27 May 2019 Progresiv Magazine
The business acquisitions of the last 11 years have taken the local business of the giant French group Lactalis up to EUR 250 million. What’s next? Find out from the first interview with Giampaolo MANZONETTO – the executive who runs the companies controlled by Lactalis in Romania – after completing the acquisitions.
- You are among the expat executives who have served the longest on the Romanian market. And because Progresiv celebrates its 20th anniversary, I would like us to start with a short look-back.
Back in 2003, when I first came to Romania, I was strongly impressed by the first glance of the poorly developed local retail. The first international retailers were just entering Romania, but my Italian experience helped me anticipate that the market would grow rapidly driven by the investments of these players who were proposing new large-size formats. But the interesting thing is that, just years after that time, Italy saw a return-to-roots trend, with small proximity stores taking off. They wanted to replicate this in Romania, too, with the Mic.Ro and Mac.Ro networks, but with little, if no success at all. Still, this is the trend that we are seeing right mow on the local market. For me, over these 16 years, the greatest professional challenges came with the acquisitions of businesses conducted by the Lactalis Group in Romania. In 2007, I was the General Manager of the natural juice producer Parmalat Romania, a role that was supplemented with coordination of the LaDorna business since 2014. Three years later, after taking-over the largest Romanian dairy producer, Albalact, as well as the company Covalact, I was appointed to run also these two companies. For an executive, aligning four different organizational cultures to that of a large group, such as Lactalis, with revenues of more than EUR 18 billion globally, was definitely the biggest of all challenges. All four businesses controlled by Lactalis in Romania have very good employees, but when you have 11 players as good as Rolando in a team, the question that raises is: how do you make them work together, as a team, to rule the ranking? What is the current size the Lactalis Group business in Romania?
But before returning to the present day, let me give you a brief history of the Lactalis Group on the Romanian market: the local deployment started in 2007 with the set-up of a commercial subsidiary, Lactalis Romania, which managed the two largest brands distributed locally by partner companies: Galbani and President. In 2008, LaDorna Group, which then integrated three different business entities, was our first acquisition. Three years later, the juice producer Parmalat Romania joined the Lactalis Group further to an international deal. The M&A process sped up in September 2016, when we took over Albalact. Only three months later, we also announced the acquisition of Covalact. Currently, in Romania, Lactalis Group gathers together 7 factories, and more than 2,500 employees in 10 different legal entities, 4 international brands, 6 local brands and a number of other regional brands, such as Friss, which is distributed only in Harghita and Covasna. We are the largest milk collector in Romania, and we ship to factories a total of about 250 million litres of milk per year. We sell more than 200,000 tons of finished products, and we have consolidated revenues of close to EUR 250 million per year.
- Specifically, what changes has the French group brought to the operation of Albalact, Covalact, LaDorna and Parmalat, and what synergies are you currently exploiting?
Internationally, Lactalis has developed a lot through acquisitions. Still, we do not apply a standard procedure to integrate the companies taken-over, as other multinationals do. As a result, Lactalis does not interfere too much with the operational side of the business: road-to-market, marketing. We usually speak about acquisitions of market-leading companies, and it would be unnatural for the group to change the way they operate, as long as this has proven to be successful. In what the synergies exploited so far at group level are concerned, these are mainly found in the production area, meaning that both the imports from other subsidiaries, as well as the exports of products manufactured in Romania have intensified over the last years.
Eventually, we will end up organizing ourselves in one single structure that shares the support functions, such as HR, logistics, etc. also on the Romanian market. For instance, the company Albalact Logistică became Lactalis Logistic, and we are now operating many changes in their IT processes in order to turn it into the logistics division of the group on the Romanian market. Our ultimate goal is to improve the quality of the services provided to our customers. For human resources, a country-wide coordination will be beneficial for employees because it will allow them to access career development opportunities outside the company they are currently working for. In the management team, the only expat brought by Lactalis to Romania is a professional with rich experience in international production, who was entrusted with the role of Industrial Director, including supervision of the 7 local factory managers.
- Is there still room for further growth in sales? Both dairy products and fruit juices are highly competitive markets.
Both divisions are currently on an upward trend. We also enjoy an organic growth driven by the investments made in increasing our production capacity. When we took over Albalact and Covalact, the factories owned by the two companies were operating at full capacity. The growth in sale was virtually limited only by production. For this reason, the largest investments made by Lactalis in Romania over the last two years, once the transactions completed, were aimed at increasing production capacity through retrofitting. We will soon complete this investment phase that allows us to increase the exports to other subsidiaries of the group, as well as to kick off local production for ranges that are currently manufactured by other European subsidiaries of the group. The investments made in 2018 amounted to approximately EUR 7 million, but this year’s investments in IT systems and logistics will exceed this figure. In fact, in 2019 we are setting foot into a brand new stage of investments. The Lactalis Group is very confident in the growth prospects of the Romanian business.
- What is the share of exports out of the aggregated revenues?
It is not a high share, because the only factory that currently produces to export is that of Vatra Dornei – President spreadable cheese is shipped abroad in large quantities. Our export projects include hundreds of tons for other subsidiaries of the Lactalis Group in other countries, we do not work with small volumes. We will continue to follow this strategy. For juices, Parmalat Romania exports to a number of countries in South-Eastern Europe, but also to England. For the time being, Lactalis Romania is in the import hub phase. Imports give us more flexibility in developing our product portfolio because we can use them to launch new products without risking losing a lot of money. When there is enough demand for a new product, then we consider investing in local production.
- Which were the most successful recent launches, and what trends did these address?
The full range of Zuzu Dolce desserts, Zuzu Divin yogurt and LaDorna organic lactose-free milk sold above expectations. Another development direction, which taps on important consumption trends, is diversification of our offer of organic products. Last year, we launched the ultra fresh dairy products and organic juices, and 2019 has so far been the year of first-times in this market segment, with the brands Covalact, Zuzu and LaDorna. In general, we invest where we see opportunities to grow. The Romanian consumer has evolved, has higher income, and is increasingly more sophisticated. They seek value-added products, and the latest addition to Albalact’s portfolio is Zuzu Fit, a range of protein-rich products for our active and sport-loving consumers. Over the last two years, the dairy market has not grown at the pace we were used to see it growing, but certain categories did stand out for their growth potential – refrigerated desserts, for instance, have doubled in sales over the last years. On the other hand, butter is declining due to the important price increase caused by the more expensive raw materials. All over Europe (including Romania) the price almost doubled in 2018, compared to the previous year.
- What threatens your Romanian business?
The unpredictability of the business environment. We rely heavily on imports. Besides the raw materials, that are 96% sourced locally, the packaging, process equipment, ingredients, fruit preparations, as well as various services are purchased from abroad, so that any exchange rate fluctuations affect us a lot. Also, we would not mind to see more legislative stability in Romania. Inflation has hit us hard lately. We cannot pass the increase in the tariffs of utilities, the wage bill or the devaluation of the local currency to the price of our products because we risk reducing our volumes substantially, which would have a further adverse impact on our fixed costs coverage. And then we have to bet on streamlining the manufacturing process.
High pressures are also exerted by the modern retail as retailers strive to get lower purchase prices year after year, when all our production costs increase. Fortunately, so far we have not had any deadlocks in our arrangements with the retailers because we always pursue a win-win approach in our customer relations.
Each legal entity of Lactalis Romania sets their own pricing policy and carries out stand-alone negotiations with the large retailers. As I was saying in the beginning, the group had not interfered with the route-to-market strategy of the companies taken over.
Most likely, however, the biggest threat to our Romanian businesses is the labour shortage. I was reading the other day in the press that Romania has the largest diaspora in the world, after Syria – a country fled by its people because of a war. And this says a lot about the challenges of the local market.