[Editor’s Notes: The European Suppliers Roundtable was held Feb. 24 at the Radisson Edwardian Hotel - Heathrow in London. The following commentaries were gleaned and edited from a transcript of the proceedings.]
CANDY INDUSTRY: Several economic indicators suggest that the global recession has ended. How did the downturn affect your company and your customers? Do you believe we are in a recovery mode or are you apprehensive about another economic dip on the horizon?
JAN HAMMINK: For us, 2009 was a year we want to quickly forget. It was not a good year. There was a reduction in turnover [sales revenue], of course. It was not until October that we saw more serious quotation requests. Let’s say that it wasn’t until the end of the year that we saw more orders flowing in, really flowing in. And the recently held ProSweets show proved to be very successful. Nevertheless, I think that the recession is not over. I would not be surprised if we get another downturn, which we are taking into consideration as part of our strategic planning.
CANDY INDUSTRY: And what about your customers? Did they feel the impact of the crisis, the recession?
JAN HAMMINK: A lot of customers were quite open about their whole situation. They would tell us up front that ‘Okay, we have problems with credit lines from our banks.’ Of course, you’re dealing with both medium-sized and larger companies. What we see now is that the medium-sized companies, many of which have money, are using that money to invest. The larger-sized companies are relying on credit lines and, especially in 2009, they had problems with their credit lines. They are very open about it and simply just stopped ordering. We still do have discussions about projects, but the ordering really completely stopped at times.
ULRICH KREIMEYER: Despite what these economic indicators suggest, I would guess that the so-called crisis will last another six to 12 months, minimum, before there’s any real recovery. Moreover, I would expect the recovery will be a slow one, precluding a return of sales activity we experienced at the end of 2008, beginning of 2009.
Financing of projects is still an issue. For example, if you go to Russia, they’ve had serious problems and are only now starting to recover. Although we are always optimistic, I believe this recovery will take a long period of time, and I’m hopeful for 2011.
STEVEN STAAL: In making a comparison between 2008 and 2010, I’ll venture forth that not only has the economy changed, but also our customers’ mentality. It used to be a seller’s market; now it has become a buyer’s market. Not only do you see it in price negotiations, but you also see it in the conditions they set down in a contract.
And that’s because cash people are less cash rich. It means that they will fight about their conditions, and that may create another issue when you pick a project.
CANDY INDUSTRY: It sounds like your contract negotiations take longer these days.
STEVEN STAAL: Yes, there are new elements on the table that weren’t there before, in more extensive ways. And they have more time to prepare their projects, which enables them to deliberate in making choices.
CANDY INDUSTRY: So how was 2009 for your company?
STEVEN STAAL: 2009 was - as for most of us - terrible. Let’s forget about it.
CANDY INDUSTRY: And what about prospects for 2010; do you see any bright spots?
STEVEN STAAL: Well, given the fact that we are in the project business, everything takes time. Therefore, I think that if you want to harvest your business properly, you will have to wait until 2011.
MONTSE CIRERA: When talking about the economic crisis, I would like to point out that it’s important to separate developing markets from developed markets. If you are a global supplier, you have this advantage. We, of course, lost sales in developed countries, ranging between 5% to10%. But other countries are doing very well, look at China.
CANDY INDUSTRY: So, when you say developing markets, are you referring to the BRIC countries, meaning Brazil, Russia, India, China?
MONTSE CIRERA: China, Asia in general, these are the countries, regions that are doing better then others. Others are still suffering, but for us, sales in China are going well.
CANDY INDUSTRY: Was that growth in China able to offset downturns in developed countries?
MONTSE CIRERA: Not totally, but it helped to ease the pain.
GREG ALLEN: I’d like to point out that we have had four or five very good years in the confectionery industry; no one expected this scenario would go on forever. So we also noticed that in 2009, customers were holding on to their machines a bit longer. That meant sales of spares and service calls were actually increasing. Those departments had a record year, but, of course, on the project side, it wasn’t so good.
CANDY INDUSTRY: So you also experienced a downturn in 2009?
GREG ALLEN: That’s for sure.
CANDY INDUSTRY: Prospects for 2010?
GREG ALLEN: We are seeing a few spots of activity, although it’s not necessarily in Europe.
CANDY INDUSTRY: So as Montse mentioned, there’s more opportunity in developing countries or markets?
GREG ALLEN: There certainly is, yes.
RALF SCHÄFFER: 2009 was a bad year for everybody, I believe. We were a bit lucky as a result of a big project, which filled up much of the slack in sales. And it’s clear, sales could not continue the pace we saw in 2007, 2008. I think we’re back on the level of 2005, 2006.
For 2010, I am a little bit more optimistic than some of the people here because what I can see; we have ongoing projects, already finalized projects, but better distributed throughout different parts of the world than what we had in 2008.
During the peak of 2008, a large part of our business was concentrated in one special market. During this recent recession, this market went down slightly, but another market went up again.
For example, England, which has lagged in the past for us, is coming back again. We now have several large projects in England. Moreover, our other projects are well-distributed to everywhere in the world; thus, North America, South America, Asia and also Russia is coming back slowly.
In general, during the past last 12 months, we didn’t experience any problems with our smaller projects. The larger projects, however, which require much more money - that’s where we experienced hesitation. Sometimes, it’s a matter of financing; sometimes simply caution. Smaller projects are still going on, but we’ll have to see how 2010 develops.
CANDY INDUSTRY: So, you are optimistic about 2010?
RALF SCHÄFFER: Basically, we have orders to keep the factory in full production until the summer holiday, which begins in July. That’s okay.
DAVID DISS: For the Bosch group, we have had some positives since September of last year. The investments in processing equipment and machines have grown in the last quarter and show signs of continuing in the first few months of 2010.
For us, 2009 was also a bad year; I think that was the case for everybody, although I’m not sure that all of our customers had some tremendous drop in their sales activity. They did maximize the use of their existing equipment and are waiting longer to invest. Perhaps they will do in 2010, perhaps in 2011.
CANDY INDUSTRY: Did you experience customers postponing projects, saying we want to be cautious because we don’t know what the market is like or how long this recession will last?
DAVID DISS: Yes, even though they still have good revenues. It’s not like they had a 20%, 30% drop in their activities. They are just waiting, but I can understand.
STEVEN STAAL: When you look at medium-sized companies, they are now investing, some of them in processing. When you look at the problems our customers are facing, it’s not so much in sales, since revenues haven’t dropped significantly or stayed flat. Rather, they’re facing issues with pricing and to some extent, distribution networks as a result of the financial crisis. They are just waiting because they have no lines of credit, so they are actually just paying their debt back. In the end, that’s not a bad thing.
CANDY INDUSTRY: Indeed, when you look at the confectionery industry, it wasn’t recession- proof, but certainly recession-resilient.
OLAF HEIDE: I can confirm this from the belting industry point of view because first, we service a variety of customers, from big-end user companies to machinery producers. So when they have less business, we have less business. But all our business in the confectionery industry was relatively stable last year. However, our business involving other industry sectors, such as automotive, textile, paper printing and so on was affected much more than the food business and specifically the confectionery business last year.
CANDY INDUSTRY: With regards to revenues and costs, how has the chocolate sector fared?
ANDY FLEMING: Well, if you think about 2008, 2009, then you have a complete reversal in the fortunes of chocolate consumption on a worldwide basis. Over the last ten years, our industry has been in growth to the tune of about 2.7% on an annualized basis. I think it was the first time, particularly in Europe, of a fairly significant cutback, double-digit shrinkage, in fact, in the developed economy.
As you can imagine, that had a fairly significant effect on the first half of our financial year for last year. Fortunately, we were able to make that back in the last six months of the year.
As a result, I think the focus on working capital - as Jan made reference to - had a real big impact on our business.
So people were definitely being a lot more conservative about their stockholdings. They were also being more conservative about how they drove volume through their business because, in the U.K., many companies exist on promotions. They are constantly promoting their products, and they are shifting from one SKU to another SKU and funding that promotion, funding that volume. And we saw a lot of that, a lot of volume driven as a consequence of that.
We haven’t lost any business; it’s just that the volume going through those people was a lot lower.
CANDY INDUSTRY: And prospects for 2010, how do you see that shaking out?
ANDY FLEMING: Well, from a volume point of view, I think we’ll have a slight return to growth, but it will only be slight. I’m not expecting more than half a percent in the developed regions for our business, maybe 1%. I don’t see the overall market in Western Europe growing. In Eastern Europe, in Brazil, Russia, India, China, of course we’ve got bigger opportunities there, but they take more time to materialize. It’s such a fast-moving market, but still it takes some time for investments to filter through to generate real volume. But I’m more optimistic in 2010.
The real problem for us, for the whole industry, for anybody that uses chocolate or cocoa, will be the cocoa price. Looking long-term, we have a serious problem with the availability of cocoa. You know, we’re entering into our third deficit year, and if we return to 2.7% growth, in a couple of years we are going to have a real serious problem with cocoa pricing. And if you think £2,200 is expensive, in two, three years time, if we don’t see more cocoa in the market, you could see well over £3,000.
TOMMY AAS: I’m just happy to be offering cocoa butter equivalents. Still, if you look at 2009, it was very different from the other years in the way that we are not normally affected by fluctuations in economy. But this year, last year, we saw that people were building up their stocks very slowly; the first and second quarter was not the best year I’ve seen. Sales started to recover in the third quarter, and the fourth quarter was really good, actually. And January, this January has been the best we ever saw in speciality fats. So, I’m not saying the crisis is over, but we are moving in the right direction now.
CANDY INDUSTRY: So, are you seeing more business as a result of increased cocoa prices since you are offering cocoa butter replacements?
TOMMY AAS: For sure, outside Europe you see an increasing interest. In European countries, sales are still very slow. Manufacturers are sticking to their old recipes, I believe, but hopefully that will change also in the future.
CANDY INDUSTRY: So, Mike, how has this affected your operations; are manufacturers holding off buying new machinery? How has this affected the refurbished equipment side?
MIKE DALBY: Well, we had a good year last year, but there was a specific reason for that. It was back in October, November, I believe. One particular section of the factory needed some work and we were saying, ‘Well okay, what can we divert into that section of the factory?’
And lo and behold, just before Christmas and subsequent to Christmas, we fortunately received a great big bubble of work. And it wasn’t from one specific place, some from the States, more from the Far East. This industry is always like that, you can never project it. But hopefully if it continues like this, it could turn out to be very, very good.
MASSIMO PIETRA: Just a comment, going back to what Steven said, I think this crisis has changed customers’ behavior quite dramatically. I don’t know if it will be back soon with the levels we’ve experienced in the past simply because I think the crisis changed our customers’ purchasing behavior, making it quite aggressive. The new negotiations are on another level, more discounts are requested by customers; longer contracts and stricter relationships; efficiency clauses.
ULRICH KRIEMEYER: Definitely, I think the trend is that our customers will try to give the risk of the investment to us as the supplier of the machines. I have one very recent example for this; we received an order from a customer, a new customer. Others here may have had a similar experience before. But what this customer asked us, what we never had experienced before, is that we had to give a guarantee for the expenses regarding wear and tear and subsequent spare parts for a maximum of eight years.
CANDY INDUSTRY: Amazing!
ULRICH KRIEMEYER: So we said for the first two years, of course. But then for the next six years, they want the maximum amount of money available so they can really calculate what is the cost of running the machine.
Such a demand was new for us, so we had to sit down and try to find a solution there. In the end, it was not a question of the money, really. Just, it was a question that they want to have it on the table, easy to calculate, clear, no risk on their side.
I think that will be the trend in the future. I think it will also be positive for us if we can really find out how much our machine costs while operating over the next eight years.
STEVEN STAAL: You are guaranteed a relationship of eight years with that customer.
CANDY INDUSTRY: No guarantees; however, it will be a good relationship!
FRANCOIS ADELE: We have also had extraordinary requests from customers such as they want to pay 50% of the machine on delivery, the remainder something like two years later. This, of course, puts us in a difficult position. It’s something we’ve never seen before, we’ve never accepted before. Now we are debating whether to accept such a condition.
KEITH GRAHAM: I don’t think our market experience has been different to anybody else’s. We have seen a downturn, but we’ve been able to live with it quite well, as most of the companies here seem to have done. I think that tells you something about what you need to be as a company if you want to stay in this business. You have to be able to live with ups and downs because you don’t know where they’re coming from; you don’t know when they’re coming; you don’t know how bad they’re going to be.
The smart thing is to set your business up so you can cope with a reduced downturn and still take advantage of the upturns when they come. I think if you’ve been in this business for as long as most of the companies here have, you learn to adapt. It’s the companies that can’t adapt that fall by the wayside. I don’t think it’s an industry where you can survive very long if you are expecting continued uninterrupted growth.
CANDY INDUSTRY: And how do you adapt to the vagaries of the market?
KEITH GRAHAM: There’s no rocket science in it, it’s obviously having as low a break-even point as you can. So that when orders turn down, you can retain the core skills that you need when the orders start to return. Because our business is more about the people, the skills and the knowledge, and the intellectual property than it is about fixed assets like buildings or machinery.
So by setting up the business up to retain those core skills rather than hanging on to assets, I think that’s one of the things that we’ve been able to do. Also looking after the customers we’ve had for a long time, both in terms of helping them with R&D, helping them with spare service, rebuilds, upgrades, all those kind of things. Those customers are in business, they have machinery that needs repairing. Merely replacing parts will be a steady flow of business coming from those customers if you look after them.
CANDY INDUSTRY: And your perspective on 2010 and 2011; is 2010 a bounce-back year, or are you looking at 2011?
KEITH GRAHAM: Bounce-back suggests some kind of rapid rise in sales. I can’t see that happening, simply because of the way that things move in the industry. If someone starts thinking about the project now, it’s going to be the end of the year at the earliest before they start placing in the orders.
So we’ve seen activity start to improve, and it will steadily improve throughout the year, so 2010 will be a better year than 2009, and 2011 will be better still. How long it will take to get to the levels of 2008, I don’t know if we ever get there, but it could be that 2008 was as exceptional as 2009 proved to be, but in the opposite way.
CANDY INDUSTRY: And your perspective, Matthew?
MATTHEW COTTAM: Not a lot of new things to add. Just generally repeating what other people have said. In our opinion, the number of orders that we received in 2009 are as good if not better than previous years.
The fact is however, you just don’t get the big orders, which have really suffered because of the lack of credit or lack of liquidity available to customers. A great deal of our business has involved making modifications, improvements to parts of process lines rather than orders for complete process lines. So you can get lots of orders around the £50,000 to £100,000 area, but you’re not getting the £1,000,000 order.
CANDY INDUSTRY: So have you seen more demanding changes in contract negotiations from you customer?
MATTHEW COTTAM: Well, I mean if they are astute, and I’m sure most of our customers are astute, they know if they are looking for a big order, they can place bigger demands on you. As to where we might be with big orders; all the big orders we have been discussing over the last year are still there. Will they arrive during 2010? I hope some of them might. But I suspect it will take a bit longer, and that depends on liquidity in the market, credit lines in the market, to allow these bigger orders to proceed.
CANDY INDUSTRY: At last year’s roundtable we mentioned the fact that despite the recession, there was business out there. I gather that’s still the case. Anyone care to comment on that?
MATTHEW COTTAM: Everybody needs to eat, and everyone’s eating confectionery. I think all our customers are maintaining their businesses, more or less how it was. It’s their reluctance to pursue a brand new line investment that’s restricted, not necessarily because of predictions for demand for their product, but because of lack of funds or lack of availability to reach those funds.
STEVEN STAAL: Let me add another issue to this discussion. In the end, we all supply equipment or ingredients for the final sales via retailers to consumers. And what you are seeing in the retail world is that they beginning to flex their muscle and use their power to control their suppliers and subsequently the suppliers of their suppliers.
I’ve had examples where at one time we’ve had three quotes given to us by three different companies, three different countries, all for the same private-label business of Tesco. Only one of them got it. But all three companies were busy trying to win that contract.
Keep in mind that the Tescos of this world move their business more and more around. Thus, placing an investment in equipment with the idea of having a 10-year depreciation seems logical. Nowadays, if you get a year contract from Tesco, you are a good man. Aldi sticks to half a year, which means your consumer, the customer of your customer, has to take a decision based on a six-month or a year lead time. The equipment purchase remains an investment depreciated over a ten-year period.
So I think this creates a conflict; some companies resolve it, some companies can’t. The more they depend on one or two customers, the more difficult it will be.
And another impact we’re seeing is consolidation within the industry. One company is taken over by another. What used to be a good customer becomes a non-customer, or vice versa.
MIKE DALBY: I think we all agree that the big multinationals are getting pickier and pickier about their terms of payments, generally on machine purchases. But one thing we’ve noticed, particularly coming from the other side of the Atlantic at the moment, is that even the medium-sized companies are now saying to us that they’re going to pay their bills over a longer period of time. Thus, if it was 30 days, it’s now going to be 60, or if it was 60, it’s now going to be 90. But certainly over the last six months, we’ve noticed a greater tendency to prolong payment.
JAN HAMMINK: Maybe this is a message we can give to readers of Candy Industry: Cash flow will be a big issue of the future.
CANDY INDUSTRY: I’m curious whether the ingredient companies have that same situation?
TOMMY AAS: It’s the same for us. Our aim is to shorten the payment period, and our customer’s aim is to prolong it. So there’s a conflict of course, but we try to stick to it. And if we have customers who are a bit unsecure, we will demand payment in advance.
CANDY INDUSTRY: That’s the way it works. And on your end, Montse?
MONTSE CIRERA: For us, one of the big initiatives this past year was to decrease the working capital. Naturally, that means you have to tell the customer, ‘Listen, I’d like you to pay sooner.’ And, of course, they don’t want to. So we have to give them discounts to achieve this.
ANDY FLEMING: When you’ve got very high commodity prices driving high prices for confectionery products, it’s common to see commercial pressures from customers to extend payment terms. However, once you do that, that has to be reflected back somewhere in the costs.
And if you have to finance your working capital over a longer period of time, particularly for something as expensive as cocoa, or the dairy constituents, which was the case 18 months ago, then that will be reflected in your operating costs.
So, we’ve had some people from large organizations that have pushed their payment terms out. But we’ve actually had some medium-size companies reduce their terms because we give them a better financing cost as a part of the price against shorter terms. So we’re seeing a bit of both.
CANDY INDUSTRY: What impact, if any, did the recession have on your developmental efforts for next year’s Interpack show, and do you think there will be less innovation as a result?’
MONTSE CIRERA: Even though we are an ingredient company, we will be at Interpack. I wouldn’t say it would decrease innovation, but the innovation will be different, for sure, at least from our side.
We are now much more focused in pursuing two different strategies: one is to find new segments where we can promote chewing gum, particularly by finding more added-value segments. As a result, we are working with foreign companies, and we are developing this market with several interesting projects.
At the same time, our efforts are focused on finding new ways to deliver the same quality, but at a lower price.
CANDY INDUSTRY: So better value?
MONTSE CIRERA: Value, how to provide the customer with a competitive product that they can offer to the market, a good product without compromising quality.
I expect more innovation because everybody has a little bit more time now to do this kind of thing. We are trying to come up with several new concepts because it is quite important to have something new in Interpack. Given that we now have some extra time, we’re looking to take advantage of it.
CANDY INDUSTRY: In a way, it’s a different opportunity. This was mentioned at our last roundtable. The resulting slowdown in sales allows companies to channel resources toward research and development. And you’re saying you’re taking advantage of that?
RENE DE VRIES: Yes, in the past one hardly had the time to do such innovations because it was critical to supply machines to our customers. So it was a case of just producing and producing. Now we have the time to develop new ideas.
JAN HAMMINK: It is for us exactly the same. Let’s say when you look at the years 2006, 2007, 2008; all our resources were almost attached to production because we had tremendous growth. We really now have a little bit more time to do more development. But there’s also another side to this situation, as well. When you look at our way of processing, we’ve come up with some new ideas on how to do it. In the past, our customers were also not interested because they also just want to produce. Today, our customers are interested in cutting costs but keeping the same quality.
So there are two aspects, we have a little bit more time and the customer is more willing to experiment together with us. It really is true that there is more development in the last few years.
CANDY INDUSTRY: Is it like Montse said, more on the value side, which is looking at less expensive ways of doing the same product?
JAN HAMMINK: Exactly, yes.
DAVID DISS: Most of the time they’d agree with us when we would show them some innovative equipment. But then the first question they would ask is, ‘What is the price of the equipment, and does it allow me to produce my products at for a lower price?’
JAN HAMMINK: But now they are really interested in new developments and are willing to take certain risks much more so than, say, two years ago.
FRANCOIS ADELE: We’re working within a restricted market now, and we have to show at Interpack how our equipment and ideas about processing new products differentiates ourselves from others. As a result of our ongoing development, we have to show solutions that are faster and cheaper and then prove that we can execute those solutions.
Since we are a processing company, making processing equipment, we have to pursue not only mechanical innovations, but innovative processing approaches, ways whereby we can reduce costs, boost efficiencies and improve quality.
CANDY INDUSTRY: And as Jan mentioned, do you see your customers being much more involved in that development effort?
FRANCOIS ADELE: I’m not sure we see our customers being much more involved, but we have to continuously communicate with them, show them what we’re working on so that they remain engaged with us.
MASSIMO PIETRA: What we really see and what we will do next Interpack will be to change the focus of what we show. In the past, it was geared to demonstrating what we can do, be it moulding, thus showing the entire moulding line or a technical solution, showcasing the complete technical solution. Now, and I think this is related to the economic crisis we’ve experienced, related to emerging markets, to the consolidation within the industry, we’ll focus on targeted solutions, solutions that can be adapted to existing lines.
That’s something we see more and more, and it’s developed into an interesting business for us. In addition to upgrading existing lines, we’re making some lines simpler for certain end markets because our multinational customers have lines all over the world. As a result, not all the markets are the same, so they have different people running different companies and they want different machinery to do that.
In this manner, we will show more specific solutions for specific needs. We will try to cover quite a few situations, but with less complex layouts and more interesting, specific solutions.
CANDY INDUSTRY: So you are offering a simpler processing line just for those people that may require it?
MASSIMO PIETRA: Well, or parts of a line to be added to existing lines or to be part of a new project, which can be used in both scenarios. In these kinds of projects, customers are very much involved, including larger organizations. They are getting more and more involved, which forges a closer relationship. We’re then able to develop a solution together, and we see this as a growing trend in the next few years.
ULRICH KREIMEYER: If you believe what Mr. Darwin said regarding evolution and ‘survival of the fittest,’ there are several different possibilities regarding research and development strategies.
Of course, there is one avenue which you can follow, addressing customer demands to make existing equipment more cost effective. The other is one where you free up R&D resources to foster further developments and future innovations.
RALF SCHÄFFER: Basically, I believe we have to accentuate development and put all our efforts we have in furthering innovation. This increases the possibilities of creating new systems, new machines and new processes because it is the only way we can survive. And if we just compare one ton of steel against another ton of steel from somewhere else, then we are losers at the end of the day.
CANDY INDUSTRY: As we’ve often said here, suppliers of confectionery processing and packaging equipment are not in the steel business!
RALF SCHÄFFER: There are low-end competitors that are offering machines that are now catching up in quality. It’s clear that as suppliers of processing technology, we have to be several steps ahead, providing a variety of benefits to our customers. And while we look at cost-savings, it doesn’t just revolve around building the machine. Rather, the cost savings revolve around how we produce certain products, how we clean and maintain the machine.
I think that is the only way to survive on the long term, because our machines will be copied somewhere in the world. In the past, many of us remember when we sat down with a customer and 90% of the discussion focused on the technical solution, the process and the product. The remaining 10% involved the contract and the conditions. That’s totally changing.
Today, 30% of the discussion involves the contract, conditions and payment and just 70% the actual machine. Hence, that translates into less focus on the machine and the product. As a result, customers sometimes don’t see the difference between machine A and B, particularly if it’s not really obvious. Moreover, project teams change often, so continuity is lost.
The times when one could talk to the owner and shake hands on a deal are drawing to a close. So I think we really have to put all our efforts into developing machines that are different. This way, we can demonstrate to our customers the inherent advancements and benefits, all of which should be obvious for them.
I think we have also to emphasize our selling points differently. In the past, we said we had the best drive, a very good mechanical solution and the perfect product. Today, I believe we have to highlight maintenance costs, energy consumption and short- and long-term cost savings.
KEITH GRAHAM: The importance of R&D to our customers and us hasn’t gone away, but the focus might have changed away from changing the process or changing the products to reducing the costs of running the machinery, cleaning and maintenance, or downtime.
Certainly our machinery has been, in terms of end product and product capability, a process rather than an event. We’re not coming in with making a brand-new way of making the same product or new products that are completely different to anything on the market. That’s an evolutionary process that we’re doing sequentially with our customers.
Where we’re pursuing development on our own, we listen to what the customers want and observe how the machinery performs once it’s in the field, looking at ease of operation, ease of cleaning, ease of maintenance.
Once a customer has our equipment, the cost of running that machinery very quickly outweighs the cost of the machinery itself. So getting the running cost down over a 30-year period is probably more important than getting the capital cost down. That’s always been the case, but a lot of customers haven’t necessarily seen it that way. I think they just focused on the capital cost.
CANDY INDUSTRY: Let’s shift from processing to sourcing and delve into chocolate again. Andy, can you give us a rundown on what’s going to happen in 2010?
ANDY FLEMING: If I knew what was going to happen, I probably wouldn’t be sitting here. Just going back to my earlier comment on supply and demand, a big driver in the market comes from the speculative community. These speculators thrive off the risks and the uncertainty in cocoa. And we’ve been in a situation where there’s a huge fight between the industry and these speculative investors. They know why the price of cocoa has escalated, stemming from the supply and demand situation, such as a poor crop in Ivory Coast, a reduction in quality, the total deficit.
CANDY INDUSTRY: So do you see speculation lessening at all in the near future, or increasing?
ANDY FLEMING: I think it’s going to be here to stay for a couple of years. I mean you see people like Anthony Ward of Armajaro. He’s invested very heavily into cocoa, and that’s an indicator. You see several financial institutions saying, ‘We’re going to invest into commodities.’ For example, Deutsche Bank did it a couple months ago, so I think investing in cocoa won’t go away.
However, I think it will shrink somewhat. You know, if something else comes along that’s a bit more sexy to play with, they’ll stop looking to cocoa and look at whatever else there might be. Because, I mean, they’re very fickle, they’re just in it for the return. It’s a bubble that’s not going to burst, but I think it will shrink back.
CANDY INDUSTRY: And as you mentioned earlier, we should expect continued high cocoa prices for the rest of the year?
ANDY FLEMING: Yeah. Fundamentally, the price of cocoa, we believe, anyway, should be between £1,800 and £1,900 per ton. And okay, it was down this morning at £2,220 on the main position, so it’s come down a little bit in the past week, but I don’t really see it hitting those levels, I don’t see it going below £2,000. And if demand comes back up quickly enough, then you can see it going the other way. So I think that volatility will remain.
CANDY INDUSTRY: With cocoa prices most likely heading up, does that further open up the market for alternative fats?
TOMMY AAS: Yes, I believe so.
ANDY FLEMING: We have more and more customers coming to us obviously saying, ‘Look, we want to engineer some value out of the recipe,’ and reducing cocoa butter can help realize that effort.
There are lots of other ways of doing it as well. We spent a lot of time doing that and I would say that over the past year, nearly 80% of our development briefs have been about removing costs from the recipe.
CANDY INDUSTRY: Have chocolate manufacturers come to you and said, ‘Listen, we need some more value, we need some ways to cut our manufacturing costs’?
GREG ALLEN: They certainly have. We’ve seen more and more customers take advantage of our specialists or as we call them, ‘plant doctors.’ So we’re sending specialists out to factories, and they’ll spend three days there on doing some fine tuning in the factories. As we’ve discussed, customers are demanding efficiencies of their equipment.
CANDY INDUSTRY: It’s an interesting term, ‘plant doctors.’ Like being sent into an emergency!
GREG ALLEN: Sometimes it’s a little bit like that.
CANDY INDUSTRY: And have you been able to satisfy their demands in giving them a 1% or 2% savings?
GREG ALLEN: The savings vary, but generally customers are not going to pay for another visit unless they see a return. So they get a return. Equipment can be tweaked, and then there’s training of operators, so you can change things. Sometimes it’s fairly straightforward, sometimes you really have to look very hard.
CANDY INDUSTRY: Is that a new service that you did not anticipate offering a couple of years ago?
GREG ALLEN: Yes, it’s new. It’s been running twelve months and it’s going nicely.
CANDY INDUSTRY: And Montse, how have gum base prices been affected?
MONTSE CIRERA: We buy several raw materials to produce our gum bases. For example, one of our important raw materials is gum rosin. Gum rosin is a natural material that is very dependant on the crops and, just for you to know, since October, it has doubled in price. Fortunately, our customers are aware this specific raw material can affect the product cost. They’ve accepted that they have to pay for this increase. But it’s easier to pass along a commodity increase with gum rosin, but not with other raw materials.
CANDY INDUSTRY: Has the recession changed the way you do business? Has your company undergone restructuring or implemented cost-cutting measures?
MONTSE CIRERA: We haven’t had a restructuring, but, of course, we have implemented cost-cutting measures. We first focused on reducing working capital; it was a key issue for us. Then our planned investments to expand production were dramatically reduced. Instead, we’re expanding our production capacity by increasing our efficiency.
DAVID DISS: As we are part of a large corporate group, we saw that other segments such as the automotive sectors were more affected by the crisis than we were. But we didn’t undergo a major restructuring. We, too, have had to adapt, to be flexible, especially regarding work scheduling.
One of the opportunities stemming from this economic crisis is that our suppliers also had to make concessions in pricing. As a result, most of our suppliers have adjusted their pricing so we could maintain our margins.
ULRICH KREIMEYER: In addition to having less turnover last year, we also had to deal with the problem of accepting projects with shorter delivery times in order to get the order. Unfortunately, there were limitations by our sub-suppliers for the parts because of the recession, which affected work schedules of our sub-suppliers. Hence, the lead time of parts, components took longer than before.
CANDY INDUSTRY: I see everyone’s nodding their heads, so you weren’t the only one facing this issue.
STEVEN STAAL: Well, in general, I would say that when your turnover goes down and you try to cut costs, you start to cut stocks. So I agree with your observations that when the whole supply chain starts cutting costs, you, indeed, find out that there are no stocks anymore. Therefore, the motor that comes from your inventory of components and should be somewhere on the shelf is not on that shelf anymore.
CANDY INDUSTRY: It does have a snowball effect. What about the sustainability movement, is it affecting your operations? Are you seeing this philosophy taking root among medium-sized and smaller companies, and is your company involved in sustainability efforts?
MATTHEW COTTAM: This may not be quite what you’re thinking of regarding sustainability, but I believe many sustainability issues have to do with currency exchange and wildly fluctuating currencies around the world. There are certain global suppliers who find it very easy to sell to one country one day, then find it far more difficult the next year. So, when it comes to sustainability, I think there is a bit of pressure to de-globalize and concentrate more on your own market, rather than try to make grandiose plans to sell to the whole world.
So I think, in our experience, the sustainability option is geared toward smaller manufacturing plants. We’re looking at regionally based operations that maintain sales or production in sales in those same economic regions or regions with the same currency. They are not quite as reliant on prosperity from expansion abroad, when two or three years further down the road, everything changes because of currency fluctuation.
CANDY INDUSTRY: Are you saying that this strategic move gives your company a smaller carbon footprint?
MATTHEW COTTAM: I’m saying it is sustainable because you know where your profits are; you know what your cost base is going forward before you know what your sale prices are going forward.
So I’m talking about how customers are choosing to manufacture and sell more in their own country rather than choosing to focus on exports. So from our point of view as a machinery supply company, I see the rise of smaller manufacturing plants as opposed to larger ones.
Ten years ago, we’d probably talked about bigger and more efficient plants. This is the type of plant that suited globalization, where one factory made all the output for the whole world at certain times. But I think there has been some reversal of that trend in the last year or two.
KEITH GRAHAM: The U.K. has outsourced many of its confectionery goods so that, for example, Spain was making many confections that were sold in England. These companies that have been importing Spanish products are now looking at the cost of importing Euro-based goods and saying, can we make it ourselves? We’ve met several of our customers who have been having those discussions.
TOMMY AAS: With regards to sustainability and ingredient sourcing, we are very much affected by it because of the publicity surrounding the environment, the impact on rain forests and ecosystems. We are now sourcing sustainable raw materials from Malaysia, from Africa; we are having our plants certified, like we have our land certified. We also have a non-GMO certification, and now we are sustainably certified. Both large and small customers are asking for such certification.
CANDY INDUSTRY: Has that driven up your costs?
TOMMY AAS: We are trying to pass it on, of course. But first we have to source the raw materials and then we have to sell it.
ANDY FLEMING: From a cocoa point of view, it’s an interesting point because, you know, we’ve been doing a lot of work for many, many years in West Africa, trying to support the farmers that we work with out there. The difficulties we’ve had and the changes we’ve seen are really a consequence of a different approach by the certification bodies themselves. For many, many years, we were saying, ‘Well, look, we would like to sell more Fair Trade chocolate or Rainforest Alliance chocolate or UTZ-certified chocolate.’
But the actual limitations they were placing on you in terms of having to segregate the raw materials, having to have clean down procedures, it was really pricing it out of the market place. Obviously, that’s changed now. The reason it’s changed is because some of the very large branded organizations have renegotiated those rules of engagement with the certification bodies themselves.
So that’s been a big step change, and I think it’s useful. It’s here to stay from a cocoa chocolate point of view, and we see other people wanting to follow and looking for the Fair Trade logo. It’s definitely going to reduce the cost long-term; short-term, it’s actually increased the cost because there’s been such a drive, such a scrabble for the Fair Trade beans that cocoa differentials have increased.
CANDY INDUSTRY: It appears that there are more business opportunities these days in the BRIC countries. Is that the case?
MATTHEW COTTAM: Personally speaking, the BRIC countries have been a bit of a disappointment to BCH. I had great anticipation of the last year, two years that sales would grow in these countries, and I don’t find them any easier to sell into them now than I did two, three, four, five years ago. So there might well be growth, but I think a lot of it is domestically produced rather than outsourced from western companies.
ULRICH KREIMEYER: From our point of view, I think the countries - Brazil, we have been always in Brazil, it is quite a good market for us. Russia has been a good market and is coming back after last year. At the moment, as far as I see, China is improving, but India from our point of view is nearly nothing.
CANDY INDUSTRY: Anyone else want to comment on any of those countries?
DAVID DISS: I think we also see Brazil as the leading country in South America and, of course, China and India. Russia less so in the last years.
TOMMY AAS: Well, I agree, the Brazilian and Russian markets are very, very important to us. India is almost nothing, and I think over the next few years we’ll not do anything in India. We’ve been working on China for the last 20 years, but it’s moving slowly. Still, it’s an important market so far.
KEITH GRAHAM: I think what we see is within India and China, in particular, and Russia, to a lesser extent, are opportunities stemming from multinational companies. They worry about having the right equipment, so we go there to help them with their needs. And I’m sure the same is true of all the others around the table.
But we have also seen limited interest from the indigenous producers, and that tends to be companies who want to make much higher quality products than can be made using locally sourced equipment.
So they’re aiming at the middle classes. For example, the middle class in China is 40 million people, which is almost the same size as the population of the U.K. The middle class in India is 150 million people. These are people with enough money to buy high quality confectionery, so there is a market for high quality products for which you need high quality equipment.
The multinationals are tapping into that market and taking us with them when they do so. But increasingly, we are seeing companies run by locals beginning to tap into that market. And they are coming to us and wanting to buy our equipment so they can make the high quality products to compete with the multinationals.
OLAF HEIDE: I can only comment on our belting business, and what I know about India is, it’s not about confectionery per se, it’s about the biscuit industry. It’s one of the largest biscuit markets in the world. They have, I don’t know, hundreds of medium and even large‑sized companies that need conveyor belts. I know also Cadbury is there with all of its production sites. At the time I visited them, they were still Cadbury. Thus, from a belting perspective, if I consider food, biscuits and confectionery, which both use a great deal of conveyor belts, India is ahead of China these days
STEVEN STAAL: My worries with China and India stem from the fact that these very large countries with local markets are very inventive. They can replicate your equipment in a very easy way. From the business we do in China, I know that companies can get everything they want locally. It may not be 100% like your equipment, but if it’s cheaper in price, they will take it. But the moment they need the know‑how to get a complicated process going, they’ll come to you.
CANDY INDUSTRY: And then afterwards?
STEVEN STAAL: And then afterwards, it depends. I mean, let’s be honest, they are moving so quickly forward, they will eventually acquire know-how. That’s because their internal market will grow so quickly that they will have to develop the knowledge in their own market.
CANDY INDUSTRY: Shifting gears here, from machines to money, are your customers finding it easier to gain capital these days?
MIKE DALBY: Yes. The banks in the U.K. market were not even talking to our customers for most of last year about money for capital purchases for processing or capacity investments in the factory.
But they’re now talking about lending. I’m not saying they’re suddenly giving their money away, but they’re at least having the conversations, so there is a change there. Globally, it’s very much a mixed bag; according to my colleagues in Russia, there’s still very little credit on offer.
CANDY INDUSTRY: Is the customer need for a “value proposition” affecting equipment design?
MATTHEW COTTAM: Yes. If you’ve got less money to spend, but you want to proceed with a certain product manufacture, you have to adapt. If you want to get a sale, you have to adapt the offer to suit the capital available.
CANDY INDUSTRY: And have you seen an increase in those kind of negotiations?
MATTHEW COTTAM: Yes.
OLAF HEIDE: With the belting business, I can confirm this also is very important. I think we spoke about this earlier, that you get away from technical specification, but tell your customers or try to prove the real value you can bring with products. This is an approach we are focusing on more and more.
CANDY INDUSTRY: One that you don’t particularly enjoy?
OLAF HEIDE: Not necessarily. It’s challenging, but it’s also enjoyable because if you do it right you can avoid a lot of price discussion. If you are really able to prove what benefits you bring to the products, to your customers, then you don’t have this 1% discount discussion, in many cases.
KEITH GRAHAM: I think there’s always been a market for smaller, simpler, cheaper equipment. It’s just a question of whether or not you as a company choose to play in that market. I think the value proposition is changing in terms of the larger equipment, which is where we tend to operate. Customers are looking for easier to clean, easier to operate.
But easier to operate has all sorts of benefits for the manufacturers in terms of reducing mistakes. Finding qualified operators becomes simpler; changeovers take less time. The manufacturers also have flexibility amongst their workers; they can take someone out of packaging and put them on processing and vice versa depending on who’s available. In addition, it’s safer because it’s easier to clean. And while that’s more of an issue in the United States regarding pathogens and cross-contamination, it is also becoming more of a global concern. Easier to maintain, that’s self-explanatory. Those kinds of things, they’re the current value propositions as opposed to bigger, faster.
STEVEN STAAL: Smarter.
KEITH GRAHAM: Yes, more complicated. And flexibility as well, the ability to think in terms of both long-term flexibility and short-term flexibility.
CANDY INDUSTRY: But that wasn’t the case years ago, I suspect?
KEITH GRAHAM: When I joined this industry it was all about bigger, faster, but things change.
CANDY INDUSTRY: They certainly do. Well, we’ve run out of time. Thank you all for your keen insights on a whole range of critical topics within the confectionery industry.