Patties Foods’ key to success is innovation, says CEO Greg Bourke

Blair Speedy
August 13, 2012
The Australian

PATTIES Foods managing director Greg Bourke has a message for food manufacturers complaining about competition from supermarkets’ in-house brands: innovate, cut your costs and stop blaming your customers.

The company behind football staple Four’n Twenty meat pies and a host of other food brands, including Nanna’s, Herbert Adams and Creative Gourmet, is a rarity among companies exposed to the discretionary retail sector, this month forecasting annual net profit to rise by as much as 7 per cent.

Bourke says he is dismayed when comments accompanying a trading update mentioning competition from supermarket brands are portrayed as another food manufacturer complaining about being squeezed by the two major supermarket chains.

“We’re not anti-supermarket, we’re not anti-customers,” he says. Rather than the supermarkets squeezing him for ever lower prices or deleting his products to make room for their own in-house brands, Bourke says the pressure from private label comes in the form of shoppers opting for economy.

“That’s just consumers looking for value — they’re buying more value than before — not just private label, but buying branded products when they’re on special,” he says.

Fellow baker Goodman Fielder said last week that price competition from supermarket-label bread — along with higher labour and logistics costs — was eroding earnings in its Australian and New Zealand baking businesses, prompting it to close at least five bakeries at a cost of 600 jobs.

Rather than downsize, Patties is responding to the trend towards private label and trading down among shoppers by coming up with more enticing products that will tempt them to buy.

“You can’t change your margins, you have to invest in your brands and develop premium products, like we did with our Angus meat pies,” Bourke says. “We’re not seeing growth in the product category, but there are lots of branded options that then create demand.

“We aim for 5 to 10 per cent revenue growth every year from new products, and we’re increasing our research and development resources.”

At the same time, products that are flagging after reaching what Bourke terms “the end of their natural life-cycle” are deleted from the portfolio.

Patties also makes private label products for supermarkets, which contribute about 10 per cent of revenue. But Bourke, who sits on the board of the Australian Food and Grocery Council, which has been a major critic of supermarkets, says he sympathises with manufacturers in commodity-style products more easily substituted by private label goods.

“We’re OK, but in some categories like milk, bread and butter it is very difficult to innovate and differentiate, so that’s the challenge,” he says.

Bourke says sales to food service distributors, which sell food at events such as football matches, have also been “flattish” as a result of reduced spending on corporate entertainment.

A recent report on the food service market from BIS Shrapnel says consumers are cutting back on eating out.

“Many food service operators are finding that their customer base has shrunk significantly, with meal services as a whole now much quieter,” says head of BIS Food Service Sissel Rosengren.

However, Bourke says Patties’ sales by volume are “up significantly” and growing faster than the baked goods segment as a whole.

“Our volume is increasing faster than category growth because we’re building market share in our out-of-home business, which is non-supermarket sales, such as our BP and Brumby’s contracts. That’s where we are getting growth,” he says.

Patties’ manufacturing plant in the eastern Victorian town of Bairnsdale has sufficient capacity to cope with the next few years of growth, but the company is still investing in plant and equipment to boost efficiency.

“We have an internal discipline for cost increases to be well below sales growth . . . the challenge is not necessarily taking costs out, but to be overlaying volume while maintaining costs at the same level,” Bourke says.

The latest investment is a $10 million machine that stacks packed boxes on to pallets ready for freezing and is expected to generate a 20 per cent return on investment. “That’s another reason we’ve been able to keep our margins,” Bourke says.

As for the flight of food manufacturers to cheaper offshore bases, Bourke says Patties wouldn’t join the ranks of Arnott’s and Heinz — even if import restrictions were removed.

“You can’t import processed meat products into Australia, and the largest part of our business is savoury, which is meat-based, but we also have a really good regional base in Bairnsdale with a good, strong, loyal workforce and support from the local community,” he says.

“This is a very good manufacturing model, we’ve invested around $100m here, and we wouldn’t leave it.”