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Sara Lee: Opportunity for HUL and Godrej - Views on News from Equitymaster

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Sara Lee: Opportunity for HUL and Godrej
Sep 29, 2009

Sara Lee Corporation is a manufacturer and marketer of high quality products throughout the world. Its products fall into meats, bakery, beverage and household products categories. The company’s operations are divided into 6 business segments – North America Retail, North America Fresh Bakery, North America Foodservice, International Beverage, International Bakery and International Household and Body Care. Sales of the company in FY09 stood at US$ 12.8 bn while net profits were US$ 384 m North America Retail segment comprises of a variety of packaged meat and frozen bakery products. Products include hot dogs and corn dogs, breakfast sausages, breakfast convenience items, smoked and dinner sausages, premium deli and luncheon meats, bacons, cooked hams and frozen pies cakes cheese cakes and other desserts. The significant brands include Hillshire Farm, Ball Park, Jimmy Dean, Sara Lee and State Fair. North American Retail business accounts for 21.4% of Sara Lee’s consolidated sales.

Under the North America Fresh Bakery segment the company sells a variety of fresh bakery products including bread, buns, bagels, rolls, muffins, speciality breads and cakes. Significant brands include Sara Lee, Earth Grains, Colonial, Rainbo, Holsum, IronKids, Mother’s Sunbeam, Sun Maid, San Luis Sourdough and Heiner’s. This segment contributed 17% of consolidated sale for FY09.

North American Foodservice sells a variety of meat, bakery and beverage products including hot dog and corn dogs, breakfast sausages, coffee, tea and dough products. This category contributed 16.2% of the total consolidated sales of the company in FY09.

Under the International Beverage segment, the company sells coffee and tea products in major markets around the world. Some of its prominent brands include Douwe Egberts, Senseo, Maison de Cafe, Marcilla, Merrild, Pickwick, Cafe do Ponto, Cafe Caboclo, Uniao and Cafe Pilao. Western and Central Europe is the biggest market for this business contributing 78% of sales in FY09. Brazil and Asia Pacific contributed 16% and 6% respectively during the same period. International beverage segment accounted for 23.6% of Sara Lee’s consolidated revenue during FY09

International bakery segment comprises of a variety of bakery and dough products in Europe and Australia. Major brands include Bimbo, Croustipate, Ortiz, BonGateaux and Sara Lee. During FY09, Western Europe contributed 87% of the category’s sale while Australia contributed the balance 13%.

International Household and Body Care category sells products in four categories - body care, air care, shoe care and insecticide. Body care consists of shampoos, bath and shower products, deodorant, shaving cream and toothpastes. Prominent brands in this category include Sanex, Duschdas, Radox, Monsavon and Zendium. Air care category provides air fresheners under the Ambi Pure brand while shoe care category provides polishes, cleaners, wax and insoles under the Kiwi brand. Insecticides are sold under brands such as Vapona, Catch, Goodknight, Bloom and Ridsect. Western and Central Europe is the biggest market for this segment with 68% of the sales being derived from this region. Of the remaining 32%, 22% is derived from Asia-Pacific and 5% each from Africa and America. This segment accounts for 15.7% of the total consolidated sales of the company for FY09.

Acquisition by Unilever
Unilever and Sara Lee have struck a deal for US$ 1.9 bn under which Unilever will acquire Sara Lee’s International Household and Body care business brands. These brands include Sanex, Radox and Duschdas.

These brands fall under shower gel, deodorant and detergents and according to Unilever, will help plug gaps in their product portfolio. These Sara Lee brands have solid market share in France, Germany, the Netherlands, the U.K. and Denmark, and generated annual sales of more than € 750 m and operating profit of € 128 m for the year ended June 30, 2009.

Possibilities for Godrej
In India, Godrej Sara Lee is a 49:51 JV between Godrej Consumer Products Ltd (GCPL), and Sara Lee. The JV had acquired the distribution and marketing rights for Sara Lee’s household and body care products like Good Knight, Jet, Hit, Ambi Pure, Kiwi and Brylcreem for the Indian and South Asia markets.

The proposed global sale of Sara Lee’s personal care unit to Unilever has increased the possibility of the former’s exit from its Indian joint venture (JV) with the Godrej Group. If Sara Lee does so, Godrej will have a distinct advantage, since an agreement gives it the first right of refusal to buy out Sara Lee’s stake.

GCPL has often reiterated its stance that it is willing to acquire its partner’s 51 per cent stake in the Indian JV. For the year ending March 2009, the net sales of Godrej Sara Lee (GSL) were Rs 7.5 bn and it posted after-tax profits of Rs 1.0 bn. The JV is a part of the household care business unit of Sara Lee and hence will not see an ownership change in India with Unilever acquiring the personal products business.

What we expect
According to Unilever, they see opportunity for Sara Lee’s brands in emerging and developing economies. However, it is still too early to say which brands maybe available in India through HUL and at which price points. In case of Godrej’s acquisition of Sara Lee’s stake in the JV, it will be a positive for the company as the JV has solid brands in its portfolio.

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