5 Strategies That Boost Agribusiness Valuations - Axial

10/2/14, 3:14 PM

5 Strategies That Boost Agribusiness Valuations

Valuing a business is a detailed and nuanced
process. You need to consider multiples, DCF, and
the competitive landscape and thats just to get
you started. With so many dynamic factors at play,
it can be extremely challenging to identify the
exact worth of the business. But, in most cases,
you can get a reasonable number.
With the recent valuations of Zynga, Groupon and Facebook, it seems like the numbers
have been unusually high. Each announced valuation was received as a bit of a surprise.
Despite intense media attention and underperformance of these businesses, high
valuations have continued just look at the $3.25 billion valuation of Square last
month and the valuation will probably grow as PE dry powder could continue to push
valuations higher.
The audacious numbers have sparked our interest in learning more about what factors
contribute to a high valuation. Rather than examining the tech industry which has
been known to encounter a bubble or two we decided to speak with David
Rudofsky, a leading strategic expert for mid-sized food businesses, a more grounded
industry.
Rudofsky is the current president of Rudofsky Associates, having previously served as
Director of Strategic Planning for Altria and Cost Manager for Kraft Food. According to
Rudofsky, there are five characteristics that should signal a higher valuation: long-term
product differentiation, forecasted purchasing capabilities, cost reduction know-how,
distribution channel management, and international presence.
1) Product Differentiation:
One of the most important considerations when valuing a food company is its ability to
http://www.axial.net/forum/strategies-that-boost-valuation-2/

Page 1 of 5

5 Strategies That Boost Agribusiness Valuations - Axial

10/2/14, 3:14 PM

distinguish itself from its competitors. Although this trait is valuable in any industry, it
is particularly important in the food business. Rudofsky explained, The barriers to entry
are relatively low in the food business, making it especially important for brands to
establish a meaningful point of differentiation from their competitors. Companies which
have established this differentiation are inherently more valuable since they are better
able to achieve premium pricing for their brands, while also reducing vulnerability from
me-too competitive entries.
However, Rudofsky warned against overvaluing temporary competitive advantages. He
explained that product differentiation is only truly valuable when the brand can
withstand new market entrants. A sustainable competitive advantage is one that is
reinforced with either patent/trademark protection or has become recognized as a
leader of a category. In this position, it is hard to undermine the market presence of
these companies. Temporary competitive advantages have none of these guarantees and
can quickly lose their value.
2) Purchasing Capabilities:
Another characteristic that adds to the value of a company is its ability to appropriately
forecast and purchase its goods in bulk. Food manufacturers invariably have a natural
long position in one food commodity or another be it grain, dairy, meat, vegetables,
etc. Manufacturers that are able to source advantageously and/or establish appropriate
hedging programs should be able to obtain higher gross margins and be less susceptible
to commodity squeezes.
Rudofsky added that centralized purchasing can also help reduce packaging costs.
Although hedging on commodities is important, knowing specific purchase quantities
can help a company prepare packaging materials. By providing suppliers with this
information, the supplier can be more efficient and can pass the savings onto the firm.
Like any valuable asset, the creation of this type of system can be challenging. Rudofsky
remembered issues with centralized spending at Kraft Food, Even at Kraft, which had a
http://www.axial.net/forum/strategies-that-boost-valuation-2/

Page 2 of 5

5 Strategies That Boost Agribusiness Valuations - Axial

10/2/14, 3:14 PM

strong centralized purchasing operation, there was the occasional issue with
decentralized spending we called it maverick spending. If it can happen in a company
that size, it is bound to happen in smaller ones. For a $10 million company, there is
barely enough budget for a purchasing resource, let alone an entire department.
3) Cost Reduction Know-How:
In addition to managing costs through forecasting and hedging, a companys ability to
identify techniques that can help mitigate costs will make it inherently more valuable.
Manufacturers with cost reduction capabilities deserve a higher valuation because they
have the in-house capability to continue growing earnings even when sales volume
plateaus. Combine good internal process engineering and R&D professionals with a
strong cost accounting capability, and you have all the elements needed to maintain a
first-rate cost reduction program.
As an example, Rudofsky told us about a client from several years ago. He explained,
They suspected that one of their products was slowing their earnings. However, they
had no real numbers to evaluate. When they finally tested it, they learned that one
product had 25% gross margins, while the other had 45%. They made a change of
supervisor to the underperforming product and quickly realized a 25% increase in gross
margins.
Rudofsky continued, Sometimes, a cost reduction strategy is simply being able to
identify certain products that should be removed from the portfolio entirely certain
products can often just be weeded out. They can be pulling all financials down, especially
for a business that is close to capacity.
4) Channel Management:
According to Rudofsky, the fourth characteristic that should be considered when valuing
a company is the state of its distribution channels identifying the appropriate channel
is vital to the success of a food business. As Rudofsky explained, Distribution channels
http://www.axial.net/forum/strategies-that-boost-valuation-2/

Page 3 of 5

5 Strategies That Boost Agribusiness Valuations - Axial

10/2/14, 3:14 PM

for food products have proliferated tremendously in the last twenty years. Each channel
requires a unique distributor the distributor who gets you into Whole Foods is not the
same one who is going to get you into a Duane Reade or CVS.
Since the channels are so distinct, the ability to sell down a variety of channels is
extremely important. Rudofsky continued, The manufacturer with the experience of
profitably selling down a variety of channels should be seen as more valuable.They have
more diversity in revenue options and expansion options, making them capable to more
quickly and profitability grow their early stage brands. However, not all channels are
good for all products. Companies should figure out which of their products can go down
which of the channels.
5) International Presence:
The final factor to consider when valuing a company is its international presence. A
global presence has the clear advantage of enabling rapid brand development. Rudofsky
explained, The largest food companies typically have at least some international
presence. Multinational giants such as Unilever, Nestle, and Kraft Food have the
capability to take basic brands and food concepts from their established market and
introduce them in developing countries, while also sourcing exciting new ethnic food
products from those countries and introducing them into more established markets. He
continued, Many mid-sized food companies are exclusively based in the US. If a midsized company has an international presence, it should be valued at a higher multiple
because it has the ability to grow brands more quickly across international borders.
However, another benefit to international presence is its ability to create distribution
partnerships. The international distribution channels, product aside, makes a company
more valuable. Many smaller firms may approach it, looking to partner with the firm
and have their products shipped overseas. These partnerships can be a valuable source
of revenue. Rudofsky continued, I have a client that has a presence in Russia and the
Middle East. I have already been able to approach them with smaller companies that are
looking to piggyback on their distribution channels. They have an incredibly
http://www.axial.net/forum/strategies-that-boost-valuation-2/

Page 4 of 5

5 Strategies That Boost Agribusiness Valuations - Axial

10/2/14, 3:14 PM

sophisticated system in place.

Although Rudofskys examples may be unique to the food industry, the advice holds in
most industries. Regardless of the specific business, a company that is able to secure a
market position, strategically purchase goods, consistently identify cost-cutting
strategies, and have a diversity of international distribution channels will be in a strong
position to grow and develop. Its valuation should be higher to reflect these strengths.
How much higher is up for debate just look at Facebook, Zynga, and Groupon.

http://www.axial.net/forum/strategies-that-boost-valuation-2/

Page 5 of 5