The Trouble with SanCor

There is a popular proverb in Argentina that says: ‘El que se quema con leche, cuando ve una vaca, llora’, which translates to: ‘He who burns himself with milk, cries when he sees a cow.’ Perhaps this phrase has never been manifested so literally as now, with stakeholders in Argentina’s dairy industry close to tears as they await signals about the future of the country’s biggest milk cooperative, SanCor.

 

In today’s blog post we explore SanCor’s history and the path of decisions that landed the company in their current situation. We will also identify a few key mistakes made along the way and attempt to extrapolate lessons that can be leveraged by other businesses. SanCor’s crisis is a tragedy by many measures, but if we can learn from their choices, perhaps we can prevent history from repeating itself.

 

Who is SanCor?

SanCor was formed in 1938, when 16 dairy cooperatives spread throughout the provinces of Santa Fe and Cordoba (hence the name, San–Cor) joined forces. In 1940, the fledgling company took its first steps into the processing sector with the foundation of its keystone plant located in Sunchales, Santa Fe, where the company’s headquarters remain today.

 

Over the years, SanCor continued to grow both in terms of milk volume collections and processing capacity. The company opened new manufacturing facilities, expanded their product portfolio, embraced export markets, and became a staple in the homes of Argentine consumers. In fact, in a recent study performed by market research group Kantar Worldpanel, SanCor ranked as the third most purchased brand in Argentina’s mass consumption space, just behind Coca-Cola.

 

Today, SanCor’s manufacturing footprint includes 16 plants spread across Argentina’s dairy basin of Santa Fe, Cordoba, and Buenos Aires, where it produces dairy products ranging from milk powder to fluid milk. Including all its facilities, SanCor has the capacity to process between 4 and 4.5 million liters of milk per day and employs roughly 4,500 people across the entire network. The cooperative is owned by 1,400 members and controls about 15% of the milk produced in Argentina.

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But even though decades of growth have propelled SanCor to an iconic level of recognition, its development has been anything but a fairly tale. The company has been repeatedly dogged by managerial and financial issues that have threatened to leave it in ruins. Today, the cooperative which was once a crown jewel for Argentina’s dairy sector, is mired in crisis with no clear path toward resolution.

 

Trials and Tribulations

To understand SanCor’s difficult history, we must go back to the mid 2000’s when an overleveraged balance sheet, combined with a weak dairy sector and decimated macro economy, threatened to bring down the company. For decades prior, SanCor had fueled its growth with debt and by 2006, the company was buckling under the weight of the nearly $200 million USD owed to both state and private banks.

 

By November of 2006, it seemed that SanCor would accept assistance to the tune of $120 million USD furnished by Adecoagro. However, as part of the deal, Adecoagro would gain 62.5% ownership in the company and SanCor would cease to be a cooperative. Instead, at the eleventh hour, SanCor agreed to accept a credit extended by the Venezuelan government in a deal partially facilitated by then Argentine president Nestor Kirchner. Venezuela’s Hugo Chavez extended two lines of credit to Sancor – one valued at $80 million USD to be used to restructure debt, and a second of $55 million USD to be used as working capital. The loans would be repaid in milk powder exports over 15 years at an interest rate equal to LIBOR and SanCor would remain a cooperative. Everyone was happy.

 

Until they weren’t.

 

Over the next few years, SanCor’s management would make several key decisions to sell off parts of certain business units. In 2012, they sold 80% of their infant formula business to Mead Johnson for an estimated $196 million USD. Mead Johnson (now part of Reckitt Benckiser) acquired an additional 10% of this business in 2015, for another $24 million dollars with an option to buy the rest in the future. Also in 2015, SanCor began to solicit offers for its fresh dairy products business, which included products like yogurt and dairy desserts. In June 2016, SanCor’s membership approved the sale of this business unit to Argentine dairy company Vincentín. While these moves were presented as strategic decisions that would provide the company capital to reinvest in their business, the writing was on the wall. SanCor was again in financial trouble.

 

In March 2017, SanCor announced that it would be closing four of its 16 plants. Not surprisingly, this decision reverberated across the industry, causing stress for dairy farmers, employees, and suppliers. As more details emerged around SanCor’s financial situation, it became clear that the cooperative had not been profitable for several years, racking up losses of over $160 million USD in FY2016 alone. Suppliers, including dairy farmers, are indicating that they have not been paid in months. Leadership has blamed the situation on a number of factors:   low global dairy commodity prices, weather impacts, poorly developed rural infrastructure – and the inconvenient issue of an unpaid debt that Venezuela owed to SanCor for dairy products shipped over and above what had been agreed in the original credit agreements.

There is no easy answer for how SanCor will emerge from this current crisis, but the solution is likely to change the face of the cooperative forever. On May 30, 2017, SanCor’s assembly approved a restructuring plan that was developed in an effort spearheaded by the government. The approved measures include the acceptance of a loan valued at $28 million USD from the government to pay suppliers, and the incorporation of a strategic partner – which is a politically palatable way of saying that the cooperative will be sold. While rumors run rampant about who the potential buyer might be, the dairy farmers and employees caught in the fallout of this crisis will be forced to wait to learn the future of their fates.

 

Lessons Learned

I don’t presume to have the magic solution for how SanCor’s dire circumstances could have been avoided. Indeed, dairy is a complicated industry, not to mention that companies across Argentina have faced a challenging business climate for many years. Nevertheless, with the benefit of hindsight, we can draw some important conclusions about several managerial mistakes that made SanCor’s bad situation worse. In particular, I would highlight:

 

  1.  Raising Cash at the Expense of Profitability
  2.  Operating a Commodity Business with Inherent Inefficiencies
  3.  Lack of Managerial Accountability

 

We all know the phrase ‘cash is king’. However, cash is of little use if a business is fundamentally unprofitable. In the case of SanCor, we witnessed the sale of two high potential business units, infant and fresh products, in an attempt to raise money to meet short term needs. As a result, the company was left throwing good money after bad and once the capital raised from the sale was gone, not surprisingly, the company was still losing money. Of course, divestitures aren’t always bad. The proper choice to divest can help a company shed an underperforming business unit or align its operations with its strategy. Even though selling off pieces of a business to raise cash may be tempting in some cases, the decision must be made only after fully considering the impact on profitability.

 

Once SanCor had sold off the value-added business units, it was left with commodity products such as milk powders and cheeses. While commodities aren’t necessarily bad business, in fact many people have been quite successful selling these products, profitability hinges on volume and high operating efficiencies. Unfortunately, this was not the case for SanCor. The cooperative’s plants are old and require significant technological updating. In addition, its network was bearing a cost structure that was suitable for a much higher production level. While SanCor boasted a capacity of over 4 million liters of milk per day, people close to the company report that they are processing less than a quarter of that volume. But despite this decline, until recently the company maintained the same workforce and manufacturing footprint. It is worth mentioning that labor issues in Argentina are notoriously prickly and it is not easy to adjust a roster of employees downward. Nevertheless, the lesson remains the same: a company cannot be successful selling commodity products if costs are bloated.

 

I cannot claim to be intimately familiar with the extent to which SanCor’s management team had to answer for their actions through all of these evolutions. However, based on my observations and conversations with those familiar with the company’s inner workings, it appears that there has long existed a need to increase oversight and accountability of the management team. While being a cooperative, SanCor is also a business and a strong, professional board is necessary to ensure that management’s decisions promote the long-term interests of the company. Though we may never know for sure, if there had been a proper board in place that forced the company’s managers to adhere to objectives, deliver results, and address issues before they spun out of control, perhaps the cooperative could have avoided landing itself in such deep trouble.

 

Looking Forward

The future is anything but clear for SanCor. While new details will surface in the coming days with respect to the cooperative’s next steps, SanCor’s journey toward restructuring will be long, messy, and complicated. However, this transformation will be an important step to endure if the company hopes to emerge from this crisis stronger than before. As SanCor painfully unwinds itself from years of questionable decision making, many of its members, employees, and stakeholders are likely to tear up as they pass by fields of cows – remembering the time that they were burned by this milk cooperative.