Snack attack: Frito Lay brands send Snack Foods soaring
Snack Foods was a relatively small biscuit and confectionary company in Australia until 1998 when it bought brands being sold off by snack giant Frito Lay. Snack Foods overnight jumped from a company with A$60m (US$30.8m) a year in sales to A$260m, and A$272.9m in the year to June 2001.
Frito Lay was buying Smiths, the biggest domestic snack foods company. This let Frito, a division of PepsiCo, jump from number two in the Australian market to number one but the sale was conditional on Frito selling a number of its brands for competition reasons. Snack Foods stepped in, with backing from the Melbourne venture capitalists the PEP Group, to buy the brands. These included Thins crisps, CC's corn chips and Cheesils. Frito kept its global brands like Doritos and in many cases sold Smiths brands, like CCs.
Snack Foods is steadily improving its position and has improved profitability over the last three years from A$6m in 1999 to A$15.6m this year - although these are pre-tax figures.
"We've been doing really well," managing director Simon Rowell told just-food.com. "We've had huge growth due to the acquisition but we've also been achieving reasonable organic growth from development of the brands. Higher sales always drives better profits but we also have to control costs, particularly wages, which go up relentlessly."
The share price has also looked solid growing from 80c a share a year ago to A$1.28, although much of the growth has come since June when the share price was around A$1. While Frito is obviously a difficult rival to grapple with, Rowell, a former managing director of Cadbury Schweppes Australia, says his company is proud of its links with the global giant and he believes Snack Foods has taken advantage of work practices left after the sell off.
"We used to be a fairly small biscuit company with the Players brand, which was founded in the 1970s. Then Frito bought Smiths and there was some movement in brands at that time, it was effectively a forced divestment. But Frito manages its business to the highest global standard and our factories are ex-Frito so we have been able to take advantage of that. We try to move quicker than they can. They are a global company that has to manage its product development on that scale; we are not constrained in that way so if there are opportunities we try to react quicker. Frito is our most aggressive competitor but we are proud of our heritage with Frito."
Rowell says the Australian snack foods market is similar to the UK and US but with a population of 20 million there is only room for a handful of brands so competition is fierce. "Australia also differs from the UK in that supermarkets there have many more own-brand varieties and also multi-packs are popular. In the US pack sizes are bigger than in Australia but these are really only details because in both these markets the biggest participant is Fritos so we face the same challenges as other smaller companies."
Rowell says he speaks regularly with Golden Wonder in the UK and describes them as a "good friend".
Snack Foods has been enjoying impressive growth partly due to the strength of the snacks market in Australia. "We had a strong year last year because the market grew by 8% and in any food market category that's good and our volumes grew faster than that. We think that growth profile will continue partly because of the aggressive marketing done by ourselves and our competitors. This stimulates activity and while this food category is traditional in that people want to buy salt and vinegar crisps, it is also a market that reacts well to innovative marketing and a new pack design or a toy in the bag can make a big difference very quickly."
Rowell believes that his company and the market in general will be relatively immune to any fallout from global recession. He says that while snacks are not essential items they are a "cheap treat" which keeps demand high.
The company is also looking at export opportunities in Asia including Korea, Singapore, Malaysia and Thailand. Rowell is hoping to slash costs and is installing new machinery as part of a three-year upgrade.
"We are also still a small part of the biscuit market through Players. We have about 4% of a market that is about the same size as the snacks market - about A$1bn a year. Because we are a niche producer in biscuits we can get considerable improvements to sales without rocking the boat in the category.
"We are proud that we have gone from a small company to a not quite so small company."
By David Robertson, just-food.com correspondent
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