Great and Small

Barry Irvin, chief executive of Bega Cheese

Among this year's most-respected companies, Bega Cheese stands out. The likes of BHP Billiton, Westpac Banking Corporation and Qantas Airways are always in the news; the New South Wales cheese maker rarely is. The others are owned by thousands; Bega is owned by just the 130 dairy farmers who supply it. And the others operate in mostly mature sectors; Bega's sales are accelerating at start-up speed.

Bega's chairman, Barry Irvin, believes this combination of co-operative ownership, longevity and dynamism is winning the 110-year-old company the respect of peers.

The company, headquartered in the south-eastern New South Wales town of Bega, has scored the top ranking in the agriculture, forestry and fishing sector of the inaugural BRW Most Respected Companies list.

The culture that surrounds the brand has withstood the test of time, he says. "Sometimes, businesses in regional Australia are not considered as dynamic as their brothers and sisters in the city. What we've proven over the last few years, in terms of growth and dealing with things like the global financial crisis, is that we are every bit as dynamic."

Only the global financial crisis, which depressed cheese prices, stopped sales reaching $1 billion this financial year for the first time, Irvin says. Bega now expects to sell mainly cheese valued at $850 million to $900 million to supermarket and food service companies in the current financial year, up from $768 million in 2008-09 and $234 million in 2004-05.

Despite the GFC setback, Irvin says Bega can "easily see how we will get to $1 billion in revenue with what we've got in front of us.

"And it is not very difficult for us to see that with some of our key growth areas - which, interestingly, are in things we are not so well known for, such as infant formula and cream cheese - there is enormous opportunity for us to move well towards the $1.3 billion to $1.4 billion mark."

The threefold increase in sales is a result of Bega turning respect for the company into profitable relationships with large partners. "If you ask me what the key to the success of Bega Cheese is, it is the ability to forge long-term relationships with 'big brothers'," Irvin says.

By far the biggest of Bega's brothers is New Zealand's Fonterra, the world's biggest dairy exporter. In 2001, Bega gave Bonland Dairies, a joint venture between the New Zealand Dairy Board and Bonlac, the right to market the Bega brand. Bega got the Melbourne cheese-cutting and packaging operations of Bonlac, later acquired by Fonterra in 2005, in return.

Irvin admits the deal was a risk. Fonterra is also a manufacturer interested in seeing its own brands fly off shelves first. But Bega's openness, including about its ambitions, eased tensions and ensured the bet is paying off, he says.

"Like all relationships, they stand the test of time if you are absolutely transparent about what you are trying to achieve," he says. "We stuck to our strategy right the way through. And people have always been aware of what that is. That helps on a number of fronts. It helps with our customers. But it also helps with our suppliers and our shareholders. Even though we are heading towards $1 billion [in sales], we still maintain a lot of that sense of family, that sense of team and that this is a great little story to be involved with."

Still, the next chapter of that story is filled with challenges. The Fonterra tie-up, a 70 per cent stake in Victorian dairy company Tatura Milk Industries, bought in 2007, and the cheese-making assets of Kraft Foods, bought last December, is starting to give Bega the scale it needs to make money despite tight margins and volatile milk availability and pricing.

Its profit margin doubled to 5.3 per cent between 2004-05 and 2007-08, industry research firm IBISWorld says. Irvin says Bega still managed a $15 million profit in 2008-09 - down from $28 million in 2007-08 - despite a $15 million loss on its Tatura investment.

Future profits will have to come from Asian and other overseas markets, where Bega already draws 40 per cent of its sales. Australia's relatively modest population growth, Irvin says, means that apart from domestic rationalisation and consolidation, really big expansion is inevitably going to come from exports.

While Irvin hopes Bega will continue to stand out in other respects, he says there is a certain inevitability that one day the company will be owned by investors other than the dairy farmers of the Bega Valley. Last year, it changed its structure from a co-operative to an unlisted public company. However, the next step in a listing for Bega is not imminent, he stresses.

"The current structure continues to serve us well as far as we can raise the capital we need to grow in the way that we have proven in the past. But there is a certain evolution in which a business like ours continues to grow, continues to create a lot of value, [so] there will be inevitable pressure for shareholders to be able to realise that value."

BRW