Until a few years ago, food company Strauss Group (TASE: STRS) was considered one of the most stable companies in Israel. What began as a small dairy set up by Hilda and Richard Strauss in the yard of their home in Nahariya in 1939, after they immigrated from Germany, became, over the years, a food and beverages concern with businesses straddling the world that employs about 12,000 people (6,500 of them in Israel) and with half its sales made overseas.
In the 85 years of its existence, Strauss has remained in the control of the family and under its leadership, and it maintains its position as the second largest food company in Israel. The company’s management has also been stable. Most of its senior managers have been with the company for many years, and Strauss has won an image of a family company that nurtures its managers from within.
So, for example, Giora Bardea, who stepped down as CEO of Strauss in 2022 after four years in the post, worked for more than twenty years before that in various management positions in Strauss and in Elite, with which Strauss merged.
In the past few years, however, something not good has happened to the food giant controlled by siblings Ofra, Irit, and Adi Strauss, the children of the late Michael Strauss, who was the son of the founders. Together, they own 57% of the company. Strauss went through an unprecedented crisis when salmonella was discovered as its confectionary factory at Nof Hagalil in 2022. The company recalled products, shut the factory for several months, and posted huge losses.
To that was added a similar crisis at the Sabra hummus factory in the US, 50% owned by Strauss, and a steep rise in world coffee prices, which hurt the company’s profits. All of this was reflected in its share price, which underperformed its benchmark indices and reverted to its 2018 levels.
Another consequence of the difficulties that Strauss experienced was the departure of ten senior managers in the past year. Among them was Strauss Israel CFO Gur Zamir, Strauss Israel CEO Eyal Dror, Strauss Coffee CEO Zion Balas, Strauss Israel VP human resources Alona Magor-Shoham, Strauss Coffee marketing manager Elad Ravid, and Sabra CEO Joey Bergstein. These departures were seen as a change from the family atmosphere that had characterized the company in the past.
Not coincidentally, they have occurred since the appointment as CEO of Shai Babad, formerly director general of the Ministry of Finance, who came to get Strauss back on course. Under Babad’s management, structural changes and streamlining measures have been introduced at Strauss, involving layoffs of hundreds of employees in Israel, mainly at head office.
Just last month, Strauss announced the dismissal of 150 employees, mainly at management level, a move expected to save NIS 50 million annually. This is the second round of layoffs within a little over a year.
Against this background, it is hardly surprising that in the Globes-Statista survey of the best companies to work for in Israel for 2023, Strauss fell from third to twenty-second place. A similar ranking by BDI Code for many years placed Strauss among the top companies (the company itself boasted of being "one of the ten best companies to work for in Israel"), but in that ranking too Strauss has declined, from sixth place in 2021 to 22nd a year later, and to 32nd last year. Yet Strauss still plans to foster managers from within the company.
In Israel, Strauss is known as the maker of Milky chocolate and whipped cream desserts, Parra chocolate bars, Turkish coffee, Cheetos corn chips, and Tapuchips potato chips, as well as prepared salads and dairy products. It has a local market share of nearly 10%, outranked only by Tnuva, according to Storenext.
But, as mentioned, the company’s business in Israel accounts for only about half of its revenue. Strauss is the fourth largest coffee company in the world, with a 2.7% share of a $100 billion global market, according to market research company Euromonitor.
Half the group’s revenue derives from its coffee business (Strauss Coffee). The main market is Brazil, which accounts for two-thirds of the revenue in this segment. The rest comes from Eastern Europe and Israel. In addition, Strauss is active in dips and spreads in North America, through Sabra, and in purified water in Israel (Tami 4) and overseas, mainly in China.
The latest blip from Strauss’s point of view is the steep rise in the raw materials for its products. The price of green Robusta coffee beans, which grow mainly in Africa and Brazil, has shot up by 90% in three years. In the same period, the price of sugar has risen 60%, and the price of cocoa has doubled. The main cause is climate change, which has harmed crop yields.
A senior market sources says that, after two years of rising raw material prices, Strauss, and the other food companies, were certain that prices would go back to normal in 2023, but they were disappointed. Prices continued to rise, and they are now "up to 100% higher than their average in the previous decade."
Unfortunately for Strauss, prices have risen even further recently because of the attacks on shipping in the Red Sea by the Houthi rebels in Yemen, and problems in the Panama Canal, where drought has caused a drop in the water level, limiting the rate at which ships can pass through.
In response to the rise in raw materials costs, the local food manufacturers are passing them on to the consumer, and raising prices by tens of percentage points, even several times a year. Strauss did so last month for the third time within a year, announcing price rises for a quarter of its products, among them olive oil, chocolate products, coffee, hummus, and snacks.
Leader Capital Markets retailing analyst Dina Korshunov says that regardless of the price rises, there is a "noticeable change in consumer preference", such as a switch to smaller, cheaper brands "at the expense of the big suppliers", and that this is liable to hit Strauss’s market share.
US factory closure
As mentioned, the rise in raw materials prices is the latest in a series of blows to have hit the company in the past couple of years. It began with the Sabra unit in the US, which received a warning letter from the US Food and Drug Administration about deficiencies at its factory.
Sabra was forced to close the factory in February 2022 for six months in order to renovate it. As a consequence, its share of the US hummus market fell to just 31% from 62% the previous year. It now stands at 38%. Sales in this segment, which had accounted for 8% of group revenue, fell by 45% in 2022, and are still well below the 2021 level.
A second and of course much greater blow in 2022 was the discovery of salmonella at the Nof Hagalil confectionary factory in April of that year. Strauss had to recall products and shut down the factory for six months. The crisis was so severe that Strauss Group chairperson Ofra Strauss had to apologize to the nation on camera. The result was a NIS 300 million hit to the group’s profit that year, with the Israeli business swinging to a loss.
Will the streamlining measures and the latest price jumps be enough to get Strauss Group back on course? Leader’s Korshunov fears that they won’t. In her view, the price inflation problems weighing on the local food market will continue. "Inflation in the food sector won’t go away in 2024," she says.
In 2023, Strauss Group’s share price fell 27%, while the Tel Aviv 35 Index and Tel Aviv 125 Index rose 4%. The company has a market cap of NIS 8.4 billion, 33% below the peak it reached in February 2022. This is a much steeper fall than we have seen in other food manufacturers such as Heinz, Unilever, and Nestle, which fell by single digit percentages last year.
It must be pointed out that Strauss’s financial statements show significant improvement in the past year. In the third quarter of 2023, operating profit was more than double that of the corresponding quarter of 2022, at NIS 212 million, and quarterly net profit shot up 237% to NIS 120 million.
Investors understand, however, that the apparently good numbers for last year are irrelevant, because they don’t represent real growth, but rather partial recovery from a difficult year, on the way back to the position before the salmonella debacle, which the company has not yet reached.
The important question is, what next? Leader is not optimistic about the future, and nor is Liat Kadish, VP and head of corporate finance at rating agency Midroog (a subsidiary of Moody’s), which gave a negative outlook for Strauss Group’s credit rating eighteen months ago.
In a report dated June 2023, Midroog cited on the positive side the low risk to the company’s business in Israel "in the light of the fairly stable demand for basic food products" and the company’s strong position in the sector "characterized by significant barriers to entry for manufactures… resulting in a fairly concentrated market." On the negative side, Midroog mentions the rise in Strauss Group’s net debt to NIS 2.7 billion at the end of 2022 from NIS 2 billion at the end of 2021, and says that the debt "is not expected to decline substantially in the next two years."
Midroog sees gross profit margins weakening in comparison with past years, and projects operating profit margins of 7.5-8% for the foreseeable future. It says that the company’s rating is liable to be downgraded if there is continued erosion of its profitability.
Always more profitable in Israel
Analysts and hedge fund managers to whom "Globes" has spoken say that the company is not attractively priced in comparison with the alternatives. Strauss has a p/e ratio of 20.
Investment banks Jefferies and Barclays, on the other hand are actually optimistic. Barclays sees Strauss as being in a good position to provide sustainable growth in its top line, driven by continuing innovation and new product launches.
Strauss seeks to enter new areas of activity. It has begun producing non-dairy milk, with a view to making non-dairy yogurts and desserts. In the future, if cultured milk develops, the company plans to enter that segment too, to create new growth engines.
Investors can only hope that Strauss Group’s bad luck will pass soon, and that coffee prices will revert to where they were in the previous decade, which would boost Strauss’ operating margin to 11% of sales or more. The company’s share of the Brazilian coffee market is steadily rising (although that is not the case in the rest of the world) and that too could contribute to an improvement in results.
In addition, Strauss Group can always rely on Israel, where its profit margins are significantly higher than they are on its overseas business. Before the salmonella crisis, its operating profit margin in Israel was 12% overall, and 21% in the coffee segment. This compares with a margin of just 7% on the overseas coffee business, and 6% on Sabra’s hummus business in the US.
Published by Globes, Israel business news - en.globes.co.il - on February 4, 2024.
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