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Farsons: the future beckons - An interview with Farsons CEO Louis A. Farrugia 5/3/2007

Farsons CEO Louis A. Farrugia at the new logistics centre

Malta's best known beverages company has prepared itself for the liberalisation of packaging next January. But it is in property development that it expects the fastest growth over the coming few years.

by Christopher Scicluna, Times of Malta

Louis Farrugia has reasons to be optimistic about the future. On Wednesday last week, Farsons announced that it had doubled its pre-tax profit from Lm460,300 to Lm960,000, in spite of the fierce competition the company today faces.

"But the most important thing is that we are moving in the right direction" were his opening words in a 45-minute interview, and it was a theme which he was to return to time and again.

"The fact is that Farsons is now operating in an environment which is totally different from what it was just a few years ago, yet we are doing well, and getting better," he said.

Competition is tougher, yet Farsons has retained market share and actually saw an increase in sales last year.

The company faces another challenge as from January 1 when packaging of beverages is set to be liberalised, meaning soft drinks no longer have to be sold in returnable glass bottles. That will raise competition by another notch, especially since it will be much easier for imports to flow in.

But Farsons has been preparing for it, well in advance. "We have been going all out to improve efficiency and raise productivity. It has been a team effort including a review of all the areas of our business, whether they are production, imports, distribution. We have continued to improve our profitable operations and to reduce or remove the loss-making ones."

At the core of this change is a Lm10.6 million investment project which will be completed within the next six months when a new packaging hall and a logistics centre are commissioned. After that a new brew house is set to be completed in about three years' time.

The lifting of regulations requiring the sale of beverages only in returnable glass bottles will mean it will be possible for importers to source popular foreign branded products. It will also be possible for foreign supermarket chains to ship their own brands to Malta. Consumers will also be able to buy their favourite products at better price value since containers will be larger than the current one litre glass bottles.

"Over the last five years we envisaged how the business environment would change, particularly because of EU membership, and we have prepared for it," Mr Farrugia said.

Indeed, the change started much earlier. "In the span of 20 years up to 2010 we will have renewed all the production facilities for a total investment of approximately Lm27 million" he said.

It means Farsons will have cutting edge production facilities which will change the way beverages are produced.

"This entails a highly sophisticated process with a high level of automation. It will be a different ball game. The employees will not have to handle any product, not even to load it onto pallets" Mr Farrugia said.

"The cost structure will change. The equivalent of some 60 jobs done by casual workers in summer (out of a total of 430 full time employees) will go, although there will not be any forced dismissals. The operators will be much more skilled in electronics and management information. The whole production and distribution chain will be linked by a single IT system which will ensure easier rotation of stock, better control on purchases and ultimately, a better product."

And it all starts from next year.

However satisfied and confident he is that Farsons can retain its market share as competition intensifies, Mr Farrugia repeatedly insisted that the playing field must be level.

"We have no problem with parallel trading, but what we do take exception to is illegal importation where importers are more competitive because they do not pay VAT and eco-tax" he said.

The more serious problem is eco-tax.

"With VAT there is an audit trail and it is difficult to wriggle out of it. But eco-tax is based on self-declaration by the payer. It cannot be properly or adequately enforced. And an eco-tax of 1c per bottle does make a lot of difference.

There is a lot of evidence of such unfair competition. The government knows about it. We are not arguing with the principle of the eco-tax, but it is a badly designed tax and needs revision. I know that the government is considering proposals, and decisions have to be taken," Mr Farrugia stressed.

He readily admitted that the exports side of the Farsons operation has remained too small.

"Over the past few years our focus has been on the investment programme, on replacing all our production facilities. That will ensure we keep our position in the domestic market, which is our most important market.

"But having said that, these new facilities will now also make it easier for us to export. We have been laying the ground, setting up a new export team and actually registering quite good progress. The focus of our export efforts are Cisk and Kinnie. We are currently exporting some quantities to most areas of Europe, but we are also exporting to Australia, the United States and Libya.

This summer you will also be able to find Cisk in a lot of pubs in Syracuse, Taormina, Catania, Palermo and some other cities in Sicily as well as Italy. We are also exporting products which are not sold locally, which have been specifically created for our export markets such as a high alcohol Cisk. In 2007 alone, we expect to double our exports over 2006 to reach some 50 containers, and we will build on that."

Asked whether he saw export potential to North African countries, or even the possibility of Farsons setting up a bottling plant there, Mr Farrugia said such agreements had been made in the past and were once again being explored.

As for overseas investment, he said the company did not want to lose focus from its current investment programme, but as that approached its end, he did not exclude moving in that direction.

He also sees potential for further growth in Malta itself.

"Sales are affected by economic performance, and we are feeling the positive impact of the current economic development," he said. "New consumers are found with new products. We are currently introducing Kinnie Zest, a sugarless orange variant of Kinnie, which by all accounts is being well received, and we have more plans to innovate. This is an area of which Farsons is justifiably proud. After all, our best selling brands, Cisk and Kinnie, are wholly Maltese."

Farsons has over the past few years diversified its traditional consumer products business, expanding into food imports and distribution, particularly through subsidiary Quintano Foods Ltd, which recorded double digit growth last year.

As for food franchising interests, Mr Farrugia said Pizza Hut had seen a drop in turnover attributed mostly to the closure of the Fgura outlet and the temporary closure of the St Julians outlet for refurbishment. Burger King saw an improvement in turnover while KFC managed to hold its own. TGI Fridays continued to experience some challenges, he admitted, but he was confident solutions would be found.

But what Mr Farrugia is visualising is the potential growth of the real estate business.

"What has been a consumer products company is becoming a dual business company" he explained. With the building of the new packaging hall, the logistics centre and the brew house on the south side of the Farsons site in Mriehel, the half a kilometre long frontage on Notabile Road, having an area of 23,000 square metres will be freed up for development. So too will be the 12,000-square-metre Wands Ltd site in Qormi.

"The group's board of directors together with Trident (the real estate subsidiary) are studying how we can best develop these two sites and we expect to take decisions within a year or 18 months," he said.

"These are valuable sites which are currently valued on our books at around cost price of under Lm1.5 million, yet they are worth substantially more.

"We have been prudent so far, but as the potential of these sites is unlocked, the balance sheet is going to look very different in the years to come."

Although the uses of the sites are still being explored, development of a business centre with an accent on the financial sector is clearly among the favoured options.

"We have the Malta Financial Services Authority (MFSA) at one end of the road and the major operations centres of the two largest banks on the other," Mr Farrugia pointed out. The location was central and well connected and this project could develop in line with the growth of SmartCity.

A particular challenge would be making the best use of the façade of the landmark Farsons building, designed by Mr Farrugia's own father.

"We would like to retain the features of this building while developing other aesthetically pleasing buildings that would go with it" he said, adding that he had already visited some art deco buildings in the UK to see how they had been put to modern use.

"Our expertise so far has been on production and distribution of consumer products and dealing with large multinational companies. Property development is a new challenge, but it is one we are going to relish," Mr Farrugia said.