`Deoleo Muscles Mills for 'Never Seen' Terms as it Moves to Hybrid Oils - Olive Oil Times

Deoleo Muscles Mills for 'Never Seen' Terms as it Moves to Hybrid Oils

Dec. 3, 2013
Julie Butler

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Its recent long-awaited strate­gic review lifted the veil on rad­i­cal changes at olive oil giant Deoleo. In the sec­ond half of our series on it, we look at the price war with store brands, why Deoleo moved from inven­to­ries of two months to just two weeks, and how lots of olive oil is sold in Spain and Italy but the profit lies in the US and beyond.

Jaime Carbó

He’s been called the most pow­er­ful man in olive oil but even Jaime Carbó was­n’t able to pre­vent what he called a price mas­sacre” by retail chains.

Usually it’s Spain’s agri­cul­tural unions who com­plain about olive oil being used as a loss leader and prices not cov­er­ing grow­ers’ costs, but now it’s the world’s lead­ing olive oil bot­tler, Deoleo (for­merly Grupo SOS).

And Carbó, the Madrid-based company’s CEO, said that even worse, it was amid what he con­sid­ered a bru­tal” rise in the ex-mill price of lam­pante oil and a dip in con­sump­tion in the coun­tries that account for about 60 per­cent of Deoleo’s sales — Spain and Italy.


Deoleo’s sum­mary of the sit­u­a­tion in its half year results report was mat­ter-of-fact: The retail­ers have used the traf­fic-gen­er­at­ing char­ac­ter of the prod­uct to prac­tice a very aggres­sive pric­ing pol­icy, at times even below cost, that have forced us to increase our pro­mo­tional activ­ity.

Private labels have been the main ben­e­fi­cia­ries in terms of mar­ket share, although their vol­umes have suf­fered as well after set­ting prices in many cases below the spot price of the raw mate­r­ial,” it said.

Store brand bot­tles were cheaper than bulk lam­pante

But speak­ing at the pre­sen­ta­tion of Deoleo’s third quar­ter results and strate­gic review at the Madrid Stock Exchange last month, Carbó was less ret­i­cent.

He used the term a mas­sacre at the hands of the store brands” to describe the sit­u­a­tion from last August to this April when super­mar­ket chains were sell­ing pri­vate label refined olive oil at below the bulk price of lam­pante oil.

Commenting on a graph dis­play­ing the data (1), he said that dur­ing this period, the sec­tor — the com­plete value chain — was los­ing money at the most basic level.”

The retail price in January 2013, €2.26, didn’t cover the cost of bulk olive oil, which was €2.65, and nei­ther did it cover the bot­tle, trans­port, amor­ti­za­tion, labor, elec­tric­ity, taxes, trans­port from the fac­tory to the store, the costs of the store, the mar­gins of the store, and of course not sales tax either.”

Many big retail chains are will­ing to lose money on olive oil in order to gen­er­ate traf­fic so that later peo­ple also pass to the deter­gent aisle, or what­ever, I have no idea.”

That was the com­pet­i­tive con­text in which we found our­selves. and that’s fruit of the com­pe­ti­tion there is in the retail sec­tor,” he said.

Incomprehensible” falloff in Spanish and Italian olive oil con­sump­tion in early 2013

The first half of this year was a time of con­sid­er­able upheaval in Spain and Italy, which affected con­sumer sen­ti­ment and — to a degree never before seen — olive oil use, Carbó said.

We saw declines of 7 per­cent and 10 per­cent in units, which is incom­pre­hen­si­ble for a prod­uct that is of such neces­sity in Spanish cook­ing.”

Deoleo’s sales rev­enues of €587.2 mil­lion for the nine months ended September 30 were down 6.3 per­cent on the same period last year. However, it man­aged to reduce its net finan­cial debt by €97 mil­lion — largely due to a rad­i­cal new approach on work­ing cap­i­tal.

Source: Deoleo

Just in time inven­tory shake-up

Deoleo admits its rev­o­lu­tion of work­ing cap­i­tal met con­sid­er­able resis­tance.

When it started to look at how to reduce its inven­tory, the word impos­si­ble’ was heard a lot within the com­pany, Carbó said. But now we don’t talk about two months of inven­tory but two weeks.”

The world’s biggest olive oil buyer now applies the just in time” prin­ci­ple to both its raw mate­ri­als and stocks of fin­ished goods, and in the process has freed up cash.

In 2010 it had nearly €177 mil­lion of its work­ing cap­i­tal tied up in inven­tory but by this September it was under €110 mil­lion.

And that’s what per­mits you to sit in front of farm­ers, pro­duc­ers, peo­ple who have a pro­tracted finan­cial prob­lem — because their process is so lengthy from when they pre­pare an olive tree until they sell its olive oil can take 18 – 20 months — and to tell them, well it will have to be 22 because if not, the sys­tem won’t work,” Carbó said.

And not only that but pro­duc­ers are also now effec­tively financ­ing Deoleo to the tune of €190 mil­lion — the amount to which Deoleo has increased its level of accounts payable.

Producers required con­vinc­ing on new pay­ment terms

Carlos Jiménez Ot, gen­eral man­ager of pur­chases, logis­tics and qual­ity, said opti­miz­ing its work­ing cap­i­tal was essen­tial for a com­pany based on raw mate­ri­als (70 per­cent of its costs), but it had been hard to make changes in a sec­tor where pro­duc­ers had tra­di­tion­ally been paid before a trans­port tanker was even filled.

Jiménez Ot said Deoleo had worked to gain the trust of its sup­pli­ers, reas­sur­ing them, ” Hey, we’re Deoleo, we’re going to pay you in 30 days, we’re going to pay you in 60 days.’ We share our mar­ket data with our sup­pli­ers (telling them) it’s in your inter­est to fix a price today because we know that the har­vest is going to be good, because these are the fore­casts.”

When you take an open book approach with your sup­pli­ers you gain their con­fi­dence to the point that now we have min­i­mal work­ing cap­i­tal. We have a level of financ­ing that’s never been seen in this sec­tor.”

Jiménez Ot claims none of the pro­duc­ers has com­plained. They’re delighted because we keep our word,” he said.

Deoleo’s pro­duc­tion fore­cast­ing model

The data that Jiménez Ot referred to shar­ing with pro­duc­ers is the prod­uct of years of work and an amaz­ing sta­tis­ti­cal job” of cor­re­lat­ing his­tor­i­cal data, such as on rain­fall, sun­shine and tem­per­a­tures, with pro­duc­tion.

We want to know what the pro­duc­tion will be next year and within the next two years because, for bet­ter or worse, the price of olive oil is extremely closely related to the quan­tity avail­able,” Jiménez Ot said.

We are enor­mously lucky that the major­ity of olive oil is pro­duced in a very con­crete zone. And even bet­ter, the quan­tity depends on fac­tors that have occurred in the past, mete­o­ro­log­i­cal con­di­tions.”

If I can pre­dict with a lot of pre­ci­sion what is going to hap­pen tomor­row, and the next day…I have valu­able infor­ma­tion to guide my buy­ing pol­icy,” to deter­mine in advance how much to buy and where.”

And not just in Spain — where Deoleo esti­mates olive oil pro­duc­tion this sea­son could exceed 1.4 mil­lion tons — in Italy and Greece, in any loca­tion,” Jiménez Ot said.

We don’t know what the olive oil map is going to be like in ten years but today Deoleo knows per­fectly well what’s hap­pen­ing in California, Chile, Argentina, and Australia, and we know per­fectly well what’s hap­pen­ing in Córdoba, in Sevilla, in Puglia, in Sevilla, and in Greece.”


Carbó said the pre­dic­tion model was good at pre­dict­ing trends and guided the company’s deci­sions on when to increase its raw mate­r­ial inven­to­ries. When ex-mill prices are expected to rise, more oil is bought.

Deoleo doesn’t tend to use the olive oil futures mar­ket, because there is not enough liq­uid­ity in it.” Instead it locks in con­tracts to pro­vide phys­i­cal hedg­ing, he said.

The hybrid oils health plat­form

Deoleo is pur­su­ing a new route of inno­va­tion based on sell­ing hybrid oils and cap­i­tal­iz­ing on the fact that health is the most impor­tant trend in food.”

One research line is focused on Deoleo’s seed oils busi­ness and devel­op­ing supe­rior” alter­na­tives to basic oils,” the com­pany said in doc­u­ments on its mid-term strate­gic review.

Deoleo prod­ucts lead Spain’s sun­flower oil mar­ket and the com­pany is also active in corn oil and other seed oils.

Another line focuses on olive oil, and striv­ing for bet­ter nutri­tional and health prop­er­ties.”

Trademark appli­ca­tions for names includ­ing Carbonell Optimax and Carbonell Olivemax

In dis­cus­sions of olive oil and health, the impor­tance of extra vir­gin olive oil and its higher lev­els of polyphe­nols such as hydrox­y­ty­rosol are often empha­sized.

But Deoleo’s strate­gic review makes no men­tion of vir­gin olive oil. Gregorio Jiménez López, who advises Deoleo on strat­egy and inno­va­tion, talked about the addi­tion of dif­fer­ent oils, cheaper than olive oil” and result­ing in oils of much more nutri­tional and health value and at a lower price.”

Carbonell is the brand that will sup­port the health con­cept devel­op­ment and Deoleo said new prod­ucts will be launched next month but gave no details.

However, the company’s recent trade­mark appli­ca­tions in Spain cover the fol­low­ing terms: Carbonell Optimax, Carbonell Optima, Carbonell Olivemax, Ergoptim, Ergoadapt de Carbonell, Carbonell Kids, Carbonell Kidds, and the Spanish equiv­a­lent of Carbonell 0.4 helps care for your heart.”

And in its 2012 annual report, the pur­chase of Omega 3 and hydrox­y­ty­rosol for €131,000 from the sup­plier Biosearch was declared under smaller pur­chases and sales to com­pa­nies related with board mem­bers.

Olive oil still prof­itable — beyond Italy and Spain

Deoleo is not aban­don­ing its tra­di­tional olive oil busi­ness, how­ever. It says the new model based on inno­va­tion and health will com­ple­ment it.

Jiménez López said olive oil remained a basic pil­lar. It’s very impor­tant because when you go beyond the tra­di­tional mar­kets, the prof­its are frankly high. There are returns of 15 – 20 per­cent on olive oil,” he said.

Company doc­u­ments show that in the year to September, Spain accounted for a quar­ter of Deoleo’s global sales but under 6 per­cent of its EBITDA. North America, mean­while, cov­ered a fifth of sales and two fifths of EBITDA.

(EBITDA — earn­ings before inter­est, tax, depre­ci­a­tion and amor­ti­za­tion — is a broad gauge of a com­pa­ny’s finan­cial health.)

Deoleo’s per-unit profit mar­gin rose from €0.20/liter in 2011 to €0.30 last year and €0.32 in the year to September. Its mar­gin per liter is €0.20 in Spain and a lit­tle higher in Italy, both very sat­u­rated mar­kets within wider cri­sis envi­ron­ments.

Margins 3 – 4 times higher in the United States

But Alberto Gallardo, direc­tor of inter­na­tional mar­kets, said that in other mar­kets, mar­gins are 5 – 10 times higher.

Carbó said Deoleo made 3 – 4 times more in the US — where the company’s Bertolli is the top-sell­ing brand and sta­ble­mates Carapelli and Carbonell also have major mar­ket shares — than in Spain. And in the US a lot of olive oil is sold — in the US they con­sume 300,000 tons of olive oil a year,” he said.

All the effort you make to sell olive oil in Spain and Italy you have to do because it helps you with vol­umes but not with profit. Profit you have to seek in other countries…hence our model of inter­na­tion­al­iza­tion,” he said.

Markets such as the US, Canada, Mexico and Brazil helped com­pen­sate, he said.

Apart from its premises in Europe, Deoleo now has offices in the US, Canada, Brazil, Mexico, Australia, China, India and Malaysia, and says more will fol­low.

Rising store brand dom­i­nance

Deoleo says Euromonitor data shows its brands Bertolli, Carbonell and Carapellia are respec­tively the world’s first, sec­ond and fourth lead­ing olive oil brands, with mar­ket shares of 5.1, 3.6 and 2.2 per­cent.

But the pri­vate labels — also known as store and house brands — are a major force in the world’s three biggest olive oil mar­kets

In Spain, the store brands’ com­bined mar­ket share lept from 58.6 per­cent last year to 68.7 per­cent for the first three quar­ters of 2013, while Deoleo’s shrank from 14.4 to 11.6 per­cent. The Italian mar­ket is more brand ori­ented but even so, the store brands went from 22.1 to 23.2 per­cent and Deoleo from 24.9 to 23.1 per­cent. And in the US the store brands grew from 32.6 to 35.7 per­cent while Deoleo slid from 19.6 to 18.6 per­cent.

Consumption up in third quar­ter

Deoleo’s net profit for the first nine months of the year was €9.1 mil­lion, up on a net loss of €1.2 mil­lion for the same period in 2012, but its EBITDA for January-September, €50.1 mil­lion, was down nearly 20 per­cent.

However accord­ing to the com­pany, it entered a period of recov­ery in the third quar­ter when con­sump­tion in Italy and Spain started to improve, the price of raw mate­ri­als sta­bi­lized at a lower level, and the growth of store labels slowed.

It says it is on track to end the year owing €500 mil­lion, down from €624 mil­lion last year and €1.5 bil­lion at the end of 2009.

Deoleo seeks investors

Earlier this year it was reported that Spanish banks includ­ing Bankia and CaixaBank had asked J.P. Morgan to han­dle the sale of their hold­ings in Deoleo. Bankia is Deoleo’s biggest share­holder and is being pushed to divest under con­di­tions of a European bank bailout last year.

Last month, Deoleo announced it had also com­mis­sioned J.P. Morgan, to advise, among other things, on a finan­cial restruc­ture in order to improve its long-term finan­cial sta­bil­ity.

Carbó said Deoleo had too much debt and to reduce it the com­pany could look for money from banks — which they’re not going to give us” — or cap­i­tal from new share­hold­ers. As some of Deoleo’s share­hold­ers are being obliged to divest, J.P Morgan had been asked to advise on how to address these three aspects at the same time, he said.

It really marks the start of our new phase, we’re resolv­ing the last theme from the past,” he said.

Deoleo’s share price reached a 52-week high of €0.515 on Nov 28, 2013.


1 — see page 17 of Deoleo’s third quar­ter results in English (link below)


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