CPGs, Restaurants Shift Capital Spending Overseas

Major packaged food and beverage companies and restaurant chains alike are shifting more of their capital expenditures overseas, in line with their increasing emphasis on realizing growth through developing markets, confirms a new U.S. corporate capital expenditures report from Fitch Ratings.

Gross capital expenditures for combined food, beverage, restaurant and tobacco companies declined 5.6% between 2008 and 2009 (data excludes Kraft Foods' recent Cadbury acquisition), to $20.2 billion.

The decline primarily reflected the restaurant sector's pullback on new-unit expansion during the recession. Restaurants overall -- and particularly casual dining and highly leveraged chains -- reduced capital spending as they encountered downward pressure on same-store sales, according to Fitch.

Fitch projects that combined expenditures for food and beverage firms, restaurants and tobacco will rise 3.7% to $20.9 billion in 2010 as the economy begins to recover, and 2.7% in 2011.

In the restaurant sector, Fitch's analysts note that while moderate capital expenditures are possible for some operators, a ramp-up in new-unit development is not expected this year.



However, like food and beverage companies, fast-food restaurant chains see substantial growth opportunities in foreign markets. In fact, because of these opportunities, restaurants' capital expenditures as a percentage of sales are higher than CPGs, say the analysts.

For example, Yum Brands is planning a significant capital expenditure increase this year for international expansion, including an ongoing push to "build leading brands across China," Fitch reports.

Yum had nearly 3,500 KFC restaurants in China as of year-end 2009 and grew profits there by 25% last year, despite a slight downturn in same-store sales, according to the corporation's annual report.

In 2008, profits in China rose 28%. According to one restaurant reviewer, Yum has modified KFC's menu "quite radically" to suit the tastes of the Chinese. (So attached to KFC are the Chinese, in fact, that protest mobs descended on the restaurants last month after the chain announced that it had canceled a special promotion offer because unauthorized coupons were being presented.)

While capital expenditures for mature packaged goods companies typically remain fairly consistent at 3% to 4% of sales, a few key companies have indicated a need to expand manufacturing capacity or build new facilities, reports Fitch.

These include General Mills, Inc. -- which is increasing its manufacturing capacity expansion in several categories, including yogurt and cereal -- and ConAgra Foods, Inc., which is expanding its sweet potato business by building a new plant, according to the report.

Meanwhile, the retail sector's capital expenditures reflected last year's depressed sales trends. Expenditures among Fitch-rated U.S. retailers declined 12.4%, on top of an even more significant decline of 18.1% in 2008.

Fitch projects modest 2.6% retailer cap-ex growth this year. While retail sales are improving, continuing uncertainty about consumer purchasing behavior is causing retailers to focus on lower-cost store remodeling as opposed to opening/building new units, and lack of new mall construction is also inhibiting some retailer expansion, the rating service reports.

On the upside, the same lack of new construction may be fostering growth among certain types of retailers -- such as dollar stores and other small, in-line mall retailers -- because it has enabled them to procure new sites more readily and at lower costs than in the past, Fitch points out.

Aggregate capital expenditures for the total 308 U.S. corporations tracked/rated by Fitch dropped 16.6% last year, reflecting significant spending cutbacks driven by revenue declines.

Among the top 10 largest capital-spending U.S. corporations, seven slashed these expenditures, most by double-digit percentages. The three that increased spending were Walmart (up 6%), ExxonMobil Corp. (up 16.4%) and Chevron Corp. (up 0.9%).

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