Expanding internationalization — a more apt word than globalization — of the grain-based foods business has followed many paths, sometimes reflecting a "toe in the water" approach and, to a mounting degree, a strategy to gain national dominance of a particular sector.
The cautious approach is best represented by how Nisshin Flour Milling, Japan’s largest milling company, has entered the North American market with a single flour mill purchased in British Columbia, Canada, a number of years ago and with a single pasta manufacturing plant newly built in Tacoma, Washington, U.S.
Similarly, the Abdon family of Sweden, while becoming Scandinavia’s leading miller, has entered the industry in other parts of Europe as well as in North America. In the latter region, rather than flour milling, it has built a specialty grain processing business, refraining from competing in the highly competitive wheat milling business.
The contrast strikingly arises in examining how Barilla, the Parma, Italy-based pasta manufacturer, has entered the U.S. market by building both pasta manufacturing capacity and durum milling, gaining a leading role for its brand. Barilla has left no doubt about its international ambition, not just in pasta, but also in baking in Europe. A middle ground might be represented by how American-Italian Pasta Co. has moved to establish a presence in Europe where it has a single plant.
Developments in North America, in both flour milling and in the baking business, represent the apogee in internationalization, even though it might be argued that geographic proximity diminishes these developments. George Weston Ltd., the Canadian grocery chain and food manufacturer, now has a leading role in baking in both its home country as well as in the United States, where it recently acquired a leading position. Grupo Bimbo, the Mexican baking company that has been extending its reach throughout the Western Hemisphere, has made acquisitions that recently catapulted it to a leading role in U.S. baking.
Even as George Weston Ltd. has mounted an aggressive strategy in the U.S. bread and sweet goods market and also in biscuit baking, the family’s U.K. group, Associated British Foods PLC, has focused on building a U.S. presence in baking ingredients, particularly refined oils. Through its ABITEC and related operations, ABF has been expanding rapidly as a supplier to U.S. bakers and also as a manufacturer of cooking and other oils for the retail marketplace.
And it is ABF that has provided the trigger for the latest chapter in grain-based foods internationalization by its surprising (at least its action caught many observers by surprise) decision to sell to the U.K. subsidiary of Archer Daniels Midland Co. its six flour mills operating in the so-called third-party marketplace. Whether ABF first decided to sell or ADM Milling Ltd. made a buying overture that won acceptance may never be known, but there have been few developments in flour milling or in grain-based foods that signal a more important change than this transaction.
While the mills’ purchase is subject to U.K. regulatory approval, it may be concluded that a great deal of homework was done to gain an understanding of how the Competition Commission might feel about this move. It was only four years ago that the commission turned thumbs down on the acquisition of the former Spillers flour mills by Rank Hovis, then a subsidiary of Tomkins PLC, an industrial conglomerate. In the wake of the commission’s ruling, Tomkins had to dispose of the four mills, and ADM, the U.S. company that had a presence in the U.K. in various food ingredients, but not in milling, emerged as the buyer of these mills.
Now, ADM, through its U.K. operation, ADM Milling Ltd., has agreed to acquire six of nine flour mills operated by Allied Mills, a division of Associated British Foods. What makes this transaction strategically so important, as well as interesting, is reflected in two major implications:
• ABF, as both a leader in U.K. flour milling and baking, has decided that it should limit its milling to supplying its own flour needs after a long period as a leader and aggressive competitor for third-party baking customers.
• ADM has left no doubt about its commitment to be in flour milling beyond North America, where it ranks second in the U.S., first in Canada and has a leading position in Mexico, as well as in the Caribbean.
Background of aggressive acquisition
As a bit of history, it was Garfield Weston, the Canadian grocer and biscuit baker, who first entered the U.K. market, as a biscuit baker in the pre-World War II years. Weston, fabled for his entrepreneurship as well as for his aggressive pursuit of acquisitions, quickly decided to extend beyond biscuits to enter into bread baking. At that time, the major players in the U.K. bread business were the group that became Rank Hovis McDougall and Spillers, and these companies were in both baking as well as flour milling. But Ranks and Spillers began as millers, and this was their core business at this time, with baking an adjunct to milling.
Weston sought to maintain a balance in his British company’s flour supplies between imports into the U.K. from Canada and U.K.-milled flour, and he blended these flours to produce what he felt was a superior product. His comfort with this situation quickly eroded during the 1950s when it became likely that Britain would eventually join the European Economic Community and that the EEC’s Common Agricultural Policy would erect a barrier to his company’s flour imports from Canada. Rather than becoming totally dependent on flour supplied by millers that he also viewed as baking competitors, Weston embarked on a mill buying program, beginning in 1961 and continuing into the 1980s. Associated British Foods, first under Garfield Weston’s direction and then under his son, the late Garry Weston, aggressively bought U.K. milling capacity. The result was not just acquiring sufficient capacity to supply his own bakeries’ needs, but also enough to become a major player in the "free" flour market.
Not so incidentally, the aggressive Weston pursuit of milling capacity prompted RHM and Spillers to make both baking and milling acquisitions in order to protect their market shares.
Changing U.K. flour milling rankings
At one point in the late 1980s and early 1990s, ABF stood as the U.K.’s largest flour miller, accounting for about 30% of production. Prior to the close of the recent ADM transaction, ABF was in second place in milling, with RHM, owned by the Doughty Hanson venture capital group, holding first place.
Statistics on U.K. flour milling capacity are not publicly available, but knowledge of the industry indicates that annual U.K. flour output, in terms of wheat grind, is approximately 5 million tonnes. Using 16 cwts of flour as produced from grinding a metric tonne of wheat, results in estimated U.K. flour output of 80 million cwts. Similarly, a mill that grinds 1,000 tonnes of wheat in 24 hours is the same as a 16,000-cwt mill in the U.S.
Assuming that the acquisition of the six ABF flour mills is finally completed, ADM Milling Ltd. will be operating 10 flour mills with a combined daily capacity of more than 3,000 tonnes of wheat per day, or about 50,000 cwts. It already has slightly more than 1,000 tonnes of daily capacity in the four Spillers mills bought from Tomkins in 1999 — at Avonmouth, Tilbury, Liverpool and Newcastle.
The six mills being bought from ABF, at Castleford, Corby, Edinburgh, Knottingley, Liverpool and Tewkesbury, are estimated to have total capacity near 2,000 tonnes of wheat per day.
ADM is believed to have paid in 1999 slightly more than £40 million (U.S.$64 million at present exchange rates) for the four Spillers mills with daily capacity in excess of 1,000 tonnes. That approaches $4,000 per cwt of capacity. The price that ADM will pay ABF for the six mills with daily capacity of more than 2,000 tonnes of wheat has not been revealed, but estimates have appeared in the U.K. financial press of a price within a range of £60 million to £70 million ($96 million to $112 million). At the high end, the price approaches $3,500 per cwt of milling capacity; at the low end, it is $3,000. These six mills in the past fiscal year generated sales of £96 million ($154 million) to customers outside ABF’s own bakeries.
While the price ADM paid was not disclosed, ABF did say the six plants had "net tangible assets" of £41 million ($66 million) at Sept. 14, 2002, the end of its latest fiscal year.
The 3,000 tonnes-plus of daily wheat grinding capacity in the 10 mills that ADM will be operating in the U.K., subject to regulatory approval, would rank the company second to Rank Hovis in British milling. The latter company’s daily wheat grinding capacity is currently estimated at near 4,000 tonnes.
Not too surprisingly, the three mills ABF is retaining, at Manchester, Tilbury and Belfast in Northern Ireland, will rank that company third in U.K. total milling capacity. The Manchester and Tilbury mills, with a combined 1,350 tonnes of daily wheat grind, are among the most modern mills in Britain, if not in the world. In a major modernization program carried out during the 1990s, ABF greatly increased the efficiency, but not the capacity, of these plants.
"The remaining ABF mills," the group said, "will now concentrate on providing the efficient supply of flour to its Allied Bakeries business, the seller of Kingsmill and other bread brands."
Along that line, an ABF spokesman noted that the sale of the six mills would cut the number of company delivery routes to about 20 from 2,500. "You’re looking at a low-margin business with a high degree of complexity," it was added.
Peter Jackson, ABF chief executive, commented, "The disposal of the British third party flour milling business leaves ABF with a very effective, integrated flour milling operation, streamlining flour supplies to Allied Bakeries in a very competitive market."
Estimates are that the three mills retained by ABF will be able to supply about 80% of the company’s flour requirements, hinting that it may have entered into a supply agreement of sorts with ADM. Regardless of the level of self-sufficiency, it is apparent that ABF has been persuaded that its increasing focus on branded consumer products — not just bread, but also sugar, drinks and other consumer foods — made its third-party flour milling business no longer a core part of its strategy. At one time, this business was hailed for helping to reduce the unit costs of the flour used by ABF in its own bakeries.
Stepped-up competition for third-party milling
In effect, it would appear, that ADM’s sudden emergence on the British flour milling scene promises stepped-up competition for third party business. During the nearly four years that it has operated the former Spillers-Tomkins mills, ADM has proved to be a tough competitor, having to contend for market share in a flour market that has barely been holding its own.
Of the estimated 5-million-tonne annual wheat grind by U.K. mills, it is estimated that about 40%, or 2 million tonnes, comprise the third-party market, where bakers are not integrated with, or committed to, a specific flour supplier. ADM’s growth to more than 3,000 tonnes of daily capacity would give it an annual capacity in a range of 30% to 40% of the aggregate "free" market. Ranks Hovis mills mainly supply its own bakeries and other food manufacturing, but it probably ranks as the second largest competitor for third-party buyers, with an annual capacity that would be half of what ADM apparently will have available.
Except for any arrangement it may have made to fill ABF’s needs, ADM is the only major miller in the U.K. without a supply agreement with a baking company. This obviously is a position that poses all sorts of possibilities for the evolution of the British flour market.
Paul B. Mulhollem, ADM president and chief operating officer, said, "We’re very pleased with the opportunity to strengthen our base in the U.K. with the addition of these six mills."
Speculation arose as to how this change in flour milling might affect the plans by Doughty Hanson, already delayed a time or two, to have an initial public offering of its ownership of RHM. The latter company, for its specialty baking business, has also been a fairly large importer of flour from France, where millers have been particularly hard hit by the sharp fall in European Union flour exports, down to a level less than half the total of a few years earlier. Questions were heard as to whether a major shift in the structure of U.K. milling like this would not provide an opening for more aggressive marketing by continental European mills.
A further important change from ADM’s new presence already had started under the current ABF management. At one time, Allied Grain was a good-sized part of the group, originating about a quarter of the grain used by Allied Mills, and also being an active grain merchandiser to other processors. ADM’s focus on integrated grain origination and grain processing will in all likelihood affect the future of Allied Grain.
It already was apparent, based on how the group operates in the U.S. and elsewhere, that ADM intends to operate its expanded U.K. milling business with only a limited headquarters staff.
U.S. millers’ international expansion
Of course, ADM is not the only U.S.-based milling or grain-based food business that has expanded its operations into other countries. Cargill, Inc., which through Horizon Milling, its joint venture with CHS Cooperatives, is the largest U.S. miller and also has flour milling in Argentina. It has launched a milling business in India, and is a major European miller as part of its starch and vital gluten operations. In recent months, Cargill entered flour milling in Australia through a joint venture with a farmer-owned grain company, which bought that country’s largest flour milling business from Goodman Fielder. Seaboard Corp., based in the U.S. where it no longer has milling operations, continues active in the industry in the Caribbean, South America and Africa. ContiGroup, Inc. has milling stakes in the Caribbean and South America, partly as a joint venture with Seaboard.
Just recently, a U.S. milling company not associated with international operations decided to enter this expanding arena. Cereal Food Processors, Inc., with headquarters in Shawnee Mission, Kansas, and flour mills in Ohio, Missouri, Kansas, Utah, Montana, Oregon and California, acquired a flour mill in Montreal, Quebec, Canada, which was a required divestiture by ADM at the time of the latter’s expansion of its Canadian milling operations.
American millers are increasingly wondering about the state of the domestic market, which has seen mill closings in recent years. It is apparent that international expansion is one method that many of these companies have embraced as a way of continuing their growth.