How innovation revitalised a dairy company

Rakesh Aggarwal, the founder of Australia’s fastest-growing dairy company, Saurin Group, knocked on the door of “virtually every bank in Australia” before securing funds for his business. His story highlights differences between entrepreneurial and corporate mindsets and how opportunities are created when lenders find innovative ways to manage risk.

Saurin Group owns Longwarry Food Park, a Gippsland factory that produces fresh milk for the domestic market and powdered milk products for export. Over the past five years it has achieved average cumulative growth of 30%. In 2011, after only six years of operation, it exported to more than 30 countries and won the Victorian Exporter of the Year award.

Gippy, a cute brand name leveraging the “clean and green” qualities of the Gippsland region, and product innovations have contributed to sales growth. Longwarry Food Park was the first to put ‘permeate-free’ milk on our supermarket shelves. (Permeate is a by-product of dairy production, occupying as much as 12% of some fresh milk.)

Aggarwal worked as an engineer at the Longwarry plant when it was owned by Bonlac. At that time, management encouraged productivity ideas but change was slow as most go-ahead decisions were coddled in red tape. He thinks that the plant was closed because from a corporate perspective it was seen as “too small, too labour-intensive and too energy intensive”.

After buying the plant in 2001 he set about removing all of the productivity barriers – size, labour and energy costs – not by buying new plant but by more ingenious and affordable in-house redesign and automation.

The refurbished plant opened in 2005. Since then an agile and engaging management style that encourages, but also tests, creative ideas from the workforce has contributed to success even as gusts of turbulence – the GFC and concurrent dairy market price volatility, drought, the high Australian dollar and then a factory fire – buffeted the business.

Over this same period production capacity has more than doubled, contributing to dramatic cost efficiencies; and a further 25% is planned for next year.

The threats to the business were substantial. It was Aggarwal’s unshakable confidence in the long-term future of the dairy market that underpinned his steady hand at the helm.

However, these qualities, along with solid business plans and industry experience, were not enough to persuade banks to lend the substantial funds needed to purchase the factory.

Banks are more willing to lend against tangible assets; but the Bonlac decision hung in the background. A breakthrough came with a creative approach by SunCorp, which provided a package of loans, with one secured against the land, another against the building and a third secured against “a fire-sale valuation of the plant and machinery”. This variegated lending model matched different loan structures to corresponding risk-based assets.

The differing perspectives of entrepreneurs (“we’re good for it”) and lending bodies (probability of default and loss given default) are perennial, but lenders that find new ways to respond to the risk and opportunity presented by talented entrepreneurs such as Aggarwal will be rewarded.