Wednesday 28 September 2016

Stan McCarthy interview: Milkman aims to deliver on further acquisitions

Kerry boss Stan McCarthy is very much in the driving seat at the blue-chip food ingredients giant after stepping down from the linked farmer-owned co-operative. He talks brands, millenials and M&A with Gavin McLoughlin

Published 12/05/2016 | 02:30

‘The retailers in the UK, for example, have been controlling the e-commerce channel, but now you have other parties beginning to enter into it that are avoiding the traditional retail infrastructure completely,’ says Stan McCarthy
‘The retailers in the UK, for example, have been controlling the e-commerce channel, but now you have other parties beginning to enter into it that are avoiding the traditional retail infrastructure completely,’ says Stan McCarthy

When most of us think of Kerry Group the first thing that comes to mind is probably milk. That's certainly true of the farmers, many rooted in the rich dairy country close to Kerry's Tralee headquarters, who dominate the share register of the €14bn food giant through the original Kerry co-op.

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Whether it's true of chief executive Stan McCarthy is another question altogether.

When the 59-year-old Kerry boss surveys the global business, milk, and the green fields of the Kingdom, are among of a whole clatter of businesses and issues he needs to juggle.

The task of managing that dynamic spilled into the open this week, after the Irish Independent revealed the depth of tensions between management of Kerry group, led by McCarthy, and some of its oldest shareholders. Kerry Co-op owns 13.7pc of the plc, worth €1.9bn, and farmers are estimated to hold a further 30pc of shares, having benefited from a series of spin-outs making them a powerful body to be reckoned with.

McCarthy joined Kerry in 1976 as a trainee accountant. He's a Kerry lifer. Forty years later the reserved Kerryman leads a vastly transformed organisation where annual revenue topped €6bn last year.

He's speaking to me from Chicago, where the company has had a presence since the early 1980s.

In his ninth year as chief executive, McCarthy sees his role, and his challenge, as positioning Kerry to take advantage of rapidly changing consumption habits.

Many farmer-shareholders back home, reeling from this year's collapse in milk prices since the lifting of European quotas, might feel there are more pressing issues to contend with - like lifting farm gate prices.

It's a tension that was probably always inherent in the hybrid corporate structure not just at Kerry but Glanbia and other big agri-food players that emerged out of the cooperative movement. The liberalisation of the dairy sector, and the globalisation of groups like Kerry, may well make it harder, not easier, to manage that tension into the future.

For one thing, the popular view may associate Kerry with milk and butter, but most of the group's revenue comes from its 'Taste & Nutrition' business.

It throws up much of the dividend income that shareholders, including farmers, have come to expect from Kerry. That business is built around cutting-edge science and technology, used to provide foodtech services to other businesses bent on making end products healthier and tastier, and more "functional" in the industry jargon.

Raw materials matter, but it's clear from the conversation that much of McCarthy's focus is on consumers, whose changing habits and requirements are being studied to shape Kerry's future.

"The millennial generation think very differently to when I was growing up. When I was growing up, you didn't pay attention to the food that you consumed the way people pay attention to it today," McCarthy said. "Lifestyle is impacting that as well. People have less time, they make decisions quickly.

"People decide what they want to eat and what they consume at four o'clock in the evening and they want it readily available, they want it to meet the standards that they expect. So you have all these factors impacting change in consumption.

"That has to be reflected in how we engage with our customers, that we ensure we're helping them deliver products that meet that consumer expectation."

Responding to that can be massively expensive, and management intensive.

Kerry is an "acquisitive business", McCarthy said. Last year it spent almost €900m on buying other companies.

"We're extremely busy integrating those acquisitions. There are a number of phases, one is to integrate them and secondly is to take what we've acquired and market it through our global infrastructure, like the developing markets. That's certainly part of the plan for 2016 and 2017.

"That being said, we will not stop acquiring in 2016 and 2017. We have a very busy internal M&A team... [the amount of money Kerry spends this year] could be from €100m to €500m." Developing markets, including Central and South America and Malaysia, account for about 25pc of Kerry's taste and nutrition business and McCarthy wants to make that 30pc by 2020.

The other side of Kerry's business is the consumer foods division. The company owns brands including Denny, Dairygold, and Cheestrings.

Snacking and convenience underpins McCarthy's strategy there, trends again driven by millennials' habits. The shift towards e-commerce in retail is an important part of the mix too.

"We have invested pretty heavily in the last number of years around the whole digital and e-commerce strategy and we continue to do that, it's a very fast-growing part of our business.

"Our foods business is very much a brand-centric business and for it to continue to grow it needs to be connected with the smartphone community.

"Certainly that has been quite successful for us over the past number of years and it has started to drive significant growth after what was a difficult period in Ireland and the UK after the economic meltdown where the consumer patterns were completely disrupted. But now they're being reincarnated if you will under a different format, primarily driven by digital and ecommerce. The future of our foods business, it's focused on brands, and those brands have to be available for consumers given the infrastructural changes that are taking place in retail. We're also expanding internationally into mainland Europe as well."

The shift online could well benefit farmers, if it helps Kerry break the dominance of big supermarkets in setting food prices, especially in the UK.

"Certainly the retailers in the UK, for example, have been controlling the e-commerce channel, but now you have other parties beginning to enter into it that are avoiding the traditional retail infrastructure completely.

"You have companies like Amazon entering into the UK market. We're engaged with many different companies that are exploring channels outside of the traditional retail channels... Amazon are looking at delivering fresh food within I believe 40 minutes in the South East of the UK."

Social media has dramatically changed the marketing landscape and Kerry has invested heavily to try and reap the benefits.

"It's about being able to connect and communicate with our consumers and the whole digital platform allows us to do that.

"Social media is a way of messaging to the consumers in terms of what's new and exciting about our products, and certainly can become more effective in terms of being able to connect with the appropriate consumer when it comes to messaging, promotions, what have you. This is changing at a phenomenal pace and it is only escalating," McCarthy said.

McCarthy's brand awareness isn't lost on industry peers.

He will be named 'All-Ireland marketing champion' at this year's industry awards run by the Marketing Institute of Ireland.

The awards, with Independent Newspapers as media sponsor, recognises 'an exceptional contribution to business performance over time, and who has also had a positive impact on the broad marketing profession in Ireland'. It's not a question of embracing novelty for its own sake, McCarthy's attitude is pragmatic. "All we can say is that it will be hugely important to our business in the future.

"The extent, it just continues to escalate every year, and it's something that you can't afford to not invest in. We continue to pour large amounts of money into it. The technology is changing rapidly, the ability to be able to take data and convert it into information to take meaningful decisions is improving all the time.

"It's a reflection of the way millennials are keeping up to date, making decisions about what they consume, it's that new way of doing business that's changing all our lives."

Kerry's focus on the future, and on consumers, dominates our conversation, which takes place just days before it emerged that McCarthy has stepped down from his role as ceo of Kerry Co-Op, Kerry Group's biggest shareholder, in part the result of row over the milk price being paid to farmers by the group many still see as "their" dairy.

The milk price issue is set to go to mediation. The gulf between the co-op and the plc may take longer to bridge.

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