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Brand programs underpinned by Wagyu drive AA Co’s future, shareholders told

by Jon Condon, 02 August 2018
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MORE than ever, the Australian Agricultural Co is staking its future as a branded beef business on the potential to produce premium Wagyu beef ‘at scale’, and optimising its inherent value through sophisticated brand programs.

That was the clear message to shareholders this week as the company struggles to recover from a statutory pre-tax loss of $35.3 million last financial year, and a $75 million impairment following the closure of its Livingstone abattoir near Darwin.

The closure announced in May of the company’s 1824 branded beef program, where those cattle are now sold as feeders into others’ supply chains, only heightens the renewed emphasis on the company’s ‘luxury’ (referencing longfed Wagyu) programs.

About 20 percent of AA Co’s 500,000 cattle now carry some Wagyu genetics, managing director Hugh Killen told Tuesday’s AGM, and the company plans to continue to transition, over time, towards growing its Westholme and Wylarah brand capacity, underpinned by Wagyu genetics.

Greater emphasis on provenance

There were several references to greater emphasis on provenance in AA Co’s brand messaging during Tuesday’s annual meeting.

That opportunity is partly explained by the company’s move to reduce its reliance on ‘externally bred’ feeder cattle for its Wagyu beef supply chain, allowing AA Co to strengthen its control over ‘conception to consumption’ brand claims.

Mr Killen said AA Co’s luxury (Wagyu and Wagyu cross) brand segment was now delivered, almost entirely, by its own internal calf-breeding supply chain.

“This is a critical achievement,” he told shareholders. “It allows us to take greater control over ensuring continuous improvement over meat quality and yield, and is key to the provenance story behind the Westholme and Wylarah brands.”

“At the same time, sales value for the luxury brands is up, because price per kilo is up. This is clear evidence of the revenue and margin benefits of this strategy,” he said.

1824 suspension

In contrast, the company’s Premium supply chain (1824 grainfed, produced from non-Wagyu breeds) had underperformed expectations, leading to the announcement in May that the brand program would be discontinued.

Mr Killen said the under-performance was due to its reliance on external service providers in the later stages of the value chain, and its level of exposure to commodity beef price fluctuations.

The company now sells those composite steers as live cattle instead of retaining ownership to feed and process them as 1824 branded beef.

“These are steers that are a by-product of our herd improvement breeding program. We expect the sustainable impact of this decision to be a significant improvement to our profit and loss. Volume and revenue from beef sales will decline as a result of this, but conversely it will deliver an increase in live cattle revenue, and these sales will now be profitable,” Mr Killen said.

“This is an example of a tough decision, but a decision which reflects our focus on branded beef at higher prices and higher margin,” he said.

‘Unlocking value’

Mr Killen said there was a ‘highly profitable’ business within AA Co – but its value had to be unlocked.

“Our luxury branded beef strategy is the right strategy to achieve that. We are making progress and we are investing in driving it forward,” he said.

AA Co’s future would be powered by the success of its customer-focused, branded beef strategy, shareholders heard.

“We have the foundations for a future of sustainable and profitable growth, and we have taken a series of actions that are driving immediate improvement to cash flow and earnings,” Mr Killen said.

“What is clear is that we need to create a simpler, more productive and more profit-focused AA Co, if we are to deliver on the company’s potential.”

He said the feature that set AA Co apart was its unique ability to produce the highest-quality branded beef, ‘at scale.’

“That competitive advantage is unmatched – worldwide – and it comes from the integration of our unique assets into one efficient supply chain. This is how we connect our brands to high-value, high-margin customers around the world, and that is what delivers true return on these assets.”

“To get this right, however, more work needed to be done. By that I mean aligning each of part of our supply chain to deliver against our brand promise, so they work together as efficiently and effectively as possible. And getting that right is a prime focus for the management team.”

“Producing the highest-quality beef at scale allows us to meet the needs of the highest value consumers, more often, in more places around the world. Our customers are the chefs who buy our product, and they buy our product for the ultimate dining experience it offers their guests. They are true connoisseurs and they care about more than just marbling, which is why it’s important our marquee luxury brands, Westholme and Wylarah, are the first in market to be aligned to the MSA’s new, robust eating quality standards.”

“What our chefs know is that high-value customers want high-quality food that reflects their values. They want natural, ethical and sustainable produce, and are willing to pay for it. We also know the highest-value customers are seeking a complete experience. That means the quality of the meal, the provenance of the product, and the heritage of its story,” Mr Killen said.

“What we need to do is continue to refine our understanding of our customers, and to improve the value chains which connect our beef to them. This is how we capture more of the premium margins these high value consumers provide.”

“The Westholme and Wylarah brands’ price performance speaks for itself, and the potential upside is significant,” he said.

Growing customer base

A major focus for AA Co now is to grow its customer base and deliver more product through these high-price, high-margin brands.

“At the same time, our Heartland brands enjoy good brand equity in key markets and continue to perform. We will continue to support those brands in markets where that makes strategic sense, while we transition over time towards Westholme and Wylarah.”

This customer-focused brand and marketing strategy is central to our future revenue and earnings growth,” he said.

The results of our Luxury / Prestige brand segment underline that this branded strategy is working. Our flagship Westholme and Wylarah brands continue to perform strongly in Singapore, and we’ve had good results post launch in Taiwan.

The customer-focused luxury brand and marketing strategy enabled AA Co to capture more margin by delivering a higher value customer experience, Mr Killen said.

“It reduces our exposure to the risks and volatility of traditional commodity markets, and positions AA Co to capture the accelerated growth offered by global consumer trends. In particular, it captures the company’s unique value proposition – the capacity to produce the highest quality, high margin beef, at scale, and to do so in a way that is unrivalled by any other producer today, and unlikely to be exceeded in the future.”

He said the company was already seeing the strong performance of this strategy in Singapore and Taiwan, where the two luxury brands were launched earlier, with strong price performance, strong support from the best restaurants and strong support from the best chefs. A third launch in another key export market is expected soon.

“The continued roll out of this strategy offers the best pathway to sustainable growth and creation of value of the AA Co business – for all shareholders,” Mr Killen said.

“Building on the fundamentals already in place, and the lessons we have learned so far, we now have a roadmap for success. We are taking a disciplined return on investment focus, against clear metrics, to significantly increase our investment in this strategy. We are very excited about our next market roll-out later this year,” he said.

Four year journey

Chairman Don McGauchie told shareholders the current journey commenced in 2013 with the decision of the board to transform AA Co into luxury branded beef business.

The origins of that decision came from walking into Harrods in London and seeing AA Co Wagyu beef being sold for £200 a kilogram.

“When we saw that, we knew what was possible,” he said.

“This journey was about transforming from an Australian pastoral company with a proud domestic history into a luxury branded beef business. But this ambition is by no means an easy feat. When we embarked on this journey, we knew it was going to be difficult. It would require patience, and some tough decisions along the way. And not all the avenues we pursue will prove successful, especially as the implementation of our strategy evolves.”

“We see great potential for AACo’s future as a luxury branded beef business, but to do that we will need to go where no other beef producer has successfully gone before us,” Mr McGauchie said.

“What I’m excited about is after four years’ hard work transforming the AA Co business to deliver on that strategy, we now see green shoots. Those green shoots are strong, and they are bright. The price performance of Westholme and Wylarah speaks for itself in their initial markets. Singapore continues to perform strongly, and we are pleased by the results in Taiwan,” he said.

The ‘decisive action’ taken to stop current operating losses from Livingstone Beef and to simplify the 1824 supply chain had had an immediate positive impact on the profitability and cash flow performance of the company, . Mr McGauchie said.

“Most importantly, it further focuses our business on the production and marketing of high-end branded beef.”

“First of all, we have taken greater control of our supply chain from production to the restaurant. That has been critical. Controlling our supply chain allows us to regulate costs, control quality, ensure the heritage and provenance of our luxury products and better respond to consumer demand.”

“Another critical part is the composition of our herd. Our herd of more than 500,000 cattle has been bred over generations to thrive in Australian conditions, and includes one of the world’s largest herds of Wagyu.”

While Wagyu cattle offered superior marbling qualities, that’s was by no means the full story, Mr McGauchie told shareholders.

“The composite cattle we have bred are unique. When infused with our Wagyu genetics, what they offer is a premium eating quality that we think is really something special. That’s about superior eating quality, and it’s also about consistency. And we’re not stopping there – we are continuing to invest in innovation and technologies to continually improve our herd genetics, further driving quality yields and reliability of supply.”

Through the work undertaken over the past four years, the fundamentals were now in place, Mr McGauchie said, and AA Co was well-positioned to now realise the margin and profit upside offered by its luxury branded beef strategy.

“We can see that already working in our Westholme and Wylarah brands, and the upside potential as we transition further to these brands is considerable,” he said.

“We are continuing to deliver on this strategy as we expand our footprint and reach in target high-value markets. We are doing so through expanding our relationships with new and existing partners. The feedback from chefs, customers and partners as we build those relationships continues to be nothing but positive.

China opportunity?

During questiontime, Mr McGauchie was asked about prospects for the brand programs in China. He said China was not a market that was on AA Co’s brand radar in the immediate future.

“Protecting ‘brand’ in that market is very difficult,” he said, “so the plan so far is to build business in those markets where our brands already have a footprint.

“The opportunity is there, quicker and easier, and we are better prepared for those markets. We’ll pursue those first, then the growing markets of the world (like China), will become ones we’re more interested in,” he said.



Reader's Comments


Comment
  • Russell pearson August 2, 2018

    “Really” ?

  • Lee McNicholl August 2, 2018

    Lot feeding Wagyu cattle for 350-400 days ( 50% of their life span} at a daily gain of 1.1 Kg/day fundamentally contradicts the Australian beef industry’s claim to be primarily a “natural” clean and green grassfed industry.
    I also wonder what the whole of life methane production is for a Wagyu beast compared to a fast growing animal that reaches say 700 Kg at a much earlier age after a 100 days on feed. Given that MLA is spending considerable research dollars in maximizing growth rates to help reach their ambitious Carbon Neutrality target by 2030, the “luxury” Wagyu industry seems to to be going in the opposite direction to sustainable environmental best practice. I guess it might be of some solace to AACo that the rich elites that can afford their luxury brands will be able to cope with climate change more easily than the “battling” masses

  • Paul D. Butler August 2, 2018

    Does AAco understand marketing and genetics?

  • bert mann August 3, 2018

    one of the large reasons 1824 has failed has been because of who has been wholesaling their product…. especially in the last few years…

  • Jonathon Ross August 4, 2018

    It appears that a large part of the Livingstone problem was the marketing of the product as well; with most product sold to wholesalers not AAco own clientele.

  • Peter Vincent August 7, 2018

    The void of knowledge and understanding of the global protein market within AACo suggests the emperor has no clothes. For the largest cattle breeding entity in the world to focus on a “niche market for luxury beef” is an absolute nonsense. AACo has significant strength and influence in the live cattle market through sheer weight of numbers and in the future one would assume, through genetic excellence. In the global protein market and specifically in the boxed beef market, AACo has at best, moderate to little influence. Forget the ego associated with a niche product; it comes with a helluva price tag. Focus on the strength of the company and improve efficiency of production and most importantly, the value of each unit produced.

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