Milling & Baking News - August 15, 2006 - 8

E D I T O R I A L

Strategic innovation again unlikely to be replicated

hange and less frequently transformation are words
heard in grain-based foods either to claim or to describe a company shifting its business. Grain-based
foods is replete with corporate strategies that have altered
companies. Yet, none comes anywhere near duplicating
the change effected in recent years by Associated British
Foods, the United Kingdom-based group controlled by the
Weston family. This is a company that not long ago was
one of the largest bread baking and flour milling enterprises in the world. It is an entity that not only won high regard
for its successes but also for the way that it greatly influenced the evolution of milling and baking in the 20th century. While still a sizable participant in milling and baking,
A.B.F.'s holdings in these sectors no longer dominate the
group. Its business has changed in truly startling fashion.
From the standpoint of the segments making up grainbased foods, the transformation is especially dramatic. In
both Australia and the United Kingdom, the group's role in
flour milling - not just as a proudly efficient operator of
mills but also as a major investor in plants and in new technology - led the entire industry. Yet, that historical commitment gave way in 2003 to divesting milling capacity. The
Australian milling business was sold to another company
and many U.K. mills were sold as capacity was slashed to
supply only its Allied Bakeries plants. Almost as if to affirm
the group's flexibility, the decision made three years ago to
abandon flour marketing to unrelated bakeries has just given
way to a cautious re-entry into third-party flour business.
This wavering about milling, which no one who
knows A.B.F. and the Weston family's leadership style
will misinterpret as uncertainty, reflects disaffection
about its branded and private label baking business.
Long considered a highly competitive food marketplace,
the U.K. baking business replicates the problems faced
by wholesale baking in America.
Yet, anyone who wonders about A.B.F.'s commitment
to baking need look no further than how the group has
expanded globally to become a major player in ingredients for baking, and also for brewers and winemakers. It
acquired from Burns Philp its international yeast and ingredients business, which not so incidentally gives A.B.F.,
once a relatively small participant in the North American
food business, a large role on this continent. Combined
with Cereform, which already was owned in Europe,
the Burns Philp business, now known as AB Mauri, sud-

denly makes A.B.F. into a significant global factor in supplying ingredients to food manufacturers. Reflecting another A.B.F. propensity, the ingredients the company now
makes and distributes benefit significantly from investing
in extensive research and development.
If a moment could be chosen when A.B.F.'s focus on
milling and baking changed, some observers probably
would identify the acquisition in the early 1990s of British
Sugar. The latter, a monopoly beet sugar refiner for much
of its history, has provided better returns than grain-based
foods. At least that was the case before the radical changes
were taken most recently in the European Union's beet
sugar support regime. In response to reduced payments to
domestic producers, A.B.F. has undertaken several actions
that reveal its mettle. It has acquired a leading European
importer and refiner of cane sugar and it is in the process
of buying a large refiner in a developing area of Africa that
will have privileged access to the European market. Seizing on its newly-acquired skills in yeast making and carbohydrate supplies from British Sugar, A.B.F. has taken the
initiative to bring ethanol production to Britain.
As amazing as all of this may be, and there's much
more to the way A.B.F. has acquired food brands like
Ryvita, Mazola and Ovaltine, hardly anything smacks
more sharply of change than the group's newfound
prominence in the retail clothing "value sector." Primark is the name of its successful chain of retail clothing
stores. This business came out of its one-time participation in the grocery business in Ireland and also in Britain. Retail clothing, which is mainly Primark, accounted
for 23 per cent of sales and for 34 per cent of operating
profits in the first half of the current fiscal year. The relatively better margins shown by those results, along with
the large investment being made in buying additional
retail sites, underscore the basis for this shift.
Very few milling or baking companies sought to follow what A.B.F. did starting in the mid 1930s to integrate
vertically flour milling and baking, even though at a few
moments in the industry's history that approach appeared to offer advantages. Even as A.B.F. now is moving away from vertical integration and has embarked on
a new course that represents numerous innovations in
how the business is shaped, the likelihood of others from
grain-based foods seeking to follow a remotely similar
course is again unlikely. It also would be ill advised.

Inflation warning stems from globalization changes

ecent research undertaken by the International
Monetary Fund warns that "globalization," once
considered a safeguard against inflation, may
soon become a cause of inflation in the near future. Until recently, integration of global product and financial
markets made inflation in large economies like America
less sensitive to domestic capacity constraints than might
have been the case without foreign supplies. That is in the
process of changing as global capacity constraints emerge.
Spare international capacity that might once have served
as a safety valve is vanishing, reversing the once positive
influence of globalization, the I.M.F. declares.
Hardly any industry is more aware of these possibilities
than grain-based foods, which for generations has had to
work within one of the first and certainly most globalized
markets - for wheat. The ups and downs of wheat prices
more often than not reflect the way surpluses in some re-

bakingbusiness.com / world-grain.com

gions ease inflationary pressures from shortfalls in other regions. At the same time, grain-based foods is acutely aware
of how markets circling the world register distressing volatility when either rising demand, often in a distant place, or
reduced stockpiles, may trigger unexpected moves.
Flour milling and baking, especially in the United States,
are quite free of either the positive or negative pressures of
globalization. It's a rare, and yes worrying, moment when a
surplus or a shortage of wheat flour in one country is resolved
by transferring the problem to a neighboring nation, even a
close neighbor. Dreams of doing that have abounded at various points in industry history, and it is likely that a few industry participants have looked with envy as China has benefited
from many businesses capturing the advantages of globalization. Yet, it is the possibility of China's capacity reaching some
limit that prompts the I.M.F. to warn of a surge in inflation
from this most unusual and unexpected source. MBN
Milling & Baking News, August 15, 2006 / 9

http://www.bakingbusiness.com http://www.world-grain.com

Milling & Baking News - August 15, 2006

Table of Contents for the Digital Edition of Milling & Baking News - August 15, 2006