Associated British Foods, Plc...After completing his studies at Oxford University and a short stint...

9-912-402

N O V E M B E R 2 , 2 0 1 1

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Professor Ray A. Goldberg, Executive Director Carin-Isabel Knoop and Research Associate Matthew Preble, both of the Global Research Group, prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2011 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

R A Y A . G O L D B E R G

C A R I N - I S A B E L K N O O P

M A T T H E W P R E B L E

Associated British Foods, Plc

In September 2011, top executives at Associated British Foods (ABF) met at group headquarters in central London. August had been a brutal month in the financial and commodity markets and their unique firm, active as it was in food, agriculture and retail clothing, was being buffeted from all sides. CEO George Westona and his team needed to assess how to capture opportunities in all sectors, what investments were needed to execute on those, and what this meant for its corporate model. The global food system was subject to high volatility, making it difficult for agribusinesses to accurately predict future trends, opportunities and challenges. ―In looking forward just 20 years,‖ Weston believed, ―one must work with present trends and existing technologies. But 20 years is also long enough for shocks to be a near certainty. Sudden but long term weather and political events, disease and so on can turn trends on their heads and create new ones.‖ Weston had called this meeting to identify global trends and understand how ABF would need to position itself in the global food system.

Weston was the fourth member of his family to run a business that had grown out of a single bakery founded by his great-grandfather—also named George Weston—in Toronto, Canada in 1884. (Appendix A provides a detailed history.) Like his ancestors, Weston had grown up in the food business. After completing his studies at Oxford University and a short stint in management consulting, he attended Harvard Business School (MBA ‘92). Weston joined the family business after graduation, managing ABF‘s rice and wheat milling operations in the U.K and Australia. He looked to aggressively grow the company, ―I have always understood this company‘s worth and am a competitive and determined individual. I don‘t have as conservative of an outlook as my father; I spent more money on acquisitions in my first two years in this job than my father did in his first 20.‖He was looking to place his bets and set the company on track for another 125 successful years.

Company Overview

ABF had been growing very rapidly under Weston‘s leadership. ABF reported group sales in its 2010 fiscal year (which ended in September 2010) of £10.2 billion,b up from close to £6 billion only five

years before. In 44 countries, ABF employed close to 100,000 people across a diverse portfolio of

a George Weston will be referred to as Weston in the case, his family members will be referred to by first and last names.

b On August 30, 2011, the exchange rate between the British Pound and the U.S. Dollar was £1 to $1.63827. Source: OANDA Currency Converter, http://www.oanda.com/currency/converter/, accessed August 2011.

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912-402 Associated British Foods, Plc

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companies, from the beverage company Twinings, to its enzymes and animal feed operations, to its clothing-retailer Primark. ABF was also a large manufacturer of refined sugar, yeast, and enzymes. Geographic strength dovetailed product strength: it was a major food company in Australia; the leading manufacturer of corn-based cooking oil in the U.S.; and the biggest customer of U.K. farmers. ABF sold products under a number of well-known consumer brands, such as Twinings, and Ovaltine.

Apart from its food-related operations, ABF was one of Europe’s major clothing retailers through its Primark operations, which billed itself as “a unique combination of fast fashion and lean operations,” and was a major player in Europe’s low-cost high fashion clothing market. By May 2011, Primark had 220 stores across Europe, 152 in the U.K. alone. The company had seen major growth in its retail clothing business and it projected future growth in the world’s fast-changing sugar system.

By 2011, ABF’s activities were grouped into five operating areas: Grocery; Sugar; Ingredients; Agriculture; and Retail. (See Exhibit 1a through Exhibit 1h for detailed company and segment financials.) ABF had eight divisional offices, each with a direct report and responsible for one area of ABF’s operations, to serve as a layer of contact between the head office and the individual operating companies. In 2011, those divisional offices covered: Animal feed; Grocery operations in Australia; Grocery operations in the U.K.; Grocery operations in the U.S. (ACH); Primark; Sugar; Twinings/Ovaltine; and yeast (AB Mauri).

Its grocery activities supplied food products and ingredients to the foodservice industry, such as breads and milled flour, as well as products under consumer brands such as Twinings beverages, Spice Islands seasonings, and Mazola cooking oils. Its sugar operations had facilities in Europe, Southern Africa and China, producing and refining raw sugar that it sold to both consumers and the foodservice industry, including through consumer brands such as Silver Spoon. ABF’s Ingredients companies made enzymes, food toppings, oils, flavorings and colorings for foods. Agricultural activities covered a range of activities such as animal feed, poultry marketing and grain trading. ABF’s retail activities were almost entirely undertaken by its clothing retailer Primark (ABF had no supermarket or grocery food retail operations and all references to “retail” in the case refer to clothing retail.) Appendix B provides an in-depth overview of the various businesses.

Each of these operating areas each had a strong global presence, and many countries had multiple ABF companies operating within them. In China, for example, ABF was: actively producing yeasts, oils, and other inputs for its ingredients activities (ABF was the second largest yeast manufacturer in China); growing and processing beet sugar for local consumption (ABF was the sixth largest sugar producer in China); sourcing clothing items for its Primark stores; one of the largest non-Chinese animal feed companies; and also engaged in limited production of enzymes and yeast extracts.

Maintaining a diverse range of companies and operations had enabled ABF to participate in multiple elements of the food chain, collaborate internally to share skills, and help manage risk. An analyst argued that, “the group’s presence in unrelated activities is one of the major strengths in the present uncertain global environment.”1 The report suggested that while some operations, such as its sugar and retail activities, were impacted by financial recession, its other operations such as its grocery and agriculture segments, “are less affected by the recession due to their importance as daily necessity in a consumer’s life.”2 In the near term, analysts were optimistic about ABF’s future financial performance (See Exhibit 2 for selected financial projections for ABF through 2013).

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Associated British Foods, Plc 912-402

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Management and Governance

Family Ownership

ABF was majority-owned by the Garfield Weston Foundation (Foundation), a charitable trust founded in 1958 by Garfield Weston,c which owned a majority of ABF’s shares through its subsidiary company, Wittington Investments Limited (WIL). As of September 2010, the Foundation owned 79.2% of WIL’s shares,3 and WIL in turn held a 54.5% ownership stake in ABF.4

Though ABF also had many minority shareholders, Weston saw the private, family control of the company as a critical strength that had enabled it to stay focused on long-term goals. In turn good cash flow meant good dividends, further stabilizing the share ownership. “It is no accident that ABF’s balance sheet has never been stretched. This comes directly from my grandfather’s experiences running a business during the Great Depression,” Weston elaborated, In fact longevity brought advantages: “you are always there, even in the downturns, to spot opportunity and take advantage of them.” A strong balance sheet and stable ownership had therefore enabled the company to pursue attractive opportunities when they arose. “If an organization is always going to be there to spot opportunity, it will be successful and that is how ABF acquired British Sugar and began its sugar operations,” Weston explained. Analysts highlighted ABF’s financial stability as well, with one report finding that, “Such a consistent and efficient financial performance gives the company a strong stability and growth prospects in the near future.”5

Management Philosophy

Weston split the travel to ABF’s various global operations with his small team of senior executives: an HR director, a finance director and a “performance” director “who spent most of his life on planes,” Weston explained. He personally traveled about a week each month. ABF created divisional offices, each with a direct report, to serve as a layer of contact between the head office and the individual operating companies. Division heads were given significant autonomy, Weston explained, “If we have one organizational belief it is that the businesses need to remain close to the market they serve.” Weston saw this approach as a competitive advantage:

We have devolved authority, but still give our leaders access to skills and knowledge available elsewhere in the group. We almost never tell companies directly what to do but still want to be involved on major decisions. However, we are careful not to impact the authority, autonomy and accountability of our leaders. If you want power, give it away. The organization’s companies are very different from one another, and need to be fit into the different markets in which they operate. Our yeast business looks and feels very different from Twinings for example.

Autonomy was critical to ABF’s efforts to keep its people engaged. “Our division heads are allowed to run their business and think for themselves,” said Weston, “Many companies try to do this, or say they do, but the center doesn’t allow it.” While ABF’s experience with devolved autonomy was largely positive, he acknowledged that it occasionally came with a price: “ABF values long-term stability and this can lead to leaving some people in their jobs for too long, and then once they move on, there is a burst of renewal.”

c The Foundation had granted roughly £40 million to 1,500 different applicants in 2009. Source: Garfield Weston Foundation, Report and Accounts of the Trustees, Year to April 5, 2010, p.3, http://www.garfieldweston.org/report/2010Report.pdf, accessed August 2011.

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ABF maintained strict financial controls, including signing off on all capital requests in excess of £100,000, to ensure it remained engaged with its companies and that it was in control of long-term planning and investments. “We do expect to be involved, in some segments more than others,” Weston said. “With British Sugar, for example, capital planning is intensive and if the company is spending hundreds of millions of pounds on a project, it cannot afford to make a mistake.” The central office was there to provide insights and resources. For example, its animal feed company had reached out to the central office after a merger deal became complicated.

Culture

Weston also attributed much of the company’s sustained success to a company culture that relied on relationships to tie its diverse operations together. “The way the group works is more personal than most businesses,” Weston explained. “People know and trust one another, and when it comes time for us to make decisions we use more than just financial metrics. People like the continuity of the organization and the accountability they are given. Employees stay because they feel they have power and influence in their roles.” This was made clear in a survey ABF had conducted of 200 of its most senior employees, asking participants why they chose to continue to work at ABF and overwhelmingly, respondents felt greater engagement with their work at ABF than they had in previous jobs.

Constant contact was crucial to making ABF’s operating model work; Weston explained “We have to push authority down through our business units, and to retain influence we have to be engaged with them. The best way to do this is through constant communication, coupled with frequent travel so that we can physically see our operations and talk with them. Things start to go wrong when we lose touch with people.” This was a very real risk because of the geographic diversity and scope of ABF’s operations, and a willingness to collaborate, communicate and travel was essential to be a successful part of ABF. Weston continued, “The diversity of ABF’s holdings does present challenges, but if the central office has good communication and good intelligence on each business then the company works. Even with a group of 200 executives across ABF’s companies, that is a manageable group of people I can know and understand. If I don’t know them personally, our people in human resources do.”

Human resources was a crucial function according to Weston, “we can have diversity at the business unit level but we want to minimize the impact of the physical distance between individuals and for that we need a strong human resources function focused on core cultural characteristics and career development.”

Trends and Resources

In the coming years, Weston knew that his management team would have to steer ABF through a set of challenges and crossroads in a rapidly changing global food system. With global population on the rise, and limited land available for continued agricultural expansion, the world would need to produce more nutritious foods on existing lands. As such, lands already under cultivation needed to be managed sustainably. While agriculture was already subject to climate volatility, future changes would impact growing seasons and access to key commodities.

Weston saw the future of the retail and grocery elements of the food system as an increasingly consolidated one, controlled by a small number of major players. In a system with increased retailer power, relationships with the end-consumer would become more important, as companies would need to have loyal customers to maintain their bargaining power with retail-customers.

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The concern over consolidation was echoed by some analysts, with one highlighting the entry of Wal-Mart into the U.K. grocery market by purchasing the established grocer ASDA, and the merger of two major continental retailers, the French grocer Carrefour with the Spanish grocer Promodes.6 The analyst went on to state that, “These consolidations have increased the bargaining power of the major grocery retailers and have intensified price competition . . .. Increasing consolidation . . . has lowered the company’s margins by increasing short-term promotion costs.”7 ABF continued to invest in this part of its operations in spite of pressure on operating margins in order to maintain and develop new markets and new products.

The relationship of food to human and animal health was still in its infancy and the development of ingredients to improve the health of humans and animals was expected to continue to be of growing importance to the food system. Weston also knew that traceability and quality of ingredients would become important to future customers, particularly as end-consumers and users demanded healthier foods and became proactively involved in ensuring the safety of their food. To achieve this, ABF would need to achieve transparency across the supply chain. Trust continued to be critical to the food system, and ABF under the Weston family’s leadership had maintained a value system that demanded trust—both within and outside ABF—in all of its operations.

Weston knew biotechnology would be a larger part of the world’s future food system, particularly in finding new ways to use crop and crop byproducts, and also in the use of genetics to improve food quality and output, as well as seed enhancement and protection. This was echoed in one analyst report, which projected that the demand for enzymes in particular, “will rise 6.3 percent annually through 2013 and reach over USD 7 billion by 2013 . . .. The increase in demand thus reflects on the huge opportunities for the company as it has a global presence . . .. “8

The future of sugar in the food system would see increased demand, both for consumer foods and also, increasingly, for energy generation. With increasing popularity of bioethanol as a source of energy, sugar production will have to increase—with some of the key areas open for cultivation including Northern China (sugar beet) and Brazil (sugar cane)—to meet human and energy needs. In spite of the growth in non-caloric sweeteners, sugar remained the favored sweetener throughout the world. With projected population growth in many parts of the world, and their need for calories, demand for sugar was anticipated to grow.

Allocating Financial Resources within ABF

Weston believed that a number of ABF’s companies and operations, specifically British Sugar, Primark, and its grocery businesses, were growing quickly and potentially looking to make acquisitions. But Weston was concerned about how such acquisitions would be financed. “Right now, ABF is facing a situation where for the first time in many years, we may not be able to support the legitimate ambitions of leaders in our group because of financial restrictions,” Weston explained. “Last year ABF had a capital expenditure of $1 billion, and it will be over that this year. But when I examined the projects, I didn’t see anything that we shouldn’t have spent money on. This is the result of the world’s growing demand for manufactured food. ABF now has to make tough financial decisions and view its companies in a more portfolio way than it has before.”

ABF stayed away from internally attaching labels to its companies, such as identifying “stars” or “cash generators,” either internally or externally. “As soon as we classify our businesses, we dilute their authority and excitement,” Weston believed. Instead, companies were encouraged to pursue opportunities and bring them to the attention of the central office regardless of their size.

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Weston and his team nevertheless worked on a set of criteria companies needed to meet in order to receive additional capital: will the investment make a financial return above an established hurdle rate; how certain is ABF that this financial return will be achieved; and could it take the company beyond the projected return rate. Also central to Weston’s financial decisions was his commitment to keep ABF’s balance sheets at a size he was comfortable with and avoid selling off parts of ABF.

Sugar

Sugar (and sugar refining) had historically been a politically active area in Europe. ABF’s British Sugar Group was created in 1936 as the British Sugar Corporation by the British government when it nationalized the dispersed sugar industry, composed of 13 separate companies at the time.9 The U.K. sugar crop came from sugar beets, which had been commercially grown since the early 1900s. The government sold off its 36% ownership in the company in 1981, at which point it became known as British Sugar.10 It was purchased by Berisford International the following year, but by the late 1980s the company was looking to sell British Sugar due to Berisford’s financial difficulties, even though British Sugar itself was performing financially—sales grew by over 50% and profits by nearly 250% during the decade.11 British Sugar was ultimately purchased by ABF in 1991 for £880 million.12

At the time of acquisition, British Sugar was U.K.-focused: its sugar was grown, processed and sold all in the U.K. ABF too was largely focused on the U.K. and its historical markets, and British Sugar offered the opportunity to lead entry into new markets, making subsequent entry by other ABF companies easier.13 By the mid-1990s, ABF had identified Asia and Eastern Europe as targets for expanding its sugar activities.14 The first country it entered was China in 1995 through joint ventures, which had the benefit of minimizing up-front financial costs and allowing ABF to learn how to operate in China from its partners.15 ABF’s entry into China worked: by 2011, it had five factories of its own processing sugarcane, and a further seven factories managed through joint ventures.

In 2001 ABF entered Poland as British Sugar Overseas Poland. In 2006 it purchased a majority ownership of the South Africa-based Illovo Sugar limited, opening up access to sugar cultivators across Southern Africa, and in 2009 ABF entered the Spanish-sugar market by purchasing Azucarera Ebro. Also that year, it sold off its operations in Poland. (See Appendix B for detailed information on ABF’s sugar activities.)

Opportunities for Growth in Sugar

Weston was positive ABF could continue to grow its sugar operations if it were able to access land in new geographies and expand existing operations, “When you look at the food system there is growth potential. The demand for sugar alone will be great, and we are the world’s second-largest producer. Our operations in Africa are at scale, and there is potential to produce more.”

ABF preferred to invest in sugar markets in which it could wield some power. A market like Brazil for example was too large and one in which ABF management found it impossible to influence profitability. Leveraging ABF’s institutional knowledge and management capabilities in developing sugar cultivation and processing was a key competency that would drive future growth, Weston believed, “In sugar, the imperative is to share the engineering and manufacturing expertise of British Sugar in the rest of the world.” Specific to opportunities in China, Weston cited one recent example,

We have recently bought out an entrepreneur who owns three small sugar factories in Northern China. Why? Because we know how to run sugar factories much better than he ever will. British Sugar has been running factories and working with British farmers for over sixty

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years. Our corporation has imbedded knowledge about sugar. Next, and just as important, we know how to harness resources, undertake the huge projects of developing factories and agriculture in the area. We employ project managers, engineers, farm advisors, training managers—everyone we need to make this project work. It is an embedded capability and it is incredibly powerful.

But Weston remained concerned that the Chinese government simply viewed foreign investment as a means to an end, and that ABF’s role future role could be diminished:

China worries about its sugar production capacity. They have run out of land on which grow sugarcane, and the increased production that will be demanded in the future has to come from sugar beet. We can build this out for them because we have been involved in sugar beet in England since the early 1990s. We are giving them the agricultural knowledge and the manufacturing piece of the chain, and this is our competitive advantage right now. Our competitors don’t have the knowledge of sugar beet that we do. As long as we continue to make progress—and China has no alternatives—we will be welcomed and encouraged.

Some analysts as well believed in ABF’s ability to leverage skills established in its other sugar operations to boost Chinese production, with one report finding, “ABF believe [sic] there are major opportunities to take best practice farming and refining techniques from their beet business in the UK [sic] and cane business in Africa into China which could more than double yields and improve profitability.”16 (See Exhibit 3 for historical data on China’s volume of imported sugar to meet demand.)

A Changing European and Global Sugar Industry17

World demand for sugar continued to grow, with the United States Department of Agriculture (USDA) finding that both sugar consumption and production had each grown at a rate of close to 2% a year since the 1989/1990 marketing year.18 More pressures on sugar would come from changing diets around the world (with wealth came sugar consumption) and also from bioplastics players wanting to use ethanol as starting point, not just as fuel.

There was usually a surplus in the total global supply, but occasionally deficits did occur, such as during the 2008/2009 season when the sugar deficit exceeded 10 million metric tons.19 For ABF, market research firm Datamonitor believed such deficits would boost world prices and fuel growth in ABF’s sugar operations.20 Only a portion of the world’s total production made it onto the world market, and according to one analyst, “volatility is exacerbated by the residual nature of the market with only around 25% of the global production being freely traded, with the rest either consumed locally or tied up in various regimes.”21 Price too was volatile: While the price (in U.S. cents) per pound of refined sugar was around $0.10 in 2000, it had nearly doubled by 2006, before dropping to around $0.15 the next year; by 2010, the price had almost doubled again, approaching $0.30.22

Annual supply available in the export market varied: impacted by climate; by the quality and yield of harvests in a few major countries such as Brazil, China and India; and whether sugar producing countries had a deficit or surplus in production. ABF’s China operations were negatively impacted in 2009, according to one analyst, by “an exceptionally high crop of over 16mt [metric tons], around 2-3mt ahead of the usual crop level,” which resulted in, “a significantly negative swing in EBITDA last year from an estimated £23m [million] in 2008A to a loss of £40m in 2009A.”23

There were also shifting attitudes worldwide about sugar consumption. Developing nations had growing demand for sugar in foods but consumers in these geographies looked for low, stable sugar

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prices and in times of uncertainty, used other sweeteners increased. In developed nations on the other hand, consumption had largely stabilized and was shifting away from sugar-heavy diets.

On the fuel side, demand was driven by higher fossil fuel energy prices meaning that not only would prices be impacted by demand for food, but also by human energy needs as well. ABF had been involved in biofuels in the U.K. since 2007, producing some 70 million liters of fuel each year from fermented sugars or starch. ABF had even entered into a joint venture with British Petroleum and DuPont to construct a bioethanol plant capable of producing over 400 million liters of fuels

Historically, the European sugar industry had been tightly controlled and regulated by the European Union and its common agricultural policy to secure supply for the continent’s needs. Countries were each given sugar production quotas, and both farmers and refiners were financially protected from the world’s fluctuating market price for sugar through minimum support prices for both raw and finished products. Imports into the continent were small and highly regulated.

This system was unpopular with other major sugar producing countries, and beginning in July 2006, the industry started implementing substantial changes through gradual quota and support price reductions. It was expected that farmers who had only been able to cultivate sugar beet because of the minimum support prices would gradually shift production to new crops. What the industry did not expect was that many farmers simply chose to immediately stop growing sugar beet, resulting in a sugar deficit in Europe for the first time in decades and a need to import sugar. (See Exhibit 4 for world production and consumption totals from the 2006/2007 sugar marketing year through 2010/2011.)

The Global Food System

Critical to how ABF decided to address the future challenges Weston had reflected on earlier, was where it believed it fit in as a piece of the global food chain and how this guided company strategy. “ABF views itself as a solutions provider for its industrial customers, but it will not sell itself as a brand directly to consumers,” Weston explained. “Consumers recognize our individual consumer brands, but they do not see ABF itself as a brand. Instead, where ABF has brand value is with our industrial customers and with shareholders.”

Weston believed the food system was undergoing fundamental change, including the rise of food and agribusiness companies in developing nations. In August 2011, the Chinese company Bright Foods announced that it had acquired a 75% stake in the Australian food company Manassen for nearly $520 million.24 In previous years, Bright Foods had become more aggressive in looking for opportunity outside China: it had previously purchased a New Zealand dairy company; and had attempted to purchase the French yogurt company Yoplait, the U.S. nutritional company GNC, and the Australian sugar refiner Sucrogen.25 For ABF, this acquisition of Manassen impacted them directly, as it one of ABF’s distributors. How would the entry of developing world food companies aggressively operating in the major growth markets—and also looking to have a presence in the developed world—impact ABF? Weston turned his attention to how these strengths would help ABF adapt to—and find new opportunities in—an evolving food system.

Partnerships and Strategic Planning

ABF’s customers—particularly food retailers and the foodservice industry—were becoming bigger and also more global, particularly those based in the developing world. It would have to examine how—or if—it would establish formal partnerships with customers or suppliers moving

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forward, something that it had traditionally not done, with the aim of not being too dependent on a single retailer or supplier. Rather than establishing large-scale partnerships that would require ABF to commit a substantial part of its products to one customer, it would look for ways to supply customers on a local or regional basis. ABF relied on developing strong ties with its customers and suppliers through continued business.

As Weston explained, “the group has informal partners and we do talk with them about strategic planning but at a very low-level. Informal partnerships have worked well for us. With our informal partners we get to a stage of mutual dependency where we know each other well but without formal attachments.” “ABF recognizes that it has no choice but to work with and supply the Tescos of the world, but the company is not sure that formal relationships will add value to the company,” Weston noted. “For example, we can’t supply Coca-Cola with all the sugar it needs worldwide, but we can work with them to help meet their needs in northern China.”

ABF formally discussed strategic planning, and ABF’s board analyzed organizational resources and opportunities, at a meeting each July. The board also met with each divisional head once every 18 months to remain engaged with ABF’s operations. ABF retained central control over long-term strategic planning for each of its main segments, with only limited interaction between the segments. According to Weston, “Occasionally, we will have some joint strategic discussions where co-products are produced, such as in China where we have worked to supply our yeast-extract operations with molasses from our Chinese sugar mills. But most of the long-term strategic planning is done individually between head office and each company.”

Despite managing the group strategy centrally, ABF stayed away from attaching a central goal or theme to its activities out of the fear that it might alienate some of its companies. “ABF has stayed away from labeling itself as a ‘health and wellness’ company or state that its mission is to ‘feed the world.’ No single label fits all parts of the group,” Weston explained.

Key to its strategic planning was a willingness to take on new businesses or move into new operating areas looking to build on ABF strengths,” Weston believed. Most information on new opportunities came from its people out in the field running businesses, which was, “The beauty of giving authority to our managers,” according to Weston, “They know the worlds they operate in, and feel comfortable coming to us to share insights and knowledge. We are aware of influences on our various businesses and this affects what we do but we rarely start from macro-trends.”

Limited Presence in Some Elements of the Food Chain

Weston was also concerned that ABF was not as well represented in some elements of the food chain. “[Financial services firm] Rabobank has projected that much of the future growth in the food industry will be in prepackaged foods,” he noted, “That part of the industry is growing at 7% to 8% a year, and we can’t take part in it because we don’t have the global brands or manufacturing capabilities to do so. As people migrate to cities, they buy more packaged foods and we don’t have good representation there,” Weston explained, but he believed ABF would be able to participate in this growth by supplying manufacturers through its ingredients operation. “This is why I like food ingredients because packaged goods need these inputs.”

This was also an area of concern for some analysts, who saw the market in which ABF participated becoming more competitive, with one analyst finding that, “Associated British Foods faces competition from large multi-national corporations and offshore product providers in low-cost locations. It competes with discount stores . . . warehouse clubs . . . and, to a lesser extent other

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retailers. To survive the intense competition, companies may be forced to lower their prices or if demand for services decreases, the business and financial condition would be adversely affected.”26

Analysts too were worried that most of ABF’s revenue was generated in the U.K., which, “accounted for 45.6% of the total revenues in FY2009. High dependence on the UK [sic] market makes the company sensitive to the demand dynamics of the region….while its competitors with significant operations in diverse geographic regions are guarded against such a risk.”27

Food Safety in its Global Operations

Food safety and product traceability were of growing importance to consumers worldwide and ABF was proactively looking to secure its supply chain and ensure its products—now coming from all corners of the world—were safe. In China, where ABF’s food and ingredients related businesses had a strong presence, ABF was particularly focused. The fragmented nature of Chinese agriculture and agribusiness and the variable practices followed by individual farmers increased the risks that raw agricultural material or ingredients could be of poor quality or even unsafe.

The safety of food products and ingredients had been a sensitive topic in China—and a concern for consumers globally—most notably manifested in 2008 when batches of milk tainted with the chemical Melamine sickened nearly 300,000 babies and killed six, and resulted in some countries banning Chinese dairy imports.28 But Weston saw the situation in China changing, “China is waking up to the need for safer supply chains.” The government had strengthened regulations designed to improve the handling and production of food in response to international criticism, but enforcement remained difficult, particularly in reaching out to educate rural farmers. In this area, China sought help from major international agribusinesses with knowledge and experience to improve food safety.

In its own activities, ABF sponsored industry conferences on food and animal feed safety to help educate the agribusiness community, a position Weston believed ABF was in a unique suited to do, as, “We have had to deal with BSE [bovine spongiform encephalopathy, a neurological disease in cattle that can be spread to humans and was commonly known as ‘mad cow disease’] in the U.K. and the industry has developed safety initiatives and practices that are exportable.” In addition, ABF looked to source products from other ABF operations in China when possible, and also work both internally and with its suppliers and customers to improve reporting and monitoring standards.

Primark

A notable outlier from ABF’s other segments were its retail clothing operations. Primark was led for most of its history by Arthur Ryan, hired by Garfield Weston in 1969 to run the original Primark store in Dublin, who stepped down as CEO in 2009 but remained on as chairman of the retailer’s board.29 “There was a strong personal relationship between the management of Primark and my grandfather and father,” Weston explained. “Arthur didn’t want a lot of interference in his operations, but he wanted someone he could consult with.”

Weston saw Primark and its high financial returns as an important part of ABF moving forward, but maintained a critical eye for internal and external challenges that could impact the retailer and even necessitate a spinoff. An immediate concern was the state of the world economy in the late 2000s and early 2010s. Weston explained, “At the moment, we are in a recession and have seen disposable income in the U.K. drop significantly. People simply don’t have as much money to spend.” However, analysts remained positive about Primark, with one analyst report stating, “It’s no

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surprise that the U.K. consumer is under pressure but we believe Primark will be a big winner from the current squeeze in consumer’s disposable income.”30

Weston also knew that Primark had real potential for growth and was a major contributor to ABF’s success: it accounted for close to one-third of ABF’s total revenue in 2010. “No other British retailer has had as much success on the European continent as we have had,” Weston explained. “Cheap fashion sells, particularly to young consumers. We sell more clothing to this demographic than Marks & Spencer, and the only true direct competitor is the retailer Forever 21.” Weston further estimated that the company could become the biggest clothing retailer in Spain in three years and the biggest clothing retailer in Europe in 10 years.

Achieving scale outside Primark’s historical markets in the U.K. and Ireland would not be easy: While it had 189 stores open in historical markets, it had 30 stores open in Europe outside Ireland and the U.K. in April 2011. To achieve a similar scale in Germany for example, Weston estimated that it would take as much as €10 billion of capital. He was also uncertain of what his level of involvement in the company should be going forward, “Having me on the board is not a problem now, but from a governance and financial standpoint it could be in the future.”

Weston credited Primark’s meteoric rise to some good luck. Right as he took over ABF, the U.K. media discovered Primark and ran many long articles about fast fashion and the stores. In 2005, there were already 80 stores in the country but low presence in London where most of the media was based. The next year a major high street chain, Littlewoods, put itself up for sale and ABF bought 120 of its stores—selling all but 41. Primark continued to grow apace. “We want to be able to fund Primark ourselves,” Weston explained. “We don’t want to go to the public market.” Yet its continued growth posed challenges. “I am not a clothing retailer. I am from the food business where I understand how to correlate actions with results. No one in this office really understands clothing retail and that has been an advantage until now.”

Ultimately, Weston had two conditions that could warrant spinning the company off from the parent organization. The first was that Primark should not hinder the rest of the group financially. ABF would not ration financial resources to the rest of the group in order to support the retailer. The second related to future governance. “Right now, the relationship between ABF and Primark’s management is a personal one and it works,” Weston noted.

“People in the businesses come up with great plans but I need to fund all of ABF’s operations. That would mean other companies will be better served being independent,” he explained. “We have not had to make these portfolio tradeoffs yet and we are still fairly under-geared. However, all it would take to bend the balance sheet would be a larger retailer to seek an acquirer for 50 stores.”

Challenges and Opportunity in European Clothing Retail

Despite the squeeze on consumer spending brought on by the global recession in the late 2000s, the European clothing industry was projected by the market research firm Datamonitor to grow—albeit slowly—at a 1.7% CAGR between 2009 and 2015 for a total value of roughly $417 billion by 2015.31 (See Exhibit 5 for value and CAGR projections for Europe’s retail industry.) The retail clothing industry was dominated by a handful of countries which together generated 73.3%d of the industry’s total value across all of Europe.32 While Western Europeans spent $533 billion on clothing and

d Germany accounted for 19.5% of the total European market, Italy for 17.4%, the U.K. for 16.4%, France for 12.7% and Spain for 6.2%.

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footwear in 2009, rising commodities prices and tax increases in some markets were projected to negatively impact retailers’ future overall costs, according to Euromonitor.33 Consumers looked to reduce spending during the depths of the recession, and Euromonitor believed that retailers’ response—lowering prices to attract customers—may have led consumers to expect these lower prices to remain the new norm.34 Consumer spending was projected to remain steady (see Exhibit 6 for projected per capita consumer spending in Western Europe and Germany, Europe’s leading clothing market by value).

This had created opportunity for the rise of low-priced clothing retailers such as H&M, Takko and Kik (see Exhibit 7 for a financial and growth comparison of Primark and competing retailers). However, the industry had a number of major players according to Datamonitor, such as Arcadia Group Limited (operating stores such as Burton, Topshop, and Topman), which reported sales of close to $3 billion in 2009, and Industria de Diseno Textil, S.A., (operating eight different store-brands, including Zara) and with worldwide sales of nearly $14.5 billion.35 By comparison, Primark represented roughly 1% of total clothing retail sales in Western Europe in 2010 (see Exhibit 8 for a chart showing Primark within the value and specialty retail segment of Europe’s retail clothing market).36

However, low-price value stores were not guaranteed success and Primark faced growing competition from other established retailers. In 2009, retail chain C&A closed its Avanti stores in Germany after 18 months.37 Tesco and Wal-Mart (through Asda) were also looking to grow their own clothing lines. In its 2009 fiscal year, Tesco’s clothing sales surpassed £1 billion.38 Asda’s George-brand was competitively priced (nearly all of its items were less than £10) and popular in the U.K.39

Primark was also challenged by the sheer volume of competition, with Euromonitor finding, “In the saturated Western European market in particular, which faces particularly strong competition from grocery retailers and the internet, demand for value will continue to put intense pressure on prices.”40 Observers were cautious about value retailers’ ability to sustain high growth once the market and consumer confidence recovered.41 Euromonitor believed that future opportunity for Primark and other retailers lay in Eastern Europe.42

Into the 5th Generation

The meeting began with a review of core strengths:

A wealth of institutional knowledge on its diverse operations, developed and refined over decades of experience;

Its empowerment of companies to give them the freedom to adapt and change to changing consumer and customer demands in their local geographies without having to run everything through the head office;

Direct access to farmers globally, particularly through their sugar operations, giving it direct access to supply and helping it to ensure food safety and traceability;

The diversity of its companies which helped it weather periods of change and volatility. A history of experience managing risk and volatility of agricultural commodities, such as

sugar and grains. Stable family leadership dating back to the 19th century. A social conscious in developing supply chains that improved both the food system and

the lives of the participants and producers.

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“People sometimes look at holding companies or large family-owned businesses and think such organizations are odd, value destructive, or archaic,” Weston noted. But he was confident that ABF had the right model moving forward: “These observers are missing some of the critical assets of these companies, such as longevity and a healthy degree of risk aversion.”

Weston also wanted to make sure that his decisions would enable him to leave the company with a strong legacy and help it achieve his broader future goals for the company:

I don’t want to be the last member of my family to run the company, and would like people to think—with a degree of surprise—that a member of a 4th generation could take the company over and keep regenerating it. I’d also like to think that the company has transformed from a U.K. focused company to a global foods company. Finally, I would like to see ABF continue operating as a privately-controlled company with a diverse portfolio.

To better manage complexity, large competitors had recently opted for simplification. In August 2011, Kraft announced intentions to split and form two separate companies, one dedicated to its global snacks business and another for its North American grocery business. Kraft’s snack business was focused on growth and expansion into emerging markets, while the North American grocery business marketed itself in traditional grocery channels. Kraft had made several strategic acquisitions in the snack food sector over the past few years, and independently its global snacks business was expected to generate $32 billion in revenue. Kraft held brands including Oreo, Cadbury and Milka chocolates, Trident gum and the Tang beverage mix. The North American grocery business included Kraft Macaroni & Cheese, Maxwell House coffee, and Oscar Meyer meats. Kraft announced that the two separate companies would launch by the end of 2012. An analyst for Leatherhead Food Research agreed with Kraft’s decision: “This would also enable Kraft to target high-growth snacks markets throughout the less developed parts of the world – for example, Cadbury was particularly strong in parts of Latin America and Africa prior to its takeover by Kraft.”43

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Exhibit 1a Associated British Foods Selected 10-Year Income Statement Financials (In pounds sterling; pounds in millions)

2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 Revenue 10,167 9,255 8,235 6,800 5,996 5,622 5,165 4,909 4,545 4,418 Cost of Revenue 7,554 7,085 6,327 5,058 4,338 4,054 3,811 3,672 3,420 3,428 Gross Profit 2,613 2,170 1,908 1,742 1,658 1,568 1,354 1,237 1,125 990 Selling, General, Administrative Expenses

1,801 1,554 1,379 1,204 1,148 1,045 887 859 755 719

Total Operating Expenses 9,348 8,630 7,681 6,244 5,563 5,072 4,725 4,524 4,168 4,140 Operating Income 819 625 554 556 433 550 440 385 377 278 Interest Income (Expense) Net Non- Operating Total

(76) (78) (53) (35) (14) (137) 36 23 35 42

Gain (Loss) On Sale of Assets 28 (65) 5 (39) (12) (48) 7 32 8 49 Other Non-Operating Income (Expense)

(8) 13 21 26 12 162 11 8 - -

Income Before Tax 763 495 527 508 419 527 494 448 420 369 Income After Tax 569 383 391 400 308 386 348 323 325 251 Minority Interest (23) (24) (34) (31) (7) (7) (6) 3 (3) (8) Net Income 546 359 357 369 301 379 342 326 322 243

Source: Adapted from Associated British Foods, Plc, Income Statement, Annual (Reuters) accessed August 2011, via OneSource.

Exhibit 1b Associated British Foods Selected 10-Year Balance Sheet Financials (In pounds sterling; pounds in millions)

2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 Total Current Assets 2,795 3,015 2,780 2,261 2,100 2,441 2,779 2,772 2,551 2,310 Net Property, Plant and Equipment

3,941 3,519 3,110 2,642 2,479 2,255 1,459 1,406 1,421 1,397

Total Assets 9,288 9,033 8,151 6,980 6,492 6,072 4,913 4,710 4,387 3,916 Total Long Term Debt 794 806 870 598 176 539 357 382 387 157 Total Debt 1,161 1,390 1,148 723 707 986 425 474 451 239 Total Equity 5,293 4,748 4,554 4,244 3,958 3,848 3,469 3,304 2,991 2,790

Source: Adapted from Associated British Foods plc, Balance Sheet, Annual (Reuters) accessed August 2011, via OneSource.

Exhibit 1c Associated British Foods Selected 10-Year Cash Flows Financials (In pounds sterling; pounds in millions)

2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 Cash From Operating Activities 1,172 833 553 696 419 515 540 525 464 336 Cash From Investing Activities (802) (622) (689) (466) (720) (1,395) (398) (404) (540) (222) Cash From Financing Activities (446) (74) (20) (81) (391) 646 (165) (95) 123 (82) Net Change in Cash (52) 151 (139) 151 (696) (226) (23) 26 47 32

Source: Adapted from Associated British Foods plc, Cash Flows, Annual (Reuters) accessed May 2011, via OneSource.

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Exhibit 1d Grocery Segment 5-Year Financials (In pounds sterling; pounds in millions)

2010 2009 2008 2007 2006 External Revenue 3,423 3,365 3,254 2,612 2,656 Internal Revenue 4 9 13 (11) (19) Total Revenue 3,427 3,374 3,267 2,601 2,637 Operating Income 229 191 194 153 185 Operating Margin (%) 6.7 5.7 5.9 5.9 7.0 Income After Tax 208 107 113. 146 180 Net Profit Margin (%) 6.1 3.2 3.5 5.6 6.8 Total Assets 2,581 2,446 2,427 1,974 1,789 Operating Return on Assets (%) 8.9 7.8 8.0 7.8 10.3

Source: Adapted from Associated British Foods plc, Business Segments, accessed May 2011, via OneSource.

Exhibit 1e Primary Food/Sugar Segment 5-Year Financials (In pounds sterling; pounds in millions)

2010 2009 2008 2007 2006 External Revenue 1,960 1,575 1,267 1,151 671 Internal Revenue 89 108 92 (99) (95) Total Revenue 2,049 1,683 1,359 1,052 576 Operating Income 244 189 153 199 115 Operating Margin (%) 11.9 11.2 11.3 18.9 20.0 Income After Tax 222 149 119 167 20 Net Profit Margin (%) 10.8 8.9 11.4 15.9 3.5 Total Assets 2,494 2,612 2,103 1,619 1,503 Operating Return on Assets (%) 9.8 7.2 7.3 12.3 7.7


Exhibit 1f Agriculture Segment 5-Year Financials (In pounds sterling; pounds in millions)

2010 2009 2008 2007 2006 External Revenue 987 1,004 909 687 631 Internal Revenue 4 1 3 (2) 0 Total Revenue 991 1,005 912 685 631 Operating Income 33 34 34 18 16 Operating Margin (%) 3.3 3.4 3.7 2.6 2.5 Income After Tax 36 33 35 19 15 Net Profit Margin (%) 3.6 3.3 3.8 2.8 2.4 Total Assets 288 281 253 203 185 Operating Return on Assets (%) 11.5 12.1 13.4 8.9 8.6


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Exhibit 1g Ingredients Segment 5-Year Financials (In pounds sterling; pounds in millions)

2010 2009 2008 2007 2006 External Revenue 1,067 997 872 748 729 Internal Revenue 75 44 42 (47) (46) Total Revenue 1,142 1,041 914 701 683 Operating Income 104 88 78 78 82 Operating Margin (%) 9.1 8.5 8.5 11.1 12.0 Income After Tax 81 53 48 10 47 Net Profit Margin (%) 71. 5.1 5.3 1.4 6.9 Total Assets 1,386 1,269 1,161 937 1,039 Operating Return on Assets (%) 7.5 6.9 6.7 8.3 7.9


Exhibit 1h Retail Segment 5-Year Financials (In pounds sterling; pounds in millions)

2010 2009 2008 2007 2006 External Revenue 2,730 2,314 1,933 1,602 1,309 Internal Revenue 0 0 0 0 0 Total Revenue 2,730 2,314 1,933 1,602 1,309 Operating Income 341 252 233 200 185 Operating Margin (%) 12.5 10.9 12.1 12.5 14.1 Income After Tax 341 252 236 201 179 Net Profit Margin (%) 12.5 10.9 12.2 12.5 13.7 Total Assets 1,892 1,780 1,628 1,436 1,302 Operating Return on Assets (%) 18.0 14.2 14.3 13.9 14.2


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Exhibit 2a Associated British Foods Projected Operating Profit Through 2013 (In pounds sterling, pounds in millions)

Segment 2011 2012 2013 Sugar 250 328 335 Agriculture 38 33 33 Ingredients and Oils 96 105 108 Grocery 250 261 270 Retail 342 360 403 Central Costs -46 -49 -52 Operating Profit 931 1038 1098

Source: Charlie Mills, Alex Molloy, Cyrus Azarmgin, “Associated British Foods. Forget cotton, sugar holds the key,” Credit Suisse, March 16, 2011, via Thomson Reuters, accessed July 2011.

Exhibit 2b Associated British Foods Projected Cash Flows Through 2013 (In pounds sterling, pounds in millions)

2011 2012 2013 Operating profit 931 1,038 1,083 Operating cash flow 1,155 1,302 1,350 Net trading cash flow 887 1,026 1,049 Free Cash Flows 187 326 349

Source: Charlie Mills, Alex Molloy, Cyrus Azarmgin, “Associated British Foods. Forget cotton, sugar holds the key,” Credit Suisse, March 16, 2011, via Thomson Reuters, accessed July 2011.

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18

Exhibit 3

Source: U

Chinese Su

nited States Dep

ugar Imports f

partment of Agric

from 1995 to

culture.

2008 (in metrric tons)

Associated British Foods, P

Plc

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Exhibit 4a Total World Sugar Production (1,000 metric tons)

2006/2007 2007/2008 2008/2009 2009/2010 2010/2011

Africa 8,149 8,284 8,426 8,158 8,302 Asia (including Oceania)

66,548 69,551 53,427 53,690 61,363

Caribbean 1,947 2,160 2,005 1,936 1,797 Central America 4,488 4,361 4,251 4,525 4,391 Europe (Western) 17,952 18,010 17,175 16,992 15,331 Europe (Eastern)) 7,484 6,606 6,478 6,267 6,180 Middle East 5,176 4,517 4,417 5,648 5,186 North America 13,426 13,374 12,537 12,419 12,860

South America 39,356 39,617 40,016 44,043 45,538

Total 164,526 166,480 148,732 153,678 160,948

Source: Adapted and compiled from, United States Department of Agriculture, Foreign Agricultural Service, “Sugar: World Market and Trade Circular Archives,” May 2011, May 2009, and November 2008, http://www.fas.usda.gov/sugar_arc.asp, accessed October 2011.

Exhibit 4b Total World Sugar Use (1,000 metric tons)

2006/2007 2007/2008 2008/2009 2009/2010 2010/2011

Africa 11,544 11,861 12,112 12,446 12,814

Asia (including Oceania

61,062 63,414 63,823 64,466 66,863

Caribbean 1,518 1,514 1,513 1,476 1,477

Central America 1,834 1,906 1,891 1,883 1,928

Europe (Western) 21,624 19,943 20,978 18,051 18,141

Europe (Eastern) 10,010 9,925 9,630 9,379 9,609

Middle East 11,452 11,370 11,279 12,137 12,531

North America 16,047 16,684 16,965 16,304 16,180

South America 17,873 18,568 19,338 19,500 19.779

Total 152,964 155,185 157,529 155,642 159,322

Source: Adapted and compiled from, United States Department of Agriculture, Foreign Agricultural Service, “Sugar: World Market and Trade Circular Archives,” May 2011, May 2009, and November 2008, http://www.fas.usda.gov/sugar_arc.asp, accessed October 2011.

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Appendix A The Making of a Company

In the late 19th century, Weston’s great-grandfather had created a highly successful company, George Weston Limited (GWL), with bakery operations across North America and its own brand of biscuits that it sold directly to consumers at the time of his death in 1924. Following George Weston’s death, his son Garfield took over as president of the company, and looked to the U.K. as a new market for expansion. He moved to England in 1931 during the midst of the Great Depression to develop bakery options there; a significant challenge.

Garfield began acquiring and developing bakeries, and in 1935 he grouped the U.K bakeries operating within GWL as Allied Bakeries Limited (ABL). While GWL continued to grow in existing geographies, it expanded internationally, first moving into Australia in the late 1940s. It eventually became the largest baker in Australia, Canada, the U.K., and South Africa during Garfield’s tenure. At one point, Weston estimated that the company produced 25% of the total food consumed in Canada. The company also moved into consumer retail in the 1950s, and at different times during the company’s history, it owned the largest food retail chains in Canada and Ireland, the third largest in the U.K, and the fifth largest in the U.S.

In 1960, ABL changed its name to Associated British Foods and continued to acquire and develop new businesses and brands including baking and milling operations, Primark clothing stores (then known as Penny’s), and the Fine Fare grocery chain.44 Garfield’s time at the helm was marked by expansion and acquisitions: Over the course of his nearly 40 years leading the company, Garfield took it from a Canadian-centric company making $25,000 in profit in 1924, to one that had a widespread international presence with profits in the millions of pounds.

But by the late 1960s, aggressive growth and acquisitions—over 100 companies alone during the 1960s—had stretched the company’s finances, and despite having roughly £12 million in profit the company was in debt. Garfield spun the organization into two separate companies—Associated British Foods which would take the U.K and other markets, and George Weston Ltd., led by his brother W. Galen Weston, which would retain Canadian and U.S. operations.e Garfield also stepped down and gave control of the company to his son, Garry Weston, in 1967.

Garry’s first priority was to get ABF’s finances in order by shedding companies not directly related to core food and retail activities. According to Weston, “Any part of the business that wasn’t generating cash he sold. Furniture manufacturing, pork pies, soft drinks, animal feed, chickens all went and the proceeds were invested largely in improving the cost base of cash generating units, particularly milling and baking.” Of his father’s management style, Weston believed that the shortages of wartime Britain when he was a teenager, “gave him a sense of obligation to the family company, a need to work hard and absolutely no sense of entitlement.”

In the 1980s, ABF expanded into more food related activities, opening AB Ingredients in 1982, but also sold off companies in what Weston attributed to a “remarkable grasp of timing” in which, “he [Garry] sold Premier Milling in South Africa before the era of sanctions and economic decline began in that country, and he sold Fine Fare for 24-times earnings in 1984 not long before the supermarket building spree began,” as a few examples.

e George Weston Ltd. continued to operate as of 2011 and was active in the Canadian food retail market through its Loblaw supermarkets and groceries, and also as a major food processing and distribution company in baked goods. W. Galen Weston continued to serve as the Executive Chairman. The company reported revenues of approximately C$32 billion in its 2010 fiscal year.

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The 1990s saw a burst of activity, with ABF acquiring British Sugar in 1991 and entering the sugar industry for the first time, and also moving into China through two joint ventures. Following an illness in 1999 that left him unable to run the day-to-day operations of the company, Garry stepped down and was succeeded by Peter Jackson, an ABF board member. On Garry’s retirement, the company was generating about £200 million in free cash every year.

ABF acquired a number of consumer food companies in the early 2000s, including Ovaltine and Mazola. Primark too continued to grow, opening its 100th store in 2000, and expanding into continental Europe by the end of the decade. ABF continued to add to its sugar operations, acquiring companies with operations in Africa, Spain, and Poland. In 2005, Jackson retired as CEO and Garry Weston’s son George Weston was appointed to lead the company.

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Appendix B Overview of Associated British Foods’ Businesses

Grocery ABF’s grocery segment was composed of a number of companies and brands producing and selling foods and ingredients for consumer and foodservice customers (including many customers within ABF’s grocery operations). For example, ABF’s Allied Mills company milled flour and semolina, some of which was purchased by ABF’s Allied Bakeries, which produced a range of consumer bread products, including the Kingsmill line that sold roughly 8.5 million loaves of bread each week.45 ABF also held a number of consumer brand companies, including Twinings (tea and beverages), Ovaltine (milk-mix products), Silver Spoon (sugar and related products), and Ryvita (crackers and crisp breads). ABF’s grocery operations had a presence in North and Central America through ACH Food Companies Inc., supplying the foodservice industry with ingredients, and consumers with cooking oil (Mazola), food seasonings and spices (Spice Islands and Weber Seasonings), and baking ingredients. In Australia and New Zealand, ABF owned George Weston Foods (a separate entity than George Weston Limited), selling breads and baked goods, and meats, to consumers and the food service industry, as well as milled grains and flour, animal feed, cleaning and chemical products. ABF aimed to sell “brands people love to love.”

Retail—Primark Brand Clothing Stores ABF’s retail activities consisted of its Primark-brand clothing stores, selling a range of clothing and home goods items, such as bath and bedding products. Originally branded as Penneys, Primark first opened as one store in Dublin, Ireland in 1969. Primark opened its first store in England in 1973, and it continued to grow in Ireland and the U.K. with close to 50 stores open by the mid-1980s and over 100 stores by 2000. At Primark’s Oxford street store in the heart of London’s fashion district, it was not uncommon to see shoppers packing suitcases full of recent purchases. Primark estimated that the average shopper at its Oxford street store purchased eight items and the store’s inventory turned over every three days.

Primark first entered continental Europe in 2006 by opening a store in Madrid, Spain (by mid-2011, Primark had 20 retail locations across Spain). Primark’s international expansion continued in 2008 in the Netherlands. Belgium, Germany and Portugal followed in 2009. By April 2011, Primark had 219 stores open across Europe: 151 in the U.K., 38 in Ireland, 20 in Spain, four in Portugal, three in Germany (and was planning more), two in the Netherlands, and one in Belgium.

Sugar ABF’s sugar operations were conducted through AB Sugar (ABS), which was primarily made up of its acquisition of the British Sugar Group company (BSG) in 1991. Globally, ABF processed sugar at facilities in the U.K., Spain, China, and six South African nations—Malawi, Mozambique, South Africa, Swaziland, Tanzania, and Zambia—and employed 42,000 people. While most of its sugar was sold to the foodservice industry, it was also sold directly to ABF’s Silver Spoon brand of consumer sugar and related products, and for uses in energy generation, bioethanol fuel, and plant seed technologies. ABF was also a partial owner in the U.K.-based sugar trading, biofuels, and related services company, the Czarnikow Group.46 Cumulatively, ABF produced over 3.5 million tons of sugar in its 2010 fiscal year.47 Sugar segment activities accounted for 19% of ABF’s total revenue in its 2010 fiscal year.

In Europe, sugar operations were carried out through two subsidiaries: in the U.K. by British Sugar U.K., and in Spain by Azucarera Ebro, a company ABF had acquired in 2009. In the U.K., British Sugar processed an average 7 million tons of sugar beet (the entire domestic sugar beet crop) into 1 million tons of sugar; and in Spain, Azucarera Ebro produced roughly 800,000 tons of sugar cane and sugar beet for the Spanish market (accounting for roughly half of the 1.6 million tons used annually in Spain).48 ABF was also briefly involved in sugar beet processing in Poland, as British

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Sugar Overseas Poland, which produced roughly 150,000 tons of sugar annually.49 BSG had acquired the company in 2001 and sold it in 2009.50

ABF entered the African sugar market in 2006 with the purchase of a 51% stake in Illovo Sugar Limited, a major processor of cane sugar in southern Africa. Illovo produced close to 1.7 million tons of sugar during the 2009/2010 growing season, with the nation of South Africa alone producing over 660,000 tons.51 Illovo procured raw sugar cane from both independent farmers, and company owned farms, which supplied Illovo with roughly 6 million tons of raw sugar cane.52

In China, ABF’s operations were carried out as a series of joint ventures and grouped together as British Sugar Overseas China (BSO China). BSG had operated in China as a joint-venture since 1995, and processed both sugar beet and sugar cane. BSO China’s five sugar cane processing facilities had the ability to produce roughly 600,000 tons of sugar each year, and produced 474,000 tons in ABF’s 2010 fiscal year.53 BSO China had also moved into sugar beet processing, with the creation of a new joint venture in 2007, Bo Tian Sugar Company, operating six mills in northern China capable of manufacturing 300,000 tons of sugar.54 In ABF’s 2010 fiscal year, BSO China’s northern operations had seven factories which produced 104,000 tons of sugar.55

ABS also contained two businesses related to its sugar operations: its seed technology company Germains and its bioethanol operations, including a joint venture with British Petroleum and DuPont—Vivergo Fuels Limited.

Ingredients ABF’s main ingredients companies were AB Mauri and ABF Ingredients, the latter of which was made up of four companies—AB Enzymes, Abitec, Ohly, and PGP International. In 2004 AB Mauri brought together ABF ingredient companies serving the baking industry. In 2011, AB Mauri had 48 facilities worldwide across 26 countries. Its companies supplied baking colorings, flavorings, ingredients, oils, fillings, toppings, and mixes for breads, cakes and donuts.

Founded in 1982, AB Ingredients developed and supplied enzymes, lactose, lipids, flavorings, flours and whey protein, and yeasts to other ABF companies, as well as to the food service, personal care and pharmaceutical industries. AB Enzymes, acquired in 1999, sold enzymes to customers in the animal feed, foodservice, textile and paper and pulp industries worldwide. Abitec focused exclusively on manufacturing lipids; Ohly on yeast extracts; and PGP International on a range of products, including proteins, flour, lactose and other ingredients.

Agriculture ABF’s agricultural activities encompassed a wide range of services and products, including animal feed, pet and livestock nutrition, grain trading, poultry marketing, analytical software, consulting, sales and marketing of co-products created by ABF’s operations (such as selling sugar beet pulp and molasses as animal feed), as well as ingredients for animal feed, such as yeasts and enzymes. AB Agri, established in 1985, managed ABF’s agricultural interests via 15 separate businesses: it employed close to 2,000 people, had operations in China and the U.K., and sold in over 43 countries.

AB Agri was the U.K.’s biggest supplier of animal feeds, manufacturing over 2 million tons of “compounded feed,” and marketing an additional 2 million tons of “straight, blends, and moist feeds” each year.56 AB Agri had also established a joint venture, called Frontier Agriculture, with agribusiness company Cargill in 2005 with the merger of ABF’s Allied Grain and Cargill’s Banks Cargill. Frontier Agriculture offered a variety of services, including grain marketing, seed, fertilizers, and other inputs, as well as two retail store locations, for U.K. farmers. The joint venture employed 600 people across 36 regional offices.

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Endnotes

1 Datamonitor, “Strategy, SWOT, and Corporate Finance Report (includes detailed five year financials), Associated British Foods plc,” March 19, 2011, via ThomsonONEBanker, accessed May 2011.


3 Associated British Foods, 2010 Annual Report, p. 106, accessed May 2011.


5 “Associated British Foods plc, Strengths/Weaknesses (SWOT),” OneSource Information Services, Inc., May 2011, accessed May 2011.

6 GlobalData, “Associated British Foods plc – Financial and Strategic Analysis Review,” March 18, 2011, p.9, via OneSource Information Services, Inc., accessed May 2011.


8 “Associated British Foods plc, Strengths/Weaknesses (SWOT),” OneSource Information Services, Inc., accessed May 2011.

9 British Sugar, “UK Sugar Beet Industry, a history,” 2010, http://www.britishsugar.co.uk/uk-beet-history.aspx, accessed August 2011.

10 British Sugar, “History. Key Dates in Our History,” http://www.britishsugar.co.uk/History.aspx, accessed November 2011.

11 Ray A. Goldberg, Carin-Isabel Knoop, and Srinivas Ramdas Sunder, “British Sugar in China,” HBS No. 9-599-059 (Boston: Harvard Business School Publishing, 1999), p. 2.

12 ABSugar, “About us, timeline,” http://www.absugar.com/About-Us/Timeline, accessed November 2011.

13 Ray A. Goldberg, Carin-Isabel Knoop, and Srinivas Ramdas Sunder, “British Sugar in China,” HBS No. 9-599-059 (Boston: Harvard Business School Publishing, 1999), pp. 2-3.



16 Warren Ackerman, Alex Sloane, Jamie Norman, “Associated British Foods (ABF LN), Buy,” March 1, 2011, Evolution Securities, via OneSource, accessed May 2011.

17 Unless otherwise noted, information for this section is drawn from: David E. Bell and Mary Shelman, “Queensland Sugar Limited,” HBS No. N2-508-038, Boston: Harvard Business School Publishing, 2007.

18 Stephen Haley, United States Department of Agriculture, Economic Research Service, “Sugar and Sweeteners Outlook, U.S. Sugar June 2011,” June 14, 2011, http://www.ers.usda.gov/publications/sss/2011/06Jun/SSSM274.pdf, p. 3, accessed October 2011.

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19 Stephen Haley, United States Department of Agriculture, Economic Research Service, “Sugar and Sweeteners Outlook, U.S. Sugar June 2011,” June 14, 2011, http://www.ers.usda.gov/publications/sss/2011/06Jun/SSSM274.pdf, p. 3, accessed October 2011.


21 Graham Jones, Damian McNeela, “Associated British Foods. Buy. Geared for growth,” Panmure Gordon & Co., February 9, 2010, p. 21, accessed August 2011.

22 United States Department of Agriculture, Economic Research Service, “World and U.S. Sugar and Corn Sweetener Prices,” http://www.ers.usda.gov/Briefing/Sugar/Data.htm#yearbook, accessed October 2011.

23 Graham Jones, Damian McNeela, “Associated British Foods. Buy. Geared for growth,” Panmure Gordon & Co., February 9, 2010, p. 29, accessed August 2011.

24 Dean Best, “CHINA/AUS: Bright Food takes control of Manassen Foods,” Just-Foods.com, August 18, 2011, http://www.just-food.com/news/bright-food-takes-control-of-manassen-foods_id116364.aspx?lk=dm, accessed August 2011.

25 Dean Best, “CHINA/AUS: Bright Food takes control of Manassen Foods,” Just-Foods.com, August 18, 2011, http://www.just-food.com/news/bright-food-takes-control-of-manassen-foods_id116364.aspx?lk=dm, accessed August 2011; and Dean Best, “In the spotlight: Bright Foods reveals global ambitions with Manassen deal,” Just-Foods.com, August 19, 2011, http://www.just-food.com/analysis/bright-foods-reveals-global-ambitions-with-manassen-deal_id116377.aspx?lk=dm, accessed November 2011.



28 Austin Ramzy, “China’s Tainted Milk Scandal of 2008,” Time.com, September 28, 2008, http://www.time.com/time/world/article/0,8599,1844750,00.html, accessed August 2011.

29 Zoe Wood, “Primark’s Chief Executive Steps Down After 40 years,” Guardian.co.uk, September 11, 2009, http://www.guardian.co.uk/business/2009/sep/11/primark-founder-arthur-ryan-resigns, accessed May 2011.

30 Warren Ackerman, Alex Sloane, Jamie Norman, “Associated British Foods (ABF LN), Buy,” March 1, 2011, Evolution Securities, via OneSource, accessed May 2011.

31 “Apparel Retail in Europe,” Datamonitor, May 2010, p. 7, via OneSource Information Services, Inc., accessed August 2011.


33 “Global Clothing and Footwear: Unlocking Opportunity in a Challenging Operating Climate,” Euromonitor International, November 2010, p.7, www.euromonitor.com, accessed August 2011.

34 “Prospects for Discount Retail Formats – Has Their Moment Passed?” Euromonitor International, June 2010, p.31, www.euromonitor.com, accessed August 2011.



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40 “Prospects for Discount Retail Formats – Has Their Moment Passed?” Euromonitor International, June 2010, p.31, www.euromonitor.com, accessed August 2011.



43 Caroline Scott-Thomas, “Kraft Foods to Split into Two Separate Companies,” Food Navigator-USA, August 4, 2011, http://www.foodnavigator-usa.com/Business/Kraft-Foods-to-split-into-two-separate-companies/?c=KYUN3%2B7nulTfoQH2mhijMQ%3D%3D&utm_source=newsletter_weekly&utm_medium=email&utm_campaign=Newsletter%2BWeekly, accessed August 2011.

44 Barbara Murray, “Associated British Foods plc, History” Hoover’s Inc., www.hoovers.com, accessed April 2011.

45 Allied Bakeries, “Our Products,” http://www.alliedbakeries.co.uk/our-products.htm, accessed May 2011.

46 British Sugar Group, “Our Group, Czarnikow Group,” http://www.britishsugargroup.com/ourGroup_CzarnikowSugar.htm, accessed May 2011.

47 Associated British Foods, 2010 Annual Report, pp. 7-10, accessed May 2011.

48 British Sugar Group, “Our Group, Europe,” http://www.britishsugargroup.com/ourGroup_BSOEurope.htm, accessed May 2011.

49 Datamonitor, “Strategy, SWOT and Corporate Finance Report (includes detailed five-year financials), Associated British Foods plc,” March 19, 2011, via ThomsonONEBanker, accessed May 2011.

50 Datamonitor, “Strategy, SWOT and Corporate Finance Report (includes detailed five-year financials), Associated British Foods plc,” March 19, 2011, via ThomsonONEBanker, accessed May 2011.

51 British Sugar Group, “Our Group, Africa,” http://www.britishsugargroup.com/ourGroup_BSOAfrica.htm, accessed May 2011.

52 British Sugar Group, “Our Group, Africa,” http://www.britishsugargroup.com/ourGroup_BSOAfrica.htm, accessed May 2011.

53 Associated British Foods China, “Business: Sugar,” 2010, http://www.abfchina.com/?action=business&lang=en&root_id=3&class_id=10, accessed May 2011; and Associated British Foods, 2010 Annual Report, p. 10, accessed May 2011.

54 British Sugar Group, “Our Group, China,” http://www.britishsugargroup.com/ourGroup_BSOChina.htm, accessed May 2011.


56 AB Agri, “Key Facts,” http://www.abagri.com/page2.cfm?pageid=907, accessed May 2011.

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Associated British Foods, Plc...After completing his studies at Oxford University and a short stint...

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