Goodman Fielder to trim underperforming brands as faltering economy provides valuable lessons

Posted by Daniel Palmer on 23rd March 2009

Goodman Fielder, Australia’s largest publicly listed food group, believes that the struggles confronted by clothing manufacturer Pacific Brands provide a valuable insight into the need to rid the company of underperforming brands.

“You can’t afford to have sub-scale brand equity out there,” Peter Margin, MD of Goodman Fielder said, according to The Age. “In two years, you should have 20-25 per cent of revenue from new products. You have to turn over the products pretty rapidly. Consumer tastes change pretty quickly. You’ve got to be able to respond.”

The company’s share price now hovers at around $1 after trading above $2 at the beginning of last year, with negative analyst commentary failing to take into full account the impact of unprecedented market conditions, according to Mr Margin.

“We have had an extraordinary 18 months,” he noted. “The commodities bubble has been a once-in-a- generation change in commodity prices, both up and down. Commodity costs for us in the past couple of years have increased by $300 million – quite a phenomenal increase.”

The impact of a slowdown has taken its toll, Mr Margin added, but he believes they are now “coming through the worst of it”.

Goodman Fielder has learnt a number of lessons from the economic crisis, including the need to maintain a focus on cash flow, invest in reducing the cost of operations and continue to innovate.

“(Product innovation is) the lifeblood of food companies in particular. We spend about $40 million on R&D. That’s a significant increase from where we were. Without that sort of investment, a company will begin to stagnate,” he suggested. “In the long run, you’ll probably have fewer brands with appropriate marketing support. The cost of launching new products is so high. The cost of failure is high, so you must try and trim your portfolio down.”

Mr Margin said the company had no plans to abandon the Australian manufacturing sector despite comparatively high wage costs. The abundance of quality raw materials and efficient supply chains allow the food group to provide products to the market quicker than many overseas plants. “There is no doubt our wages are high, but our focus is that you must be a low-cost operator, buy the latest technology and make sure your people are as skilled as any in the world,” he told The Age.

Upon reporting a 21.9% drop in profit in the first half, the company advised that internal cost savings were being “vigorously” pursued, which will lead to a 5% cut in their workforce for the full year and continued restructuring costs.

The food group is currently in the midst of a strategic review, which could see a few of their brands sold off or cut to reduce inefficiencies. Some analysts have predicted that there may be a sale of their NZ dairy business or their commercial oils business.

The prospect of acquisitions also remains alluring, according to Mr Margin, but patience will be a key to ensure they don’t become overburdened by debt.