Čakovečki Mills: Retail Accounts for Three Quarters of Revenue

After Metss, Trgovine Krk, and Trgocentra Virovitica, Čakovec residents have recently entered the ownership structure of the Trgostil in Donja Stubica. The acquisition activity with this purchase is not yet complete, and reportedly a new target is being sought in the Istria region.

Written by: Antonija Knežević
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Photo: Željko Jelenski

The company Čakovečki Mills recently acquired 10 percent of treasury shares in the retail chain Trgostil from Donja Stubica, thus positioning itself at the top of the list of the largest shareholders of that trading company. By entering its ownership structure, the Čakovec milling and baking company has continued its series of investments in retail activities that began with the acquisition of Metss, Trgovine Krk, and the purchase of a 40 percent stake in Trgocentra Virovitica at the end of last year. As a result, today 72 percent of its revenue comes from retail, milling accounts for 15 percent, and the bakery segment nine.

According to informed sources, the acquisition activity of Čakovečki Mills with this purchase is not yet complete, and reportedly a new target is being sought in the Istria region. Considering that the company cashed in on Mlinar’s shares this spring, reportedly boosting its bank account by around 40 million kuna, such a development is quite logical.

Expansion through the Ultra gros group

More concrete information about acquisition plans, despite all the effort invested, we could not extract from Stjepan Varga, the CEO and largest shareholder of Čakovečki Mills. He diplomatically responded that they constantly monitor the market and assess the strategic justification of investments, but that for now he cannot say anything more concrete than that.

When asked why they are acquiring minority stakes in certain companies instead of taking them over, for example in Trgostil or Mlinar, he replied that they do not want to engage in hostile takeovers.
– When we invest in a company, our goal is to accelerate its development because that increases the value of our stake. We proposed to Mlinar to replicate the business model and organization of Čakovečki Mills, but unfortunately, there was not a critical mass to realize that – explained Varga. In any case, there are plenty of acquisition targets in the market, but according to unofficial sources, numerous smaller bakery companies, which are increasingly struggling with market challenges due to retail consolidation, are being offered for sale to Čakovečki Mills.

The domestic leader in wheat processing in the bakery segment has so far covered the Kvarner area, the vicinity of Dubrovnik and Zadar, as well as Međimurje, Zagorje, and Varaždin County, expanding mainly where the stores of the Ultra gros group are located, which also includes trading companies from the Čakovečki Mills Group. As early as 1994, the management of Čakovečki Mills realized that less and less flour would be purchased in stores and that its distribution needed to be organized through its own bakery. Therefore, it decided to acquire the company Radnik d.d. and thus add capacities in Čakovec, Oroslavje, and Konjščina to those in Lovran and Malinska. The move into the bakery segment continued last year with the acquisition of Vražap, the second-largest bakery in Zadar, and the establishment of a joint company Pogača Babin kuk in Dubrovnik with the hotel group Valamar.

Acquisitions without debt

The expansion of Čakovečki Mills from milling operations to the bakery segment and retail somewhat resembles Agrokor’s policy of expansion and vertical integration, of course, on a smaller scale. In any case, this business model based on the milling business has enabled significant synergy for the company. This primarily relates to retaining a large part of trade discounts and margins within the system (on flour and bread). That such a model has paid off is also shown by the business results of Čakovečki Mills. In 2007, they had revenues of 627 million kuna with a 12 percent growth in domestic sales, and in the first half of this year, revenues grew at a rate of 23 percent. This year, milling production is 22 percent higher, bakery production 8.5, and retail 15 percent, so accordingly, says Stjepan Varga, the revenues of the Čakovečki Mills Group should also grow.

Impressive figures in the balance sheet can also be seen under the item ‘operating profit’: it nearly doubled in the first two quarters compared to the first half of 2007. It should be particularly noted, thinks consultant Milan Ora, the excellent financial situation of Čakovečki Mills.
– The company is not in debt, and it also generates significant income from financial assets. Long-term and short-term financial assets were at the end of the half-year greater than 100 million kuna, which is a great potential for financing future development – noted Ora.

Although considering the financial position, Čakovečki Mills has great opportunities for regional expansion, judging by the words of Stjepan Varga, the company will continue to pursue a rather conservative policy.
– We fully finance ourselves. Since 1992, we have been accumulating working capital. Shareholders have not been greedy, they have not withdrawn large profits, so we have managed to self-finance without loans all the time. Given the current economic situation, we will now invest more cautiously and slowly. We do not want to be credit-dependent – explained Varga.

Čakovečki Mills is often criticized precisely for its overly cautious policy. Although industry experts cite entry into retail as an excellent move, they also add that the company should accelerate its expansion and vertical integration, especially after Agrokor acquired a majority stake in Mlinar and thus announced the consolidation of the previously fragmented milling and baking activities.
– Expanding into retail is certainly a good decision, but the retail of Čakovečki Mills has not yet undergone the changes necessary for success. They are still stores of fast-moving consumer goods, and they should transform into recognizable specialized stores for bakery products – says consultant Boris Teški and adds that if the company does not initiate a process of accelerated national expansion, it will remain stuck between great desires and the reality that will arise from Agrokor’s ambitions.

Another important subject of consolidation

Although Stjepan Varga also says that nothing will be the same in the bakery industry once Agrokor completes the acquisition of Mlinar, he believes that this will not affect the stability of Čakovečki Mills.
– When it comes to suppliers, I believe that Konzum will retain a large part of them because it needs to have a large offer. We assume that Čakovečki Mills will continue to cooperate with Konzum at the local level, in the areas of Međimurje, Kvarner, and Zagorje. Daily products, in fact, do not tolerate such long-distance transport. Even if the relationship with Konzum changes, it will not undermine our stability because no single customer accounts for more than 10 percent of Čakovečki Mills’ revenue – Stjepan Varga is convinced.

By modernizing the facilities, Mlinar will be able to cost-effectively follow the regional expansion of bakery products, so it is not excluded that in the Plus market stores, Agrokor will decide to reduce the share of competition, and thus also that of Čakovečki Mills, in the region where it currently operates. It is possible, however, that during the sale of its package of Mlinar shares, they managed to somehow negotiate with Agrokor and thus preserve their positions in the regions where they are currently dominant, but it is, of course, impossible to get confirmation from either side for such a thing. However, it is certain that the bakery market is entering a phase of consolidation and that Agrokor, which already owns several bakeries, will become the largest bakery group in Croatia with Mlinar and a leading subject in the consolidation of the market. According to Milan Ore, Čakovečki Mills is currently Agrokor’s most likely partner and could be the second important subject of consolidation. – However, we should not forget serious regional players: Kruna (Osijek), Babić (Split), and Svaguša (Split), who have reached the limits of their regions and partly outgrown them. Their strategic orientation: to defend current positions or make a breakthrough into other regions, we still expect – concluded Ora.

That they will step more into the region, and not just defend current positions, is certainly what the shareholders of Čakovečki Mills are hoping for. Despite strong competitors in all sectors in which the company is represented – Granolija (milling), Mlinar (baking), Konzum (retail) – and thanks to the model with two production and retail activities, there is certainly potential for further growth and development. Three key areas for success in this are product innovation, retail transformation, and regional expansion.