industry/Business
Food companies fatten stake in chemicals Drawn by higher profits but with limited cash, food concerns mostly are taking the specialty route in chemicals So much for the outsiders, thought many chemical company men after oil companies stubbed their toe on a number of chemical investments in the 1960's. Among others, Du Pont chairman Charles McCoy is on record forecasting a slowed invasion into chemicals this decade. Lest the assumption become too comfortable, a major push into chemicals from the food sector is beginning to enliven the scene. The two leading chemical operators in the food world— Borden and Swift & Co.—have tightened up after a shaky time during the recent recession. Profitable chemical businesses are rising fast at General Mills, Quaker Oats, and Beatrice Foods. And a brand new thrust into chemicals comes from United Brands with its 30% slice of Foster Grant. Why don't these firms see any handwriting on the wall after the failures of others in trying to penetrate the chemical business? Foremost is that chemicals make more than twice as much money as food (see box). Beyond this, food companies have natural raw materials for starch chemicals and other chemicals. Food companies are also
Marusi: good third-quarter 10
C&EN Nov. 13, 1972
performance
tailor-made to market high-markup consumer chemicals, since food firms have huge distribution systems in place and plenty of retail experience. Another factor influencing the way food companies are getting into chemicals is the modest cash flow generated by food operations. This means that their entry into chemicals must be selective and specialty oriented. Mr. McCoy's prediction still makes sense for ordinary process companies. After a decade of entering chemicals from all corners, most outside companies now big in chemicals still can't match profits of basic chemical makers or even match profits of their own nonchemical operations (C&EN, April 24, page 9). Huge chemical write-offs in the past two years, scarcity of capital, and an unappetizing return on chemical commodities serve as a warning to would-be chemical investors. Nevertheless, the basic condition for nonchemical companies' looking at chemical diversification—higher profit margins—still applies for some industries. Notable among these is food. The history of food companies already in chemicals is checkered, but recently they are doing better. The two leaders in the field, Borden and Swift, with roughly $400 million and $300 million annual sales in chemicals, respectively, had troubled times in the late sixties. Borden's chemical sales climbed steadily, but profits fell from $39.1 million in 1967 to $30.9 million in 1971. This year, however, chairman and president, Augustine R. Marusi, notes much improvement. Earlier this month, he said the chemical division "came through with a strong performance" in the third quarter from "good demand and firmer prices." A major capacity boost has started in polyvinyl chloride. At Swift, the picture is much the same. The only major packer to keep its chemical stake intact after the recession (C&EN, Feb. 15, 1971, page 22), Swift stuck by agricultural chemicals even though they were weak. President Robert W. Reneker notes that this sector had not improved in the third fiscal quarter this year, ended in July. However, Swift's other chemicals, consolidated this month with agricultural chemicals, are making a "strong profit contribution." The smaller chemical operators among food companies have not faced massive reverses stemming from single markets soured in a general business downturn. They report good growth from their wide range of products. New-
est entrant into chemicals is United Brands with its purchase of a 30% interest in Foster Grant (completed last month), largely from a trust created by the late chairman, Joseph C. Foster. United Brands is a combine, largely of the old banana kingpin, United Fruit, John Morrell Packers, and Baskin-Robbins ice cream. Foster Grant chairman Edward Creiger says that he welcomes the monolithic financial interest from United Brands and adds that they have some board members in common. For its part, United Brands may welcome Foster Grant, since the latter's profit margin of 6% through nine months of fiscal 1972 can only improve United Brands' 0.8%. Encouragement for United Brands in
Profits from chemicals attract food firms . . . Percent8 10 8 Basic chemicals 6 4 Food ?" 0
1964
1966
1968
1970
1972b
. . . but they can't splurge on chemicals as oil firms did
Food sales are bigger
li Food
Oil
Food
Oil
Earnings are smaller
|^M Cash flowc is also smaller Food
Oil
Note: All data for bar charts for fiscal 1972 and in billions of dollars, a After-tax profits as per cent of sales, b First six months, c After-tax profits plus depreciation. Source: Federal Trade Commission
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At a security analysts meeting in New York City in October, the parent com pany called profit margins in its manu factured products and services area, which includes chemicals, "a delight to any food producer." Although the company performs bet ter than the food industry as a whole (the firm is one of only six on the New York Stock Exchange to increase sales and earnings 20 years running), Beatrice still made just 3.3% after-tax earnings on sales of $2.38 billion in fiscal 1972 ending last Feb. 29. Return on chemicals, on the other hand, is several times this per centage. Beatrice's management, headed by chairman William G. Karnes, operates a highly decentralized array of more than 350 profit centers, 15 in chemicals. The company is intensely market-cen tered and consumer-oriented and counts Wechsler: mammoth specialty products on volume increases for its primary earnings thrust. The pressure for sales growth has its new venture should come from Gen eral Mills, which has built up sales, and made the company very distributionparticularly profitability, of its specialty minded on a global scale. Acquisitions chemical business in the past five years. play directly into this pattern, fre Though sluggish for the recessionary quently leading a regional company into period, chemical sales spurted 22% to a national or international marketing $46.9 million in the fiscal year ended in thrust. May. Operating profits rose a spectacu Growth through acquisitions is guided lar 65% to $5.1 million after earlier in by certain other principles. Beatrice creases drove operating profit as a per snoots for companies leading their fields cent of chemical sales from 5% in 1968 with the idea of controlling these fields. to 11% in 1972. It favors specialty producers, shies away General Mills' chemicals are all spe from debt-financing, and does not sub cialties. One big thrust has been its vita scribe to the conglomerate theory of min Ε production. But the company buying anything and everything. also makes numerous other synthetics, Beatrice uses this same strategy in especially resins. chemicals, treating chemical operations Another example of rapid growth in not as by-products of food businesses or chemicals is Quaker Oats. Its sales of steps in backward integration but as a chemicals, largely by-product furan diversification move for future growth. products, have grown more than twofold The different chemical profit centers in since 1967. In fiscal 1972, ended in June, leather chemicals, floor-finish materi the company chalked up another gain of als, fabric coatings, and the like have 16% to $44.9 million in chemical sales. their own business goals and push for Although Borden pioneered the con their own international expansions. cept of food companies' treating chemi A quick rundown of Beatrice Chemi cals as a large, separate investment, it cal operations by president Louis E. lost its chemicals chief this year to an Stahl gives strong hints of how this ag other fast-rising chemical force in the gressive enterprise is positioned ι in the food industry, Beatrice Foods of Chi chemical industry's future. President cago. Last winter, Dr. Harry C. Wechsler Stahl's father gave his name to the old joined the highly successful Beatrice est part of the division, Stahl Chemi Chemical division as executive vice cals, for finishing leather and other president and chief operating officer. products. Stahl is the world leader in The division consists of several specialty leather and related coatings with much businesses. It is headquartered in Wil of its business overseas. Besides the in mington, Mass. ternational flavor, Stahl also fits the Beatrice provides a microcosm of the Borden pattern of involving itself deeply food industry's outlook on chemicals. It in its markets through fashion and tech is one of the first off the mats in the cur nical service to customers. Beatrice Chemical makes its own polymeric ma rent investment wave. What Beatrice has in mind is swift terials, mainly acrylates, urethanes, growth of its newly consolidated chemi and vinyls from monomers purchased cal operations, now running $46 million in the merchant market. a year in sales. Currently, internal Allied businesses are Paule Chemical, growth is about 15% per year. This will which makes finishes for shoes, and increase to 25% and be complemented Permuthane, which makes some leath vigorously by acquisitions. First target er-finished materials but devotes most —but only the first—is $100 million in of its efforts to urethane fabric coat chemical sales by the mid-1970's. ings (for example, the "wet look" in Beatrice makes no bones about why it fashion). A fourth chemical segment, is in chemicals or how it plans to grow. Polyvinyl Chemicals, was started as a 12
C&EN Nov. 13, 1972
captive resin source for acrylics but now has most of its market in fields such as vinyl floor polish materials. Two other businesses in paints and lubricants complete Beatrice Chemical for the moment. Farboil Co. in Balti more makes marine coatings and is a leader in developing powdered thermo plastic coatings. Imperial Oil & Grease sells specialized lubricants for mining and other equipment operating under heavy stress. For the future, Dr. Wechsler says, "We want to develop, you might say, mammoth specialty products. We want to acquire giants in their field. If these happen to be specialties, we'll take them." He is edgy about the label of a chemical specialties outfit for Beatrice, since he is not interested so much in a mass of miscellaneous chemicals as in high-technology, high-value-added mar ket leaders. Nevertheless, Beatrice will certainly avoid large investment in chemical commodities such as large-volume thermoplastic resins. Dr. Wechsler says Beatrice will be basically different from the oil companies that plowed huge cash flows into chemicals in the 1960's. Food
Creiger: welcomes United Brands companies, he points out, consider their cash flows precious, have low debt, and behave as conservative investors. By definition, Beatrice Chemical will have to move into new fields, since it is already a large factor in its present mar ket. Although Dr. Wechsler will not rule out a move into some organic intermedi ates, he is more open to expansion into fabricated items to get the high value added at the consumer end of the manu facturing chain. The present approach used by Bea trice Chemical and other food com panies' chemical operations will indeed set a new example of how to move into chemicals from the outside. To date, this approach has brought about rapid growth and high profits through empha sis on performance-oriented premiumpriced specialties.
