Getting There

By Chavez, Gertrude | Global Finance, November 1997 | Go to article overview

Getting There


Chavez, Gertrude, Global Finance


Profits plummeting, Asia's San Miguel restructures at home and looks to investments abroad to pay off down the road.

How do you get from here to there? That's the problem facing one of Asia's largest and oldest companies, beer and food producer San Miguel. The 107-year-old Philippine company, with $1.2 billion in market cap and $2.4 billion in sales, has been suffering a contraction in its primary domestic businesses for the past three years. Because of the region's economic downturn, demand will probably slump further before it recovers. An ambitious capital expansion program is weighing it down with overcapacity. At the same time, the overseas operations launched over the past seven years won't be profitable until 2000.

"I think over the next 6-12 months the company will be much more fundamental," says Alberto de Larrazabal, San Miguel senior vice president for treasury. "You probably have to run things as tight as you can-defer totally unnecessary items." De Larrazabal anticipates recovery of the Philippine economy by the last quarter of 1998. Meanwhile, the company is pressing ahead on its three-year-old strategy of restructuring and cost-cutting.

The restructuring is largely focused on San Miguel's food businesses, hit in the last two years by rising raw materials prices, heightened competition, and an epidemic of hoof-and-mouth disease that has hobbled the entire meat-processing industry. San Miguel's food sector, which contributes roughly 28% of its total revenues, registered an operating loss of 120 million pesos ($3.5 million) in 1994 and 770 million pesos in 1995. Losses declined to 280 million pesos in 1996, however.

San Miguel is now deep in talks with conglomerate Ayala ($1.4 billion in market cap) on the possible merger of their processed-meat businesses into a joint venture, a move that could result in a shake-up of the industry. San Miguel currently has a 17% market share of the local processed-meat sector, third behind Swift and Vitarich. "There are areas [of the two businesses] that have excess capacities," says de Larrazabal. "The process of consolidation allows us to be much stronger, resulting in higher margins."

Tina Ibarra, analyst at SocGenCrosby UBP Securities in Manila, notes that the merger should spawn the birth of a powerful player in the processed-meat business. "Instantly, they could become the market leader. With that comes bargaining power in purchasing raw materials and in importations."

The merger talks with Ayala follow the rationalization of San Miguel's ice cream business in response to the appearance of a formidable competitor. San Miguel's Magnolia was the leading ice cream brand in the Philippines for 65 years until Selecta, produced by another Filipino company, RFM, came along and instantly grabbed market share with a host of new flavors. From a high of 80% in the 1980s, Magnolia's market share dropped to 49% in 1995.

San Miguel responded by consolidating its stakes in Nestle Philippines and Magnolia into a 45% interest in a merged company called Magnolia Nestle. This became San Miguel's sole vehicle for its ice cream and packaged pasteurized milk business, creating economies of scale and improving operating margins.

San Miguel also refocused its processed-food strategy by phasing out its Instafood (ready-to-eat meals) business, where competion was shrinking margins, and instead devoted resources to the processed-meat line. It also curtailed its shrimp farming operations, which had a limited market and thinning profit potential. All told, the restructuring has cut fixed costs in the food division by 12% since 1995.

The company's domestic beer business, 32% of revenues, is a different story. Here, where sales have also been sliding, San Miguel has focused on strengthening distribution and enhancing cost efficiencies. According to Jose Salceda, former research director at SBC Warburg, San Miguel has developed a "very efficient distribution machine that is perhaps second only to the national police or the armed forces. …

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