There are a lot of family businesses out there. In Germany, for example, 1.5 million companies, out of a total of 2.1 million, remain family-owned.
Traditionally, family businesses have not been very keen on the stock market. In Italy, for example, the preponderance of family-owned companies has kept the stock market small: its capitalization is 18% of GDP, compared with an OECD average of 50%.
But things are changing. Even in Italy, there were 10 new listings in 1995, primarily of family businesses. Why? Yoram Gutgeld, a specialist in family businesses at management consultant McKinsey, believes generational change is always the most important motivation.
“In a number of cases,” he says, “the company was built in the 1950s by a great entrepreneur. But in the generation below, some are interested in the business, some are not. Floating stock resolves this problem.”
Governments have also done their bit to encourage flotations. The former Berlusconi government in Italy passed the Tremonti law giving companies that listed in 1995 an attractive tax break – a reduction in corporation tax amounting to 16% annually for three consecutive years.
And, of course, some family companies are just desperate for capital.
Still, it would be an exaggeration to claim that family-owned companies are rushing to get themselves listed. The desire to stay in control and a reluctance to disclose financial information are strong disincentives. “The last thing they want is to open their books to public scrutiny,” says a Spanish government official.
Take Spain’s biggest family business, El Corte Inglés, a department store chain, which is famously reluctant to release its figures. The group’s financial year closed on February 28 but, in accordance with the firm’s tradition, it was not until the last Sunday in August that the outside world learnt that the privately owned company’s turnover had for the first time exceeded Pta1 trillion ($8.3 billion).
The attitude towards listing in the UK has always been different from that in its continental neighbours. Marc Goergen of the School of Management Studies at Oxford University has found that German companies are on average 51 years old when they list; in the UK they are 14.
Goergen also found after examining 55 German and UK businesses that the distribution of voting rights was substantially different in the two countries for family businesses floated between 1981 and 1988. In Germany, the percentage of businesses whose families still had voting rights in excess of 50% six years after an initial public offer (IPO) was 56.36%. In the UK, the figure was 11.11%. Granada’s current effort to take over the UK “family” hotel group Forte, bears this out. The Forte family owns only 8% of that company.
Tax can discourage flotation. “Mention accounts to a German,” says one German investment banker, “and the first thing he thinks of is tax.” Wealth tax is the biggest disincentive to listing. Austria abolished it in 1993, with very beneficial consequences for the stock exchange. Mayr-Melnholf, the world market leader in recycled cardboard, owned by the aristocratic family of the same name, responded by floating 40% of the company in 1994. Chief executive Michael Gröller says there were many reasons for listing, but “the scenario of listing while there was wealth tax was never discussed”.
But no two cases are the same. To gauge the strength of the trend towards listing, Euromoney reporters visited leading family companies in Italy, France, Germany and Spain to ask them what plans they had for going public. We also publish an exclusive table listing Europe’s biggest family companies.
PLANNING TO LIST
ERG: the power of expansion
“I joined the company in 1987,” says 34-year-old Edoardo Garrone, vice-chairman of ERG. “My father called me one morning and said: ‘You should come and join me because I have some problems with my chief executive and I need help.’ He wanted to have a son close to him – more of a counsellor than a manager.”
Today, the son is looking to float the company.
ERG, which stands for Raffinerie Edoardo Garrone, is owned by the Garrone family of Genoa and operates oil refineries and petrol stations throughout Italy. Indeed, the first thing one sees leaving Genoa’s airport terminal is the blue and white design of an ERG petrol station. The Garrones like you to know Genoa is their town. They even used to sponsor the local football team, Sampdoria.
ERG grew from a small petrol company established by Edoardo’s grandfather (also called Edoardo Garrone) in 1938 and an oil refinery he built during the war. (He was jailed in 1943 by the Nazi occupiers who thought he was supplying petrol to the Italian resistance.) After the war, Edoardo built up a network of petrol stations.
In 1963, his 28-year-old son, Riccardo, who had just graduated from university with a degree in chemistry, was thrown into the business when Edoardo died suddenly while salmon-fishing in Norway. Apart from having acted as an English translator for his father in negotiations with BP (British Petroleum), Riccardo had nearly no experience.
The company today has consolidated assets of L2,000 billion ($1.3 billion) and a staff of 1,650, accounts for 6% of Mediterranean refining capacity and operates 2,217 petrol stations in Italy.
Edoardo Garrone, the eldest of the third generation, says the company’s growth was financed by cashflow – individual shareholders have not received dividends for over 15 years. “My father and his sister, the only shareholders, did not care about dividends,” says Edoardo. “Neither had a king-size lifestyle.”
For 60-year-old Riccardo Garrone, the changes are difficult to come to terms with. “It’s a change of culture for him,” says his son. “Every day he has to make some violence on himself to change his style. He has to be non-operating which is difficult for him.” He pauses and says: “The most difficult job in this company in the past 30 years was public relations. He put a lot more value on truth than diplomacy.”
Succession
Pierantonio Nebuloni was Edoardo’s choice for managing director in 1993. Nebuloni had joined the finance department in 1987 from Montedison, the agrochemical and energy group. He is widely admired by investment bankers for having successfully extended the ratio of the company’s long-term debt to total interest-bearing debt from 8% to 25% in the space of one year, 1995.
Father and son differ significantly in their management styles. Riccardo Garrone always wants to be instructed and to understand before he makes a decision. Nebuloni comments: “For a manager, it bothers you but it protects you. He shares the responsibility.”
Edoardo, who is vice-president, says his approach is different: “If we pay someone to do his job, he has to do it.” The two Garrones’ interests however are similar – both father and son love sports. Last year, they took up golf. Edoardo’s handicap is already 16.
He is frank about the succession: “This is the most difficult thing to manage. I don’t want to destroy our company or make 14 small bits of it.” (He is referring to the 14 family shareholders: Edoardo’s brothers, sisters and cousins.)
His plan is to double the value of assets in five years. A cornerstone of this strategy is the decision to enter the power-generation business. Together with Mission Energy of the US, ERG plans to build and operate a L1,800 billion, 512MW thermal power station. The company emphasizes that this is not a diversification, but a solution to the over-production of heavy fuel gases (viewed as a by-product of the refining process) at its Sicilian refinery. Given the fall in world demand and prices for these products, it makes sense to use them to power the plant.
With Mission Energy, it will finance L400 billion of the project. The rest will be provided by a consortium of banks which include SBC Warburg, Barclays and Citibank.
ERG is talking to 15 investment banks about the possibilities of going public. Edoardo Garrone points to the door of the boardroom to indicate how queues of bankers have been lining up outside. He says he has not spoken to any of them – except informally over coffee: “I don’t want to talk to banks about suggestions. Mr Nebuloni and his team are doing this. Then they can come to me and my father afterwards.”
Nebuloni has already invented a slogan to raise investor awareness of the company: “I told Franco Bernabe [head of ENI, the recently privatized Italian oil company] ours would be – ERG: private energy since forever.”
Edoardo is positive: “I don’t see any problems because my mind is ready. I see only advantages in an IPO.” He is confident that short-termism will not be a problem: “You have to demonstrate that the value of the shares may be low today but you are growing the company. You have to be ready to talk to Fidelity-style [institutional] shareholders. That is why we are having some management changes.”
The structure of the company is being simplified for the purposes of an IPO. “We are merging all operating companies into a single company in January 1996,” says Nebuloni. A more difficult task is deciding what to do with the companies set up when ERG closed its Genoa oil refinery in 1988. These range from data management to chemical research, and were created largely to provide work for 400 unemployed families.
“We are going to take all these out,” says Nebuloni, “and become just an oil company. Some will be sold outside and some will be bought by the family as private concerns.”
Nebuloni says the company is looking to be 30% public and 70% family-owned, with possibly a private placement of shares. “ERG represents 100% of the family worth. They cannot contribute more to finance the growth phase.” Going public, Nebuloni says, will also give the company an acquisition currency – its own shares.
A shareholder agreement has already been drawn up. Edoardo says: “The difficult thing was to tell the other 13 shareholders that we had to make one. They all replied: ‘Why? We don’t need one, we have always in the past delegated responsibility.’ I had to explain that it gives us security. If we have an IPO, it means we have control. We need to keep the votes together for the children.”
But of the 30% which he plans to float, he has concluded that between 2% and 5% will be put into the hands of the family as liquid stock. “This,” says Edoardo, pointing to an impressionist view of Genoa on the wall, “is so they can buy pictures and houses.”
But two problems will confront bankers and investors wanting to analyze the balance sheet – the temporary use of a refinery for the past two years, which has inflated earnings, and the peculiar tax planning the company has adopted. Last year, first-half profits were L22 billion, with a tax bill of L3 billion. This year, profits were L3 billion, with a tax bill of L22 billion. Edoardo explains: “We have paid this year the tax for last.” Steven Irvine
PLANNING TO LIST
Here comes the son
Spanish hotel and resorts company Grupo Sol Meliá plans to float about 40% of its equity on the Madrid stock exchange this year. It would be the first European listing of a company specialized purely in hotel management.
The group’s finance director, Oscar Ruiz, tells Euromoneythat the company expects to raise about $300 million by floating the hotel management side (as opposed to the real-estate side). About 50% of shares will be offered to foreign investors.
“There are five quoted hotel management groups and they are all American owned,” says Ruiz. “This will be the only listed company of its kind under European ownership.”
The launch will probably take place sometime in the second quarter, after Spain’s general elections in March.
Ruiz says Grupo Sol Meliá is awaiting reports from the banks selected to coordinate the float before setting a date for the launch. Spanish co-lead managers will be Argentaria and Banco Central Hispano with an international adviser still to be chosen. The decision to take Grupo Sol Meliá to the market reflects a generational change of attitude almost unique among family-owned Spanish companies, which still account for a major proportion of the country’s economy.
Gabriel Escarrer, the company’s 60-year-old chairman, laid the foundation for his tourist empire in 1956 when he bought a 30-room hotel on the island of Majorca. Since then, he has developed the company into Europe’s third-largest hotel chain, with more than 180 hotels and resorts in 22 countries.
Nearly 30 new hotels were opened in 1995 and 35 are planned for this year. With tourism on the upsurge worldwide, the company is confident it can continue this rate of expansion for the foreseeable future.
Market enthusiasm
So how was Gabriel Escarrer persuaded to relinquish control of one of Spain’s most successful family-owned businesses and why? A large part of the credit goes to chief executive officer Sebastián Escarrer, the 29-year-old son and heir apparent to the family business empire. As the eldest son of Gabriel Escarrer’s six children, Sebastián is the unopposed successor to his father. Majorca, the headquarters of Grupo Sol Meliá, may have the highest standard of living in Spain, but it is also a southern European society steeped in traditional values.
Armed with an MBA from the University of Pennsylvania’s Wharton School and several years’ experience with Credit Suisse First Boston in London, the younger Escarrer came to the company with a burning enthusiasm for the market.
“The decision to go public in fact coincides with Sebastián Escarrer’s arrival at the company,” says Ruiz. “But it should not be viewed strictly as a generational decision. The chairman is still deeply involved in decision-making. He knows that a hotel group is not a property company, and the business is not about making a profit by buying and selling hotels, but rather [about] managing the profit- and-loss account. It was quite easy to convince him of the wisdom of going to the market.”
Ruiz says that, although it may seem ironic, when a family is totally devoted to the success of its business, it can be a lot easier to release the reins of power. “Gabriel Escarrer has acknowledged that this will make for a stronger company,” he says. “It is good for the company, so it is good for him. On a purely practical level, it is perhaps easier for a hotel group to admit new shareholders since we are accustomed to having a lot of our assets managed by others.”
The shares will be made available in a single tranche, says Ruiz, as the costs and complications of a stock market flotation should not be a recurrent feature. He is confident that 1996 will be a good year to go to the Madrid market. “We are looking for a gradual reduction in interest rates, continued economic recovery and a more stable political situation once the elections are out of the way,” he says. “Ours is a cyclical business, which is very much on the upswing.” A private equity placing is not ruled out but Ruiz sees two shortcomings with this type of operation: high costs and the difficulty of structuring a large operation.
“The success of this flotation will depend on the structuring, pricing and timing,” he says. “We expect to offer about 50% to international institutions, which are generally more sophisticated than local investors. Our investment story is especially appropriate for major international fund managers.”
Grupo Sol Meliá will add depth to the Madrid bourse, which has traditionally been dominated by the large banks and utilities. It is one of the first major listed Spanish companies to represent the country’s real economy, whose growth is driven to a large degree by tourism. Ruiz says the lack of a hotel group on the Madrid bourse is like the Tokyo exchange without an electronics company or Zurich without any bank stocks.
“I have the feeling that European fund managers are somewhat bored with a constant chain of privatized telecommunications and chemical companies,” says Ruiz. “We will offer them the chance to invest in something new in Spain.”
But is a cosy family business truly prepared to cope with constant pressure from analysts and daily worries about the company’s share price?
“Analysts oblige you to focus on financial discipline, which is a very good thing,” says Ruiz. “On the other hand, all that glisters is not gold. As a family business, we can move with greater agility and convene a board meeting in a matter of hours. But now we will be able to tap the capital markets instead of relying on bank financing.”
There are no plans to redefine company strategy once a listing is obtained. Grupo Sol Meliá will remain focused on diversification within the sector, with sufficient city-based hotels to offset the ups and downs of the tourism industry. “This has always helped to smooth the volatility of our capital flows,” says Ruiz. Outsourcing hotel management and franchising remain high on the list of priorities. Jules Stewart
LISTING IN 1998
The Bonduelles’ sell-by date
The French say that a good businessman, one with a flair for a good deal, has le nez creux– a hungry nose. Friends of the Bonduelle family, which controls Europe’s second-largest producer of canned and frozen food, often use this expression to describe them. Dedicated food-product manufacturers since 1926, the Bonduelles now have a Ffr4 billion ($823 million) pan-European business, with profits of Ffr30.2 million.
The family has always kept a tight hold on the company, but since the consumer crisis of 1994, this luxury has been denied them. Major banks such as Paribas, Crédit Lyonnais and Crédit Agricole have already snapped up invitations to take small stakes, but more capital is needed.
General manager Christophe Bonduelle tells Euromoneyhe is paring down operations and improving productivity with an eye to producing a regular profit. “This,” he says, “will make the company more suitable for a stock market offering in 1998.”
Life was easier for the Bonduelles in the 1920s, when brothers Pierre and Benoît started a cannery in Renescure. After the war, their children began to help. Félix Bonduelle, perhaps the hungriest nose the family has known, took advantage of government incentives and expanded the canning business abroad.
“My father, who has no business education, had a singular philosophy for export,” says Félix’s son Christophe. “His attitude was that you get in the car and then you drive there.”
German appetite
During his travels, Félix sniffed out a few facts about Germans and canned vegetables. They eat lots of them and, until the war, most of their supplies came from eastern Europe. When the Iron Curtain came down, Félix was able to fill the vacuum. He started earning Deutschmarks, which were worth a lot more at the time than the devalued franc. By 1969, Bonduelle was ready to open his own factory in Germany. Now it accounts for about 30% of the German canned vegetable market and 30% of the frozen vegetable market.
“Our family reinvested as much of the profits as it could in the company. Over the years, we have almost never taken a dividend.” The family is hard-working and unostentatious, and devoted to its native region of northern France.
But the family has also expanded. There are now 150 Bonduelles and, within the company, two holding groups. One is for the immediate family, and the other for the so-called non-voting Bonduelles – who include a few distant relatives and ex-wives.
The company recently restructured itself as a société en commandite par actions– an entity which allows a family with a minority shareholding to maintain control. Quite a few well-known French companies, such as tyre-maker Michelin, are also structured this way. A company with such a structure is not prevented from listing on the stock market: therefore the immediate Bonduelle family – which directly controls only 20% of the equity – could retain power after an IPO.
The company’s expansion was guided by then company president Bruno Bonduelle, who retired two years ago. He is the only family member of his generation to have a degree from one of France’s grandes écoles, l’Ecole des Sciences Politiques in Paris. Bruno found a partner in Banque Paribas, which helped finance plant development after 1963. Paribas held a 25% stake in Bonduelle from that time until two years ago – it now holds 10%.
Today, Bonduelle accounts for one-third of the French market – the largest share. In the Netherlands, it has a 30% share of the catering sector (sales to hospitals, factories etc). In Belgium and Italy, it leads the market for conserved vegetables. In Spain, it has 10% of the market for frozen food. And in Poland, Bonduelle is already a market leader.
“Bonduelle is clearly in a good position to service the big, pan-European retailers like Auchan, who want to deal with the same supplier in every country,” says Frédéric Genevrier, an industry analyst with Barclays de Zoete Wedd in Paris.
Christophe Bonduelle admits that margins are problematic. “We are devoting more and more of our budget to improving productivity and marketing, both of which will improve our margins,” he says. “We hope to use the funds we would have access to after an eventual public offering to work even harder on these areas.” He points to large-scale catering, where profits and sales are improving. But canned food markets are expected to decline by 1.6% a year over the next five years.
Bonduelle says he is confident of the kind of results the bourse likes to see. “My family believes in this company,” he insists. And after all, the Bonduelle nose has always performed well in the past. Andrew Rosenbaum
RUMOURED
Schickedanz’s dirty word
Despite the recent death of the family matriarch, the Schickedanz family retains almost the mystique of royalty in Nuremberg in southern Germany. Even though faithful stewards protest that the succession is assured, the future control and ownership of the family business is the subject of speculation in Germany.
When Schickedanz converted to Aktiengesellschaft,or public corporation, status in spring 1992 – usually as a sign that a company is establishing the legal framework for listing on the stock exchange – bankers began to describe its possible listing as an “interesting prospect”.
Through the Quelle brand name – which has 98% brand recognition in Germany – it is Europe’s largest mail-order company. Yet “flotation” is viewed as almost a dirty word in Nuremberg where the company occupies 50 buildings and employs 37,000. One Quelle employee says: “Yes, there is a fear it will happen. But we think it will mean jobs will be lost and that it will break the emotional connection with the family.”
The view of one insider is that the company has actively considered the possibility of going public for at least two years. The hindrance was – and remains – the balance sheet. In 1993, this insider says, a provisional date of 1997 was set for an IPO.
The family denies such intentions. Says head of the family and company chairman Wolfgang Bühler: “At Quelle, we have the legal possibility to go to the equity markets very quickly if we want to. Up till now, we have made no use of the possibility and will not do so for the foreseeable future.”
The question of equity is slightly sensitive. Bühler, 63, is married to Madeleine Schickedanz, the founder’s daughter. But they have separated and there is a possibility of divorce. Bühler points out that he is contractually head of the family until he is 70. This does not stop his critics questioning the legitimacy of his position. “He’s only the husband of Schickedanz’s daughter,” says one.
The other branch of the family, Dedi, is represented by Ingo Riedel, 34, whose mother-in-law is another Schickedanz daughter. There has regularly been speculation that the two lines will divide the company up.
Nor were the politics of the firm helped by the death of Grete Schickedanz, Gustav’s wife, in 1994. Until her death at 82, she retained power, walked to the office, made decisions, chatted with employees, and had a style very different from the present management, which prefers to be more distant. She also managed family politics with great skill.
Cold chaser
She began as one of Schickedanz’s first five employees in 1927. Her business skills were unrivalled. One story of her canniness concerns negotiations over a purchase of washing machines. The talks had dragged on for two days. By midnight on the second day, the price had been agreed and a contract was ready to be signed. She disappeared momentarily and returned with ice-cold schnapps on a silver salver which she smilingly offered around. “But for this schnapps, you must give me 10 pfennigs off each machine as a gesture of good will.” Unable to take any more, and thirsty, the executive from the manufacturing firm gave in and drank. “It was the most expensive schnapps I ever had,” he recalls.
Schickedanz’s results last year were disappointing. Turnover shrank to Dm15.1 billion ($10.5 billion) from Dm17.1 billion the previous year. Profits rose to Dm650 million, but Dm447 million of this was from the sale of a brewery and a paper-handkerchief manufacturer. German financial journalists speculated that the Quelle mail-order business lost money. “But it’s difficult to be certain,” says one, “because of the way they calculate their figures.”
The construction of a new distribution centre in Leipzig, an investment which cost Dm1 billion, is the subject of further debate. It duplicates the work of the Nuremberg centre, which will be closed with an unprecedented loss of 2,000 jobs. However, the Nuremberg jobs have been guaranteed until 1997, which will cost the company around Dm150 million this year and next.
In recent years, the firm has brought in professional management. The first outside manager, a former McKinsey consultant, Klaus Zumwinkel, faced a conflict over his decision to rename the 150 Quelle electrical shops. Grete Schickedanz was wholly opposed to this. Zumwinkel left for a senior role in the German post office.
Klaus Mangold was his replacement. He was responsible for building the Leipzig distribution centre and for the expansion into eastern Europe. He also sold the Schickedanz department stores – a move which anticipated a consolidation in the sector. However, the family was said to be uncomfortable with his fondness for travelling and talking to journalists, and personality conflicts soon led to his departure for Daimler-Benz.
It took over a year to find a replacement for him. In the interim, the faithful family retainer, Herbert Bittlinger, 69, took over – not for the first time.
The new man, who starts this January, is Steffen Stremme. He joins from Adidas, also a family company (which last year went public), which is located only 30km away. Stremme spent 14 years at the sportswear manufacturer. From 1993, he was a member of the board, as the head of Adidas Europe. He is said to have good communication skills.
Should Quelle Schickedanz ever go public, its closest house bank is believed to be
Dresdner. SI
JUST LISTED
In the can
Signora Anna-Lamura Farraioli still lives in her tomato-processing factory, although it’s only 70% hers nowadays. Her sons, Antonio and Andrea, floated 30% of La Doria in November.
The company is based in Angri, near Salerno in southern Italy, where family businesses have always been strong. Founded by Diodato Farraioli, the company began life in 1953 processing and canning tomatoes. Tomato-based products still account for one-third of sales, but the group has diversified into fruit juices, tinned spaghetti and baked beans. Exports account for 54% of sales.
“This is the way a lot of medium-sized Italian companies will go in the future,” says Antonio Farraioli, managing director of La Doria. “Italian family businesses are secretive. But I think this is changing with the new generation. And there is a realization that a company cannot always grow with a family.”
La Doria’s IPO was seven times oversubscribed. It was priced at L5,400 ($3.40) a share, and reached a high of L5,850, before falling back at the beginning of December to L5,350. “The disadvantage,” says Farraioli, “is you are allied to a stock exchange which is simply going down because sentiment is not good because of politics. This has nothing to do with the fundamentals of the company. This is the problem of a small stock exchange.” (The MIB Italian stock index fell over 12% last year.)
The company’s fundamentals are good. Operating profits have risen from L3.4 billion in 1991 to L16.2 billion in 1994. Total turnover is expected to rise from L169 billion in 1994 to L205 billion in 1995. The company also raised production levels by 30% last year, but with 20% fewer workers. It is the third-largest producer of tomatoes in Italy with a market share of 4.4% and is a dominant supplier of unbranded products to discount stores.
Growth has been greatest during the second generation. An earthquake in 1980 destroyed many of the factories and there was a brief period of receivership in 1982. The founder, Diodato, died the following year, leaving his two sons to manage the business with their mother and five sisters.
Antonio, 40, deals with strategy; his brother Andrea, 38, looks after day-to-day production. Two of their sisters work in the administration department and another in the export department. Of the 9.3 million shares listed in November, 6.75 million provided fresh capital – the company has cleared all its debt – and 2.55 million represented shares sold by the eight family shareholders.
The roadshow, Antonio Farraioli says, was not a frightening prospect: “It has been a good experience. You can talk with people and focus on problems.” And, of course, “there are investors who cannot be 100% aware of the tomato business”. About 25% of the issue was placed with foreign investors – something he is very pleased about. He admits to no annoyance at the interruption of his daily schedule by calls from large investors wanting to chat about strategy. The company has no investor relations department.
He views the stock exchange as a long-term solution to the family’s liquidity problems: “In 20 years, perhaps there will be some family members who no longer want to be involved. Being on the exchange makes this situation easier, and means the company will survive.”
But what would his father, Diodato, think of the flotation? The son pauses: “It is very difficult to say. But each decision can only be judged with the eye of today.”
With the company’s ambitious expansion plans – investment of L19 billion over three years – the options were limited. “It is not always possible to get capital from banks,” he comments ruefully. Further capital may be raised: “The family is ready to have 51% if need be.”
Why not list in New York? “Companies like Natuzzi [luxury leather furniture] and Luxottica [spectacles] export 90% of their products to the US. But 90% of our exports are in Europe.” So will La Doria ever list in London? “Eventually,” he hopes. SI
INVESTMENT BANKERS STAY CLEAR
Pasta, present and future
They are the three princes of pasta: Guido, Luca and Paolo. Jointly, they are in charge of Barilla, probably the slickest pasta company in the world. It controls 34% of the Italian pasta market – a lot of pasta considering the average Italian eats 28kg a year. In Europe, Barilla has a 22% share of the market.
The empire was built by their father, Pietro, described as a man who had spaghetti, not blood, in his veins. The first factory was built in 1911. Growth became explosive after World War Two when Pietro took over. He died in September 1993.
Ever since, tongues have wagged in the brokerage houses of Milan: “Would these young princes float Italy’s premier food company now the old man has gone?” The early signs suggest they won’t. Guido Barilla recently said: “We do not for the moment have any interest in going public. We are fit financially. We are not planning for the short term, we are planning for the next decade and for decades to come.”
Family buyback
For the brothers, the call of the business is strong. The youngest, Paolo, gave up his motor-racing career to join the firm. He won the Le Mans 24-hour race in 1985. Guido is a promising golfer.
The value of keeping the business private was instilled in them by their father. This was because the greatest regret of his life was selling it to American multinational, Grace, during the 1970s. They were difficult times and certainly not profitable ones. The Italian government put a compulsory price freeze on pasta in its battle against inflation. But Pietro Barilla nevertheless felt he had “betrayed” his ancestors. Eventually, he bought the firm back (it is not known for how much) and brought in a Swiss family and a Dutch firm as sleeping shareholders (again it is not known for how much).
Once the firm was back in his hands, his first act was to reinstate the Christmas gift package for employees. He always chose the contents personally. It would not be too difficult to imagine the dying words of Pietro Barilla to his sons: “Never make the mistake I made. Never sell.”
Barilla’s home is Parma, which is known locally as Food Valley. It is Italy’s answer to Silicon Valley, but rather than computers and microchips, Parma produces Parmesan cheese, Parmalat milk, Parma ham, and is home to the world’s biggest pasta factory. More than 3,000 Parma families have relatives that work for Barilla.
The group is not totally reliant on pasta. It diversified into biscuits in the 1970s, with a popular range called Mulino Bianco, which has a market share of about 40% in Italy.
Barilla’s strength under Pietro was marketing. It is Italy’s fourth-biggest advertiser, spending L170 billion ($107 million) annually – it even persuaded Federico Fellini to make his first-ever commercial.
But Barilla is caught between two consumer trends. On the one hand, more and more Italians are buying cheap, unlabelled pasta from discount stores which have gobbled up 10% of the market in two years. On the other, the market for fresh pasta has grown threefold in five years. Barilla responded to the first trend by cutting its price, and vowing never to supply discount stores. In response to the second trend, it is trying to catch up with its own fresh pasta brand, Voiello.
Its strategy cannot be said to be paying off. While turnover has been holding relatively steady, profit has been declining. In 1991, the profit was L155 billion, in 1993 L126 billion and, in 1994, only L111 billion. Not surprisingly, the company has looked towards other markets to compensate for the pasta war in Italy – most prominently the US, which is now the biggest and fastest-growing pasta market in the world. But even there, there is bad news. An official investigation into Italian pasta imports by the US government is looking at accusations by US domestic producers that the Italians are dumping pasta as a result of EU subsidies. Canada has banned the import of Italian pasta altogether.
American friend
Certainly, it is a time of change. The original Barilla factory, in a street named after the company, is to be replaced. The new factory will achieve cost savings, and result in the shedding of a third of the workforce. But those made redundant will be taken on wherever possible in the breadstick plant – also located in Parma.
The most significant appointment since Pietro Barilla’s death was that of 65-year-old Edwin Artzt as an executive director, last summer. Artzt, who was formerly chief executive of Procter & Gamble, is a surprising choice, given that he will spend over half his time in Parma but does not speak Italian. Locals assume his role will be that of a surrogate father for the Barilla brothers. Those with a knowledge of Artzt’s illustrious career at Procter & Gamble say he will provide valuable international experience and great insights into cost-cutting. But, they doubt whether he will be a paternal figure, given his reputed nickname at P&G of “prince of darkness” for his skill in eliminating whole layers of middle management. SI
