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Lancaster Colony (LANC)Stock (Consumer Products Industry, Food & Beverage Industry, Food - Major Diversified Industry)
 Lancaster Colony (NASDAQ: LANC) makes specialty foods like salad dressings, frozen breads, and fruit dips. The company also sells other products, food makes up 67% of revenue and consistently earns the highest margins. The company does most of its business within the United States; in 2007, domestic sales represented 90% of total sales.[1] Low margins and slowing demand for its glassware, candles, and automotive divisions led the company to put these less-profitables segments up for sale in 2007 [2] in order to focus on its specialty foods business, which reported its 37th consecutive year of record sales in 2007. As the company deals with the restructuring of its business, it faces other challenges as well, including rising commodities prices, which are driving up the costs of making and packaging food. Lancaster Colony is dependant on fresh fruits and vegetables, soybean oil, egg and dairy products, and flour to make its products, [3] while oil is refined to make plastic bottles and used in dressing and sauces. The rising costs of these commodities are forcing Lancaster into a difficult choice - raise prices on its products and risk losing customers, or cut its operating margins and earn less profit. In Q2 of FY2008, the company saw a 10% year-over-year decrease in profits, mostly due to higher raw materials prices.[4].
[edit] Business Financials[edit] SegmentsLancaster Colony divides its sales into three different product segments: Specialty Foods – this is the primary segment for Lancaster Colony as it generated 67% of net sales in 2007, which was also a record number for the segment. The area has also proved to be the company’s fastest growing segment as it has grown from 38% of net sales in 1997 [5]. The company produces a variety of products under this segment such as: salad dressings, sauces, croutons, fruit glazes, vegetable dips, fruit dips, frozen hearth-baked breads, yeast rolls, dry egg noodles, and caviar. Some of its brands include: Marzetti, Cardini’s, Pfeiffer, Mamma Bella, New York BRAND, Sister Schubert’s, Reames, Romanoff, and Inn Maid. These products are produced at 16 different manufacturing facilities across the country; the company finished the construction of two more plants in 2007 in which the increased capacity resulted in greater operating efficiencies [6]. To continue the growth in the specialty food segment and to reinforce the company’s efforts to focus on food operations, in June 2007, the company acquired Marshall Biscuit Company, a company that makes frozen rolls and biscuits [8]. Glassware and Candles – generated 20% of net sales in 2007. Net sales for the segment remained roughly flat from 2006 to 2007, and a 7% decrease overall since 2005. Low sales were generated from soft market demand for candles and the general decrease of sales of industrial glassware [9]. The candle product line, sold under the brand Candle-lite, includes products such as candles, candle accessories, and other home fragrance products. The glass product line, sold under the Brody and Indiana Glass brands, includes tumblers, bowls, pitchers, jars, barware, and vases [10]. Automotive – generated 13% of net sales in 2007. Net sales for the segment decreased 2% from 2006 to 2007 due to reduced sales of aluminum light truck accessories resulting from the general decline in sales of light trucks. Net sales for the segment however are up 23% from 2005 [11]. Under the brand Dee Zee, the company sells running boards, tube steps, toolboxes and other accessories for pickup trucks, vans and sport utility vehicles[12]. [edit] Sale of Glassware, Candle, and Automotive DivisionsIn 2007, as a result of the growth and success of the specialty food segment and declining performance in its other sectors, the company decided to sell its non-core businesses and focus on specialty foods. The company plans to continue growth of the specialty food segment by leveraging the strength of its brand names to sell more current products and introduce new items, capitalizing on the strength of its reputation in product development and quality, and by pursuing strategic acquisitions (example Marshall Biscuit Company). At the end of fiscal 2007, the company sold all of its automotive floor mat operations to a private buyer. In 2006, this operation generated net sales of about $76 million [13]. In addition, in November of 2007, the company sold most of its floral glass operations, which included the Indiana Glass Company and the E.O. Brody Company subsidiaries. This operation generated net sales of about $53 million in 2007. CEO John Gerlach Jr. said in regards to the transaction, “Similar to a number of fiscal 2007 divestitures, this sale is consistent with our objective to concentrate our future effort and investment in the food sector.” [14] [edit] Annual Data InformationIn fiscal 2007, net sales increased 2% to $1.09 billion and was driven by increased sales in the specialty foods segment. Gross margin declined 6% due to higher manufacturing costs as a result of higher raw materials and energy costs. Net income totaled to only $45.7 million compared to $84.4 million in the previous year due to the after-tax loss from the discontinued operations mentioned above [15].
* Indicates amounts exclude the impact of certain discontinued automotive operations sold in FY2007. [edit] Trends and ForcesThe ability to obtain raw materials, which include agricultural commodities such as fruits and vegetables, soybean oil, egg and dairy products, and flour, at favorable prices is an essential part of the company’s success. Higher commodities prices translate into higher production costs for the company, which forces the company to either raise the prices of its products by placing the burden on the consumer or to take the burden itself by absorbing the higher costs and decreasing its profit margin. Many variables affect the availability of these commodities, such as government policy and regulation, crop shortages due to disease or pest infestation, adverse weather conditions, or other unforeseen circumstances. For example, 2007 and early 2008 saw the price of soybean oil reach record prices above 55 cents a pound. The sharp increase in price can be attributed to soybean shortages in Asia and the rapid increase in soybean consumption which is far greater than the rate of production [17][18]. As a result of the increase in soybean oil as well as in other commodities, Lancaster Colony saw its operating costs rise which lead to a 10% decline in net income for the second quarter of 2008. Consumers have become more health conscious in the past decade, evidenced by growing demand for healthier alternatives across all food categories. Research shows that the consumer isn't just going for the low-carb weight loss alternative but also for natural and organic alternatives [19]. In addition, there has been increasing sales in "light" product alternatives, which is a sector that is growing faster than normal category foods [20]. To meet consumer demand, Lancaster Colony provides a variety of alternative low fat and organic products. The Marzetti brand provides a whole line of light & reduced calorie products ranging from dressings, mustards, egg noodles, and even caviar [21]. Furthermore, as consumers turn to healthy meal options involving salads, fruits, and vegetables, Lancaster's products such as salad dressing and fruit dip should see a rise in sales. Rising energy and fuel costs significantly affect the cost of manufacturing, transporting, and distributing products. High energy prices increase the cost of production in factories and high fuel prices increase the cost of transporting their products to distributors. Effects of oil prices are also seen in the cost of production of the petroleum-derived packaging materials in which Lancaster Colony sells its specialty food products. Oil costs are also incurred by farmers, who in turn increase their prices of crops that the company uses. A continued rise in oil prices will force the company to either reduce operating margin or raise product prices higher and risk a decrease in sales. Lancaster Colony already saw decreasing operating margins due to high natural gas prices in 2006.[22]
When Lancaster Colony decided to focus its business in specialty foods and to divest from its non-food operations, the company took a substantial risk in concluding that it would be able to replace the revenue generated by the two divisions and eventually profit from the divestiture of these assets. Part of this risk lies in the company’s ability to complete the sale of the two segments - soon after announcing its plan to refocus its operations, the company sold part of its candle and most of its automotive segment, but if it cannot complete the sale process quickly, the company will incur operation costs in addition to revenue and profit losses. Risk also lies in the company’s ability to recapture the revenue that its departed divisions contributed to the balance sheet. This means that the company will have to either produce and sell more of its current food products or spend money on R&D to create new and profitable food items. One action the firm has already taken in this vein is the construction of a new yeast roll production plant in Kentucky. [edit] Competitor AnalysisBecause Lancaster Colony makes a wide range of products selling in different markets, the company faces competition from both big companies with a diversified line of products and smaller narrowly-focused companies. In the Major Diversified Food industry, Lancaster Colony competes with H.J. Heinz Company (HNZ) , Kraft Foods (KFT) , and Blyth (BTH) .
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