Strauss Group Ltd. (STRS), Israel’s largest traded foodmaker, is using a partnership with PepsiCo Inc. (PEP:US) to strengthen its foothold overseas as competition and price curbs reduce earnings at home.
The company, already the world’s fourth-largest retail coffee supplier, aims to boost sales of hummus more than three-fold to $1 billion a year through a partnership with the soft drinks maker, Chief Executive Officer Gadi Lesin said April 7. Israel sales accounted for 41 percent of Straussâs operating income last year, compared with 48 percent in 2012, according to data compiled by Bloomberg.
The strategy underlines how laws approved by parliament March 20 to limit shelf space and force stores to publish prices online are encouraging Israeli food companies to step up their presence abroad. Competitor Osem Investments Ltd. (OSEM), which has a partnership with Switzerland-based Nestle SA (NESN), is also seeking to expand sales overseas.
“Increased regulation weighs on these companies,” David Kaplan, a Tel Aviv-based analyst at Barclays Plc who recommends investors hold Strauss shares, said by phone April 13. “If you have good partners and good products, why not go international?”
Strauss didn’t raise prices in Israel last year because of increased competition, according to its annual report. The company’s profit margin was 4.2 percent in 2013, compared with about 9 percent for Shoham, Israel-based Osem and 11 percent for both Deerfield, Illinois-based Mondelez International Inc. (MDLZ:US), formerly Kraft Foods Inc., and Nestle, according to data compiled by Bloomberg.
“There is a new reality in Israel and competition is very aggressive,” Lesin said in an interview at Strauss’s Petach Tikva, Israel headquarters. “The engine for growth will come from abroad.”
Israel has ramped up regulations to curb food prices since street protests erupted from the northern city of Haifa to Beersheba in the south in 2011. The government in February cut the import duty on milk and is expected to vote on a plan to eliminate tariffs on imports of certain cheeses, cream and yogurts, the Ministry of Finance said today.
Straussâs shares have almost doubled since dropping to a three-year low on Aug. 14, 2012, and advanced 21 percent in the past 12 months, through yesterday. Osem shares increased more than 81 percent and 19 percent in the same periods.
“Coffee and dips have the potential to be a potent combination,” Michael Klahr, a Citigroup Inc. analyst in Tel Aviv, wrote in a Nov. 7 note, when he initiated coverage of Strauss with a buy rating and a 74-shekel target price.
The company’s 2007 partnership with PepsiCo for the sale of Sabra-branded spreads and dips has helped the company capture 64 percent of the U.S. market for hummus, a spread made from chickpeas, Lesin said.
“We will get to $1 billion in sales” from hummus, compared with about $300 million last year, he said.
Osem, which partnered with Nestle in the 1990s and is 64 percent-owned by the Swiss foodmaker, is opening an international division to target Europe and the U.S. and has a factory in the Czech Republic. Its Tribe Mediterranean Foods Inc. unit holds 8 percent of the U.S. market for salads and spreads, according to the company’s 2013 annual report.
Establishing a presence overseas carries risks, according to Gil Dattner, an analyst at Bank Leumi Le-Israel Ltd. in Tel Aviv.
“To develop a business abroad requires commitment, a clear strategy and strong competitive advantage,” Dattner said by phone April 13. “Strauss is the only company which has done this on a significant scale, by focusing on niche markets and creating strategic joint ventures with strong partners. But it is not simple, and demands time and a huge investment.”
Strauss is also targeting Mexico and Australia to expand its spreads and dips business through its Obela joint venture, which it set up with Purchase, New York-based PepsiCo in October 2011, Lesin said.
Kaplan has an equalweight rating on Strauss, meaning investors should hold the stock in line with benchmark indexes, and a 65 shekels target price. Leumi’s Dattner has a market-perform rating with a 64 shekels target price. Strauss shares declined 1.4 percent lower to 62.3 shekels at the close in Tel Aviv.
Any time a company “expands its markets and finds new avenues for growth, while of course there are risks, the move is likely to be appreciated by investors,” Kaplan said.
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