Maestro of the Kingdom is taking on the world
While most chief executives are struggling just to keep their businesses afloat, Stan McCarthy's main problem is trying to find new ways to keep Kerry Group growing. By Peter Flanagan
Published 25/08/2011 | 05:00
IT'S not easy being a senior figure in the Irish business community these days. With the economic downturn and the struggles in the domestic sector, most chief executives have their hands full just keeping their company in business.
One person who doesn't have that difficulty, however, is Stan McCarthy. As chief executive of Kerry Group, McCarthy's problems are quite the opposite. Namely, how to keep a business growing when it is already the third biggest company listed on the Irish Stock Exchange with a market capitalisation nearly €5bn?
Ever since he took over from Hugh Friel three-and-a-half years ago, McCarthy has overseen average earnings per share grow by more than 10pc annually while increasing margins by the same amount.
That has been achieved while restructuring the company internally and spending small fortunes on bolt-on acquisitions. Last week the company reported another strong set of half-year results and the company share price is up more than 50pc in the last two years.
McCarthy is unusual in the business world these days. The 53-year-old joined Kerry Group in 1976 when it was still primarily a dairy business and has stayed ever since, working his way up to head the American division before becoming CEO of a company that is now one of the biggest ingredients and flavours (I&F) companies in the world.
When McCarthy travelled over to America in 1984, most Irish heading that way were trying to escape unemployment and a life with no prospects. They weren't heading west to grow an Irish business.
"At that time the strategy behind the Kerry Group you see now was evolving out of what had been a tough time for the co-op and the PLC," he says.
Due to a variety of factors, Kerry had lost a fifth of its milk supply in the late 1970s and needed new sectors to grow the business. One of those was ingredients.
"To be quite honest, it was ingredients and not flavours we were focused on and a couple of us headed off to America in 1984 to learn that business and grow it," he claims.
Based in the John Hancock Centre in Chicago, the small team zeroed in on ingredients and educated themselves in the food and beverage sector.
"We had developed a business in Ireland around the extraction of casein (a key protein in food ingredients) from milk.
"Most of the casein was being exported to the US and we knew it was being used in ingredients and value was being added; but we didn't fully understand the process.
"Maybe that was the crumb on the trail that led us to get into ingredients. It's difficult looking back but the vision at the end of the day was to develop a broad-based ingredients business and to do that we had to get close to the customer and understand the marketplace, which is why the States was so important to us."
The years spent in America are plain to see in McCarthy. His default use of the phrase "earnings" instead of "profits" is perhaps the most obvious manifestation of the time spent there and he maintains a home in Chicago to this day. It certainly affected the way he does business personally.
The American way hadn't infiltrated Ireland in the early 1980s to the extent it has now, and it was a very welcome culture shock for him. When asked if he could have become the person he has without going across the pond, his answer is emphatic.
"Unlikely. The US was a vastly different and vastly friendlier place to do business (compared to Ireland then), but it was a new experience for me so I have to recognise that and especially how Kerry was embraced by the Midwest community there. It was a fantastic place to learn, develop and start a business.
"I had to make a commitment to immerse myself over there and it's part of the culture in Kerry that you're empowered to make decisions and you're supported in your decisions. Once I knew I had that support and that empowerment; that was phenomenal for me at the time."
Clearly he looks back on those first years in the US fondly, and seems to revel in the thrill of starting a new business in a strange country.
"Yeah we made mistakes, but it was phenomenal for us and it helped us all mature because it was such a young growing business and we were learning our responsibilities."
McCarthy made his name in the States, and that arguably set him on the path to the top job. He laughs when that is put to him, however.
"I was hardly on what I'd call a 'predetermined career path'. It really depended on how I got on myself. As I grew from a financial background (he is a qualified accountant) I knew I wanted experience in sales, I wanted to understand technology and the marketplace, so I was always working and driven to move the business on as well as my own development."
By 2001 McCarthy had moved from "rising star" to potential chief executive and was mentioned in dispatches as a possible replacement when long-time boss Denis Brosnan stepped down. Ultimately, Hugh Friel got the job but McCarthy gives short shrift to the idea that he was passed over.
"That's a little bit of a misperception, I wouldn't agree with that at all. How did I react? I'm still with the company. There have been reports that I was ill or something like that but that wasn't the case either. I was running the American business and was an executive director of the company so that wasn't an issue at all as far as I was concerned."
In any case, by the time Friel stepped down he was the heir apparent. When he took over, the business was doing fine. But he has still made significant changes behind the scenes.
"In 2008 we had a structure that worked very well for the group but it was very business unit-focused, we needed to transition to a more customer-centric model and get much more symmetries in I&F around the world.
"Foods had been going through a transformation which had started in 2006 and I knew there was very little I could contribute to that; but I think what we developed was our go-to-market strategy, which put in place a very structured approach to our global I&F model, which was hugely beneficial to us to this day and brought the structure of I&F down from a business-unit focus to three regions with an executive over each. That has worked very well."
Talking about internal restructuring may not be sexy but it is a necessity in any successful business, especially in today's environment. Another necessity is the ability to cut fat during the good times, and McCarthy has shown a real aptitude for that.
Soon after his taking over, the group exited a fragrances business ("personal care wasn't for us") and in the last year has sold off a number of its liquid milk dairies. He is crystal clear on his strategy.
"Our mindset is very clear in the two platforms, Consumer Foods and I&F, and our shareholders are very clear about our plan. Holding on to an underperforming or non-core business becomes a drain for capital and resources that you need to employ elsewhere."
Consumer Foods has struggled for some time and, following McCarthy's logic, could Kerry look at selling off that business?
After all, the vast majority of revenue and profits now comes from I&F. Getting rid of a business with such an historic link to the farming industry would be a massive deal but he doesn't blink at the question.
"Everything is possible but what may not be understood is the cost of entry to that business was not as high as I&F and it is a very strong cash-generative business.
"The chilled foods business is, from a working capital perspective, very minimal so in terms of return on investment it's just as good as I&F. We think it's a hugely strategic and important sector for the group.
"Were we faced with other alternatives and big decisions, is that (a sale) something we could consider? Yes. Are we doing it? Absolutely not.
"I think we demonstrated in our interims the strength of our balance sheet and what we can do through our banking facilities. We don't think it would be in the interests of the group. You benchmark the business with your peers and it's up on top in that regard."
Kerry Group is pretty unusual when it comes to big multinationals in that the company is very much still a local company, despite its size.
It has sponsored the Kerry footballers for years and has put its name to many local events and teams.
The tie with farmers is not unique to the food sector here but the chief executive of a company that practically everyone in the county has a holding in inevitably gets plenty of unsolicited advice when he's out and about. It must grate after a while?
"That comes with the job and it's something I quite like. It's good that people have such an emotional attachment to the company and I take it as a compliment that so many people in the locality have invested in us," he says.
That local interest may be in the process of being loosened after the co-op voted to allow its minimum holding in the PLC to be halved to 10pc. Next month the co-op will vote on allowing its board representation on the PLC to be cut as well.
These events have been portrayed as Kerry moving away from its agri roots, but for McCarthy the changes are a product of the new regulatory environment.
"These are to comply with the new corporate governance regulations. That's all. We have some great co-op board members but we are a progressive company and we have to move with the times."
Kerry Group has been a star for years and it looks set to continue. "Things are going very well," says McCarthy. Acquisitions during the year will be higher than previously indicated, with total purchases in 2011 now expected to be closer to €400m than the previous estimate of €300m.
Numbers like those boost Kerry's reputation abroad, and it is perhaps understandable then that McCarthy hasn't experienced the blowback internationally that other leaders have experienced at the head of an Irish company.
"The state of Ireland comes up in conversation but no more than that. At this stage Kerry Group's reputation is our passport abroad.
"There is a recognition in Ireland though, perhaps more so than in other parts of the world, of what needs to be done to move forward.
"People here want to move on at this point, they've adapted their lifestyles, and there's a recognition about what needs to be done to be a successful economy and once we get to that place we will be able to wear that as a badge of honour in the future.
"I'm very positive on the Government's moves so far. We aren't getting held up in political ideology and politicians are trying to do the right thing. It's too early to tell in terms of one government versus the other but I think the right things are being done."
The food sector is back in fashion after years in the wilderness but not being in a "trendy" industry doesn't bother McCarthy in the least.
"Whether it's dot.com bubbles or property or something else, we'll keep doing what we do. It has proved successful so we won't be changing anytime soon."