, as interim CEO. The company cited “the business climate and the stock price” as reasons for Mr. Willis’ ouster, according to the Financial Post. In February, the stock fell nearly 60 percent in two days after the company said that Wal-Mart, Cott’s biggest customer, would be reducing the shelf space it gave to the company’s carbonated soft drinks.

Cott is reportedly negotiating with Wal-Mart over how much shelf space it will lose. Last week, Invesco, a major mutual fund operator, announced that it had reduced its stake in the company from more than 11 percent to less than 5 percent.

Whenever oil prices spike, energy companies like Exxon come in for even more criticism than usual. The public is generally a bit more forgiving of food companies – that is, up to a point. With the government reporting that food inflation is as bad as it has been in nearly two decades, we may be reaching that point now. Some analysts expect that Wednesday’s Consumer Price Index report from the Labor Department will show that inflation is even worse than what’s been reported so far.

It will be interesting to see whether food producers — not to mention grocers and restaurateurs — will be better than oil companies generally are at explaining that the rise in prices is largely out of their control, and that they are victims, too.

During the rampant inflation of the early 1970’s, most people didn’t think of food producers as evil. But back then, as now, they surely thought oil companies were. Oil companies befoul the environment and destroy aquatic ecosystems with spillage from their tankers. They do business with corrupt foreign governments. Windfall profits tax? You bet!

But over the past few decades, the food industry has lost much of its innocent sheen (which was never really deserved, but still). Now the attitude is: Food companies clog our arteries, make our children fat, and fill our meals with unpronounceable ingredients that may well be poisoning us. They experiment on us with genetically altered crops and hormone-stuffed milk and meat. And they wreck the environment with harsh chemical fertilizers, pesticides, and diesel-sucking farm machinery.

Fair or not, that’s the attitude. Adding higher prices to that mix will bring no love to the food industry. That is, unless producers and vendors effectively explain to consumers that inflation isn’t their fault.

Euromonitor International, a research outfit, doesn’t mention Constellation Brands, or any other particular company, in its new report on the global spirits market. Many big liquor firms, Constellation included, are going after consumers of premium brands, and leaving low- and mid-tier products behind them. Euromonitor’s Jeremy Cunnington (who mentions brands, but not companies) thinks that is a mistake.

The “vast majority of spirits sold in the world, even in established markets for international spirits, are either economy or standard brands,” he notes. And “in many markets it is these products that are driving volume growth. Margins may be lower, but with the large volumes involved, these products still offer producers huge potential.”

The report can be found at just-drinks.com, where registration is required.

Mr. Cunnington’s analysis is limited to vodka and Scotch, but many of his points can, in very general terms, be applied to other markets, such as wine. It boils down to this: premium and super-premium brands are growing more than any other segment. But much of that growth is in mature markets. And even there, the growth is not universal. He cites the blended-Scotch market in France, where mid-tier and economy brands have recently outpaced overall growth by several percentage points.

Even more starkly, the strongest growth in premium vodkas can be found in the United States. Nevertheless, 60 percent of the overall growth in the U.S. vodka market comes from standard and economy brands. In other words, a lot more people are drinking a lot more vodka across the quality spectrum, but it’s the cheaper stuff that’s seeing the most growth (what this says about the state of American livers is another matter.)

“Even if standard and economy variants do not see the most dynamic growth rates these products are still the key volume growth drivers in many Western markets,” Cunnington writes. Companies that are swiftly abandoning the economy brands in their race to the high end might want to remember that.

On Thursday, Frito-Lay, the snack-foods division of PepsiCo, unveiled a line of its top-selling chips called “A Pinch of Salt.” They have 30 to 50 percent less sodium than regular chips. Well, fine. Less salt is better. But however much Frito-Lay’s marketing department would like its customers to believe otherwise, the new products aren’t going to lower America’s blood pressure by very much.

In a statement heralding the new line, the company notes that a serving of the Pinch of Salt version of its Lay’s potato chips has 75 milligrams of salt, compared to 180 milligrams in the regular version.

Neither of those amounts is particularly huge – even the original chips had just a pinch of salt in them, relatively speaking. But what’s in a pinch? The American Heart Association’s guidelines limit daily salt intake to 480 milligrams. In its statement, the company notes, correctly, that chip snacks get a bad rap for their salt content – they don’t have nearly as much as many other products, particularly processed foods, many of which don’t taste salty at all, but are nonetheless filled with the stuff.

Still, 75 milligrams, the amount of salt in a single, vending-machine-sized bag of the new chips, is 16 percent of what the AHA recommends for a whole day. And presumably, the new chips contain the same three grams of saturated fat and 150 calories that the original chips do.

Improbably, Frito-Lay has made “health” a cornerstone of its marketing efforts. It pushes the “baked” versions of its chips as if they were rice cakes, and it has long boasted of its line of reduced-fat snacks (but mentions the calorie counts only on its nutrition labels, as required by law). To some degree, this works. Many people see “lower in salt” or “reduced fat” on a label and feel this gives them license to pig out.

But consumers are becoming smarter all the time, and are increasingly making choices based on real, as opposed to perceived, health considerations. Fast-food chains have learned this, so they market their healthier fare to people who are interested in it, and, without pretense, they market their calorie-laden, artery-choking meals to people who couldn’t care less, such as young men. Witness Burger King and Taco Bell, whose advertisements sometimes come close to outright boasting about how unhealthy some of their foods are.

There may come a time when makers of snack-foods will become similarly comfortable with what they’re selling, and will stop pretending they are in the health-food business. Until then, it’s best to take their claims with a grain of salt.

Whether Supervalu’s introduction this week of a line of organic products is meant as a long-term play or is a simple case of trend-mongering, the nation’s third-largest grocer is a straggler.

Even Wal-Mart, the country’s leading grocer, has been offering organic products for years – first in 2001 with dairy and produce. In 2006, it made a major push into the organic market with a full selection of products. Kroger, the nation’s No. 2, made similar moves in approximately the same timeframe. Supervalu had tried to offer organics through a separate chain called Sunflower Markets. But after experimenting with that concept with five stores in the Midwest, it gave up in February.

Still, though it is late to the game in offering a complete line of organics at its major outlets, Supervalu — which owns several chains including Cub Foods, Albertson’s and Jewel-Osco — is playing it smart. The new line is a store brand, called Wild Harvest. That will allow it to offer organics, which are generally more expensive, at reduced prices — about 15 percent less than they normally sell for, the company says. And it will enable the company to boost the amount of self-branded products it sells. Store brands carry higher margins, and it’s a segment where Supervalu has fallen behind its rivals.

Supervalu also runs a wholesale operation, so it has the infrastructure in place to deliver the products to its own stores in a timely fashion – an important consideration in selling organics, where freshness is more important than usual.

Given that sales of organic products has been increasing steadily since the early ’90s, it would appear that it is more than a trend. But Supervalu’s introduction of Wild Harvest, coming at this late date, “is a decidedly ‘me too’ move,” says Rich Duprey of The Motley Fool, and likely won’t “add anything more than an incremental boost in revenue.”

Still, it’s something Supervalu had to do, and should have done long ago.

Here’s how scary things are at Dole Food: it’s relying on the real estate market to get it out of trouble. To avoid defaulting on $350 million worth of bonds, the company is planning to sell land in Hawaii and California.

Dole, the world’s largest purveyor of fresh fruits and vegetables, is facing the same problems as the rest of the food industry: soaring costs and cost-conscious customers. But last month, with the news that Standard & Poor’s would slash its credit rating, the company’s biggest problem came into sharp relief: its ridiculously high debt load.

The situation might not have been so bad if Dole had raised prices on its bananas to pass along the cost of Europe’s tariffs, which were raised in 2006. But Dole has stubbornly insisted on trying to gain market share from its rival, Chiquita Brands International. Now, it’s paying for that stubbornness.

It could be that Dole figures it can afford to be stubborn. If all else failed, David Murdock, the 84-year-old billionaire chairman and former chief executive, would likely have pumped some of his own money into Dole, according to Bloomberg news.

But Murdock’s wealth means little to Standard & Poor’s, which lowered the ratings on Dole’s unsecured debt from B- to CCC+. S&P cited the volatility of the produce market and the company’s financial position as reasons for the downgrade. Murdock took the company private in 2003 in a leveraged buyout financed by, you guessed it, bond debt.

The bonds that are in danger of default, set to mature in 2009, represent just a third of Dole’s debt load — which surpasses $1 billion.

Can “lite” and “craft” really co-exist in the same beer? Miller Brewing obviously thinks so, having declared in press releases that its forthcoming Miller Lite Brewers Collection will combine “the best of both worlds.”

The new beers will be rolled out in September. Miller is reacting to a trend that is quickly becoming a permanent reality. Craft beers make up just 5 percent of the market, measured in revenue. But industry-watchers say that share could grow to as much as 30 percent in the next decade. In the first six months of 2007, sales of craft beers, in terms of dollar volume, jumped by 14 percent over the year-earlier period.

The problem for Miller is that the kinds of people who are interested in craft beers generally aren’t the kinds who are interested in light beers. Jay Brooks, a veteran, independent beer-industry writer and keeper of the Brookston Beer Bulletin blog, was apprehensive about any beer purporting to be “craft” coming out of the majors. But on that score, he was willing to give the Brewers Collection a chance. It wasn’t the “Miller” that bothered him, it was the “Lite.”

“It may seem prejudicial to not go into trying them with an open mind,” he wrote recently, “but I would argue it’s because I have a problem with the low-calorie beer category itself. I’ve never liked them, not just their lack of flavor, but the very idea of them. I find them an abomination, an aberration, a triumph of marketing over good sense.”

Not surprisingly, then, Mr. Brooks was less than impressed with the Brewers Collection.

Miller claims that its recent test-marketing trials in four cities were successful. If so, it is likely that it captured the market-segment it no doubt was after: light-beer drinkers who aren’t
interested in rich, complex flavors so much as they are in appearing to be interested in rich, complex flavors. Whether that segment is large enough to sustain the Miller Brewers Collection will be determined this fall.

In the face of a recession, Constellation Brands is confronting a central question as it changes its strategy to focus on premium wines, beers, and liquors: When times are tight, what happens to sales of booze? Do pricier offerings like premium wines and high-end vodka slump in favor of cheaper fare? Or is it the rotgut stuff that loses sales?

For liquor distributor Constellation, the question is more important than ever because it has been spending big on acquisitions of higher-end wineries and liquor producers while casting off some of its low-end business units.

Among its many recent moves, it purchased the Clos du Bois wine brand, as well as Effen and Svedka vodkas. And it sold off the lower-end Almaden and Inglenook wine labels.

But “with the economy mired in a slump,” writes Rich Duprey of the Motley Fool, Constellation “may find that consumers opt for ripple instead of wine to save a few bucks.”

The company released its fourth-quarter earnings last week, and the results don’t do much to clarify the picture. Reactions were so confused that the Associated Press headline read “Constellation Brands Swings to 4Q Loss,” while Reuters reported, “Constellation Brands Profit Tops View.”

Much of the confusion had to do with one-time charges, but still, the company’s short- and intermediate-term future is hard to pin down. Sales are weak in Australia and Great Britain, but, for now at least, still strong in the United States.

The company’s line of beers – all imports – is doing well, Chief Operating Officer Rob Sands said in a conference call on Thursday.

As for wine, Constellation is well positioned because sales of wines costing between $8 and $20 are still selling, Sands said. “We continue to see very, very strong double digit growth in those categories and we continue to see strong trading-up trends in the wine business.”

That “trading up,” though, doesn’t include high-end wines, which have seen sales fall off in recent months. But, Sands said, “basically, that’s immaterial to the wine business as a whole.”

The company forecasts that fiscal 2009 will see higher-than-expected sales in most of its business units. “Our sense,” wrote Goldman Sachs analyst Judy Hong in a research note “is that while market expectations tilt to the cautious side, we await further clarity on the underlying business fundamentals to adopt a more optimistic view.”

The Motley Fool’s Duprey, was more direct. There is, he noted, a worldwide glut of wine, which could hurt international sales. If so, Constellation’s “formerly improving margins may now fall flat” if the economy continues to tank.