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Corporate Research E-Letter No. 8, January 2001

A Lot to Swallow: An Overview of the Food Industry

by Philip Mattera

The U.S. population spends about 15 percent of its disposable income on food, and a substantial portion of that money ends up in the hands of a processed-food industry with half a trillion dollars in annual revenues. U.S. agriculture and food processing yield a remarkable quantity and variety of edible offerings, but this industry increasingly finds itself surrounded by controversy. Here are some of the reasons:

Concentration of Ownership

The food industry is becoming controlled to an ever greater extent by a small number of mega-corporations that have the power to manipulate markets. Grain trading is dominated by the likes of Cargill, the largest privately held company in the United States. Thousands of brands of packaged food are owned by a handful of companies such as Philip Morris and ConAgra, as well as their European-based rivals Nestle and Unilever. Meatpacking is ruled by companies such as pork producer Smithfield Foods, which owns some 700,000 sows, and Tyson Foods, which leads the poultry business and is now poised to dominate beef through its deal to acquire IBP Inc.

The large food processors have been swallowing their competitors at a rapid rate. The past year alone has seen deals such as the $20 billion takeover of Bestfoods by Unilever, the $15 billion acquisition of Nabisco by Philip Morris and the $13 billion sale of Quaker Oats to PepsiCo.

Concentration of ownership keeps consumer prices artificially high (note the ridiculous cost of brand-name breakfast cereals, for instance), but there is an even more dramatic effect on small farmers and ranchers, whose fate is increasingly determined by large corporations at both ends: Big seed, feed and fertilizer companies dominate the market for agricultural inputs, and other powerful companies dominate the markets in which farmers and ranchers sell their output. Family farmers end up paying more for their raw materials while the slump in commodity prices has depressed the income they receive for their product. One of the worst problems is in the meat business, in which a system of captive livestock marketing perpetuates anti-competitive practices that weaken the bargaining position of small cattle producers.

The position of family farmers is weakened by two other factors: federal policy and new trade practices. The so-called Freedom to Farm Act of 1996 makes farmers more dependent on market forces, and the free trade principles of the World Trade Organization discourage government aid to farmers. All of these factors have led to a precipitous drop in the number of family farms at the same time that the big agribusiness companies grow more powerful.

Biotechnology

Advances in genetic engineering have inspired the food industry to propose a variety of new foodstuffs that will purportedly be healthier, cheaper and better tasting. Companies such as Monsanto have developed patented seeds that produce crops resistant to blights and insect pests--and are promoting them as solutions to world hunger. The industry's biotech thrust has been met by a movement that questions the safety of such technology and warns that strict corporate control of seeds will turn small farmers into serfs. The movement, which is stronger in Europe but gaining ground in the United States, has generated enough public concern that some large food processors and fast-food chains are refusing to purchase some genetically altered produce. European drug companies Novartis and AstraZeneca merged and spun off their agribusiness operations into a new company called Syngenta, at least in part to diffuse protests over genetically altered foods.

Last September Kraft Foods recalled millions of taco shells after learning that they contained a genetically engineered corn called StarLink that was not approved for human consumption. (StarLink is a product of Aventis, a company formed by the merger of two European chemicals giants: France's Rhone-Poulenc and Germany's Hoechst.) It later came out that other foods had been contaminated with StarLink, leading to the recall of hundreds of products and substantial disruption of the grain-handling industry.

Food Adulteration

The purity of many foods that are not genetically engineered has also come into question. Meat quality is threatened by a drive to relax federal inspection, while at the same time there is widespread concern that the mad cow disease afflicting European herds will spread to this side of the Atlantic. There are regular outbreaks of E. coli and other foodborne diseases. For example, last month turkey deli meat produced by Cargill was blamed in four food-poisoning deaths tied to listeria.

Other threats to food quality and human health include the heavy use of antibiotics in animal feed, the drive to expand food irradiation and the perennial use of dangerous pesticides.

Environmental Impact 

Certain kinds of food production also pose a threat to the environment. Water quality is endangered by the spread of confined animal feeding operations. CAFOs, otherwise known as factory farms, produce huge quantities of animal waste that often makes its way, untreated, into waterways. The filthy conditions at the CAFOs also contaminate the meat--a problem that the industry wants to address with the dubious solution of irradiation.

Labor Practices

The meatpacking industry has one of the worst records when it comes to recognizing the collective bargaining rights of its employees. During the 1980s the industry launched an all-out assault on wage levels, resulting in bitter strikes. Companies such as IBP, ConAgra and Smithfield have done everything possible to thwart organizing drives. Earlier this month an administrative law judge at the National Labor Relations Board found Smithfield guilty of "egregious and pervasive" labor law violations in the course of resisting organizing efforts by the United Food and Commercial Workers.

World's Top 25 Food and Beverage Companies
(ranked by 1999 food and beverage revenues, in millions of U.S. dollars)

1. Nestle	41,422
2. Philip Morris Companies	31,139
3. ConAgra Foods Inc.	24,594
4. PepsiCo Inc.	20,367
5. Unilever	20,310
6. The Coca-Cola Co.	19,805
7. Cargill Inc.	17,143
8. Diageo	16,419
9. Mars Inc.	14,500
10. Archer Daniels Midland	14,283
11. IBP Inc.	14,075
12. Kirin	12,427
13. Snow Brand	11,870
14. Anheuser-Busch	11,704
15. Sara Lee Corp.	10,818
16. Danone	10,532
17. Suntory	10,022
18. Asahi Breweries	9,704
19. H.J. Heinz Co.	9,410
20. Maruha	8,675
21. Bestfoods	8,637
22. Nabisco	8,268
23. Nippon Meat Packers	8,101
24. Tyson Foods	7,363
25. Kellogg Co.	6,984

Source: Food Engineering magazine, October 2000

Here are thumbnail sketches of the top 10 food giants:

NESTLE S.A. (headquarters: Vevey, Switzerland)
1999 total revenues: $46.7 billion
1999 profits: $3.0 billion
This global food and beverage giant is best known in the United States as the producer of Nestle Crunch chocolate bars, but it is also a world leader in instant coffee (Nescafe, etc.) and bottled water (it now owns Perrier, Poland Spring and San Pellegrino). Among its other major brands are Buitoni pasta, Stouffer's frozen meals, KitKat candy bars and Alpo dog food. Nestle is still remembered among activists because of its controversial record in pushing infant formula in poor countries.

PHILIP MORRIS COMPANIES (New York City)
1999 total revenues: $78.6 billion
1999 profits: $7.7 billion
Tobacco giant Philip Morris (once described by Business Week as "America's most reviled company") began hedging its bets in the 1980s by swallowing up two familiar names in U.S. food processing: General Foods and Kraft. What is now known as Kraft Foods is the largest U.S. food producer with all-American brands such as Jell-O, Kool-Aid, Kraft Macaroni & Cheese, Post cereals and Oscar Mayer processed meats. Last year it spent $15 billion to acquire Nabisco (formerly owned by another tobacco company, R. J. Reynolds), thus adding brands such as Oreo cookies and Ritz crackers to its stable. Philip Morris also owns Miller Brewing, the second largest U.S. beer producer.

CONAGRA FOODS INC. (Omaha)
2000 total revenues (fiscal year ends in May): $25.4 billion
2000 profits: $798 million
During the 1980s ConAgra transformed itself from a sleepy producer of feed, flour and poultry into a diversified and aggressive food producer. The firm became a major force in meatpacking through the purchase of Armour, Monfort of Colorado, and half of Swift Independent. In 1990 it broadened its holdings by acquiring Beatrice Co., a food giant that had fallen victim to corporate restructuring mania. Today ConAgra's operations are divided into three main segments: Refrigerated Foods (Butterball turkeys, Hebrew National hot dogs, etc.), Packaged Foods (Wesson oil, Healthy Choice meals, Parkay margarine, etc.) and Agricultural Products (fertilizer, seed and crop protection chemicals).

PEPSICO INC. (Purchase, New York)
1999 total revenues: $20.4 billion
1999 profits: $2.1 billion
The parent company of Pepsi-Cola dates back to the late 19th Century, but it was not until the 1950s that it became a significant contender in the market for flavored sugar water. Since then Pepsi and Coke have engaged in a classic American rivalry. PepsiCo experimented with diversification, moving into dry snack foods in the 1960s with the purchase of Frito-Lay and trying out the restaurant business in the 1970s by acquiring Pizza Hut and Taco Bell (and later Kentucky Fried Chicken). PepsiCo abandoned the restaurant business in 1997 but strengthened its position in beverages with the purchase of Tropicana in 1998. Last year PepsiCo added oatmeal, Gatorade sports drink and granola bars to its lineup with a $13.4 billion purchase of Quaker Oats.

UNILEVER (London and Rotterdam, Netherlands)
1999 total revenues: $43.6 billion
1999 profits: $3.0 billion
Unilever, one of the leviathans of the global packaged goods industry, is a peculiar English-Dutch hybrid enterprise. The two Unilever companies list their stock separately but have a single board of directors and consolidated financial accounts. Unilever got started in the soap business, later moved into margarine and then branched into a variety of foods, beverages (especially Lipton tea) and household and personal care items. In the late 1990s Unilever slimmed down with the cancellation of some 1,000 brands and 25,000 jobs. Last year Unilever ended the independence of the unorthodox ice cream company Ben & Jerry's by purchasing it for $326 million and went on to swallow the much larger Bestfoods (Hellman's mayonnaise, Skippy peanut butter, etc.) for more than $20 billion.

COCA-COLA CO. (Atlanta)
1999 total revenues: $19.8 billion
1999 profits: $2.4 billion
Coca-Cola is the best known product name in the world, and the Coca-Cola Company is the undisputed leader of the international soft drink industry. The company gets about two-thirds of its operating income from outside the United States, by cultivating markets large and small. In addition to carbonated soft drinks, the company 's beverage operations include Minute Maid juices, Powerade sports drinks, and Dasani bottled water. Faced with threats of a boycott, Coca-Cola agreed to pay $192 million last November to settle a major racial discrimination lawsuit.

CARGILL INC. (Wayzata, Minnesota)
2000 total revenues (fiscal year ends in May): $47.6 billion
2000 profits: $480 million
Cargill, the largest of the highly secretive group of companies that dominate the world grain trade, got some unwelcome attention in the 1970s because of its role in arranging the controversial Soviet grain sales. Cargill later branched out into a variety of other businesses, including salt mining and sugar. In 1978 it acquired meatpacker MBPXL, later renamed Excel. Cargill's operations include commodity trading of gain, cotton and sugar, futures brokering and feed and fertilizer production. In 1999 Cargill received federal approval to acquire the grain business of its rival Continental Grain after agreeing to sell off nine facilities.

DIAGEO (London)
2000 total revenues (fiscal year ends in June): $17.9 billion
2000 profits: $392 million
Diageo is the result of the 1997 merger of two global giants of the alcoholic beverage business: Grand Metropolitan and Guinness. Grant Met also brought with it Pillsbury Co., the well-known purveyor of baking products and frozen foods (Green Giant brand) it had acquired in 1988. Last year Diageo agreed to spin off Burger King (acquired by Pillsbury in the 1960s) and to sell Pillsbury to its competitor General Mills for some $10 billion; the latter deal is awaiting regulatory approval.

MARS INC. (McLean, Virginia)
1999 total revenues: $15.3 billion (Forbes estimate)
1999 profits: $1.1 billion (Forbes estimate)
Privately held Mars is the number two U.S. candy maker (behind Hershey) with brands such as M&Ms, Snickers and Skittles. The company also produces the leading branded rice in the United States (Uncle Ben's) and pet foods such as Pedigree and Whiskas.

ARCHER DANIELS MIDLAND CO. (Decatur, Illinois)
2000 total revenues (fiscal year ends in June): $12.9 billion
2000 profits: $300.9 million
ADM, self-proclaimed "supermarket to the world," is one of the largest processors of agricultural commodities on earth, though it sells little directly to consumers. Dwayne Andreas, who took over the company in 1966, globalized ADM and became a leading advocate of soybeans as the solution to world hunger. He also made ADM a major producer of corn sweeteners (which have replaced sugar in soft drinks) and was a tireless proponent of corn-based ethanol as a gasoline additive. Thanks to generous campaign contributions (including some that turned out to be illegal), ADM gained enormous political clout in Washington. Yet that was not sufficient to thwart a price-fixing investigation propelled by the testimony of an ADM manager who was serving as an undercover informant for the FBI. In 1996 ADM agreed to pay $100 million to settle charges that it conspired to fix the price of lysine and citric acid. Later three former ADM executives--including the son of Dwayne Andreas--were found guilty of conspiracy to fix lysine prices.