Livestockholder value

Alltech, founded by an Irishman and headquartered in the US, is a global leader in animal feed additives which improve the animal’s immune and reproductive functions. Professor Frank Bradley (Michael Smurfit Graduate Business School, University College Dublin) tells the story of Alltech’s success and poses the question of how it might achieve its ambitious growth goals.

Over a thirty year period Alltech has grown to become a $435 million company, with a sales target of $1 billion for 2012. Behind Alltech lies an Irishman, Pearse Lyons. After studying biochemistry at Dublin, Lyons wrote a Ph.D on the biochemistry of yeast. That scientific knowledge took him first to Irish Distillers and then to a smaller and younger company, Biocon, which produced additives for brewing. He founded Alltech in Kentucky in 1980 to meet the demand from fuel alcohol producers for advice on distillery setup and operation.

The instability of the fuel business led Lyons to seek other applications and he turned to animal feed additives, ingredients that improve livestock performance, immune and reproductive functions. By 1994, 90% of revenues were coming from the animal feed products and in 2004 the fuel alcohol business was sold off. In a case study (see reference below), professor Bradley looks at Alltech’s feed additive business and particularly its marketing.

Products
The product range is centered on three platforms: yeast fermentation (Alltech has approximately 40% of the world market), enzymes (20%) and proteinated minerals (30%). In 2003, these platforms covered some 150 feed ingredients. The ingredients are aimed at six animal groups: dairy and beef, pig, poultry, horses, pets, and fish (aquaculture). As part of its growth strategy, the company decided in 1997 to devote particular attention to six high selling products (the “Big-6” strategy). In 2006, with the sales goal now placed at $1 billion for 2012, the focus was increased from six to nine products.

Animal feed is no small market: in 2008 the market was estimated at 700 million tons, with a corresponding market value for Alltech’s range of products of $9.15 billion – typical usage rates for Alltech type products are 1kg for each ton of animal feed. The FAO projects the feed market to reach one billion tons in 2030. Given the size of that market, the sales target seems attainable.

Global range
Alltech has succeeded in building a global presence with strong market shares in three geographical areas. Its share of the Latin American market was estimated at 50% while its shares in the United States and Europe were an appreciable 30%. Latin America, the United States and Europe each contributed about 25% of sales (total of $435 million in 2008). Asia had become a recent are of focus - 19 offices had been opened and growth rates of 20-30% were sought after. The strategy of global balance was also reflected in the distribution of production plants and employees, spread out relatively evenly over the geographical areas.

Scientific foundations
The company founded by a science Ph.D. has remained faithful to its research roots. Of Alltech’s 1800 employees, 60 are full-time researchers working with a $ 7.5 million budget. In the US, Alltech was second only to the US government in research sponsorship of animal feed additive projects. In 2007, it had made a strong commitment to nutrigenomics, the application of genomics to create customized nutrition, by building a $420 million laboratory near its company headquarters.

Alltech plays a leading role in the dissemination of animal feed science by organizing an annual three day conference, the Alltech Symposium. Some 1,000 research scientists and animal feed representatives attend this conference and through the publication of the 80 papers in book format and online, Alltech has positioned itself as a technological leader in the sector. The results of the annual conference are then disseminated in time and space via regional lecture tours organized by Alltech on the five continents, allowing the company to reach a further 10,000 professionals.

Food risk as a competitive advantage
One of Alltech’s competitive advantage has been its development of ecologically-friendly products. Safety in food products has been an increasing concern for a couple of decades now with particular concerns about the role of feed in animal diseases (e.g. mad cow disease) as well as the effect of  animal breeding waste products on the environment . In 2006 for example, the EU banned the use of antibiotics as growth promoters, to great benefit for Alltech with its range of natural probiotics growth promoters. A different type of product, bioplexes, helps cut down on animal excretion with positive effects on the environment. Positioning itself as a supplier of natural animal feed additives, Alltech has been able to benefit from the increased importance placed on safety in the food chain.

How to achieve the growth goals?
In the case, Professor Bradley lays out different paths that Alltech would explore, as would the case readers, to reach the 2012 $1 billion sales goal.

One path centers on segment focus. Alltech had identified three major market segments. A first group, feed mills and premix companies (suppliers to the feed mills), was more price sensitive. Premixers were historically an important segment for Alltech. A second group included food producers for whom product benefits (animal performance) and branding were paramount. A third group consisted of the international compound feed producers, typically large global companies for whom risk management and new technologies were the driving purchase factors. One option for Alltech was to move down the chain and to supply customers potentially more sensitive to Alltech’s scientific advantages.

A second avenue is geographical. While Altech was well established in Latin and North America as well as Europe, it was only gearing up in Asia and setting up in Africa. These continents were home to over 4 billion inhabitants and corresponding animal feed requirements and so offered great growth potential. Furthermore, Alltech’s success in Latin America showed that it knew how to cater to emerging markets.

Another avenue focuses on animal groups. Aquaculture, pets and horses contributed less than 10% of sales. An obstacle to growth via the pet market was that pet food had more in common with human food than with animal feed. Psychological benefits played a greater role than did effects on feed digestibility and health. Furthermore, a small number of big companies (e.g. Ralston) dominated this market.

The equine market was more promising and Alltech had just engaged in a novel branding exercise by becoming the sponsor of the FEI World Equestrian Games, to be held in Kentucky in 2010. These equestrian Olympics, held every four years and lasting sixteen days, would attract some 800,000 visitors. For its $10 million of sponsorship, Alltech was buying a lot of brand awareness in a market which presented considerable growth potential.

Another possibility was for Alltech to move toward human food markets. It could provide some of its minerals in capsule form or some of its products could be incorporated into finished foods such as yogurts. 

While exploring these options, Alltech had to confront two issues. The first was the threat of competition. Alltech’s business was an attractive one from the standpoint of margins. Two lower margin businesses could be tempted to move into Alltech’s areas: producers of yeast products for the human food market (e.g. Lesaffre with $800 million in sales); the premix companies who were familiar with the products in the animal feed supply chain and with the players in the animal feed sector.

The second challenge was the presence of managers able to drive a doubling of sales in less than a ten-year period. Here Alltech needed to balance the tension between scientific excellence and profit attentiveness. On the one hand, the company had built its success on scientific competence; on the other, it was going to need more and more sales and profit mindedness on the part of its managers. Core competencies should not trump profit potential. Alltech had therefore embarked on a policy of selecting twenty or so managers a year for seven weeks of extensive management training spread over four years.

To be thought of, perhaps, as the didactic equivalent of animal feed additives, an enhancer of Alltech’s reproductive functions.

Reference:

ECCH 509-069-1
“Alltech in 2009”
Frank Bradley
Michael Smurfit Graduate Business School, University College Dublin

Published February 2010