The Trade | Alicorp withdraws from Argentina: How is the company’s strategy readjusted in the region and in Peru? | Interview

During the second half of this year, Alicorp withdraws from two of its most challenging markets in the region: Brazil and recently Argentina. Alfredo Pérez Gubbins, CEO of Alicorp, analyzes the international strategy of the Romero group company after these decisions. Their focus will now be on their ‘core’ markets. Likewise, it explains the performance of consumption in the Peruvian market, after the price hike that afflicts the food industry due to the strong increase in the cost of raw materials. It also responds to questions from consumers towards the company.

—Last week you announced your departure from the Argentine market, what finally triggered this decision? A few months ago they recognized that it was a challenging market but that they would continue evaluating.

We as a company make a very strategic evaluation of the various investments we have, in businesses, geographies or in more particular issues that we may have, based on this we are looking at businesses, geographies, brands that generate value for us or which, on the contrary, they are more challenging or do not generate the value we expect. As part of that evaluation we analyze alternatives. Aligned to this, two geographies of our portfolio did not meet these conditions and We believed that those resources allocated to them would provide greater value to the company if we redirected them to other businesses or markets. As a result of that decision, the sales of the operations came out from Brazil (with the sale of Santa Amalia) a few weeks ago and from Argentina last week.

Both correspond to the same strategic reasoning of the company to manage efficiently in order to invest where we can obtain more value for the organization with medium and long-term time horizons.

—Losses of S/206 million were reported for the sale of the subsidiary, why is there such a high volume of losses? Was it preferable to assume that volume of losses in the transaction than to continue operating in said market?

This responds to an accounting issue. Alicorp will present a net profit from continuing operations, which is the profit generated by those that continue to operate. Then there are the discontinued operations, which are the results of the sale of these two operations. Why are there those losses? This is explained because when every company makes investments in an operation with a different currency and in a different country, it records assets and liabilities in those investments. As time passes, the destination investment currency, whether it is the real or the peso, devalues over time. We, when registering the company’s balance sheet and in its equity there will be a negative effect of the initial investment to reflect the devaluation in your balance sheet accounts. And that has been done every year and has had an impact on the company’s results.

—Taking into account how the operation in Argentina was, were you able to sell at the price you estimated?

In the last 10 years, Argentina had a very complex macroeconomic context, with constant inflation, currency devaluation and the impact of these factors on purchasing power. Our business has been faced with that. In this market, the company had cheaper brands in both personal care and home care . Over time we have found initiatives to make the operation profitable with various efficiencies. And although this year was a record for results, what was seen is that price controls in Argentina have tightened. In this way, we cannot transfer the general inflation of costs, supplies and other costs to the final price, therefore this year’s results are affected.

But this is a temporary situation, our decision has been more strategic, so in that sense we agreed with the local investors that they buy the operation from us, I think it was a fair value, given the complex context that Argentina has and that we believe will continue So.

—Are we seeing a withdrawal of the international strategy or will there be other markets to which these investments will be redirected?

We have been defining and communicating the company’s growth and investment strategy in recent years, it is very much anchored in the ‘core’ markets, where we will continue to invest. Peru is the main one, the largest for Alicorp, with the best competitive advantages built over the years. There is also the Bolivian market, where we made two acquisitions in 2018. Now we have an equivalent of an Alicorp (from Peru) there, leaders with many categories and growth prospects, because we want to start complementing the original lines of business with other food, personal and home care lines. The other is the Ecuadorian market in the world of consumption, a very powerful economy, exporting our product to Ecuador, beyond the aquaculture business, Vitapro, which has its own dynamics concentrated in Ecuador, Chile and Central America. That is why Brazil and Argentina no longer fit into that strategic division and the decision was made to exit both operations this year.

—Some analysts – who spoke with an economic media outlet – maintain that the price of raw materials, the exchange rate, inflation and reputational damage will impact their recovery prospects, which would occur in 2023. Does Alicorp match that projection?

The key factor that explains the impact on performance, not only of our main businesses but of all industries globally, is the context of rising prices and the cost of raw materials. In the last 16 months, the main raw materials that we buy from abroad, such as soybeans, have risen more than 110%, wheat 120% and palm 140%, in addition to a higher cost of polyethylene and with freight rates that have doubled or tripled . When faced with such material inflation in costs, it is inevitable to have to pass them on at some price level. Since last year, we have made an effort so that this transfer is not total or simultaneous, as an organization we have to take care of the impact of this intensity of prices. Raw material prices are out of our control, but we understand the impact that higher prices have on consumers .

—The recovery of the company would then be for 2023?

Our expectation is to reach double digit growth and also in Ebitda. For the next year, 2022, I cannot make comprehensive estimates. The raw material scenario is not going to go down, which implies that the inflationary pressure of costs is not going to go away, at least during the next year. Given this, it is essential that the company take actions with the variables that will be in its favor. That is why we are with a powerful initiative to accelerate efficiency and increase productivity, with which we have ambitious savings goals of more than S/200 million by 2023 , through the Multiannual Efficiency Program , which sees the variables of capital requirements, expenses and aligned with innovation. For example, digital transformation. We will refocus and resize to align with the context of the company today.

—Does the 7.3% drop in consumption in Peru in the third quarter of this year have anything to do with the rise in prices?

Without a doubt, the most affected business in Alicorp has been the consumption of Peru because the increase in raw materials directly affects very sensitive businesses such as oils, pasta, cookies . When you see increases of 100% in our three main raw materials, you have to see how much you are going to be able to transfer and the difference is less margin for the company. The materials are not going to go down, maybe they will go up a little . But if we look at history for reference, this is a business cycle.

—How much has this higher cost been transferred to the consumer price?

I don’t have average figures, but what I do want to say is that our efforts to open and recover the cost to ensure that consumption is not affected as much means that Alicorp has to assume part of that cost. In addition, the company ensures with “Brands by your side” (MATL) so that some brands have the best possible prices.

—What is the balance of the launch of MATL?

We have had very positive results. In September, up to 50% more of these brands were demanded compared to the previous quarter (June to August), more than 60% of clients believe that rotation has improved with this initiative and 56% consider that they have more clients. So, I think the initiative has been positive. In Mirasol oil, demand grew by 150%, Sayón 120%, Patito more than 50%, a good ‘performance’ in such a difficult context for the channel.

—Although the consumer, in effect, looks for prices, how do you manage that the consumer migrates to the brands that are part of the MATL initiative, when in that price segment there are also other brands with higher positioning than some of the 14 that are part MATL? How do you deal with this new type of competition?

In this context there is a dynamic of more competition. And I think this is what consumers need. We are a company that grows in the face of competition, we have a brand portfolio for different types of consumers, in a differentiated way. For everyone to buy what they need. We are not going to stop investing in our brands. Both in oils such as Primor and for a Mirasol , which is doing well today in this context.

—Is there then a greater competition in this price segment?

There has always been competition and there always will be.

—Some analysts comment that there was a negative reputational effect for Alicorp, which stopped them from transferring a higher cost to the final price. Is it a factor that is influencing?

I think that when you talk to our clients and consumers, the level of affiliation is very high. What contexts do do, such as the rise in raw material, which affect costs and prices so dramatically, in a Peruvian context-where there is no positive news of increased employment or investment, there is political uncertainty and less purchasing power- all that does is aggravate any new information the consumer sees, like a price increase, That will have an impact on your perception. What we did was launch initiatives such as Brands by your side , so that they see that the brand is there, by their side in hard times, with correct prices for the consumer. We believe that in this type of context we emerge stronger, Alicorp is a long-term player.

—In addition to the context, there is criticism that it is a monopoly, due to the dominant position it has in several key categories of mass consumption, and the prices it has raised during the pandemic.

Any company that has a significant presence of its brands in the categories in the market will generate diverse opinions, what is clear is that Alicorp always puts its customers and consumers at the center. We are a company with a purpose, it is not just a phrase. The company invests a lot in its brands and in the relationship with the channel. In contexts like these, with such dramatic increases[de precios] there is annoyance, but that is the natural reflection of the context. We have a long-term vision.

—According to Semana Económica, within the Alicorp board there were questions regarding the current size of the gangs. There have already been some mergers of vice presidencies, has that criticism been given?

I think it is quite evident that the contexts where there is so much pressure on costs and expenses as a result of generalized inflation -in our case, highly concentrated in raw materials- orIt forces the company’s management to seek efficiencies on all fronts. In that sense, we are completely aligned with the board that this is the path to follow. I think it is correct to say that directors, shareholders, managers and what everyone expects is that a company has to carry out this type of program in complex contexts. We are aligned and it is the path we are choosing to follow.

—The reduction of the payroll will be one of the fronts then. This year or 2022?

The Multiannual Efficiency Program, which I mentioned to you, is very ambitious, it includes all fronts of the organization.

—With all these measures, when will Alicorp’s operation be more stable and recovered?

The factors that are under the control of the organization, have no doubt, will be successful. But there are other factors like inflation, raw materials , which are not under our control. And there is another aspect, which is not minor, which is the macroeconomic context that we will face in Peru next year. Although it is still too early to visualize what 2022 will be like, there is a climate of political uncertainty, so we will have to see the impact it has on the generation of employment, capacity and consumption, which is the variable that directly affects us. This year, meanwhile, we expect double-digit growth in sales and operating profit.

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