Standing against any diversifying

by Morton Sosland
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Diversification, once the favorite investment goal of many companies in grain-based foods, has dramatically been put aside in recent years. Indeed, it is quite striking in looking at leading industry companies to see that diversification beyond core businesses like baking bread and milling grains into flour has been put aside. The current master strategy favors seeking the wherewithal and direction to expand core operations, often by a significant amount. A large part of recent acquisitions has been structured so as to reflect this single-minded targeting of growth that expands market share, geographic coverage or strengthens the business by the power accompanying becoming larger.

Looking at the leading companies in baking and flour milling provides convincing evidence of what has happened, but also portrays a striking difference from how this same picture appeared in the recent past. It is not very long ago that the top layer of baking businesses comprised divisions of large conglomerates that had operations totally unrelated to baking and even to food manufacturing. Flour milling’s case was equally different, and often reflected how a company founded in milling reached out to diversify its products and markets in totally new ways by ventures as different as pizza chains and wine distribution.

In many ways what baking and milling have done could be ranked as the forerunner of a trend under way in American industry. Most telling in this regard and often cited as the major example of what is under way is the decision of GE to dispose of its bank-like capital business in favor of focusing on its industrial operations. Even though “industrial” covers a huge range of possibilities, it is a dramatic change for a company that not long ago earned half of its income from businesses that now are being sold. Often noted as the driving forces for this change in one of America’s largest companies are the relative strength of the U.S. dollar, the expanding regulatory controls being placed by governments on financing-type businesses and the grand opportunities GE believe exist in some of its industrial areas like aviation and health care. It should be noted that GE Capital has utilized the pages of this magazine to present its services to baking and milling.

At the same time that managers of American milling and baking are erasing what once might have been called a strong drive to diversify into different enterprises, the leaders of these same companies in Europe particularly seem still committed to entering unrelated businesses. Here there’s no better example than Associated British Foods, the Weston family-controlled enterprise that for long has been among leaders of both baking bread and flour milling in Britain. It is also an international force in making and marketing baking and food ingredients and a few years ago became a powerhouse in sugar. Attention within the investment community, though, has not been centered on its food operations as much as it has centered on ABF’s chain of nearly 300 retail stores in Europe operating under the Primark chain name. These stores, acquired in a diversification move, feature what is called “value fashion.” Growth is projected through adding retail stores, with one analyst forecasting 2,200 stores by 2040, up from 287 currently.

It is wishful thinking even to hope that ABF and the Weston family would be planning anywhere like similar growth for its operations in baking, flour milling and food specialty ingredients. A leading investment banker specializing in retail observed that Primark was still in its infancy with double-digit space growth likely in each of the next 20 years. “This makes Primark via AB Foods a core holding in our retail sector,” the analyst said. This stands as one of the few times — if ever — that a company leading in grain-based foods has gained such standing as a consequence of diversification. Yet, there’s also comfort for the entire industry from the single-minded commitment ruling in milling and baking.

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