Del Monte Foods Executive Summary
Del Monte Foods Co.
Capstone 4 Report
By
Abdullah Ghazali
Executive Summary
Del Monte Foods is an American food production, distribution company and marketer of packaged fruits and vegetables. The company is headquartered in San Francisco, California. It is one of the leading producers, distributors and marketers of premium quality, branded food and pet products in the US. The company generated revenue of $3.7 billion in 2010, 94 percent of the sales was from North American operations.
Del Monte has two operating segments, consumer products and pet products. The Consumer Products segment offers a wide selection of vegetables, fruit, and tuna products, under famous brands names, such as Del Monte, Contadina, Orchard Select, and …show more content…
StarKist. While it’s pet food and snack brands include Meow Mix, Kibbles 'n Bits, Milk-Bone, Pup-Peroni, Pounce and 9Lives. In addition, the company also produces private label food and pet products. Its products serve retail markets, the US military, certain export markets, the foodservice industry and other food processors.
Del Monte Food co. is recommended to be part of our client portfolio. The company has been found to be highly profitable. Net sales in 2010 increased 3.1 percent to $3.7 billion. The Pet Products segment grew by 4.6 percent during the year and Consumer Products segment also grew by 1.9 percent in fiscal 2010. The Altman’s Z score was 2.19 in 2010 from 1.88 in 2009. This is a good sign for the company was above the “distressed” zone, 1.8. The debt/equity ratio kept decreasing each year to 0.71 in 2010. This is a good sign for the company as it indicates that it uses less debt to finance its operations or assets. The gross and net profit margin has been improving year by year, indicating that the company is performing well and is in a good financial position.
There is a high degree of competition among existing firms because there is very little differentiation in the industry. This makes the degree of the threat of new entrants into the industry very low. It is very unlikely that a new entrant will be successful unless a bigger player drops out. Switching costs are very low in the industry, which puts the threat of substitute products at a moderate or average degree of competition. Bargaining power moves into the customer’s favour since switching costs are low and customers are more than willing to pay less for a similar product.
The SWOT analysis has identified Del Monte Foods co. strength, weakness, opportunity and threats. The strength includes strong market position, portfolio of strong brands and strong financial position. However, its major weaknesses are the high reliance on North America (94% of 2010 sales) and high dependence on its largest customer Wal-Mart, accounting for large percentage of the net sales. Its major threat is the pricing pressure from its competitors across its market segments. Moreover, the increase in labour and raw material cost has an adverse affect on the company’s product cost, causing less profitability or selling at a higher price.
Del Monte Foods co. focuses on four corporate strategies, which are investment in growing markets, marketing, innovation and improving its profit margins. These corporate strategies and business strategies are described further in the report.
In 2010, Del Monte reported annual revenue of $3.739 billion, up 3.1% from $3.626 billion in 2009. This was driven primarily by net sales in both the Pet Products and Consumer Products reportable segments, and growth in existing products.
Organisational Overview
Del Monte Foods is an American food production, distribution company and marketer of packaged fruits and vegetables. The company is headquartered in San Francisco, California. It is one of the leading producers, distributors and marketers of premium quality, branded food and pet products in the US. The company generated revenue of $3.7 billion in 2010, 94 percent of the sales was from North American operations.
The company has 17 production facilities and 10 distribution centres in the United States, as well as two production facilities in Mexico and one production facility in Venezuela. They also use six co-packers located in Chile, the Philippines and Belgium. At the end of year 2010 it employed approximately 5,400 workers.
Del Monte has two operating segments, consumer products and pet products. The Consumer Products segment offers a wide selection of vegetables, fruit, and tuna products, under famous brands names, such as Del Monte, Contadina, Orchard Select, and StarKist. While it’s pet food and snack brands include Meow Mix, Kibbles 'n Bits, Milk-Bone, Pup-Peroni, Pounce and 9Lives. In addition, the company also produces private label food and pet products. Its products serve retail markets, the US military, certain export markets, the foodservice industry and other food processors.
Del Monte has a recent history of acquiring business, only to sell them a short time later, when they fail to prove profitable, for the company. An example of this would be the acquisition of the soup business and Nature’s Goodness, acquired from Heinz in 2002, which they sold to TreeHouse Foods, Inc., in 2006. Another example would be the selling of IVD, Medi-Cal, and Techni-Cal, in 2004, after acquiring them from Heinz two years earlier.
External Analysis:
Porter’s Five Forces
Rivalry among Existing Firms (High):
However, it may be difficult for Del Monte Foods to compete effectively, in an industry saturated with competition. Del Monte should focus on pet foods. Pet food products have enabled Del Monte to offset the negative effects of consumer products, without having to pursue an unrelated diversification strategy.
Threat of New Entrants (Low):
Developing a manufacturing footprint of the size of Del Monte Foods Corporation would require a high amount of capital investment, complex and lengthy development cycles. In addition, Del Monte Foods Co. long-term, highly integrated customer relationship is another barrier to entry.
Threats of Substitute Products (Moderate):
Substitute threat is moderate. The likelihood of buyers switching over to another competitor depended mainly on the cost.
Bargaining Power of Supplier (Moderate to High):
The power of supplier is moderate to high. There are many suppliers in the food processing industry similar to Del Monte Foods Co. Suppliers are willing to pay for food products that provide substantial product differentiation, reduced cost and quality.
Bargaining Power of Customer (High):
The power of customer is high. As customer have many choices to choose from. But there are many factors that can affect customer’s decision in buying the product. These factors might include the brand recognition, store location, service, availability of the product and cost.
SWOT Analysis:
Strengths:
Leading market position
Del Monte enjoys a leading position across some of its product categories. The company is one of the largest marketers of processed fruit, vegetables and tomatoes in the US, with market share of 31.4%, 25.6% and 15.6% in FY2009 respectively. Del Monte is the second largest branded broth product in the US broth products with a market share of 35.4% in its core markets in the northeastern US, which made up 79.4% of its total case volume, in FY2009.
Furthermore, the pet products represent some of the leading pet food and pet snacks brands in the US, with a strong presence in most major product categories.
Portfolio of strong brands
Del Monte has highly recognized brands with significant customer equity, ranging from packaged vegetables to pet food products. The company’s leading food brands include Del Monte, S&W, Contadina, College Inn and other brand names, and its pet food and pet snacks brands include Meow Mix, Kibbles ‘n Bits, 9Lives, Milk-Bone, Pup-Peroni, Meaty Bone, Snausages, and Pounce2.
Further, as a food processing company, Del Monte enjoys significant brand equity and its portfolio of strong brands has helped it to expand market presence and visibility.
Strong financial performance
Del Monte recorded strong financial performance in 2010. Net sales increased by $112.9 million, or 3.1%, in fiscal 2010 compared to fiscal 2009. The revenues of the company were positively impacted by solid volume growth in both consumer products and pet products. The profitability of the company also improved significantly during FY2010.
Weaknesses
Business concentration
Del Monte's operations are concentrated both in terms of geography and customers. The operations of Del Monte is concentrated in the US, 94.3% of its total revenue was from the US.
In terms of customer concentration, Del Monte's top ten retail customers represented approximately 62% of its 2009 total turnover, with Wal-Mart alone representing approximately 34%. Any decrease in revenue from these customers could have an adverse effect on the company's revenues and profits.
Opportunities
Shift towards vegetarianism
The vegetarian-food market segment in the US is increasing. In the recent period, vegetarian food has to some extent replaced the meat, eggs, and cheese, as well as frozen entrees and side dishes.
Improving growth rates in the US restaurant sector
Del Monte offers a variety of consumer foods, sauces, ketchups to restaurant industry. Therefore, the company is well positioned to tap the growing out of home eating market.
Growth plan
The company announced a multi-year growth strategy, in the recent period. The strategy is based on three components: initiatives focused on pricing and productivity, leveraging the company’s portfolio of strong brands, and building new products and categories3. As a part of this strategy, Del Monte successfully realigned its portfolio, focused on leveraging the branded strength.
Threats
Intense competition
Del Monte faces intense competition across its market segments. The company faces competition from global companies such as Chiquita Brands International and Dole Foods. In some product lines, the company competes with smaller national producers.
Moreover, the company faces competition from branded and private label pet food and pet snack products manufactured by companies such as Nestle-Purina, Colgate, and Procter & Gamble. Intense competition could adversely affect the margins of Del Monte.
Dampened consumer demand
Del Monte’s business is dependent on continuing consumer demand for its products and brands. The economic downturn adversely impacted its business by reducing the demand for some of its products. Further, the economic conditions are exploiting the price volatility for commodities, which is a significant challenge for companies like Del Monte.
Rising labour cost
In recent years, labour costs are rising in the US. Because of this, the governments mandated increase in minimum wages resulted in an increase in labour costs. This could adversely increase Del Monte’s operation cost.
Corporate-level Strategy:
Vision:
Del Monte is committed to enriching the lives of today's family — everyone in the family, including pets — by providing nourishing, great tasting and easy-to-use products that meet the needs of everyone in the home.
Mission:
To become a recognized leader in value, quality, consumer preference in consumer and pet food products, in the USA and South America5.
Corporate Values:
* Accountability - Accepting responsibility for our actions. * Innovation - Committed to discovering new solutions using engineering expertise and advanced technologies. * Continuous Improvement - Relentless focus on achieving more with less. * Excellent service * Commitment to quality * Superior shareholders value * Execution with discipline - Delivering the best for our customers by following through on goals, standardizing improvements, and applying operational excellence.
Core Strategy:
Del Monte Foods co. core strategy is centred in four areas:
Marketing: - Marketing strategy is critical to the growth of the company brands. The marketing function oversees new product development, pricing strategy, advertising, publicity, consumer promotion and package design. Collectively, Del Monte marketing programs are designed to strengthen its brand equities, generate awareness of new items and stimulate trial among their target customers.
Drive its Growth Engine: - The current strategy for Del Monte is to increase its market share and to grow its business through expansion of its pet products business and its packaged produce sales. Also to become a leading brand in the entire segment they operate in.
Improve Profit Margins: The improvement in the profit margin is done through increase in sales, launching new products, reducing the total cost of quality and ensuring that it meets customer requirements for sustainable product solutions. Moreover, identifying and pursuing the elimination of all forms of waste achieved by training and deploying teams that follow a rigorous prescribed format. Lastly is to enhance its operations by focusing on operational excellence in all its functional areas.
Innovation: - Del Monte believes that the economic and sustainability challenges can be met through increased innovation.
Business level strategy:
Accelerated Growth It has granted a number of perpetual, exclusive, royalty-free licenses for the use of the Del Monte name and trademarks outside the United States and South America. These firms use the Del Monte name to sell various products, such as fruits, vegetables, and other produce. The firms benefit by selling their products under a brand name that is trusted worldwide, for excellent taste and value. Although Del Monte does not benefit monetarily from granting these licenses, it does benefit by having its reputation for quality value spread across the world, without having to invest significant resources.
Improve Profit Margins:
During fiscal 2010, margins benefited from a more stable cost environment; nonetheless, the increase in margins was by improving the productivity and efficiency of getting products from plants to store shelves. Del Monte generated $88 million in productivity related savings during the year reflecting progress in LEAN manufacturing initiatives, improved procurement strategies, and optimization of our logistics network7.
Marketing
Del Monte have invested in the entire marketing infrastructure-from streamlining and upgrading outside agencies to hiring additional creative marketing talent centric organization.
From fiscal 2009 to fiscal 2010, the company increased its marketing investment by 54% ($76.2 million) 7.
As a result of this marketing investment, net sales have increased $112.9 million in 2010 from previous year due to more customers becoming aware of the new and old products in the market.
Innovation
In fiscal 2010, the company launched the following national advertising campaigns: “It’s Good to Give” for Milk-Bone dog snacks, “Bits Make it Better” for Kibbles ‘n Bits dog food, “The Taste Cats Ask for by Name” for Meow Mix cat food and “Dog’s Just Know” for Pup-Peroni brand dog snacks. In fiscal 2010, they also launched the “Value Without Sacrifice” national advertising campaign for our Del Monte brand. The launch of Del Monte Ready to Blend Smoothies and Del Monte No Sugar Added products in fiscal 2010 is an example of innovation behind the core Del Monte brand.
In fiscal 2010, 2009 and 2008, research and development expenditures were $26.8 million, $23.7 million and $23.7 million, respectively. They operate a research and development facility in Terminal Island, CA where they develop new products and product line extensions and research existing products related to pet food and pet snacks. They also maintain a research and development facility in Walnut Creek, CA, where they develop new products and product line extensions and conduct research in a number of areas related to our fruit, vegetable and tomato products, including packaging, pest management, food science, environmental and engineering8. These facilities employ scientists, engineers and researchers and are equipped with pilot shops and test kitchens.
Financial Highlights:
Income Statement
| 2007 | 2008 | 2009 | 2010 | Revenue ($ mil.) | 3,414 | 3,736 | 3,626 | 3,739 | Gross Profit ($ mil.) | 999 | 1,030 | 1,109 | 1,328 | Operating Income ($ mil.) | 321 | 349 | 360 | 508 | Total Net Income ($ mil.) | 112 | 133 | 172 | 244 |
8
Net sales increased by $112.9 million, or 3.1%, in fiscal 2010 compared to fiscal 2009. The increase was due to increased net sales in both the Pet Products and Consumer Products reportable segments, driven by growth in existing products.
Moreover, net sales in Pet Products reportable segment increased $76.6 million, or 4.6%, in fiscal 2010 compared to fiscal 2009. The increase was driven by fiscal 2009 pricing actions, increased volume of existing pet snacks and dry pet food as a result of category growth and promotional activities and new product sales contributed to the increase in net sales.
Furthermore, net sales in Consumer Products reportable segment increased by $36.3 million, or 1.9% in fiscal 2010 compared to fiscal 2009. This increase was primarily driven by growth in existing product volume, new product sales and net pricing. The increase in existing product volume was driven by fruit and vegetables and lower margin South American sales9.
The gross profit has increased from $1,109 million, to $1,328 million in 2010. This is related to lower cost, growth in existing product volume, new product sales and net pricing.
Cash Flow Statement
| 2007 | 2008 | 2009 | 2010 | Net operating Cash Flow ($ mil.) | 230 | 287 | 201 | 356 | Net Investing Cash Flow ($ mil.) | (1,345) | (80) | 227 | (105) | Net Financing Cash flow ($ mil.) | 668 | (195) | (361) | (336) | Net Change in Cash & Cash Equivalents ($ mil.) | (447) | 12.7 | 117 | (89) | Del Monte Foods Annual report 2010.
Operating Activities
Cash provided by operating activities during fiscal 2010 was $355.9 million compared to $200.6 million in fiscal 2009. This $155.3 million increase was driven by increased net income.
Cash provided by operating activities during fiscal 2009 was $200.6 million compared to $286.9 million in fiscal 2008. This $86.3 million decrease was primarily driven by an increase in cash taxes paid and cash payments related to commodity futures positions.
Investing Activities
Cash used in investing activities was $104.9 million during fiscal 2010, which represented capital expenditures.
Cash provided by investing activities was $277.1 million during fiscal 2009, which primarily consisted of $365.8 million from the sale of the StarKist Seafood Business, partially offset by capital expenditures of $88.7 million.
Financing Activities
During fiscal 2010, $336 million was used in financing activities, which consisted primarily of net repayments of debt of $269.0 million, payment of $43.6 million of costs related to the issuance of the New Notes and tender offer for the Old Notes and entering into the Senior Credit Facility, and further of $37.6 million in dividends. In addition, had $12.3 million of proceeds from the issuance of common stock9.
During fiscal 2009, $361.3 was used million in financing activities, which consisted primarily of net short-term borrowings of $2.0 million, Term Facility loan repayments of $333.8 million and $31.6 million in dividend payments.
Key Ratios
| Company | Industry | Sector | S&P 500 | Quick Ratio (MRQ) | 0.5 | 0.77 | 0.66 | 0.70 | Current Ratio (MRQ) | 2.2 | 0.97 | 0.93 | 1.02 | Return on Assets (TTM) | 5.7 | 4.00 | 5.98 | 6.41 | Return on Equity (TTM) | 13.4 | 8.84 | 14.93 | 18.41 |
| 2010 | 2009 | 2008 | 2007 | Current Ratio | 2.2 | 2.3 | 2.3 | 2.2 | Quick Ratio | 0.5 | 0.7 | 0.6 | 0.5 | Total Debt/Equity Ratio | 0.71 | 0.97 | 1.26 | 1.38 | Leverage Ratio | 2.3 | 2.7 | 3.0 | 3.1 | Gross Profit Margin % | 35.5 | 30.6 | 27.6 | 29.3 | Net Profit Margin % | 6.5 | 4.8 | 3.6 | 3.3 |
The current ratio and quick ratio has been steadily over the last four years and it is above the industries average. The current ratio is 2.2 far better than the industry, sector and S&P 500 meaning that they have strong ability to pay current liabilities if needed. However, there quick ratio is below the industry, sector and S&P 500 may be attributable to its recent acquisitions that have laden the company with debt.
The debt/equity ratio has been decreasing over the last four years as shown above. This is a good sign for the company as it indicates that it uses less debt to finance its operations or assets.
Moreover, Del Monte leverage ratios have decreased from 2.7 in 2009 to 2.3 in 2010. This means that the company is using less debt and liabilities to finance its assets. Moreover, this places them at a competitive advantage by extending their ability to invest in the business or in further research and development.
Furthermore, the gross and net profit margin has been improving year by year is may be due to the increase in sales and a decrease in input costs. Moreover, the increase in gross and profit margin indicates that the company is performing well and is in a good financial position.
Corporate forecast:
I used the sales percentage method to forecast the next five years, I estimated to be 6.0% as its sales was growing steadily each year.
For the rest of the forecasted data shown below, the average of the last five years was calculated and used to forecast the next coming five years. As shown below in the table:
In Millions of USD
| 2011 | 2012 | 2013 | 2014 | 2015 | Sales | 3,964 | 4,202 | 4,454 | 4,722 | 5,005 | Cash | 11 | 12 | 13 | 13 | 14 | Account receivables | 265 | 281 | 298 | 316 | 335 | Inventory | 865 | 917 | 972 | 1,030 | 1,092 | Current Assets | 595 | 631 | 668 | 708 | 751 | Fixed Assets | 1,392 | 1,476 | 1,564 | 1,658 | 1,757 | Total Assets | 4,835 | 5,126 | 5,433 | 5,759 | 6,105 | Account Payable | 387 | 411 | 435 | 461 | 489 | Current Liabilities | 595 | 631 | 668 | 708 | 751 | Total Liabilities | 3,094 | 3,280 | 3,476 | 3,685 | 3,906 | Cost of Goods Sold | 2,757 | 2,923 | 3,098 | 3,284 | 3,481 | Gross Profit | 1,207 | 1,279 | 1,356 | 1,438 | 1,524 | EBIT | 409 | 433 | 459 | 487 | 516 | Net Income | 189 | 200 | 212 | 225 | 238 |
Risk Assessment:
There are a number of business risks and uncertainties that could affect Del Monte’s business. These risks and uncertainties could cause its actual results to differ from past performance or expected results. It may also adversely impact the business, financial condition and results of operations.
Moreover, the Company’s has identified risks factors that it can affect it business:- * The pet product and food product categories in which we participate are highly competitive and, if we are not able to compete effectively, our results of operations could be adversely affected.
* We may not be able to successfully implement initiatives to improve productivity and streamline operations to control or reduce costs. Failure to implement such initiatives could adversely affect our results of operations.
* The inputs, commodities, ingredients and other raw materials that we require are subject to price increases and shortages that could adversely affect our results of operations.
* Increases in logistics and other transportation-related costs could materially adversely impact our results of operations. Our ability to competitively serve our customers depends on the cost and availability of reliable transportation.
* Our substantial indebtedness could adversely affect our operations and financial condition.
* If our cash from operations is not sufficient to meet our operating needs, expenditures and debt service obligations, we may be required to refinance our debt, sell assets, borrow additional money or raise …show more content…
equity.
* If the financial institutions that are part of the syndicate of our revolving credit facility fail to extend credit under our facility, our liquidity and results of operations may be adversely affected.
* We may not be able to successfully maintain the level of our product distribution to high volume club stores and other mass merchandisers, which could adversely impact our net sales and results of operations.
* The loss of a significant customer, certain actions by a significant customer or financial difficulties of a significant customer could adversely affect our results of operations.
* We may be exposed to counter party risk in our currency, interest rate and commodity hedging arrangements.
* Government regulation could increase our costs of production and increase legal and regulatory expenses.
* We may not be successful in our future acquisition or other strategic transaction endeavors, if any, which could have an adverse effect on our business and results of operations.
* Adverse weather conditions (caused by climate change or otherwise), natural disasters, pestilences and other natural conditions can affect crops and other inputs, which can adversely affect our operations and our results of operations.
* We rely upon a number of third parties to manage or provide distribution centers for our products. Failures by these third parties could adversely affect our business.
* We rely primarily on a single company to provide us with logistics services and any failure by this provider to effectively service us could adversely affect our business.
* We use a single national broker to represent a significant portion of our branded products to their tail grocery trade and any failure by the broker to effectively represent us would adversely affect our business.
* Failure by us or our third-party co-packers to comply with environmental or other regulations may disrupt our supply of certain products and adversely affect our results of operations.
* We rely upon co-packers to provide our supply of some products. Any failure by co-packers to fulfill their obligations could adversely affect our results of operations.
* Volatility in the equity markets or interest rates could substantially increase our pension costs and have a negative impact on our results of operations.
* Intellectual property infringement or violation claims may adversely impact our results of operations.
* Our business operations could be disrupted if our information technology systems fail to perform adequately.
* Our business could be harmed by strikes or work stoppages by Del Monte employees
* Transformative plans involve risk and may adversely affect our business and financial results.
In addition to the external risk factors, the assessment of the risk could be measured by the Altman’s Z-score. Altman’s Z score is a formula for predicting bankruptcy, created by Edward Altman. It takes multiple areas of firm and combines them to create a picture of the firm’s financial health. If a company has a score of 3 or greater, then bankruptcy is not likely. However, if the firm’s score is between 1.8 and 3, or the grey area, then bankruptcy is likely within the next several years. Below 1.8 is the “distressed” zone, where by definition the company is already bankrupt.
The Altman’s Z score has increased from 1.88 in 2009 to 2.19 in 2010. This is a good sign for the company was above the “distressed” zone, 1.8. As shown in the graph above the Altman has increased in 2010 primarily due to stronger aftermarket sales, particularly in North and South America, and new launches of new products drove the company's revenue growth in 2010. Overall, the Altman’s trend will increase year over year and will have a general upward trend.
Recommendations:
Due to the strong performance of Del Monte Foods co., I do recommend adding the company to our portfolio for the following reasons:- * Solid top-line growth: Net sales in 2010 increased 3.1 percent to $3.7 billion.
The Pet Products segment grew by 4.6 percent during the year and Consumer Products segment also grew by 1.9 percent in fiscal 2010. * The Company generated cash flow of approximately $250 million and, through a combination of cash on hand and cash generated, substantially reduced debt levels. * The leverage ratios have decreased from 2.7 in 2009 to 2.3 in 2010. This means that the company is using less debt and liabilities to finance its assets. * The Altman’s Z score has increased from 1.88 in 2009 to 2.19 in 2010. This is a good sign for the company as its above the “distressed” zone, 1.8. * The debt/equity ratio has decreased to 0.71 in 2010. This is a good sign for the company as it indicates that it uses less debt to finance its operations or assets. * The current ratio 2.2 far better than the industry, sector and S&P 500 meaning that they have strong ability to pay current liabilities if
needed. * The gross and net profit margin has been improving year by year, indicating that the company is performing well and is in a good financial position.
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[ 8 ]. Del Monte Foods Annual report 2010.
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[ 11 ]. http://ca.advfn.com/p.php?pid=financials&btn=annual_reports&mode=&symbol=NYSE%3ADLM (accessed May 25, 2011)
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[ 13 ]. http://www.investopedia.com/
Capstone 4 Report
By
Abdullah Ghazali
Executive Summary
Del Monte Foods is an American food production, distribution company and marketer of packaged fruits and vegetables. The company is headquartered in San Francisco, California. It is one of the leading producers, distributors and marketers of premium quality, branded food and pet products in the US. The company generated revenue of $3.7 billion in 2010, 94 percent of the sales was from North American operations.
Del Monte has two operating segments, consumer products and pet products. The Consumer Products segment offers a wide selection of vegetables, fruit, and tuna products, under famous brands names, such as Del Monte, Contadina, Orchard Select, and …show more content…
StarKist. While it’s pet food and snack brands include Meow Mix, Kibbles 'n Bits, Milk-Bone, Pup-Peroni, Pounce and 9Lives. In addition, the company also produces private label food and pet products. Its products serve retail markets, the US military, certain export markets, the foodservice industry and other food processors.
Del Monte Food co. is recommended to be part of our client portfolio. The company has been found to be highly profitable. Net sales in 2010 increased 3.1 percent to $3.7 billion. The Pet Products segment grew by 4.6 percent during the year and Consumer Products segment also grew by 1.9 percent in fiscal 2010. The Altman’s Z score was 2.19 in 2010 from 1.88 in 2009. This is a good sign for the company was above the “distressed” zone, 1.8. The debt/equity ratio kept decreasing each year to 0.71 in 2010. This is a good sign for the company as it indicates that it uses less debt to finance its operations or assets. The gross and net profit margin has been improving year by year, indicating that the company is performing well and is in a good financial position.
There is a high degree of competition among existing firms because there is very little differentiation in the industry. This makes the degree of the threat of new entrants into the industry very low. It is very unlikely that a new entrant will be successful unless a bigger player drops out. Switching costs are very low in the industry, which puts the threat of substitute products at a moderate or average degree of competition. Bargaining power moves into the customer’s favour since switching costs are low and customers are more than willing to pay less for a similar product.
The SWOT analysis has identified Del Monte Foods co. strength, weakness, opportunity and threats. The strength includes strong market position, portfolio of strong brands and strong financial position. However, its major weaknesses are the high reliance on North America (94% of 2010 sales) and high dependence on its largest customer Wal-Mart, accounting for large percentage of the net sales. Its major threat is the pricing pressure from its competitors across its market segments. Moreover, the increase in labour and raw material cost has an adverse affect on the company’s product cost, causing less profitability or selling at a higher price.
Del Monte Foods co. focuses on four corporate strategies, which are investment in growing markets, marketing, innovation and improving its profit margins. These corporate strategies and business strategies are described further in the report.
In 2010, Del Monte reported annual revenue of $3.739 billion, up 3.1% from $3.626 billion in 2009. This was driven primarily by net sales in both the Pet Products and Consumer Products reportable segments, and growth in existing products.
Organisational Overview
Del Monte Foods is an American food production, distribution company and marketer of packaged fruits and vegetables. The company is headquartered in San Francisco, California. It is one of the leading producers, distributors and marketers of premium quality, branded food and pet products in the US. The company generated revenue of $3.7 billion in 2010, 94 percent of the sales was from North American operations.
The company has 17 production facilities and 10 distribution centres in the United States, as well as two production facilities in Mexico and one production facility in Venezuela. They also use six co-packers located in Chile, the Philippines and Belgium. At the end of year 2010 it employed approximately 5,400 workers.
Del Monte has two operating segments, consumer products and pet products. The Consumer Products segment offers a wide selection of vegetables, fruit, and tuna products, under famous brands names, such as Del Monte, Contadina, Orchard Select, and StarKist. While it’s pet food and snack brands include Meow Mix, Kibbles 'n Bits, Milk-Bone, Pup-Peroni, Pounce and 9Lives. In addition, the company also produces private label food and pet products. Its products serve retail markets, the US military, certain export markets, the foodservice industry and other food processors.
Del Monte has a recent history of acquiring business, only to sell them a short time later, when they fail to prove profitable, for the company. An example of this would be the acquisition of the soup business and Nature’s Goodness, acquired from Heinz in 2002, which they sold to TreeHouse Foods, Inc., in 2006. Another example would be the selling of IVD, Medi-Cal, and Techni-Cal, in 2004, after acquiring them from Heinz two years earlier.
External Analysis:
Porter’s Five Forces
Rivalry among Existing Firms (High):
However, it may be difficult for Del Monte Foods to compete effectively, in an industry saturated with competition. Del Monte should focus on pet foods. Pet food products have enabled Del Monte to offset the negative effects of consumer products, without having to pursue an unrelated diversification strategy.
Threat of New Entrants (Low):
Developing a manufacturing footprint of the size of Del Monte Foods Corporation would require a high amount of capital investment, complex and lengthy development cycles. In addition, Del Monte Foods Co. long-term, highly integrated customer relationship is another barrier to entry.
Threats of Substitute Products (Moderate):
Substitute threat is moderate. The likelihood of buyers switching over to another competitor depended mainly on the cost.
Bargaining Power of Supplier (Moderate to High):
The power of supplier is moderate to high. There are many suppliers in the food processing industry similar to Del Monte Foods Co. Suppliers are willing to pay for food products that provide substantial product differentiation, reduced cost and quality.
Bargaining Power of Customer (High):
The power of customer is high. As customer have many choices to choose from. But there are many factors that can affect customer’s decision in buying the product. These factors might include the brand recognition, store location, service, availability of the product and cost.
SWOT Analysis:
Strengths:
Leading market position
Del Monte enjoys a leading position across some of its product categories. The company is one of the largest marketers of processed fruit, vegetables and tomatoes in the US, with market share of 31.4%, 25.6% and 15.6% in FY2009 respectively. Del Monte is the second largest branded broth product in the US broth products with a market share of 35.4% in its core markets in the northeastern US, which made up 79.4% of its total case volume, in FY2009.
Furthermore, the pet products represent some of the leading pet food and pet snacks brands in the US, with a strong presence in most major product categories.
Portfolio of strong brands
Del Monte has highly recognized brands with significant customer equity, ranging from packaged vegetables to pet food products. The company’s leading food brands include Del Monte, S&W, Contadina, College Inn and other brand names, and its pet food and pet snacks brands include Meow Mix, Kibbles ‘n Bits, 9Lives, Milk-Bone, Pup-Peroni, Meaty Bone, Snausages, and Pounce2.
Further, as a food processing company, Del Monte enjoys significant brand equity and its portfolio of strong brands has helped it to expand market presence and visibility.
Strong financial performance
Del Monte recorded strong financial performance in 2010. Net sales increased by $112.9 million, or 3.1%, in fiscal 2010 compared to fiscal 2009. The revenues of the company were positively impacted by solid volume growth in both consumer products and pet products. The profitability of the company also improved significantly during FY2010.
Weaknesses
Business concentration
Del Monte's operations are concentrated both in terms of geography and customers. The operations of Del Monte is concentrated in the US, 94.3% of its total revenue was from the US.
In terms of customer concentration, Del Monte's top ten retail customers represented approximately 62% of its 2009 total turnover, with Wal-Mart alone representing approximately 34%. Any decrease in revenue from these customers could have an adverse effect on the company's revenues and profits.
Opportunities
Shift towards vegetarianism
The vegetarian-food market segment in the US is increasing. In the recent period, vegetarian food has to some extent replaced the meat, eggs, and cheese, as well as frozen entrees and side dishes.
Improving growth rates in the US restaurant sector
Del Monte offers a variety of consumer foods, sauces, ketchups to restaurant industry. Therefore, the company is well positioned to tap the growing out of home eating market.
Growth plan
The company announced a multi-year growth strategy, in the recent period. The strategy is based on three components: initiatives focused on pricing and productivity, leveraging the company’s portfolio of strong brands, and building new products and categories3. As a part of this strategy, Del Monte successfully realigned its portfolio, focused on leveraging the branded strength.
Threats
Intense competition
Del Monte faces intense competition across its market segments. The company faces competition from global companies such as Chiquita Brands International and Dole Foods. In some product lines, the company competes with smaller national producers.
Moreover, the company faces competition from branded and private label pet food and pet snack products manufactured by companies such as Nestle-Purina, Colgate, and Procter & Gamble. Intense competition could adversely affect the margins of Del Monte.
Dampened consumer demand
Del Monte’s business is dependent on continuing consumer demand for its products and brands. The economic downturn adversely impacted its business by reducing the demand for some of its products. Further, the economic conditions are exploiting the price volatility for commodities, which is a significant challenge for companies like Del Monte.
Rising labour cost
In recent years, labour costs are rising in the US. Because of this, the governments mandated increase in minimum wages resulted in an increase in labour costs. This could adversely increase Del Monte’s operation cost.
Corporate-level Strategy:
Vision:
Del Monte is committed to enriching the lives of today's family — everyone in the family, including pets — by providing nourishing, great tasting and easy-to-use products that meet the needs of everyone in the home.
Mission:
To become a recognized leader in value, quality, consumer preference in consumer and pet food products, in the USA and South America5.
Corporate Values:
* Accountability - Accepting responsibility for our actions. * Innovation - Committed to discovering new solutions using engineering expertise and advanced technologies. * Continuous Improvement - Relentless focus on achieving more with less. * Excellent service * Commitment to quality * Superior shareholders value * Execution with discipline - Delivering the best for our customers by following through on goals, standardizing improvements, and applying operational excellence.
Core Strategy:
Del Monte Foods co. core strategy is centred in four areas:
Marketing: - Marketing strategy is critical to the growth of the company brands. The marketing function oversees new product development, pricing strategy, advertising, publicity, consumer promotion and package design. Collectively, Del Monte marketing programs are designed to strengthen its brand equities, generate awareness of new items and stimulate trial among their target customers.
Drive its Growth Engine: - The current strategy for Del Monte is to increase its market share and to grow its business through expansion of its pet products business and its packaged produce sales. Also to become a leading brand in the entire segment they operate in.
Improve Profit Margins: The improvement in the profit margin is done through increase in sales, launching new products, reducing the total cost of quality and ensuring that it meets customer requirements for sustainable product solutions. Moreover, identifying and pursuing the elimination of all forms of waste achieved by training and deploying teams that follow a rigorous prescribed format. Lastly is to enhance its operations by focusing on operational excellence in all its functional areas.
Innovation: - Del Monte believes that the economic and sustainability challenges can be met through increased innovation.
Business level strategy:
Accelerated Growth It has granted a number of perpetual, exclusive, royalty-free licenses for the use of the Del Monte name and trademarks outside the United States and South America. These firms use the Del Monte name to sell various products, such as fruits, vegetables, and other produce. The firms benefit by selling their products under a brand name that is trusted worldwide, for excellent taste and value. Although Del Monte does not benefit monetarily from granting these licenses, it does benefit by having its reputation for quality value spread across the world, without having to invest significant resources.
Improve Profit Margins:
During fiscal 2010, margins benefited from a more stable cost environment; nonetheless, the increase in margins was by improving the productivity and efficiency of getting products from plants to store shelves. Del Monte generated $88 million in productivity related savings during the year reflecting progress in LEAN manufacturing initiatives, improved procurement strategies, and optimization of our logistics network7.
Marketing
Del Monte have invested in the entire marketing infrastructure-from streamlining and upgrading outside agencies to hiring additional creative marketing talent centric organization.
From fiscal 2009 to fiscal 2010, the company increased its marketing investment by 54% ($76.2 million) 7.
As a result of this marketing investment, net sales have increased $112.9 million in 2010 from previous year due to more customers becoming aware of the new and old products in the market.
Innovation
In fiscal 2010, the company launched the following national advertising campaigns: “It’s Good to Give” for Milk-Bone dog snacks, “Bits Make it Better” for Kibbles ‘n Bits dog food, “The Taste Cats Ask for by Name” for Meow Mix cat food and “Dog’s Just Know” for Pup-Peroni brand dog snacks. In fiscal 2010, they also launched the “Value Without Sacrifice” national advertising campaign for our Del Monte brand. The launch of Del Monte Ready to Blend Smoothies and Del Monte No Sugar Added products in fiscal 2010 is an example of innovation behind the core Del Monte brand.
In fiscal 2010, 2009 and 2008, research and development expenditures were $26.8 million, $23.7 million and $23.7 million, respectively. They operate a research and development facility in Terminal Island, CA where they develop new products and product line extensions and research existing products related to pet food and pet snacks. They also maintain a research and development facility in Walnut Creek, CA, where they develop new products and product line extensions and conduct research in a number of areas related to our fruit, vegetable and tomato products, including packaging, pest management, food science, environmental and engineering8. These facilities employ scientists, engineers and researchers and are equipped with pilot shops and test kitchens.
Financial Highlights:
Income Statement
| 2007 | 2008 | 2009 | 2010 | Revenue ($ mil.) | 3,414 | 3,736 | 3,626 | 3,739 | Gross Profit ($ mil.) | 999 | 1,030 | 1,109 | 1,328 | Operating Income ($ mil.) | 321 | 349 | 360 | 508 | Total Net Income ($ mil.) | 112 | 133 | 172 | 244 |
8
Net sales increased by $112.9 million, or 3.1%, in fiscal 2010 compared to fiscal 2009. The increase was due to increased net sales in both the Pet Products and Consumer Products reportable segments, driven by growth in existing products.
Moreover, net sales in Pet Products reportable segment increased $76.6 million, or 4.6%, in fiscal 2010 compared to fiscal 2009. The increase was driven by fiscal 2009 pricing actions, increased volume of existing pet snacks and dry pet food as a result of category growth and promotional activities and new product sales contributed to the increase in net sales.
Furthermore, net sales in Consumer Products reportable segment increased by $36.3 million, or 1.9% in fiscal 2010 compared to fiscal 2009. This increase was primarily driven by growth in existing product volume, new product sales and net pricing. The increase in existing product volume was driven by fruit and vegetables and lower margin South American sales9.
The gross profit has increased from $1,109 million, to $1,328 million in 2010. This is related to lower cost, growth in existing product volume, new product sales and net pricing.
Cash Flow Statement
| 2007 | 2008 | 2009 | 2010 | Net operating Cash Flow ($ mil.) | 230 | 287 | 201 | 356 | Net Investing Cash Flow ($ mil.) | (1,345) | (80) | 227 | (105) | Net Financing Cash flow ($ mil.) | 668 | (195) | (361) | (336) | Net Change in Cash & Cash Equivalents ($ mil.) | (447) | 12.7 | 117 | (89) | Del Monte Foods Annual report 2010.
Operating Activities
Cash provided by operating activities during fiscal 2010 was $355.9 million compared to $200.6 million in fiscal 2009. This $155.3 million increase was driven by increased net income.
Cash provided by operating activities during fiscal 2009 was $200.6 million compared to $286.9 million in fiscal 2008. This $86.3 million decrease was primarily driven by an increase in cash taxes paid and cash payments related to commodity futures positions.
Investing Activities
Cash used in investing activities was $104.9 million during fiscal 2010, which represented capital expenditures.
Cash provided by investing activities was $277.1 million during fiscal 2009, which primarily consisted of $365.8 million from the sale of the StarKist Seafood Business, partially offset by capital expenditures of $88.7 million.
Financing Activities
During fiscal 2010, $336 million was used in financing activities, which consisted primarily of net repayments of debt of $269.0 million, payment of $43.6 million of costs related to the issuance of the New Notes and tender offer for the Old Notes and entering into the Senior Credit Facility, and further of $37.6 million in dividends. In addition, had $12.3 million of proceeds from the issuance of common stock9.
During fiscal 2009, $361.3 was used million in financing activities, which consisted primarily of net short-term borrowings of $2.0 million, Term Facility loan repayments of $333.8 million and $31.6 million in dividend payments.
Key Ratios
| Company | Industry | Sector | S&P 500 | Quick Ratio (MRQ) | 0.5 | 0.77 | 0.66 | 0.70 | Current Ratio (MRQ) | 2.2 | 0.97 | 0.93 | 1.02 | Return on Assets (TTM) | 5.7 | 4.00 | 5.98 | 6.41 | Return on Equity (TTM) | 13.4 | 8.84 | 14.93 | 18.41 |
| 2010 | 2009 | 2008 | 2007 | Current Ratio | 2.2 | 2.3 | 2.3 | 2.2 | Quick Ratio | 0.5 | 0.7 | 0.6 | 0.5 | Total Debt/Equity Ratio | 0.71 | 0.97 | 1.26 | 1.38 | Leverage Ratio | 2.3 | 2.7 | 3.0 | 3.1 | Gross Profit Margin % | 35.5 | 30.6 | 27.6 | 29.3 | Net Profit Margin % | 6.5 | 4.8 | 3.6 | 3.3 |
The current ratio and quick ratio has been steadily over the last four years and it is above the industries average. The current ratio is 2.2 far better than the industry, sector and S&P 500 meaning that they have strong ability to pay current liabilities if needed. However, there quick ratio is below the industry, sector and S&P 500 may be attributable to its recent acquisitions that have laden the company with debt.
The debt/equity ratio has been decreasing over the last four years as shown above. This is a good sign for the company as it indicates that it uses less debt to finance its operations or assets.
Moreover, Del Monte leverage ratios have decreased from 2.7 in 2009 to 2.3 in 2010. This means that the company is using less debt and liabilities to finance its assets. Moreover, this places them at a competitive advantage by extending their ability to invest in the business or in further research and development.
Furthermore, the gross and net profit margin has been improving year by year is may be due to the increase in sales and a decrease in input costs. Moreover, the increase in gross and profit margin indicates that the company is performing well and is in a good financial position.
Corporate forecast:
I used the sales percentage method to forecast the next five years, I estimated to be 6.0% as its sales was growing steadily each year.
For the rest of the forecasted data shown below, the average of the last five years was calculated and used to forecast the next coming five years. As shown below in the table:
In Millions of USD
| 2011 | 2012 | 2013 | 2014 | 2015 | Sales | 3,964 | 4,202 | 4,454 | 4,722 | 5,005 | Cash | 11 | 12 | 13 | 13 | 14 | Account receivables | 265 | 281 | 298 | 316 | 335 | Inventory | 865 | 917 | 972 | 1,030 | 1,092 | Current Assets | 595 | 631 | 668 | 708 | 751 | Fixed Assets | 1,392 | 1,476 | 1,564 | 1,658 | 1,757 | Total Assets | 4,835 | 5,126 | 5,433 | 5,759 | 6,105 | Account Payable | 387 | 411 | 435 | 461 | 489 | Current Liabilities | 595 | 631 | 668 | 708 | 751 | Total Liabilities | 3,094 | 3,280 | 3,476 | 3,685 | 3,906 | Cost of Goods Sold | 2,757 | 2,923 | 3,098 | 3,284 | 3,481 | Gross Profit | 1,207 | 1,279 | 1,356 | 1,438 | 1,524 | EBIT | 409 | 433 | 459 | 487 | 516 | Net Income | 189 | 200 | 212 | 225 | 238 |
Risk Assessment:
There are a number of business risks and uncertainties that could affect Del Monte’s business. These risks and uncertainties could cause its actual results to differ from past performance or expected results. It may also adversely impact the business, financial condition and results of operations.
Moreover, the Company’s has identified risks factors that it can affect it business:- * The pet product and food product categories in which we participate are highly competitive and, if we are not able to compete effectively, our results of operations could be adversely affected.
* We may not be able to successfully implement initiatives to improve productivity and streamline operations to control or reduce costs. Failure to implement such initiatives could adversely affect our results of operations.
* The inputs, commodities, ingredients and other raw materials that we require are subject to price increases and shortages that could adversely affect our results of operations.
* Increases in logistics and other transportation-related costs could materially adversely impact our results of operations. Our ability to competitively serve our customers depends on the cost and availability of reliable transportation.
* Our substantial indebtedness could adversely affect our operations and financial condition.
* If our cash from operations is not sufficient to meet our operating needs, expenditures and debt service obligations, we may be required to refinance our debt, sell assets, borrow additional money or raise …show more content…
equity.
* If the financial institutions that are part of the syndicate of our revolving credit facility fail to extend credit under our facility, our liquidity and results of operations may be adversely affected.
* We may not be able to successfully maintain the level of our product distribution to high volume club stores and other mass merchandisers, which could adversely impact our net sales and results of operations.
* The loss of a significant customer, certain actions by a significant customer or financial difficulties of a significant customer could adversely affect our results of operations.
* We may be exposed to counter party risk in our currency, interest rate and commodity hedging arrangements.
* Government regulation could increase our costs of production and increase legal and regulatory expenses.
* We may not be successful in our future acquisition or other strategic transaction endeavors, if any, which could have an adverse effect on our business and results of operations.
* Adverse weather conditions (caused by climate change or otherwise), natural disasters, pestilences and other natural conditions can affect crops and other inputs, which can adversely affect our operations and our results of operations.
* We rely upon a number of third parties to manage or provide distribution centers for our products. Failures by these third parties could adversely affect our business.
* We rely primarily on a single company to provide us with logistics services and any failure by this provider to effectively service us could adversely affect our business.
* We use a single national broker to represent a significant portion of our branded products to their tail grocery trade and any failure by the broker to effectively represent us would adversely affect our business.
* Failure by us or our third-party co-packers to comply with environmental or other regulations may disrupt our supply of certain products and adversely affect our results of operations.
* We rely upon co-packers to provide our supply of some products. Any failure by co-packers to fulfill their obligations could adversely affect our results of operations.
* Volatility in the equity markets or interest rates could substantially increase our pension costs and have a negative impact on our results of operations.
* Intellectual property infringement or violation claims may adversely impact our results of operations.
* Our business operations could be disrupted if our information technology systems fail to perform adequately.
* Our business could be harmed by strikes or work stoppages by Del Monte employees
* Transformative plans involve risk and may adversely affect our business and financial results.
In addition to the external risk factors, the assessment of the risk could be measured by the Altman’s Z-score. Altman’s Z score is a formula for predicting bankruptcy, created by Edward Altman. It takes multiple areas of firm and combines them to create a picture of the firm’s financial health. If a company has a score of 3 or greater, then bankruptcy is not likely. However, if the firm’s score is between 1.8 and 3, or the grey area, then bankruptcy is likely within the next several years. Below 1.8 is the “distressed” zone, where by definition the company is already bankrupt.
The Altman’s Z score has increased from 1.88 in 2009 to 2.19 in 2010. This is a good sign for the company was above the “distressed” zone, 1.8. As shown in the graph above the Altman has increased in 2010 primarily due to stronger aftermarket sales, particularly in North and South America, and new launches of new products drove the company's revenue growth in 2010. Overall, the Altman’s trend will increase year over year and will have a general upward trend.
Recommendations:
Due to the strong performance of Del Monte Foods co., I do recommend adding the company to our portfolio for the following reasons:- * Solid top-line growth: Net sales in 2010 increased 3.1 percent to $3.7 billion.
The Pet Products segment grew by 4.6 percent during the year and Consumer Products segment also grew by 1.9 percent in fiscal 2010. * The Company generated cash flow of approximately $250 million and, through a combination of cash on hand and cash generated, substantially reduced debt levels. * The leverage ratios have decreased from 2.7 in 2009 to 2.3 in 2010. This means that the company is using less debt and liabilities to finance its assets. * The Altman’s Z score has increased from 1.88 in 2009 to 2.19 in 2010. This is a good sign for the company as its above the “distressed” zone, 1.8. * The debt/equity ratio has decreased to 0.71 in 2010. This is a good sign for the company as it indicates that it uses less debt to finance its operations or assets. * The current ratio 2.2 far better than the industry, sector and S&P 500 meaning that they have strong ability to pay current liabilities if
needed. * The gross and net profit margin has been improving year by year, indicating that the company is performing well and is in a good financial position.
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