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27/05/2013

Campofrío, trapped in the consumer spending crisis

Carmen Llorente

"It's a real battle to sell a kilo in Spain", said Ignacio González, Chief Executive Officer of Campofrío Spain, at the end of last year. He painted a dreary picture with Christmas around the corner, traditionally the time of the year when consumer spending peaks. Fortunately, the company was able to offset difficulties in Spain with a good international performance, ending 2012 with revenues of 1.918 billion euros, up 5% year-on-year. But the company's problems only got worse in 2013: the consumer spending crisis in Spain has intensified, and the company (a leader in processed meat products) has to step up sales not only in Spain, but also in its main foreign markets. The anti-spending fever has spread throughout southern Europe and into France; as a result, Campofrío Food Group ended the first quarter of 2013 with losses of 4.1 million euros and a 1.4% slide in sales.

"We believe that Campofrío's operating profit will remain under pressure due to high production costs and depressed consumer demand in its main markets, including Spain, France, Italy and Portugal", announced Standard & Poor's, in view of the company's 1Q13 performance. The rating agency downgraded the company's credit rating, from BB- to B, and gave a sober outlook for 2013 and 2014, when it will be "unlikely that the company will register positive growth or improve its operating margins".

Higher commodities prices, anemic consumer spending, a years-long and taxing price war among large distributors, constant growth in private labels in the most economically depressed European countries... The Spanish multinational has too many forces working against it. Campofrío, founded in Burgos in the 1950s, has spent the last few years cutting costs, closing plants and improving efficiency, like other food companies. But unlike much of the consumer goods sector, the company (which owns Navidul and Oscar Mayer) has decided to inject a healthy dose of creativity into new advertising campaigns. While much of the industry has slashed investment in advertising and marketing as a result of the crisis and slumping profit and revenues, company leaders Pedro Ballvé and Robert A. Sharpe II are working tirelessly to capture the attention of depressed consumers.

Although product sales in Spain have declined, the company's advertising campaigns have strengthened brand awareness. Campofrío—along with Danone, Nestlé and Leche Pascual—is one of the top-ranking food companies in terms of corporate reputation, according to the latest report by Key Audience Research.

It is now more difficult than ever for Campofrío to sell its hams and sausages, but it has won several awards for its brilliant advertising and marketing campaigns. The company has cleverly converted the crisis into its marketing strategy, and has also leveraged new tools, like the internet and social media (an area in which most Spanish food companies still lack experience).

"Ballvé strongly believes in marketing and advertising and especially in investing in publicity in times of crisis", says a company manager. Campofrío is committed to new, innovative products: sales of snacks rocketed by 21% in the first quarter, and health-related products by 25%.

"Campofrío faces many challenges, but it is implementing new approaches to address the difficult economic situation," says a stock analyst. The company is in its darkest hour. Its shares are trading at almost record lows and its market capitalization has declined to 480 million euros, i.e. half of its value just two years ago, when Smithfield, its core shareholder, announced a takeover bid for 50% of the company. Later it backtracked, leaving behind a very disappointed market that still hasn't recovered from the letdown.

Ever since Smithfield, the leading pork producer and processor in the US, abandoned the Campofrío deal in mid-2011, the company's shares have been on a downward spiral. Investors have also turned their backs on the company, battered in recent months by the contagion effect from the Pescanova scandal. Pescanova's accounting problems have raised doubts about the health of Spanish food companies. Stock market and business media are worried that more cases like Pescanova will come to light, especially since it's not the first of its kind in recent years. The sector is also concerned about a collapse of SOS.

Looking to US shareholders

"Campofrío is led by two US companies: multinational Smithfield, which owns 37%, and global asset management firm Oaktree, with 24%, both of which apply rigorous oversight in accounting practices. The company is not governed by one chairman who does as he pleases, like Jesús Salazar, at SOS Cuétara, or Manuel Fernández de Sousa, at Pescanova", says a sector analyst. Since Smithfield became the core shareholder in 2008 and created Campofrío Food Group, the company Chairman and son of the founder, Pedro Ballvé, has maintained his post but has gradually handed over functions to the Chief Executive Officer/Executive Director, Robert A. Sharpe II, assigned to his post by Smithfield.

Oaktree Capital is also involved in managing the company. The firm, which is known in the sector for being the core shareholder of Panrico—another company clobbered by the consumer spending crisis—is closely watching Campofrío so that it can exit the company once it appreciates in value. Oaktree came close to offloading its stake in 2011 in the delisting takeover bid launched by Smithfield; however, its plans were thwarted when the latter withdrew its offer. Both Oaktree and CaixaBank (which owns 4.16% and also absorbed Caja Burgos) are trapped in Campofrío.

The sector believes that it's only a matter of time before Smithfield changes its mind and seeks complete control of Campofrío again. "Even Pedro Ballvé is hopeful", the sector says. Two years ago, Smithfield cancelled its plans to launch a takeover bid because its own stock had taken a hit. Smithfield shares plummeted 15% after announcing its acquisition plans in Spain, as shareholders felt the deal would lead to excessive dilution of their stakes.

Today, things have changed. Smithfield registered a stellar overall performance and its market cap has soared by more than 40% in the last year. The time may soon come when it tries its hand once again at conquering the Spanish company.  

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