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industry in North America. The world is much different today than it was seven
years ago when we last undertook to benchmark
Funding for this study was provided by Agriculture and North America’s food and beverage processors –
Agri-Food Canada based on a recommendation from in addition to experiencing profound changes to
the Food Processing Industry Competitiveness Working the competitive landscape, we’ve seen changes in
Group. The Working Group is comprised of senior government in North America and across the globe,
industry leaders including representatives from the and are currently experiencing an economic and
three national food processing trade associations and financial downturn which by some measures is the
government officials, working together to examine the worst since the Great Depression.
challenges facing the sector and recommend industry-
government actions to stimulate the sector’s growth I believe this new Benchmarking for Success study is
and sustainability. The Benchmarking for Success especially relevant in the face of the changes we’ve
initiative is one of the areas of research directed to be seen over the last several years. I hope you find it both
undertaken by the Working Group. relevant and insightful.
Benchmarking for Success 2009 analyzes industry In 2008, Canadian and American processors’ EBITDA
data for the fiscal year ending in 2008 for food (Earnings Before Interest, Taxes, Depreciation and
and beverage processing companies in Canada and Amortization) were equal at about 10% of sales
the United States. Financial information for public revenue. This represents a substantial improvement
companies was gathered from publicly available from the 7% margin advantage enjoyed by the U.S.
audited financial statements and from private group in 2001. On the other hand, both Canadian
companies on a (confidential) survey basis. The survey and U.S.-based processors have seen a decline in
methodology, a glossary of terms and financial ratio overall profitability over the last year in the face of
definitions are included in the appendices to this challenging economic conditions. 2008 saw Canadian
report. This year, we analyzed a total of 76 food and processors’ return on investment (ROI) fall from a 2006
beverage processors, approximately one-third of which high of 20% to 14% in 2008; American processors
are Canada-based. experienced a modest decrease from 17% to 16% over
the same time period.
1
Processor count includes only publicly listed companies headquartered in the U.S. or Canada with
revenue of at least $10 million annually. Public companies that trade in an over-the-counter fashion
are not included in this figure.
2
The profile and magnitude of industry consolidation has resulted in a less granular subsector review
in this year’s report since some previously studied subsectors no longer have sufficient membership
to warrant “sector” analysis.
0%
2006 2007 2008
Canada
Canada
US U.S.
3
The timing of corporate tax payments can skew calculated tax rates on a year-by-year basis. Even the three year average
method employed here should not be considered an exact answer, but taken as evidence that tax rates paid by Canadian
processors are comparable to or somewhat better than their American counterparts.
20%
The near equality of Canadian and U.S. margin
performance in recent years is a significant finding
– prior Benchmarking for Success studies found that 12% 12%
11% 10% 10%
10%
Canadian processors’ EBITDA/ sales ratio materially 10%
lagged the U.S. group (by 7% in the 2002 version of
this study). While it is difficult to neatly attribute the
narrowing of the margin gap to a handful of factors, the
0%
margins of companies with operations in both countries 2006 2007 2008
would certainly be impacted by fluctuations in the
Canada
Canadian/U.S. dollar exchange rate which has risen from
Canada
US U.S.
an average of 65 cents between 2000 and 2002 to an
average of 92 cents from 2006-2008.
4
Typically EBITDA includes “other” operating expenses in addition to COGS and SG&A. However, for the
purposes of the overall Canadian/U.S. margin comparison the impact of “other” charges is negligible.
Benchmarking for Success 2009 5
Over the time period studied, Canadian processors Figure 7: Asset turnover
matched or modestly outperformed their American 2.0
counterparts in asset utilization, with 2008 asset
1.5 1.5 1.5
turnover of 1.5 for both groups. 1.3
1.4
1.3
Canada
US
80
68 70 67
64 62
60 55
40
20
0
2006 2007 2008
Canada
Canada
US U.S.
Despite the Canadians’ superior CCC performance, the Figure 11: Days of payables
size of the Canadian cash advantage has fallen from 80
21 days in 2006 to 11 days in 2008. One oft-mentioned 66 66
technique to maintain liquidity in an uncertain business 60
environment is to ‘stretch’ an organization’s payables. 47 52
65 64
60 57
44 44 46
40
20
0
2006 2007 2008
* excludes wine/spirits processor inventory days from calculation
Canada
US
Canada U.S.
20%
0%
2006 2007 2008
Canada
US
Canada U.S.
Return on equity, before tax 18% 25% 17% 23% 8% 24% 10% 17%
Return on investment 21% 21% 19% 20% 11% 19% 14% 16%
Gross margin 21% 36% 19% 35% 19% 33% 24% 30%
Asset turnover 1.3% 1.4 1.3 1.4 1.5 1.6 1.5 1.5
SG&A as a percent of sales 14% 23% 16% 22% 14% 22% 16% 20%
Days of inventory 53 68 66 68 63 58 64 62
Net PP&E turnover 10.8 5.3 9.6 5.2 11.2 5.5 7.1 5.2
Debt-to-total capitalization 24% 40% 29% 39% 28% 42% 33% 39%
Interest as a percent of sales 1.1% 2.1% 0.8% 2.1% 0.8% 1.9% 1.2% 1.7%
Current ratio 1.5 1.8 1.3 1.8 1.7 1.7 1.5 1.8
PP&E-to-total capitalization 49% 40% 57% 39% 55% 42% 54% 42%
Note: days of inventory and cash conversion cycle for “all food processors” excludes wine/spirit processors.
5
The relatively small average revenue of Canadian participants is attributable to the
inclusion of a number of smaller, private companies in Canada’s diversified subsector.
While Canadian meat processors were more profitable The capital structure of Canadian and U.S. meat
than the rest of the Canadian group, their U.S.-based processors is markedly different: whereas U.S. meat
counterparts fared poorly in 2008, with an alarming ROE processors have less debt than the U.S. group as a
of -9% compared to 17% for the U.S. processors as a whole, the Canadian meat processors carry materially
whole. more debt (and the associated interest charges) than
their Canadian processor counterparts.
While North American meat processors typically have
poorer gross margins than the rest of the processor
group they enjoy lower SG&A expenses; when
compared on a net margin basis (COGS plus SG&A)
Return on equity, before tax 12% 1% 12% 11% 13% -9% 10% 17%
Gross margin 19% 15% 18% 16% 16% 12% 24% 30%
Asset turnover 1.7 2.0 1.5 2.1 1.6 2.3 1.5 1.5
SG&A as a percent of sales 12% 11% 11% 10% 11% 10% 16% 20%
Days of inventory 51 51 75 54 68 48 64 62
Net PP&E turnover 5.7 6.0 5.1 6.3 5.8 7.1 7.1 5.2
Debt-to-total capitalization 35% 27% 44% 26% 48% 31% 33% 39%
Interest as a percent of sales 1.2% 0.7% 1.3% 0.6% 1.4% 0.7% 1.2% 1.7%
Current ratio 1.5 2.4 1.5 2.4 1.5 2.3 1.5 1.8
PP&E-to-total capitalization 48% 48% 40% 48% 45% 47% 54% 42%
Note: days of inventory and cash conversion cycle for “all food processors” excludes wine/spirit processors.
Return on equity, before tax 15% 4% 15% 7% 12% 10% 10% 17%
Return on investment 17% 11% 15% 12% 13% 12% 14% 16%
Gross margin 14% 27% 15% 28% 15% 20% 24% 30%
Asset turnover 1.8 1.1 1.5 1.0 1.8 1.0 1.5 1.5
SG&A as a percent of sales 11% 17% 12% 17% 13% 13% 16% 20%
Days of inventory 40 59 56 56 47 60 64 62
Net PP&E turnover 4.1 4.2 3.2 5.0 4.2 4.6 7.1 5.2
Debt-to-total capitalization 40% 37% 32% 34% 24% 46% 33% 39%
Interest as a percent of sales 1.3% 2.2% 1.6% 2.4% 1.6% 2.1% 1.2% 1.7%
Current ratio 1.3 2.2 1.0 2.1 1.3 1.6 1.5 1.8
PP&E-to-total capitalization 65% 47% 81% 43% 88% 41% 54% 42%
Note: days of inventory and cash conversion cycle for “all food processors” excludes wine/spirit processors.
Return on equity, before tax 18% 9% 15% 13% 9% 10% 10% 17%
Return on investment 23% 12% 20% 15% 16% 20% 14% 16%
Gross margin 46% 41% 46% 41% 41% 41% 24% 30%
Asset turnover 1.3 1.0 1.3 1.1 1.3 1.2 1.5 1.5
SG&A as a percent of sales 26% 30% 25% 32% 26% 29% 16% 20%
Net PP&E turnover 4.8 4.6 7.5 4.1 6.4 4.6 7.1 5.2
Debt-to-total capitalization 26% 31% 23% 32% 32% 36% 33% 39%
Interest as a percent of sales 1.2% 1.7% 1.2% 2.1% 1.2% 1.9% 1.2% 1.7%
Current ratio 2.0 1.6 2.4 1.5 1.8 1.5 1.5 1.8
PP&E-to-total capitalization 44% 30% 47% 34% 43% 35% 54% 42%
Note: days of inventory and cash conversion cycle for “all food processors” excludes wine/spirit processors.
2008
2006 2007 2008
All processors
Return on equity, before tax 20% 42% 19% 41% 18% 57% 10% 17%
Return on investment 23% 26% 22% 25% 20% 28% 14% 16%
Gross margin 49% 46% 49% 45% 46% 45% 24% 30%
Asset turnover 1.2 0.9 1.1 0.9 1.3 0.9 1.5 1.5
SG&A as a percent of sales 24% 25% 22% 24% 23% 23% 16% 20%
Net PP&E turnover 5.1 4.4 8.8 4.5 7.3 4.8 7.1 5.2
Debt-to-total capitalization 22% 46% 19% 47% 16% 52% 33% 39%
Interest as a percent of sales 0.9% 2.7% 0.9% 2.8% 0.7% 2.6% 1.2% 1.7%
Current ratio 2.5 1.5 2.8 1.7 2.4 1.6 1.5 1.8
PP&E-to-total capitalization 43% 32% 46% 32% 43% 32% 54% 42%
Note: days of inventory and cash conversion cycle for “all food processors” excludes wine/spirit processors.
2008
2006 2007 2008
All processors
Return on equity, before tax 14% 7% 12% 13% 13% 2% 10% 17%
Gross margin 24% 29% 27% 27% 25% 26% 24% 30%
Asset turnover 1.7 1.2 1.2 1.3 1.8 1.5 1.5 1.5
SG&A as a percent of sales 16% 19% 18% 19% 15% 17% 16% 20%
Net PP&E turnover 5.9 4.1 7.7 4.2 9.0 4.76 7.1 5.2
Debt-to-total capitalization 32% 36% 36% 33% 29% 37% 33% 39%
Interest as a percent of sales 0.7% 1.8% 0.5% 1.9% 0.7% 1.3% 1.2% 1.7%
Current ratio 1.6 2.5 1.6 2.4 1.7 2.0 1.5 1.8
PP&E-to-total capitalization 39% 43% 45% 44% 40% 45% 54% 42%
Note: days of inventory and cash conversion cycle for “all food processors” excludes wine/spirit processors.
2008
2006 2007 2008
All processors
Return on equity, before tax 11% 31% 13% 32% 8% 43% 10% 17%
Return on investment 17% 23% 18% 22% 17% 24% 14% 16%
Gross margin 11% 37% 12% 36% 15% 35% 24% 30%
Asset turnover 1.7 1.2 1.6 1.2 1.7 1.3 1.5 1.5
Days of inventory 31 61 40 60 34 55 64 62
Net PP&E turnover 5.1 4.7 4.4 4.7 5.0 5.1 7.1 5.2
Debt-to-total capitalization 31% 48% 32% 51% 34% 54% 33% 39%
Interest as a percent of sales 1.2% 1.9% 1.1% 2.0% 1.1% 1.9% 1.2% 1.7%
Current ratio 1.4 1.2 1.2 1.3 1.3 1.3 1.5 1.8
PP&E-to-total capitalization 45% 36% 50% 36% 48% 38% 54% 42%
Note: days of inventory and cash conversion cycle for “all food processors” excludes wine/spirit processors.
Key North American stock indices fell substantially in Global food and beverage processors have also
2008 with the food and beverage processing industries seen substantial volatility in input prices over the last
following suit in both Canada and the U.S., though the 18 months.
market value of Canadian processors was hit harder:
share prices of Canadian food and beverage processors Commoditiy Low High Change
fell 40% in 2008, whereas shares of their American Corn $3.31 $8.19 57%
counterparts fell by just half this amount. Fortunately,
Oats $2.13 $5.31 66%
by the midpoint of 2009 equity markets had bounced
Sugar $317.00 $453.00 20%
back substantially, with the shares of both Canadian
and American processors up approximately 10% over Wheat $5.00 $11.31 48%
their 2008 close. Despite this increase, share prices of Oil $31.00 $145.00 169%
Canadian and U.S. processors remain at just 74% and
Jan 2008-May 2009
91%, respectively, of their 2006 levels.
Figure 17: Period returns: Food and beverage processors vs. equity indices
120%
100% 100%
91%
82%
80%
74%
70%
67%
60%
Dec 2006 Dec 2007 Dec 2008 Jun 2009
In 2008, Canada’s food retailers totalled $92 billion in SG&A expenses, capturing all such activity in cost of
sales, while U.S. sales were $762 billion over the same goods sold. While this leads to drastically different gross
time period. The proportionate difference in retail margin calculations, when we measure EBITDA as a
food sales between the countries closely mirrors the proportion of sales (which accounts for both COGS and
population difference, with U.S. population and retail SG&A) we see the Canadian and U.S. retailers perform
food sales both roughly eight times that of Canada. similarly on a margin basis, with the Canadian group
However, the competitive landscape is very different modestly outperforming the Americans in the 2006-
in Canada and the U.S.: In the U.S., the top five food 2008 time period.
retailers account for 40% of sales, whereas in Canada
just 3 retailers account for 60% of retail food sales. Lastly, we note the highly favourable cash conversion
Despite the fragmented nature of the U.S. market, cycle (CCC) enjoyed by Canada’s major food retailers.
American retailers outperformed their Canadian A negative CCC indicates an organization is paid for
counterparts on the ROI and ROE profitability measures. the goods they sell before they have in turn paid
their suppliers; Canada’s large retailers may be taking
Note the reappearance of the issue related to advantage of their substantial influence in the Canadian
accounting treatment of COGS and SG&A in Canada market by negotiating highly favourable payment terms
versus the U.S. The issue is even more pronounced with their suppliers.
in food and beverage retailing than in the processing
sector: Canada’s major food retailers do not identify any
2008
2006 2007 2008
F&B processors
Return on equity, before tax 17% 22% 16% 23% 15% 27% 10% 17%
Return on investment 19% 22% 18% 22% 18% 25% 14% 16%
EBITDA as a percent of sales 5.7% 5.3% 5.5% 5.4% 5.5% 5.2% 10% 10%
Asset turnover 2.4 2.7 2.4 2.8 2.4 3.0 1.5 1.5
Debt-to-total capitalization 37% 45% 40% 47% 39% 51% 33% 39%
Note: days of inventory and cash conversion cycle for “all food processors” excludes wine/spirit processors.
North America has experienced several high-profile food One of the most comprehensive global evaluations of
safety incidents recently, spanning diverse processing food industry sentiment is the annual Top of Mind survey
sectors and originating both from within Canada and the issued by The Consumer Goods Forum. This year’s Top
U.S. and from abroad. Certainly the topic of food safety of Mind survey is based on a sample of 596 decision
is much on the mind of today’s consumers. Consider makers heading retail and consumer goods companies
the following statistics from AMR research and a 2008 in 54 countries. The survey results are consistent with
Deloitte food survey of more than 1,000 consumers: Benchmarking for Success findings and support the
judgment that food safety has gained prominence across
* 83% of consumers can name a product that was the globe.
recalled in the last two years because of safety
concerns The increasingly global food and beverage supply chain
* 57% of consumers have stopped eating – either network has also given rise to a broader set of food
temporarily or permanently – a particular food safety considerations. The editors of the most recent
because of a recall Top of Mind survey note that while industry efforts to
* 76% of consumers report they are more concerned reduce food safety incidents have traditionally focused
today than they were five years ago about the food on reducing accidental contamination attributable to
they eat. inadequate food processing and handling processes,
recent incidents involving deliberate contamination of
Not surprisingly, food safety concerns are also product in (misguided) efforts to control costs have
widespread among Canada’s food and beverage made the notion of food security far more prominent
processors: 50% of respondents to this year’s than it was in the past.
Benchmarking for Success survey took concrete
measures towards improving food safety (working We expect the confluence of these high-profile food
towards a recognized safety certification and/or process safety incidents and a progressively more global
improvement) in 2008. food and beverage supply chain network to result in
continued attention being devoted to product safety
among consumers, organizations and governments
worldwide.
“Lowering labour costs through automation of “The industry is having to invest further capital and
an existing line” incur increased operating costs at a time when
customers (food service, retail) are not willing to
“Pushing co-packers for reduced rates…” accept price increases due to either the challenging
economic conditions or the fear of having to
“Initiating a review of key suppliers” compete with Wal-Mart”
“Reduce COGS through...going to RFP for key “The need to get to the next level of scale, both for
requirements” growth and to achieve higher levels of efficiency,
lower costs and higher margins”
“Reduce travel, training and other discretionary
costs” “People cutting discretionary spending reduces the
market for our value-added products. The longer
the economy is perceived as bad, the bigger the
issue will become”
Beginning in 2002 annual M&A transactions in North Transactions involving Canadian targets have typically
America’s food and beverage sector rose for five represented 10-12% of the North American total; this
consecutive years, peaking at nearly 250 deals in 2007. trend continued in 2008 with Canadian targets account
M&A activity remained strong through the first half of for 21 of the 182 transactions.
2008 but slowed substantially in the latter portion of
the year. While packaged foods and meats represented the
substantial majority of deals, many of the largest
The vast majority of North American food and beverage transactions have involved brewers, vintners and
M&A activity involves privately held companies, with distillers.
94% of the nearly 1,500 deals between 2000-2008
targeting private operators.
Total North American food and beverage M&A activity 2000-2008: Number of transactions
Sector 2000 2001 2002 2003 2004 2005 2006 2007 2008 Total
Agricultural products 10 3 2 8 13 18 18 24 17 113
Packaged foods & meats 80 100 76 83 104 109 137 160 123 972
Total 131 124 93 120 164 172 212 241 182 1,439
Deal value
Buyer Target Year
(millions)
28
Participating companies
A total of 76 food and beverage processors were included in Benchmarking for Success 2009.
Public companies 14 53
Private companies 96 0
6
The names of private company participants are being withheld for confidentiality purposes.
There were a total of 10 private company responses to the “qualitative” portion of the survey.
Benchmarking for Success 2009 29
Normalized financial statements
Only publicly held Canadian and American processors this is thus a weighted average, and figures typically will
were included in the normalized analysis. Financial differ from those calculated using the straight-average
results were normalized by taking the average of method in the body of this report.
reported line items and dividing by average sales (for
income statement) or total assets (for balance sheet);
Balance sheet
Canada U.S.
Gross property, plant & equipment 60% 58% 55% 46% 44% 44%
Net property, plant & equipment 33% 35% 32% 24% 23% 23%
Deferred taxes 3% 3% 3% 5% 5% 4%
Minority interest 1% 1% 1% 0% 0% 0%
Preferred stock 0% 0% 0% 0% 0% 0%
Total liabilities & equity 100% 100% 100% 100% 100% 10%
Canada U.S.
Interest expense 1% 1% 1% 2% 2% 2%
Income taxes 1% 1% 1% 3% 3% 3%
Minority interest 0% 0% 0% 0% 0% 0%
Extraordinary items 0% 0% 0% 0% 0% 0%
Net income 2% 4% 2% 8% 8% 7%
Preferred dividends 0% 0% 0% 0% 0% 0%
Profitablity Return on equity, before tax Year-end income taxes / (Year-end value of total shareholders’ equity N/A
+ minority interest)
Return on investment Year-end income before interest, taxes, depreciation & amortization / N/A
(Year-end value of total shareholders’ equity + minority + total debt)
Efficiency Gross margin (Year-end value of net sales – cost of goods sold) / Year-end of net %
sales
Asset turnover Year-end value of net sales / Year-end value of total assets N/A
SG&A as a percent of sales Year-end value of sales, general & administration expenses / Year-end %
value of net sales
Inventory days (Year-end value of inventory *365) / Year-end value of cost of goods days
sold
Receivables days (Year-end value of accounts receivable *365) / Year-end value of net days
sales
Payables days (Year-end value of accounts payble *365) / Year-end value of cost of days
goods sold
Cash conversion cycle Days of inventory + days of receivables – days of payables days
Net PP&E turnover Year-end value of net sales / Year-end value of net property, plant & N/A
equipment
Solvency Debt-to-total capitalization Year-end value of total debt / (Year-end value of total shareholders’ %
equity + minority interest + total debt)
Interest as a percent of sales Year-end value of current expenses / Year-end value of net sales %
Current ratio Year-end value of current assets / Year-end value of current liabilities N/A
PP&E-to-total capitalization Year-end value of net property, plant & equipment / (Year-end value of %
total shareholders’ equity + minority interest + total debt)
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