Hormel Foods

Company Profile
Publication Date: 25 Jun 2008

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TABLE OF CONTENTS

TABLE OF CONTENTS
Company Overview..............................................................................................4 Key Facts...............................................................................................................4 SWOT Analysis.....................................................................................................5

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Hormel Foods
Company Overview

COMPANY OVERVIEW
Hormel Foods Corporation (Hormel Foods) is a multinational manufacturer and marketer of consumer-branded meat and food products. In addition, the company also manufactures and distributes branded, value-added consumer items. The company operates in the US, Australia, China, Canada, Japan, Korea, Mexico, the Philippines and Vietnam. It is headquartered in Austin, Minnesota and employed about 18,500 people as of October 28, 2007. The company recorded revenues of $6,193 million during the fiscal year ended October 2007 (FY2007), an increase of 7.8% over FY2006. The operating profit of the company was $483.9 million during FY2007, an increase of 7.4% over FY2006. The net profit was $301.9 million in FY2007, an increase of 5.5% over FY2006.

KEY FACTS
Head Office Hormel Foods 1 Hormel Place Austin Minnesota 55912 USA 1 507 437 5611 1 507 437 5129 http://www.hormel.com

Phone Fax Web Address

Revenue / turnover 6,193.0 (USD Mn) Financial Year End Employees New York Ticker October 18,500 HRL

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SWOT Analysis

SWOT ANALYSIS
Hormel Foods (Hormel) is engaged in the production and marketing of a variety of meat and food products. It has a strong focus on research and development activities as a part of its strategy for extending existing brands and expanding new ones. This would thus help the company to establish a competitive advantage. However, increasing commodity costs would adversely affect the company's profit margins. Strengths Broad and diversified portfolio Strong focus on R&D Robust financial performance Opportunities Higher demand for organic products Growth in private label Growing Chinese market Weaknesses Dependence on few customers Geographic concentration

Threats Increasing commodity costs Regulations Shift to vegetarianism

Strengths

Broad and diversified portfolio Hormel Foods is engaged in the production of a variety of meat and food products. In addition, the company also manufactures and distributes branded, value-added consumer items. The company operates in five divisions, including grocery products, refrigerated foods, Jennie-O Turkey Store (JOTS), specialty foods and all other. The companys refrigerated foods division consists primarily of processing, marketing, and sale of branded and private label pork products for the retail, foodservice and fresh customer markets. The company processes, markets, and sells branded and unbranded turkey products to the retail, foodservice and fresh customer markets through its Jennie-O Turkey Store (JOTS) division. Furthermore, through its grocery products division the company is engaged in the processing, marketing, and sale of shelf-stable food products sold predominantly in the retail market. The companys specialty foods division consists of the packaging and sale of various sugar and sugar substitute products, salt and pepper products, dessert mixes, gelatin products, and private label canned meats to retail and foodservice customers. This division also includes the processing, marketing, and sale of nutritional food products and supplements to hospitals, nursing homes, and other marketers of nutritional products. The companys all other division includes the Dan's Prize

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SWOT Analysis

and Hormel Foods International operating units which produce, market, and sell beef products and manufacture, market, and sell company products internationally. As a result of having a broad product portfolio, Hormel Foods has a diversified stream of revenues. For the FY2007, refrigerated foods segment contributed 52.8% of the total revenues, followed by the Jennie-O Turkey Store segment (18.8% of 2007 revenues), grocery products (14.2%), specialty foods (11.2%) and others (3%). A broad and diversified business portfolio of services not only enhances market share of the company across various markets, but it also gives a diverse revenue stream to the company. This in turn limits the companys exposure to the risks associated with a particular segment. Strong focus on R&D Hormel continues to invest and increase its research and development activities as a part of its strategy for extending existing brands and expanding new ones. There are numerous patents and trademarks that are important to the companys business. It also holds seven foreign and 48 US patents reflecting its strong R&D focus. The expenditure on research and development for fiscal 2007, 2006, 2005, and 2004 was approximately $21,475 million, $18,631 million, $17,585 million and $15,944 million, respectively. The company employs 79 R&D professionals in full time research; 36 of whom work in the area of improving existing products.The remaining 43 contribute in developing new products. The return received from the companys ongoing investment in research and development was evident during fiscal 2007, as Hormel Foods reported total sales of $6.19 billion with more than $1 billion generated from products introduced since FY2000. Strong focus on R&D would thus help the company to establish a competitive advantage. Robust financial performance Over the years, the company has recorded a robust financial performance. The revenues of the company increased at a CAGR (20032007) of 10% to reach $6,193 million during FY2007. The profits of the company showed a similar trend due to the increasing revenues. The operating profit of the company increased at a CAGR (20032007) of 12% to reach $483.9 million in 2007. The net profit of the company increased at a CAGR (20032007) of 13% to reach $301.9 million in 2007. Furthermore, the companys return on invested capital improved from 11.9% in 2003 to 13.5% in 2007. Robust financial performance enables the company to expand, consolidate and manage its operations well. It also increases the financial flexibility of the company.

Weaknesses

Dependence on few customers

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Hormel Foods
SWOT Analysis

Hormel's five largest customers in each segment contribute a significant percentage of sales. In FY2007, these five customers accounted for 40% of grocery products, 35% of refrigerated foods, 40% of Jots, 34% of specialty foods, and 21% of all other. The loss of one or more of the top customers in any of these segments could have a material adverse effect on the results of the concerned segment, which, in turn, would adversely affect the company's financial position. Moreover, if these businesses are not able to purchase their products on favorable terms from the company, then the company may be not be able to find suitable alternatives to sell their products in time. The company because of this arrangement is prone to loss in sales and market share. Geographic concentration The company's operations are concentrated in the US. In FY2007, the US accounted for about 95.9% of the total revenues of the company. Concentration on the US market could have a dampening effect on the company's revenues if the economy and/or the companys sales in US do not grow as expected. According to the latest Nielsen Global Consumer Confidence Survey conducted in June 2008, the consumer confidence in the index in the US, grappling with the subprime crisis and other problems, nosedived 17 points. The US economy has been in the midst of a prolonged economic slowdown in the face of the ever-worsening economic environment, marked by rising inflation and interest rates, the subprime and credit crises, and fickle stock markets. On top of it, the meat and food products segment is highly competitive in the US. The companys largest domestic competitors for its refrigerated foods segment are Tyson Foods, Smithfield Foods, and ConAgra Foods; for its grocery products segment, the competitors are ConAgra Foods, Pinnacle Foods, and Campbell Soup; and for Jennie-O Turkey Store, the competitors include Cargill Foods, and Butterball. Thus, a high dependence on the on US is an obstacle in the company's effort to boost its top line growth.

Opportunities

Higher demand for organic products Natural and organic food products segment is one of the fastest growing categories in food retailing. There is an explosive growth in the demand for organic foods because of the increasing preferences among consumers for healthy food. The US, Germany, and the UK would be the key geographical areas of growth for the organic food market. The US organic food market grew by 12.3% in 2006 to reach a value of $15.9 billion. The US organic food sales are expected to reach almost $24 billion in 2010. The organic food market in Germany is anticipated to grow at a CAGR (20072011) of 12%. Japan will be the leading Asia in terms of organic food market revenue and its market is anticipated to grow at a CAGR (20072011) of 29.8%. In order to cater to the growing consumer preference for natural, healthy and low fat products, the company launched Hormel Natural choice products in 2006 made with all natural ingredients, without preservatives, artificial colors or flavors. Further, the Hormel Natural Choice product line offers

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SWOT Analysis

nutritious and flavorful products, such as deli sandwich meats, turkey breasts and hams, which appeal to a range of consumers. Products such as Hormel refrigerated entrees offer consumers, convenient choices that are healthy, fully cooked and seasoned. Increasing customer preference for organic foods would thus favorably impact the company sales. Growth in private label products Private label products in the US are witnessing a strong growth in sales. Private labels have been growing at twice the rate of established brands over the last 10 years. In 2006, the US private label industry was worth a sales value of $114 million. Private label accounted for 23% of food sales and 7% of drinks sales in the US in 2006. Sales are forecast to grow at just over 3% per year to top $56 billion by 2011.Private label brands provide higher margins than branded products. Hormel also offers processed meat products under private label brands, apart from its branded products. Increased acceptance of the private label products will have a favorable impact on the company's revenues. Growing Chinese market Food market in china would witness strong growth in the years to come. The market would grow phenomenally from over 450 million in 2000 to nearly 970 million by 2050, a whopping growth of 115.6%. Chinas middle class market is as large as the total US market. Chinas income has grown by more than 10% per year over the last decade and is projected to continue to grow by at least 8% annually over the next decade. This robust growth coupled with a growing population will result in chinas demand for food increasing rapidly over the next decade. Hormel Foods has established a significant presence in China. In 2007, Hormel Foods was designated as the processed meats supplier to the Training Bureau of China State Sports, where the Chinese Olympic athletes train. Furthermore, the company opened an idea and innovation center in China in February 2008. The new center is devoted to creating innovative new products for Chinese consumers. The growing Chinese market would thus fuel the revenues of the company and in turn boost its profitability.

Threats

Increasing commodity costs Hormel Foods depends on commodities, which are subject to price fluctuations, such as corn, cocoa, soybean meal, soybean oil, wheat, dairy and natural gas, for its production. In the recent years, increasing global warming has driven countries to prefer biofuels to fossil fuels. In the US, ethanol has emerged as the principal alternative fuel and corn is the main ingredient of ethanol. In January 2007, the US President proposed to increase the mandatory alternative fuel use from 7.5 billion

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SWOT Analysis

gallons in 2006 to 35 billion gallons by 2017. This trend has increased the price of a bushel of corn from $1.86 in 2005 to $4 in January 2007. Further, the price of a bushel of corn reached $6 in April 2008. The WTI crude oil prices in 2006 were $66 per barrel in 2006, up by 16.9% compared with 2005 prices. Furthermore, the WTI crude oil prices increased to $139 per barrel in May 2008. Increasing commodity costs would adversely affect the company's profit margins. Regulations As a food processor, the company's operations are subject to extensive regulation by the US Department of Agriculture, the US Food and Drug Administration, and other state and local authorities that oversee food safety standards and the processing, packaging, storage, distribution, advertising and labeling of the company's products. The company's manufacturing facilities and products are subject to regular inspections by federal, state and local authorities. Claims or enforcement proceedings could be brought against the company in the future. Additionally, the company is routinely subject to new or modified laws, regulations, and accounting standards. The company's failure or inability to comply with such requirements could subject the company to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions, which may impact the business of the organization. Shift to vegetarianism Rising health awareness among consumers is leading to higher demand for low carbohydrate and low calorie foods worldwide. This has resulted in increase in demand for vegetarian food. The total vegetarian-food market segment in the US is worth about $1.2 billion. Sales of substitutes for milk, meat, eggs, and cheese, as well as frozen entrees and side dishes reported a 64% sales increase over 2000. The overall vegetarian food market is expected to grow to over $1.7 billion by 2010. People in the US and Europe are shifting their dietary priorities from non-vegetarian to vegetarian food at a fast pace. The increasing popularity of vegetarian food could have a negative impact on the company's poultry and meat sales.

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