Oakville Produce: How can a company supplying 23 percent of Australia's potato market go bankrupt?

After Oakville Produce (formerly known as the Moraitis Group) entered receivership earlier this month, questions arise how that could happen to a company good for almost a quarter of the Australian Potato market.

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 which three years ago was making $36 million in profits when Chinese conglomerate Chevalier Group bought a 70 per cent stake. The transaction valued the business at $212 million, making Chevalier's investment about $148 million.

Oakville Produce supplies about three-quarters of all the potatoes sold in Woolworths and is a long-standing supplier. A Coles spokesman said on Thursday that Oakville Produce "is not a material supplier" to the supermarket chain. It is understood that Coles accounts for about 1 per cent of Oakville's total sales.

There were ominous signs when Chevalier Group, which is listed on the Hong Kong Stock Exchange, made a write-down of HK$118 million ($21 million) 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".

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

"The margins are very, very slim," she says. There are 880 potato growers in Australia, according to national vegetable industry body Ausveg.

​A circular to creditors of Oakville Produce on May 11 from receivers and managers Deloitte said they had been appointed by CBA Corporate Services, an arm of the Commonwealth Bank. The CBA is the major lender to Oakville Produce, while Rabobank is also among the lenders. Deloitte receiver and manager Vaughan Strawbridge is seeking a quick sale of the Oakville business and wants expressions of interest by June 6.