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Morningstar | Calbee Is Past the Worst, With Re-entry Ito China via Frugra an Exciting Opportunity

Calbee’s long-term strategy to achieve a 15% operating margin has two pillars: acquiring two thirds of the domestic snack food market and raising overseas sales to 30% of total sales. The emerging granola business, along with new core snack food product introductions, will be a key driver domestically and overseas.Selling Japanese products via cross-border e-commerce presents new growth opportunities in China. Calbee is pinning its hopes on granola brand Frugra to fuel growth in China. Frugra, Japan’s top cereal brand, has been a key force behind domestic growth, with sales rising eightfold over the past five years. Positive feedback on Frugra posted on its Alibaba Tmall store raises our confidence in its growth potential in China’s health food market, where consumers demand high-quality, safe products. Alongside e-commerce expansion, Calbee continues to probe the possibility of teaming up with PepsiCo. The lack of local retail networks is Calbee’s key disadvantage when operating overseas. Localizing operations is essential to expanding the business to a meaningful size, and securing a partner with distribution power is an effective means to penetrate a new market.Product innovation is critical to domestic share gains and overseas sales revival. It has made inroads into a new genre of single-serve snacks in mini bags targeting health-conscious consumers in 2018. An expanding product lineup is key to Calbee’s overseas strategy. Growth in the United States and Korea has been driven by a few core products, causing volatility. Despite efforts to accelerate new product development, it is likely to take at least a few quarters before new products gain traction among consumers, because Calbee is still in the process of identifying products that meet local needs. Given the midteens to 20% margin that the U.S. market once generated, recovering U.S. sales will boost the group’s earnings growth. Apart from top-line growth, curtailing domestic promotional spending will serve as a major means to lift margins. A close rival’s plan to focus on profitability hints at a greater likelihood of weaker competition on pricing.