Artoparto's Blog

Friday, January 18, 2013

Atria Finland’s poultry business is growing

Atria's press release January 4^th promoted its newest brand, Perhetilan broileri, family farm chicken, emphasizing its success. That’s fine, but the release didn’t tell anything really new, but merely repeated statements from the last year. What’s more, the brand’s properties do not differ much from the properties offered by Atria's competitors, HKScan and Saarioinen. The key idea of the brand concept is traceability, but both competitors' poultry products are traceable to the farm as well. Therefore Atria’s new brand does not bring anything new to the consumer. Atria is excellent in production and logistics, its advertising is always bold, but I’m not that sure about its ability to innovate.

Surprisingly the release appeared to raise enormous interest to the whole Atria Plc.

Let’s now return for a while to the 2011 Annual Report, where Juha Gröhn, CEO Atria Plc listed the key means, by which Atria then planned to improve its profitability in 2012. One of them was precisely this family farm chicken. The others were Lönneberga in Sweden, Max&Moorits in The Baltics and Campomos as well as Sibylla in Russia. The success of Lönneberga has also been reported thoroughly but Atria has not given any info about the success of Campomos’ new products. One may wonder the reasons for that.

But now, inspired by the release let’s talk a little about Finnish poultry production. With certainty it will be even more important part of Atria Finland's business in the near future.

Poultry business in Finland is growing

One that changed the poultry business is the 2010 EU directive, which prohibits marketing of frozen poultry meat as fresh after defrosting. It has, after the initial hassle, of course improved the position of domestic processors. However, at the same time, it has forced them in a very precise and controlled production control.

Demand for chicken meat has also increased, so it is no wonder that Atria Finland is actively developing its own poultry production. In the autumn of 2011, the company decided to expand its hatchery. More importantly, one year ago, the company, or in fact Itikka co-operative together with poultry farmers, decided to build their own poultry feed plant alongside the existing feed plant, which therefore now expands its product range. Feeding is a major cost item but the construction of the plant is also, according to Atria’s press release, motivated by R&D, animal welfare and growth, as well as by supply chain transparency. It is also interesting that the desire to preserve the feed production in domestic hands is expressed in the release.

Ethics fight

In a number of recent campaigns Atria has made it clear, what it thinks about the ethics of foreign meat production and food security. It has loud and clear placed itself above the foreign meat production. It has made it in a credible way, in fact. There are reasons to believe that Finnish food, compared to most or even all other countries, is more ethical, more natural and cleaner. The bad thing from Atria Finland's point of view is that it of course has to succeed in Finland. It would be easy if the rest of the meat processors operated unethically but this is not the case. The ethics competition in Finland is rock-hard.

Poultry production is factory farming, which almost by definition nearly minimizes animal welfare. Then, Atria, just like other companies, tries to minimize animal suffering but only within the limits of efficiency requirements. It comes at a cost. Full organic production would be a real and appropriate but even more expensive alternative.

One may easily come into conclusion, that Finnish meat processing companies compete with each other also by trying to achieve, within the strict limits of effectiveness, breeding conditions that are natural at least to some extent, and due to this arms race, the companies themselves get sick.

Views

Now it is the right time to visit the farm. In this figure is shown a Ross 508 chicken, a breed used also in Finland. Quite a creature, I must say. Breeding time is very short, 32 to 39 days. Carcass weight is up to near 2 kg. Animal density at the farm is about 40kg/square meter. You ever thought about a chicken harvester? Here is one. Comparable technology is used in Finland although this picture is certainly from elsewhere. The driver's mask is fine, what else could I say. This picture from a Finnish farm is on the pages of Suomen Broileriyhdistys, a Finnish association, whose members include chicken farmers and meat processing companies. Is it ammonia vapor or dust or is the picture taken from behind some plexiglass?

Food industry is very eager to criticize all the information that other bodies produce. That's why it makes perfect sense to find out what Animalia, one of Finland’s best known animal protection organizations says on this matter. Quite a lot, it seems. They have for instance these arguments: Large chest muscles and rapid growth cause problems and pain in the feet and in the heart, large flocks prevent formation of the pecking order, no perches where to sleep safe from predators, no room to scratch the ground, some do not learn how to eat and starve to death.

Looking at the pictures above, one may conclude that the arguments look very plausible.

Atria and its competitors, as well as the association informs on the better sides. They too are many. Chickens are allowed to move freely on dry litter material, eat and drink freely throughout their lives. Their feed is balanced and designed primarily with chickens’ health in mind. The rest period (continuous dark), per day is as much as 6-8 hours. Transport distances are short. Salmonella does not exist at all. The use of antibiotics in Finland is very limited and occasional. However, to prevent intestinal parasitic diseases, the feed contains coccidiostats. This is of course permitted by the EU.

Evidently, a lot is done to ensure relatively comfortable conditions for the chickens. Nevertheless, mortality is high. About 4-5% of chickens die during the breeding, which is really short, less than 40 days. During transport dies another 0.5%. Furthermore at the slaughterhouse about 1.5% of the chickens is rejected.

Number of deaths can be reduced through different technologies but one crucial factor is feed. As already mentioned before, building of the poultry feed plant was motivated among other things by animal welfare. It is not empty talk or some cheap attempt to please consumers. By using a bit of science and experimenting, it is possible to develop better feed, which will prevent the disadvantages resulting from the rapid growth, and at the same time, still achieve large chest muscles without extending the breeding time. Own poultry feed plant is likely to bring Atria a strong competitive advantage in the Finnish market. And perhaps in the Finnish ethics race too. The plant will start this year.

We will be back in Atria later but on Friday, February 1^st we try to evaluate HKScan’s Q4-2012. Each snowflake is unique, they say. So what?! Each pile of snow is unique, I say! Summer please come soon.

This is Artoparto and here is my Disclaimer. Please read it.

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Friday, January 4, 2013

About HKScan’s subsidiaries and associates - part 1

The mighty Scan in Sweden is poorly profitable year after year. In 2011 Scan’s net sales were about € 763 million, EBIT about € -4,5 million and profit about € -4,4 million. The entire HKScan Sweden instead was in 2011 slightly profitable, net sales € 1045,7 million and EBIT € 17,2 million. So, it would be worthwhile to study, where the profits are made. We will try. This is the first attempt, and studying will continue later without any schedule.

HKScan, in its annual report back in 2007, stated as follows:

A hallmark of Scan’s business is that much of it is carried out in subsidiaries and associates. Subsidiaries SLP Pärsons AB and Annerstedt Flodin AB and associate Nyhléns & Hugosons Chark AB are worthy of particular mention in this context.

This is how it is yet today. All those mentioned, and still a few companies further are important to Scan and HKScan. Today we will take just a skin-deep look at those three companies plus two other, namely Siljans Chark AB and Svenskt Butikskött AB. The sad fact is that none of these companies is highly profitable.

Before looking at these companies, one remark must be made. It is about Daka a.m.b.a., which is a Danish animal by-product company. Daka was the most profitable of Scan’s subsidiaries and associates in 2011. Its net sales were € 140,9 million and its profit about € 21,6 million. Scan's stake in the company was 33.9%. Now it seems very much, that Scan has sold a significant proportion of its shares in the summer of 2012. If this holds, then I must have missed the Group’s announcement completely. But let's examine this issue in April at latest, when the Group’s annual report comes out. Daka’s 2010/2011 annual report is here, and here is Daka’s announcement of the new alliance (in Danish). Here is a bunch of official papers, and here is the corresponding press release, these two last from The Brussels. But now back to our five selected companies.

Nyhléns & Hugosons Chark’s (the whole subgroup) net sales in 2011 were about € 60 million and profit about € 0,4 million. However, there has been successful years, and for example, in HKScan’s 2009 annual report its success was noticed also in the text. At that year its profit was close to € 2 million.

Mikael Hugoson owns 51% of the company and Scan owns the rest 49% and the company used to be classified by HKScan as an associate. HKScan however announced in its 2009 annual report that the status of Nyhléns & Hugosons Chark AB has changed from an associate to a subsidiary. In the same report, HKscan gives the following definition of a subsidiary.

Subsidiaries are companies over which the Group exercises control. Control arises when the parent company either directly or indirectly holds over half the voting rights or otherwise exercises control, for example through agreements concluded with principal owners. Control is defined as the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

Perhaps the Group is in control, but in the eyes of the public this company in northern Sweden with a broad product range is just Hugoson’s company. For instance in a nationwide paper, Land Lantbruk & Skogland, an ordinary article about company’s result is entitled: Hugoson’s slaughter empire. Scan is only mentioned once in the text as an “also-owner”. On company’s net pages, managing director Magnus Nilsson completes the company presentation in about this way: Thank you for choosing our northern Swedish alternative! It is quite clear that the other alternative is Scan. Really these two companies don’t look like close partners but like close competitors.

Siljans Chark’s net sales in 2011 were about € 19 million and profit about € 0,4 million. In 2010 the result was roughly the same.

The company is owned by farmers, employees and Scan, whose ownership percentage is 39,3%. Siljans Chark is classified by the Group as an associate. Unfortunately, the partnership has not been a walk in the park. In 2011 Scan was about to increase its ownership to over 50%, but all of the farmers did not accept it. Instead there was formed a group which persuaded Scan to sell its newly acquired shares to the group. No doubt, a great majority of the province was with the group and Scan had better to retreat. In a regional newspaper, an article about the operation and the group was entitled: They saved Siljans Chark. One may wonder if there is room for any true collaboration between Scan and Siljans Chark.

Group’s name, something like “Love Locally”, illustrates well the reasons that led to the operation. The group members felt that they must defend local industry in middle Sweden. The problem with Siljans Chark is that its products’ most important sales argument to consumers is local origin. It has a broad range of products but its product range looks very much the same as Nyhléns & Hugosons’ and Scan’s. That’s why all three companies look like each other’s competitors.

Svenskt Butikskött’s (and Gotlands Slagteri’s) net sales in 2011 were about € 45 million and profit about € 0,4 million. In 2010 the profit was even € 1,2 million.

Svensk Butikskött continues the activities which Scan, as a part of its rationalization program, ceased in Gotland a couple of years ago. As early as the autumn of 2009 Scan was planning some kind of a collaborative model and in the end, Scan became the co-owner (25%) of Svensk Butikskött.

Svenskt Butikskött’s market is the whole Sweden but the company draws heavily from the local origin. The company says that Gotland with its strong food tradition and uniqueness is even comparable to Parma, Italy. Svensk Butikskött specializes in fresh quality meat and may well find its place in the market and also in Scan's palette.

Annerstdt Flodin’s net sales in 2011 were about € 45 million and profit about € 0,3 million. In 2010 net sales were slightly less than € 40 million and the profit was close to € 0,4 million.

Annerstdt Flodin also is a quality oriented company. It is Scan’s subsidiary and fully owned by Scan. It imports quality meat from all over the world. It is quite sensitive to economic cycles and dependent on changes in meat production, exchange rates, etc. Clearly the company has chosen its product strategy and it is a natural part of Scan. Like an apt pupil, in fact. Just look at the company’s presentation, so thorough and so nice: the Group is introduced before the company itself. Too kind?

Pärsons is the largest of these five companies. Its net sales in 2011 were about € 90 million and profit about € 1,9 million. In 2010 net sales were about the same and the profit was about € 2,7 million.

Pärsons is Scan’s subsidiary and fully owned by Scan. It is firmly focused on cold cuts and a few other sandwich toppings. Its products are sold nationwide and also exported to Denmark. HKScan has developed and streamlined Pärsons with determination and the brand it is of enormous importance for Scan. Of these five, it is the major money-making machine.

Cold cuts are not the sexiest products, but believe or not, there is one interesting family of cold cuts in Pärsons assortment: Mediterranean. In the product description there reads among other things:

Here we have reduced the proportion of saturated fat significantly and instead added Extra Virgin Olive Oil from Crete.

The thing is that the olive oil very likely has been added with the technology supplied by a Greek food company, Creta Farm S.A. Following excerpt is from their pages:

Our vision is to change diet on an international scale through the “En Elladi” patented production process replacing—where possible—animal fat with extra virgin olive oil, a process that intensifies the flavor of traditional local deli meats.

According to the company’s web pages, sometime in 2010 they were planning to enter in two years the market in Sweden, Denmark, Finland, Estonia, Latvia and Lithuania via a joint venture with Pärsons.

Today the co-operation of these companies is not yet wide, their associate company Creta Farms Nordic AB (50% for both) showed in 2011 net sales of about € 0,7 million and profit of about the same but negative, € -0,7 million. It is probable that the cooperation does not expand very significantly. Scan has its own "oil project”, namely, the use of rapeseed oil for pig feed and corresponding products perhaps are in their way to success, so Scan will invest on them instead. It can also be assumed that currently any Greek raises no great enthusiasm, at least not in Finland. However, the development of cooperation is worth watching.

That’s it for today. There are more subsidiaries and associates in Sweden, not even mentioned here and of course many more in Finland and in the Baltics. We will look at them some day.

We will be back in HKScan later but on Friday, January 18^th we are going to look at Atria’s businesses. Before the summer finally comes, we will see all sorts of snowmen. They are even not nice. Here is one. And what is this? Another evil snowman, right?

This is Artoparto and here is my Disclaimer. Please read it.

Friday, December 21, 2012

A brief look at Atria Group's 2012-12-04 Capital Market Day presentations

Yawn freely, but Atria has updated its strategy. The slogan is now “Atria’s way to number 1”. There are three lanes: Commercial excellence, efficiency and Atria way of work. Commercial excellence is about branding, understanding consumer, being a preferred partner and creativity. Efficiency is about processes, production, R&D, purchases and upstream activities. Atria way of work is about leadership governance, knowledge and synergies and positive atmosphere.

That’s it. Forget it. It is first class nothingness. Or is it even that? Somehow I feel, that public sector is better when it comes to producing this kind of general nonsense, namely every now and then they manage to be even interesting.

Juha Gröhn, CEO Atria Plc nails these theses and the country managers apply them to their plans and the presentations are cut from the same cloth. Their content looks somehow orchestrated. However, for whatever reason, Olle Horm, EVP Atria Baltic, did not follow the format, and his presentation is the most interesting. Anyway, there is some useful content in all of these CMD presentations. Let’s take a look. Links to presentations are found here.

Atria Group – Juha Gröhn, CEO

Atria Group’s core is cold cuts and processed meat products. There is nothing new but it is good to know that there are no changes. Gröhn also gives arguments for the stated core: High volume and value potential, strong expertise in recipes and production, flexibility in sourcing, strong categories in more or less all countries, opportunity for synergies and state-of-the-art product portfolio.

In all, the Group core is solid and clear, and arguments for it are convincing. Next we will have a look at local cores.

Atria Finland - Mika Ala-Fossi, EVP

Atria Finland’s core is wide. It includes practically the whole product range. But a large food company must have products in all product and price categories for every consumer. Perhaps the core just couldn’t be less wide. Upstream activities – a new term in Atria’s vocabulary, mentioned also by Gröhn, is now repeated here. One may wonder what kind of changes it means or already has meant for Finnish farmers. Not anything good, I suppose.

In his market update Ala-Fossi gives some interesting info about consumer trends. Organic food and ecological aspects shouldn’t pose big problems for Atria. Finnish origin is of course a big plus. However, Ala-Fossi mentions still another emerging trend: Cooking at home is growing. If this is a valid research result, there is a huge threat to Atria. The presentation includes also some info about retail chains, and in this context is the following announcement: Market development is based on price increases. Volumes have been developing far less excluding in poultry category. This is quite frightening.

Atria Scandinavia Tomas Back, EVP

Back does not explicitly state Atria Scandinavia’s local core, but instead repeats the old and familiar strategy: To be market leader or to have a strong second position in cold cuts, sausage and delicatessen in our markets in Scandinavia through strong brands, innovation and successful sales.

Quite funny, but this statement gives the chance to be only the second, perhaps Back should update it. But practically speaking, the statement looks sound: Cold cut brands Lönneberga and 3-Stjernet prosper, Lithells sausages likely are ok and Ridderheims goes well with its deli products. But something is missing: Where is fast food? It is indeed thought-provoking that specifically in Atria Scandinavia’s presentation Sibylla is just mentioned once and only due to its expansion in Russia.

Atria Russia Jarmo Lindholm, EVP

Atria Russia’s local core looks clear: Processed meat products, convenience food and Sibylla, concentration on branded products, and only in St. Petersburg and Moscow.

One question arises instantly: Is Sibylla Atria Russia’s business in Russia? I thought that Sibylla is a part of Atria Concept in Atria Scandinavia. Another thing is that it has now become obvious, that Atria’s primary production in Russia will be closed down. Why it is not stated explicitly in the presentation or someplace else?

Lindholm’s arguments for the local core are clear but they are mostly wishes, a list of potentials like these: High market value potential in cold cuts, strong market growth potential in convenience food and Sibylla, strong assortment management and new product development implementation. Only one argument is a realized fact: Strong market position in sausages category. And this is valid only in St. Petersburg, of course.

There is nothing wrong with the presentation but Atria Russia will not convince anyone until there is more evidence about successful launches and until Gorelovo’s plant is running at full steam.

Atria Baltic Olle Horm, EVP

Horm, not following the given presentation format,defines Atria Baltic as a full circle meat company, which is a fact of course. Reading on the presentation, one could suspect that Horm himself is a man of 180 degrees, and when compared to the rest of the pack, he goes into the opposite direction in a number of issues.

Straightforwardly he defines Atria Baltic’s two main focus areas. They are sales improvement and cost efficiency. This is not original, but his means for sales improvement might be. He plans to restructure sales and marketing organization, reduce the share of campaigns in daily sales and he also aims to growth in meat sales. One cannot know, what he means by restructuring, but surely it will lead to major changes. Less campaigns is an unexpected and bold move and growth in meat sales is just opposite to the previous strategy, according to which highly processed products have seen to be the only way to success.

Unfortunately Horm’s cost efficiency measures are not quite as straight talk although saving targets are clearly expressed. Measures include optimizing office and management personnel, centralizing logistic operations to Valga factory and tightening general cost control. But what means optimizing and what is general cost control? One more target there is listed, namely the factory outlet in Valga. We discussed about the matter in this blog four weeks ago. Now the closedown looks certain. Not a great move.

In the future outlook section Horm, just in case, repeats the new strategy: Our focus is on increasing sales, especially in fresh meat segment. However, elsewhere in his presentation, Horm brings up processed products and somewhat softens the strategy change. He says that Atria Baltic has been losing market share in processed products and gaining market share in meat, and in this instance he declares that the primary target is to stop the loss of market share. No doubt, Horm will implement at least some of these activities. Atria Baltic’s long-awaited entry into the black may be just around the corner.

We will look at Atria again later but on Friday, January 4th we are going to study HKScan’s businesses. If snow turned green, it would not make summer, in my opinion.

This is Artoparto and here is my Disclaimer. Please read it.

Friday, December 7, 2012

Organic junk food by HKScan Finland

Järvi-Suomen Portti Oy, a subsidiary of HKScan Finland, merging into HK-Ruokatalo by the end of the year, really intends to prosper. To my surprise, the company has started producing organic burgers and a veggie version too, already in last August. That’s fearless, indeed. One cannot know, if there is a decent sized target group but the launching of this product means that the company completely ignores ordinary market research reports, one of which is presented (in Finnish), incidentally by HKScan Finland’s closest competitor. According to this competitor’s presentation, of all organic food categories in Finland, ready meals are currently the least used and, what’s more important, one of the least desired in the future (see pages 4 and 5).

Without looking at any reports, one is able to guess that many organic food friends are sharply against all ready meals, and burger in particular is a red rag to them. However, I think that there is also a group of busy consumers, perhaps predominantly female, who are frequent users of ready meals and for whom organic food is a highly positive thing. And there is yet another possible target group, those who don’t mind the farming method or even do not recognize it, but just pick up their food quickly. The former group in mind, one must hope that the nutritional properties of this new product are suitable and the packaging is sufficiently attractive. It is also hoped that these products will get sufficiently shelf space so that the latter group would at least notice them. Of course, there is also the price issue. Compared to ordinary food, organic food is necessarily more expensive. In this case it is even more so due to the fact that these new organic burgers contain minced beef. Perhaps there is not yet too much organic pork available in Finland. On the other hand, beef is of course generally considered healthier than pork.

All in all, HKScan Finland’s organic food strategy seems to differ drastically from its competitor’s strategy stated in the report above. Competitor's strategy can be summarized as something like this: The less processed product, the better organic food works. This kind of competitor’s statement means that we need to return to strategy differences between these two companies at some later date.

Organic junk food launch is a tough thing, and sometimes such ideas succeed. There seems to be also many other organic foods in the company’s product range. If some of them will be hits, then it is clear, that the company, acquired by HKScan Finland in 2010, has found its place in the Group, and against all odds, will prosper.

It is likely, that the organic food ideas were born in the plant but there is still another new organic product: Rose Poultry's organic chickens are in Finland sold under the same brand as those burgers above. This must be the management group’s idea. The product itself is bad, whole frozen chicken, just like 70’s were here again. Secondly, for the Finnish consumer, foreign organic food is not real organic food. Moreover, Danish meat is in Finland not considered to be completely safe or ethic although “No more salmonella in Danish poultry” tells a headline in Science Nordic. Whatever, Finnish burgers may well succeed but this particular Danish product will be a failure in Finland.

Danes go China

Surely there will be demand for Rose Poultry’s products elsewhere. Just these weeks, a group of Danish food companies are aiming the Chinese market. See for instance TV/MIDT-VEST and LandbrugsAvisen. Authoritative Danish delegation has just returned from China and this was a return visit, namely the outgoing president Hu Jintao visited Denmark in June and food certainly was on the agenda back then. Danish Crown was of course the most important commercial player on this visit, but Rose Poultry was accompanying, as well as its major competitor Danpo. Danish food companies' global reputation is good and Danes' self-confidence is of course first class, which will guarantee that in the near future we can expect Rose Poultry’s announcement of their successful visit to China.

We will look at HKScan again later but on Friday, December 21st we are going to examine Atria's businesses. It's cold. Hurry up, climate change, hurry up! Could you come already before the summer? Even next week?

This is Artoparto and here is my Disclaimer. Please read it.