Foodmakers Have That Lean And Hungry Look

The news release was terse: Just two weeks shy of closing its fiscal year on Sept. 30, Ralston Purina Co. announced that 1992 earnings would plunge at least 12%, excluding extraordinary items, from last year's $ 3.59 a share. Worse, the St. Louis maker of pet foods and cereals also canceled the spin-off of the major drag to its earnings, its Continental Baking Co. unit, purveyor of Wonder bread and Twinkies. Ralston stock plummeted 11%, to $ 43.75.

Ralston is hardly the only high-flying foodmaker that has tumbled back to earth. For food packagers, the glory days of the 1980s have turned into the gloomy 1990s. Long gone are dropping federal tax rates and acquisition-driven growth. Food packagers have no more lagging nonfood businesses to sell off. And with value-conscious shoppers resisting price hikes and food volume growing at just 2% a year, "it's a zero-sum game," notes John H. Bryan, chairman of Sara Lee Corp. "You can trade market shares, but it's not going to make you grow."

FOREIGN FOODS. Indeed, despite major restructurings in the past few years, Borden, Heinz, and Quaker Oats all are struggling to rev up results. And that has attracted Wall Street's notice. Once trumpeted as recession-proof, the $ 350 billion domestic food industry has proven all too vulnerable to the slump. After trading at as much as a 30% premium to the Standard & Poor's 500-stock index in 1989, food stocks as a group have underperformed the market since the recession started in July, 1990 (table).

To cope, food companies are taking some drastic steps to improve profits -- mostly by chopping costs. The industry has slashed nearly 5% of its work force, or 15,000 jobs, in the past year, estimates John M. McMillin of Prudential Securities Inc. Take Campbell Soup Co. It began revamping several years ago, closing 20 plants, cutting 8,000 jobs, and pruning unprofitable lines. The result: Profits soared 22%, to $ 490.5 million in its fiscal year ended Aug. 2, on sales that edged up a bare 1%, to $ 6.3 billion.

Such efforts don't always work. Philip Morris Cos.' Kraft General Foods Inc. unit, the largest U.S. food company, with $ 30 billion in sales, is still waiting for a big payoff from its massive overhaul, launched late last year and accompanied by a $ 455 million charge. In 1992's first half, operating income for Kraft's North American food business inched up just 1.7%, to $ 1.2 billion, while revenues declined 1.4%, to $ 4.2 billion.

In a bid to expand sales, foodmakers increasingly are looking abroad. Europe's lowered trade barriers could mean new market-share opportunity, although food growth is slow there -- Coca-Cola stock took a hit on Sept. 22 when it warned that third-quarter overseas sales would be flat with the second quarter's. In July, PepsiCo Inc. and General Mills Inc. merged their European snack-foods businesses to become No. 1 -- with just a 3.5% share of the $ 17 billion market. And Mexico and Latin America are attracting Campbell Soup, Dean Foods Co. and others. Already, McMillin says, 25% of the industry's profits come from foreign sales.

SLIM PICKINGS. Even with improved foreign sales and an economic pickup in the U.S., the food biz won't see annual profit gains of 20% or more anytime soon. With supermarkets reluctant to accept higher prices from foodmakers, "I think there's going to be a lot of hard work to prevent price increases," says Tom E. Smith, chief executive of supermarket chain Food Lion Inc. Indeed, the group of 13 food giants tracked by Michael J. Mauboussin, a vice-president for First Boston Corp., will rack up earnings growth of 9% to 10% for 1992.

Of course, notable exceptions, including Kellogg Co. and Sara Lee, are expected to continue dishing up sparkling results. "If you're the No. 1 or No. 2 brand with consumers and you support your brand, you'll do fine," predicts Herbert M. Baum, president of Campbell's North and South American food unit.

But even for perennial Wall Street favorites such as General Mills, "the margin of error has narrowed," notes Mauboussin. Despite a 12% jump in profits for its fiscal first quarter, announced on Sept. 21, lackluster sales for its Red Lobster and Olive Garden restaurant chains triggered an investor stampede: General Mills' stock dropped $ 3.25, to $ 69.50, before trading was halted. With that kind of performance, it's no wonder Wall Street is getting a lot more finicky about biting into food stocks.

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