ANDY FINNERAN, FD of R&R Ice Cream, loves ice cream. “I wanted either to be a footballer or work in an ice cream factory,” he says. On meeting Finneran at the company’s UK manufacturing plant in North Yorkshire, it seems clear that he does not have the build to cut it in the English football Premier League. However, as the finance director of Europe’s largest private label ice cream producer, he can say that he has at least fulfilled one of his life’s ambitions.
Finneran’s claim that he loves his company’s product is no empty platitude. There is a freezer filled with some of the country’s best-known ice cream brands in the meeting room – incidentally, these freezers are found throughout the company’s head office – and it is not long before tubs of one of R&R’s latest products are being cracked open.
The laid-back atmosphere is indicative of the youthful and vibrant feel of the company, a natural reflection of the products it sells. But this should not detract from the way that R&R has ruthlessly consolidated the UK and continental Europe ice cream industry. The company was formed in 2007 through the merger of Richmond and Roncadin, one of Europe’s largest ice cream producers.
The group’s strategy of growth by acquisition has paid dividends. Since the merger, the company has delivered a staggering growth in profit of 210% a year, from £1.5m in 2006 to £43.3m in 2009. This expansion has won the company the number-one spot in The Sunday Times Profit Track 100 list of the UK’s fasted growing companies.
The challenge for Finneran is planning how to take the company to the next stage of its growth strategy. According to Finneran, in the UK R&R, which makes more than 750m litres of ice cream each year, is already as big as the consumer goods giant Unilever, the company behind such well-known brands as Wall’s, Carte d’Or and Ben & Jerry’s. The ice cream sector in Europe is dominated by Unilever, so the objective is clear for Finneran.
“In 2006, we came together with the goal of becoming the number-one private label business in Europe. The objective now is to be number one in take-home sales in Europe,” he explains.
Scooping the competition
Much of R&R’s success is down to acquisitions. These have been central to the group’s strategy both now and before the merger. By the late 1990s, Richmond, formed in 1985, was consolidating the UK ice cream industry through a series of acquisitions. The first was that of Windsor Creameries in 1995. In 1998, the company went public after merging with Treats Group, where Finneran was FD at the time, and retained its listing under the name of Richmond Foods.
More acquisitions were to follow, the most notable being that of Allied Frozen Foods, a major soft scoop competitor, in 2000. Finneran says the deal nearly doubled Richmond’s size to more than £80m and gave the business a seasonal peak gearing of 250, which was “scary stuff”. With four sites across the UK, this made Richmond the UK’s biggest producer in terms of both volume and range of products.
The deal also facilitated a change in strategy. “The strategy we identified was what we needed to do to become the number one private label in the UK,” says Finneran. “Buying our biggest competitor was a simple way to achieve that. The next step was to get a brand. We knew that Nestlé were having some difficulties in the UK and we got them a year later. By 2001, we were the biggest private label manufacturer and we had the world’s biggest food brand.”
As the company reached the maximum of how much it could grow in the UK-branded and private-label business, Finneran was faced with the big growth question: where do we go from here? Should the company diversify its product offering into frozen deserts or food, or should it continue as a single-play business and go into ice cream in Europe?
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“Our strategy dictated that ice cream was what we were good at and what we knew. We spent the year doing research into all the ice cream companies in Europe and decided to go with Roncadin,” says Finneran.
Picking up the Germany-based Roncadin did not go as planned, however. US private equity firm Oaktree Capital Management outbid Richmond. The two companies had the same aspiration: consolidating the European ice cream industry. This resulted in Oaktree’s £183m public-to-private purchase of Richmond, and the merger with Roncadin.
“There was only one management team with the experience to consolidate the European ice cream business and that was us,” says Finneran. “So we went to Oaktree and told them we could do exactly what they wanted to do with ice cream in Europe. If you can’t beat them, join them.”
Growth by acquisition
The initial impact on profits was a reduction as a wet summer and soaring costs combined to create a challenging trading year in 2007. But profits have since grown rapidly and the strategy of growth by acquisition has continued, resulting in several more: Kelly’s in 2008 and French ice cream maker Rolland last year.
The acquisition of Rolland was financed by a £350m bond issuance, which Finneran says was six times over-subscribed. That left a £100m war chest for further deals. One of these was the €27m (£23.5m) acquisition of Pilpa last month. Finneran says the company is still looking but is coy about specific targets.
“The strategy is to keep building within France and Germany, and then we will have to look at potential growth markets,” he says.
The acquisitions may have stolen the headlines, but the consolidation process is behind R&R’s improved profits. Finneran says the company’s position as the UK’s fastest-growing company is a bit of a chimera. He is more pleased to see that R&R is the UK’s fourth most profitable company in The Sunday Times’ list.
“There has been little top-line growth because our strategy and our disciplines mean that we won’t sell products below pre-determined hurdle rates or margins. All the growth has been in profitability,” he says. “There is no magic formula to transforming the business. There is no single lever to pull. It is a matter of buying better, being more efficient, taking overheads out, and taking out duplication.”
One of the things Finneran found when R&R acquired Roncadin was that the company’s biggest product was sold at a 2% margin. Once costs had been added, the product was actually going out at a loss. And surprising as it may sound, most ice cream products are made with vegetable fat, which is cheaper than dairy fat. But Finneran found that the cheap labels were made with dairy fats in Germany, while expensive brands were made using vegetable fat, “which doesn’t make any sense whatsoever”.
“That took a huge amount of rearrangement,” says Finneran. “Within the business people now understand the concept of activity-based costing and why they have to make the margins.
“Most private label companies are making no money whatsoever, so we believe we can turn it round if we can get hold of the right ones. A lot of ice cream companies are making EBITDA percentages of 5% and ours in 18% to 20% in the UK and that is the model we are trying to replicate. One of our tag lines is trying to be the lowest-cost manufacturer.”