2012 Grant Thornton Executive Roundtable
Food in Canada is pleased to partner with Grant Thornton LLP to present our annual industry roundtable
Exporting & Importing
Research & Development
Food in Canada is pleased to partner with Grant Thornton LLP to present our annual industry roundtable. This year we’ve gathered executives from across different sectors of the industry to discuss the challenges and opportunities facing Canadian food and beverage producers and processors today.
Photo caption: Executive roundtable participants (above, left to right): David Pigott, senior vice-president, Burnbrae Farms; Bill Redelmeier, owner, Southbrook Vineyards; Daniele Bertrand, partner and president, Dufflet Pastries; Peter Singer, president and CEO, Thomas, Large & Singer, Inc.; Lucky Lankage, CEO, Grace Kennedy (Ontario) Inc.; Jol Hunter, National Lead, Professional Services Advisory, Grant Thornton LLP; and Jim Menzies, partner, Assurance and Business Advisory Services, and International Food and Beverage Industry Leader, Grant Thornton LLP. All photography by Lynne Fox/KlixPix
As we see it
By Jim Menzies
We’re proud to be able to provide Canadian food and beverage companies with an outlet to share their challenges and opportunities with others in the industry. Our Food in Canada 2012 Executive Roundtable participants were as diverse as the industry as a whole, varying in size, business life cycle, and product offerings. Despite their differences, they were able to share some common challenges and opportunities.
A Challenging environment
One of the most prominent barriers that resonated with every participant was the increasing cost and price pressures from suppliers and retailers. Growth for Canadian food and beverage companies is difficult to achieve in this environment of high commodity prices and a challenging economy. Some producers have been able to pass along a portion of their cost increases, while others are looking at alternative solutions. They are also very aware of the price sensitivity of cash-strapped consumers. Powerful retailers, trying to appeal to these consumers, are exerting pressure on producers to keep prices low while maintaining their own margins. Many consumers are also looking for higher-quality produce — healthy and ideally locally sourced — and they are willing to pay for it. Our participants felt this was an important trend to pay attention to given the increased focus on health and wellbeing. Providing products that complement that lifestyle represent a significant opportunity for their businesses.
Another key to unlocking growth opportunities, as our roundtable participants mentioned, is the ability of a company to communicate its brand message. Taking pride in brand, ingredients and production methods, and being able to put yourself in the shoes of the consumer to understand their motives for buying your product, are critical to growth. Many producers are looking to brand messages focused on quality, innovation and sustainability in order to achieve this.
Canadian food and beverage companies are energized about the future and are very excited at the prospects of finding new growth opportunities. At Grant Thornton LLP, we believe that the future is bright too. With extensive experience in the food and beverage industry, providing business advisory, productivity improvement, and corporate finance services — and everything in between — we continue to look forward to helping food and beverage businesses unlock their potential for growth.
Jim Menzies, CA International Food and Beverage Industry leader Grant Thornton LLP
Jim Menzies: Before we get into the broader discussion, could each of you spend a few moments introducing your companies.
Peter Singer: Thomas, Large & Singer has two businesses — a sales agency business and a value chain distribution business. It’s a privately held Canadian family business, and we’re proud to be celebrating our 100th anniversary this year. We’re only active in Canada, but we deal with products from around the world. Our sales agency business is involved in the supply of industrial food ingredients to food manufacturers here in Canada, and we also have a private-label business that procures private-label products for the major retail chains in the country. Our value chain distribution business represents a number of different brands and provides their whole supply chain in Canada, which involves not only the movement of goods into the country, warehousing and shipments out to customers, but also all the financial details of the market. So, we take title to the goods, we ship them, we handle the receipts and, of course, we handle the deductions that are so present in this industry.
Lucky Lankage: Grace Kennedy is a Caribbean company started 90 years ago in Jamaica. We can call ourselves the purveyor of Caribbean food around the globe. Our brand is present in more than 40 countries, and is actually a very popular brand amongst Caribbean diaspora. It’s a public
company in Jamaica that has been in Canada 28 years. Our primary objective is bringing Caribbean food, or exotic food, to Caribbean people and mainstream Canada. We started our journey as an importer of Caribbean food, serving the Caribbean population, and we used that as a springboard. Now we’re going into the mainstream marketplace and in fact giving something different to the consumer who’s looking at and craving something exciting. We have a facility in Richmond Hill, Ont. that services all the food retailers around the country from east to west, although our primary market is in the Greater Toronto Area.
Daniele Bertrand: Dufflet Pastries provides fresh and frozen desserts. My partner is Dufflet Rosenberg, who started the company 35 years ago in her mother’s basement. Now we are in a large facility in Toronto, and we’ve also purchased a chocolate business. We sell across Canada, in the U.S. and outside of the continent as well. So we’re looking to grow. We are all-natural and we have a very clean label, something that people tend to look for more these days. We look to be Canada’s premier dessert provider — that’s our story and that’s our goal.
David Pigott: Burnbrae Farms is the largest vertically integrated egg producer/processor in Canada. Burnbrae Farms itself is over 100 years old. It was originally a family dairy operation, and it’s still a family farm — it’s just 3,000 acres now. Joe Hudson, the current owner, began in the egg business 70 years ago as a school agricultural project. We do everything; we raise pullets from day-old chicks, house layer hens and grade the eggs for retail as well as foodservice. We also break eggs for industrial companies as well as for foodservice and retail. The smallest container we do is a 250-mL container and the largest is a 20,000-kg tanker. We’re also in the hard-boiled egg business and in individually quick-frozen patties and omelettes. Pretty well everything you can do with an egg, we do.
Bill Redelmeier: Southbrook Vineyards started about 35 years ago as a spin-off from an old family farm from the 1940s. It started as a roadside
market selling fruit and vegetables. We saw that we needed to differentiate ourselves, so our differentiation was selling only Ontario products. We started the winery in 1991 because it tied in with our idea of selling Ontario products, and it sounded like fun. It’s one of the few businesses where you’re legally selling pleasure. So it’s a nice business to be in. About six years ago, my wife and I purchased 150 acres in Niagara and decided at that point to show what was possible in the wine business in Canada. We had the architect Jack Diamond design our building, which is Canada’s first gold LEED-certified winery. We’re the largest organic winery in Canada, but we’re also the next step beyond organics, which is called biodynamics, where we plant, harvest and make wine using phases of the moon. The reason that we’re doing that is because we think it makes better wine. Last year we launched a new product called Bioflavia, a high antioxidant powder made from grape skins. We use organic grape skins, which is important because it keeps the pesticide load low. I think of the product as an ingredient, but the industry thinks of it as an industrial product. As I say it’s about 11,000 ORAC units per gram. And one of the wonderful things about it is that the ingredient panel is incredibly simple — it’s dried organic grape skins, nothing else.
Menzies: The first topic I wanted to get out on the table is not specific to your own companies, but instead what you view as the major issues facing all food and beverage companies in Canada, and internationally.
Singer: The biggest issue that we see facing our business right now is rising commodity prices, which are particularly occurring due to the weather in the Midwest. That would normally be a factor that would encourage you to adapt your prices, but what’s made this an issue is the
retail marketplace — and I’m talking Canada here — which is extremely resistant to price change. It’s about trying to reflect the actual cost of the product and maintain product quality in this environment. The reason for the resistance to price changes is mainly because of the increased square footage that’s coming into the retail marketplace caused by one major retailer coming up from the U.S. and one other major retailer who has been here for a number of years expanding their stores and opening new ones. There’s an incredible amount of fear associated with these changes in the retail grocery market.
Bertrand: Our largest challenge is innovating in that environment, because that’s what keeps us in the forefront. If we want to stay competitive, not only in Canada, and grow to the point where we want to grow, we have to innovate. But in an environment where it’s all about cost, how do you continue to innovate? It’s not a choice, you have to do it, but you’re facing this difficulty of having to find the money to do it in different ways.
Menzies: With respect to commodity prices, issues that have given rise to the increase in commodity prices are: weather; rising demand in China and India; transportation cost issues with respect to oil; and differences in commodity uses. Take corn, for example. In the U.S. it is estimated that about a third of it is now used for ethanol. Over the past 10 years commodity prices have gone up 150 per cent on average. What strategies can producers put in place to overcome that?
Lankage: I think those points are noted, but some of the countries those products are originating from, let’s say Thailand for example, are running about 3.5 to four-per-cent inflation. That is constantly going up, whereas in Canada we’re running below two per cent. So food inflation is a fact of life in the Far Eastern countries. And not just Far East, just look at the BRIC countries. So when we start importing from them, and actually start distributing here, we are faced with this inflationary gap all the time — the rise in prices contributed by weather and any other shortages stemming from whatever catastrophe that is happening in the world. But the challenge of any company is how we differentiate ourselves so that we can command that premium consistently. I think this is back to investing in the brands and telling our story. That’s the way we can bring differentiation into the marketplace that allows our brands to command a premium, that is not commoditized.
Redelmeier: Part of the premium that we can command for Canadian organic food products overseas is because we have a wonderful reputation. We are the only country in the world that is automatically accepted both in the U.S. and in the EU. Everybody loves Canada and that kind of differentiation is absolutely what it’s all about. And that’s the only way we can do it. The problem is that food has been so cheap for so long that all we’re doing is buying on price, whereas in Europe, where food is more expensive, people are willing to pay more to get a better quality.
Menzies: So in terms of getting into markets outside North America, what goes through your mind as you try to expand?
Bertrand: What worries me is making sure that at the end of the day there’s a quality product for the consumer to buy. Because I’m selling something that has to be in a refrigerated container, and because branding is so important, my concerns are will my name have the quality that I want at the other end? And secondly, of course, will I get paid? So we approach it cautiously and we try to find the right partners. That’s the biggest challenge — finding the right partners, the right distributor, the right channel, the right stores. Our philosophy at Dufflet Pastries is we like to walk before we run. We like to take calculated risk. And we don’t just go for the big deals; we go for the right deals and we’re very patient.
Pigott: We’re looking at several countries including India and China in the liquid egg business. And everybody who wants to partner with us
wants us to build a factory there. We’re saying “No, we’ll sell you a container, here’s your pricing, here’s some marketing literature. You prove that you can establish a market, establish our brand, and keep the quality.” Again, refrigerated supply chain is a real issue in many of these countries. And so we’re just dipping our toe in, for all the same reasons. The company that wants to be your partner and is chasing you from those countries, you don’t want as your partner; instead it’s about finding the right person. And when you go overseas it’s quite different. The logistics don’t scare me as much — getting the product to Mumbai, for example, we can do no problem. But it’s from then on that’s the concern. I mean, getting from Mumbai to Delhi can be a two- or three-day trip. What condition is your product going to be in? Are they going to maintain the cold chain? Are they going to honour claims with retailers? Because it’s your brand ultimately that’s on it. So we feel we have to do business there, but we’re very much going slowly.
Redelmeier: One difficulty is that there is a huge amount of export subsidies in the wine business, with Canada not doing as much as most other countries. This makes it hard to export, but even more to own our own market. When a litre of Ontario wine is sold here, over $11.50 stays here, while when a litre of imported wine is sold, less than a dollar remains. Most wineries in Ontario look on exports as a small part of their strategy, as often as much for promotion as much as profit. We were very proud when our Framboise became the first Ontario wine sold in Harrods.
Lankage: You know we talk so much about the BRIC countries, where the next growth is going to come from for export potential, but we forget to look at places like Africa. Now, for instance, Ghana and Nigeria are huge economies, and there are huge potentials and fewer barriers to going there. There are a lot of good companies wanting to invest, wanting to bring in product from North America or Europe. You know, we can talk all about India, but unless you go there and make and sell a product at the cheapest price, you won’t be successful. We forget that there are other economies that are emerging and could be very profitable to us.
Menzies: There are a number of different trends that we see when we’re dealing with our clients here in Canada and internationally. What are the trends that you see affecting your businesses?
Redelmeier: We’re finding that the millennials especially, people under the age of 35, are really looking for authenticity. The wonderful thing about a bottle of wine is that you should be able to put it on the table and tell a story about it. And that differentiation is one of the things that people are really looking for. Wine is one of the few agricultural products that can be traced back to its farm of origin.
Bertrand: We see a tendency for a cleaner label, as people are reading nutritional labels much more. If you take one of our cakes and you read the
labels, you don’t need to be a nutritionist or a chemist to understand what those words mean.
Lankage: One of the things that we’ve seen in the marketplace now, is that consumers want natural, not necessarily organic. Natural without preservatives, without additives, but with a big caveat — at an affordable price. When we look at our own product portfolio, what’s growing is the no sugar varieties, no preservatives, or less salt. Organic has become so expensive, and also less credible in some instances, but natural has actually become more credible and affordable.
Redelmeier: One of the things we decided at Southbrook is that we would make no claims unless they were third-party certified. And there is no such thing as a certifying body for “natural,” “sustainable,” “green,” or whatever. One of the reasons that we use the “organic” title is because we can have a third-party certify us and use both the Canadian Organic logo plus the logo of the certifying body. A problem is that the wine business is full of green washing. It doesn’t matter how light your packaging is, if it’s coming from Chile it’s going to have more of an environmental impact than locally made wine.
Bertrand: The other trend we see is smaller portions in food. I don’t know if anybody else would agree with that, but people tend to eat smaller portions. They’re more conscious.
Singer: The trends we’re talking about right now — clean ingredient statements, natural and organic — are certainly major trends and I would agree with them. However, I think we forget that the biggest portion of the market is still the consumer who gravitates towards the discount format grocery store. That portion of the market continues to be price-oriented, would love to buy organic, but when it comes down to their purchase decision it’s more based on price, availability and proximity. That big market is still where the largest volume of food is sold in Canada. You still see tremendous growth in products that do not make you proud. So the challenge for the food industry in Canada, and anywhere, is to try and take the ideals of a cleaner label statement and better-for-you products and somehow translate that into a more generally available product line for the largest portion of the market, as opposed to just for the more inelastic quality-conscious customers.
Menzies: What’s your reaction to the regulatory environment in Canada right now?
Lankage: It’s actually a difficult question. Let’s look at the Canadian Food Inspection Agency (CFIA). As far as we see it, when you’re becoming big, the regulators come at you like a 40-ft. truck, but when you’re small, that doesn’t exist. The regulatory environment is not applied consistently across all sizes of companies, and that’s a really big problem.
Bertrand: Our issue is labelling. And again it goes with what you just said — it’s not enforced. I mean just pick up any package in a grocery store and see if it has all the required labelling. A lot are not even legal in Canada because they don’t have French or English. But more so, for us, the labelling issue is about the clean label. I have lots of competitors who say they have a clean label. They don’t. So we don’t have a level playing field.
Pigott: Well, it’s not just government. We find that our large customers, including both retailers and large foodservice/industrial companies, are enforcing regulations on us far in excess of the CFIA. For example, everybody now has to comply with the Global Food Safety Initiative (GFSI). We’re also seeing that we’re being audited for far more than food safety, which we’re used to. Now we’re also being audited for animal welfare, social responsibility and sustainability. There are many more bars that we’re expected to hit. Fortunately, we’ve always led on things like that.
Menzies: In our firm, our tag line is “Grant Thornton, an instinct for growth,” and we focus on it when we’re serving our clients. What comes to mind when you think about growth in your sector?
Singer: Innovation is certainly a way to grow, and I think it is perhaps the best route to growth. But if you’re a major manufacturer today, while innovation is very important, it’s hard for that alone to make up for Canada’s slow economic growth rate. To achieve significant growth you’re really forced to go after somebody else’s market share, which creates a very competitive environment. It also creates an environment that makes it difficult to pass on your price increases because people are trying to grab up market share either through pricing or through the trade programs that they have with the major retailers. So you’re always looking for new points of distribution, and that’s very expensive. Looking for emerging economies around the world, I think, is a way to find growth. But if you’re looking at just what’s going on in Canada, if you haven’t got innovation working for you, it’s a tough place to find growth.
Lankage: Innovation in the food industry is very difficult, but nevertheless, we need to innovate. An example is coconut water — now that’s true innovation. Twenty years ago, I don’t think hardly anybody at this table knew what coconut water was, but today Pepsi and Coca-Cola are jumping into it. We have been in that business for 10 years. But it’s a product we can take and make more appealing to mainstream consumers. So what we’re trying to do now in terms of innovation is to find some health or functional benefit, as well as having an exotic angle.
Menzies: In the food industry $100 billion in transactions have taken place in the last year worldwide. What’s happening in your particular sectors with respect to mergers and acquisitions?
Bertrand: There is a lot of consolidation. A lot of small companies being gobbled up. But we can also make acquisitions. We’ve just made one in the chocolate business that is very synergistic and makes a lot of sense for us. Chocolate is our number-1 ingredient, so it affords us a different market, a different way of growing. And the synergies make us more innovative in both companies.
Lankage: It’s especially prevalent because small companies are finding that the barriers to entry have been raised because of initiatives like ECC Net capabilities, program fees and penalties from retailers. It squeezes the small guy out. That’s one of the things contributing to this consolidation — you have to get bigger because the cost of doing business is growing.
Pigott: We’ve also seen lots of mergers and acquisitions, nothing huge in our particular area, but in terms of co-operatives absorbing more and more businesses as producers have banded together to vertically integrate. GFSI has caused lots of problems for the small egg grader, for example, who can’t afford to be certified, so some of them are selling out. Most of that has already happened, and again, there are only three, maybe four, major players in Canada’s egg industry. So it’s a zero sum game. Innovation for us is not so much about growth. Our growth is actually affected by a couple of things. One is what the retailers are doing with feature pricing, and the other is the economy. Eggs are a very affordable protein, and with the decline in the economy people are eating at home more often, and they’re eating eggs more often. So it’s not that innovation is actually for growth, but it is affecting profitability. Obviously you can sell an innovative product for more money. We always say an egg pushes an egg, so if we can sell more of an innovative product at a higher margin then that’s obviously better for us and for our customers. Our mix of innovative speciality products is probably the highest in the industry, and our president has driven that. That’s also where we see innovation contributing to growth, but more bottom line and gross margin growth, rather than top line growth.
Redelmeier: The wine business is an interesting one because it looks like it’s so much fun from the outside, and everybody wants to get into it. It’s a prestigious business, and it’s an enjoyable business. We got our license in 1991, and we were the 21st winery in Ontario. Now, by the time you include all of the fruit wineries, there are probably 160 or 170 wineries in Ontario. And there’s been a fair bit of mergers. Five of the biggest wineries in 1991 are now under the banners of Andrew Peller or Vincor, which was then purchased by Constellation Brands, now the largest wine corporation in the world. Dealing with a single retailer in each of the provinces except Alberta is easier to do as a large producer. So whereas in 1991 about 75 per cent of the Ontario wine market was made up of about five wine companies, there are now two companies — Constellation and Peller Estates — that make up that 75 per cent. All the rest of us are basically chasing a small portion of the industry. We don’t have to play in the larger market, nor can we. The commodities are coming out of Chile, Argentina and Australia. But my competitor isn’t the guy down the road who’s making wine, and in fact it’s not even the guy from Chile. My competitor is Coca-Cola, Seagram’s and Labatt. If I can convert people to wine drinkers, hopefully they start out at lower-end European wine or an Argentine wine, and then move onto trying higher-quality VQA wines.
Singer: One other opportunity for growth, in addition to growth by acquisition, is growth by picking up brands that the big players dispose of. We’ve seen a lot of opportunities like this in our business. For example, Procter & Gamble used to be a fairly big company in food, but over time they’ve disposed of all their food products so that they’re now totally out of it. Unilever is rumoured to be going out of food. Kraft has disposed of a number of different brands. This creates tremendous opportunities for smaller companies.
The Grant Thorton Executive Roundtable appears in the September 2012 issue of Food in Canada.