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Through prudent acquisitions in emerging markets, the Strauss Group is becoming a major player in the world coffee market


by Neal Sandler

You would hardly think of Israel as a major player in the $40 billion global coffee market. Yet the Strauss Group (STRS.TA), based in Petach Tikva, expects to be one of the top five coffee companies worldwide within the next four years. It's a tale that illustrates Israel's growing strength in globalized business.

Strauss was founded in 1936 by the grandparents of the current chairwoman, Ofra Strauss. Richard and Hilda Strauss escaped from Germany and set up a small dairy in the northern town of Nahariya that sold milk, cheese, and other products. The company expanded over the years, cooperating with Danone in yogurt and later with Unilever in ice cream. In 1997, Strauss bought a majority stake in Israel's top coffee and chocolate company, Elite Industries, and then blended the two companies together in 2004. Total revenues this year are expected to reach $1.8 billion.

ACQUISITION STRATEGY
Earlier this decade, Strauss began looking for ways to reduce its near-total dependence on a small local market with low single-digit growth. The company embarked on a strategy of acquisitions in countries where coffee drinking is either strongly entrenched or taking off in popularity with newly affluent consumers. So far the strategy has paid off handsomely in Eastern Europe, Ukraine, and even Brazil, where the Israeli company has become the second-largest player in the roast and ground coffee market.

There's plenty more opportunity for an aggressive player like Strauss. Global multinationals Nestlé (NSRGF) and Kraft Foods (KFT) dominate the instant coffee market. But no one company has more than a 12% share of the much larger wholesale roast and ground coffee market. "The fragmented market presented us with a unique opportunity to become a global player and compete head on with multinational giants," says Erez Vigodman, president and CEO of Strauss.

The company's first overseas acquisition was in Brazil, where coffee is the national drink. There, the Israeli company has teamed up in a joint 50-50 venture with Lima Brothers, a leading local producer. In Eastern Europe, Strauss has established its own local coffee production and marketing facilities.

DOUBLE-DIGIT GROWTH
Last year coffee accounted for nearly half of Strauss' $1.55 billion in revenues and $72 million in net profits. Sales of the company's coffee products rose by over 23% last year, and continued double-digit growth—twice the industry average—is projected for 2008. "The rise in the standard of living in countries like Romania, Serbia, and Ukraine has led to a phenomenal rise in coffee consumption," says Vigodman.

The overseas expansion program already has turned Brazil into the largest Strauss market outside Israel. Russia is now No. 2, following the Strauss acquisition in April of Cosant Enterprises for $93 million. The move is expected to double its coffee sales in Russia. Global coffee sales are fast approaching the $1 billion mark and will be enable the company to achieve its target of 50% of revenue coming from outside Israel.

The success of Strauss in becoming a global company contributed to the 42% jump in its share prices on the Tel Aviv stock market in 2007. The price has since retreated by nearly 20%, as part of the global pullback in equities. But the stock droop has hardly had an impact on the company's efforts to create a global coffee empire. In May the leading private equity group Texas Pacific Group (TPG) announced it was taking a 25% stake in Strauss coffee operations for $228 million. The private equity and investment firm also was given an option to buy a further 10% of the joint venture.

Strauss is tight-lipped about its future plans. Analysts who follow the company are looking for it to enter the nascent Asian market soon, with China the odds-on bet for the next locale.

"China fits the bill since there is a growing middle class, and their strategy is to gain the advantage by being first on the ground in such a huge market," says Moshe Soni, food industry analyst at Bank Hapoalim. Few would argue about the huge potential of a market with 1.3 billion consumers. But the biggest challenge is likely to be educating a nation of tea drinkers to switch to coffee.

BEYOND COFFEE: CHOCOLATE AND HUMMUS
Strauss is by no means placing all its bets on the coffee market in its effort to continue growth. In the U.S. (currently its third-largest market outside Israel) the company is focusing its efforts on hummus, a traditional Middle Eastern chickpea spread that has witnessed a meteoric rise in popularity amidst escalating demand for health and ethnic foods. Its New York-based Sabra subsidiary is already the largest hummus seller in the U.S., with 27% share of the market.

In March, PepsiCo (PEP) bought a 50% stake in the hummus and Mediterranean salad maker for $45 million. The teaming up of forces is expected to help expand Sabra's presence in the U.S., which has so far been largely limited to the Northeast and Florida. "There's no doubt that the cooperation with PepsiCo will give a huge boost to Sabra and enable the company to go nationwide," predicts Tsachi Avraham, food industry analyst at Clal Finance Brokerage, a Tel Aviv-based investment bank. The company may soon face competition from another large Israeli food company, Osem, which is 50% owned by Nestlé. Osem is reportedly in talks to buy Tribe Mediterranean Foods, the No. 2 hummus maker in the U.S.

Strauss also is looking to expand its Max Brenner chocolate "bars" concept in the U.S. market. The enterprise, which is still relatively small, is geared to hard-core chocoholics. The bars serve a full range of designer chocolate products in a café or restaurant setting. After opening first in Israel, then in Australia, Singapore, and the Philippines, Strauss brought the Max Brenner concept to Manhattan in 2005. Two locations have already been opened, and there are plans for outlets outside of the New York area in the coming year.

In the past five years, Strauss has succeeded in its goal of reducing its dependence on a small local market. The next few years will determine whether the company can become the first Israeli food company with a substantial global presence.
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