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

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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.

deoleo-muscles-mills-for-never-seen-terms-as-it-moves-to-hybrid-oils-olive-oil-times-jaime-carbo
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.

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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.

deoleo-muscles-mills-for-never-seen-terms-as-it-moves-to-hybrid-oils-olive-oil-times-price-differentials-raw-materials-vs-mdd
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.”

Hedg­ing

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.


Ref­er­ences:

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

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