After surviving the kind of tainted-meat tragedy that brings companies down, Maple Leaf Foods is now fighting to stay alive in a par-dollar world.

IF MAPLE LEAF FOODS WAS A SCHLUBBY middle-aged guy, he would have recently told his buddies he was finally going to lose that 20 pounds, move out of his mother’s house and take control of his life. It’s the sort of bold and overdue makeover the food giant announced in October that will see it shed aging meat factories, modernize operations and catch up to its leaner, more productive U.S. competitors. The $560-million investment—the largest in the Canadian food industry—is the third and final phase of a sweeping $1.3-billion restructuring strategy the company launched in 2006, which has since reached every corner of operations, from hog rendering to baked goods and now, finally, prepared meats.

It’s the latest survival strategy for a company that’s pretty good at surviving. Since being bought by the McCain family in 1995, Maple Leaf has lived through a tainted-meat tragedy that killed 21 people, a messy divorce with longtime shareholders and, recently, a near proxy battle and board shakeup. The company weathered these vicious blows while struggling to raise earnings and profit margins, but it’s a dull, nagging headache that may finally cripple Maple Leaf.

Over the past few years, a strong Canadian dollar has been hurting exports and dampening any competitive edge the company had abroad, while U.S. food giants like Tyson and Smithfield expand their Canadian market share. Soaring commodity prices, especially wheat, corn and hogs, have placed huge cost pressures on already fragile margins. Hence, the latest streamlining measures.

“The benefits are about straight cost-reduction,” says Maple Leaf CFO, Michael Vels. “Right now, we make wieners out of five facilities; when we’re done, wiener production for the entire Canadian population will be in one facility.” In doing so, Maple Leaf will cut a net 1,550 jobs, or roughly 12% of its meat-division workforce, as the company closes several factories from B.C. to New Brunswick and consolidate operations into a new $395-million flagship facility in ­Hamilton, set to start churning out sliced meats and wieners by 2014.

Some of the company’s earlier restructuring efforts have been starting to pay off; latest third-quarter results showed overall profitability of $43 million compared with a loss of nearly $20 million in the same period last year. Price increases on bakery and meat products have helped, but management remains confident that the way to widen margins is by cutting costs, and the way to cut costs is by heavy streamlining in modern factories, or what the company calls “centres of excellence.” Though analysts and investors may be wary of such a huge capital outlay in the name of ­cost-cutting, this latest push to modernize is critical for Maple Leaf in a par-dollar world. For a company that has survived some spectacular threats, its ultimate survival may come down to the vagaries of production scale and commodity prices, factors as unsexy as its products.

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SINCE BEING OUSTED FROM McCain Foods, the family’s frozen food dynasty, and taking over Maple Leaf in 1995, the McCains—the late Wallace, and sons Michael and Scott—modernized an old meat-packing business into one of the country’s top packaged-food companies. It is the biggest supplier of fresh and processed meat to Canadian supermarkets via some 70 brands, including the flagship Maple Leaf, ­Schneiders, Shopsy’s and Dempster’s names, plus many more, smaller regional brands acquired over 15 years.

Such acquisitions have been both good and bad for business. “They gave us all those strong brands, market shares and a fantastic position,” Vels says. “But at the same time, they came with a large number of smaller facilities.” Running a network of disjointed plants, each with their own product lines, machinery and systems lacks the benefits of scale. According to Vels, consolidating the prepared-meats operations was planned years ago, but in 2005 the company “started planning for parity dollar.” Management focused first on hog production, primary pork processing and international trading—areas that were “immediately and directly affected by parity dollar,” he says.

The rising dollar forced management to re-evaluate how much the company should deal in the commodity side of business. After months of internal mulling and analysis, the decision became clear that Maple Leaf would lessen its role as a primary pork processor and focus on the “value-added” products, things like luncheon meats and smoked ham. Between 2006 and 2008, Maple Leaf closed a hog processing plant in Saskatoon, sold one in Burlington, Ont., and consolidated all slaughtering and packing operations into one mega-plant in Brandon, Man.

“[The Brandon facility] is what you would call a U.S.-style plant,” says Kevin Grier, senior market analyst at the George ­Morris Centre, an independent agrifood think-tank in Guelph, Ont. Though average by ­American standards, the Brandon plant is by far the biggest of its kind in Canada, and was the first to introduce double-shifting. Staff can slaughter 90,000 hogs a week day and night, compared to 40,000 at the previous facilities. “They are getting up to scale on their processing,” says Grier. “They basically had no choice, if they were going to survive in a world of par dollar.” As Maple Leaf grappled with the effects of a strong loonie, grain prices shot through the roof in 2008, severely denting its Canada Bread subsidiary. Plans had already been in the works to streamline the bakery business, but had to be suddenly abandoned as management scrambled to deal with a new disaster.

In August that year, news broke that listeria originating from a Maple Leaf meat plant in Toronto was sickening and killing people. People may remember a sombre Michael McCain addressing the cameras and declaring that the buck stopped with him. The company shut down the affected plant for testing and scouring, and recalled more than 200 products. Sales and stock prices plunged. Reported financial losses exceeded $50 million, including the $27 million in lawsuit settlements. Marketing experts lauded the company’s crisis management.

After walking away, bruised but alive, from the kind of disaster that has brought companies down, in late 2009 Maple Leaf returned full attention to the dull but devastating problem of currency and commodities. At this point, management realized the strong dollar was the “new normal,” says Jeffrey Gandz, a Maple Leaf director and a professor at the University of Western’s Richard Ivey School of Business. “Like for many companies, that was a wake-up call that says you can’t rely on the Canadian dollar going down 2% to 3% a year to keep competitive. You actually have to determine your own future.” Around the same time, grain and hog prices were back up and rising, after a brief respite during the market crisis. Passing on price increases to consumers helped, but in the long run, streamlining and getting up to scale were still a crucial part of the plan.

On the bakery side, it would mean closing three aging bakeries (the oldest one built in 1903) in the Toronto area, and consolidating operations to a new $100-million mega-bakery (also located in Hamilton). Not far from the new bakery in Hamilton is the site of the soon-to-be built meat-processing plant, which is the nucleus of the restructuring plan and, at $395 million, easily the costliest part. It will be 402,000 square feet, about the size of 10 supermarkets, and will produce deli and sliced meats and wieners, taking over from six smaller plants across four provinces, including the 120-year-old Schneider’s plant in Kitchener, Ont. Another $155 million will go toward updating existing facilities in Saskatoon, Winnipeg and Brampton, Ont. It’s a major overhaul and investment that had some investors feeling uneasy. “Yes, it’s a lot of money,” admits Vels. “But many companies do this. Companies that want to be efficient and leaders in their industry have to invest in their infrastructure.” In formulating the particulars of the facility—the type of equipment, optimal scale and other line-item details—management looked to other best-in-class plants across Europe and North America, including the wiener king, Oscar Mayer. “This isn’t a case of a superficial flyby,” says Vels. “We’ve spent three years benchmarking right down to line efficiency and crewing levels in some of the best plants in the world.”

In 2009, during this key phase of the restructuring plan, Maple Leaf lost the Ontario Teachers’ Pension Plan, its biggest and a longtime shareholder. In 1995, the pension plan had co-funded the McCains’ takeover bid for Maple Leaf Foods from British company Hillsdown PLC, and held a 35% stake since then. The Teachers’ weathered many years with the company, but it became increasingly frustrated with low to no returns and couldn’t support the investment-heavy revamp. In June 2010, it sold a 10% stake directly to Toronto activist hedge fund, West Face Capital Inc., notorious for cracking the whip on troubled companies. The Teachers’ didn’t comment publicly on reasons for leaving, but in a press release the executive VP of investments offered the usual hollow statement about the sale opportunity being “in the best interests of the fund and our members.’” (The Teachers’ remaining 25% went up in a public share sale.)

But as one disgruntled investor stormed out, another would soon take up the mantle. Shortly after the sale, a proxy battle nearly ensued when West Face sought to shake up the board and oust directors who it considered too close to the McCain family. To avoid a drawn-out battle, Maple Leaf gave West Face CEO Gregory Boland a seat on the board and on a few key committees, including a special working group tasked with reviewing the costly meat-processing modernization plan. West Face couldn’t be reached for comment, but in a Globe and Mail interview in October, Boland said he felt Maple Leaf had become “more focussed on reducing costs and improving shareholder returns.” The board unanimously approved the plan, though it’s not clear exactly to what extent Boland and the other working group members influenced the final version. “They provided a massive amount of scrutiny on certain parts of the plan, including the risks,” says Vels. “The basic infrastructure of the plan didn’t change, but some alterations were presented regarding some of the risks and the analysis of the spending.”

Jeffrey Gandz, who also chaired the group, says, “There were some lively debates as you would expect from a board of directors. I mean, we’re spending millions in a business that doesn’t have fat margins.” The alternative likely on the minds of many investors is selling off parts of the business rather than spending millions during uncertain times for uncertain returns. “Typically, the hard roads are the ones that are more valuable,” says Vels. “We looked at a number of alternatives, but the strategy we settled on was the one that adds the most significant amount of shareholder value over time. I mean the CEO [McCain] owns a third of the company, and I and many other of the management own a number of shares—so, we’re in.”

Analyst reaction to the strategy has been mostly positive. But heading into the home stretch, there’s some concern about the high costs. “It’s going to cost [Maple Leaf] $1.3 billion, which is almost their market cap. But the benefits are there to be had if they are able to execute—that’s what remains to be seen,” says Derek Dley of Canaccord Genuity.

Question is, do consumers want it? This hyper-industrialization of the food industry seems at odds with growing consumer interest in organic, ethical and local food. This leaning is even evident in some of Maple Leaf’s products, namely its Natural Selections line of deli meats, where “you won’t find anything you can’t pronounce” in the ingredients. According to the George ­Morris Centre’s Grier, though the market for responsible food is important, it is still fairly small. “When people are asked on surveys whether they care about how an animal was treated,” he says, “the resounding majority claim they do. But if you ask people what’s most important about the food they eat, you’ll get answers like ‘taste’ and ‘price.’ The overwhelming number of consumers just want safe, affordable, good-quality food.”

For big food processors like Maple Leaf, the only way to offer that and still make a profit is by consolidating into big, modern plants, so you can benefit from scale and keep up with the pack, because, Grier warns, not doing so would guarantee failure. And it wouldn’t be the dazzling sort of crash from, say, a listeria outbreak, but rather a gradual, quiet unravelling.

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