Agribusiness

Profitability focus drives AA Co in new directions

Jon Condon, 11/08/2014

 

AAco logoA RENEWED focus on profitability is driving the Australian Agricultural Co in new directions, in diverse areas of the company’s operations such as genetics, approaches to cattle trading, and technology transfer.

Addressing last Thursday’s Rural Press Club breakfast at Brisbane show, managing director Jason Strong gave a detailed account of some of the changing focuses within the company, some of which have been implemented since he took the reins in January this year.

Beef Central covered his earlier comments on the imminent launch of the company’s Darwin abattoir in this item, published on Friday.

“It’s an exciting time to be in agriculture,” Mr Strong told the gathering.

“Global demand for food is increasing as the population grows and large numbers of people become more affluent – and this increase in demand certainly applies to beef,” he said.

“Programs like MSA that I was involved in earlier in my career, caused a massive shift in our communication with the consumer domestically. Seeing the global opportunities for Australia’s beef products first-hand during my time with MLA in Europe and Russia also gives me confidence about the opportunities we have now.”

Mr Strong outlined the latest steps in the company’s transition out of being simply a large-scale producer of cattle to becoming a ‘truly vertically integrated’ beef company, and the market conditions that demanded that change.

“What we are doing as a company, I think, reflects where we are as an industry,” he said.

“The beef industry, and indeed the whole agricultural sector, needs to be focusing not just on performing well operationally, but on profit. We need to make agriculture more profitable, and that’s also what we’re striving to achieve at AA Co.”

While traditionally AA Co’s main activities had been at the pastoral and production end of the supply chain, that was now changing rapidly, with exposure in all parts of the value chain, from production to processing, sales and marketing.

This was a strategic change that would help reduce the volatility of exposure to the variable climate in Australia, and the impact that had on domestic cattle prices, Mr Strong said.

By participating in different parts of the value chain, the company hopes to increase the stability of its earnings. But this is not a knee-jerk or overnight move the transition has been going on for several years.

Mr Strong said AA Co’s brand beef group was one of the real growth areas of the company, starting from nothing 12 years ago to a position today where it provides more than half of AA Co’s revenue.

“A year ago about half of our feedlot and backgrounding production was sold as branded beef. In the first quarter of this year, that figure will be 85 percent,” Mr Strong said.

Just as important was how and where AA Co sells that beef.

“The key question for us in developing this strategy was not just about which parts of the supply chain we want to participate in, but at which end of the market we want to operate at,” he said.

The Asian dining boom was a stunning change in global food consumption. Most people have heard the statistics:

  • Food demand rising by 70pc in the next 30 years
  • The growing Asian middle class: right now it is about 500 million people, but that will increase to 3.2 billion just 15 years from now
  • The Asian middle class in 2030 will be five times the entire combined population of Europe and the US today.

“It’s often been suggested that Australia will need to double food exports to meet this demand.

“In world terms, Australia is an important part of supplying that food demand, but we can’t supply all of those people with all of the beef they will need.”

“What we can do is supply the very top of that demand with premium beef,” Mr Strong said.

“I don’t think that our cattle industry should try to be the food bowl of Asia – instead I’d rather that we were the high-end specialist.”

He said while AA Co was a large company by Australian pastoral standards, on the world stage it was one of tens of thousands of beef producers.

“Where we think we stand out is being recognised – and trusted – as producers of the finest quality – and traceable – Australian beef. To use this reputation, and to operate at the top of the premium market, we have been transforming our business to one that is responsive to its customers’ demands.”

“We have taken the decision that we don’t want to simply be a commodity player. That’s going to be an important part of what we do, especially through the new Darwin Plant we are building which will be commissioned in the next month.”

“So whatever we produce, whichever market we are selling into, we want to be selling the premium product in each category.”

“In the premium beef category, AA Co has the ambition to selling the world’s best Wagyu.  If we are selling trimmings from the Darwin plant, we want them to be packaged and marketed as premium trimmings.”

“We want to use that trusted reputation to cement a place at the top of the premium price pyramid, capturing the value at the very top of the market, because that’s where we think our beef belongs.”

 

Growth in Wagyu segment

The company’s clear focus on profitability had seen its Wagyu and Wagyu-infused herds grow to become the biggest in Australia, and possibly the world, at more than 50,000 head.

In the past few months AA Co’s Darling Downs Wagyu brand had won gold medals in Brisbane and Melbourne Royal branded beef competitions. Its top Wagyu brands sell for more than $250 a kg at some of the world’s best retailers.

AA Co’s Wagyu cattle now account for about half of all its branded beef sales – and it sells for about 60 percent more than the company’s shortfed beef.

“There is still enormous potential for our Wagyu, especially as that Asian middle class continues to grow and demand not just red meat, but premium red meat,” Mr Strong said.

“This is a customer-led transition. We will produce the beef and the cattle that our customers want.”

Having said that it wants to be trading at the top of the price pyramid, that it wants to be profitable and want to take advantage of its trusted reputation as a producer of finest-quality Australian beef, how does it get there?

The company’s board and leadership team had engaged in a coordinated, in-depth study of that question over much of the past year, Mr Strong said.

“We wanted a plan we could work to, one where every activity in the company is clearly focused on achieving a vision.”

To that end, AA Co has defined a series of strategic goals. Some of those were discussed in Beef Central’s earlier Friday article, focusing on the Darwin abattoir.

Another is to leverage off the trusted reputation that AA Co and the Australian agriculture has, to build an ‘authentic’ AA Co brand.

“We are very lucky because ‘Brand Australia’ gives you a really good free-kick overseas,” Mr Strong said.

“We’re a nation renowned as excellent farmers, not to mention that there’s a real sense of romance attached to the wide open spaces of the Australian bush. It’s something we often take for granted, but it’s a very powerful selling point overseas.”

“It’s not just about the individual brands, like Darling Downs Wagyu or 1824. Our long-term customers understand that the reason these brands are so good is that they come from AA Co – so we want to build on that trust and reputation.”

The second goal was to align the AA Co business internally to focus on producing beef.

That’s involved re-aligning financial reporting on a supply chain basis – grassfed, including live export and the pastoral operations supplying feedlots; grainfed, operations and branded beef sales; and northern beef, including the Darwin plant.

“This may sound technical but it’s a very important move for the company and really puts the focus on what the end-market is demanding. This supply chain focus recognises that we are now a fully integrated beef company,” Mr Strong said.

 

Cattle procurement strategies

 

AA Co Canobie northern cattle

Mustering on AA Co’s Canobie Station

 

Another goal is to develop the company’s cattle procurement capabilities and strategies.

“Again, buying and selling cattle is something AA Co does every week. But we have to keep asking ourselves whether it aligns with the rest of the business,” Mr Strong said.

“The temptation is that when it rains, you buy in more cattle to maximise the available grass. And then you’re exposed to volatile spot markets.”

“We now only buy in cattle when there is a clear end market for them,” he said.

“It wouldn’t necessarily be a bad thing for us to finish the year with excess grass, especially if the alternative is losing flexibility to cope with the seasons.”

“So let’s develop the cattle we own, and only buy in if it’s favourable to us – not because we have grass to eat.”

Another company goal is focusing on optimising its production activities.

“That means changing our mindset from producing cattle, to producing kilograms of beef. At every point of our operations, we need to be asking ourselves – does this put on more kilos? Does it do it in a cost-effective way?” Mr Strong said.

“That all comes back to profitability. We might have the biggest herd, or the most brandings or the most grass, or any other measure you might consider. But unless those activities are putting on kilograms – profitable kilograms – of beef, there’s really no reason for them. They are just a distraction.”

The final goal is to better exploit the company’s knowledge and genetics.

“And I don’t mean just exploit them to make us a better producer,” Mr Strong said.

One of the terrific advantages of scale the company had was that it could develop cutting-edge technology. That applies in areas like genetics in its northern grassfed herd, the tremendous advances it had made in Wagyu genetics, and innovations in feeding and nutritional management.

“We can see opportunities for commercialising this work outside the company,” he said.

“There’s a valid argument that some of this work can be a commercial advantage, that we should hold it close and exploit it. Well, we’ll continue to do that, but we don’t want to be selfish about it when there’s increased margin we can capture by sharing it.”

“The next step is looking at our innovations and working out whether they’ll make us more money by only utilising them in our production systems or by selling them outside AA Co.”

“It all comes back to my earlier theme of profitability. As a company, we don’t want to be too proud to change the way we do things, if it means making profit. Our guiding principle in all of this has been profitability and stability, whether by accessing the top of the market or by ensuring our earnings are less affected by the volatility of markets and climate.”

Mr Strong said he did not necessarily agree with recent comments suggesting that Australian beef producers needed to focus only niche markets, rather than commodities.

“I don’t entirely agree. For AA Co, yes, it’s the strategy we’re pursuing and pursuing vigorously, but for others in the beef industry it may be that the commodity space is where you can make the most profit,” he said.

“The challenge is working out where that sweet spot is, and having the courage to pursue it, even though it may not be where others in the industry think you traditionally belong.”

 

 

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Comments

  1. Wayne Salvestro, 12/08/2014

    I believe the AA Co is right on the money and I, as a small Wagyu producer hope they do well.

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