Finding key to diversification by flour millers

by Morton Sosland
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Even as attitudes toward diversification by flour milling companies tend to shift over time as well as among the regions of the world, it would seem that few businesses have done as well regardless of how they are structured. Companies concentrating solely on the milling of wheat into flour as an intermediate ingredient used by bakers and other food manufacturers or as producers of finished consumer products have prospered in recent years regardless of where located. Looking at North America alone, four of the largest flour millers are parts of corporations engaged in many other aspects of agribusiness and food manufacturing, as well as flour milling. At the same time though, leaders in North American milling include companies solely engaged in wheat milling with a successful record in managing a demanding business.

One particularly easy, but fairly accurate, method of identifying companies that are likely to be diversified and those that are not is to examine ownership. It is much more likely, if not almost a certainty, that companies with public shareowners will operate businesses in addition to flour milling. This is so in North America as well as in other developed countries. While appreciating that public companies are often larger, it is the privately-owned companies that seem satisfied with building milling businesses while avoiding anything that smacks of diversification. That was not always true, but it has become more the case recently.

In North America, publicly-owned companies that once prospered in the post-World War II period by focusing solely on flour milling are no longer in existence. While industry consolidation has not been limited to publicly-owned companies being absorbed by diversified competitors, flour milling in publicly-owned enterprises is almost certainly a part of a diversified corporate entity.

It is no surprise that the same ownership characteristic rules in Great Britain where large public companies once focused on milling are now parts of diversified enterprises. On the European continent, some of the world’s largest flour milling companies remain in private ownership and have largely avoided diversification, except for the ties between milling and its major customers in baking. Here, too, it is privately-owned companies that have maintained a strict adherence to milling. The same pattern holds true in Southeast Asia, while in Japan, where business patterns frequently differ from the rest of the world, milling may remain the sole business of several small publicly-listed corporations. Milling’s structure in China is unsettled as the food industry in that rapidly developing nation undergoes multiple layers of transformation.

Hardly anythingreflects diversification gone wild more than recent moves by Flour Mills of Nigeria P.L.C. This publicly-owned milling leader in Africa’s most populous country has long been active as an importer of cement. Early in 2010 it acquired a stake in a domestic cement manufacturer, started construction of a sugar refinery and launched a rights issue to raise $180 million “to diversify into new markets, including power generation.”

All of this is happening as the attraction of diversification as a superior way of smoothing out business results subject to varying supply and demand cycles is being increasingly questioned. The Nigerian company’s stock plummeted in response to its latest moves. The rising doubts about diversification intensify when corporate strategies are not based on obvious synergies, such as ties between milling and baking or grain marketing and milling. But when a flour milling enterprise is part of a company with totally different supply sources and customers, utilizing varied financing and distribution systems, questions are being asked as to what fundamental purpose such diversification serves. This is particularly the case when America’s largest food manufacturer makes a case for splitting itself into two parts in the name of specialization. The latter is an approach drastically at variance with diversification as an overriding goal.

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