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CONFECTIONERY LEADER WRESTLES WITH SMALL SHAREHOLDERS

Company Profile: Jacobs Suchard Figaro

Anyone who walks down Račianska ulica in Bratislava is likely accustomed to sniffing the sweet smells of chocolate wafting from the factory of Jacobs Suchard Figaro a.s. (JSF), a daughter company of Kraft Food International Inc., which in turn is wholly-owned by the Philip Morris Group.
Without Philip Morris, JSF, with 46 percent of the confectionery market in Slovakia, would most likely have had major problems steadily increasing its market position and surviving against the aggressive competition of outside chocolate makers. The company also produces coffee under the Jacobs and Dadák brands.
"The overall amount of investments put into the plant after 1992 was around half a billion Slovak crowns," Rudolf Stelzhammer, JSF's deputy chairman, said. The quality and the hygienic conditions within the production process are now comparable to any western European plant owned by Kraft Jacobs Suchard, Stelzhammer added.


Sweet smells. A chocolate production line at Figaro.
Courtesy of Figaro

Anyone who walks down Račianska ulica in Bratislava is likely accustomed to sniffing the sweet smells of chocolate wafting from the factory of Jacobs Suchard Figaro a.s. (JSF), a daughter company of Kraft Food International Inc., which in turn is wholly-owned by the Philip Morris Group.

Without Philip Morris, JSF, with 46 percent of the confectionery market in Slovakia, would most likely have had major problems steadily increasing its market position and surviving against the aggressive competition of outside chocolate makers. The company also produces coffee under the Jacobs and Dadák brands.

"The overall amount of investments put into the plant after 1992 was around half a billion Slovak crowns," Rudolf Stelzhammer, JSF's deputy chairman, said. The quality and the hygienic conditions within the production process are now comparable to any western European plant owned by Kraft Jacobs Suchard, Stelzhammer added.

The company now seems to be in its best shape since the merger. "The chocolate market is ours, we state the prices," said Ivan Pukan, brand manager from Figaro's marketing department. Still looking ahead, though, Figaro has just embarked on a comprehensive advertising campaign for its mid-level chocolate brands, connected to new packaging designs "to separate us from the others by attractive packaging as well as by high quality," Pukan said.

The plant in Bratislava is important to the Philip Morris Group thanks to its location, which enables Kraft to supply Russia, Hungary, the Czech Republic and Poland. "This year, half of our revenue will come from our exports," Stelzhammer said. "Strengthening exports is one of our main goals."

Figaro originated in 1896 under the old Austro-Hungarian empire. Since then, the company has specialized in chocolate confectionery, especially pralines, surviving two world wars and endless years of planned economies, when it belonged to a Czechoslovak chocolate holding firm, Československé Čokoládovny n.p. Praha.

Finally in 1992 Figaro was transformed into a joint stock, 100 percent state owned company and shortly after that a 67 percent stake was sold to Jacobs Suchard, which later merged with Kraft General Foods Europe creating Kraft Jacobs Suchard, now a daughter of Philip Morris Companies.

Bittersweet dreams

Since the multi-level mergers, some say only dreams are left for those who in 1992 purchased the remaining 33 percent share of Figaro.

One of these minority shareholders, Prague Investment Partners Holding (Cyprus) owning a 7.27 percent stake, has repeatedly expressed concern over JSF's financing and its dividend policy.

Little wonder why they are worried.

Since 1992, the market value of Figaro shares have dropped more than four-fold, resting now around 700 Sk with shares being negatively affected by a 1992 agreement between Figaro and the National Property Fund to pay no dividends and by losses from past years. "Dividend policy is the decision of the shareholders," Stelzhammer said. "We have no right to influence this decision."

There may be a point in minority shareholders' complaints. Looking at the financials of Philip Morris's Slovak daughter would probably raise anyone's eyebrows. Profits are weaker than one would expect, especially considering JSF's strong market position.

Yet in 1995, JSF incurred a loss of 27.2 million Sk, just a little less than in 1994. JSF said it was caused by paying fines, especially to the tax office. However, the director of Prague Investment Partners, Robert Blažek, offered a darker tale. "Costs are non-controllable," he said. "For example, the high sales expenses suggest that profits were poured somewhere else." Figaro representatives reject the claim.

Also JSF's profit margins are in question. Prague's minority shareholders complain about their low level, having compared them to margins of JSF's biggest competitor, Čokoládovny Praha, jointly owned by Nestlé and Danone.

JSF argues otherwise. "Our margins are comparable to other Philip Morris daughters, especially in central and eastern Europe," Stelzhammer said. "We even reached higher ratios than the Austrian Nestlé."

Conservative financing

In 1996, the company showed an income of 83.2m Sk, which caused small shareholders to hope for a dividend payout. But major shareholders at last May's general assembly decided to retain the profits, sparking another wave of disagreement.

"Companies like Philip Morris are looking at investment from a different scope as are the investment funds," Stelzhammer said. "For us, established profitability over the long-term and maintaining a dominant market share are more important than immediate earnings."

Like other companies, Figaro's financial structure is closely linked to its dividend policy.

If dividends are not paid out, profits are retained and a company doesn't need external financing. Figaro's financing policy is set in this conservative mold; the share of its external financing is less than 10 percent, and the company does not have any bank loans.

It looks like a pretty wise strategy, as Figaro shares 33 percent of the risk with minority shareholders who haven't, though, shared in the returns.

Figaro's low external financing also wards off the threat of high and unpredictable interest rates.

"We don't need any bank loans, as we are able to finance our activities as well as our investments from the generated cash flows," Stelzhammer explained.


Jacobs Suchard Figaro At a Glance

(Figures are in Sk through June 1997 unless otherwise noted)


No. of employees: 720
Operating expenses: 43 mil.
Total assets:1.03 bil.
Pre-tax income: 21.4 mil.
Fixed assets:554 mil.
Share capital:1.45 bil.
Equity income:895 mil.
Ownership:67% - Phillip Morris

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