The Strategist

A strategy of growth through investment, Tereos' successful gamble

09/09/2020 - 12:00

French agri-food cooperative Tereos, a domestic market leader and the world’s second in its field, has been described as struggling with debt and falling prices. However, the company performance has significantly improved recently, just when its competitors started to give up and close enterprises. When sugar prices picked up again, Tereos proved to be the only French company in the sector to be able to benefit immediately, reaping the rewards of a long-term strategy and securing local food supplies.

A strategy of growth through investment, Tereos' successful gamble
Rumours stated that French giant Tereos, unites 12,000 sugar beet farmers, was balancing on the verge of a financial collapse in the spring of 2019. Its debt kept growing, following its development and investments, resulting in endless discussions with some of its cooperative shareholders and market observers... In addition, the second largest European sugar player has been severely affected when the European Union’s output quota regime ended, and prices for the main production of Tereos nosedived.
Or, at least, that was the perceived image, largely created by “dissidents accusing Tereos of hiding financial difficulties”, Reuters noted. The entire situation, however, was different. Not only Tereos suffered, but its competitors as well, i.e., the industry as a whole. In April 2019, Cristal Union sugar cooperative announced closure of its factories in Bourdon (90 people) and Toury (150 people) in addition to downsizing 70 more jobs at its packaging plant. Cristal Union followed the decision of its German colleague Südzucker to cease production at two of its four sugar factories in France, as well as to terminate its packaging site in Marseille.
Tereos was expected to do the same. However, the company surprised everyone when it announced that it was not going to give up and was committed to preserving its enterprises: “In the long run, the choice of restructuring will obviously lead to the sale of assets and the closure of plants in order to reduce the offer. This is not the future that the supervisory board wishes for its members, its employees and its customers,” the group said then.
A year later, it turns out that Tereos knew what it was doing and had a well thought-out plan. After a two-year loss period, Tereos has finally returned to profit, with a staggering 53% growth rate and a reduction in net debt. A great help here was a confident strategy for maneuvering in the constantly stormy sea of the unstable industry, where the company constantly has to navigate.
The market turmoil that Tereos is facing now is not exactly a new thing for the company: for instance, just over the five years to 2019, the global sugar manufacturing industry has been experiencing massive fluctuations in global sugar prices, with average industry growth falling by 4.2% during 2014–2019, says IBIS World researchers. It was not much easier in the past years either, but every time, Tereos employed an enduring strategy and perseverance to work its way up to the top.
What this strategy is about? In the essence, it’s about a wider field of vision. This time, the cooperative refused to abandon its core business, even partially, but accepted the fact of limited profitability in the present. At the same time, the firm chose to see elsewhere, both geographically and in terms of activities, and so the wide expansion overseas began. Not everyone was pleased, and there were voices concerned with the slowdown in France and the growing debt burden. Why didn’t Tereos then refuse to hold on and listen to criticism of the spectators? After all, if it becomes unprofitable, the only obvious thing to do is to slow down activity, even if it means closing factories and encouraging farmers to produce less, with its procession of economic and human dramas.
It turns out it is not. There’s one more way of looking at things: understanding that the success achieved elsewhere may make it possible to relieve the slowdown at home, perfect the procedures, and to be ready tomorrow when the economic situation is better. “In the European market, marked by a structural decrease in sugar consumption, only an international development and growth strategy can save future prospects. Any expectant or detached logic inevitably entails a vicious cycle of exhaustion, leading to a fatal outcome...”, explained Alexis Duval, CEO of the Tereos Group.
For the time being, the question of investment became vital. The liberalization of the European sugar industry in the sluggish landscape, the rapid development of new technologies in agriculture and industry, the new demands of consumers for health and nutrition, naturalness and sustainability required improving productivity, innovating, in short, developing the group. The debt and the gripes were the price that the company had to pay.  
In the end, however, all efforts began to pay off: the group's net debt fell to € 2.56 billion, against € 2.63 billion in the last year. Tereos was able to enlarge its market share while the competitors were busy downsizing, even though this strategy has proven to be ineffective: downsizing firms are twice as likely to declare bankruptcy as firms that did not downsize, a team of researchers from the US found earlier.
The future is still obscure for Tereos’ colleagues, but the French sugar cooperative is quite sure of it, especially on the domestic ground: expanding internationally, the group is also making profits that are reinvested in France. What does this mean for the French and for Europeans in general? First of all, this is the strategic security of the local food market. A possible supply crisis caused by the pandemic of the novel coronavirus has placed food security at the forefront. This is even more important for France, which agricultural sector, and, therefore, a large part of the food sector, is now in a more than precarious position.
In this situation, Tereos, which produces not only sugar, but also important food components such as proteins, starches and others, actually becomes responsible for a contribution to the food safety and job market of the country and the union. On the financial side, this is ensured by the company's stable market position as most of its export volumes in Brazil and sales in Europe have already been contracted. The internal trust is equally important: “The commitment of the cooperative members (since 2017, the beet contract has increased by 20%, let's recall) has become a key factor in a more uncertain environment. The very good results which Tereos has achieved in terms of contracting with its members... demonstrate our firmness”, says Alexis Duval.
In general, the strategy of Tereos, albeit initially dubious, is beginning to bear fruit. For the consumer, this is expressed in confidence in the availability of several key food products. As for the state and the union, it is about having a strong market player, seasoned, but not broken by difficulties. It’s not easy to predict the company’s exact future, just like it’s not easy to make forecasts in an ever-changing stormy sea such as food production industry. However, Tereos keeps the sails up and is confident in its outlook.