010802 Farmland: Branded Foods Key to Profits

Kansas City, MO - At Farmland Industries Inc.'s new corporate offices north of downtown Kansas City, Chief Executive Bob Honse and other executives enjoy the culinary creations of a full-time chef and not one, but two, richly appointed penthouse kitchens.

The meals whipped up in state-of-the-art cooking areas are not aimed at satisfying the appetites of Honse and Farmland's leadership team, however. Rather, they are seen as the focus of an aggressive new business strategy for the 72-year-old agricultural concern that calls for building profits on brand marketing.

By focusing less on high volume slaughterhouse operations and fresh meat sales, and more on high-margin sales of branded case ready and precooked pork and beef products, Farmland hopes to jump-start profits.

“There is not a lot of money in just slaughtering animals,” said Honse in an interview. “We used to have the focus that we wanted to kill more animals. Now we're more interested in processing the animals and in value-added marketing. That's made a huge change in the mentality around here.”

Honse, who will mark his first anniversary as CEO Sept. 1, said he intends for the new strategy to help Farmland more than double earnings next year.

The cooperative, which has 600,000 farmers as shareholders, has struggled with high debt, lagging revenues and a bloated cost structure, and last year lost $29.25 million. Now in its fiscal fourth quarter, Farmland is writing up another money-losing year after taking a third-quarter $79 million restructuring charge.

JOB CUTS, CLOSURES, DIVESTITURES

The company has cut hundreds of jobs, closed food and research facilities, sold its grain merchandising subsidiary, and cut out the bulk of its grain business.

To counter the problems, Honse and his team of top executives are busy turning on its head the old-line farm cooperative business model that once drove Farmland's strategic moves, and are aiming to turn Farmland into a modern-day branded foods company.

Within the last several weeks, many new products bearing the Farmland big- sky logo have started hitting grocery store shelves. Branded offerings include “case-ready” products, like “hickory-smoked center cut pork chops,” and ready- to-eat “ribbits” barbecue pork brisket tips.

All feature the prominent display of the company's logo, and are backed by a multi-million dollar, new multimedia advertising campaign. One ad for Farmland pork products features the famed Elvis Presley tune “Love Me Tender.”

“None of these products were in the market six months ago,” said Jim Sbarro, senior vice president/sales and marketing for Farmland Foods. “This is where the money is.”

Farmland officials are most excited about a new “ground & browned” product that packages fully-cooked, crumbled ground beef in a zip-lock pouch. Consumers can choose from original, Italian and Mexican style when they want to whip up tacos or spaghetti sauce in minutes.

In making a move to leverage the Farmland name into higher profits, Farmland is taking a page from other agribusiness giants, including Archer Daniels Midland Co., IBP Inc., and Smithfield Foods Inc.

“These commodities type companies are attempting to look for higher margin opportunities, and branding offers better margins and better growth opportunities,” said Midwest Research agribusiness analyst Christine McCracken.

STRATEGIES UNPROVEN

Still, analysts noted, agricultural concerns have yet to prove that their branding strategies are pulling in profits.

“Right now we're just in the first inning for the meat companies,” said Prudential food analyst Jeff Kanter. “It's where everybody is going. “You see companies trying to scramble to capture whatever market share they can.”

Farmland has already had some early stumbles. It bought a Colorado bakery this spring, with high hopes for a branded specialty bread product to sell at kiosks in grocery stores on both U.S. coasts. But handling and distribution problems have shelved the product for now.

And some of Farmland's branded heat-and-eat “family entree” meals such as pot roast and barbecue rib dinners are not ringing up the kind of sales that officials would like.

Nevertheless, cooperative officials are convinced that they have found the answer to the problems that have plagued the company. The refrigerated foods unit, which includes Farmland's pork and beef operations, is projected to see double-digit income growth each year for the next several years, said chief financial officer John Berardi.

That, combined with a strategic changes being made in Farmland's fertilizer business, including a switch to coal gasification to reduce a reliance on natural gas, and the overall cost and debt reduction moves made over the last year, should help propel the company's finances back to good health, Farmland officials said.

“From a growth standpoint, this is where our emphasis is,” Honse said.

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