Not in my back garden

Melanie Stern is section editor of Families in Business.

France's Darbonne family are seasoned players in their herb-growing niche. But China could pose a threat to the future of their business and 119 years' dominance, chief executive Luc tells Melanie Stern

Before speaking with Darome Group's chief executive Luc Darbonne, one question begs to be answered: how does a company make more than €100 million a year from herbs? Afterwards, the answer still isn't clear. But. one way or another, this family has done it, turning a medicinal shrubbery into an international agri-food success by tapping a lucrative niche at the right time.
 
Run by fourth family generation successor Luc, with half the company managed by his brother Hubert, and with members of the fifth generation already ensconced in running foreign subsidiaries, the Darome Group dominates its sector by operating at all levels of the supply chain. First they specialise in the large-scale agricultural production of herbs; then they see their product through processing, packaging, sale and delivery. At the core of its offering, says Luc, is the promise of the very freshest, highest quality herbs on the market. Guaranteeing delivery on this promise requires painstaking attention to detail at every stage, and being in charge of the entire process.
 
So far, so good. But the high costs of this business model eat ever more uncomfortably into the potential revenues from selling a niche product at bulk trade prices. "The business is very expensive to run because some of our plants, such as tarragon, oregano, chives and thyme, can take up to six years to grow fully," Luc tells Families In Business. "They need so much time, and require a lot of initial financial investment to nurture them to maturity."

As the chief executive of a privately-owned family business, Luc won't disclose financial particulars, but concedes that profits have remained flat for the last three years running. Sales, running at around €100 million annually, saw modest gains of between 4-5% in 2005, says Luc. The plan in 2006 is a 10% increase in business at Darome's US business, and a 3.5% increase for its European operations, making 2006 an ambitious year.

Though agriculture has a relatively safe-guarded existence – so being as humans can't survive without food – it has become a far less lucrative business in Europe, with costs pushed skyward and profits squeezed downward, evident in the UK at least by the prevalence of farming subsidies. In France, though, agri-business has been a top earner since the 1970s, with the sector running a surplus of €7.9 billion against a country trade deficit of -€19 billion in 2004, according to government statistics.

France's continued reliance on the success of its agriculture business is in no small part down to its proud and long-held reputation for high-quality food and wine. Darome is no different. Headquartered in Milly-la-Forêt, a small town of only 5,500 residents just south of Paris, it resides in a location with a reputation for growing herbs stretching back to medieval times. In homage to this, playwright and Milly resident Jean Cocteau famously decorated the town's 12th century chapel Chapelle Saint-Blaise with local herbs, painting the interior walls with illustrations of simples, 'healing' herbs that grew locally; he was buried inside the chapel in 1963. Testament to this is France's Conservatoire National des Plantes à Parfum, médicinales et aromatiques, based in Milly, and something of a national treasure, charged with preserving hundreds of varieties of plants and herbs for future generations.
 
Darome, meanwhile, has commercialised Milly's top tourist draw. The company tends to nearly 1,500 hectares of land spread across five continents, and produces 50,000 tonnes of herbs every year, supplying the foodservice and retail markets. Around 40% of its herbs are Independent Quick Frozen (IQF) – a process used widely and often adapted in the foodservice world for which Luc, as inventor, holds the patent – and sold for use in the production of ready meals, as well as own-brand fresh herbs in various preparations to supermarkets.
 
The biggest challenge Darome has to face in achieving its financial aims this year is, as is the case for so many other businesses and sectors across Europe and the US, the Far East. Or China, to be specific. Not so long ago mocked as the sweatshop of the world, the People's Republic has been keeping chief executives of the world's most powerful corporations up worrying all night, and Mr Darbonne is equally concerned with the backlash of globalisation from the world's largest country. Agriculture has long been a leading industry for China, and herbs are intrinsically linked with Chinese medicinal traditions – but the 900 million rural population powering this market were initially left to rot when they didn't fit into the drive by Western companies to exploit cheap, non-unionised Chinese labour for the manufacture of white-label goods. In 2000, however, the Chinese government moved to drag agri-business into its future with a series of development strategies aimed at injecting more efficiency and a chance to compete with the growing popularity in China for better quality imports. Herb growing in China is both plentiful and of increasingly higher quality; China exports six times more herbs than India, one of the leading players.
 
"Being in the food market we think long-term when it comes to problems and challenges. Perhaps one year the big problem will be the weather, for example, but we've answered this issue by setting up on every continent," says Luc. "The major issue for us today is what we and France will do about globalisation, which is a very real risk to an organisation like ours, because low-cost countries like China are easily able to deliver a quality product at a very low cost."

Darbonne has already done something to counter this problem, and align the company to be ready to deal efficiently with future pressures, by diversifying outside France. Last year, the chief executive split the business in two under the Darome holding company. One side, run by Hubert, houses breeding, production and distribution capabilities for varieties of strawberries, asparagus and chicory across France and Spain, and a business growing turf grass in Portugal. The other side, run by Luc, consists of their herb-growing operations across Africa's Togolese Republic, Argentina, China, Mexico and North America as well as Europe. In the States, Darome runs endive specialists California Vegetable Specialties, based in the rich soils of the Sacramento River Delta and the first Stateside endive producer. It also runs SupHerb Farms, in partnership with Armanino Farms. Hubert's son Alexander runs the Spanish business, while Luc's youngest son Charles is in charge of marketing in France. Celine, Luc's daughter, sits on the board of the US business.
 
The Darbonne family retained 75% of the shares in their company after the split, but the remaining 25% was bought out by French banks, Credit Agricole and Société Générale. Initially, Luc made the split to circumnavigate a heavy capital gains tax bill facing the family if a succession took place in the future; company calculations pitted Darome against similar but publicly listed companies in France, thus bumping up the company's indicative value and the resulting tax bill on succession of the shares. The family faced paying 40% capital gains tax on what they deemed as wildly over-valued from their own pocket. Faced with the choice of handing over hard-earned value to the government, or a sale, the family turned to Credit Agricole and SocGen for a solution. They had been partners since 1992 when they came on board to help finance Daregal's expansion into the US with the purchase of California Vegetable Specialties. Following some strategic meetings they were brought on as owners.

While an increasingly common way of financing business exits, bank finance and partnership still doesn't sit well with families looking at expansion - even more so French families. But Luc can't understand this aversion.

"It isn't the case for us because, in my opinion, the only way for us to have been able to invest in America was bank finance. At that time we just were not large enough to find the sort of capital we needed to do it otherwise. Plus, we were keen to have the banks with us because they help in more ways than just financial," says Luc. "They looked over our numbers but they also helped us think very clearly about how to build the company and it makes us more efficient."
 
And the set up is hardly as invasive as many families would imagine. Neither bank has a representative on the board; instead, it is filled by three non-executive directors from outside the company and the family, and three family members. The only time the banks get involved is in the two meetings every year the board has with them to present their results. "We have a really good relationship with the banks, and good discussions too," Luc adds. "It isn't an intrusive relationship."
 
The split also meant the family managed to avoid some of the more costly intricacies of French taxation, including a law that obliges individual family members with ownership of their business to pay 1.9% of the capital they make from the business to the government every year. This law has driven hordes of French companies out of French hands and into the global public markets to survive; private equity or bank funding have been the only other, often equally unattractive alternatives for the country's family-owned (and typically, paternalistically-minded, passionately private) companies. Luc and his family saw it coming and spent the preceding 8 years preparing the company for its current existence. It is, therefore, pretty ironic that the French government reduced inheritance tax on January 1st this year. "The tax we'll have to pay at succession is very low now but I would have done it anyway. That said, we still have capital gains tax to think about. My problem is wondering what the government will do to help family businesses like ours," Luc adds.

It was the invention of IQF that took Darome into the realm of international commerce. Timing, with hindsight, played a crucial part.
 
Until the 1970s the company maintained its dominance as the market leader for dried herbs by using huge, cumbersome mechanical dryers. In 1976, just as frozen convenience meals were hitting the market in Europe and gaining popularity, Luc designed the IQF process. Thet became one of the first companies to provide fresh but long-life packaged herb products for which cleanliness and quality could be assured, in bulk frozen form in which manufacturers could easily request the exact quantities they needed. Darome cemented its place in what was to become of the biggest and most lucrative sections of the food service market, worth €5.7 billion across the UK, France, Germany, Spain and Italy alone. Three decades on, however, the frozen food market is in a bit of a pickle as consumers shun microwave meals to try their hand at re-creating Jamie Oliver-esque fresh-food dishes. Unilever announced this February that it would sell most of its underperforming frozen-food operations, following dwindling European profits in this sector from rivals Heinz and Kraft. Looking ahead Luc doesn't see this as a big problem. Consumers in this sector are mostly moving to chilled goods – still a major user of frozen herbs – and Daregal's supermarket customers can make use of their non-frozen herb preparations in their dalliance with TV chef-ism.

Although creations as pivotal as IQF don't come along that frequently, Luc maintains innovation of this kind is vital to Darome's future in an ever more competitive, globalised market. Research and development (R&D) is the powerhouse of the company's efforts to stay ahead of their competition, with teams of highly specialised plant scientists assigned around 3% of annual sales (in 2005 this was between €3 million, says Luc) to play with. That's more than other comparable businesses invest. Though it's hardly play; Darome's boffins are under pressure to come up with new varieties of their plants that will resist evolving plant diseases and grow in various environments, invent new processes to freeze and store their goods for transportation, new preparations in which they can be sold, and anything else that could give them a leg up on their rivals. Somewhat unusually, Luc is that rare animal in the corporate world: a chief executive who is in tune with his market. Rather than having been parachuted in from some other random corner of global commerce to pull the right numbers from a hat, Luc has not only worked his whole life in his company's business, but is an inventor by training and at heart. His sleeves are rolled up alongside those of his R&D people; he is still heavily involved in their work. "I think that it is because we are a family business with a longer-term outlook that means we work with our people," he says. "'It's easier to do as family owners. I meet with our R&D people every month so that we're always in touch directly, and we have a very strong, friendly relationship. We try hard to keep them. And so far it works."

It is this mindset of ingenuity that will need to be capitalised on hard to see Darome through the threat of China and other low-cost countries. "It's hard for us to predict how things will pan out for these countries as rivals," Luc concedes. "China is a big risk. But it has its own problems, and though it is a big competitor, it competes slowly because of the problems it has. But China is certainly dangerous and we have to be careful going forward."