Guido Barilla, chairman of the Barilla Holding, took the moral high ground in his speech during the ECR Europe Forum & Marketplace early May in Milan. He called on the community of the international food industry to become truly sustainable by prioritising people over profit. But how credible is this moral appeal from Barilla Holding?

“We must not confuse innovation with either creativity or with simple product improvement. […] The question we must ask ourselves about growth is not: ‘how much?’ It’s ‘how?’ […] We must reformulate the notion of growth in the light of the concept of sustainability. […] We must stop thinking about consumers and start thinking about people. […] We must accept that we have greater responsibilities than those of other industrial sectors. What is at stake is the sustainability of our growth, and of our future.”
Guido Barilla’s speech was a long to-do list for companies to improve their habits. It was a moral appeal to all growth-obsessed food companies who are reluctant to take responsibility for their consumers, employees and the environment, and who wrongly focus on short-term growth and profit gains. According to Barilla, there is nothing wrong with profit, as long as it is part of the sustainable trinity of people, planet and profit.
Barilla’s morality is surely credible, if one considers the high ranking of the Italian food company on ‘The World’s 200 Most Respected Companies’. This ranking from the New York based Reputation Institute is based on a survey among more than 60,000 consumers in 29 countries. It measures the corporate reputation of 600 of the world’s largest companies. In the most recent ranking of 21 May 2007, Barilla ranked third, just behind the Danish toy company Lego and the Swedish furniture retailer IKEA. Last year, Barilla even topped this ranking, in which consumers judge seven factors of a firm’s reputation: products and services, innovation, workplace, governance, citizenship, leadership and performance.

Academia Barilla
As a company Barilla has the right reputation for a moral appeal and as a privately owned business – without the straightjacket of a public company having to deliver constant quarterly results – Barilla is free from short-term pressure that often drives management teams into the wrong direction of unsustainable short-term growth strategies. According to Guido Barilla, putting pressure on performance is counterproductive. “We hear a great deal of talk about innovation these days as a result of the push to achieve results in less and less time,” he said in Milan. “However, this drive for efficiency generates anxiety about performance. It also creates victims. Just a few years after they are launched, ninety per cent of consumer goods are no longer on the shelves. It seems, therefore, that this short-term-ism is more of an innovation-killer than an impetus for development.”
Barilla – like many other branded goods suppliers – realises that innovation is key for survival. Therefore it moved away from only producing and selling high-volumes of commodity items of pasta, sauces and other foods, by adding value-added (and higher-priced) products to its offer. As stated by Guido Barilla, innovation goes beyond creativity and simple product improvement. For Barilla this means innovation is the fruit of following a methodological path. As Guido put it: “Generating lasting value requires us to proceed slowly and patiently down our path.”
The ‘Academia Barilla’ is an important signpost for this innovative path. Established in May 2004, Academia Barilla calls itself “the world’s premier centre dedicated to the art of Italian gastronomy and culture”, offering education in Italian gastronomy and cultural-culinary education. Academia Barilla, which is located in Barrila’s home-base of Parma, is also the source for new ranges of authentic Italian products, branded under the Academia Barilla brand.
Academia Barilla belongs to the brand portfolio of the Barilla Group which also comprises Barilla, Mulino Bianco, Pavesi, Wasa, Misko (in Greece), Filiz (in Turkey), Yemina and Vesta (in Mexico). The Barilla Group owns 27 factories and production facilities, 15 of which are located in Italy and 12 abroad.
The Barilla Group is already the world’s number one pasta company, selling its brands in over 100 countries. In recent years it achieved most of its growth abroad, while sales in its home market Italy remained stable (see figure 2). In 2006, Barilla Group’s turnover increased by 3.4 per cent, with operations in North America and Latin America increasing their turnover by 13 per cent and 22 per cent, respectively. Turnover in Asia and Europe was in line with the Group’s average.

Kamps: problem child
The Barilla Group accounts for almost 60 per cent of the Barilla Holding, which also comprises the Germany-based Kamps (Europe’s largest industrial baking group), Harry’s (a French bakery group) and GranMilano (frozen foods and ice cream). 
By acquiring a majority share in Kamps, Barilla bought a problem child. When Barilla acquired Kamps jointly with its investment partner Banca Populare Italiana (BPI) in 2002, Kamps was already in trouble. After years of turbulent growth in which Kamps’ management recklessly expanded the business via acquisitions (a.o. Harry’s in France), too heavy a debt burden put pressure on Kamps’ financial performance and its share price. In 2002, Barilla paid €1.8 billion for a majority stake in Kamps and Kamps’ 49 per cent share in Harry’s. In the first four years after the acquisition, however, Kamps was underperforming and losing money. In 2006, the German bakery business saw its turnover decrease by almost seven per cent. The acquisition of Kamps burdened Barilla Holding with a hefty debt. Despite substantially reducing the debt by €310 million in 2006, Barilla Holding has a remaining debt of €1,455 million, which equals over 35 per cent of its total sales.
Solving the Kamps problem is a key priority for Barilla. After the acquisition, Kamps reverted back to being a private company. However, Barilla is committed to its investment partner BPI to have Kamps listed again, ultimately by 2010. If not, Barilla is obliged to purchase BPI’s 41.2 per cent share in Kamps for the 2002 share price. This is substantially higher than the valuation Kamps would get in its current state.
Purchasing the BPI stake for the 2002 price would therefore be capital destruction and – even worse – lead to an even higher debt. According to Barilla, selling Kamps is no option. After restructuring the operations of the embattled bakery subsidiary (disposing of two of Kamps’ bakeries in Germany and almost entirely dismantling Kamps’ head office in Düsseldorf), Barilla is also investing in a new bakery plant for Kamps in the German city of Lüdersdorf and it intends to upgrade the product range in Kamps’ outlets by adding snacks, drinks and spring-rolls.

Efficiency and authenticity
On 30 May this year, it was announced that a pool of banks agreed to extend a €1.5 billion credit line to Barilla Holding, enabling the company to pay off existing loans and invest in development projects. The Italian publication Il Sole 24 Ore quoted Barilla Holding’s CEO Robert Singer as saying that this proved the financial system had faith in Barilla’s ability to grow and add value. Crucial was Barilla’s ability to reduce debt in 2006 by €310 million and invest a record amount of €286 million despite an unfavourable business climate.
Besides external funding, efficiency gains are also required to finance investments in R&D and production capacity. “Investment in R&D enabled us to launch 50 new products on the market,” the Barilla Holding’s press release on the consolidated 2006 figures reads. “Product innovation contributed to the growth in volumes, above all in the United States (+8 per cent) where Barilla confirmed its position as the only brand on the national level and the leader in the pasta market with a market share of 26 per cent.”
Volume growth in Barilla’s most important export market means that additional capacity is needed. In 1997, Barilla America built its first pasta plant in Ames, Iowa, using a blueprint from a similar plant in Foggia, Italy. “Walk into our Ames plant and any plant in Italy, and you can’t tell the difference,” said Kirk Trofholz, president and CEO of Barilla America, last April in the magazine American Executive.
The exact pasta production processes to create the authentic Italian products are also being used in Barilla’s brand new pasta factory in Avon, New York. This site – in which Barilla invested US$96 million – plays a key role in Barilla America’s aggressive growth strategy, allowing the Italian pasta-maker to double its production capacity (over 200,000 tonnes per year) by 2009.
In the US, Barilla remained consistent during the low-carb hype in recent years and did not introduce a low-carb version. This makes the company’s claim for authenticity even stronger. But Trofholz acknowledges that for future growth the company needs to go beyond pasta and sauce. “Whatever we decide, our focus will remain on the long term,” he said in American Executive. “We’ll always strive to produce the highest quality product we can and stay true to the values of the Barilla family.”

Sustainable innovation
In 2005, Barilla introduced ‘Barilla Plus’, a healthy pasta with double the quantity of fibre of regular pasta, containing Omega 3 and 40 per cent more protein. This turned out to be a very successful introduction and quickly accounted for eight per cent of Barilla’s total business in the US.
In the Italian media there is speculation of Barilla preparing to enter the promising functional foods sector but it is questionable how this would combine with the company’s claim for authenticity and sustainability. A product like Barilla Plus (which is sold only in the US) may well be on the verge of the leeway that Barilla’s product developers and marketeers are granted.
“What is known as the medicalisation of food is proving to be unsustainable because the researchers who produce guidelines, indications and standards feel that they have to exhibit political correctness to companies,” Guido Barilla said, pointing out that most partnerships between the food industry and nutrition science are mere marketing levers, and that most foods dubbed ‘healthy’ are tailored to the needs of production and not to the needs of life. Barilla speaks about a gap between marketing and the real value of products, a gap between companies and people. “And the size of that gap increases whenever scientific or pseudo-scientific associations insult our intelligence by characterising hyper-caloric products as healthy,” he said. “Truly sustainable innovation does not come from focusing on biochemical cause-and-effect relationships. It can only stem from thinking more about individuals’ lifestyles and about their culture. Central to our thinking must be those people who day by day ask themselves how they can stay healthy, yet are unable to unravel the chaos of information on the seventeen thousand new products brought to market each year.”
Instead of “a frantic search for expedients to stay alive in price wars,” Guido Barilla thinks that sustainable innovation must result from listening to people, offering solutions for many people’s health problems due to poor nutrition. In his view only socially responsible companies that wish to create benefits and wellbeing for people, are capable of sustainable innovation by building people’s understanding of nutritional balance and offering them the right, innovative products.

Speculating the future
Building such a sustainable business requires a company with a sustainable business model. The Reputation Institute’s repeated reward for Barilla, and the consortium of banks who recently expressed their confidence in Barilla Holding by extending the credit line, are clear examples of trust. Barilla Holding’s 2006 achievements are impressive while future challenges lie in finding a solution for Kamps, further reducing debt levels and seeking new growth opportunities.
Barilla refuses to comment on any aspect of its business strategy. Still one can say that Barilla Holding’s challenges are interrelated. What happens with Kamps seems to be of vital importance. Before the 2010 deadline Barilla Holding may either buy the remaining shares in Kamps or still put Kamps up for sale. Further sale of non-core activities is also expected, given Barilla’s focus on its pasta and sauces operations and because of the Holding’s need to further reduce debt. In April this year Barilla sold its ice cream and frozen foods unit Gelit, and there is speculation that GranMilano may also be sold.
Barilla’s growth opportunities are in existing markets worldwide – especially in the US – and in a new, promising market such as Russia. In Moscow, Barilla Holding’s subsidiary Harry’s already has a bakery and now there are rumours that Barilla is interested in entering the Russian pasta market. This market is said to be on the verge of consolidation. In March 2007, the chief executive of the local pasta producer Altan said that there were negotiations among leading producers and foreign companies – including Barilla – to create a leading pasta company with an annual output of some 200,000 tonnes. To compare: the size of the packaged pasta market for Russia’s 23 cities with a population of one million or more is some 400,000 tonnes and the total Russian market grew 3.4 per cent in 2006 to a volume of 1,028 million tonnes.