Sunday 4 December 2016

Success of largest co-ops offers troubled banks food for thought

Published 20/02/2012 | 05:00

THE stark differences between the banking and food sectors will be thrown into sharp relief this week when Bank of Ireland reports results today and Kerry Group reports tomorrow.

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It is difficult to see how our largest bank can avoid reporting yet another miserable set of results as the property market falters and the number of people unable or unwilling to repay their mortgages continues to rise.

Over at our largest food company, things are likely to be far more palatable. Kerry Group's first-half results saw sales jump 8.4pc to €2.6bn, while profit was up 8pc at €175m, and there is little reason to believe that the former co-op has any disappointments in store.

Food companies are having a great run lately. Glanbia's shares are hovering close to three-year highs, while the banks languish at all-time lows. There is little doubt food stocks worldwide are in danger of entering bubble territory but this does not mean that banks cannot learn from food companies.

An obvious place to start is management styles.

The men who run the nation's food companies tend to be very solid and reliable and at times even dull. There is nothing flash about Kerry's Stan McCarthy and there was nothing flash about his predecessors. The same can be said over at Glanbia, where John Moloney has ruled the roost for more than a decade. These men understand their customers, suppliers and companies.

They invest in their people and products. Companies such as Kerry and Glanbia send staff to every corner of the globe and then bring them home again. The senior management and the layers underneath have a wealth of expertise that has stood to them and ensures both companies have an ethos.

It is a long time since the banks had an ethos of any kind and it is also a long time since the banks invested in home-grown talent. The absurd and childish focus on salaries in the financial services industry to the exclusion of everything else means that no ethos can really flourish.

Kerry Group never lost its way but Glanbia did, under Ned O'Sullivan (also of Anglo Irish), so there are lessons for Bank of Ireland here. Like Glanbia, the bank can be rebuilt, but it will take years and it will require solid, calm and purposeful management.

Having said this, I do worry for our food companies. Drastic reform has been foisted upon our banking sector by the EU/IMF bailout team.

The food industry was talking about reform and rationalisation for decades with few concrete results.

But never has there been a more crucial time for our lucrative dairy sector to evolve. In 2015, the EU will lift its dairy quotas, with the result that, for the first time in almost 30 years, European farmers will be able to produce an unlimited supply of milk.

This could be of particular benefit to Ireland because our outdoor grass-based system is the cheapest feed for cows and puts us at a competitive advantage to other countries.

Food Harvest 2020, the ambitious government strategy document which sets out growth targets for the development of the agri-food sector, is estimating a 50pc increase in milk production by 2020.

The concern is whether milk producers and processors are sufficiently prepared for expansion. Milk producers need to expand, while major consolidation is required in the co-op sector.

One of Ireland's main dairy rivals, New Zealand, is dominated by just one co-op, Fonterra. In contrast, we still have almost 20 separate dairy co-ops with limited processing capability dotted around the country.

This may, however, be about to change with a landmark deal involving Glanbia and Dairygold merging their Irish processing assets in a co-operative structure believed to be under discussion. Glanbia co-op marginally lost a de-merger vote in 2010 and a return to this issue is sure to be fraught with tension.

The reasons for going down this road are solid but perhaps this time those leading the charge will make sure the sums add up.

Irish Independent

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