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Liabilities Zombies - The risks poorly dimensioned
Luiz Azevedo - PBC - Food & Beverages Consultants

“Liabilities Zombies”
The risks poorly dimensioned or not considered in the Food & Beverages industry.

The term liabilities can be interpreted as the risks previously evaluated and measured. Or according to the technical definition, they are the business financial obligations not yet carried out and they are presented as provisions in the balance sheet of companies.

In the Food & Beverage industry, most senior executives usually either ignore, consider eliminated or "dead” a lot of sources of very high operational business risk. They are, in fact, men of great faith. They believe that the company, by owning fantastic ERPs (SAP, Oracle, etc) or some ISO certification they are free of hazards and damnations. A big mistake, indeed: the "Liabilities Zombies" return from their alleged "tombs" hungry to devour the "flesh" - the value of the company.

For these executives, it is worth noting one of the basic definitions of the business, which says that the company value corresponds to the sum of tangible assets and intangible assets. As we can see, it is a very simple relationship, but unfortunately, it is often poorly interpreted and misunderstood.

In the Food & Beverage industry, intangible assets represent on average 50 to 60 % of the company s market value (data from U.S. market). That means to say that the intellectual capital (trademarks, brands, know-how, etc.) is worth equal or more than all manufacturing plants, inventory, financial resources, etc.

When compared with other economic sectors, the food industry has low rate of innovation and relatively low technological level. If so, what explains the great value of brands (intangible assets) in this sector? The main responsible is the rigidity of eating habits. Consumers are conservative regarding food products due to strong cultural aspect associated (traditions).

The importance of brands in the F&B industry is such that they act as entrance barriers. This means that a company seeking to start operations in a different market segment or in another country, almost mandatorily needs to make the acquisition of a traditional local company. 

Therefore, impacts on reliability and brand value (intangible asset) generate substantial losses in the market value of the company.

So, if the intangibles are so important, what are the possible reasons for cases of severe impact on brands, widely reported in the media, such as Ades soya drink (Unilever) in Brazil with residues from the process? Or, the transnational scandal in Europe, about horse meat found in burgers (Tesco, and several other brands) and in lasagna (Findus)? Or, the case of baby food (Danone/Nutricia) and powder milk in Asia, involving raw material contaminated by bacteria that cause botulism (Fonterra - New Zealand group and one of the worlds largest dairy producers).

In the Ades case, Mr. Paul Polman, the Unilever’s CEO, admitted sales losses around R$ 220 million (€ 70 million). In the European horse meat case, only the company Tesco had an impact on its market value around £ 300 million (€ 360 million). And in the Fonterra case, there is still no idea of the financial dimension of problem. These are just some cases, as the number of food and beverage products recalls have increased worldwide, mainly in the U.S., since even before the full implementation of the Food Safety Modernization Act (FDA).

Back to the question, what could be causing this? As we can infer the culprits are the "Liabilities Zombies". The zombies are in the supply chain, industrial operations and also in the demand chain (distribution, etc.). Since each of these topics requires a specific chapter, we will cover them in future articles.

The business environment has changed. The consumer has become an activist through social networks (Facebook, Instagram, etc.). Political pressures create more regulation on food safety, on environmental management and on corporate social responsibility.

The Food and Beverage industry is the most exposed to these risks, not only for the obvious daily contact with the consumer, but mainly because their intangible assets (brands and what they represent) are the highest proportional value of these companies. Therefore, it is about time to F&B industry wakes up and faces the risk management beyond the bread and butter (taxes, commodities and currencies). It is urgent the implementation of analysis, impact measurement and risk management across business structure.

Luiz Azevedo – BSc Chemical Engineer, MBA Marketing, MSc Economics, Partner PBC Council - Food & Beverages Consultants.