Andrew MacDowall in Koprivnica, Croatia -
From an overgrown village in the bucolic rolling hills of Croatia’s Podravina region, Zvonimir Mršić aims to expand Podravka - which started making jam 80 years ago - across the world and deep into markets both developed and emerging.
Podravka, Croatia’s second-biggest food producer, is one of a select number of Adriatic champions - such as Croatian retailer Agrokor and consumer goods company Atlantic Grupa, and Slovenian white goods manufacturer Gorenje - which are eyeing growth beyond their saturated home region.
A successful expansion in Europe and the Middle East and North Africa (MENA) region could lead to a listing on the London, Vienna or Warsaw stock exchange, Podravka’s CEO and chairman, told bne IntelliNews in an interview.
“We think we will be able to grow faster than our competitors and look for inorganic growth – to be a hunter,” he said over lunch in Koprivnica, the small town near the Hungarian border where Podravka was founded and still has its headquarters and most of its manufacturing capacity. Mršić compares his company to Nestlé – based “in a small town in a small country”, but with international clout.
“We are opening three new hubs: Tanzania, Beijing and Dubai. We are now ready to make the next step of internationalisation and become a global company. We are stronger than ever, but too small to be cost-efficient, and too big just to supply the regional market. We have a choice – stay where we are and decline, or go out into new markets.”
Podravka was founded as a small jam producer in 1934 by two brothers, then nationalised after the war. The government still retains a 26% stake, a not untypical situation in the former Yugoslavia, where the state still owns swathes of the manufacturing economy that might have been privatised elsewhere.
What helps set Podravka apart from most of these companies is its success. In 2014, the company posted sales revenue of HRK3.503bn (€460m), making adjusted gross profit of HRK1.477bn and achieving an EBITDA margin of 10.9%. Its market capitalisation reached HRK1.591bn. Revenue and profit showed some slippage from 2013 (down 3.4% and 2.1%, respectively) during ongoing restructuring, but investors have nonetheless started to look more favourably on Podravka again.
It was in the doldrums in 2012, when Mršić took the helm. The company and several of its previous executives had been caught up in a corruption scandal involving a former deputy prime minister – the management had allegedly been trying to acquire a stake in the company using its own money, via suspect loans.
The question now is whether the company has the ability to build on the turnaround to achieve its very ambitious goals.
Podravka is perhaps best known for Vegeta - a condiment based on salt and dried vegetables - that was launched in 1959. Vegeta is ubiquitous in the former Yugoslavia, and one of its hardest-hitting brands abroad, being exported to 40 countries. Mršić claims that Vegeta has 92% brand recognition in Poland, for example.
The factory where it is produced in Koprivnica is a remarkable sight, with 500kg sacks of powder on an upper floor feeding through funnels in the ceiling into whirring packaging machines. Massive rolls of foil are fed in to wrap soup powders. Hundreds work 24 hours a day, seven days a week. The factory churns out 100 tonnes of Vegeta per day, as well as 35-40 tonnes of soup. An adjacent 15-storey warehouse can store 15,000 pallets of Vegeta, a month’s supply.
Other products include sweets, snacks, drinks, baby food, “meal makers”, sauces, processed meats, and, less successfully, pharmaceuticals. Bne IntelliNews was greeted at Podravka’s dated and simple headquarters with a bowl of Čokolino, a thick chocolate drink on which many Croats are reared.
Podravka will soon also boast the range of Slovenian baker and confectioner Žito. On April 21, it concluded a deal to acquire 51.55% of Zito for €33m, with the expectation that it will later purchase the remainder of the company for the same price. The sale is still subject to approval by competition authorities.
Following the turnaround, Mršić sees the acquisition as the first step in boosting both Podravka’s growth and its efficiency.
“Žito is a big enough sales target, of €110m,” he said, over local nettle soup (Koprivnica’s name is derived from the Croatian word for nettle). “We can increase our sales but also improve efficiency, EBITDA margin and net profit margin. We have had some sort of mental barrier because for more than 20 years, our sales in Croatia have been around HRK3.5bn. But the Žito acquisition has given us new courage and confidence. It’ll be the first time in more than 20 years that sales of the Podravka Group will be higher than HRK4bn, and if we undertake consolidation from last year, Podravka will be at sales of HRK4.5bn.”
Podravka sees Žito’s bakery division – which accounts for 45% of its revenues – as particularly strategically important for targeting the tourism sector, which is growing quickly all down the Adriatic.
Some question the deal, however. Tomislav Bajić, head of research at Zagreb-based InterCapital Securities, says that it may leave the company over-extended in its range of products, as well as over-reliant on the saturated Slovenian market.
In any case, the process of retail consolidation in the market – which has included the takeover of Slovenian retailer Mercator by Croatian counterpart Agrokor – will strengthen retailers’ buying power and thus put pressure on companies like Podravka.
While Mršić is bullish about the prospects presented by the Žito merger, he is well aware of the drawbacks of the regional market, hence his determination to broaden sales outside South Eastern Europe. In 2014, Podravka made 41% of its sales revenue in Croatia, and 27.4% elsewhere in South Eastern Europe. Central Europe accounted for a 15.4%.
One prong of his expansion strategy is to deepen penetration in markets such as Germany – where currently Podravka’s products are largely sold in “ethnic” shops (Balkan and Turkish in particular) - and Sweden – where the products are already becoming better-known in the broader market.
Mršić also wants to capitalise on Vegeta’s strong brand recognition in Poland to ramp up annual sales from €30m towards the €100m that he believes the company is capable of. (Though, as ever pragmatically aware of the downside risks to his approach, he identifies Poland as the most competitive market in Europe, given the presence of most major international players and strong local brands.)
He also hopes that the Ukraine crisis will ease, and relations between the EU and Russia improve enough to support Podravka’s sales in the CIS.
On the hunt
The second prong of the geographical diversification strategy is the establishment of new hubs in Dubai, Beijing and Tanzania – and a factory in the latter. Mršić won’t be drawn on the size of the investments being made, but Tanzania aside, they are not particularly capital-intensive.
“We decided we needed more than one hub because if we fail with just one hub we will have a total disaster, whereas if we establish more than one, we have more chance of being successful,” says Mršić, in a matter-of-fact manner, as main courses and rich Croatian red wine arrive.
“We decided on MENA after market research, and we see the market as one on which we can grow, our products are suitable for their habits, tastes and lifestyles.
We think that we can understand this market, it’s important that we understand and communicate with the consumer. We think that we have this understanding, and we have identified a spot on the market where we can place our products and meet local tastes.”
The choice of Tanzania is based largely on the experience of a senior staff member who lived and worked in the country for eight years, and retains strong links with the Tanzanian business community. The plant is expected to open in the first quarter of next year.
Podravka will launch in Africa with meal makers and stock cubes, tailoring products to local tastes. In the Middle East, the company will initially offer soups, cereals and preserved vegetables, where the aim is to be recognised as a branded supplier.
Mršić suggests that Podravka’s experience of Muslim consumers in Bosnia, Kosovo and Sandžak helps give it a better understanding of the Middle Eastern market. Iran, Saudi Arabia and Egypt are all large markets which Podravka will eye longer-term, should initial results be promising. The choice of Dubai as a hub largely reflects its convenience, rather than the potential of the UAE market itself.
As Bajić notes, there is plenty of scepticism about whether Podravka has the punch to succeed in markets in which it does not have an existing foothold. Mršić’s strategy is to enter in partnership with a local player, and box clever on promotion. Without a huge advertising budget, Podravka will deploy tools that have worked well elsewhere, such as point-of-sale promotions and recipe books that promote the company’s products.
Mršić makes it clear that the Žito purchase is just the start of Podravka’s “hunting”, and that he is hungry for more acquisitions. The company’s debt-equity ratio is a hefty 2.2, which could have been increased to 3.3 had the company taken a loan to finance the Žito move. Instead, Podravka has announced a capital increase, issuing 1.7m new shares to raise up to €65m.
Mršić seeks Podravka as participating in a regional consolidation trend, as companies look to bolster their position on slow-growing, saturated markets. Recent M&A activity includes the purchase of €30m-valued Pekarna Grosuplje, Mercator’s bakery arm, by Slovenia’s Don Don; BAT’s acquisition of Croatian Adris Grupa’s tobacco business for around €550m ; Heineken’s purchase of brewer Pivovarna Lasko; and of course the Agrokor-Mercator deal. Mršić expects consolidation to accelerate.
Privatisations are also part of the mix: the Slovenian state had stakes in Mercator, Laško and Žito, and sales of major banks and the state telecom company are in the pipeline. To the east, investors are waiting for progress on Serbia’s plans to restructure or privatise more than 500 companies, including its main telecom and pharmaceutical company Galenka.
Agrokor owner Ivica Todoric has said that his company’s acquisition of Mercator is a first step to bolder expansion outside the Adriatic region, and a planned IPO on the London Stock Exchange. Mršić has similar ambitions of a new listing.
“Our market capitalisation is [currently] too small for dual listing, but if our plan is realised, perhaps in two years we’ll need more capital,” he said. “We don’t have the capacity at the moment, but if we realise our plan in the next two to three years, we will be ready to maybe think about new share offerings on the London, Warsaw or Vienna stock exchanges. But first we really need to realise our business plan, and we need to realise the next step.”
A major challenge in doing so will be improving efficiency. Mršić asserts that the company can become more efficient through acquisitions. But paring back loss-making parts of the business may also be necessary to make the company one of the top performers in Europe.
Critics say that job losses will not sit well with the state’s substantial stake in the company. Mršić counters that the workforce has already been reduced by 33% in Croatia, and that the government now acts as a normal shareholder, wishing to see the best value possible achieved for its shares.
Podravka’s strategy is based on an intriguing mix of pragmatism and remarkable boldness. Mršić’s judgement that big Adriatic companies must acquire and expand, or stagnate or be taken over, seems a judicious one. His plans to build Podravka are based on necessity, but success is by no means guaranteed.
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