Sergei Mikhailov: A vow to make Russia a global meat player like the US

11 january 2017
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This year, Cherkizovo is ranked first in the Agroinvestor’s list of Russia’s largest meat producers, an accolade that came after it had hown its ability to deliver consistent growth despite a volatile domestic market.

Unlike many other companies, Cherkizovo has remained profitable -- and continued expansion -- after Russia had joined the WTO, which brought in a lot of foreign competition, and in spite of the country’s recent economic recession.

This is a significant achievement and management, led by Sergei Mikhailov, CEO since 2006, has to be credited for it. What’s eyebrow-raising about it is that Mikhailov was practically an industry outsider before joining Cherkizovo. Of course, he was deputy CEO before taking over the top Cherkizovo job.

But before that he made his career outside of Russia and in industries not related to agriculture. He was a financial analyst at Goldman Sachs from 1997 till 1999 when he moved to Morgan Stanley.

Family business

A finance and economy graduate from Georgetown University in Washington DC, Mikhailov founded a telecommunications company, aTelo, Inc., in the United States and was its CEO until 2001 when he joined Cherkizovo. The company was then known as Cherkizovsky Meat Processing Plant (MPP), acquired by Sergei’s father Igor Babaev. It was the seed from which the Cherkizovo Group, a family business, grew.

“When my father founded the company, he started with a single facility, which has become Russia’s largest producer of meat products and animal feed. Our group is among the three leaders in the poultry, pork and processed meat segments, and we are the country’s largest producer of animal feed,” he says.

Cherkizovsky MPP was established during the Soviet era. “I joined it to help my father improve the quality of its products and make the operation more stable and profitable,” he adds. “I brought in my expertise in international business to complement my father’s thorough understanding of the operation, not to mention his domestic business acumen.”

Thanks to this family connection, “I was able to get a thorough understanding of all aspects of the business, go through all stages of operational management in order to streamline and improve all the production processes and integrate into it advanced technologies that helped to improve the quality of our products,” Mikhailov explains.

Today, Cherkizovo Group consists of eight full-cycle poultry production complexes, 15 modern pork production complexes, six meat-processing plants, and nine feed mills with more than 140,000 hectares of agricultural land. It has 22,000 employees and, in 2015, it produced over 825,000 tonnes of meat products.

Although the group has grown so big, Sergei Mikhailov says, it remains a family business.

It is a publicly traded company at the same time, so it needs to be transparent in its corporate governance – which is a good thing. As a family business, however, management remains within the family, he says. “Within the family we discuss strategies and consult with each other.”

One of the key competitive advantages of Cherkizovo is its vertically integrated structure, which incorporates grain cultivation and storage, feed production, breeding, rearing and slaughter of animals as well as meat-processing and distribution.

According to him, it is this business model that helps to deliver long-term sustainable growth in terms of sales volume and profit. In 2015, Cherkizovo’s consolidated revenue was RUB77 billion (US$ 1.15 billion), a 12% increase from the previous year. The company’s shares are traded on the Moscow Stock Exchange (MoEx) and the global depository receipts on the London Stock Exchange (LSE).

Efficiency and quality

“I believe that, under any circumstances, you should never stop improving. You must progress, further develop, modernise and look for new profitable niches even during the current economic conditions. We aim to build a business in such a way that one segment can support another and contribute to the bottom line. We continue investing in new projects that will deliver success in the near future,” Mikhailov says.

konv.jpg Already one of the largest and most diversified agricultural holdings in Russia, it continues to expand aggressively. The company, as an example, recently added a new hatchery with the capacity of 240 million eggs per year to its poultry segment. The facility, he says, is the largest and most technologically advanced in Europe.

He reveals Cherkizovo intends to completely stop importing hatching eggs and day-old chicks by going into these aspects of operations by itself.

pole.jpg This has to wait a little while, however, as the company is currently focused on improving the efficiency of its poultry processing plants.

Another important project is Tambov Turkey, a joint venture between Cherkizovo and Spanish Grupo Fuertes.

Tambov Turkey’s production and processing facilities were completed recently. “And in autumn this year, we will begin to deliver turkey products to the country’s largest retail chains,” he says, adding that he expects demand for turkey in Russia to continue growing.

“An important strategic addition has been made in the pork segment,” he says, with the launch of the company’s first feed facilities in Russia’s Voronezh Oblast. These facilities, he adds, “will form the basis for a large-scale interregional pork production cluster in the future.”

In the meat-processing aspect of the operation, the company has focused on expanding production capacity and boosting its product range with premium, high value-added products. The result is a 33% increase in sales volume, he says.

“All these changes have helped us strengthen our market position significantly,” he points out, although “the overall market has continued to decline.” He considers the company’s “ability to produce premium quality, high value-added products as its key competitive advantage on the domestic market.

The next stage

Now accounting for a large share of the Russian meat market, Cherkizovo believes that further growth could be achieved primarily through exports.

“In 2015, we decided that export would be the future direction of the company. “Our targets are the countries in Southeast Asia, the Middle East and Africa.”

Cherkizovo is not entirely new to exports. It has been exporting to CIS countries for many years now. “But the current weakness of the Russian ruble made us shift directions,” he says, adding that the company has just signed a major contract for the delivery of meat to Egypt, making it one of first Russian companies to explore opportunities in that country.

One of Cherkizovo six modern meat-processing plants in Russia.

“All our poultry products are certified in accordance with Food Safety System Certification and meet the highest international standards,” he makes a plug for his company.

“The introduction of a new system of quality management and food safety compliant with the FSSC 22000 standard is an important step for the Cherkizovo Group on the way to increasing sales to major international retail chains and establishing a well-functioning management system. It helps us produce high quality products, without any risks to the health of the consumer.”

To control the quality and safety of its products at all stages of the processing operation, Cherkizovo has put up its own research and testing centre, which is one of the most sophisticated in Russia.

“Its innovative laboratory complex operates state-ofart machines that help to diagnose and prevent animal diseases at an early stage, test the quality of feeds, detect changes in the quality of preserved food, determine food energy values, and measure the impact that quality standards and product ingredients have on people’s health.”

According to Mikhailov, some of Cherkizovo’s poultry facilities are certified to produce halal products. The company has in fact been supplying such products to several Muslim countries.

China and other Asian countries are now among the priority markets for the company. In May 2016, Cherkizovo participated in SIAL China for the first time.

“We are very interested in the Chinese and Southeast Asian markets,” he says, pointing out that this region has traditionally been a major importer of meat from Brazil, the United States and Canada.

This time, he adds, “we want to offer high quality Russian products at very attractive prices.” They have a wide range of products to offer, Mikhailov says, and they include “pork and poultry, including offal, which are in demand in China.”

Russia is a newcomer in the global meat market, “but I am confident that we will soon become a serious player,” he concludes.

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