Will accession save Parmalat divisions?

Related tags Parmalat European union

Despite Italian food giant Parmalat's financial crisis, its
divisions in both Romania and Hungary continue to operate. Indeed,
Parmalat Hungary is expecting that in the run up to accession,
production will increase in response to rising demand. Simon
Pitman looks at what is in store for the divisions.

As the investigations into the alleged multi-billion euro financial cover-up at Italian food giant Parmalat continue, the future of its international operations lie in the balance. The group has already made it clear that it intends to reduce its international operation from 30 countries down to 10 - a move that will cut the workforce from 32,000 to 17,000. This means that in Eastern Europe the company's business in Hungary is now facing imminent liquidation.

But that has not stopped the unit from continuing to try and act as if it were business as usual. In fact, both the Hungarian and Romanian divisions have so far fought to stay afloat with a determination that has been sorely lacking at other parts of the Parmalat empire - and which will be crucial if either is to remain in business, in whatever guise, in the future.

Both divisions say that they have fallen victim to the actions of the parent group. But neither has taken the news lying down.

Indeed, the CEO of the Hungarian Parmalat division, Cristiano Villani, recently told Hungarian reporters that he is expecting the division to benefit from the increased market opportunity brought about by EU accession, despite the fact that the division is in the process of liquidation.

At Parmalat Romania, which has manufacturing operations in both Bucharest and Baia Mare, the future looks a little more certain, though at this stage in the game nothing is a certainty. The Parmalat group has earmarked certain core international operations which it would like to maintain. These include the two Romanian facilties along with Italy, Spain, Portugal, Canada, Australia, South Africa and Russia. All of these operations are described by Parmalat as hubs, which will help to maintain the company's footprint in as many different markets as possible.

Now both eastern European divisions are faced with the problem of trying to maintain production volumes by regaining the trust of their suppliers - the dairy farmers throughout the region. Undoubtedly, with a considerably more uncertain future, this challenge is even more important for the Hungarian operations. At its peak, Parmalat Hungary processed up to 300,000 litres of milk a day. Now that figure stands at around 90,000 litres a day. Although Parmalat Hungary is still a relatively small player, with 6-7 per cent of the market, it held the leading position in the UHT sector.

Villani believes that if the Hungarian division can win back some of the suppliers lost since the financial scandal came to light then the momentum provided by accession could see the company riding out the present storm.

At the Romanian division, there is more reason to be confident. Here the company's operations are much bigger - processing 150 million litres of juice a year and a further investment in its dairy operations expected to push milk processing up to 80 million litres a year. And although Romania is not mooted to join the EU until 2007, there is still expected to be a moderate knock-on effect for the country's food and beverage sector.

But the transition is not expected to be an easy one for the Romanian division, and already a major shake-up of its operation is in the pipeline. Group chairman Enrico Bondi recently announced that Parmalat plans to slash the number of its international brands from 120 to 30 and concentrate on 'healthy lifestyle' products - an ambition that will undoubtedly impact the Romanian division in the future.

With an estimated group debt of €15 billion, the fact that either of the Parmalat divisions is still in operation today continues to surprise many industry observers. Indeed, many believe that the two divisions are out of the most dangerous period and have a considerably brighter future than they might have hoped for just a few months ago.

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