The just-food interview part two: CFO Augusto Ribeiro sees BRF moving to growth phase
BRF CEO Augusto Ribeiro
As we heard in part one of the just-food interview, BRF has undergone a far-reaching restructuring process that, it believes, will deliver a more stable margin structure. The company is now moving to a new phase of growth as this stable foundation enables it to ramp up top-line expansion at home and overseas. Katy Askew speaks to BRF chief financial officer Augusto Ribeiro to find out more.
BRF, the Brazilian food group created through the merger of Sadia and Perdigão, has spent the past two years working to get its house in order. The company has strengthened its base business, aligning its production network to its needs and removing complexity from its back-end functions.
The BRF that has emerged at the end of this process is a more streamlined organisation that is fit for purpose. And that purpose, chief financial officer Augusto Ribeiro tells just-food, is expansion on the global stage as a value-added, branded food maker.
"There is a white space from our perspective. There is no worldwide player within our [categories]. If you look at Europe, there are a lot of companies per country or per region. If you think of the US, you have big companies there. If you think about Latin America, there is a big company within each country, there is not a Latin American company. If you look at Africa it is the same. If you look at the Middle East it is the same. Asia, the same... There is a huge space for someone to step in and start to grow through a worldwide network," Ribeiro explains.
BRF is already the world's largest poultry exporter, accounting for around 20% of the global market. However, the company is undergoing a "profound cultural shift" as it attempts to move the products it supplies up the value chain. To achieve this, Ribeiro says BRF must adjust its "mindset" from that of an "industrial company" supplying the global commodities market to a "commercial" company driven by consumer demand.
"We are increasing the proportion of finished processed products within our international market. Not that we are not going to sell [commodity] products any more but we want to move into the more valued products," Ribeiro explains.
The first region that BRF has targeted for growth is the Middle East, Ribeiro says. "The Middle East is the first region outside of Brazil where I can replicate my Brazilian model, which is big distribution, cold chain, local production, investing in marketing, trade marketing, as a food company."
The company already has a sizeable branded business in Middle Eastern markets, but one which is firmly focused on poultry. BRF's target is to raise the proportion of sales it generates in the region's processed food categories.
"Sales to the Middle East are all branded but it is still poultry. Griller as they call it - the small birds. Poultry, poultry parts, not processed. We have some sausage, franks, but at the moment only a small amount... We have a very big market share, almost 40%, of poultry. But we want to get that share with processed products: pizza, lasagne, nuggets."
To this end, BRF went on something of an acquisition spree in the region this summer, buying up assets from some of its local distributors to strengthen its Middle Eastern reach. In August, the group struck a deal to acquire a 75% stake in the frozen distribution business of its partner in Kuwait, Alyasra Food Co. This followed on from an earlier agreement that saw BRF take a 40% stake in Al Khan Foodstuff, the company that distributes its products in the Sultanate of Oman. Earlier in the year, a separate deal saw BRF increase its stake in dairy-to-meat group Federal Foods, a manufacturer based in the United Arab Emirates.
BRF will also inaugurate a new production facility in the Middle East at the end of this month. Based in Abu Dhabi, in the United Arab Emirates, the factory was commissioned in 2013 and will have the capacity to produce 70,000 tonnes of value added products a year.
"By producing processed foods there we want to increase sales, to get our fair share," Ribeiro explains. "At the end of the month [November] we have the official opening. We brought distributors in the region and set up local production so the Middle East market is advanced in our strategy."
Argentina is another market that Ribeiro describes as "advanced". But here the narrative is a different one: "Argentina is a turnaround story. Given the macroeconomic scenario, what is happening out there, [we have] closed factories. We are restructuring the company trying to recover profitability."
Elsewhere, the company is focused on growing in emerging markets. "It is not that we are not looking into the US or Europe. Those regions are the ones that, if we had opportunities, of course we would look at them. But our short term strategic cycle is going to be definitely concentrated on emerging markets."
The Brazilian continues: "We are putting a lot of attention on Asia. China is a huge market for us. Latin [America], Africa will come later. But emerging markets is our overall focus."
BRF's experience operating in Brazil provides it with some significant competitive advantages as it works to grow in these developing markets, Ribeiro asserts. The company's expertise in reaching traditional retail channels and developing infrastructure leave it well-placed to tackle some of the challenges presented by these high growth markets.
"We understand a little bit of this emerging market world since we grew up in one of [the BRICs]... We think that we understand a lot about the cold chain. Some of the regions that we want to get into, the challenge is to help the country develop the cold chain. We are not in India yet. Even in China, if you go to certain regions you have wet markets and a specific kind of consumption. Our main challenge is to help a country develop those cold chains. We do believe we have the capabilities to do this, which is good for food safety, good for quality, etcetera."
A next step in BRF's global growth strategy could potentially be the establishment of local R&D facilities. "We will increase our local research and development capability. We do have a research and development facility in Europe. But we do not yet have one in the Middle East, Africa or other regions. South America, yes, we develop our products in the countries - Argentina, Chile - but outside LatAm and Europe the main growth regions for us in the short term - Asia and the Middle East - we are still planning to develop our research and development capabilities locally.
"This is very important. The development cycle is taking too long and if we want to speed our development outside of Brazil we need to increase that [R&D] capability outside of Brazil."
Another area that the company could well deploy its investment muscle to grow internationally is through acquisitions, Ribeiro continues. "We are looking at M&A. We are looking at organic growth as well. In the Middle East, it is a mixture of both of them. We develop our own distribution, we build up our factory but we brought some distributors to speed up [the process] and to secure the supply chain."
BRF is striving to expand its value-added protein footprint worldwide. But, Ribeiro continues, this does not mean that the ambitious company has fully exploited the growth potential offered domestically.
"There is a huge opportunity in Brazil. We intend to take that. People think that, given we have more than 50% market share in our portfolio, that is why we are [expanding overseas]. That Brazil is done. That is incorrect."
Ribeiro says that there is still "good room to improve" in Brazil. According to Nielsen, BRF's market share stands at 50-60%. This reading is based on the "big retail chains" Ribeiro stresses, leaving space to grow through independent operators and the traditional trade.
"The small retailer is my strength. I have more than 50% of my net revenue in Brazil generated in Mom and Pop shops. We currently have something like 160,000 points of sale. We estimate that the total market that could afford our products - that have the capability to store frozen products - is around 400-500,000 points of sale.
"We would be more than happy if we were able to double our current points of sale to roughly 300,000 outlets in two years time. That would be great. We came from 130,000 to 160,000 points of sale in seven months. Based on that, I affirm that we have space to grow in Brazil."
Ribeiro is therefore confident BRF can grow sales at a decent clip in Brazil and internationally. "We do not give [sales] guidance, but we would be happy to go back to what we used to achieve in Brazil in the past, which is low double digits on the value. In international we want to have the same measure."
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