‘I never thought we would become farmers,’ says F&N CEO

CITRUS farms in Florida have been battered after two hurricanes in two weeks swept over the South-eastern coast of United States between September and October this year.

One of the world’s largest citrus producers, the state expects crop yields in 2024 to be at their lowest in close to 100 years after Hurricane Helene and Hurricane Milton tore through Florida.

This has exacerbated beverage manufacturer F&N’s difficulties in securing its supply of orange juice, said its chief executive officer Hui Choon Kit in an interview with The Business Times.

“The prices just keep going up, and we have no choice but to pass them on to customers. So that is something that’s very real to us, and the only thing we can do right now is look for alternative sourcing or alternative countries,” he added.

Local sourcing

Securing a continued supply of raw materials for the long term has been F&N’s primary focus in managing its climate-related risks over the last few years.

Supply chain disruptions during the Covid-19 pandemic and uncertainties in the production of raw materials due to the increasing frequency of severe weather events have led Hui to turn to local sourcing as a key risk management strategy.

“If I cannot get my raw materials, our factories will go down. We need to make sure that we have sources of supply that can take us through the next 20, 30, 40, 50 years. Otherwise we have to close shop,” he said.

To this end, the company is in the midst of developing its first large-scale dairy farm in Malaysia in its bid to go upstream.

Construction of the first phase of the farm is expected to be completed soon. However, F&N has announced that milk production, which was originally intended to begin in January next year, could be delayed by between six and 12 months, as the Malaysian government has suspended the import of dairy cows from the US due to an avian flu outbreak.

The dairy farm is meant to be a one-stop shop providing a reliable supply of milk to F&N – this involves growing its own animal feed for the cows. The company is also looking to incorporate technological solutions that will mitigate methane emissions at the farm.

“I never thought we’d become farmers… When I joined the company 20 years ago, I never thought we would go upstream. But it is just such that, in order to grow that business, we need to have reliable supply,” said Hui.

“The primary objective is to be able to develop or to deliver products in a reliable way to our customers, and we know that the quality is there,” he added.

In addition to having a stable supply, building the farm in Malaysia – which is one of F&N’s biggest markets – also means situating production closer to market. This would lower logistical costs, as well as the emissions that would arise from transportation.

This would also provide Malaysian consumers greater accessibility to fresh milk – a healthier option than powdered or recombined milk, which is made by mixing water, milk powder and milk fats. The country consumes more milk than it produces locally.

Dairy, so far, is the only commodity for which it makes business sense for F&N to go upstream. However, Hui does not discount similar opportunities for other commodities in the future.

That being said, there are some raw materials not suitable for cultivation in South-east Asia’s tropical climate.

One of them is soybean. A major ingredient in one of F&N’s product lines, soybean is best grown in cold temperatures.

Finding the right suppliers allows the crop to be grown in an environmentally responsible and also financially sustainable manner.

“We also need to make sure that these guys can continue to support us in the future. They have their practices such that they can continue to supply soy,” said Hui.

F&N sources soybeans entirely from Canada, due to deforestation concerns in other markets.

That being said, Hui acknowledges that customers might still have to get used to changes in the formulation and taste of some beverages, as the company may sometimes have to switch to alternative sources despite their best efforts to maintain supply from their usual partners.

“Customers like a certain taste, and that’s why they keep coming back to us. But we also have no choice but to work with them so they can understand that we cannot always be getting the same ingredients or raw materials. So then, you will have to get used to some tweaks in the taste. But that is just a reality that we face. I don’t think we have a real solution as to how that can be resolved quickly,” he said.

“We’re all creatures of comfort. We like what we’re used to, but when you’re faced with no choice, I think people will switch and say: ‘Okay, I can accept this.’”

Banking on wellness

Notwithstanding the long-term challenges in maintaining a stable procurement network, F&N is also relying on product innovation to access new markets and customers, especially Malaysia and Thailand, which are the biggest contributors to its revenue.

Given that soft drink beverages have generally appealed to younger customers, the company is looking to develop health-focused products for older customers – including the elderly – such as soy-based drinks.

“That is something that we are working towards to capture a larger segment – looking at more times in the day that you will consume a product,” he added.

Leveraging on the wellness trend has been beneficial for the company, as its zero-sugar beverages, such as 100 Plus Zero Sugar, have been quite well-received, said Hui.

It is currently working with health-related institutes to develop beverages that could be clinically proven to be healthier.

“We still believe that the product must taste good. We’re not selling medicine,” said Hui.

The food and beverage segment continues to be the biggest contributor to F&N’s revenue. According to the latest earnings update for its entire fiscal year ended Sep 30, 2024, the segment recorded a 4 per cent increase in revenue to S$1.9 billion, while profits jumped 21 per cent compared with the previous financial year.

Overall, the company’s revenue increased by 3 per cent to S$2.2 billion, and its net profit rose 13 per cent to S$150.2 million.

Education consultancy

However, the group’s overall performance was dragged down by its publishing and printing segment, with revenue declining by 9 per cent to S$201.3 million due to reduced print orders and the closure of unprofitable business units.  

While the company has started a sustainable packaging and printing line, it is not enough to offset the declines in traditional printing, noted Hui.

F&N will focus on its growing educational consulting and content business in this segment. The company is working with education ministries overseas to develop educational content and textbooks, and to train teachers in their use.

“That has proven to gain some traction, and we hope that it will then create a momentum of its own, as other countries start looking and say: “I want to upgrade my workforce as well.’”

Shares of F&N have increased considerably, jumping 25 per cent from July this year when Thai Beverage (ThaiBev) announced its plans for a share swap agreement with F&N and Frasers Property.

Responding to comments that its shares have been undervalued, Hui said that F&N will work together with ThaiBev – which is now the company’s majority shareholder after the share swap deal – to figure out how to build a clearer future for the group.

“So when it comes to valuation, that is something that’s very difficult to talk about. What we’ve always said is that what we can do is to make sure that our business continues to deliver and grow and give good returns to shareholders.”

Hui acknowledged that F&N’s very small free float of 12 per cent makes it difficult to attract institutional investors.

“So it becomes a bit of a chicken-and-egg (issue). Unless our valuation is higher, they would not be very keen for us to to increase the float,” he said.