Canned food industry structure analysis

Industry Structure Analysis CANNED FOOD INDUSTRY Team Members: 202 Akriti Agrawal | 215 Divya Bangera 220 Heemanish Midde | 235 Mohit Soni | 257 Vikrant Warudkar April 2008 Xavier Institute of Management and Research, Mumbai Mumbai University

TABLE OF CONTENTS 1. INTRODUCTION 1.1. Market Analysis 2 1.2. Market Value 2 1.3. Market Volume 3 1.4. Market Segmentation I 3 1.5. Market Segmentation II 3 1.6. Market Share 3 2. COMPETITIVE LANDSCAPE 1.1. Buyer/Supplier power 4 1.2. Economies of scale 4 1.3. Brand loyalty 4 1.4. Access to Raw materials 4 1.5. Availability of substitutes 5 1.6. Entry criteria 5 1.7. Capital expenditure 5 1.8. Exit criteria 6 1.9. Distribution 6 3. LEADING COMPANIES 1.7. Del Monte Foods Company 7 1.8. ConAgra Foods, Inc. 7 1.9. Hormel Foods 8 4. STRUCTURE ANALYSIS 1.1. Entry Barriers 11 1.2. Exit Barriers 11 1.3. Rivalry among Competitors 12 1.4. Bargaining Power of Buyers 12 1.5. Bargaining Power of Suppliers 13 1.6. Threat of Substitutes 13 1.7. Summary Table 14 1.8. Conclusion 14 5. ANNEXURES 15 1

1 INTRODUCTION The canned food industry will be analyzed taking food processing and canning companies as players and food retailers as the main buyers. Globally, food retail was fragmented, which means that players can sell to a large number of relatively small buyers. Key inputs for canned food producers are raw materials such as grains, fruit and vegetables, and meat and fish. Leading companies in this industry are Del Monte Foods Company, ConAgra Foods, Inc., and Hormel Foods. 1.1 Market Analysis The global canned food market generated total revenues of $51.4 billion in 2006, this representing a compound annual growth rate (CAGR) of 2.2% for the period spanning 2002-2006. In comparison, the European and Asia-Pacific markets grew with CAGRs of 1.7% and 3.2% over the same period, to reach respective values of $24.3 billion and $7.3 billion in 2006. Market volumes increased with a CAGR of 1.7% from 2002 to 2006, to reach a total of 18.2 billion kg in 2006. The market's volume is expected to rise to 19.8 billion kg by the end of 2011, this representing a CAGR of 1.7% for the 2006-2011 period. Sales of canned fish/seafood and meat products proved the most lucrative for the US canned food market in 2006, generating total revenues of $21.8 billion, equivalent to 42.5% of the market's overall value. In comparison, sales of canned vegetables generated revenues of $13.7 billion in 2006, equating to 26.6% of the market's aggregate revenues. The performance of the market is forecast to follow a similar pattern, with an anticipated CAGR of 2.2% for the five-year period 2006-2011 expected to drive the market to a value of $57.2 billion by the end of 2011. Comparatively, the European and Asia-Pacific markets will grow with CAGRs of 1.7% and 2.9% respectively over the same period, to reach respective values of $26.4 billion and $8.4 billion in 2011. 1.2 Market Value The global canned food market grew by 2.2% in 2006 to reach a value of $50.9 billion. The compound annual growth rate of the market in the period 2002-2006 was 2.2%. [See annexure 1] 1.3 Market Volume The global canned food market grew by 1.7% in 2006 to reach a volume of 18.1 billion kg. The compound annual growth rate of the market volume in the period 2002-2006 was 1.7%. [See annexure 2] 1.4 Market Segmentation I Sales of canned fish/seafood and meat products account for 42.2% of the global canned food market's value. Canned vegetables sales generate a further 26.7% of the global market's revenues. [See annexure 3] 2

1.5 Market Segmentation II Europe was the most lucrative regional market, accounting for 47.7% of the global canned food market's value. The Americas generate a further 38% of the global market's revenues. [See annexure 4] 1.6 Market Share DelMonte Foods holds a 6.7% share of the global canned food market's value. ConAgra Foods generates 4.4% of the global canned food market's revenues. [See annexure 5] 3

2 COMPETITIVE LANDSCAPE 2.1 Buyer/Supplier power The canned food market is generally high volume-low margin. Fragmented food retailers are the main buyers. Supplier power was weak, with canned food players able to source their commodity inputs from a large number of suppliers. The canned food industry will be analyzed taking food processing and canning companies as players and food retailers as the main buyers. Globally, food retail was fragmented, which means that players can sell to a large number of relatively small buyers. However, in some important country markets, mainly in Western Europe, retailer concentration was much higher. For example, in the UK, four supermarket chains account for approximately 85% of food retail. 2.2 Economies of scale Major players have strong brands and the scale economies associated with high-volume production facilities; these mean that there was no more than a moderate threat of new entrants. 2.3 Brand loyalty Retailers are unlikely to be swayed themselves by brand loyalty, and price sensitivity will be high. However, these drivers of buyer power will be mitigated where consumers are loyal to particular brands: retailers will need to stock these products in order to meet their own customers' demand. Food processors rarely integrate forwards into retail, and vice-versa. Canned food was generally a significant part of a food retailer's business. 2.4 Access to Raw materials Key inputs for canned food producers are raw materials such as grains, fruit and vegetables, and meat and fish. There are two main ways for players to obtain these inputs. They may purchase them on the open market, in which case they have little control over prices, and often use techniques such as hedging to mitigate the impact of price fluctuations. Alternatively, they may negotiate supply contracts with growers and farmers - fixed-term contracts with periodically negotiated prices are common. Where growers operate in a fragmented upstream landscape, large food processing firms may have a strong negotiating position, but supplier power was boosted by the switching costs to food processors of terminating a fixed-term agreement early. For example, major US player DelMonte sources much of its vegetable supply from around 700 growers, with one- year contracts and annually negotiated prices the norm; the company sources fruit from a similar number of suppliers, with one- to ten year contracts. DelMonte also buys inputs, including flour and sugar, on the open market. Leading players must maintain product quality if they are to maintain their brand equity in the long term; their need to source raw materials of appropriate quality tend to strengthen somewhat the suppliers that can offer these. Metal cans are also important inputs in this market and, again, some market players enter into long- term contracts with their supplier, which strengthens supplier power. 4

2.5 Availability of substitutes Substitutes are available for any one raw material in the sense that, if the price of one kind of vegetable rises, a manufacturer could buy less of it and more of a cheaper one - provided, of course, its contracts with suppliers are due for renewal. Overall, supplier power was weak. From the point of view of consumers, the main substitutes for canned foods are frozen and dried products as these offer similar benefits of convenience and extended storage lifetimes. Retailers, aiming to meet consumer demand, will tend to stock both kinds of substitute. Dried products are less of a threat, as fewer foods can be successfully dried than canned; frozen foods have the disadvantage (from a retailer's perspective) of requiring more costly storage in freezers. However, few consumers will want to rely completely on canned products for their non-perishable food needs and the threat of substitutes was assessed as strong. 2.6 Entry criteria Some food product markets can be successfully entered on a small scale. For example, it is possible to enter the bakery business as an independent, with artisanal production and a single integrated retail outlet, perhaps appealing to customers by emphasizing the freshness and quality of bread baked on the premises. However, the canned food business was difficult to enter in such a low-key manner. The majority of canned foods are mass-market items, appealing to consumers mainly on the grounds of convenience and low price. Especially where retailers are strong buyers, the per-can margins for manufacturers are not likely to be all that high. Also, canning is inherently an industrial process that is very difficult to perform as a craft process. 2.7 Capital expenditure These factors point to the need for considerable initial capital expenditure, in order to establish canning plants offering scale economies that will offset the low margins expected. This raises the barriers to entry to the global market. Incumbents have strong brands. This was always a barrier to new entrants in markets where consumers ultimately drive demand. It was particularly important in the canned food market because there was no way for a consumer to assess the quality of a canned product from an unknown manufacturer before purchase (other kinds of food can be checked visually, or perhaps even by smell and touch). Access to distribution channels may be difficult. Shelf space was a vital but finite resource and retailers will need to be persuaded to allocate it to a new player's canned food, especially in highly competitive food retail markets. In some regions, access to suppliers may also be non-trivial. Even where there was no shortage of small-scale growers, for example, it may be difficult to set up reliable supply chains, especially for perishable raw materials in countries with poor transport infrastructure. Furthermore, global market revenues have grown rather unexcitingly in recent years making it less attractive to new players. Overall, there was a moderate likelihood of new entrants. The global market was fragmented despite the presence of multinationals like Heinz and DelMonte. This boosts rivalry. Retailers can switch between different manufacturers products quite easily, although the brand loyalty of consumers exerts a pull-through on retailers and makes it difficult for them to abandon completely the more expensive branded products for private-label alternatives. It was notable that the largest players in this market own the majority of their factories (although they lease a few facilities): outsourcing was less prominent in this business than in some other consumer markets. 2.8 Exit criteria In consequence, exit barriers are high, since leaving the canned food market would require divestment of substantial - and often quite specialized - assets. Fixed costs are also likely to be high and automated processes mean that production can be ramped up when necessary. These factors tend to intensify rivalry. Some leading 5

players have diversified into other food businesses, which reduces rivalry by making them less reliant on canned food sales. However, market growth had been no more than modest in recent years, which boosts rivalry, as players strive to retain their share of the revenues. Overall, there was a strong degree of rivalry in this market. High exit costs and a relatively large number of competitors are just two factors driving the strong rivalry that characterizes this market. 2.9 Distribution Supermarkets and hypermarkets form the leading distribution channel, with 69% of the global market by value. Independent retailers account for a further 15.9% of the market's value. [See annexure 6] 6

3 LEADING COMPANIES 3.1 Del Monte Foods Company Del Monte was a branded food producer. The company presently has nearly 26 brands that provide a range of food products, including: canned fruits and vegetables, sauces, soup, packaged tuna, baby foods, and pet foods and snacks. The company had two main operations; consumer products, and pet products. In 2006, Del Monte operated 15 production facilities and 11 distribution centers in the United States, Additionally; Del Monte had operating facilities and distribution centers in American Samoa, Ecuador and Venezuela. The company sells products under the Del Monte, S&W, SunFresh, Fruit Naturals, Orchard Select, Contadina, College Inn and Nature's Goodness brand names, as well as private label products, in the consumer products segment. This segment includes products such as: packaged spinach, carrots and potatoes; packaged fruits, including peaches, pears, fruit cocktail/mixed fruits and apricots; packaged tomato products, including stewed, crushed, diced, chunky tomatoes; broth products; and packaged infant feeding products. The company uses a direct sales force as well as independent food brokers to sell its products to its customers in different channels. It presently owns 22 US patents covering food production and preservation methods, methods for manufacturing cans and ends, methods for sealing cans, animal foods and food processing equipment. 3.2 ConAgra Foods, Inc. ConAgra Foods (ConAgra) is a packaged foods company serving grocery retailers, restaurants and other foodservice establishments, as well as food processors. The company was highly focused on the sale of branded and value-added consumer products. The company owns consumer brands such as Healthy Choice and Chef Boyardee. The company operates four primary business divisions: consumer foods, food and ingredients, trading and merchandising, and international foods. The consumer foods division offers branded, private label and customized food products to various retail and foodservice channels. Its products include a variety of categories (meals, entrees, condiments, sides, snacks and desserts) across frozen, refrigerated and shelf-stable temperature classes. This division had 44 manufacturing facilities in Arkansas, California, Georgia, Illinois, Indiana, Iowa, Massachusetts, Michigan, Minnesota, Missouri, North Carolina, Ohio, Oregon, Pennsylvania, Tennessee, Texas, and Wisconsin; and one manufacturing facility in Arroyo Dulce, Argentina. Its key brands include Chef Boyardee, Marie Callender's, Healthy Choice, Orville Redenbacher, Slim Jim, Hebrew National and Kid Cuisine among others. The food and ingredients division includes commercially branded foods and ingredients, which are sold principally to foodservice, food manufacturing and industrial customers. This division's primary products include specialty potato products, milled grain ingredients, dehydrated vegetables and seasonings, blends and flavors, which are sold under brand names such as ConAgra Mills, Lamb Weston, Gilroy Foods, and Spicetec to food processors. This division operates 51 domestic production facilities (including two 50% owned facilities) in Alabama, California, Colorado, Florida, Georgia, Idaho, Illinois, Iowa, Minnesota, Nebraska, New Jersey, New Mexico, Nevada, North Carolina, Ohio, Oregon, Pennsylvania, Texas, Utah, Washington, and Wisconsin; one international production facility in Puerto Rico; one manufacturing facilities in Canada (three of which 50% 7

owned); one manufacturing facilities in the UK (five of which 50% owned) and three manufacturing facilities in the Netherlands (50% owned). The trading and merchandising division operates under the company's subsidiary ConAgra Trade Group. It includes sourcing, merchandising, trading, marketing and distribution of agricultural and energy commodities. It had 73 domestic production facilities (including two 45% owned facilities) in Colorado, Delaware, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Ohio, Oklahoma, Texas, Washington, and Wisconsin. The company's international foods division includes branded food products, which are sold principally through retail channels in North America, Europe and Asia. The division's products include a range of categories (meals, entrees, condiments, sides, snacks and desserts) across frozen, refrigerated and shelf stable temperature classes. Its key brands include Orville Redenbacher's, Act II, Snack Pack, Chef Boyardee, Hunt's, and Pam. It operates four manufacturing facilities in Canada, Mexico and the UK. 3.3 Hormel Foods Hormel Foods (Hormel) is a manufacturer, processor and marketer of meat and food products in the US and in other countries through its subsidiaries. Products manufactured by the company include hams, bacon, sausages, franks, canned luncheon meats, stews, chilies, hash, meat spreads, shelf-stable microwaveable entrees, salsas and frozen processed foods. These products are sold to retail, foodservice and wholesale customers under the company's patents and trademarks. Hormel Foods sells products in all 50 states of the US, in addition to serving Australia, China, Spain, Canada, Japan, Korea, Mexico, the Philippines and Vietnam. The company's manufacturing facilities are located in Austin, Minnesota; Algona, Knoxville, and Osceola, Iowa; Atlanta, Georgia; Aurora and Rochelle, Illinois; Beloit, Wisconsin; Fremont, Nebraska; Stockton, California; and Wichita, Kansas. The Fremont plant also had a pork slaughtering operation that provides the company with additional raw material through its pork slaughtering operation. Jennie-O Turkey Store, a wholly owned subsidiary based in Willmar, Minnesota, was the nation's number one producer of whole and processed turkey products sold to retail and foodservice outlets. The company markets its products internationally through a wholly owned subsidiary Hormel Food International Corporation (HFIC). Products manufactured by the corporation include hams, bacon, sausages, franks, canned luncheon meats, stews, chilies, hash, meat spreads, shelf-stable microwaveable entrees, salsas and frozen processed foods. These selections are sold to retail, foodservice and wholesale operations under many well-established trademarks that include Always Tender, Black Label, Carapelli, Cure81, Curemaster, Di Lusso, Dinty Moore, Dubuque, Fast n Easy, Herdez, Homeland, Hormel, House of Tsang, Jennie-o Turkey Store, Kids's Kitchen, Layout, Light & Llean, Little Sizzlers, Mary Kitchen, Old Smokehouse, Patak's, Peloponnese, Range brand, Rosa Grande, Sandwich Maker, Spam and Wranglers. The company reports its business in five segments: grocery products, refrigerated foods, Jennie-O Turkey Store, specialty foods and others. The grocery products segment consists primarily of the processing, marketing, and sale of shelf stable food products sold predominantly in the retail market. This segment also includes the operations of Arriba Foods. Arriba Foods manufactures and distributes Mexican flour tortillas, corn tortillas, salsas, seasonings, and tortilla chips for retail markets and the food service industry. These products are marketed under the Manny's, Gringo Pete's, and Mexican Accent brands. The refrigerated foods segment includes the meat products and foodservice business units. This segment consists primarily of the processing, marketing, and sale of branded and unbranded pork products for the retail, food service, and fresh customer markets. This segment also includes the Precept Foods operation, a 51% owned joint venture with Cargill Meat Solutions Corporation, which offers fresh, case ready, branded pork 8

and beef products. Clougherty Packing (Farmer John), a pork processor, was included as an operating segment within Refrigerated Foods. The meat products business unit includes the operations for Lloyd's Barbecue. The specialty foods segment includes the Diamond Crystal brands, Century Foods International, and Hormel Specialty products operating units. This segment consists of the packaging and sale of various sugar and sugar substitute products, salt and pepper products, dessert mixes, gelatin products, and private label canned meats to retail and foodservice customers. This segment also includes the processing, marketing, and sale of nutritional food products and supplements to hospitals, nursing homes, and other marketers of nutritional products. Diamond Crystal Brands includes the results of operations for Hormel Health Labs and Mark-Lynn Foods. Hormel Health Labs offers a full line of specialized food products for the healthcare industry and Mark- Lynn manufactures and distributes food products including salt and pepper packets, ketchup, mustard, sauces and salad dressings, creamers, sugar packets, jellies, desserts, and drink mixes. Others include the Dan's Prize and Hormel Foods International operating units. These businesses produce, market, and sell beef products and manufacture, market, and sell company products internationally. This segment also includes various miscellaneous corporate sales. 9

4 STRUCTURE ANALYSIS Based on the above data, we can analyze the industry as follows: 1. Entry Barriers Attractiveness Parameter Remarks 1 2 3 4 5 Established canning plants required as high volumes, low margin industry Economies of Market Share: √ Scale Del Monte 6.7% Con Agra 4.4% Homel Foods 2.3% Product √ Brand loyalty high, consumers unsure of quality Differentiation For consumers quality of new manufacture was Brand Identity √ unknown and there was the need to smell and touch. Hence retailers are brand conscious Switching Costs √ As brand loyalty of end consumers high Access to Distribution √ Retailers are not swayed by brand loyalty Channels Capital √ Since the industry is vertically integrated Requirements Access to Skills-based, which is an intangible asset not easily √ Technology available Access to Raw √ Can purchase directly from open market even farmers Materials Average 3 Moderately Attractive 2. Exit Barriers Attractiveness Parameters Remarks 1 2 3 4 5 Asset √ Non-fungible assets Specialization Cost of Exit √ High exit costs Average 2 Not attractive 10

3. Rivalry among Competitors Attractiveness Parameter Remarks 1 2 3 4 5 No. of Del Monte, ConAgra, Hormel are the three major players √ Competitors in the market Industry Growth √ CAGR 2.2 % from 2002 to 2006 Fixed Costs √ Asset Specialization Differentiation √ Brand loyalty high, consumers unsure of quality Switching Costs √ As brand loyalty of end consumers high Strategic Stakes √ Leading players are diversified Average 3 Not Attractive 4. Bargaining Power of Buyers Attractiveness Parameter Remarks 1 2 3 4 5 No. of Buyers √ Large number of fragmented retailers Substitutes √ Substitutes not easily accepted due to brand loyalty Switching Costs √ As brand loyalty of end consumers high Buyers’ threat of Backward √ Capital requirement was too high for retailers Integration Supplier’s threat of Forward √ As industry is vertically integrated Integration Average 4 Moderately Attractive 11

5. Bargaining Power of Suppliers Attractiveness Parameter Remarks 1 2 3 4 5 No. of Suppliers √ Large number of suppliers Substitutes √ Substitutes for raw material easily available Switching Costs √ Substitutes for raw material easily available Buyers’ threat of Less probability as primarily agro-products require a Backward √ completely different skill-set Integration Supplier’s threat of Forward √ Farmers cannot setup manufacturing firms Integration Industry’s importance to √ Suppliers supply to many different customers Supplier Average 3.5 Fairly attractive 6. Threat of Substitutes Attractiveness Parameter Remarks 1 2 3 4 5 Availability of √ Substitutes are available ( fresh raw mat., meat etc) close substitutes Switching Costs √ Can switch to fresh food Substitute’s √ Substitute value for money was high price/value Average 2 Not Attractive 12

Summary Table Parameter Attractiveness Entry Barriers 3 Moderately attractive Exit Barriers 2 Not attractive Rivalry Among Competitors 3 Moderately attractive Bargaining power of Buyers 4 Very attractive Bargaining Power of Suppliers 3.5 Attractive Threat of Substitutes 2 Not attractive Average 3 Moderately Attractive Conclusion The canned food market is generally high volume-low margin. Food retailers are the main buyers and generally wield strong buyer power, especially if they are large chains. Supplier power was weak, with canned food players able to source their commodity inputs from a large number of suppliers. Major players have strong brands and the scale economies associated with high-volume production facilities; these mean that there was no more than a moderate threat of new entrants. High exit costs and a relatively large number of competitors are just two factors driving the strong rivalry that characterizes this market. 13

ANNEXURES Annexure 1 Market Value: $ billion, 2002-2006 Global Canned Food Market Value: $ billion, 2002-2006 (Source : Datamonitor) Annexure 2 Global Canned Food Market Volume: Kg billion, 2002-2006 (Source : Datamonitor) 14

Annexure 3 Global Canned Food Market Segmentation I: % Share, by value, 2006 (Source : Datamonitor) Annexure 4 Global Canned Food Market Segmentation II: %Share, by value, 2006 (Source : Datamonitor) 15

Annexure 5 Global Canned Food Market Share: %Share, by value, 2006 (Source : Datamonitor) Annexure 6 Global Canned Food Distribution: %Share, by value, 2006 (Source: Datamonitor) 16

Annexure 7 Global Canned Food Market Value Forecast: $ billion, 2006-2011 (Source : Datamonitor) Annexure 8 Global Canned Food Market Volume Forecast: Kg billion, 2006 - 2011 (Source : Datamonitor) ***** 17

Canned food industry structure analysis

by Heemanish Midde

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Canned food industry structure analysis Document Transcript