Hilton Foods announced yesterday (11 January) it has reached an agreement with Australian grocer Woolworths Ltd to operate a joint venture company. The move will mark Hilton’s first foray into the Australian market and could point to further expansion plans in the region. Katy Askew reports.

Hilton Foods and Woolworths Ltd have joined forces to form a joint venture operation that will supply Woolworths stores in western Australia.

The deal establishes a new company, Woolworths Meat Co, in which Hilton Foods subsidiary Hilton Foods Asia Pacific Ltd will hold a 50% stake.

The firm will operate the Bunbury Meat Centre, which currently supplies 84 Woolworths stores in Western Australia with a range of fresh meat including beef, lamb and pork and value added products.

While it seems likely this existing facility – which is currently operated by Woolworths – will require investment to bring it up to Hilton’s standards, Shore Capital analyst Darren Shirley says he does not expect the news to necessitate a significant injection of capital from Hilton. 

“We do not expect Hilton to inject any capital into the JV, with Woolworths providing for any investment Hilton brings its operational expertise to the company,” Shirley writes in a note to investors.

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According to Shirley, start-up costs in the first half of the year are likely to be offset by a “modest profit” in the second half, meaning the deal will break even in fiscal 2013. 

While the deal is unlikely to significantly boost Hilton’s bottom line in the near-term, it will once again broaden the meat packers geographic spread.

This is a key strategic plank for Hilton because a diverse geographic base offers some protection against the often volatile swings in costs and pricing the company must grapple with. Currenrtly, Hilton is facing the headwinds of rising commodity costs and an extremely constrained consumer in key European markets.

Currently, Hilton’s primary markets are the UK and Ireland, the Netherlands, Sweden, Denmark and central Europe. Hilton’s operations have benefited from its geographical diversity, with growth in central Europe offsetting a continued slow-down in Sweden and product-mix and pricing pressure in the UK.

According to Panmure Gordon analyst Graham Jones, the move is “very significant” for Hilton because it represents the first time the group has moved its operations outside of Europe. Indeed, Jones raises his price target for Hilton “reflecting this new growth angle”.

The scale of the Bunbury business is relatively small in the context of Hilton’s overall operations. According to Investec analyst Nicola Mallard, the business is comparable in size to Hilton’s existing Irish operations.

“In volume/capacity terms, this site would be equivalent to Hilton’s Irish business, although, in this instance, it has only a 50% interest,” she suggests.

However, announcing the deal Hilton hinted it will be able to leverage its relationship with Woolworths to open up the Australian market and deepen its involvement in Asia Pacific.

“The board of Hilton believes that good opportunities exist for further collaboration with Woolworths in Australia through the new joint venture,” Hilton said.

Nevertheless, operating in the Australian market is not without its challenges.

The Australian grocery sector is highly competitive and exceptionally price driven. As in other global markets, Australian consumers are looking to reduce their household expenditure in the face of poor economic conditions.

Australia’s two largest retailers – Coles and Woolworths – have responded to this in kind and as they vie for market share, price has increasingly become a key battleground. Earlier this week, Coles announced it will further cut prices accross “hundreds” of its products as part of its Down Down marketing campaign. 

For some time, producer organisations have highlighted they are often the victims of this price warfare in the market.

However, Woolworths will hold a 50% stake in the meat company. This is significant because a vertically integrated model means the retailer is less able to squeeze the supplier – because they would in fact be squeezing themselves.

It therefore seems likely that the Australian business will start generating a respectable return in fiscal 2014. Indeed, analysts predict the deal will lift profit before tax by between 4% and 6% in 2014.

Beyond this, Hilton’s expansion outside Europe would suggest the group is increasingly looking to fresh geographies and new markets to fuel growth. In the longer term, it is probable the UK meat packer will be evaluating new ways it can expand in the Asia Pacific region. The tie-up with Woolworths represents a first step in that journey.