Seneca Foods Corporation overview and operations

Seneca Foods was founded in 1949 and is a producer of canned, frozen and bottled foods for the supermarket trade, often under store labels. In 2013, Seneca posted $1.27 billion in sales and net income of $41.4 million. The company is in the mature stage of growth for both itself and the industry, growing mainly with increases in population and inflation. The company's operations are subject to variability from weather, which affects the crops at the heart of the supply chain, and the seasonality of the industry.

Internally, Seneca has a strong supply chain, wherein it contracts with farmers to ensure supply of critical fruits and vegetables for its products. That said, Seneca remains quite small compared with many of its competitors, as Seneca mainly sells in the U.S. And has few major brands. Larger competitors sell globally and have individual brands as large as Seneca's entire operation. One of the other key strengths of Seneca is its seeds. The company acquired a seed facility and this has allowed Seneca to maintain control over its seed stock, some of which is now proprietary.

The current problem facing Seneca relates to the maturity of the industry and intense competition from larger companies. These factors are driving down the price of the goods that Seneca produces, and this has created a situation where over the long run the company's margins are being squeezed. This is reflected in the company's financial results. Most major measures, from revenue per share to ROE, have declined in recent years. The company is eyeing a growth strategy to accomplish a couple of things. One is to bring it into markets with more growth potential or at least the potential to expand margins, and the other is to bring some positive returns to the shareholders.

Mergers and acquisitions is the primary driver of growth in mature industries, and for that reason Seneca is targeting M&A as a strategy for its own growth. There are risks to this strategy, however, and many mergers and acquisitions fail to deliver positive shareholder value. The company has also explored diversification as a growth strategy, but there are risks in moving too far from a company's core business. A third option is that Seneca can expand into overseas production in order to lower the costs in its supply chain.

It is recommended that Seneca Foods look to offshore production contracts in order to lower costs throughout its supply chain. This tactic fits with the company's overall competencies that is has already developed. This strategy is not without its risks -- it requires doing some things in which it has no experience -- but provides genuine growth opportunity and more correctly aligns core competencies with strategy.

Company Background

Founded in 1949, Seneca Foods is a food processing company that primarily makes canned, frozen, and bottled fruit and vegetable products as well as snack chips, sauces and gravies. The company has 21 processing centers located in the Northeastern, Midwestern, and Northwestern regions of the United States and "currently contracts with approximately 2,000 local vegetable growers for over 200,000 acres and up to 175 fruit growers for over 10,000 acres." ("Farming Operations") Products offered by Seneca Foods come under the labels of Libby's, Aunt Nellie's Farm Kitchen, Stokely's, Read, Festal and Blue Boy. In the year 2013, Seneca Foods posted net sales of $1.27 billion, an increase of 1.5% over the $1.25 billion in sales in 2012. ("Seneca 2013 Annual Report") However, while sales increased only 1.5%, the overall earning posted by Seneca reached $41.4 million in 2012; and increase of 267.9% from its 2012 profits of just over $11 million. ("Seneca 2013 Annual Report").

Seneca Foods Corporation is a food processing company that realizes 99% of its net sales comes from food processing. At the end of the 2011 fiscal year, the canned vegetables represent 72% of the company sales, frozen fruit represents 11% and fruit products represents 16%. However, non-food processing sales represent 1%, and the company realizes 10% of its net sales from its brands at the end of the 2011 fiscal year. Recently, the company is facing challenges to record growth because of changing in people's food habits. Typically, the company is recording lower earnings and sales because of the decline in the selling prices of the company's core commodities. For example, the revenue per share declines from $167.2 in 2009 to $113.7 in 2013. Moreover, return on equity (ROE) declines from 11.28% in 2013 to 3.50% in 2014. The company net margin declines from 3.24% in 2013 to 1.03% in 2014. Typically, the company is facing challenges to keep its costs down because the costs of goods sold keep rising year after year. Seneca Foods is required to design a growth strategy to increase profitability. The paper evaluates the alternative growth strategies that Seneca Foods can consider.

Mission, Vision and Value Statements

Seneca does not label any specific mission, vision or value statements. They do provide similar statements, however, on their website. The following can be considered a mission statement:

"At Seneca, we believe that everyone deserves year-round access to great-tasting food that's also great for you. That's why we're bringing families and organizations all over the world real food that's nutritious, affordable, and delicious."

("About Us," Seneca.com)

The following statements provides insight into the values that drive the company:

We source the majority of our high-quality fruits and vegetables from over 3,000 American farms in order to support agriculture and employment here in the U.S.A. Since our first days in 1949, we've been dedicated to our fantastic customers, growers, suppliers, and to each and every one of our 3,500 loyal employees.

("About Us," Seneca.com)

Environmental Scan

As Seneca Foods primarily sells fruit and vegetable products, the company is wholly dependent upon the climate and weather for the amount of produce grown. In fact, the weather is probably the most important external factor that affects Seneca Foods and it's profit potential. As the weather is beyond the control of the company, but still affects the company's decision making process as well as its plans for the future, the weather can be considered the company's most important external factor in terms of its remote operating environment. If the weather is good, for example, crops will be abundant and the company can make its decisions based on the abundance of produce. On the other hand, if there is a drought, or the weather is bad in some other way the crops will be poor and the company must factor this into its decision-making. In either case, the weather is completely out of the control of the company and Seneca Foods is at its mercy.

As for the most important factor in terms of the industry environment, the seasonal cycle is the one factor that affects and regulates all growers, packers, and distributors of agricultural produce like Seneca Foods. There are four quarters in a company's financial year but as the first and fourth quarters coincide with winter in much of the United States, a time not conducive to agricultural production, Seneca's net sales drop accordingly. In 2013, Seneca Foods posted only $231 million in sales in the first quarter and $274 million in the fourth. But the second and third quarters are prime agricultural production time with 2013 net sales of $317 million and $452 million respectively. ("Seneca 2013 Annual Report") And since all agricultural producers in the United States are limited by the same seasonal cycle, the seasonal cycle is a factor that affects and regulates all in the industry.

Operating Environment

Because Seneca Foods produces and sells agricultural products, and because these products are dependent upon the weather and seasonal cycle, both of these related factors can be considered the most important factors affecting the external operating environment. These factors not only influence Seneca Food's activities and choices, but also its opportunities and risks for the future. Season and weather affect the overall output of agricultural produce and determines which products are needed in what form to best meet projected sales. This in turn influences the company's choices in terms of production and promotion as well as the company's opportunities for expansion into new markets or the promotion of new products.

Internal Strengths and Weaknesses

But when it comes to internal strengths, Seneca's greatest strength comes from its farming operations. The company has contracted with fruit and vegetable growers across the nation in such states as California, Idaho, Illinois, Minnesota, New York, Pennsylvania, and Washington. This allows Seneca to follow the seasonal patterns across the nation and continually produce all year round. It also allows for a more diversified number of products as different regions specialize in different produce. And by having growers near to the production facilities, produce can be processed quicker and maintain freshness. However, as farms are completely dependent upon the weather, farming operations can also be a major weakness for Seneca. While some weather can be alleviated, for example sprinklers can help in droughts, unpredictable weather can have disastrous effects on agricultural production.

Competitive Position

Seneca Foods may make over a billion dollars in sales each year, but in terms of its competitors it is a relatively small operation. In comparison with other food processing companies such as Kraft, General Mills, or ConAgra, Seneca has captured only a small percentage of the market. For example, Kraft Foods posted net revenues of $18.3 and earnings…of $2.5 billion. ("Kraft 2013 Annual Report") And while Seneca may not be one of the giants in the food processing industry, it does have substantial room for growth and expansion. From the 1950's to the present, Seneca has continually expanded its operation most recently acquiring the assets of UniLink and Lebanon Valley Cold Storage in order to create an eastern distribution point for its products.

Seneca Foods has been very smart in its acquisition of assets over the years. This has led to a structure that has benefited the company and aided in its profit making. Seneca Foods has structured itself in order to acquire everything necessary to produce processed food. All agricultural production requires the highest quality seeds and Seneca begins its structure with a seed research and breeding center. In other words it makes its own seeds. Then these seeds are grown on either contracted or Seneca-owned farms and, when harvested, sent to a Seneca-owned regional processing center. Regional processing centers, "strategically located throughout the country" assure the freshest and best tasting product. ("Retail") And with farming centers located throughout the country, Seneca is able to offer fresh fruits and vegetables to customers nationwide all through the year. Finally, in order to market these products, Seneca owns a number of regional, national, and international brands through which the company markets its products accordingly. Seneca controls almost every aspect of the production of processed foods from the seeds to international marketing and this corporate structure allows for a more efficient means of production and distribution of their products.

For more than 60 years Seneca Foods has slowly expanded from small operation making frozen concentrated grape juice for Minute Maid to a major food processing company owning a number of labels and selling their products worldwide. In that time Seneca has accumulated the facilities necessary to control their entire operation; from seed to store. But while it has grown and expanded continually for more than six decades, it is still a relatively small player in the overall industry.

Seneca competes as a cost leader, often offering its goods as store brands, but also using some of its own brands as well. Firms with this competitive position usually benefit from economies of scale and strong supply chain management. Seneca's relatively small size compared with its competitors puts it at competitive disadvantage -- only because most competitors compete with pricier brands can Seneca succeed. However, its margins are going to be lower than industry average and because of that it needs either size or a low cost supply chain to thrive. The supply chain reflects the company's commitment to working with American farmers, but this is not a low cost option. The low cost option sources raw materials from all over the world. Tight control over the raw materials end of the supply chain is usually an essential for companies that require premium quality inputs as a source of competitive advantage. That would imply that Seneca utilizes premium branding. In other words, it is using its supply chain advantage in the wrong way, and this is in part why its margins are being squeezed.

Review of Strategies

One of the strategies that Seneca Foods can consider to achieve growth is to embark on the aggressive merger and acquisition of smaller and sister companies. Typically, Seneca Foods could enjoy a superior growth by embarking on the acquisition alliance. Organizations across various industries have embarked on various forms of strategic alliances as well as merger & acquisitions. These strategies have been used to bridge technology and resources gaps, obtain expertise as well as achieving market positions quickly that could have been done through internal development. The merger and acquisition is very advantageous when an organization is attempting to enter the new industries. Despite the extensive use of these strategies, the expected benefits are smaller than their failures. A report published by the Business Week (2000) shows that 61% of alliance meets an outright failure. Moreover, merger and acquisition carried out between 1990 and 1996 failed to deliver substantial returns to shareholders. A study carried out by the PriceWaterhouseCoopers (1999) on the merger and acquisition between 1994 and 1997 showed that two-thirds of the company stocks dropped following the announcement of the acquisition alliances. Major reasons for the problems include unrealistic expectations, conflicting corporate cultures, and paying too much for the alliance.

Diversification as a Strategy

Diversification is another strategy that Seneca Foods can consider to record a growth rate. The diversification into a new sector will allow the company to enter the interesting new market and achieve the market advantages. Mitchell, (2013) differentiates the diversification from concentration strategy. A diversification is a strategy that allows organizations to enter into other line of business. On the other hand, concentration strategy is a line of business that allows an organization to focus on the existing line of business. Organizations can employ a concentration strategy when it does not face a serious threat within the industry. However, diversification is an option that an organization can employ if facing stiff competition within the industry. Since Seneca Foods is facing stiff competition from the local and international companies, diversification strategy will be the best for the company to follow.

Best Generic Strategy, Value Discipline, and Grand Strategy

Porter (1996) argues that a firm is able to grow its competitive advantages based on the values it is able to deliver to buyers. Typically, a firm delivers values when the values are higher than the costs of creating the values, which assists the company to achieve competitive advantages in the industry. Cost leadership and differentiation are the grand strategies that Seneca Foods could employ to achieve competitive market advantages within the industry. One of the strategies that Seneca Foods could employ to achieve a cost leadership is by sourcing for the cheap and quality product materials. The company could also use the differentiations to achieve a grand strategy and deliver value to its customer. Moreover, the company should choose one of the following value disciplines to achieve competitive advantages:

Customer intimacy,

Operational excellence, and Product leadership.

More importantly, the company can also use the following tools to achieve differentiation to achieve a market advantages:

New product introduction,

R&D,

Licensing vs. production,

Pricing,

Advertising, and Regulation.

The implication of this is interesting for Seneca. The company can expand, but if it is not approaching the business in the right way, such expansion may not be the best choice for the company. Right now, Seneca is not differentiated much, either in its brands or its food. Having high quality inputs is all but meaningless in processed food, because the processing obfuscates the marginal differences in raw material quality -- canned foods taste like canned foods, not high end agricultural products. Because of this, differentiation in the food business is usually done on the basis of branding, and this requires extensive marketing support. It is doubtful whether or not Seneca has the money or the experience to pursue this strategy, since it has never really pursued this strategy before. This leaves Seneca with the pursuit of operational excellence, which it seems to have, as a cost leadership strategy.

Recommendation of a Strategy or Combination of Strategies for Seneca Foods

The paper suggests that the company should embark on merger and acquisitions. Although, some organizations have recorded failure in the acquisition alliance, however, diligence investigation of market, market research, industry and financial analysis of the new markets can assist the company to enjoy benefits from the acquisition alliance. The records of the past acquisitions that Seneca employ reveal that the company records an increase in revenues from the alliances. Over the years, the company has emerged intact and stronger with the numerous acquisitions employed. Some years back, the company embarked on the acquisition of the market segment that fits its overall strategic directions. In 2011, the company completed the acquisition of Unilink, and Lebanon Valley Cold Storage, which has become the potential revenues for the future growth. For example, the acquisition of Unilink represents 7.4% increase in the company revenue. Thus, Seneca Foods will realize an increase in the future growth if the company should continue embarking on the acquisition of the rival and small companies.

Seneca Foods can also use the unrelated diversification to achieve a market growth. Typically, the unrelated diversification strategy involves diversifying into an unrelated line business, and the strategy will assist the company to tap attractive opportunities from another markets. One of the benefits of this strategy is a risk reduction. However, the shortcoming of this strategy is that the company may lack competencies in the line of business. Thus, the paper suggests that the company should conduct a market research and evaluates the opportunities before embarking in the new line of business units.

Moreover, the company should aggressively embark on the overall cost and price leadership to achieve competitive market advantages. The cost and price leadership will be appealing when the company delivers its product and services at lower prices compared to competitors. To achieve this, the company can embark on the outsourcing of the cheap and quality of materials from Asia or Latin America in order to achieve cost advantages. This strategy lies in apparent conflict with the commitment to American farmers, but has two advantages. First, Seneca can still do business with its existing farmers -- the new strategy would simply increase capacity. Second, by adding capacity Seneca will be able to grow more rapidly. The low cost strategy is more effective when backed by economies of scale, something that Seneca currently lacks. The long-term vision has to be that Seneca needs to grow. While many competitors choose not to compete directly in the low cost segment of the grocery business, should they desire to do so they will be able to outcompete Seneca, so the company's lack of size represents an existential threat. The U.S. is the largest market in the world, so should remain the focus of this growth effort before any international expansion is considered.