August 28, 2006

Talk with Danish Crown CEO Kjeld Johannesen

Kjeld Johannesen, CEO Danish Crown (photo: Carsten Milbret)
Kjeld Johannesen: "If you aren't profitable, you can't grow"
Pleasant, easy-going Kjeld Johannesen is the boss of a company which is living proof that a co-operative structure is no impediment to size in the meat trade.

Danish Crown's revenues of around €6.3bn make the Randers-based group the world's largest meat exporter and the third-largest pig slaughtering business.

In the search for profitability, however, the international meat trade looks very much on the verge of another round of consolidation.

This is a man who gives the impression that his people, the environment and animal welfare concerns are not mere ciphers on a management agenda.

The need to reduce cost in an increasingly competitive and high-volume environment has inevitably drawn him into conflict with local Danish trade unions. Meanwhile, Eastern Europe, and even Germany, offer sites with cheaper labour.

Will Johannesen choose peace at home or a cost-optimised balance sheet?

INTERVIEW


Mr. Johannesen, what do your retail customers want?


Obviously, different retailers want different things from us according to their concept. But at the end of the day most want the best quality, the best service, and the cheapest price.

But surely there is a difference between supplying, for instance, a niche quality operator and a discounter?

Of course there is. Meat can be free-range, or not, cutting can be by hand or by industrial machine, depending on the price. Some, like Waitrose in the UK, go down a different route.

In what way?

High-quality, high prices. Most other retailers want high quality, but demand ever lower prices.

Waitrose has been a very profitable niche operator over the last years, for instance, by building up a clever marketing story line emphasising their high quality criteria from farm to customer.

So you prefer dealing with people like Waitrose?

We serve the whole market, not just them.

Do you consider yourself large enough to survive the concentration process?

The name of the game is not so much about how big we are today and could be tomorrow, but rather can we fulfil retailers’ requirements and still remain profitable because, if you are not profitable, you can’t grow.

So the name of the game is profitability rather than sales growth?

It’s not a question of either/or, but about being competitive. Of course size and volume are part of being competitive.

So there could still be a mega-merger between Vion and Danish Crown?

Our focus is on customers, and our position has always been not to comment on such things.

Swedish Meats are said to have approached you as a potential partner. Would you at least comment on that?

Swedish Meats have said that they are looking for partners in Europe and that these could potentially include, in addition to ourselves, one or two Finnish companies, Vion, and a local Swedish combination, but I think we should leave this to the Swedes.

Were you worried when Joseph W. Luter III, CEO of Smithfield Foods, stated a few years back that he was prepared to make losses in Europe in order to achieve sales growth goals in the region?

As the CEO of a listed company on the New York Stock Exchange, it was a surprising statement to make. Perhaps it was made in the wake of the losses they had previously incurred in Poland.

Would you be prepared to loss lead in order to gain market share?

We are not in a Smithfield situation where we could ever announce that we were prepared to take losses.

Whatever market we enter, we always have to be convinced in advance that our business model is viable. We have to know that customers will want our high-quality products and that we can be competitive on the market concerned.

So you are concentrating on organic growth?

Our strategy has been to build up our position in England, Germany and Poland via acquisitions. We have also invested considerably in making our factories more cost-efficient in Denmark.

Independently of your own plans, do you think that there will be further consolidation in your industry?

Yes, there will have to be, if even only a small profit is going to be left for the operators.

The European meat industry is in transition. Vion has grown strongly through acquisitions including soon Südfleisch. Smithfield Foods is becoming increasingly involved in Europe and has purchased Sara Lee's meat division.

We have to focus on our main mission which is to serve the customers and the farmers. We are a co-operative, owned by farmers, which guarantees stability of supply.

How big a market is China for you?

We operate a factory there which processes the pork and lamb casings we ship from Denmark, Germany and France.

China is also a huge market in terms of tonnage for specialist products such as pigs ears and various by-products, which are not very popular in Europe, but where we get added-value.

Is distribution a problem?

No, because we ship to the big distribution centres at the ports.

But it takes five weeks to ship meat from Rotterdam to China?

That’s no problem when it’s all deep frozen. The key is to remember that it is more difficult and expensive to send a truck from the Danish border to Rome than to ship from Denmark to China, Japan or Australia.

Why is that?

The containerisation of ships is so efficient that ship freight rates are cheaper than truck transport despite the recent increase in energy costs. We also profit from the fact that most of the freight volume flows from the Far East to Europe.

As we export the other way, we can get excellent backhaul rates. In fact, we are in the fortunate position whereby we can ship big volumes to a few key customers in China as well as to Japan and Australia.

The other side to globalisation is that competition is increasing on export markets, and that this will increase as the EU continues to expand. How do you intend to match competitors from, for example, Brazil, who produce at considerably lower costs?

Low-cost production is one thing, but guaranteed high quality is another entirely.

You only have to look at the problems Brazilian producers have had with the quality of their poultry exports to Europe. They still have a long way to go before they can meet European food safety and veterinary requirements.

But won't Brazil become an increasingly strong competitor on the global market?

Of course, Brazilian producers have considerably increased their beef exports to Europe.

However, due to the outbreak of foot & mouth disease in Brazil, they were out of Russia, their main market, for a while. Obviously, they fought hard to control the disease, but I estimate that it will take them a number of years to get back, especially in poultry.

What are the big world export markets of the future?

We see local and international production increasing in both China and Russia, but at the same time local consumer demand and purchasing power continue to increase. Japan and Australia will also remain big markets.

But, at the end of the day, Danish Crown has to focus on the fact that the EU has been and will continue to be our largest market, where we have a particularly big stake in the UK and Germany, and getting distribution in the region remains the most important thing.

But your global expansion strategy remains firmly in place?

Of course. One of our key strengths compared with our competitors is that we have access to all the major pork markets, i.e., China, Korea, Japan and Australia as well as to the fresh meat market in the US and the EU.

Your livestock is slaughtered in Denmark and then goes to your cutting plant in Oldenburg. This takes an extra one to two days. Doesn’t this put you at a disadvantage to your German competitors?

I think you've been talking too much with our German competitors! If you look at our operations, we slaughter in Denmark during the day, ship through the night, and we cut and pack the next day, so your one or two days are more like 12 hours.

But that’s still a time lag on a product with a limited shelf life?

I am sure that, if you compare the quality of our meat regarding salmonella, shelf-life etc., it will compare very favourably with that of any competitor in Europe.

At the end of the day, it's a question of the quality of the meat the customer buys, not whether it is a few hours older than the meat of another supplier.

Do you think German buyers appreciate this point fully?

Unfortunately not. The high food safety standards in Denmark mean that we can guarantee the same shelf-life, but with even higher standards, which is far more important than a mere 12 hours.

They must realise that quality is much more important than the age of the product. In fact, if our meat is slightly older, it might well be more tender by the time the customer consumes it.

What is your profit strategy?

Firstly, you must realise that we are profitable as a cooperative. At the end of the day, our sales minus cost is the profit to the farmers. We measure profit in terms of how much we can pay back to the farmers who supply us.

Won't the automation of your abattoir production lines in Denmark and the transfer of your cutting activities abroad cause problems with local workers' unions?

Workers in the Danish meat industry are 100 per cent organised in trades unions which gives them more power than in Germany or England.

On the other hand, they are fully aware today that there will be no jobs at all, if we are not competitive. We can only remain competitive, if we move jobs to Germany, England or Poland.

Our strategy is to slaughter pigs at as low a cost as possible in Denmark and to process the product close to the customers — again for cost reduction reasons.

All new investment is costly. How can your cooperative structures provide sufficient capital long-term?

Both we and other European entities such as Arla Foods or FrieslandCampina have proved that they can grow big on a co-operative basis. Today, we have adequate access to the cash we need for expansion through the equity of farmers in Danish Crown.

To date, access to capital has not been so much the problem, but rather finding the right objects to invest in and making these profitable.

To what extent do co-operative structures slow your capacity to make management decisions?

Our farmers elect a Board of Representatives who then elect the Board of Directors. We run the business together, but the management has full and unfettered power of decision.

The beauty of this close cooperation with the farmers is that, if a customer comes to us and wants pigs to be grown in a special way or with a special weight or fat content, we can start production at farm level in only a few weeks.

Danish Crown has a 90 per cent share of the slaughter market for pork in Denmark. The price paid to Danish farmers is considerably less than their German counterparts receive. Are you using your monopoly to exploit Danish farmers?

It is true that countries such as Sweden, Poland, France, Holland or Denmark have paid lower prices than Germany in the past.

As far as Denmark is concerned, it must be remembered, however, that nine out of ten of our pigs are for export, which involves extra freight and labour costs. That said, prices in Germany differ.

Meaning what?

The top price level announced in a country is not always what the farmers get back in terms of profit. In fact, we have seen former suppliers to Danish Crown, who decided to supply to Germany, coming back to us. The Danish system is totally transparent.

Implying that it is not always so in Germany?

I believe that there is not just one price, but a thousand prices for farmers in Germany. The German market is undergoing tremendous consolidation and change, not least because of the easy access to cheap labour from Central & Eastern Europe.

In Denmark we have less access to this cheap labour, which is one of the reasons why we have moved our processing plants to Germany, Poland as well as to the UK and why we have increased our level of automation in Denmark.

At the end of the day, however, one has to ask how profitable is the German meat industry really?

How important is the Danish QSG quality concept and the GRMS (Global Red Meat Standard) standard?

It's essential that retailers and processors work together to reassure consumers that they are getting a better quality standard. Obviously, it would be preferable to have a general standard within Europe.

As this does not exist, Danish Crown has to meet the quality standards in various countries and to convince customers that our Danish quality systems are even better than their local ones. 

Are you worried about the consumer trend in western Europe towards less red meat?

No, because there are different trends in different areas in the world. For instance, Denmark now exports five-figure tonnes of red meat to Australia, at the beginning of this century we didn’t have that market. There is also growing demand in China and Russia.

What are you doing to meet current consumer demands for non-intensive animal husbandry?

Danish Crown has its own high standards, which are audited by external bodies, and we fine any farmer who does not live up to our code of practice.

Consumer demands for increasing quality also mean that we are producing more and more free-range pork as well as organic pork and beef.

We also check the state of the pigs on arrival at the slaughter house and only allow short transport distances. In Germany we see a lot of pigs transported a long distance, in Denmark we only talk of journeys in terms of one to three hours.

We are convinced that it is better to transport livestock as little as possible.

 
Related article in German: Interview by Mike Dawson in Lebensmittel Zeitung, no. 34, 28.08.2006


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