The increase in commodity costs and fall in consumer confidence seen in many Western markets last year as forced many companies to adapt – not least Dutch bakery group CSM. In the latest just-food interview, Dean Best talks to CFO Koos Kramer about how the company is shaking up its business, notably in Europe, and how it believes dealing with raw material volatility will be a constant pressure in the years ahead.
For an example of how food manufacturers, even multinationals, were caught between last year’s jump in commodity costs and cautious consumer spending, look at Dutch bakery supplies group CSM.
The company, which makes donuts, cookies and muffins for the likes of Starbucks and UK retailer Asda, and sells bakery ingredients to major industrial bakers, had what it has described as a “very challenging” 12 months in 2011.
Sales increased 4% but only because of price increases, changes to the mix of products it sold and contribution from acquisitions. Like many manufacturers, CSM’s sales volumes fell as its moved to increase price hit customer demand.
Furthermore, the company’s underlying EBITA slumped 30%, with sales volumes and earnings in North America and Europe falling. Lower volumes made it harder for CSM to absorb its fixed costs and the company was unable to pass on its full commodity bill to its customers. CSM said higher selling prices had absorbed 90% of the increase in its raw material costs but that still left a EUR24m (US$32m) hit to its earnings.
In the autumn, as it became clear that market conditions would hit CSM’s profits in 2011, the company started a restructuring programme and embarked on a broader review of the business. It has made further changes to its North American bakery unit to make it more “lean and agile”, is revamping its operations in Europe and streamlining its central organisation. CSM hopes to save EUR30m in 2012, which would increase to EUR50m next year.
However, it is in Europe that CSM is set to make more wide-ranging changes. Its North American unit is, it says, “strategically well-positioned” and it is now looking to “reshape” its bakery business in Europe, focusing more on major retailers in the region.
CSM says 2011 saw an acceleration in the trend for consumers in Europe to buy bread and bakery products at major retailers and less from what the company calls “artisan” bakers. In many cases, this was due to price: the major multiples can offer consumers more value but CSM says shoppers are also looking to buy bakery products more often at coffee shops and convenience stores. In any case, with major supermarket chains in Europe expanding into the convenience channel, their c-stores are likely to provide more value than traditional bakers.
CSM, which in mainland Europe focuses more on the artisan channel, recognised its bakery business on the continent had to change. The cash coming in no longer justified the value of the unit’s assets, leading CSM to book a non-cash impairment charge of EUR249m in 2011 (which led to a group loss of over EUR174m).
It is also offloading assets in Europe, notably those that serve industrial customers. CSM says 30% of its bakery business in the region needs to improve or be sold and, of these assets under scrutiny, the company says it has already identified units worth EUR100m in sales that have been lined up for sale.
CFO Koos Kramer acknowledges the changes CSM needs to make to its business in Europe will take time, not least due to the existing competition to supply major retailers and convenience outlets, although he does emphasise his company’s strengths. “There are good competitors, good companies. We of course have some specific niche products where we are very strong. Because of our link with the United States, we are very good with American pastry – donuts, muffins, cookies. That’s the assortment we are trying to benefit from. We have a good position in the UK, not only with products but we also do a lot of service. We know how to deal with big retailers. That kind of knowledge we can also use to find a place in continental Europe but there are respectable companies out there,” he says. “It will be a gradual process.”
However, CSM’s business is not only in bakery. It has a second division called Purac, which supplies lactic acid for use in the food, polymers and chemicals markets. In food, for example, lactic acid is used on meat to prolong shelf life and improve its colour. Lactic acid can also be used as a fortification element in soft drinks. The food sector hit Purac’s performance in 2011, with competition from lower cost alternatives for food preservation but CSM believes the company has a lot of potential. So far, cash generated from its bakery business has been in part used to expand Purac but CSM’s business review has set out a plan for the unit to be self-sustainble by 2015. It plans to extend Purac into other organic acids, invest in bioplastics and look for alliances with other companies to hit that target.
Kramer says Purac has been “more or less subsidised” by CSM’s bakery unit but the company wants it to become more financially independent. “It should be more or less the ambition to have them at a scale that they can fund their own capex and really absorb all the innovation,” he says.
The contrasting nature of the two businesses means they could, one day, be split in two, although Kramer says CSM has no plans to do so – at least not for now. “I don’t want to speculate on that. You see it with a lot of businesses that when they get to a certain size you have to reconsider the strategy but we think that’s probably 2015,” he says. “From manufacturing or from the customer side, they are different businesses. But we think Purac and bakery exist fine within CSM. If Purac gets bigger, we’ll see what the next step is.”
The CSM finance chief insists the company will continue to invest in its bakery business. “Over the past years we have invested in our bakery business. We did some acquisitions, especially in the United States, we have been putting money behind capital expenditure, especially in frozen over the years so it’s not as if we shift all the money to Purac,” he says. “We want to invest in bakery because we want to build upon the position in the United States and Europe.”
CSM, however, has only taken tentative steps in building a presence away from developed markets, which account for 95% of its sales. In 2011, it opened a bakery ingredients plant in China and set up an ingredients venture in Tunisia with local company GIAS.
Kramer sees CSM making further investments in emerging markets, although significant moves may not be made this year. “If you take 2012, certainly for our European businesses it will be a case of repositioning ourselves, for the US business, it’s continuing to grow and in emerging markets it’s more or less the same,” he says. “It is part of our strategy to further invest in emerging markets. We have selected a number of markets like China and Turkey, as well as north Africa and the Middle East, where we have started to build a base, build an organisation. We created the pockets where we see growth in the coming years.”
But it is the coming year that looks likely to focus minds at CSM. The company has already earmarked 2012 as a “transitional year” and, with the changes throughout the business, it will be a challenging one. And, of course, there is the ongoing pressure from commodity prices. CSM still has to try to push through some price increases and is seeing the cost of other raw materials increase again, notes Kramer.
“We all know that sugar especially in the United States and Europe has increased over the last half year and part of that still has to be pushed through in price increases. Some other commodities came down a little bit but they have started to come up, some of them, especially if you look at palm oil,” he says.
CSM plans to increase its use of hedging to offset the pressure from commodity costs, which Kramer argues will, over the longer term, continue to rise. He acknowledges it is “very very difficult” to pass on price increases (in some areas, it took CSM a year to push through the higher cost of raw materials last year) but says the company tries to work with its customers to try get prices through or costs absorbed. “We try to do that with a lot of discussions with our customers to make sure that they have the time to push the prices through in the market. We like to discuss reformulations with them to ease the pain of raw material prices,” he says. And he points to the company’s moves to lower costs: “We try not to go to our customers without having our own house in order.”
Ultimately, however, after a year in which CSM has battled – and suffered from – the pressure of a jump in raw material costs, Kramer argues its commodity prices must be passed on and, as market leader, his company needs to take the initiative.
“We expect raw materials to stay expensive or to show underlying growth. If that is your vision, you have to push through price in the market. Otherwise returns in the industry, or our returns at least, will remain under pressure. Because we are one of the market leaders, the market leader in most of the markets, we have to lead by example.”
In the current climate, that could be easier said than done.