Product innovation is setting the path for significant growth across several markets

Belgium’s Lotus Bakeries’ Lotus Biscoff is a product that many readers will be familiar with. However few will have ever looked at the company as a potential investment opportunity.

At first glance the shares, trading at €49.15, appear to be expensive. Based on 2022 forecasts they trade on price-to-earnings ratio of 38.5 times and 26 times enterprise value to earnings before interest, tax depreciation and amortisation.

PROVEN TRACK RECORD

Nonetheless, the group’s proven track record of expanding its product offering through a shrewd combination of product innovation and acquisitions, has enabled it to drive growth by leveraging new products into undeveloped international markets.

This strategy follows in the footsteps of Oreo’s whose success resulted from leveraging new product categories including ice cream and chocolate from its traditional cookie.

Biscoff has the potential to become the next Oreo. Looking forward the four key international markets of America, France, China and Germany could drive growth in sales and earnings.

Lotus Biscoff is a caramelised biscuit. It is the signature product that Lotus Bakeries has produced since 1932. Lotus Biscoff is short for ‘biscuit with coffee’ and is the snack Dutch and Belgians have traditionally serve with their coffee.

ACQUISITIONS HAVE ENHANCED THE PRODUCT PORTFOLIO

After listing on the Brussels Stock Exchange in 1998, Lotus Bakeries engaged in a series of lucrative acquisitions that dramatically enhanced the group’s product portfolio. Between 1999 and 2012 four separate acquisitions added waffles, gingerbread, ginger thins and the iconic Dinosaurs children crunch biscuits to the Lotus marque of brands.

In 2015 the company made a strategic shift by diversifying into the healthy snacking segment with the acquisition of Urban Fresh Foods a UK based company that sells fruit snacks and cereals with 100% natural ingredients under the BEAR and Urban Fruit brands.

In the same year the group further consolidated its position within the healthy snacking segment through a strategic partnership with Natural Balance Foods, owner of Nakd and Trek brands.

This focus on nutrition continued with the acquisition in 2018 of Kiddylicious, a British baby snack brand that creates healthy, portion controlled snacks and meals for babies and young children. This forms the natural Foods componant of the business which sits alongside Biscoff and its Local Heroes business selling other brands of biscuit in Belgium, The Netherlands, France and the UK.

PRODUCT INNOVATION HAS PLAYED A CRITICAL ROLE

Product innovation has been fundamental in driving growth and profitability for Lotus Bakeries. According to Berenberg, the group has increased its share of innovation within the caramelised and spreads category from 0.7% in 2010 to 10% in 2020.

Lotus Bakeries has consistently innovated across different categories. In 2018 the group launched Lotus Biscoff spread that enabled consumers to enjoy the unique taste of caramelised biscuits in a sweet spread.

In addition to being an alternative to traditional spreads, it is frequently used as an ingredient for desserts like tiramisu. In 2019 Lotus announced the international launch of Biscoff ice cream.

More recently the launch of the Biscoff sandwich cookie in April 2020, in the UK, America, France and Belgium was a resounding triumph, further driving growth with strong in-store sales.

This was followed in September 2020 with the launch of Lotus Biscoff chocolate in Belgium. Nielsen data reveals that the product accounted for 21% of growth in the chocolate category in Belgium since its launch.

CAN BISCOFF BECOME THE NEXT OREO?

Oreo provides a prescient blueprint for the potential international growth opportunities that are open to Biscoff.

Oreo and Biscoff have adopted a similar strategy to securing consumer acceptance and adoption for their products. This is centred around offering innovative products with a universally attractive taste, multiple product offerings (coated confectionary and ice-cream extensions), at a competitive price point.

Oreo has a proven track record in innovating across categories including chocolate, ice cream, yoghurt, chilled deserts and cereal. In 2019 net revenue from the brand hit more than $3 billion according to its parent company Mondelez.

Biscoff has mimicked Oreo’s innovation strategy in chocolate, ice cream and biscuits. Critically there is significant scope for Biscoff to innovate further into new product types.

FUTURE SOURCES OF GROWTH

According to recent research by Berenberg, America offers the largest opportunity for Lotus Biscuits. This assumes market share progression from 0.8% to 2.7%, which would generate incremental sales of €152 million. This estimate is in line with peer brands Belvita (Mondelez) and Tate’s Bake  Shop (Mondelez).

The potential for further penetration within the US market is reflected in the construction of the Lotus Biscoff manufacturing facility in Mebane, North Carolina in 2019, which enabled the company to commercially produce American-made Lotus Biscoff cookies.

The other three key international markets, which will drive sales and earnings growth, are France, China and Germany. Berenberg estimates that these markets can generate incremental sales of €77 million, €55 million and €22 million respectively.

To place these numbers in context Lotus is forecast by Berenberg to chalk up total group sales of €852 million in 2022.

The company benefits from strong cash generation and a solid balance sheet with net debt to earnings materially below one times. This should enable it to continue investing in innovation and to potentially strike more deals to broaden and diversify its portfolio. [by Mark Gardner]

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