As a supply chain manager of agricultural products, we are engaged in origination and sourcing, primary processing, exporting, shipping and logistics, importing and distribution, marketing, including value-added solutions and services, and managing the risks at each stage of the supply chain. From our founding in 1989, we have evolved from a single country, single product trader to a multi-country, multi-product global agri-business. The key to our strong core business is a repeatable and scalable formula that allows us to continue to grow organically.
Selective upstream expansion
We selectively integrate upstream into plantations and forest concessions, targeting specific countries where we believe these countries have a comparative advantage to produce these commodities cheaper or better sustainably over the long-term. This involves plantation ownership and management of perennial tree crops, farming of annual crops, dairy farming and forest concessions, although in recent years, we have approached this expansion in a less asset-intensive manner through sale and leaseback or revenue-sharing arrangements where we do not have to own the land (or trees in some cases) and yet retain the production economics of the asset.
We invest upstream only if we are able to achieve a cost structure below the marginal cost producer’s cost of production for that commodity that would allow it to be viable across commodity pricing cycles. This ensures that we are profitable in the upstream activity under all pricing scenarios including a deep commodity down cycle. Our strategy to integrate upstream is therefore not based on a speculative judgment of higher commodity prices over the long term.
Selective midstream/downstream expansion
We selectively integrate midstream in value-added initiatives, processing some of the agricultural raw materials into ingredient quality intermediate products that not only offer attractive returns but also value-added solutions to develop strong, long-term customer relationships. As a differentiated player in the mainstream commodity categories, we pursue midstream initiatives, such as wheat milling and edible oil processing in Africa and sugar refining in Indonesia. In order to mitigate any asset utilisation risk, Olam would ensure that there is sufficient internal captive load from the supply chain business before entering into a midstream processing activity.
Our downstream expansion involves building a consumer franchise and distribution infrastructure in Africa. The foundation for this downstream activity is based on our knowledge and capabilities related to the management of food supply chains and the common distribution pipeline that we have built for related commodity products in West Africa. Our Packaged Foods business, a joint venture between Olam and Japan’s Sanyo Foods, undertakes this activity by manufacturing and marketing a range of branded packaged food products to consumers across these markets, such as Nigeria and Ghana.
We use six criteria to inform our judgement on how to prioritise our portfolio and the basis for making key investment choices and capital allocation decisions between the various businesses:
- Address areas where performance has been inconsistent or has not met expectations
- Double down on strong businesses to scale up and strengthen leadership positions
- Focus new investments on areas where we have the highest win-ability and returns
- Streamline business portfolio and release cash from divestments
- Find the right investment balance between contributing and gestating businesses; and
- Assess and manage portfolio risks.
Based on this approach, we have prioritised our portfolio into five clusters:
Cluster 1 contains the six prioritised platforms – Edible Nuts, Cocoa, Grains, Coffee, Cotton and Spices, all of which are in attractive markets where we have a strong competitive position. We intend to accelerate its investments in these six platforms to build global leadership.
Cluster 2 consists of five platforms – Packaged Foods, Palm, Rubber, Dairy and Commodity Financial Services all of which are in attractive markets, but our investments in these platforms are still gestating and therefore the model is still to be proven. We intend to scale up these platforms once we have more proof of concept.
Cluster 3 consists of three platforms – Rice, Wood, Sugar and Sweeteners which are smaller businesses (in terms of size of profit) for the Group, but with very high returns.
Cluster 4 consists of two platforms – Fertiliser and Ag Logistics & Infrastructure that are non-core, and therefore we intend to deconsolidate these businesses and partially monetise these investments at the appropriate time.
Cluster 5 are businesses through which we will collectively prioritise and focus Africa as a separate vertical, by leveraging the region as a globally competitive supply source, supplying food staples and ingredients into Africa, participating in its consumer story and investing in Africa’s agricultural logistics and infrastructure.
Each platform in the five clusters has mapped out specific strategic pathways that it intends to execute over the next three years.
Our clear and differentiated strategy in terms of where we participate and how we win in our industry, has helped us achieve more consistent, sustainable and profitable growth over the current plan period. We have built market leading positions in our prioritised platforms and strategic niche positions in a number of other adjacent products, markets and value chain segments.