When downsizing is necessary

A growing number of companies are being forced to make difficult decisions as they realise the need to increase their competitiveness. At the beginning of what looks to be a difficult year for many businesses, Louis Farrugia tells MIRIAM DUNN how Farsons are tackling this problem

There have been rumours that changes are on the horizon for the arm of Farson’s fast food business - Food Chain. Is there any truth in these rumours?

Food Chain currently has three franchises with a total of 10 outlets - four Burger Kings, four Pizza Huts and two Kentucky Fried Chicken outlets.

I can confirm that we will be taking certain steps at Food Chain with a view to downsizing operations, in particular the unprofitable ones.

I do not want to elaborate on this statement at the moment, since we will be giving more details of these measures in the next few weeks. But I can tell you that we have asked our employees if they are interested in taking early retirement and we will be looking at tailoring our head office set-up which supports the operations.

Will this involve any closures?

What I can say is that we will be taking the necessary steps to retain only the profitable outlets and restructuring our head office to support those outlets, as any company that had incurred losses from an operation would expect to do.

Are you expecting problems from the unions due to your decision?

I am sure unions appreciate the necessity of certain steps, but it may not be easy for them to explain these changes to their members.

This must be a disappointing decision for you to have to make. Why do you think the fast food projects have not been as successful as they might have been?

It is not an easy choice to make, but ultimately, I’m charged with the responsibility of ensuring we increase profitability and sometimes one has to make a decision on whether to move forward and acquire new franchises or sometimes downsize operations.

The objective must be to increase the profitability of the business for the benefit of both the shareholders and the employees.

Food Chain has sustained considerable losses, partly, I believe, because some of the outlets did not live up to our expectations and also due to the fierce competition that exists in this line, also from non-franchised outlets.

Would you say that Food Chain has been affected by the restructuring process which so many businesses are having to undergo?

Restructuring is about gearing up to become more competitive and we are looking at our operations as a whole, with a view to competing in the open market.

As I said, competition is tough and I’m sure that Food Chain is not the only group of fast food outlets in operation failing to make money at present. In fact, I think it’s surprising how many loss-making operations are still open.

But I think the chickens are gradually coming home to roost now. We’ve seen it in certain areas, such as supermarket chains and soft drink companies. I am sure we will witness the fall-out of more difficult decisions.

Was your decision affected by the bad debts you incurred from the Price Club crash?

The bad debts that the Price Club disaster brought about definitely affected our profitability last year, but it was a one-time debt for one year, rather than an ongoing situation.

Having said that, it would have affected the economy as a whole since many suppliers had to bear the brunt of substantial bad debts. One has to consider that the Price Club had seven or eight outlets, while many suppliers were also hit by the closure of Supermaster and MA supermarkets. All in all, the debts totalled something like Lm12 million in one year for suppliers, which obviously gives them great problems.

If Farsons is downsizing its fast food operations, what will it be focusing on instead?

Basically we are a local-based operation, with 98% of our turnover taking place in Malta.

We are aware that the markets are opening, so we have to gear up for the challenge of taking on competition from overseas. We are looking at ways of becoming more competitive, such as improving our systems, from production to distribution, and increasing our efficiency. We will be investing in new technology which will help us do this, while also bringing our costs down.

Our prosperity depends on our ability to keep up with the times – if we fail to do this, we will not remain competitive.

Do you think we might see mergers among local players in a bid to take on foreign competition?

If we look at the global situation, there are only two major players in the soft drinks sector - Pepsi Cola and Coca Cola – while there are also only three or four players in the area of wines and spirits. We see the same picture in many sectors – massive conglomerates owning many brands, such as fast food outlets - so I would not be surprised if, in the long term, our local markets end up dominated by a couple of major players in each sector.

There are already only two major players in soft drinks in Malta now, and this may well be a trend we witness in other areas, such as pharmaceuticals or importation.

Are you still confident that EU membership is the best way forward for Malta?

I’m confident that our economy will benefit from what the EU has to offer and that membership will bring many opportunities for everyone, especially job seekers.

Membership is the only way that we will increase competition and efficiency. In fact, if you look at the debate in Europe on the euro it is focusing on whether Europe is competitive enough yet in relation to the US. There is criticism that the American system still produces much more competitive activity, which has brought about greater efficiency, while the European system is still rather rigid. What chance do we have if we are not even in the European set-up?

How do you react to criticism that the government is placing too great an emphasis on EU membership and is neglecting domestic issues?

I think the government has a very determined objective to join the EU, but perhaps its message of why it is doing this isn’t always coming across well.

We should remember that we need to take certain steps to get our economy functioning well anyway, irrespective of whether they are prerequisites for joining the EU.

Introducing measures such as dismantling monopolies and privatisation, for example, can only be healthy.

We need competitive activity in every sector, not just the beer and drinks sector, which affects Farsons. Competitive activity leads to better services - just look at how the pluralism in broadcasting has led to improvements in the quality of locally-produced programmes and better advertising rates. Why shouldn’t that apply to other services such as water, electricity and telecommunications?

When Farsons recently took over the Seven Up franchise, the company said it would do its best to offer jobs to the employees made redundant by Portanier Brothers. Have you been able to do this?

We’ve written to all the Seven Up employees and told them that they are welcome to send in applications for work, although it will obviously depend on what we have available.

We’ve interviewed all those who applied, and hopefully we’ll be able to offer some of those people a job, as long as they are suitable for the posts available.