Looking chipper

By Jenny Ruth

Tuesday 1st March 2005

As its name implies, Mr Chips Holdings makes potato chips and other potato-based products. It supplies fresh chilled product to the nation's fish and chip shops and frozen versions to companies such as Restaurant Brands (which owns KFC and Pizza Hut).

It also produces house brands for supermarket chains including Pams for Foodtown and Basics for Woolworths and has a small sideline making fresh chilled coleslaw, carrots and onions, mainly to support the activities of its franchised distributors.

The company has dabbled in creating a branded product without success, but doesn't rule out re-entering this area at some time.

Its major competitor is the multinational giant McCains, which is estimated to have between 55% and 60% of the New Zealand market compared with Mr Chips' 25-30%. Mr Chips has been listed since September 1993.

The numbers: The company's profit performance over recent years has been patchy, reflecting a mixture of growing pains and a few pieces of bad luck. These included an insurance company which refused to pay out after a refrigeration plant breakdown (Mr Chips eventually won a legal battle) and the worst potato growing season in the company's history in 2004.

Contract growers are spread over four regions (Manawatu, Hawke's Bay, Pukekohe and Waikato) to guard against a poor season in any one region, but last year all four regions suffered difficult conditions.

Its net profit for the six months ended September 2004 rose just 2% and the first-half result before that was down 15% on the previous corresponding period. Perhaps a better reflection of the company's progress is that its sales have risen from just $17.7 million in 2000 to $35.3 million in the year ended March 2004. Sales for the six months ended September 2004 exceeded those in 2003 at $15.3 million. The company has doubled its capacity since 2001.

Management: Chief executive Jon Davison took on the top job in September 1998. From appearing to be a company going nowhere back then, it has trebled in size with total assets rising from $9.7 million in March 1999 to $28.4 million in March 2004. Davison describes Mr Chips as "a no-nonsense company".

Current strategy: Winning the Restaurant Brands contract in 2001 allowed the company to double its capacity by building a new $13 million factory next to its existing Auckland plant in East Tamaki. Davison won't be drawn on how long the contract has to run except to say, "We still have a significant term of our present contract to go." Nevertheless, the company is focusing on increasing other sales, including those of house brands and exports, to reduce its dependence on a single customer. Davison says it was frustrating that the company could have made extra sales last year if potatoes had been available.

Mr Chips is also looking at developing new products, although it will stick with potatoes, he says. It is likely to commit to building a substantial cold store expansion in the near future. Its existing one can handle only 600 pallets, less than a tenth of the company's total needs which are currently mostly supplied by global transport and logistics company P&O. Davison says a new cold store would not only be a strategic asset, making the company more self-sufficient, it would also cut costs. It should be completed by the beginning of next year.

Recent track record: Davison says the potato growing season this year has been excellent. Although this summer has been unseasonably wet, that's good for immature potatoes so the current crop is a very good size, he says. "We won't have any problems this year with supply."

Mr Chips started producing frozen product early in January - a month earlier than usual - and its plant is operating 24/7. The company may finally have gotten all its ducks lined up. Certainly Davison is confident about lifting profitability substantially over the medium term and regards the company's recent difficulties as temporary setbacks.

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