When Dean Hamilton and David Surveyor each came from Melbourne to take top jobs in the New Zealand meat industry, little did they know they’d almost been next door neighbours before coming here.
Silver Fern Farms chief exceutive Hamilton recalls his first meeting with Surveyor when the subject of where they’d lived in Melbourne came up.
“I said I was in East Melbourne. He said, ‘So was I, what street?’. I said, ‘Central Park Road’. He looked at me and he said, ‘I was in Central Park Road too’, and it ended up we were only ten houses away but I’d never met him.”
“It’s an incredible coincidence,” says Alliance’s Surveyor. “In fact, not when Dean was living there, but I’ve even been inside the house that he lived in.”
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The other thing the two chief executives have in common is stepping into an industry that only a few years before their appointments had lost nearly $200 million in one season and still faced enormous challenges.
Before joining Silver Fern Farms, New Zealand-born Hamilton spent 13 years as an investment banker with global bank Deutsche Bank, ending up in Melbourne for seven years. Previously he ran Riverlands Foods, a meat business now part of Anzco.
Before becoming chief executive, he worked with Silver Fern for a year, helping it find a way out of “a financially challenging place”.
“With the lamb crisis of four or five years ago when markets collapsed, the whole industry lost close to $200m and our business lost close to $100m of that. They had excess inventories and it took a while to sell those and markets kept getting worse so that was a very challenging time,” Hamilton says.
Two and a half years ago, he was offered the top job when his predecessor Keith Cooper stood down.
“I was quite closely involved with the business so when the board said, ‘Would you like to run it?’, I had quite a clear view of what I thought was needed and grasped the opportunity.”
Surveyor, an Australian, started his career in sales and marketing in the steel industry and ran a steel roll-forming business in Malaysia before returning home to helm Laminex, a building material company. He was invited to apply for the Alliance Group role.”I think the board were quite brave because they were looking for something that was different and unique and they weren’t going the same way that Alliance or other meat companies had done in previous years and I thought that was really intriguing and interesting.”
Surveyor started by building what he calls a “footprint” of the business, to understand what makes it tick and says four things stood out.
“The first was, the business hadn’t had any growth for long time so it’s revenue was quite flat and its cost base was rising; if you have that, you’re not far away from being in significant pain.
“We were carrying more debt that we should was the second thing, the third was our farmers were telling us that they weren’t getting paid enough for their livestock, and the fourth was we were getting some conversation with our bankers around our debt levels.”
He and the board spent six months analysing every detail of the company, delving into its history and reading virtually every report ever written.
“I worked with board to turn that data into a series of hypotheses that we’ve tested and out of that really has come the company strategy which is the two ‘virtuous loops’ that we spend a lot of time talking about.”
The strategy is represented in a graphic of two rotating loops, side by side and intersecting.
“The first loop is get costs out of the business, use that to return higher prices to farmers for their livestock, have that pull volume through the plants and use some of the gains to invest in getting down the cost curve.
“The other loop is around creating value in the market place, use that to create value that you can return back to farmers, have that pull volume through the plants and invest in more market development.”
Alongside the virtuous loops, Alliance’s strategy is based on seven “strategic pillars”. These are co-operative principles, safety, building organisational capacity, a low cost structure, farmer supply, capturing market value and transforming the “shape” of the business.
It boils down reducing costs and searching for greater efficiencies at home and developing markets overseas, concentrating a lot of effort on appropriate cuts and packaging for individual markets and targeting high-value food service.
More than 100 projects have been run in Alliance under the strategy, testing ideas and approaches. Some of this work has lead to savings of $12m for non-livestock procurement, items including packaging, protective equipment and electricity.
Another project is improving meat yield. Surveyor says every 1 per cent of improvement is a “meaningful number”, though he won’t say what that is.
“We’re saying to people, ‘How could we do it better, how do we make sure we have less meat drop on the floor, how do we sequence product coming through our plants so that you don’t have waste as you’re cutting to the various cuts you need?’.
“There’s a really exciting gain for our company in this space.”
Changes have also been made in the way Alliance works with Chinese partner Grand Farm, which has 1500 hyper-markets and 150 retail stores.
“To create more value, instead of our meat sitting unbranded, we’re going with a co-branded solution to parts of the market with product now packaged in consumer-ready pouches. They’ve got our Pure South and Grand Farm packaging that’s really terrific and meal-ready for consumers when they buy it.”
Alliance remains a full co-operative, owned by farmer suppliers, a model Surveyor is a strong believer in, but the other big co-op, Silver Fern Farms, is now 50 per cent owned by Chinese company Shanghai Maling. Dean Hamilton started work with Silver Fern before that ownership change occurred.
“There’s no doubt the business had to raise equity. The shareholder base didn’t have the capability to put $150m in. When the reality dawned on everybody that the solution didn’t sit internally, you had to go and seek capital offshore.”
Shanghai Maling was chosen because it didn’t want total control of Silver Fern and could offer access into China. It took two years to finalise deal which was completed in December last year.
“It hasn’t really changed our strategy,” says Hamilton. “When we spoke to potential investors, we said this is our strategy. We had the Plate To Pasture strategy whereby we’re trying to create a differentiated branded product and go further into retail and food service.
“We’ve said we’re 100 per cent made of New Zealand, all our product will come from here, our livestock and processing plants are here, that’s what we want to do, that’s our point of difference – grass-fed, natural New Zealand red meat – and they bought into that strategy.”
Premium product in China is invariably associated with imports, Hamilton says, so Shanghai Maling prefers processing and packaging of Silver Fern product to be done in New Zealand.
“Chinese consumers actually don’t have high levels of trust in their own food so ideally you’re doing everything here and that product is packaged in a safe way, with traceability and integrity and it’s delivered to the Chinese consumer.
“All our research on food in China is about food safety for them and their children.”
Hamilton says the recently announced six-month trial of chilled meat exports to China from 10 New Zealand plants is an exciting development, as is the re-opening of exports to Iran after 16 years of trade sanctions, though that will be challenging.
“Obviously they’ve been eating something else in the meantime – how do you reintroduce your product back into that market? You’ve got to establish customers, supply chain and money chains to get your money out of Iran.
“If you read most articles, that’s the biggest challenge dealing with Iran because the US banks have still got their sanctions – getting money our of Iran will be the constraint in the near term.”
Hamilton says if he’d been asked three years ago how important market access was, he’d have said it didn’t occupy his daily thinking, but that has now changed.
“With Brexit, TPP falling over, Russia banning some stuff, Indonesia banned some product from New Zealand and we had to go to the WTO as a country to get that overturned, I think trade and access is going to be more and more important.
“As a country that relies on trade, hopefully more trade can be positive for us. There’s no immediate golden bullet because if you think of Iran, they open up but they’re buying very commoditised product. It’s not going to be a solution that just clicks his fingers.”
The two big co-ops face similar challenges, be they market access or exchanges rates and in some ways their strategies are similar, variations on getting branded product into high value markets. But there are differences, as shown when Silver Fern discontinued its involvement with Silere-branded merino lamb, only for Alliance to quickly step in.
“We’d been at it for five years trying to create a differentiated lamb based on the merino breed but you just couldn’t scale it up. We got to about 100,000 animals and the desire had always been to get to at least 500,000,” says Hamilton.
“We don’t think the future is with Silere breed-specific stuff, we’re better to not have a breed-specific product and sell great lamb, rather than as merino lamb.”
Surveyor sees Silere differently, though. “What we see is the opportunity to go out and take some product that’s a slightly unique proposition about high alpine merino and the flavour and the taste and the unique profile that exists for that and the way it could be packaged and delivered to consumers around the world.
“That had great appeal to us, so we’re working closely with the Silere team on that – but it’s early days.”
He also has high hopes for Omega lamb, the healthier, higher intramuscular fat animal being developed with PGP partners MPI and Headwaters Group.
“We think it’s an animal that creates a unique proposition that allows you to tell a taste and health story. The work we’ve done around Omega lamb is educating us about a whole greater market strategy in food service more generally.
“We’ve done some research, say around chefs in Hong Kong; we sell something to that chef and that pulls through some other of our Pure South product,” says Surveyor.
Something both chief executives agree on is the need to pay farmers more for their lambs.
“We’re paying more for livestock this year than last year. Our projects are creating value that’s allowing us to return more money back to farmers,” says Surveyor.
“It’s also a reflection of what’s going on in global markets so let me not overplay the story, but you can see that some of the philosophy is allowing us to return a result to farmers even now.”
“Commodities go in cycles and sometimes it’s a good price and sometimes a weaker price but in reality you’re not really enlarging the pie,” Hamilton says.
“The desire is to get more revenue and the place to get more revenue is to try to get a differentiated product and that’s either into food service or into retail.”