Supermarkets mashed potato giant’s thin margins

Experts point to razor-thin margins and the enormous power of supermarket giants Woolworths and Coles as a large part of the problem for a business that three years ago was making $36m in profits.

When Chinese conglomerate Chevalier Group bought a 70 per cent stake in 2013 the transaction valued the business at $212m, making Chevalier's investment about $148m.

What was then known as Moraitis Group was rebadged as Oakville Produce last year, and along with the biggest fresh potato business in Australia, the firm also ran the biggest onion supply operation.

But it's hard to build a brand in the potato market, where the supermarket giants have their own packaged washed potato brands as well as selling loose potatoes in the fruit and vegetable aisles.

There were ominous signs when Chevalier Group, which is listed on the Hong Kong Stock Exchange, made a write-down of $21m in its broader interim results for 2015-16 on its Australian fresh produce supply business.

It grumbled about an "underperforming" fresh produce business, and said in those results "the operating environment stays challenging".

Chevalier is a conglomerate with extensive interests in property development, insurance, lifts and escalators, hotels and cafes, and had high hopes that the biggest potato and onion business in Australia would be a winner.

Chevalier had an existing relationship with the largest supermarket business in China, CRE, which operates more than 8500 stores.

Oakville - with large potato and onion farms in regional South Australia in the Murray Mallee region, which encompass 6760 hectares of land, and operations at Hillston in western NSW on 4150 hectares, along with a string of packaging and distribution operations in the eastern seaboard - was a vertically integrated business.

It had it all covered, from seed development, to growing, packaging and distribution.

But it had limited impact on the prices the potatoes eventually sold for in Australia's major supermarkets, even though it had bulked up and represented almost a quarter of the market.

Potatoes South Australia chief executive Robbie Davis said the industry was hi-tech and had become much more corporatised over the past years as single, niche growers found the going tough.

Building bigger scale and becoming vertically integrated had been the business model being pursued by many fresh produce growers, not just those in the potato industry.

"That's the model. It's all about corporatisation," she said.

Ms Davis said profit margins had become thinner and thinner for potato growers.

"The margins are very, very slim."