PARMALAT
How the Milk Spilled

Article by - Shirisha Regani ,
Faculty Associate ,
ICMR Case Studies and Management Resources.

Parmalat was a highly successful food company - that was until it entered bankruptcy protection in 2003. Investigations revealed that, for years the company had been using false accounting and complicated financial systems to create a picture of financial health, misleading investors and analysts alike.

In late-2003, when news broke out that Parmalat, one of the biggest and most successful companies of Italy had used fraudulent accounting for well over a decade and a half to hide its real financial position, people were only mildly surprised. After all, accounting scandals had almost become a trend of the times.

It all started with Enron, the American energy giant which broke down in 2001 following revelations that the company's huge success in a very short time had its roots in posting inflated profits and using complicated financial transactions to hide debts. The Enron fiasco led to lifting the veil on another American company, WorldCom, which eventually acquired the dubious distinction of being the biggest bankruptcy ever witnessed in business. While America was still reeling with the shock of the bankruptcy of two of its bigger companies, Europe did not lag behind. So while the US got Enron, WorldCom and several other big names, Europe responded with Ahold and Vivendi. Parmalat, though a big blow to Italy, was just another company added to the already long list of fraudulent companies and did not stir people too much

Some analysts commented that accounting scandals were to the 2000s as environmentalism and sexual discrimination were to the 1990s. In other words, they were the most discussed and analyzed of all corporate activities. So common had they become that some business schools even introduced ethics courses for their accountancy students.

Parmalat, set up by Calisto Tanzi (Tanzi) in the 1960s, was a food company with a global presence. From milk to yoghurt, to juices and biscuits, it seemed impossible to eat or drink something without Parmalat having a presence in that category. The splashing milk drop logo of the company was one of the best recognized corporate symbols and the company seemed to stand for all that was good and healthy. That was, until the events of 2003 proved that behind the façade of goodness and health was an unhealthy penchant for complicated financial structures that milked the publicly held Parmalat Group to keep the Tanzi family companies running.

Tanzi was well known in Italy as a devout and sober person. He and his family were never ostentatious in the display of their wealth and were regular contributors' to charity. It seems ironical that the same Tanzi was languishing in prison for committing a fraud involving billions of euros.

THE ORIGINS

Tanzi was a young man of 22, when he inherited the family business that was started by his grandfather. "Tanzi Calisto e Figli - Salumi e Conserve" (Tanzi Calisto & Sons - Cold Cuts and Preserves), produced processed foods like seasoned ham, cured meat and tinned tomatoes. Tanzi, who had a strong entrepreneurial streak, was not satisfied with simply running the family business and decided that he wanted to explore new products and markets to help the business grow. On a trip to Switzerland, he noticed a carton of milk on a super market shelf and decided that the route to success was through milk. He set up a pasteurization plant near Parma to produce milk and sell in the areas surrounding the town.

In 1963, the name 'Parmalat' was given to the company and the milk was also marketed under the same name. (Parmalat meant 'milk from Parma', latte being the Italian for milk. Parma was well known as a center for culinary excellence in Italy, and Tanzi capitalized on this reputation). Parmalat was the first branded milk to be produced in Italy and became hugely successful. Over the years, the company expanded operations to other areas of Italy, and Parmalat soon became a national brand.

Tanzi's commitment to innovation and marketing contributed to the company's success. Parmalat was the first milk processing company to package its milk in a tetrahedron shaped carton called 'Tetra Pak' and use the Ultra High Treatment technique in the production of milk. Tanzi's innovativeness considerably increased the shelf life of milk and Parmalat became well known for its long life milk. The company was also one of the earliest to use sports persons to endorse its milk, earning it global recognition as the 'milk of champions'.

Over the years, Parmalat diversified into a variety of other products like yoghurt, vegetable sauces, fruit juices, baking products, soups and mineral water. In the 1980s, the company expanded rapidly and entered several other countries around the world. In 1990, to raise the money to support its rapid expansion, the Tanzi family gave up 49 percent of their stake in the company and Parmalat was floated on the Milan Stock Exchange. By the early 2000s, the small company from Parma had become a global food empire spanning 30 countries and employing over 35,000 people.

SNOWBALLING SCANDAL