Bold Strategic Move 9: Food of the free

Grain of truth: Australian farmer checks sorghum crop.

A small manufacturer of allergen-free foods enjoys serious advantages as it embraces giant opportunities in the US.

Talk about David taking on Goliath. In May, Australian company Freedom Foods – the listed health food maker of gluten‑free breakfast products – announced a renewed tilt at the US, the birthplace of packaged cereal.

On 1 July the company opened a sales and distribution office in the premises of California-based Wholesome International, its former distributor, which has a small share in the venture.

With just two full-time employees, Freedom’s initial stake in the US market will be modest, says managing director Rory Macleod.

The company is committing A$1.5 million of working capital towards the venture this year and Freedom Brands chief executive Michael Bracka will lead the charge.

“We are not pouring enormous amounts into marketing and investment because the market we are operating in is very good for allergen-free products,” Macleod says.

This investment may be small potatoes in a grocery market worth US$940 billion overall, yet the gluten-free subset is estimated to be worth around $US3.4 billion and that is growing at a compound annual rate of 15 per cent.

Importantly, the Australian company has two advantages, Macleod says. All products destined for the US will be from Freedom’s factory in Leeton, New South Wales, which manufactures gluten- and nut-free products and is the largest of its kind in the southern hemisphere.

“We’ve similar equipment to manufacturers such as Kellogg’s. Essentially, we have quite a small form of competitive advantage in the sense that we have a dedicated facility. It’s a scaled facility for cereals and cereal snacks, where we manage everything from key inputs from growers through to the process of taking raw materials from our mill and, from there, managing it to finished products.”

Australia is the most efficient country in the world at detecting gluten in food, says Macleod. “Australia has set the benchmark for many years. We measure for three parts per million and in the US it’s 20 parts, which they believe is sufficient, but there are some people who get levels of reaction below 20.”

The company’s other advantage is that Australia doesn’t allow genetic modification of the main food grades, unlike the US, where nearly 100 per cent of the soy crop and 80 per cent of corn is genetically modified.

“We’ve always been largely non-GMO [genetically modified organisms] in this country, but we haven’t made a big deal about it,” MacLeod says.

In the US the awareness of GMOs is gaining momentum, with the giant Wholefoods Market on the front foot. It recently became the first national grocery chain to set a deadline for GMO transparency.

By 2018 all products in its 300-plus stores in the US and Canada must be labelled to indicate whether they contain GMOs.

The company boasts that it carries 3300 non‑GMO products currently and there are moves afoot to carry more.

One of Macleod’s major considerations when embarking on this strategy was acknowledging that the US food and grocery market is a very different beast compared with Australia, where two main retailers dominate.

In the US there are 25 key retailers in the wholefood market alone and the market is extremely fragmented geographically.

This is why Freedom is not ploughing funds into aggressive marketing, preferring the more cost‑effective approach of maintaining a presence at national consumer trade shows where staff interact directly with the customer.

Then, once retailers accept the range, space has to be aggressively managed and merchandised, says Macleod. “Generally, when you go into a supermarket in Australia the store and shelf layouts are managed by the retailers. In the US you have to work very hard to manage your shelf space.”

Gluten-free cereals, the core of Freedom’s product range, comprised 40 per cent of sales in the first half of the 2012-13 financial year.

Currently the US makes up less than 5 per cent of Freedom’s revenues, but the target is a million cases a year in three years, equivalent to 30 per cent of total sales.

In the half-year to June, Freedom’s share price has doubled, with investors giving the tick to the company’s ventures into far-flung, competitive markets.

As well as the UK and Europe, Macleod is also eyeing Asia – not for cereal, but the growing demand for high-quality dairy.

The company is in the process of building a 10,000sq m facility in Shepparton, Victoria, that will produce about 100 million litres of dairy milk: 70 per cent will be focused on demand in China and the South-East Asian markets.

This article is from the October 2013 issue of INTHEBLACK magazine.

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