In response to predictions of astronomical growth outside of U.S. borders, Tyson, the largest chicken producer in the United States, has begun looking abroad to expand its growth and stake its dominance in new markets.
In fiscal 2018, Tyson Foods generated $4.8 billion in international sales — about 12% of its total revenue. According to Tyson Foods CFO Stewart Glendinning, most of those sales were generated by exports from U.S. operations to other countries.
“We’re the largest protein player in the United States, and 90% of the growth in protein in the world will come from outside the United States over the next five years. So if we focus only in the U.S. we’re going to be focusing on only the 10%. By exposing ourselves to the international maets, we hope to gain more of that growth,” Glendinning told Food Dive.
As the number of middle-class consumers grows in developing countries, their desire for greater culinary variety is driving new pockets of growth for companies that are able to tap into them. With monumental growth on the horizon, American companies have begun scouting these new markets for the most effective way that can integrate their product portfolios outside of U.S. borders and gain more consumers.
For those companies looking for growth, their eyes are trained east, toward Asia and Africa — but particularly Asia. According to Glendinning, more than half of Tyson's future sales growth is expected from that continent. A study by consulting firm McKinsey & Company underscores his prediction. In three years, 550 million people will make up China's middle class, a group with disposable income that is large enough to be considered the third-most populous country in the world.
But how do companies tap into these markets abroad?
International exposure can come through many different avenues. Some companies, especially smaller ones, make partnerships with local enterprises. Others work with exporters. Some acquire local companies and still others commit to building factories in the countries where they wish to invest. How it's done all comes down to a company’s available capital and its risk tolerance.
Buying into it
International investment is often approached progressively, beginning with a low-risk, light touch in foreign markets and later evolving into a significant investment, according to Will Hayllar, partner and head of the consumer goods practice at OC&C Strategy Consultants. The key is getting doing it right. When companies are successful, the long-term profits can be transformative.
“Your ability to drive long-term organic growth is heavily predicated on your ability to get exposure to markets where you’ve got a faster underlying growth rate,” Hayllar told Food Dive.
Getting that exposure begins with a local presence that includes local talent, local decision making, local supply chain and local product development, Bahige El-Rayes, a partner in the consumer and retail practice of A.T. Kearney, told Food Dive.
This strategy is evidenced by Tyson’s recent investment in the Thai and European poultry operations from BRF SA, and frozen nugget and patty provider Keystone Foods.
“They are local companies selling locally relevant products,” said Glendinning.
"We're the largest protein player in the United States, and 90% of the growth in protein in the world will come from outside the United States over the next five years. So if we focus only in the U.S., we’re going to be focusing on only the 10%."
CFO, Tyson Foods
Keystone in particular works with quick service restaurants, making products that Glendinning said have a “local bent.” The company, which makes McDonald's Chicken McNuggets, also offers specialty vegetable processing and bakery items in Asian markets.
Adjusting to regional tastes and cultural preferences is just one of the advantages of having on-site production, Glendinning said. By investing in companies that have established businesses and product demand, he said it ensures a built-in market with an appetite for the products.
In addition to domestic benefits, Tyson’s acquisition of BRF’s Thai operations and Keystone provides the company with a scalable production and distribution platform from which to enter the Asian poultry market. It also establishes an export network for value-added products like chicken nuggets, beef patties and breaded fish fillets that can be tailored to local consumer taste preferences in key markets like Europe, the Middle East and Africa.
This change, Glendinning explained, will help Tyson stay away from the kind of financial struggles it experienced when running China-based poultry-farming complexes that controlled everything from the hatchery to the slaughter. At the time, a bout of avian flu and slow economic growth eroded the Chinese craving for poultry — which left Tyson with $169 million in impairment charges for the overvalued purchase of their facilities.
Now, instead of having a stake in rendering facilities and hatcheries, Tyson plans on investing in companies like Keystone and BRF where it can sell its own branded, already-processed products directly to Chinese and other Asian supermarkets and quick service restaurants.
With the advantage of shortened supply chains and more locally focused, processed products available to companies engaging in international investment, Tyson has not been the only American corporation to succeed in foreign waters.
The (international) land of milk and honey
Jared Koerten, head of packaged food research at Euromonitor International, told Food Dive that Mondelez has seen significant success through international investment. Since the company was spun off from Kraft Foods in 2012, it receives 75% or more of its total sales from outside of the U.S. Today, Mondelez is one of the world’s largest snacking companies, operating in 165 countries. It's worth $26 billion, 16% — or $4.2 billion — of which is generated in emerging markets, per 2017 company data.
With a portfolio that includes Cadbury and Milka along with a host of other legacy foreign-based brands, the company would find itself geographically limited if it kept all of its manufacturing and distribution in North America. In fact, according to the company’s latest earnings report, North American Q4 revenues of $1.8 billion came in a distant second to Europe’s nearly $2.8 billion in Q4 net revenues. Asian earnings came in third, at $1.4 billion in net revenue.
"Your ability to drive long-term organic growth is heavily predicated on your ability to get exposure to markets where you've got a faster underlying growth rate."
Partner and head of the consumer goods practice, OC&C Strategy Consultants
Kellogg also followed this strategy of looking abroad. After seeing continued soggy cereal sales in the United States, the Michigan-based manufacturer looked elsewhere for growth to boost its bottom line. From 2014 to 2016, Kellogg snapped up companies in each of its international regions, which include Europe, Latin America and Asia Pacific, to bolster its stake in emerging markets. After acquiring international companies — the latest of which was the $430 million acquisition of Brazilian snack seller Parati in 2016 — an analyst with Stifel told Bloomberg that emerging markets represented about 15% of the company’s sales.
International investment has become such an attractive strategy,in the last five to 10 years, Hayllar said the rate at which companies are looking outside of their domestic markets has accelerated.
Companies with strong, consistent growth are primed for international investment, El-Rayes said. If there is any indication of weakness in an acquiring company's portfolio on its home turf, he cautioned, an international investment should be made with caution, if at all. International growth at the expense of an established domestic market can cause core components of a company’s portfolio to be put on the back burner, which can negatively affect a company’s bottom line, El-Rayes said.
Campbell Soup exemplifies this advice. Domestically, Campbell has been having a rough time financially and otherwise. In an effort to correct its course at home and give the company a clearer direction as it works to get its core divisions back on track, the CPG manufacturer is selling off its Australia-based Arnott's and Danish butter-cookie producer Kelsen Group. The segment that includes these brands has been performing extremely well, growing from $708 million in the first quarter of 2018 to $1.24 billion in the first quarter of 2019.
However, even for those who are financially secure at home, looking for growth opportunities abroad can lead to unexpected problems as a result of not fully evaluating potential issues there before an investment is made.
Expectations were high when Hershey announced it took an 80% stake in China’s Shanghai Golden Monkey chocolates and snacks business in 2014. Sales were expected to increase 40%, according to the company.
However, the sweet deal soured quickly. A year after the acquisition, the company's second-quarter earnings showed a net loss of almost $100 million, a steep drop compared to the prior year’s net income of more than $168 million. Part of the problem was a slowdown in the Chinese economy, but the biggest issue, said then-CEO J.P. Bilbery, was the distributor network was not as stable as Hershey believed.
It was such a big problem that the 2015 sales forecast was downgraded from $200 million to around $90 million. Due to what some analysts cited as a lack of prudence and due diligence in vetting the Chinese company and its supply chain, Hershey found itself saddled with payment collection and distribution problems that were already inherent in their Chinese acquisition.
To make matters worse, while they were struggling to even get their product to market and be paid, Hershey simultaneously found itself negotiating trade barriers between regions within the market and battling to build consumer preference for their chocolate.
Although the company tried to make ends meet by expanding chocolate distribution in the U.S., Hershey was unable to dig itself out of a financial hole for several quarters. Hershey quietly sold Golden Monkey to a Chinese company last year.
Other pitfalls for international investment abound. Some countries have much more institutional corruption than others. Brazil-based JBS SA, the world's largest meatpacker — which owns meat companies in several countries, including brands like Pilgrim's Pride in the United States — is a textbook example of corruption. For years, company executives in Brazil paid bribes of nearly $180 million to nearly 1,900 politicians through controlling shareholder J&F Investimentos. This resulted in scandal, a $3.2 billion fine and high-profile criminal charges — including for the owners of JBS and former Brazilian president Michael Temer.
Political instability is another risk that companies take when they invest abroad. Venezuela, which used to be one of the most lucrative markets in Latin America, has suffered under the rule of President Nicolás Maduro. In 2016, political tensions, corruption, high crime rates, restrictive investment law, lack of raw materials and interruptions in electric service forced Coca-Cola to suspend production in the country. In 2017, a similar set of circumstances prompted General Mills to severely curtail its local production. For Coca-Cola, the financial result of this foreign political turmoil worked out to a 112% increase in administrative and selling expenses compared to 2015.
Cut off from the outside
As the United States weathers a trade war with China, it may be difficult for many companies looking to expand into that valuable market to gain a foothold. At the same time, the pressure to make international investments is getting more pronounced as analysts predict a slowdown of the U.S. economy and the country’s borders are at risk of closing more tightly. By having an international arm of a business, companies can shield themselves from the potential fallout and use their foreign investments as a strategy for recovery and strong reentry into future markets.
“One of the advantages of building an international business is ultimately you reduce your risk exposure to any individual country having a difficult period,” said Hayllar.
Glendinning also agreed with this assessment. He explained that despite the rise in nationalism around the globe, countries should not balk at the idea of cross-border investments. By producing goods in another country, companies put themselves in a position to have their products seen as local, a designation that those who are keen on supporting manufacturing in their countries will likely approve.
Due to the nature of foreign direct investment, companies are often partnering directly with cities rather than countries. This arrangement is advantageous since not only are some individual cities wealthier than entire countries (a recent study by the McKinsey Global Institute showed that 75% of global GDP is currently generated in large cities) but they also often offer incentives to businesses.
Cities are home to populations that are generally more receptive to foreign entities. However, in Glendinning's experience, he said there has been little consumer pushback against international products.
“I don’t think a nationalism of consumer attitudes is playing through into limiting the potential for growth,” he said.
Still, the window to capitalize on this investment avenue is closing, since expanding internationally is easier when economies are booming and there is more access to capital. In good economic times, like the current environment, investors are more likely to take financial risks, and governments are more keen to offer tax incentives to companies to help grow a healthy economy.
"One of the advantages of building an international business is ultimately you reduce your risk exposure to any individual country having a difficult period."
Partner and head of the consumer goods practice, OC&C Strategy Consultants
When the economy contracts, this free flow of money and goods suddenly dries up. For companies, changing course becomes more akin to swimming against the tide.
Although the current state of affairs is favorable for international investments, according to this year’s National Association for Business Economic survey, analysts predict that the U.S. economy's momentum is fading, and there will be an economic downturn by the end of next year.
El-Rayes agrees there is only a year left for fundamental changes or big bets before the U.S. economy hits a slowdown. As such, the consensus among analysts seems to be if companies are looking to venture outside of U.S. borders and reap the rewards, the next few quarters will be the ideal time in which to make that jump.
Still, the impending economic dip will not be forever, assured Koerten.
“In terms of long-term, I think the outlook is still positive. I don’t expect a sort of a long term decline for packaged food,” he said.