Emerson Electric Co. Chief Executive Officer David Farr wants to boost growth at his air-conditioner compressor unit by helping keep the world’s food supply from spoiling.
Chilling perishables in developing nations offers a way to increase sales in a Climate Technologies business crimped by a stagnant U.S. housing market and dominance in North American sales of air-conditioner compressors, Farr said in an interview at Emerson’s St. Louis headquarters.
“I need to get my growth elsewhere and I think the elsewhere is going to be in the refrigeration area,” Farr said. “If you go look at the No. 1 issue around the world, it’s food.”
Cooling food and not just homes is part of Farr’s strategy to cope with a global economic slowdown that he said may drag for five years while U.S. and European policy makers grapple with cutting debt. Farr said he expects emerging markets to grow at a 6 percent annual rate instead of the recent 8 percent, and developed countries at 2 percent rather than 3 percent.
The climate unit generated 16 percent of Emerson’s $24 billion of 2011 revenue, and it’s one of four businesses with worldwide growth potential on which the company will focus, according to Farr. The others are network power, process management and industrial automation, he said.
Emerson expects the $100 million global market for compressors in transport refrigeration to grow 21 percent a year through 2015, and the $86 million market for the units in industrial refrigeration to expand at an average rate of 16 percent, according to a company presentation.
Most of the new demand will be in developing nations, Farr said. Pushing into refrigeration will help Emerson’s climate unit cut its reliance on residential air conditioning to about a third of sales over time from 42 percent in 2011, he said.
“That’s going to be a huge growth market for us,” said Farr, 57, who has been CEO since 2000. Macquarie Group Ltd. estimates that Emerson has more than a 70 percent share of sales of U.S. air-conditioner compressors, a figure that Emerson declines to discuss.
In developing nations, food loss for fruits and vegetables can exceed 50 percent across all the stages from production through consumption, according to a report by the Food and Agriculture Organization, a United Nations agency. For meat and dairy products, the rate may top 20 percent.
Emerson already is moving to fill that refrigeration gap. Farr spent $50 million in April to buy Johnson Controls Inc.’s marine container and boiler controls business. That helped Emerson expand into products that monitor refrigerated sea containers, adding to its main business of building compressors for heating, ventilation and air conditioning units.
“Emerging markets are still in these dark ages of having open-air food markets, and the retail supermarkets are only a fraction of the kind we know,” said Deane Dray, an analyst with Citigroup Inc. in New York. “That’s still a land grab.”
Emerson slid 0.3 percent to $50.42 at the market close in New York, joining a retreat by the Standard & Poor’s 500 Index. The stock’s previous gain of 8.2 percent this year trailed the S&P 500’s 16 percent advance.
U.S. residential construction eventually will rebound and help the climate unit outpace the company in growth, said Michael Wood, a Macquarie analyst based in New York. The climate unit’s sales will turn from a contraction of 2 percent this year to expansion of 3 percent in 2013 and jump to 8 percent in the two years after that along with a housing rebound, he said.
“It’s still going to be driven by residential” air conditioning and heating, Wood said. “That’s the reality.”
Emerson began making air-conditioner compressors after buying Copeland Corp. in 1986, when Farr was Emerson’s chief of acquisitions. So-called scroll compressors, introduced 25 years ago, offered greater efficiency and helped Emerson grab a majority of the North American market for the units, Wood said.
While Emerson has been able to defend its position with updates to the technology, it doesn’t have much more room to add market share, Wood said in an interview.
Emerson isn’t alone in seeing refrigeration opportunities. Thermo King, the transport-refrigeration unit of Ingersoll Rand Plc and a buyer of Emerson compressors, also expects increasing demand in emerging markets for cold-chain food technology.
Urban consumers in China and India are shopping in rising numbers at Western-style retailers and buying more frozen food, said Ray Pittard, president of Thermo King North America.
“These megatrends are coming together where you’re having increased domestic consumption, demographic shifts to bigger cities, more visibility toward food safety and higher quality requirements for exports,” Pittard said in a phone interview.
Those are the possibilities that entice Farr.
“You can see that this product is needed, our technology is needed,” Farr said. “You can see that you can keep waves going for a long time.”