Old Dogs New Tricks

The pressure on chief executive officer Michael McCain to get it right has hit a crescendo. This month, shareholder activist West Face Capital Inc., which owns about 11 per cent of Maple Leaf, succeeded in shaking up the board and parachuting West Face founder Greg Boland onto it. Maple Leaf is under new scrutiny, with a former enemy in a leadership role, leaving little room for error.

The Globe and Mail
February 24, 2011

Old Dogs New Tricks
78 different wiener recipes, 50 different sizes, Maple Leaf is driving hard to streamline its fragmented operation
Tara Perkins


No underdogs here: Two employees discard imperfect wieners coming off the line in a packaging area at the Maple Leaf Foods wiener plant in Hamilton. Peter Power/The Globe and Mail

It’s raining hot dogs.

On the lower level of Maple Leaf Foods Inc.’s (MFI-T11.94-0.04-0.33%) wiener plant in Hamilton, hot dogs are tumbling out of a large hole in the ceiling and bouncing onto a conveyer belt below.

The belt in the “ready-to-eat” portion of the plant carries the hot dogs through the final phases of the process that sees them neatly wrapped into packages, in this case to be branded “Top Dogs.” It’s a continuous, automated assembly line – one of the better ones that the company has. But it’s still easy to spot inefficiencies in this two-storey plant.

It takes about four hours to make a wiener. The process begins in the “formulation area” that houses the raw hot dog batter, a colourful chunky-looking thick goo (“emulsion”) that’s squished into collagen casings that are then twisted like balloon animals before being smoked, after which the casings come off. Eventually, the dogs make their descent onto the ready-to-eat conveyer belt.

The process stops many times a day to switch to a new type of wiener. Sometimes those “changeovers” take an hour and a half or more.

That is why Maple Leaf believes simplification will be its salvation. At the outset of 2010, the company made wieners using 78 different recipes in 50 different sizes, some of which differed by as little as a few millimetres. Metal tubes and parts must be swapped to switch between sizes. Within the recipes (“formulations”) there were eight different combinations of potential allergens (such as milled wheat or soy), and the machinery has to undergo a thorough cleaning between each. Sanitation takes longer here than it would in newer facilities. Last but not least, wieners were being cranked out of six different plants.

It’s wiener-making at its most complicated, a legacy of several acquisitions that resulted in Maple Leaf adopting an array of hot dog brands and manufacturing plants. The same convoluted structure can be found in its other meat products and bakery items too. That, the company says, is why its costs are high and profit margins low. And it’s the justification for a $1.3-billion turnaround plan that will see the company shed its worst plants, build some shiny new mega-facilities, and spend on the latest technologies. But shareholders are skeptical of the costly plan, and some question whether it wouldn’t be better just to sell parts of the firm off.

The pressure on chief executive officer Michael McCain to get it right has hit a crescendo. This month, shareholder activist West Face Capital Inc., which owns about 11 per cent of Maple Leaf, succeeded in shaking up the board and parachuting West Face founder Greg Boland onto it. Maple Leaf is under new scrutiny, with a former enemy in a leadership role, leaving little room for error.

“I think [Mr. McCain] realizes that time is of the essence, so it’s something they need to move aggressively on,” says Tim McElvaine, founder and president of McElvaine Investment Management Ltd., a Maple Leaf shareholder and former director of Humpty Dumpty Snack Foods and Sun-Rype Products Ltd. “But that doesn’t mean that you just throw money at it.”

The choices that Maple Leaf are confronting are emblematic of those being made throughout Canada’s manufacturing sector, which accounts for about 12 per cent of the economy and has been battered by the strong Canadian dollar and the economic downturn.

The realization that the high-flying dollar is likely here to stay is just setting in, said Jayson Myers, chief executive officer of the Canadian Manufacturers and Exporters. “So every company has to weigh the risks of making these investments in new markets, products and technologies against the expectation that if they do so they’ll be able to grow their business. And all of this is happening at a time when competitive pressures are more intense than ever before.”

Maple Leaf reported its 2010 financial results Thursday and said the weak U.S. dollar is helping U.S. rivals to compete more aggressively on pricing in Canada, where about 61 per cent of the wieners sold come from Maple Leaf.

The company also said that “some early benefits” of its strategic plan have already been realized. “We’re making very good progress,” Mr. McCain told analysts on a conference call.

Maple Leaf, which has about 21,000 employees worldwide, actually began restructuring more than three years ago but its efforts were waylaid in 2008 by a deadly listeriosis bacteria outbreak linked to one of its plants in Toronto. It’s clear that new challenges will erupt, not the least of which is the dramatic “food inflation” that’s occurring due to rising costs for everything from hogs to crude oil.

But in the face of short-term obstacles Maple Leaf executives say their plan is what’s needed now to position the company for the long term.

Wieners, a mainstay of the firm, are at the forefront of this multi-year strategy.

In November the company announced the closure of its prepared meats plant in Berwick, N.S., which employed about 280 people. This month it said it will be shutting down another plant in Surrey, B.C., affecting about 155 employees.

“When you have hot dogs made in five different plants, you lose the benefits of scale,” said Rick Young, Maple Leaf’s executive vice-president of transformation (whose business card also reads “shareholder”).

Maple Leaf is planning to build a giant new facility for its meat business in the next couple of years, fitted with the latest technology.

Such a facility is already under construction for its Canada Bread subsidiary. The $100-million bakery that’s being built just a short drive away from the wiener plant in Hamilton will be Canada’s largest. The production of items such as bread, hot dog buns and pitas will shift from three older bakeries in Toronto to this 385,000-square-foot new one.

Maple Leaf is going to have to prove to its shareholders in the quarters ahead that such financial outlays will pay off. “The shareholder group has indicated that return on invested capital is a very important indicator for Maple Leaf,” Mr. McElvaine said.


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