US Packaged Food Companies’ Look to Expand in International Markets

Geographical diversification and expansion in international markets has been a key strategic direction for most packaged food companies, particularly those with a strong US market bias. Most recently, Diamond Foods and Smithfield Foods have made acquisitive moves to strengthen their growth platforms outside their domestic US market.

Through the purchase of Pringles and Campofrio Food Group, respectively, the two companies will benefit from diverse growth opportunities in a number of regional markets and dilute their reliance on the saturated, slow growing US packaged food market.

Growth constraints in the US packaged food market

Prior to its ongoing acquisition of Pringles, Diamond Foods generated almost its entire revenues in the US, although expanding its presence in the UK through the integration of its Kettle Chips assets purchased in 2010, while Smithfield only benefited from Campofrio’s revenues in the European market via the minority stake it had held in the company since 2007. The challenges facing companies with strong US exposure include significant market maturity, strong private label competition and a slow recovery of consumer spending power.

The overall US packaged food market is expected to post less than a 1% CAGR over 2010-2015, while over the same period the global market is set to achieve a 2% CAGR. There are limited growth opportunities for example in Smithfield’s largest packaged food category, chilled processed food, which is set to post an absolute retail value CAGR of just over 1% in the US over the 2010-2015 period.

In terms of the wider operating environment, consumer expenditure on food in the US is expected to grow little over 2010-2015, at a CAGR of 0.5%, while in some of both Diamond Foods’ and Smithfield’s new markets (thanks to their latest acquisitions), such as Eastern Europe, consumer expenditure on food is forecast to grow at a 2.4% CAGR over the same period. A significant difference in the level of private label competition between the US and some of the new markets US-based packaged food companies are targeting is also a relevant factor.

The US market remains strategically important to both domestic and international players, offering a large and affluent consumer base, a steady revenue flow and higher operating margins stemming from higher average unit prices in comparison to certain more dynamically growing emerging markets.

Diamond Foods builds a diverse international platform via a series of acquisitions

Diamond Foods has been building a stable of sweet and savoury snacks brands largely via the acquisition of well-established labels, such as the current Pringles deal, following on from Kettle Chips in 2010 and Pop Secret popcorn back in 2008. The company also markets Emerald snack nuts and Diamond of California culinary and snack nuts.

With the integration of Pringles, Diamond Foods will gain access to diverse international markets and be positioned to exploit a range of growth opportunities. The acquisition will elevate Diamond Foods from 16th to second position in the global sweet and savoury snacks market, albeit still a long way behind category leader PepsiCo which commands a 28% value share compared to Diamond Foods’ projected 3% (including Pringles).

The recent global economic downturn in developed regions has had a significant adverse impact on the performance of companies with a North American bias and highlighted the strong need for further geographical diversification. Additionally, building further sales growth for these newly strengthened platforms in international markets, potentially coupled with further acquisitions, will have to remain a strategic direction for Diamond Foods.

Smithfield Foods’ further European expansion

Smithfield Foods’ move to take a majority stake in the Spanish Campofrio Food Group will serve the company’s aim to both further strengthen its international market presence and consolidate/enhance its global position in the core packaged food category of chilled processed meat, in which the company currently ranks second globally behind Kraft Foods.

Growth prospects for chilled processed meat in Europe are better than those in Smithfield’s domestic US market. However, Smithfield still has room for further geographical diversification, particularly targeting Asia Pacific and Latin America.

Currently, the company has a small foothold in these regions, generating a small proportion of its retail value sales in Singapore, Hong Kong and Argentina. Establishing/expanding its operational infrastructure in these regions is a strategic necessity for the company to dilute its reliance not just on its domestic US market but also on Western Europe, which is largely characterised by similar growth constraints as the US.

Breaking out of the US likely to intensify

Efforts to move away from the saturated US market seem to have intensified in recent years. Global acquisitions such as Mars Inc’s purchase of Wrigley or Kraft’s takeover of Cadbury were partly driven by the incentive to establish a strong presence in international/emerging markets. In the current environment, with limited growth opportunities in North America, the trend is likely to continue.

Other iconic American companies, such as Hershey or Dean Foods, have also been taking steps, although on a smaller scale, such as through setting up joint ventures (Hershey-Godrej) and making smaller-scale regional acquisitions (Alpro) to facilitate expansion in new markets. In the future, this international expansion trend is likely to intensify via wider regional business partnerships or larger-scale acquisitions.