HKScans Kottonen says further cost savings to be had

HKScan's Kottonen says further cost savings to be had

In a bid to boost profitability, HKScan has embarked on a journey to streamline and simplify its operations. However, this is just one plank of the group's four-prong strategy to improve its performance, HKScan CEO Hannu Kottonen tells just-food.

When Hannu Kottonen took the helm of HKScan in March last year, the group was struggling with a number of issues across its major markets, including Finland, Sweden and Denmark.

The company was facing rising raw materials costs and high overheads at a time when consumer sentiment was turning increasingly negative. This situation made it difficult for the group to pass costs down the supply chain, an issue that was exasperated by a growing acceptance of private label products.

The result was pressure on revenues and plummeting profits. Indeed, the company saw EBIT drop by 17.5% in fiscal 2011 while net profit more than halved due to higher financing costs. And, after initially predicting an improvement during 2012, the group was forced to issue a profit warning in May as problems in the Swedish market weighed on the bottom line.

So, it is little surprise that the months after Kottonen took the reigns as chief executive were filled with action.

In April, just one-month after Kottonen joined the group from Metsä Tissue Corporation, the company quickly "redefined its strategy" when it revealed plans to achieve annual performance improvements exceeding EUR20m (US$26.1m) by 2013.

"We have potential to reduce costs because the earlier operating model was very local and fragmented, meaning plenty of overlapping work in a decentralised manner in many separate legal entities," Kottonen tells just-food. 

HKScan has announced a number of moves to strip costs out of the business.

These are being assessed on a market-by-market basis, Kottonen adds. "Business cost base will be different in each market to a great extent; we have to be cost competitive in each market on market terms," he explains.

HKScan's restructuring work began in the problem market of Sweden. While the group's other markets were performing "according to plan", in Sweden the firm's results were being hit by increasing volumes sold under private label and higher sales of imports due to falling supplies of Swedish raw meat as well as favourable exchange rates. As a result, the market was dragging on the group's financial results - placing it high up the priority list as HKScan looked to turn its performance around.

In August, the meat firm said it will streamline its operations in Sweden in a bid to cut costs by EUR10m a year in the country. Measures include the merger of the firm's local subsidiaries, Scan and Pärsons, into one business unit called HKScan Sweden.

The group also overhauled its Swedish production. First, it merged its commercial, production and logistics organisations in the country, resulting in the closure of its Strövelstorp plant and transfer of production to facilities located in Halmstad and Kristianstad. Approximately 150 jobs were cut as a consequence of the closure. The company also reduced its pork production levels in the market - with further job losses - in response to falling demand.

Elsewhere, HKScan also closed a production unit in Denmark before turning its attention to its domestic business.

In Finland, HKScan has taken a number of measures to simplify its corporate structure. Indeed, earlier this week (2 January) the firm revealed that HK Ruokatalo Oy has become a wholly owned subsidiary of HKScan Corp. The move follows a merger between HKScan Finland Oy and Ruokatalo Oy. This, in turn, follows the integration of Järvi-Suomen Portti Oy and Helanderin Teurastamo Oy into the Ruokatalo business.

And, Kottonen says, there are still more savings to be had. "We can find savings in all markets going forward, we have plenty of unused potential still left," he comments.

By reducing the complexity of its operating units, HKScan is generating significant savings that should boost the bottom line. But, for Kottonen, the company's mission must look beyond this. 

"To improve productivity is one of the four key strategic imperatives we are implementing," Kottonen tells just-food. "To assess business based on costs only can't be the main logic."

HKScan has developed what Kottonen terms four "must win battles". In addition to improving operating efficiency the company is working to actively manage the dynamics of future business, developing its capital structure and - perhaps most importantly - building up HKScan's brand value and driving consumer demand.

"The first strategic target for us is to develop our brands and demand," he says. 

Kottonen is upbeat on the group's ability to respond to changing consumer dynamics and build on the potential of HKScan's "strong local brands".

HKScan hopes this will be achieved through innovation based on consumer insight and marketing. However, given the austere consumer environment in Europe, it is likely the challenges presented by a highly price conscious consumer - one that is increasingly turning to private label products - will persist.

Perhaps because of this pressure, Kottenon adds that even HKScan's investment in innovation can be deployed more effectively. "Here we have potential as well given our strong local brands, but very local innovation processes and relatively small intercompany business. We can here find further internal synergies as well."