Cheese fails to please on farm

BOB CUNNINGHAM inherited a traditional dairy farm when his father died. The farm had been in the family for generations and little about it had changed. Cunningham was the first of his family to go to agricultural college and, upon his return, he set about modernising the farm.

In time, Cunningham married and his wife, Mary, made small amounts of cheese, butter and yogurt, which she sold locally. The couple had a son and a daughter. Their son, Bob Jr, followed in his father’s footsteps to agricultural college. Their daughter, Emma, studied food science and went to work in the US with a multinational food ingredients company. After college, Bob Jr spent two years working in New Zealand and three years in Holland before returning home 12 years ago to join his father on the family farm.

Recognising that the farm would struggle to support two families, Cunningham had encouraged his son to look at alternative enterprises when he was abroad. One of the reasons Bob Jr had chosen to work in Holland was to see if there was potential for the family farm to start producing cheese on a commercial scale. Having decided that this was an idea with merit, there was a big debate as to whether this should be an artisan cheese or a more mainstream product with greater growth potential. Mary wanted to stick with an artisan product. Her husband and son felt they had to opt for a cheese with broader sales appeal if they were going to make a significant difference to the farm income.

One thing the farm had plenty of was space, and Cunningham decided that if they were going to build a cheesemaking facility, they might as well build it big enough to cope with increased volumes if the business took off. They borrowed heavily to finance the project and spent about 18 months setting everything up. After much research it was decided that the focus would be on producing two block-cheese products aimed at home cooks and the food service sector. Over time, “light” versions were added for more health-conscious buyers.

Having chosen to make a mainstream cheese and invested accordingly, the Cunninghams knew they were looking at selling to the multiples to get the sort of volume required. They knew this was a challenging way to go and that the multiples would drive a hard bargain on price. However, having gone over and over the numbers exhaustively, they felt they stacked up if they got the volume.

They began by approaching two of the biggest Irish multiples to see if they would list their products. Both agreed to give them a trial run and the Cunninghams were euphoric. The price negotiations were tough but fair, and father and son went home happy.

Over the next five years, sales to other Irish multiples followed and they steadily built up their Irish customer base. The operation was turning a small profit and the next big step was breaking into the UK market. The family recognised that this was going to strain their limited human resources to breaking point, as Cunningham was still running the farm and Bob Jr now needed to start spending time on developing the UK market. He phoned his sister in the US and floated the idea of her coming home to join the family business. To his surprise, she agreed.

With Emma in charge of day-to-day operations at the cheese plant, Bob Jr turned his attention to the UK market. Getting a foot in the door was more difficult than he had expected, not least because UK buyers were keen to support their local producers and made it very clear to him that price would be a key issue.

The Cunninghams shaved their margins as much as possible and went back to the buyers. Ideally, they wanted a small number of UK customers to start with. But Bob Jr’s enthusiastic sales pitch was very successful and they ended up with more than anticipated, which put production under huge pressure and skewed their costs as extra shifts were required to meet the order deadlines.

The next two years were very challenging for the business as the Cunninghams struggled to get all aspects of the operation running smoothly. They discovered there was a big difference between projecting volumes, planning production and juggling cash flow on paper and how it panned out in reality.

For example, they had not bargained for ongoing hitches with distribution. They were using a small local haulier who sometimes missed his delivery slot if he was delayed by traffic. He was also delayed if there was a delivery backlog and charged accordingly for his time. Rather late in the day, the Cunninghams also discovered the real impact on their cash flow of the multiples taking 90 days to pay. They also fell foul of the payments system on several occasions due to small errors in their paperwork which held up payment.

While three family members were wholly absorbed by the new cheese plant, Mary continued to make her artisan products in the old dairy and was quietly satisfied by how demand for her yogurt and cheese was growing. She used to tease her family that her “cottage industry” was a less hassle and more profitable enterprise than their high-tech venture.

The bite of the recession has hit the business hard even though volumes have been increasing. The biggest change, however, is that supermarkets are offering more and more products on promotion to attract buyers. As smaller players, the Cunninghams do not have the clout to get promotions. As a result they are losing out to heavily discounted products and are experiencing a big drop in volumes.

In their planning, they had allowed for the fact that they would lose some ground during in-store promotions, but instead of having to absorb this drop two or three times a year, they are having to do it almost every month. The situation has been further exacerbated by the fact that they now have more outlets, many of which are running promotions simultaneously.

Whatever way the Cunninghams look at it, their profit margin is being all but wiped out and, in some cases, they are already trading at a loss. Bob Jr is run ragged trying to keep on top of things, but he believes that if they can weather the storm for another while, it will be possible to rebalance the books. His father and sister are not so sure. They feel everything possible has been done to trim overheads and be as efficient as possible. Emma says she could make some savings if she replaced staff with a packing machine, but the machine costs in excess of €50,000 and the company would have to borrow to finance it. They are not optimistic they would get the money as they are still paying off the initial loan.

Mary has shocked her family by suggesting they cut their losses and withdraw from the multiples entirely. She says there is no soft landing from such a bruising encounter and that the company should focus instead on the restaurant trade, which has been sidelined in the drive for retail sales. Her argument is that they have the capacity and that, while prices may still be competitive, they will not be subject to the same pressures. Her other suggestion is that the family changes direction completely and focuses on building her thriving little artisan foods business into something bigger.

What should the Cunninghams do now?

THE EXPERTS’ ADVICE

The Cunninghams have a fine business. They can and must fix it. They should bring on board the expertise to turn it around

THE KEY TOsurvival is to offer a point of difference to competitors which, in the short term, will be about the brand. The business should look at what sets it apart from other companies. It has a clear heritage and is making a genuine farmhouse product. The company should look to ensure that their brand clearly communicates a "family farm from Ireland" and tells the story of the family and values behind the brand. This brand audit is equally as relevant for the artesian side of the business as it is for the more mainstream cheese range. The artisan side of the business could be used to create a "halo" effect on the more mainstream business.

However, it is not enough just to look at the packaging/brand design element of the brand, the company should undertake a comprehensive benchmarking exercise against other competitor brands to ensure that consumers can taste the difference and appreciate the quality of Cunningham’s cheese versus the other heavily-promoted brands.

Cunningham then needs to look at developing a tactical promotional plan to raise awareness and secure trials, but not on a monthly basis as this will undermine brand values as well as profitability. He needs to agree a promotional calendar with each retailer, ensuring the dates do not clash as he needs to avoid peaks in demand. If his buyers are only willing to agree to promotions that are deep cut and therefore very low margin, it may be wiser to look at alternative ways of securing trials such as sampling in stores.

The business then needs to find ways of adding value to existing products by looking at the trends in the category, for example by tapping into consumer demand for more convenient formats such as sliced or grated cheese.

The company will need to develop a business case to secure investment and this will come from analysing the potential payback or size of the prize, using the latest growth figures for the category. An alternative to investing up front in their own plant could be for the business to outsource grating or slicing to a third party until critical mass is achieved which would warrant the investment in the production equipment needed.

It shouldn’t be a case of servicing just the multiple retailers or food-service sector, the business should have a multi-channel sales strategy to spread risk – potentially targeting cheese wholesalers for the independent retail trade and food service operators, in addition to looking at supplying cheese as a food ingredient for further manufacturing (for example, cheese sauces and so on).

In the longer term, the business should focus on developing some distinctive new cheeses that will not be competing directly with more added-value lines. In addition, they need to tighten up on internal paperwork and systems to avoid invoicing errors and late deliveries. – Clodagh Sherrard

MANY IRISHfood businesses would give their eye teeth to have made the progress that the Cunninghams have made over the past 15 years. But they are all over the place – they are flat out and yet they are not making profits.

There is probably no easy route to profitability through food service or supplying restaurants. There is a number of outstanding Irish food service distributors with whom they could have tested that route over the years if they truly believed this was the solution to their woes.

The Cunninghams have a fine business and its success to date is down to the family. Mary appears the most grounded and certainly there is a larger business possible with her artisan products, but not one to replace the scale or potential of the bulk cheese business.

There is a number of large Irish food and dairy companies that would love to get their hands on the Cunninghams’ business. The Cunninghams must opt to do themselves what a predator would do. First off they need to hire a sales director who has the required toughness to negotiate terms that work for the multiples but that deliver profits for the Cunninghams’ business as well. This will require some retrenchment and the dropping of some volume that is pulling down margins and stretching management capacities to breaking point.

Multiples get a bad press from early-stage Irish food producers, some of which is deserved. They are very efficient retailers and, as a result, more than 90 per cent of the population buy their food in multiple outlets. To maintain efficiency and to compete effectively against their competitors, multiples are ruthless in their demands. They do deliver some very positive opportunities for suppliers – they offer a guaranteed route to huge numbers of consumers quickly and they provide centralised distribution, so that even small suppliers can scale up very quickly.

Multiples are extraordinarily demanding on price and then further increase the demands with extras like promotions and other add-ons. Most suppliers can now negotiate guaranteed payment terms, but they must match multiple deliveries with right-every-time invoicing to avoid payment delays.

The Cunninghams have a fine business. They can and must fix it and it is fixable. They should bring on board the experience and expertise that can turn the business around. Money should not be the obstacle as the situation will deteriorate further if they don't take action quickly. – Willie H Maxwell

OVER THE PASTnine years, the Cunninghams have brought significant expertise and achievement to their enterprise: four experienced people knowledgeable in different aspects of the cheese business, a first-rate production system based on a nutritious and green raw material, and an enthusiastic, if somewhat naive, selling arrangement that has seen them distribute nationally and export to the UK. It is a credible business, but one that needs to leverage a lot more value, and so profit. In sum, the Cunningham's enterprise is crying out for more marketing expertise.

Their decision to supply large supermarkets with a commodity-type block cheese, most likely packaged and sold under the supermarkets’ own labels, must be revisited. For a new food manufacturer, this avenue can seem seductive with the promise of significant volumes and the provider does not have the (sizeable) costs of developing and promoting its own brand name. But the harsh reality in the case of supermarket own-label brands is that the chains control prices, merchandising arrangements and margins. Supermarkets enjoy very sizeable bargaining muscle, as the Cunninghams are now beginning to realise.

A modest, and relatively inexpensive, effort at packaging and promoting the product under their own name, for instance, Cunninghams Country Cheese, would lead to a greater perception of quality among consumers, who in turn would be prepared to pay two to three times more in price. Volumes, of course, would be lower, but margins would be higher.

Allied to this, a concerted marketing drive should be include the restaurant and catering sector and speciality retailers. Here, price is not quite as cut-throat, and longer term relationships and loyalty become important. The company should also consider offering a sister product, grated cheese, which is normally sold on the same supermarket shelves, and also bought by restaurants and pizza outlets.

In reshaping their strategy, the Cunninghams can draw encouragement from Mary's thriving artisan cheese business, in respect of its reputation/brand, provenance of ingredients and focused distribution. These marketing dimensions can add value in revamping the larger cheese business. – Aidan O'Driscoll