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GROUP BEL

Reinout
Vana
Prashant
Silvia
Joao

Crouching Moat, Hidden Group Bel

Stock Rating:
HOLD
We initiate coverage of Group Bel at Hold.

INITIATION REPORT

We focus on three key investment thesis:


China Growth

o Company name
o Exchange
o Ticker symbol
o Sector
o Industry
o Recommendation (buy/sell/hold)
o Current price (as of __date)
o Target price (% increase/decrease)

Innovation

Business
Consumer
Sector

Catering
Sector

Dairy
Products

Key Ratios / Stats

Description
120 countries
30 subsidiaries
27 production sites
5 core brands, 25 local brands
Bel Foodservice subsidiary
Catering business: serves the
institutional and the commercial
catering segments
PAI (intermediary food business):
sells Bel cheese to food industry and
fast-food chains
Nollibel: world leader in its
segment
50 countries
60% of the production exported

TABLE OF CONTENTS
1. Business Overview
2. Key event timeline
3. Group Strategy
4. Risk Analysis
5. Financial Highlights
6. Competitive Overview
7. Industry Overview
8. Key Investment Thesis
9. Equity Valuation
10. Conclusion

GROUP BEL HEC PARIS 1

Business Description
Fromageries Bel SA, headquartered in Paris,
France, is a family-owned company that
produces and sells four categories of cheese
(pressed, processed, fresh and spreadable)
and is the global leader in cheese portions. It
owns more than 25 international and local
brands, including 5 core brands, is present in
120 countries and owns 30 subsidiaries and
27 production sites, with 10 of them located
in France. Through its subsidiary, Bel
Foodservice, the company is present in the
catering sector and serves fast-food chains,
hospitals, restaurants, vending machine operators, train stations and airports. In addition to that,
Bel also sells dairy proteins to food manufacturers (especially ice cream) under the Nollibel
brand. The company attracted 400 million consumers and hopes to achieve 3 billion in sales
by 2015.
Bels retail strategy is established either at the national level, through subsidiaries, or at the
international level, with contracts negotiated at the group level. Moreover, Bel uses a network of
wholesalers specialized in food service. On the Supply side, the company has the following
purchasing needs: core raw materials (milk, milk powder, butter), packaging materials and
energy. Bel has contracts with suppliers of milk in France, Netherlands, Poland, Slovakia,
Ukraine and US. Moreover, it controls six dairies in France and 22 in other countries.
The Fievet/Bel Family holds 3.5% of the Fromageries Bel shares directly and 54% through its
80% holding in Unibel SA.

Brand Portfolio
5 Core Brands
The Laughing Cow

Kiri

Boursin

Mini
Babybel

Leerda
mmer

National Brands
Cousteron, Gervais, Karicha, Kaukauna, Limiano, Maredsous, Merkts, Prices, Samos,
Smetanito, Sylphide, Syrokrem, Syrtos, Terra Nostra, WisPride
International Brands
Apericube, Babybel, Bonbel, Cantadou, Les Enfants, Port Salut, Picon

Group Strategy
Constant product innovation
The company is constantly in search of new products and new concepts. For instance, in 2012
and 2013, it developed Apericube Soiree Filles! and On Joue, targeted at young adults. In
addition, in 2013, Bel launched a new brand of cream cheese, Boursin Tartine.

GROUP BEL HEC PARIS 2

Strong brand image


Bels products enjoy high recognition. The company was ranked
number three for branded cheese worldwide, while its core brands
The Laughing Cow, Mini Babybel, Leerdammer and Kiri ranked
among the top twelve cheese brands in the world (Bel Global
Cheese 2012, Zenith international study).
Niche positioning (portions)
Bel has a niche positioning in the aperitif consumption. In France,
in 2013, it is estimated that 45% of cheese consumption was
outside of meals. Bel is well positioned to take advantage of this
trend with its snack-like products and the increasing marketing of
its products for cooking.
Expansion
Bel is is expanding both through regional expansion by setting up
subsidiaries and production plants worldwide, and through
acquisitions. For instance, in 2012, the company commenced the
construction of a production plant in the US. Regarding
acquisitions, some of the most significant ones were Leerdammer
in 2002 for 190 m, Boursin in 2008 and Tranchettes in 2013.

Key Business Risks


Geopolitical events: Special attention needs to be given to the impact of the geopolitical
events worldwide on Bels activities. The unstable situation in some countries in the Middle East
and Africa needs to be taken into consideration, just as the situation in Ukraine needs to be
monitored.
Volatility of commodity prices: The price of raw materials used by Bel (milk, milk powder,
butter, cream) is likely to fluctuate due to changes in supply and demand and weather
conditions. It is unlikely that Bel will be able to translate an increase in raw materials into
increased prices of its products. Moreover, there is no financial hedging market in the dairy
industry, except in the US (see appendix for commodity price chart).
Competition: Bel faces intense competition from major international food players, as well as
local producers. In addition to this, there is increased competition coming from retail chains that
have developed house brands (also known as private label/control label in North America).
Regardless, consumers react to pricing aggressively, like any other product in the food industry
product.
Economic climate: Bels sales are likely to be influenced by the economic activity in the
markets where it operates. With slowed economic growth in Europe and uncertainty regarding
economic recovery, caution needs to be taken when predicting the level of sales in this region,
which currently accounts for 40% of Bels revenues.
Exchange rate risk: Due to the geographical spread of its operations, Bel is exposed to FX
risk, since it receives revenues and faces expenses in multiple currencies apart from the euro.
The Treasury Department of Bel implements a central currency hedge strategy using derivative
instruments with a time horizon of 18 months. However, because of the high volatility nature of
some currencies where Bel operates, there is a material downside risk due to this.

GROUP BEL HEC PARIS 3

Regulatory risk: Due to the geographical reach of its activities, as well as the nature of its
business, Bel faces regulatory threats. These include hygiene standards, environmental controls
and competition laws. Changing regulations will have a direct impact on Bels activities and may
impede the company to sell its products in some markets. For example, changing food
regulation will require the company to adjust its products, which will take a considerable amount
of time.

Financial Highlights
Key Financials
table...xxx

Competitive Position
The Bel Group faces three main types of competitors: major international food groups that
produce cheese among other types of products (Kraft), major international dairy producers
(Bongrain, Hochland, Lactalis, Friesland Campina) and regional food producers (Almarai in
Saudi Arabia).
In 2013, Bel ranked 11 in the packaged food sector in France, with a 1% value market share.
Especially Leerdammer, The Laughing Cow and Boursin performed well, while Mini Babybel
faced a decline. Within the cheese category, the company ranked second, behind Groupe
Lactalis, with a 10% value share. In terms of reconstituted cheese, The Laughing Cow and
Apericube dominate the market.
Fromageries Bel SA: Competitive Position 2013
Segment
Retail value share Rank
Packaged Food 1.2%
11
Dairy
5.1%
4
Cheese
10.0%
2

Industry Overview
Mature dairy markets can no longer count on growth through higher volume gains as per capita
consumption is expected to continue to decline in North America (down by a CAGR of 1%)
(Euromonitor) and remain static in Western Europe over 2014-2019. But consumers continue to
respond well to innovative ideas. Todays consumer expects not only immediacy and
convenience from products and services but also simplicity, healthy choices, environmental
piece of mind, taste novelty and a greater level of customization.
The consumption of raw milk is slightly decreasing in most countries. Nevertheless, in the EU12 the dairy industry is growing in importance in the total food industry, mainly due to the
increased consumption of cheese and yoghurts.
The EU dairy industry is very dominant in the world market. The EU-25 exports amount 21 bn
worth to other countries, while Oceania exports amount to 3.8 bn and NAFTA to 1.1 bn
(Euromonitor).
Nowadays, product innovations are mostly done on varieties, but innovations on new
ingredients (in functional foods) are also very important. SMEs as well as large companies,

GROUP BEL HEC PARIS 4

including the packaging and ingredients industry, all contribute to innovation. In North-Western
Europe, large firms dominate the dairy industry. This has been a result of previous waves of
consolidation. France and Germany, however, have a small number of large firms and quite a
large number of medium and small firms. The EU dairy industry can be characterized as an
innovative and a global player, but with a losing market share. Bels competitive position is just
below average, mainly due to the loss in world market share. In fact, across most of the key
players in the EU market growth has stagnated. According to Euromonitor, global CAGR of the
dairy industry for 2014-2019 is expected to be 2.8%, with growth being highest in Asia Pacific
and Middle East and Africa (Euromonitor).
Industry Consolidation
The worlds top 10 dairy giants capture 24% of the market in 2014, up from 17% in 2009. In
existing and mature markets such as the US, France and Italy, multinationals are buying in
innovation through acquiring smaller, more innovative firms in niche markets. More M&A activity
is expected to occur with multinationals buying more niche organic or lactose-free brands in
order to widen their portfolio and tap into smaller but faster growing markets. Another health
food category, which is being eyed up by multinationals, is non-dairy milk alternatives.
With per capita dairy consumption in mature markets dropping, companies are seeking for
growth in emerging markets that have a far lower level of consumption but, conversely, are
growing.

Investment Summary
INVESTMENT T HESIS (1): M OAT -ZARELLA

Value-added innovation in dairy is evolving and becoming of greater importance in a


highly competitive and, above all, mature market space, where consumption is
declining. The evolution of dairy is dependent on the commoditization of the category
and demonstrates the need for value
where private label share is high.
Pack-types have been a successful
marketing tool for brands since times
immemorial. Bel has been a pioneer in
this field with the early launch of the
iconic La Vache Qui Rit, Babybel and
Kiri products.
Products ranged from the single serve
salad cheese launched in
Switzerland to the tiramisu-to-go bar
launched in Austria. Given tiramisu is
typically seen as a dessert eaten with
a spoon or fork at the dinner table, the uniqueness of this product is that the packaging
allows it to be eaten as a snack on-the-go, without the use of cutlery.
GROUP BEL HEC PARIS 5

Innovations that have caught the eye recently are pesto and tomato Gouda, tiramisu
on-the-go as well as butter with seaweed cheese to name a few. If Bel can continue
to revolutionize the cheese industry by launching new products that especially differ in
terms of packaging, there will be a catalyst for future growth.
INVESTMENT T HESIS (2): N UTRITIONALLY NAUGHTY TREND

In mature dairy regions such as North America, Western Europe and Australasia, there
is a strong need for value creation in dairy in order to counteract declining per capita
consumption of dairy overall. Combining naturally good-for-you products with
indulgence offers value innovation in terms of nutritionally naughty eating occasions.
A successful example promoted at SIAL was the Sweet Quark Bar by Vilvi, a Lithuanian
company active in dairy products. The product is made from cottage cheese covered in
a thick layer of chocolate. In fact, chilled snacks, under which Vilvi would be classified,
has seen a CAGR of 4%, whilst dairy overall grew by a CAGR of just 3%. Innovation
both in terms of packaging and combinations of ingredients will be essential to drive
value creation in the dairy sector.
INVESTMENT T HESIS (3): C ROUCHING B EL H IDDEN C HINA

Cheese remains something of a niche category in China, not


being part of the countrys traditional cuisine and widely
regarded as having a pungent smell. However, cheese is
gaining popularity among children, reflecting a rising
consumer awareness of its nutritious value. Cheese posted
a 25% rise in $ value sales in 2014, which can be attributed to
a number of key factors:

Hard
Cheese
CAGR:
25.8%

Soft
Cheese
CAGR:
27.6%

Processed
Cheese &
others:
24.5%

The growing exposure to Western lifestyles, particularly in tier-one


cities where fast food outlets are prevalent, is contributing to the
evolution of Chinese consumers tastes
Overall China Cheese Market
Growth

Manufacturers made notable efforts to boost consumer


awareness of cheese, including the purported health benefits such as their inclusion of
various vitamins, minerals, amino acids and omega-3 fatty acids, which all help to
support healthy bones, brain and heart

Soft cheese is more popular than hard cheese in China as it is considered to have a
less unpleasant smell and Chinese consumers prefer its soft texture. While cheese is
not a traditional element of Chinese cuisine, Western exporters are competing for a
foothold in the Chinese market by promoting packaged cheese. Most of the cheese in
China is imported from Australia, Europe and New Zealand, a fact that leaves cheese
prices vulnerable to global price fluctuations. Chained pizza restaurants have seen their
GROUP BEL HEC PARIS 6

presence expand over the review period, with major international brands such as Pizza
Hut and Dominos Pizza being notable examples. The extensive presence of pizza,
which generally features mozzarella, has led to some Chinese consumers seeking out
this cheese type in retail outlets.
Bongrain (Tianjin) Foods Co Ltd remained the leading player in cheese, with a 21%
retail value share in 2014, up slightly from 2013. Bel China currently holds a 6.6%
market share in China and this market share has been increasing over the past years. It
is the 4th player in the Chinese market (Euromonitor). However, Bel China recorded the
most dynamic value growth and the strongest rise in share in 2014, up by 35% and one
percentage point respectively. La Vache qui Rit (also known as Laughing Cow), has a
global presence which was achieved through two key initiatives:

Bite-size cubes
These packs facilitate consumption among Chinese shoppers
who tend to be unsure about the quantity of cheese to use in a
serving

Television
Bel China sponsored a, Niuniu Tour of France, that showed a
family trip to France and embedded introduction of La Vache
qui Rit about origin and production

We believe that Bel Groups ability to project an image of being French is what gives it
an economic moat or sustainable competitive advantage vs. other rivals who primarily
focus on the health benefits of the product.
Euromonitor estimates that cheese is a highly import-dependent category in China, with 80-90%
of sales being accounted for by imported brands. It has been estimated that by 2030 over two
thirds of Chinas population will reside in cities. This widespread urbanization will further ensure
the extensive exposure to Western- style quick-service restaurants, which function as a bridge
between Chinese people and the culture of cheese consumption. This will not only give Chinese
people a basic understanding of the product, but also help overcome the longstanding
perception of cheese as a product with a pungent smell and unpleasant taste. We surmise that
China will learn to appreciate that stinky cheese is good cheese. The rising number of
expatriates and the growing interest in Western lifestyles are set to boost the overall demand for
cheese.
Other Investment Considerations:
Average unit price is set to continue to rise over the forecast period, at a CAGR of 1% at
constant 2014 prices. Global milk prices are rising, a situation that is driving up the unit price of
cheese, an import-dependent product. Given the volatility of milk prices and the gradually
increasing penetration of cheese, the unit price of cheese is unlikely to drop short term.

GROUP BEL HEC PARIS 7

Valuation

Comparable Analysis

493
485

EV/Sales
EV/Sales
EV/Sales
EV/Sales
EV/EBITDA
EV/EBITDA
EV/EBITDA
EV/EBITDA
EV/EBIT
EV/EBIT
EV/EBIT
EV/EBIT
P/E 2015
P/E 2014
P/E 2013
P/E 2012

376
420
486
498
469
502
438
500
645
587
341
380
339
261
0

200

400

600

800

1,000

1,200

1,400

GROUP BEL HEC PARIS 8

APPENDIX

Company

Business Description

Geography

Bongrain

Bongrain SA is a milk processing


company, which engages in the
manufacturing and distribution of
cheese and other dairy products. The
company operates its business
through two segments: Cheese
Products and Dairy Products.The
company was founded in 1956 and is
headquartered Viroflay, France.
Saputo, Inc. produces, markets, and
distributes dairy and grocery products.
It produces mozzarella, cheddar,
specialty and fine cheeses, fluid milk
and dairy products, including cream,
yogurt, butter, powdered milk,
evaporated milk, ice cream mixes and
value-added dairy ingredients, such
as whey powder, lactose and whey
protein. The company was founded in
1954 and is headquartered in SaintLonard, Canada.
Emmi AG is a milk processing
company, which engages in the
development, production, and
marketing of dairy and fresh products.
It also focuses on the production,
ageing, and trade of cheeses. Emmi
was founded in 1907 and is
headquartered in Lucerne,
Switzerland.
Glanbia Plc is an international
nutritional solutions and dairy products
group. The company engages in
producing cheese, performance
nutrition, dairy ingredients, whey
proteins and other micronutrients. The
company was founded in 1997 and is
headquartered in Kilkenny, Ireland.
Dairy Crest Group Plc is engaged in
the business of manufacturing,
processing and distribution of milk and
dairy products. Dairy Crest Group was
founded in 1933 and is headquartered

France 32.5%,
Europe 40%, Rest of
World 27.5%

Saputo

Emmi

Glanbia

Dairy
Crest
Group

Revenues
(FY 2013)
4.4bn EUR

Canada 39.6%,
United States 48.6%,
Rest of World 11.8%

9.2bn CAD

Switzerland 56.5%,
Europe without
Switzerland 27.2%,
North & South
America 11.6%,
Africa /Middle East
3.7%, Asia Pacific
0.9%

3.3bn CHF

Ireland 23.6%,
United States 50.3%,
Rest of the World
12.8%, Rest of
Europe 7.3%, United
Kingdom 5.9%

2.4bn EUR

United Kingdom
95.7%, Rest of World
4.3%

1.4bn GBP

GROUP BEL HEC PARIS 9

Milkiland

in Esher, the United Kingdom.


Milkiland NV is a holding company
Ukraine 54.2%,
that engages in the production of dairy Russia 41.6%,
products. It operates through the
Poland 4.2%
following segments: Cheese & Butter,
Whole-milk, and Ingredients. The
company was founded in 1994 and is
headquartered in Amsterdam,
Netherlands.

1.4bn PLN

Key historical dates:


SWOT Analysis:
Strengths
Strong brands
Operational performance
Product quality
Global leader in cheese portions
Opportunities
Rising demand for healthy products
Rising demand for dairy products in
untraditional markets
Emphasis on convenience
Untraditional consumption of cheese (outside
meals)

Weaknesses
Not enough expansionary activity
Limited product expansion potential
Exchange rate exposure
Threats
Increasing raw material costs
Expansion of competitors
Political instability (Middle East, Russia)
Weak economic growth in Europe

GROUP BEL HEC PARIS 1


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