ANZCO’s 2018 pre-tax loss of $38 million was the worst result in the company’s history.
The exporter has traditionally posted a profit, even in difficult years for the meat industry which has always had a chequered history, so it is critical to assess what went wrong and, more important, how to make sure it doesn’t happen again.
None of the largest meat companies that publish their annual results, Silver Fern Farms, Alliance and ANZCO, enjoyed a great year, but contrary to its previous performances relative to its competitors, ANZCO had the worst of it by a considerable margin. Analysis of the figures shows record income more than offset by expenses and finance costs; the obvious questions for CEO Peter Conley are what is going to change and how is 2019 tracking?
At Conley’s invitation I visited ANZCO at its new Christchurch head office where I met chairman Sam Misonou and the senior management team for a frank discussion, providing context for the 2018 performance and explaining the changes that will turn performance round in the current financial year. The first point which Conley acknowledged up front is last year’s loss was totally unacceptable, but it was caused by a perfect storm of unfavourable circumstances which ANZCO is confident won’t be repeated.
The first and most obvious factor was the cost of livestock procurement which remained obstinately high throughout the year, swallowing an unsustainable percentage of the historically elevated market prices. While ANZCO remains committed to paying its suppliers a fair price for their livestock, the current year has seen a considerable improvement in the proportion of the final sale price retained by the company. However there is still some nervousness about the opening price for lamb when the new season starts in October and how long this level will persist.
Livestock Manager Grant Bunting told me livestock prices had been set to guarantee maximum procurement numbers to satisfy a double shift processing configuration, planned to capture a peak kill that only lasted a couple of weeks. Heavy competition also resulted in all weights and grades stock purchases, as distinct from schedule, causing an excess of incorrect specification lambs without a profitable destination. ANZCO has since changed its focus to matching procurement to customer orders instead of procuring livestock to generate a contribution to overheads which always used to be the industry’s justification for pursuing market share at any cost. Much greater emphasis is now being applied to optimisation of the three key factors of market, customer and product specification.
Bunting also referred to livestock headage and commission payments for third party supply which ANZCO no longer pays, but livestock price creep as a result of other processors still using this system still affects procurement prices as a whole.
By my calculation, if ANZCO can reduce its livestock cost by 5% as a percentage of revenue for the year, it will save as much as twice last year’s loss. To some extent supplier pressure and the competitive tension between processors will determine whether ANZCO is able to achieve this, but more attention to the single biggest expense item will go a long way towards getting the company back into profit. Other key factors are plant efficiency, overhead reduction, market returns and inventory management.
Conley is confident the ovine plants are very efficient, with $12 million invested in automation last year in Rangitikei, while the beef plants are generally in line with the rest of the industry; the two North Island plants at Bulls and Eltham have hot boning, while the South Island plants still use cold boning because of the traditionally high proportion of prime.
The consultants tasked with identifying efficiency improvements judged the plant configuration to be cost competitive and told the company there didn’t appear to be any low hanging fruit. However two specific measures implemented recently are expected to deliver considerable cost savings: following Costco’s decision to buy direct, closure of the Chicago office will save $2 million a year, while the change from divisional to functional business structure and consolidation of management and administration at the new head office will reduce overheads.
ANZCO’s owner Itoham which has Mitsubishi as a major shareholder not only provides financial strength, but also opens many doors throughout Asia and the Middle East, ensuring the company has huge supply chain and distribution options. It has market influence in chilled beef and lamb, particularly in Japan where Itoham has a major retail presence, supported by restaurant sales which have a large role in educating retailers and end consumers.
The main focus of ANZCO’s business is on chilled and value added products where the largest margins can be made, while frozen product must be handled very efficiently to ensure fast throughput. Last year’s record turnover proves the logic of this focus on maximising sales value, although high livestock costs squeezed the contribution from the added value part of the business which now makes up 10% of turnover.
Another profit improvement initiative will be shortening the supply chain and reducing inventories which Conley admits haven’t been managed very well; for example Japan has historically held three months inventory and taken three months to collect debtors. However he is adamant the investment in the Lamb Company is totally justified by the margins and returns ANZCO obtains from its North American business.
The commitment and support of its owner and the improvements to its business structure and operations give Conley confidence ANZCO has already put last year’s loss behind it and is well on the way to a good profit for 2019.
Current schedule and saleyard prices are available in the right-hand menu of the Rural section of this website. This article was first published at Farmers Weekly and is here with permission.
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21 Comments
Over paying for livestock! What’s new? When will they ever learn? You buy it for A. You process it for B. You sell it for C. If the sum of A & B is greater than C, you go out of business. Think even simpletons could work that one out. Not so the meat industry, sad to say.
Sure is Belle but at the end of the day, that is how it stacks up on the processor’s balance sheet. Appreciate you are a producer and from previous contributions you know your stuff about stock and supply. But this article is explaining the historical foolhardiness of processors buying stock at the gate at returns the market(s) will not support. The fatal flaw in that strategy is the much vaunted word “throughput.” In other words lower your unit processing cost by increasing the numbers. The delusion of economies of scale if you like. Hellaby, Fletchers, HBMC, CWS,Waitaki, Challenge, Fortex, SFM, are all due testament of exactly that failure.
But also don’t forget the role of government in the meat industry and dairy.
These monolithic inflexible structures suited them vey well, production at any price.
They are now throwing money at reforestation with a political agenda, based on history they will not want to share the pain.
fair comment & to prove your point you only have to look at Muldoon & the scandal of the SMPs. Had to keep the rural vote happy you see. Probably one of the most outlandish & unscrupulous example of a misguided subsidy the world has witnessed. Cost NZ taxpayer in excess of $2 billion and all it did was prevent the processors from hitting the well earned wall and let them go careering on with more of the same. ie build more cold stores. Belle if you read this. Go back and research that dreadful scene. SMPs were all about manipulating A & B to come out at less than C! Problem was though, C is the market, outside of NZs control. You can’t export your problems
We can forget free market principles because, as a agricultural exporting behemoth we operate in a world of quotas and tariffs, negotiated between governments.
Our criteria as I last knew was protect exporter share and allow for new entrants.
So a change may mean companies. bid to supply the quota and quota is allocated on export highest price.
For Belle it would mean quotas and price as well of course.
Well now let’s see. We are talking 1983/4ish. At the time the NZ sheep flock would hit a peak of about 75mill. There was not enough traditional market to absorb that. Diversification was novel and insufficient. Markets such as Iran were volatile, of uncertain potential. Muldoon knew well enough that the sheepmeat industry was in deep trouble. The processing itself was shall we say unsophisticated, the final product far below the quality of today. Case in point, when one of the larger processors met with Muldoon to extract finance for a new huge frozen storage complex he turned them down flat. Why? Because he knew at least that product having to being stored in NZ, wasn’t going anywhere fast. So the industry had, very obviously to all in the know, reached a stage of immense over capacity. Instead the hard reality of that being addressed SMPs did the exact opposite, plants actually built in more chains! But politically it was expedient for the rural vote and our country squandered $ 2 billion or so just for that. You ask of other examples. One very similar situation was in the USA under Clinton with the imposition of a tariff on sheepmeat imports about 1997/8 I think. The American equivalent lamb was a very unhappy product by NZ standards. Very large cuts, fatty & not so tender. Very expensive at retail, less than 2% of American red meat consumption for all of those reasons . Quite a bit of the tariff take filtered through to the producers who were then able to increase their production, but not improve it. So the moral of the story is doubling up production of a dud or unwanted or inferior product doesn’t pay. Elsewhere the subsidies in the EEC causing such as the beef mountain(s) of the eighties etc, were shockingly wasteful. A lot of processors were gifted, yes gifted, huge cold stores to accommodate it. So in my opinion subsidies create nothing but market distortion and are a manipulative tool of the deluded politician unable to cope with reality.
Point well made thanks Foxglove.
What are your thoughts on the 'DIRA'? I don't make apologies for poor decisions and direction at Fonterra, but the government requiring milk to be supplied to 'independent' start up processors in the name of competition appears to be leading us to the same scenario of stranded assets in the dairy industry.
The dairy industry has always been a bit of a mystery to me. In the days that they were the Dairy Board came across some quite unsavoury actions in various markets, that could only happen because they were a monopoly. Strangely enough there is a hansard of one Robert Muldoon, in opposition, in brilliant form, to the Kirk government, lambasting the Dairy Board’s dumping of cheese in the UK, which was then quite a scandal. No government should interfere financially, directively or operationally at any point with private industry or commerce. To go back to the meat industry, the Holyoke government introduced what was termed Meat Hygiene Loans to the processors to facilitate sorely needed upgrades to satisfy the EEC at that time. But these were based in the trading bank operations more or less as a relaxation of the strict lending corset then being applied by the R BNZ. But these were loans and it was worthwhile lending, the improvement enhanced quality and the loans were repaid. On the other hand the subsequent introduction of tax incentives for exports of a further processed type, was quickly rorted and ended up being entirely counterproductive. True test of any enterprise is that it is only worth the product it produces. Any viable operation of any worth or potential should be able to locate venture capital easily enough within the private sector. Government involvement, using other people’s money, is neither accountable nor justifiable. It simply unlevels the playing field.
Hiya Foxglove. Yes you have a point. I deal with a handy smallish processing facility. Deliver them first thing in the morning. They are dead within a couple of hours. I have an email mid afternoon detailing the kill and the invoice. They even pay within a few days. I use to work there many moons ago. I paid the bills, it was mindboggling the costs. The staff issues. Stock procurement. Transport and cool store charges. Then there was foreign exchange cover, and if they didnt get that right, ooh the pain. To add to the pain there was MPI in its other form, MAF. Plus the Regional Council who really seemed to want to put us out of business. Throw in the local iwi and I could understand the owner being partial to a whiskey. Its not a business for the faint hearted, and after my stint there I had a lot more sympathy for them thats for real. Much more fun buying and selling the living, and making a quid that way.
Here are some current retail prices of NZ product in Hong Kong last week:
NZ Lamb loin $97.90 per kg
NZ Lamb tenderloin $101.75 per kg
NZ Lamb mince $51.80 per kg
NZ Lamb belly (bone in) $30.70 per kg
NZ Lamb shoulder (shaved) $59.50 per kg
NZ Venison chop $113.25 per kg
All prices in NZD's.
Who's making all the money?
Possibly the retailer.
Global meat news has some examples of restaurant chains selling fat lamb kebabs for 30 yuan each, sounds expensive but the markup through the restaurant may be 500%, at least in NZ.
So a portion of lamb may be 100gms and cost about $1.NZ in China
That sounds about right
As someone involved in sending product to Asia, we have kept our own database of retail prices of approximately 100 fresh and frozen food items from NZ, Australia and the US, across seafood, lamb and beef, dairy, and eggs.
This gives us a basic picture of food inflation, year by year, in Hong Kong.
Something that was evident this year when we conducted our survey was that NZ origin products had increased by a smaller percentage than products from other countries (in some individual cases, the price had decreased). And this is in spite of consumers wanting NZ product!
The only explanation we could come up with is that NZ trade negotiators or salesmen do not bargain as hard as those from Australia or the US, or simply do not know the market.
Across all the NZ products we follow; fish, crayfish, scampi, shellfish, beef, lamb, kiwifruit, eggs, dairy products, and honey, the NZ primary producer receives on average 3.3 % of end value price.
1/30th of the end value.......that's quite astounding. Why the primary sector haven't realised this themselves and found a way to increase their slice of the pie is beyond me.
Wow. The players that are closer to the consumer must do a great job of protecting their patch. A really interesting metric to see over time would be how many labour units have ended up exiting at each part of the supply chain. As in a pointer to where most of the risk lies.
I think from the past there was a hang over with sheep meat from the days when there was a large carry over of inventory from one season to the other. Financing that was draining hence the consistent dumping of all sorts of product which undermined pricing overall. NZ was perceived then as weak sellers in a bit of a hurry, perhaps they still are and can be manipulated accordingly. Who remembers Mr Bachelor of Tesco’s famous remark that they would find it easier and more lucrative to sell gateau rather than NZ lamb.Those were the frozen product days. Nowadays with the venture into chilled product, not so much with the Asian markets you explain but with the largest Europe, shelf life by the duration of sea freight, can get a bit pinched. It is better to sell if it becomes necessary at a discount than freeze down and repackage.
I guess what I find the hardest thing to understand is the farmers attitude towards being ripped off to the extent they are. I'm not sure if its lack of intelligence or possibly the fact that many farms are multi-generational and passed down, so effectively the current generation has had all the establishment work done for them.
But where I am based in NZ I have friends who are large farmers, and in the beginning I would tell them the asian prices for their lamb chops etc.....and they simply didn't believe me! They were so confident they'd just say no you must have made a mistake. So then I started taking photographs of the product and price and showing them. They then changed the tune to oh well the processors need to make a quid too you know.
Its like some sort of twist on Stockholm Syndrome where they start defending the people who are helping to screw them. They are simply incapable of believing the system could work better for them.
This is a generalisation I appreciate, but there is a sad reality in that in terms of global consumption demand no market actually needs NZ lamb. If there was a bio tragedy preventing our exports, it would not be much missed or for long. Cynically speaking, the only interest is from the importers and traders who can still make money out of it. The chilled lamb product is second to none in quality it is white table high class, but it is expensive by the kg and a very small niche market. Therefore it just has to be vulnerable to outside influences. This article is a bit ironic. ANZCO was founded by Graeme Harrison who was first to grasp the essential reality of separating high quality from commodity. Each can be profitable but don’t get one involved with the other. Hence at the time ANZCO for the latter JANMARK for the former. From the look of it the lines may now have become blurred.
You're right they don't need our lamb...they want it!
Kiwis need to change their entire way of approach to thinking about this. Te Mana Lamb is screaming in Hong Kong right now. People talking about it. Its on many 5 star hotel restaurant menus. Do any farmers know that? Doubt it, they're too busy farming the conventional way.
Australian premium lamb chop last week $165 per kg on the bone! I'm not talking about anything fancy here like french rack either.
WHY WONT New Zealanders just accept there other ways of doing this.
As foxglove says, they don’t need our lamb, they are the biggest producers of lamb in the world, for their domestic market.
My bet is we and the aussies are weak sellers and the Chinese buyers know it.
The message is still expect declining prices for lamb, global production is increasing, even as our production is declining.
our production is declining. therein lies the real big truth. Sheepmeat production in the SI started to really outpace that of the NI in the eighties. Hence the rise of Alliance, PPCS as the dominant players. So think about the SI. A modern plant at Nelson. Nearest plant to that Smithfield, Timaru. So in the prime sheepmeat producer areas of old, these plants no longer exist. Picton/Marlborough, Kaiapoi, Belfast, Canterbury, Islington, Sockburn, Fairton. Down south of Dunedin, Silverstream built by Fortex, in its day the biggest & most modern further processing unit ever, lies mothballed (hopefully I may be wrong now on that one.) So despite all of that we have once again the cycle of over capacity, thus the bogey of buying overpriced as per the thrust of this article. Pretty despondent isn’t it, hardly signifies growth being stimulated by market demand.
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