Strauss Group, Israel’s largest traded food-maker, is using a partnership with PepsiCo to strengthen its foothold overseas as competition and price curbs reduce earnings at home.
The company, already the world’s fourth-largest retail coffee supplier, aims to boost sales of hummus more than three-fold to $1 billion a year through a partnership with the soft drinks maker, said CEO Gadi Lesin. Israel sales accounted for 41 percent of Strauss’s operating income last year, compared with 48 percent in 2012, according to data compiled by Bloomberg.
The strategy underlines how laws approved by the Knesset on March 20 to limit shelf space and force stores to publish prices online are encouraging Israeli food companies to step up their presence abroad. Competitor Osem, which has a partnership with Switzerland-based Nestle, is also seeking to expand sales overseas.
“Increased regulation weighs on these companies,” David Kaplan, a Tel Aviv-based analyst at Barclays Plc who recommends investors hold Strauss shares, said by phone. “If you have good partners and good products, why not go international?”
Strauss didn’t raise prices in Israel last year because of increased competition, according to its annual report. The company’s profit margin was 4.2 percent in 2013, compared with about 9 percent for Shoham, Israel-based Osem and 11 percent for both Deerfield, Illinois-based Mondelez International – formerly Kraft Foods – and Nestle, according to data compiled by Bloomberg.
“There is a new reality in Israel and competition is very aggressive,” Lesin said in an interview at Strauss’s Petach Tikva, Israel headquarters. “The engine for growth will come from abroad.”
Israel has ramped up regulations to curb food prices since street protests erupted from the northern city of Haifa to Beersheva in the south in 2011. The government in February cut the import duty on milk and voted Wednesday on a plan to eliminate tariffs on imports of certain cheeses, cream and yogurts.
Strauss is also targeting Mexico and Australia to expand its spreads-and-dips business through its Obela joint venture, which it set up with Purchase, New York-based PepsiCo in October 2011.
Kaplan has an equalweight rating on Strauss, meaning investors should hold the stock in line with benchmark indexes, and a 65 shekels target price. Strauss shares declined 1.4 percent to 62.3 shekels at the close in Tel Aviv.
Any time a company “expands its markets and finds new avenues for growth, while of course there are risks, the move is likely to be appreciated by investors,” Kaplan said.