Passion for wine enticed Richmond head home

Agricultural editor PHILIPPA STEVENSON meets a winemaker who also leads New Zealand's biggest meat exporter.

The biggest drawcard Richmond meat company held for John Loughlin was its location in the burgeoning Hawkes Bay wine region.

Nine years on from dealing himself a hand in a small company so he could pursue a passion for winemaking, 42-year-old Mr Loughlin is chief executive of the country's biggest meat processor and exporter.

And it is a high-stakes game. In one corner, Richmond and Mr Loughlin are johnnies-come-lately. They are seriously in the money.

On the other side of the North Island's green baize-like paddocks is old warhorse Affco and its back-to-basics executive chairman, Sam Lewis. Their chips are down.

Richmond has grand ideas of shaping the meat company into a food company that is market-led, customer-responsive and, perhaps most challenging of all, can get its 17,000 farmer/suppliers on board the good ship vision before it sails without them.

At Affco, Mr Lewis, since assuming management control in March, has scythed the ranks of senior executives, starting with high-profile chief executive Ross Townshend.

He has jettisoned the Mathias Meats marketing arm and closed an American sales office.

Mr Lewis is opting for the tried and true: buy and process livestock, get it quickly to market, sell it.

If the companies are chalk and cheese, their chiefs are beer and wine.

Mr Lewis is an Otorohanga farmer who followed in his father's footsteps to chair Affco. He takes perverse pride in calling himself an "amateur" executive.

Mr Loughlin is an eye surgeon's son from the city who once managed New Zealand's largest share portfolio. He is a professional manager.

At the moment, Richmond appears to hold a winning hand.

In the September year, the company, with headquarters in Hastings, made a record after-tax profit of $20.7 million, up 77 per cent on the previous year's $11.7 million.

Over the same period, in which the two other big meat companies, South Island-based Alliance and PPCS, also increased profits by record percentages, Affco's surplus headed towards the backdoor by the inverse degree.

The big question now is whether Mr Lewis' trimmed-down Affco, which he has styled on PPCS, can get enough good cards to stay in the game.

If there is a joker in the pack, it is PPCS.

Ironically, while the southern co-op is Mr Lewis' preferred model, it has battled for four years to grab a stake in Richmond. PPCS is likely ultimately to take control of the Hawkes Bay company.

The reasons Mr Lewis likes PPCS - it is largely a commodity processor with few marketing pretensions - are the same grounds Richmond has found it something of an anathema.

At Richmond's annual meeting on December 20, Mr Loughlin will take a seat on his company's board. The move up to director, interpreted as a board ploy to offset the influence of PPCS' representative, taciturn chief executive Stewart Barnett, was announced soon after PPCS made its successful June bid for 16.75 per cent of Richmond.

Mr Loughlin denies his elevation is to counter Mr Barnett, seeing it more as enabling him to work with his opposite number "on equal terms" - which could be viewed as the same thing.

PPCS, says Mr Loughlin, is a minority shareholder in Hawkes Bay Meat along with Active Equities, which owns 51 per cent of Richmond.

Active Equities, the investment company of former Brierley Investment executives Paul Collins, Bruce Hancox and Patsy Reddy, has made it clear it is in the driving seat, he says.

PPCS can take 52 per cent of Richmond in 2003 and block other investors, "but Richmond is still Richmond and is still being run for value for all shareholders," says Mr Loughlin.

"If PPCS does go to 52 per cent, until they go to 100 per cent the company still has a duty to all shareholders and as long as the vision is delivering, there is no reason to deviate from that."

PPCS had not bought openly into Richmond's four-year-old food company plan but it "certainly hadn't contradicted it either".

Richmond's relationship with Affco has at times been "fraught", although Mr Loughlin has always found the rival to be "a good and professional competitor".

"Affco, for a long time, felt it was the biggest player as-of-right, and the other players were second-rate. They appeared to have a view that Richmond or Lowe Walker, or both, would go broke and Affco would pick up the pieces and strengthen them.

"The Richmond acquisition of Lowe Walker was an enormous shock to them, and that the company [Richmond] made so much change so fast."

Mr Loughlin credits the dumped Ross Townshend with accomplishing more for Affco than is recognised.

"Affco lost its way a lot earlier [than Mr Townshend]," he says.

And he jokes that he admired Mr Townshend's ability to negotiate a salary. Affco's annual report last year showed him on $870,000; Richmond's report this year puts Mr Loughlin's salary at $570,000.

"I did suggest to the Richmond remuneration committee that it was an awfully good precedent," Mr Loughlin laughs.

He is comfortable with his salary but admits to intense discomfort with the attention it receives from Hawkes Bay media.

Lifestyle drew Mr Loughlin, wife Kathryn, 3-year-old Amy and newborn Rebecca back to the bay in 1993. The couple now have a third daughter, Laura.

Mr Loughlin, born in Dunedin, spent six years there and two in Nelson before his family moved to the bay in 1967.

After schooling in the region, he went to university, where he was great at socialising, ordinary at studies, and "retired hurt" after a year.

He joined the Napier branch of AMP as the office boy, learned every job in the office, was relief manager in other provincial branches, worked in management accounting and property management and went on to run the AMP share portfolio.

An ambitious Mr Loughlin took note of the qualifications of AMP staff.

"You could see the pattern and I formed a view that I wasn't going to run second to anybody just on qualifications."

He did one year of fulltime university but mostly studied part-time for a bachelor's degree in economics and commercial law, with some additional accounting papers, before gaining a masters degree in economics and business strategy.

Thoroughly dispelling the ordinariness of his initial university career, Mr Loughlin, then 30, moved to Westpac, where for four years from 1989 he ran the bank's investment management business.

Most of his contemporaries were in their 50s.

"Westpac's wholesale fund management needed a massive turnaround. At the same time there was an embryonic life insurance business, and retail fund management business. They were going into unit trusts for the first time.

"It was a chance to be involved in a startup, and to build a product and a business from scratch."

His interest in the wine industry was also taking off. The couple bought land in Hawkes Bay with a plan to develop a winery in about 10 years. "But suddenly this job of finance manager at Richmond came up and I thought I could accelerate the whole process."

The lure of Hawkes Bay was strong.

"It's a place that holds a special affection for me. My parents are still there, and it's a part of New Zealand I've become very attached to."

His father established a winery, Waimarama Estate, and has since planted another small-scale vineyard.

Mr Loughlin says he got his own interest in wine "from drinking it".

During the Wellington years he joined the wine scene, attending tastings and doing such "fascinating things as trying 30 reds from around the world, or the same wine from different vintages, or ports over several decades".

"You got really interested in how wine ages, how it changes, and began to develop an interest in how to have a vision in your mind, and translate that through the vineyard and the winery to something in the glass."

Kathryn Loughlin, formerly a Wellington property manager, shared her husband's interest. The property they owned was not suitable for immediate development so they sold it and bought another in Havelock North that is now Askerne Vineyard, run largely by Mrs Loughlin.

But while it was convenient to take the job at Richmond, Mr Loughlin says he was also keen "to move away from industries that just dealt with paper to industries that made things - I wanted to get into the real economy as opposed to the paper-shuffling economy".

The fund manager wondered what created value in a company.

"I'd spent years outside of companies looking in and trying to work out what made companies tick, what was the linkage between position in the industry, the business strategy, the quality of execution and shareholder value."

Meat industry identity John Foster was Richmond's chief executive when Mr Loughlin arrived.

"In the early days, I focused a lot more on the winery but really started to get drawn into Richmond. It was turning over about $400 million a year; it was a small company," he says of Richmond, started by Scotsman W.R. Richmond, who arrived in New Zealand in 1887 and began trading in his own name in 1909.

Until 1974, the company was strictly an exporter, processing stock in other companies' plants under contract. In 1986, it acquired Dawn Meats, Pacific Freezing and Hawkes Bay Farmers Meat Company.

In another burst of growth-by-acquisition, it took over Lowe Walker in 1998 and Waitotara in 1999. Turnover went from about $480 million four years ago to this year's $1.4 billion.

Richmond now has 14 processing plants and handles two of every five animals slaughtered in the North Island.

For Mr Loughlin, the turning point came in 1994/95 with the industry-wide Trial Run Holdings plant rationalisation - the buyout and closing of the Weddel plants.

It was something of a mission impossible, he says, to persuade 17 warring meat companies to agree on a common framework for the deal, persuade banks who were trying to get out of the industry to put in $50 million more, and persuade the Commerce Commission that the deal was not anti-competitive.

It proved such a buzz that Mr Loughlin became entranced by the meat industry.

By the time Mr Foster retired in 1997, Mr Loughlin, then 38, had formed such strong views about where Richmond should head that he had to put his hand up or leave.

His vision for the company swung a close-run contest but his delight turned to apprehension as he contemplated what suddenly looked like a huge step.

He bolstered himself with a belief - he calls it an obsession - in Richmond's enormous potential.

"I used to sit there when I first joined Richmond. The share price would be $1.20 and the assets of the company, which I thought were bought cheaply, were $3.60.

"So [I thought] the assets are here, the industry is tough but if we get that industry structure sorted, get our strategy right, execute well, there is a pile of value there."

The rugged industry has been a graveyard for careers as well as bank loans but is also one in which New Zealand enjoys a competitive advantage, so "should be good", he says.

Mr Loughlin is aware of the quote from American billionaire investor Warren Buffet on bad industries with good managers: "The industry will win every time."

Mr Loughlin does not believe the meat industry needs to be bad, but knows the margin of EBIT (earnings before interest and tax) to sales is low.

Last year, Alliance stood out with a 4 per cent earnings-to-sales ratio. Richmond had 2.9, PPCS 2.4 and Affco 2.3 per cent.

"We've got the turnover now. The margin is proving elusive but it affects the quality of performance."

Mr Loughlin says that when he joined the industry the prevailing view was that in any given year either meat companies won or farmers won. He believes both must win, as they have in the past two years.

"It's great to see both winning because when meat companies don't win they don't invest in R&D, marketing, [they] limit their capital spend on plants, and all the things that produce future value don't happen.

"Inherently, that future value gets shared with the farmers."

But is the food company vision winning over farmers? Yes, but slowly.

"At the end of the day, farmers respond to money and what Richmond pays for their livestock is their earnings."

But sales are made either in, or with ref%erence to, a spot market, in which somebody %"has always got more to spend on today's livestock than somebody who's making an investment for the future. That's a constraint on the industry," Mr Loughlin says.

The food focus is critical for the industry because farmers will get value only if they produce what consumers want and deliver it in a way that commands a premium.

"When animals leave our plants they need to be in a format that somebody will look at and find them appealing as their meal." In short, something that will tempt a foodie like John Loughlin.

"One of the things I bring to the business is the fact that I come from outside the business and have a background of being a relatively affluent consumer in a city, not knowing anything about animals or farming practices but knowing what I want when I go in to buy food for my family."

Most Saturday nights he cooks for himself and his wife. "I like picking a wine, picking a food style to go with it and building a meal round the wine."

Fortunately for Richmond, its wine-loving, foodie chief thinks meat "is the serious part of the meal".