Molinos Looks to the long-term

Argentina’s largest food company has set itself up for long-term growth through diversification, a shopping spree and solid management.
But risks abound in the short term.

San Benito Port | Photo: Courtesy of Molinos

BUENOS AIRES – Molinos Rio de La Plata, the largest food company in Argentina, is a favorite for stock analysts, who praise its solid management, its diversification into commodities and a slew of new acquisitions as reasons for a steady rise in sales over the past decade.

Now, with inflation and currency woes clouding the horizon, experts say these same policies –along with a proven capacity to increase sales– will keep the company on stable ground over the long-term.

Lucchetti | Photo: Courtesy of Molinos

Sales figures for the company’s Lucchetti brand serve as a case in point.

After years of conservatively marketing the pasta, rice and soup brand, Molinos worked with an advertising agency on a makeover that led to the launch of the Mama Lucchetti campaign in 2009.

The campaign features animated characters, funny skits and catchy jingles. Children caught on quickly, enamored with Diana Arroz and other members of a bizarre family of short, big-eyed and nose-less characters. The brand became so familiar to parents it may even rival the popularity of “Where’s the beef?” and “Milk does a body good” campaigns from the 1980s in Canada and the United States.

The new tack paid off. Lucchetti’s share of the dry pasta market surged to 14.2 percent in 2011 from 11.8 percent in 2008, while its share in the soup market nearly doubled to 14.9 percent over the same period, according to ACNielsen, a market-research firm.

The strength of Lucchetti and other brands like Don Vicente and Matarazzo helped the Victoria, Buenos Aires province-based company to increase overall sales in constant dollar terms by 12 percent in 2011, to $2.97 billion, up from $2.65 billion a year earlier.

But not all of the news is good
“Our forecast is that this will be a year that will have its complexities, above all because of the international situation”, said Molinos general manager and chief executive Amancio Oneto.

The home front also is complex. Argentina, a main production market for Molinos that also accounts for 30 percent of its sales, is becoming a more challenging environment, prompting uncertainties about the company’s short-term future.

Inflation is high and the economy is stagnating. Private estimates show that consumer prices rose more than 20 percent in 2011 and the trend is accelerating this year. The local currency, meanwhile, is expected to depreciate against the dollar at 13 percent to 14 percent this year, compared with 8.3 percent in 2011.

For Molinos, these economic troubles led to a 29 percent rise in costs in 2011 on the year, as it was forced to pay more for everything from labor to ingredients to the fuel it needs for processing, packaging and distributing its foods. The firm’s profit narrowed 28 percent to 277.4 million pesos (about $64.5 million) in 2011. The decline continued in the first quarter of 2012, when it posted a loss of 32.3 million pesos.

“The big problem is that sales are losing dynamism in a very inflationary environment,” said Martina Gallardo, an analyst at Arpenta, a brokerage in Buenos Aires.

This is slowing overall sales in Argentina despite the strong performances by Lucchetti and other brands, she said.

The same factors also are hitting the company’s biggest business: its sale of biodiesel, grains, oilseeds and livestock.

Commodities account for about 70 percent of total sales, with 92 percent of that revenue generated in foreign markets.

The problem for Molinos is that much of its production is based in Argentina. While commodities prices are high –soybeans, for example, are at $515 per metric ton, far higher than $110 in 2001– costs at home are surging, Gallardo said. This in turn undermines price gains.

Argentina’s inflation has been in the double digits since 2007. But in past years Molinos could pass along inflation hikes to its domestic and international consumers, since wages were rising at the same pace, on a robust economy. Argentina’s economy expanded an average of 8 percent a year between 2003 and 2011. This year, however, growth is expected to slow to 4 percent or less.

Economists warn that the economy could even enter a recession in the second half of this year. Not only will salaries rise more slowly this year—- at 15 percent to 20 percent, versus 30 percent to 35 percent last year– but consumer spending power and corporate costs are taking hits from higher utility costs, they say. The government this year started jacking up the prices of natural gas, power and water for companies and many households, hurting profit margins. The higher costs, too, are making it harder for Argentina to compete in export markets.

“Inflation is eating up consumer spending power,” Gallardo said. “The commodities business is losing operating margins because of the high costs from inflation.”

Worse, the government this year started restricting the purchase of dollars, causing the peso to weaken by 30 percent on the black market compared with the central bank-controlled exchange rate. This is pushing up devaluation expectations and as a consequence, businesses are raising prices, which is stoking still more inflation and dampening consumer spending, said Alejandro Bianchi, an analyst at InvertirOnline in Buenos Aires.

“High inflation is suffocating the company’s large earnings on the price of soy,” he said.

Even so, analysts say Molinos has been deft at laying the groundwork for long-term growth, a strategy that gained steam after the entry of Argentina’s Perez Companc family into the business in 1999, led by Gregorio Perez Companc, the richest man in Argentina.

Gregorio, 78, and other family members, built up experience and fortunes in banking and the oil industry, and since the late 1990s and early 2000s they have sold out of those sectors to focus on Molinos.

As important, analysts say, Gregorio is a sharp businessman.

“He is very efficient,” said Federico MacDougall, a consultant and economist at the University of Belgrano in Buenos Aires. “He is not a businessman who runs a company into the ground. With Molinos, he took over a good management and made it even better.”

It was under the direction of Gregorio and other family members that the 110-year-old Molinos expanded abroad and dived into the commodities business. It also entered new businesses like biodiesel and wine. The company, with 16 plants and seven distribution centers, now exports to more than 50 countries, making it one of the biggest food companies in South America.

The pace of acquisitions has remained steady as it pursues a two-pronged strategy of brand development and expansion in the oilseed market.

“Our vision always has been long term,” Oneto said.

This is even more the case now with the jittery global economy. “Our investment project clerly targets the long term and to continue generating syergies between our two areas of business: brands and commodities,” he said.

Last year Molinos also teamed up with Lucini Italia, a gourmet food maker based in Italy, to market olive oil, dressings, sauces, soups and organic foods in the United States, with an investment of $8.5 million for a 49 percent stake, plus an option to acquire 100 percent.

This followed a partnership with three companies in Argentina to invest in the expansion of a biodiesel plant in Buenos Aires province, with Molinos putting in $11 million.

Then, earlier this year, it bought a 25 percent interest in soy and sunflower lecithin producer Argentina’s Emulgrain for $2.5 million. The company exports most of its lecithin as an emulsifier that is widely used in cooking and animal feed, as well as in paint, pharmaceutical and plastics industries.

Also this year, Molinos has completed a $21 million takeover of Chile’s Compania Alimenticia de los Andes from Chilean food giant Grupo Carozzi with the aim of expanding sales of Los Andes candies, chocolates and cookies in Argentina. To top it off, the company bought Chilean pork producer Sipco for $5 million with plans to expand exports on rising demand.

“Molinos is a well-positioned company for long-term growth,” said Gallardo. “It has bought a lot of small companies to build and diversify its business, and this will pay off in the long term.”