Lamb Weston held an investor day ahead of its imminent spin-off from ConAgra Foods, which will itself become a consumer-facing branded food group Conagra Brands. The move aims to enable a more focused Lamb Weston to deliver strong profit margins thanks to a product mix that is highly complementary and synergistic. But, Lamb Weston management insists, it is also about growth. Here are our key takeaways from the investor event.
Lamb Weston wants to be global number one
Lamb Weston is a frozen potato products manufacturer with annualised sales totalling around US$3bn globally.
The company holds the number one position in the $6bn North American French fry market, with a 42% market share ahead of rivals like McCain Foods, Simplot and Kraft Heinz-owned Ore Ida. However, Lamb Weston is only the second-largest player in the $13bn global market, with a 23% share of worldwide sales behind Canada-based McCain.
Lamb Weston pulled no punches about wanting to take the premier global share position at its investor event last week. CEO Tom Warner spelt it out: “Our vision is to be the number one frozen potato company in the world. It is the North Star that drives us each and every day.”
He continued: “Our future is guided by a clear vision which is at the heart of everything we do. And that vision is to be an industry leader, not just in measurable metrics like share, but cutting edge customer process and product innovation.”
Lamb Weston’s margins are strong in a profitable category
Lamb Weston’s margins are strong. With an adjusted EBITDA of $593m, the company’s EBITDA margin stands at around 19.8%.
As a stand-alone company, Lamb Weston benefits from a highly-focused product portfolio of complementary and synergistic brands. Its well-invested infrastructure is efficient and scalable.
The company also benefits from the dynamics of the frozen potato category, which management notes delivers good returns. “Margins in this category are attractive all the way up and down the value chain,” Tim McLevish, executive chairman, stressed.
Indeed, in a category where foodservice is one of the most important channels, it is significant French fries are the most profitable menu item. “Fries are one of the most important products to our quick service, casual dining foodservice customers. They are one of the most profitable items on a restaurant menu,” Warner added.
Category dynamics are favourable
While French fries might not strike you as the most dynamic item on the menu, the category is nevertheless growing. According to data provided by Lamb Weston, sales are expected to grow from $13bn globally today to $15bn by 2020.
The majority of fries – 80% – are sold through foodservice operators and this channel is growing its share of consumer spending on food.
“We participate in a category that enjoys enduring trends with solid growth in developed markets enhanced by out-sized growth in the rest of the world as per capita consumption catches up,” McLevish insisted.
Global scale is key
Lamb Weston’s ability to tap into this growth opportunity is reliant on its global reach, the company said.
North America and the EU are the two largest markets for frozen potato products in the world and Lamb Weston has a well-established presence in both of these. And it is here that the majority of the company’s processing capacity is located.
But, management stressed, it also has the ability to competitively reach “nearly every global market”.
“This supply chain is the nerve centre of our business,” Warner explained. “This footprint provides a base of operations from which we can effectively and efficiently serve customers in nearly any location around the globe.”
This is achieved through Lamb Weston’s export model, which is augmented with in-country processing when a market reaches critical mass.
“We have a tremendous global scale and it all starts with our strategic positioning of potato processing plants near the worlds best potato growing regions in North America and Western Europe,” Warner explained. “We can cost-effectively ship product to customers in every major market around the globe. We reach key markets such as China, Korea, Japan and the Middle East from the Pacific Northwest and Europe.”
As market demand grows, Lamb Weston is also ready to invest in local production to shorten its supply chain. The company operates a processing facility in Shangdu, China, and expects a plant in Lipetsk, Russia, that it recently invested in to be up and running within two years.
Lamb Weston is looking for growth in a number of key markets. These include the US, Mexico, Europe, China, Australia and Asia.
In particular, Lamb Weston wants to expand in countries that are forecast to be net importers of frozen potato products.
The company plans to leverage its strong market position in emerging markets to step up its growth rate. In China, the firm commands a 27% market share and in Mexico, it accounts for 25% of frozen potato sales. In the Middle East and Russia, Lamb Weston’s share stands at 19% and 18% respectively.
While the company is working to grow in areas that it believes afford the greatest opportunities, it is also keeping its finger on the pulse and looking out for emerging consumption patterns that point to future growth in frozen potato demand elsewhere in the world.
“As consumption trends evolve, our goal is to remain flexible and continue investing in our sales organisation in these key growth markets,” Warner said.
Lamb Weston places customer relationships at the centre of its growth strategy. “Our customer-focused mindset has been a driving force in developing long-standing collaborative relationships,” the company’s chief executive observed.
With leading global foodservice chains counted as some of its largest customers, Lamb Weston management believes the company’s strategic investments in capacity expansion have enabled the company to grow with its customers.
The group is therefore focused on deepening its relationship with strategic customers are well as forming new relationships. This fact is reflected in the longevity of its customer relationships. The average length of time a customer has been served by Lamb Weston is 28 years and the group’s oldest customer has been with it for 45 years.
Lamb Weston works to make itself a more valued partner and not just by adding value to the potato.
“We pride ourselves on the level of engagement we have with our customers. And that is what drives us closer to their unique consumer enabling us to create new and distinctive products to satisfy their growing appetites,” Warner said. “Customer collaboration comes in several forms from developing new and innovative menu solutions and limited time product promotions, to serving as a trusted business partner providing category insights and participating in joint planning sessions.”