SMC Food Interest Remains With Ice Cream Investment

San Miguel Purefoods, a subsidiary of Philippine conglomerate San Miguel Corporation (SMC), has announced a PHP350mn (US$7.4mn) investment in an ice cream manufacturing facility in Laguna, on the northern Luzon island. Looking to tap into rising demand for snack foods and other non-essential foodstuffs, a result of the country's healthy economic growth and favourable age demographics, the investment appears to represent a change of tack for SMC, which has recently focused its attention on diversification into heavy industries, with food investments focusing more on the primary livestock sectors.

At times over the last few years, SMC's strategy for its food business has appeared confused. Investments in telecommunications, oil refining, infrastructure and power - and the divestment of a stake in its once-flagship brewing arm San Miguel Brewery - seemed to indicate that the group saw its future in heavy industries. This view gained weight after the company announced it would seek buyers for minority stakes in Purefoods and its Ginebra spirits division in order to further fund its diversification.

However, the company's desire to retain majority ownership of its food and beverage units hints at the importance the categories have. Food offers stable demand and reliable margins, and SMC's diversification away from it always raised eyebrows among analysts. The desire to retain majority ownership signifies the need to keep a balance between food and the more volatile, commodity-dependent sectors into which it is foraying.

Nonetheless, when announcing investment plans for its food arm in February 2009, SMC appeared focused on its more primary agricultural units, diverting the majority of its PHP9.93bn (US$211mn) war chest into hog farming, poultry operations and animal feedstuff production. This decision might have been influenced by 2008's aggressive commodity price spikes and food shortages that saw food prices in the region soar and led to a significant supply-side response. The company's subsequent decision to divert funds towards processed food production might be the result of 2009's food price deflation and a desire to increase output of higher margin foodstuffs. Such a strategy would again signify an attempt to find balance in its portfolio between food and heavy industry, and in this case between primary and secondary goods.

Regardless of SMC's motivation, the company is undoubtedly investing into a high-growth, dynamic category. The company's Magnolia ice cream brand once dominated the Philippine ice cream market but its market share has deteriorated amid competition from RFM Foods and Unilever's joint venture brand Selecta and from Nestlé's ice cream portfolio (see above pie chart). The PHP350mn Laguna plant will be Purefoods' first ice cream manufacturing facility - production is currently outsourced - and it will hope to use its parent company's large distribution network to steadily rebuild its market share.

Forecast private consumption growth of 4.8% annually through to 2018, favourable population demographics (the UN Population Division predicts that 43% of the country's population will be 19 or under in 2010) and ongoing domestic and multinational competition will ensure that the Philippines ice cream market remains dynamic. These factors also contribute to a growing audience for the company's other non-essential foodstuffs, such as confectionery, value-added meats and coffee. This outlook, and the enormous brand and distribution strength of SMC, should ensure that a buyer for the available stake in Purefoods is forthcoming is 2010. Hormel Foods of the US is the frontrunner thanks to its existing joint venture with the subsidiary.

For Q209, ending in June, Purefoods posted revenue growth of 12.7% year-on-year to PHP18.59bn (US$394.9mn). Net profit for the period rose by 49.2% to PHP374.5mn (US$8mn).

This article is tagged to:
Sector: Food & Drink
Geography: Asia, Philippines

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