Windsor buy provides Ajinomoto with a stable of well-known ethnic brands in the US

Windsor buy provides Ajinomoto with a stable of well-known ethnic brands in the US

Japanese seasonings and frozen food manufacturer Ajinomoto is expanding its overseas footing. The company became the US's largest ethnic food maker in the frozen category when it acquired Windsor Quality Holdings earlier this month. The deal significantly ramps up Ajinomoto's North American presence - but it is just one step on the group's path to becoming a "global speciality company". Katy Askew reports.

Japanese food maker Ajinomoto has witnessed rapid growth in the US since it entered the market in 2000. The company generates revenues of JPY13.5bn (US$124m) in the country and has seen a compound annual growth rate of 15.1% over the past five years.

As quickly as the group might be expanding in the US, Ajinomoto wants to raise its growth trajectory in the country.

To this end, Ajinomoto entered into an agreement to acquire Windsor Quality Holdings earlier this month for US$800m. Windsor counts Tai Pei and Ling Ling among its brands and the company generated annual sales of $670m last year.

The move catapults the Japanese food maker into pole position as the US's largest ethnic frozen food maker. According to data from IRI, the acquisition raises Ajinomoto's market share from 7.1% to 36%.

The combined entity will generate US sales of approximately JPY84bn, helping Ajinomoto move towards its targeted sales of JPY100bn in the country by 2020.

Ajinomoto plans to use the combined strengths of the new entity to expand its market share and the company hopes to account for more than 50% of frozen ethnic food sales in six years. That can be achieved by combining Ajinomoto's "advanced product development capabilities and production technology" with Windsor's brand strength and sales force, president and CEO Masatoshi Ito suggested during an analyst presentation following the M&A announcement.

Ajinomoto intends to feed its dry ethnic grocery products, including seasonings, noodles and rice - into Windsor's sales channels in a move that should provide a near-term sales lift. Windsor has established customer relationships with some of the country's largest retailers and foodservice companies, including Wal-Mart, Kroger, Safeway and Albertsons, Ajinomoto stressed.

At the same time, Ajinomoto will develop Windsor's innovation pipeline using its own technological expertise, Ito indicated.

Windsor's US production capabilities will also facilitate growth, management suggested. The acquisition included seven US production facilities and three distribution centres spread throughout the country. Prior to the deal, Ajinomoto operated just one US manufacturing site.

While Ajinomoto drives top-line growth on the one hand, the group also intends to enhance profitability on the other. Ajinomoto said it will focus on products that deliver higher returns while reducing production costs and improving productivity by utilising its expertise in production technology.

Goldman Sachs analyst Keiko Yamaguchi rates the company's chances of boosting margins, concluding the group's aim of generating a frozen food operating margin of 10% in North America looks "feasible".

"Windsor's frozen food sales are around five times that of Ajinomoto's North American business, but its operating margin is approximately half," Yamaguchi wrote in an investor note. "We believe its integration into the Ajinomoto group may provide opportunities to help improve Windsor's profitability through branding, production control, etc."

The developed North American market might not be an obvious place to try and eke out growth but Ajinomoto has honed in on a flourishing market segment by focusing on Asian and ethnic foods.

According to the company, the category  generates annualised sales of over $40bn. From this large base, ethnic food sales are growing at a rate outpacing the overall food sector. Between 2009 and 2012 retail sales of frozen ethnic foods saw a CAGR of 5.3%.

Ajinomoto hopes to capitalise on growing demand for Asian and Japanese foods in North America. According to consumer research from Japanese trade body JETRO, 52% of US consumers indicated Asian food was their "favourite foreign food", compared to 16% who opted for Italian and 14% who indicated a preference for Mexican food. Of those who chose Asian food, 15% indicated Japanese cuisine was their "favourite".

Through the acquisition of Windsor, Ajinomoto is well-placed to grow its market share in an expanding sector of the massive US food market. But US expansion is only one plank in Ajinomoto's global growth strategy: the company has prioritised a number of other international markets as it works to grow into a "global speciality company".

As part of its medium-term management strategy, Ajinomoto has said it wants to become one of the top ten largest food manufacturers worldwide. Overseas growth will be crucial to Ajinomoto's success as it looks to overcome weak domestic consumption trends and tap into global growth markets.

The company therefore aims to increase overseas sales to JPY500bn by 2020, compared to an international turnover of JPY200bbn in 2012.

In order compete on the global stage, the company will pursue "rapid growth" in what it has defined as the "five stars" markets.

Between now and 2016, Ajinomoto wants to drive trebling sales in the Philippines, Vietnam, Indonesia and Brazil, while doubling sales in Thailand. These markets are key to Ajinomoto's international targets and will likely account for the lion's share of international growth.

The "rising stars" of Europe and North America, alongside the Middle East and north Africa, represent a secondary target for the Japanese food major.

To deliver on these objectives Ajinomoto has developed what it calls the "open new sky" strategy. The company is expanding its horizons by driving organic growth in adjacent categories, channels and countries. In particular, Ajinomoto has said it will expand exports from Indonesia to Islamic countries such as Turkey and Egypt and develop the central/south American market from Brazil/Peru (including the establishment of a local subsidiary in Colombia).

Within the context of this ambitious international growth strategy, Ajinomoto has indicated it intends to look to further M&A and joint ventures.

It seems highly likely, then, that we can expect more global M&A news out of Tokyo in the years to come.