Israel’s Strauss Group is a food and beverage maker with interests in sectors from coffee and chocolate to dairy and dips. Coffee accounts for over half of Strauss’s sales but the company has aspirations to grow its food business. Hannah Abdulla met Strauss CFO Shahar Florence to find out more.
just-food: Strauss has 29 production sites across 22 countries. Geographically, what’s the most important region for you in terms of growth?
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Florence: That’s like asking which is your favourite out of all your children! There is a reason for each business, and when I say business, I’m talking about geographies, too. For some, the strategic role is to generate the cash to stabilise the business and make sure it is resilient. Others must deliver growth. I’m not expecting that they will generate profit or cash flow – with the right scale, the profits will come. For example, Max Brenner – we converted this into a fully franchised business because for us it is not about the revenue and profit from chocolate bars, it’s about the creation of a worldwide brand. We see royalties of about 5-6%. It’s not always significant for a business of our size but right now we expect the footprint growth, not the profit. In our case the sum is greater than the parts. If each business will deliver the role we created for it, we can excel.
just-food: In increasing your geographical presence, you recently extended the deal with PepsiCo to take your dips and spreads partnership worldwide. Can you tell us a bit more about that?
Florence: We identified the US dips and spreads sector and the US culture of dipping. We saw there is no owner of the category, it’s very diverse, under-invested and that’s why we started there. We did a few years by ourselves and then PepsiCo indicated it was looking for a co-packer. At the time, they came up with Stacy Pita Chips and were looking for a dip. They asked us to manufacture white label which we don’t do. We had partnered with them in Israel for salty snacks so again we proposed a partnership. They came back and said they wanted to partner with us. We would never have believed PepsiCo would have a 50/50 partnership with us in the US – their home market. Since then we’ve had tremendous growth. They’ve extended that trust and offered a 50/50 partnership from the US to worldwide for fresh dips and spreads.
just-food: How far has that developed?
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By GlobalDataFlorence: We opened it up to two countries – Mexico and Australia. In Mexico it’s a pure greenfield operation. In Australia we bought the Redrock Deli for US$2-3m – Australia’s dips are a bit different from the US, they are chunkier. So we slowly brought in new production, under the Obela brand name, but had the existing staff. Then we also bought Copperpot, a white-label factory from one of the food manufacturers in Australia. We now have a US$30m operation in Australia. In Mexico, we’ve taken it a little more slowly. The idea is to understand what we are doing right or wrong and to replicate the success we’ve had in the US.
just-food: What made you pick those two locations?
Florence: We look for markets where it is easier to introduce hummus. Let’s face it at the beginning, hummus is a weird thing. On the other hand, people tend to love it even if they are not familiar with it. In Mexico, garbanzo beans are popular and Australia has a big Mediterranean population familiar with the product. That’s why we started there. We assessed western Europe, but at the time the economy was not in good shape so we decided not to launch. We checked Turkey and some other countries – we will probably get back to it.
just-food: You must find Mexico a challenge as the sector for dips is quite competitive?
Florence: It is a challenge but we have wonderful partners there. For [PepsiCo’s] Frito, it’s one of the largest operations in the world. At present we’ve started with hummus, but we are willing to do salsa and guacamole too – we are up to the challenge!
just-food: On the subject of competition, who is Strauss’s biggest domestic rival and how do you ensure the company stands out?
Florence: Well the market in Israel is very consolidated. About five manufacturers represent about 50% of the market. We don’t have one competitor that competes with us on the whole range. If you take the dairy side then Tnuva, held by Apax here in London, is the biggest competitor with about a 19% market share. Confectionery, salty snacks, dips and spreads – Nestle is our main competitor. Each has their own advantage – Nestle brings all the product and knowledge. Tnuva has the scale – because they are large they almost have the monopoly in areas like raw milk, butter, plain cheese and so on.
How we excel? We are the largest advertiser in Israel; we think we have the strongest brand in Israel; we invest a lot in technology and last but not least, even in Israel we are not ashamed to partner with the best brands in the world. These are some of the tools we have against the bigger guys.
just-food: So you believe partnering with renowned brands is important for Strauss’s growth?
Florence: Let’s start with necessity – first of all, we have no choice. Take for example the dairy market in Israel. Israel is a small market, dairy is a heavy R&D market. Unlike chocolate which is a simple product, to be able to develop Danaco or Actimel or Activia it requires a heavy investment. No one can justify it in a small market like Israel. We were the first to understand it and co-operate with Danone. It’s the ability to be humble enough and say ‘we will not be able to invest enough and if we want to win we have to co-operate.’
Second, it’s about the reason to win. In salty snacks – Frito with its vast product line will always bring at least one or two products we couldn’t think of. Let’s be arrogant and say 80% we can do by ourselves. It’s that 20% they bring that gives you the edge.
just-food: Have you got any further joint ventures or projects planned?
Florence: With PepsiCo, right now – no. Possibly in water in the future. They are searching lots of technologies in water, but there’s nothing on the table right now. In coffee, we acquired the Amigo brand in Romania allowing us to penetrate the instant coffee market. It will make us the largest coffee company in Romania. This deal might lead to another in Brazil but again nothing is on the table currently.
just-food: What areas of the business will Strauss be concentrating on over the next few years?
Florence: Our main two growth engines are dips and spreads in the US and the rest of world. Sabra and Obela are proven success stories in the US, we now need to execute this in other countries. Our other main source of growth will come from water purification though this is still in the incubation stage so the liability of proving it in the market is still on our shoulders. The opportunity, however, is enormous.
just-food: But like many multinationals, you must have plans in place for growing in emerging markets?
Florence: We currently have a presence in Brazil, China and Russia – the three are good markets for us and have demonstrated profit and revenue growth. These markets go up and down and while there are huge growth opportunities, they are riskier. Take for example the situation in Russia and Ukraine. We work the Russia and Ukraine operation together. In the same office we have Russians and Ukrainians, it’s the same manufacturers, same supply chain. It’s not a simple situation to manage but it’s proven to be very profitable together with high growth rates. We are aware of the risks but we also know the opportunities.
just-food: And finally, what do you predict will be the biggest industry challenges over the next few years?
Florence: Volatility in both currencies and commodities make the business a challenge. You need to understand deeply the industry in order to be able to handle it. The worldwide market is not in a good shape and it puts lots of pressure on margins. People find it difficult to have enough free income to buy food. There’s also not enough drinking water, nor enough land to provide food. So if you’re talking about the five- to ten-year horizon, you’ll find lots of pressure on prices and margins.
This interview was held on Tuesday 18 March at the Consumer Analyst Group of Europe conference in London.
Strauss Group was restricted on discussing its financial performance ahead of the publication of its 2013 results on 26 March.
