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 chief executive 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 around this financial year.
The first point Conley acknowledged up front is last year’s loss was totally unacceptable but 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, this 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 said livestock prices were set to guarantee maximum procurement numbers to satisfy a double-shift processing configuration, planned to capture a peak kill that lasts only 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 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 can achieve that 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 $12m 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 doesn’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 the closure of the Chicago office will save $2m 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 that 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 the focus on maximising sales value though 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 debts. However, he is adamant the investment in the Lamb Company is totally justified by the margins and returns Anzco gets 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.
