Sept. 11, 2000

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IT: Always In Good Taste

Menu of E-business initiatives satisfy companies in slow-growing industry

By Beth Bacheldor

More on food and beverages:

Industry Charts: Food & Beverage (PDF file) sidebar: Better Cookies Built In Partnership With IT Internet Week Food Service Giants Form E-Marketplace (7/31/00) EETimes Purdue biochip screens for pathogens in real-time (7/17/00) Internet Week Dotcoms Vie For Recipe To Serve Food Biz (7/10/00)

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aybe it shouldn't come as any surprise that behind an industry that gives us everything from baby carrots to pork rinds, from seedless watermelon to chicken hot dogs, and from Grey Poupon mustard to green ketchup are companies whose business philosophies and approaches are every bit as diverse as the comestibles they foist upon us. But if a common thread runs through this highly diverse world of food-and beverage-processing companies, it's that they're desperately trying to find growth opportunities in a market that flatlined because of Americans' growing desires to eat outside of the home.

While the food-and beverage-processing industry has undoubtedly been a laggard in getting to know its customers and potential customers more intimately--and in marketing intelligently to them--there are signs that at least some of the companies cranking out things such as Cheez Whiz and frozen pancakes, custard-style yogurt and kiwi-mango drinks in disposable boxes, premade salads, and beef jerky are starting to get it.

And some are even getting IT. But for some food companies, IT remains almost exclusively a tenant of the back office, relegated to accounting and mundane organizational chores rather than being deployed as a customer-and market-intelligence tool that can help build opportunity, growth, new revenue, and new markets. In this overview of the food-processing business, we'll take a look at the good, the bad, and the ugly--or, perhaps more germane to the subject, the exquisite, the inedible, and the cheesy.

It's been a tough year for Chiquita Brands International. The produce company, known throughout the world for its bananas, reported a loss of $58 million last year, and the slump triggered a worldwide workforce reduction of 20%. Chiquita's IT staff was hit hard: Nearly a quarter of the department's employees were cut, and nearly all its supplemental contract staff was eliminated.

Not surprisingly, the overall IT budget was hit as well: In 1998, Chiquita spent about $30 million on IT--about 1.1% of its revenue. Now, the IT budget is less than 1% of revenue, or about $25 million.

"With all that said, the business is doing poorly, and our IT strategies are molded around that," says Kevin Ledford, senior director of information services at Chiquita. "We're trying to survive, lower our costs, and do everything we can in a discriminatory marketplace."

While not all food-and beverage-processing companies have been hit that hard, the industry is suffering. Financial analysts estimate the sector has grown during the last several years by a paltry 2% to 4% per year. "These are real sleepy markets," says Katie Streeter, a VP at BioScience Securities Inc., an investment banking firm. David Nelson, an analyst at Credit Suisse First Boston, agrees. "There's been a lack of volume growth due to a maturing population and because people are eating out more. Companies are struggling," he says.

The struggle is driving industry consolidation because companies can buy each other at rock-bottom prices. It's also forced a cap on IT spending--the average company in the food-and beverage-processing industry spent 1.49% of its revenue on IT in 1999, a change of only .08% from the year before, according to the Grocery Manufacturers of America and Computer Sciences Corp., the companies that produced the study. The industry association expects little change in IT spending between 1999 and 2000. That compares with 4% of total revenue spent on IT by all InformationWeek 500 companies.

Sometimes, though, struggle can pave the way for innovation, and IT executives in the food-and beverage-processing industry say change is imminent. "The conversation everybody has is that you don't want to be Amazon.commed," says Tyson Foods Inc. director of technical services Kevin Young. "Is there someone out there who will change how everything works? And the thought is still valid. How do we re-evaluate ourselves? As technology becomes more and more pervasive, how are we going to derive business value from all of this, to make all this better, cheaper, faster?"

For Tyson--and many of its competitors--many answers to those questions may come from the Internet. One of the hottest trends for nearly every industry is online marketplaces--electronic business-to-business ventures that bring buyers and sellers together to wring efficiencies out of supply chains, streamline procurement, and reshape markets. The food-and beverage-processing industry is no different; in July, Tyson joined with Cargill, Sysco, and McDonald's to form the electronic Food Service Network, or eFS Network. The marketplace will focus on the $150 billion U.S. and Canadian food-service distribution industry.

On an even grander scale, an industry association of food, beverage, and consumer-product companies began work early this year on an online marketplace that its creators hope will span the consumer packaged-goods industry, from suppliers to manufacturers to retailers. Backed by about 50 companies, the marketplace--called Transora.com--will offer participants procurement, vendor and product catalogs, online order management, supply-chain collaboration, and financial services, says Bill James, senior VP of industry affairs at the Grocery Manufacturers of America, which helped spawn the exchange.

Transora.com expects to begin operations this fall and next year hopes to offer collaborative planning, forecasting, and replenishment between manufacturers and retailers. "Such a connected supply chain has a huge promise," James says. "The purchase of Bounty paper towels in New York could signal the cutting of a tree in Washington."

One of the key players in the proposed eFS Network is Cargill, which a year ago decided to become a substantial player in online marketplaces. In addition to being a founding member of the eFS Network, the $47.6 billion marketer, processor, and distributor of agricultural, food, financial, and industrial products has been involved in the development of five other online marketplaces since the beginning of the year.

Cargill has a minority investment in Novopoint.com, a marketplace that links food and beverage manufacturers to their suppliers. It also has a stake in Rooster.com, an agricultural marketplace, and LevelSeas.com, a marketplace for the seaborne wet and dry commodity shipping business. Other ventures include a marketplace for the meat and poultry industry and a business-to-business marketplace for cotton, textiles, and fiber-related products and services.

An unexpected benefit from this early adoption has been a clear boost in morale and product-development ideas from involved employees throughout Cargill, including the IT organization, says Lloyd Taylor, corporate VP of IT at the privately held company.

"A lot of our Cargill employees are providing a lot of domain expertise to start these companies, and that's a very rewarding activity," says Taylor, who adds that these intense business-to-business initiatives have given IT a more visible corporate role. "That energizes everybody. They're much more enthusiastic about what they're doing because they see the immediate impact on the business."

Because IT is an enabler of the company's entire business strategy, Taylor says, the IT budget has increased fivefold since he came on board nearly eight years ago. As a result of that corporate commitment, not only in budget dollars but also shared vision of strategic relevance, IT helps Cargill move beyond being a provider of commodities to being a provider of customer solutions.

For example, Cargill offers a service to all of its farmers called AGHorizons.com, an extranet that provides farmers a range of information from weather reports to current grain prices. Farmers can log on to the site and customize it for their own region; they can even sell grain on the site if they choose. Several thousand farmers use AGHorizons.com, up and running for less than a year.

Venerable Kraft Foods Inc. is being anything but stodgy in its recent approaches to the Web. Late last month the company made an equity investment in E-retailer EthnicGrocer.com Inc., giving Kraft a stake in an online operation that sells ethnic foods and products to consumers and businesses. In turn, Kraft will share its supply-chain and quality-systems experience with EthnicGrocer.com. The partnership isn't Kraft's first such venture; back in March, the North American food business of Philip Morris Cos. made an investment in Food.com, an online site that offers content such as restaurant reviews and recipes, and lets visitors purchase food and even place orders for delivery and takeout from restaurants in a number of cities.

Kraft, which in 1999 brought in $17.5 billion in North American revenue and had an overall volume growth of 1.8%, uses its Web site, www.kraft foods.com, to share recipes--Kraft even E-mails new recipes to consumers on a regular basis--meal planners, monthly activities for kids, and even customizable grocery lists. Last year, consumers accessed 11 million recipes on the site and received another 9.8 million recipes by E-mail.

Tyson also leverages the Web to provide customers with more services. Two years ago, the $7.36 billion producer of chicken and poultry food products implemented what it calls the Broker Workbench, a system that lets brokers and independent dealers conduct business with the company via the Internet. "Once they clear security, customers can do any number of things: look at product specs, look at order status," says IT director Young. "We even have satellite tracking on the delivery trucks so customers can find out exactly where the order is."

While these advances in processes and communication will provide substantial benefits on the operational side to suppliers and customers, the entire industry needs to shake things up more aggressively in product conception and development, and the creation of new opportunities--what the IT world calls relentless innovation.

"What we need to do now is transformational growth," says the industry association's James. "We need to come up with the type of innovation inside of companies to spark new ideas and reasons for consumers to buy our products."

BioScience Securities' analyst Streeter says the food-processing industry needs to consider forming partnerships with pharmaceutical companies to develop foods that could, in effect, act as preventive medicines. Another potential growth area Streeter cites are organic food and soy products, both of which are growing at about 20% a year, which is an order of magnitude larger than the overall food sector.

In the meantime, though, companies throughout the industry are trying to build brand equity with consumers and business partners via Web connections and services. The Internet has also opened new doors that let food and beverage companies--companies whose immediate customers are retailers, distributors, restaurants and the like--directly market their goods to millions of consumers who visit their Web sites. Nabisco has three Web sites it uses primarily as an advertising medium to build better relationships with consumers. "We have to market and advertise to a consumer, even though we depend on someone else to distribute our products,'' says executive VP and CIO Doreen Wright.

But in a market segment like packaged consumer goods, with enormous volumes of small packages touching many hands over large distances, operations and logistics dominate the discussions as the drive for greater efficiencies and lower costs become paramount, particularly with sales growth so sluggish.

Chiquita has turned to the Internet to reduce communications costs with some 40,000 associates around the world, including more than 30,000 who live and work in Latin America, where the company grows its bananas. "You can't run a leased line to all these places," Chiquita's Ledford says.

With a mix of terrestrial, satellite, wireless, radio, and virtual private networking systems, the company can route payroll transactions, E-mail, and more to remote areas that four years ago didn't even have electricity.

But Chiquita's biggest project--one that's likely to net $1.2 million by reducing ongoing client PC support--is centralizing control of its PC operations. The company adheres to a standard desktop platform, which is a mixture of Microsoft NT and Novell print-and-file servers. Mandating standard desktops that employees can't change means updates will run more smoothly. "It prevents us from having to employ 30 people to do updates, and we can do application rollouts in minutes, as opposed to days and months,'' Ledford says.

Chiquita also implemented Citrix Systems Inc. application server software that lets client sessions run on a server. "People dialing in to the network where they don't have a dedicated line and only a 28.8 modem can now run full-blown applications," he says.

And like most companies in the food and beverage industry, Chiquita--in spite of the enormous financial pressures forcing it to limit most of its IT projects to tactical initiatives such as PC standardization--isn't going to sit back and watch E-business take off without participating. Key suppliers can directly access Chiquita's intranet systems to test product specifications; third-party brokers and customs offices can access Chiquita's internal tracking systems via the Web; and the company is exploring opportunities with online marketplaces.

Beyond the Internet, warehouse automation is helping food and beverage companies streamline product delivery. Shamrock Foods Co., which began as a small dairy in Tucson, Ariz., in 1922, now does more than $1 billion in sales annually and offers more than 16,000 different fresh, frozen, and specialty products to customers in Arizona and nine other states.

To handle such volume, Shamrock is wrapping up a project that will automate its new, 500,000-square-foot warehouse in Phoenix that serves a 500-mile radius around the city. The facility loads 150 trucks a night with as many as 100,000 cases of frozen and fresh food and canned goods.

The seven-story warehouse is sectioned into high rises that hold 70,000 pallets of goods; eight computer-controlled cranes move the food into the sections, and conveyor belts on each level move the food toward the trucks. "We simultaneously load 40 trucks," says Boyd Rice, CIO at Shamrock.

The warehouse operations are managed by SCT Corp.'s Adage enterprise resource planning system, which collaborates with a warehouse manufacturing software package from Manhattan Associates; the software combo was installed last year to replace a 12-year-old legacy mainframe system. The new configuration can handle a transaction load that often exceeds 64,000 order lines in only two hours.

The automated warehouse has propelled IT's importance at Shamrock up several notches. "We're still a brick-and-mortar company and the core of our business is distributing product to our customers and serving our customers," Rice says. "What's recognized is that IT is integral to that. Because of the level of automation, if the systems aren't available, we are shut down. And we work in an industry that can't afford shutdowns. These are highly perishable items in a just-in-time situation. If the delivery isn't made, the restaurant can't serve lunch."

A stressed industry often means consolidation, something Earthgrains Co. experienced firsthand. It recently completed the $625 million purchase of Metz Baking Co., which will increase Earthgrains' business by 50% and push its annual sales to $2.5 billion.

The acquisition, Earthgrains' sixth in about two years, puts constant demands on its IT staff of about 100 people, which includes outside staff and consultants. "We have to consolidate all the systems of the acquired companies into our systems," says VP of business systems Steve Brazile. "With acquisitions, we have to eliminate corporate offices, and part of that includes IT departments. We don't need two separate IT departments, and we don't want to have to support a number of differing computing platforms."

Until the bakery-goods company completes the IT integration of its latest acquisition, new projects are on hold. "Until we get them converted, we're in status quo position," Brazile says. "If a project was funded, each project has a business case and has to stand on its own, regardless of an acquisition. But in terms of getting new ones funded, those have to take a backseat."

One current project is to build an electronic procurement system for maintenance, repair, and operational items. "Our plan is to reduce the number of suppliers, negotiate purchasing contracts based on entire company volume, and then integrate the procurement system into our SAP application to streamline the procurement-to-payables process," Brazile says.

Ariba's E-procurement software is helping Earthgrains estimate how much it spends on supplies so it can negotiate better deals. "Until we had Ariba, we didn't know how many dollars we spent on what types of supplies," Brazile says. "Now we can actually predict how many staplers we'll buy, what types of tires we'll buy. And we can say, 'We can give you this much dollar volume now. In turn, what kind of volume pricing can you give us?'"

The company looks to use the system to purchase raw materials, such as corn syrup, sugars, flours, and even packaging materials. For the past four years, Earthgrains has input purchase orders into its SAP ERP system. From there, an electronic file was passed to the vendor detailing the amount and delivery date, and the vendor sent back an invoice.

Brazile and his team are building a Web site that is integrated with the ERP system; suppliers will check the Web site to monitor inventory levels, consumption history, and consumption predictions.

The new system, which Brazile says will be up and running in six months, will automate the creation of purchase orders, and vendors will be able to schedule shipments via the Web. Invoices will no longer be needed, because Earthgrains will pay on receipt for the supplies.

"The advantage is that suppliers will be able to schedule the shipments," Brazile says. "We'll let them come into our plant any time they want and drop off the shipment. They're able to offer us a lower price because of optimization of their fleet and they're able to better plan for delivery."

The drive to cut costs in a slow market, streamline communications with customers, build brand, and--most important--innovate, is giving IT a new role in the food-and beverage-processing industry. "That's really a shift I've noticed," says Tyson's Young. "I came to Tyson in 1987, and in 1987, IS was a necessary evil. Now here we are 13 years later, and things have turned 180 degrees."

Illustration by Jeffrey Fisher
Photogragh by Michael DeFilippo

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