As Tnuva, Israel’s largest food manufacturer, becomes a limited corporation, Aaron Priel talks to president and CEO Arik Reichman about the company’s prospects. Growth by acquisition and a focus on branded products are the name of the game.

Tnuva, Israel’s largest food company, is thinking global. From a small cooperative founded by farmers in 1926, aimed at centralising the management of production and marketing of fresh produce, Tnuva has developed over the years to become the country’s largest, most versatile food manufacturer, with a business vision that has made it one of the leading factors that contribute to, and influence, Israel’s national economy.

Arik Reichman, CEO and president of Tnuva, told that in recent years, as part of the strategy of becoming a company that markets brands rather than commodities, “Tnuva has completed a multi-scope structural changes. The new organisation and management style place the company in an excellent position to confront existing and future challenges on the local market as well as on global markets.”

Tnuva is owned today by 620 moshavim and kibbutzim (cooperative settlements) and upon completing the formal structural changes, the company will become a fully fledged business entity, Tnuva Ltd., which will enable it to enter the stock exchange by the end of this year. Bearing in mind the company’s social and historic commitment to its founders, the current 620 owners will each be given proportional shares, which will make some old settlements quite rich. This, however, was not the main motive that prompted Tnuva to become a limited corporation.

Growth by acquisition

Facing tough competition from local and international food companies, in recent years Tnuva has abandoned unprofitable activities and invested in new business ventures including the acquisition of several companies with synergetic activities to Tnuva’s core business which supported and strengthened its market share. At the same time, Tnuva focused its activities on enhancing processing, marketing and distribution of food, especially fresh produce, at all stages of the marketing processes.

In an exclusive interview with Reichman, 67, a member of Kibbutz Glil-Yam near Tel Aviv, who was appointed to his present position in 1996, said: “Tnuva aims to preserve and strengthen its position as the country’s leading food company, providing consumers with high quality products, to increase the components of freshness to its end products, to expand its production of convenience and functional foods, and to establish production plants in Europe and the USA.” Since Reichman took over, Tnuva eliminated from its production lines 650 products replacing them with 350 new branded products, backed by aggressive advertising campaigns.

Overseas expansion

As the company is a profitable business entity, it has its own resources to invest overseas in establishing new plants, as is the case with Tnuva Romania and Tnuva USA Inc. Reichman revealed that “after several years of preparations and studying the economic feasibility, we intend to invest US$100m in setting up a comprehensive dairy/industrial enterprise in Romania. This venture, in cooperation and in some form of partnership with the European Bank for Development and Reconstruction, will include building state-of-the-art cow sheds and feed centres, and dairy-based processing facilities, as well as a distribution infrastructure that will market our products throughout Romania under two brands: Tnuva’s whole range of fresh products, including milk, sour and sweet creams, cottage cheese and other cheese products, all under the Tnuva brand name; and the other brand is Yoplait, offering – with the cooperation of Yoplait France – consumers in Romania the whole range of Yoplait branded yogurts.

Reichman added that Tnuva was fortunate to receive full assistance from the Romanian authorities, “eliminating any bureaucratic hurdles, which makes our entry to that country a very smooth process indeed. I wish that I could say the same thing about Israel.” The new venture in Romania is also a test-case for the Israeli company, in its plans to establish additional enterprises in Eastern Europe, especially in those countries that joined the European Union last May, and eyeing the candidate countries that are slated to join the EU within the next couple of years.

Softly, softly into the US

The other market eyed by Tnuva is the USA. Its entry into this very lucrative market is “an extremely difficult venture, considering the might of American corporations.” Hence the Israeli dairy is adopting a strategy for a gradual entry into this market. In 2004, Tnuva USA Inc was established, setting up a logistics centre for distributing a wide range of products made by Tnuva Israel and its subsidiaries, focusing on the kosher and ethnic markets.

Within six months, Tnuva’s sales returns in the USA amounted to US$6m from selling dairy products, processed meats and a wide range of confectionery products. Reichman believes that Tnuva’s sales returns in the USA will be doubled every year, “which now prompts us to change course and purchase a plant in the USA and produce there our entire range of dairy products, instead of shipping it by sea.”

Progress in Gaza despite Intifada

Tnuva was among the first large Israeli industrial enterprises to form a partnership with Palestinian entrepreneurs to establish a modern dairy in the Gaza region. Before the current Intifada started some three years ago, the Israeli-Palestinian joint venture started to build the new dairy processing plant, but the fragile security situation that developed halted the continuation of the project, “which is now being revived. We are aware of the potential in the Gaza region. Three years ago Tnuva sold there a wide range of products worth NIS200m (US$45.5m) per year. Last year, despite all the difficulties, Tnuva sales in Gaza amounted to NIS100m ($22.8m).”

As part of Tnuva’s policy to establish strategic partnerships and joint ventures worldwide, in order to advance its policy of globalisation, it signed a joint venture agreement with New Zealand’s Fonterra for the production of value-added products derived from whey milk. Milk surpluses are made into milk powder for export or for use in milk-based products in Israel. The facility for the production of whey is part of Tnuva’s new dairy located in the lower Galilee, considered to be one of the world’s most modern dairies.

Tnuva, which employs 4000 people in its different plants, registered 2004 sales returns of NIS5.5bn ($1.28bn), and net profits of NIS160m ($36.6m). Reichman maintains that 2005 Tnuva will see a 3-4% growth in net profits, generated from an expected NIS5.5bn of sales returns, similar to its 2004 performance.

Tnuva’s line of business, as outlined below, has significantly diversified in recent years, owing to the many acquisitions it made or to partnerships it formed with existing industrial enterprises:

  • Dairy, registering revenues of over $670m in 2003, supplying 70% of Israel’s dairy needs;
  • Meat Marketing, supplying 20% of chicken products and 20% of frozen meat consumption in Israel. Sales revenues: $200m. This division is undergoing structural changes prior to the distribution of the products of Tnuva’s subsidiaries: Sunfrost (fresh and frozen vegetables); Maadanot (pizza and confectionery); Topap (processors of potato chips); Tiv Tirat Zvi (deli meat and sausages), and Tnuva Galil (readymade meat products);
  • Eggs, supplying 45% of eggs consumed in Israel;
  • Hardoof Organic Foods – producing and marketing organically grown produce, including milk and dairy products, eggs and poultry meats, breads and confectionery items;
  • Foodservice – Tnuva  Chef — supplying over 30% of Israel’s food service needs to hotels, the catering sector, and restaurants;
  • Tnuva Fish
  • Beef production – production and marketing of fresh beef from Tnuva’s own herds. Anticipated revenues within two to three years: NIS600m ($137m) per year.