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AMERICAN LORAIN: Solidifying China presence
Written by Andrew Vanburen (China Correspondent)
Tuesday, 26 January 2010
Nuts for Chestnuts: Taiwanese actor/singer Alec Su was recently brought on board as American Lorain's spokesperson. Photo: company
AMERICAN LORAIN CORP (AMEX: ALN), a producer of convenience foods, chestnut products and frozen, canned and bulk foods mainly for sale in hypermarkets across China, is solidifying its presence in the market as a result of product adjustments.
In order to avoid overreliance on the seasonality of chestnut products, the Shandong province-based firm is gradually raising its revenue contribution from convenience foods to ensure more stable income.
In an interview with NextInsight, American Lorain’s CFO and Treasurer, Mr. Alan Jin said: “The firm’s business model involved a strategic but gradual shift to a more reliable revenue earner that was not constrained by the vagaries of seasonality and harvests.”
“For ALN, 2009 was a transitional year. We made several strategic adjustments during the year in product, production and sales,” Mr. Jin said.
“The firm had three major product segments: chestnuts, convenience foods and frozen foods, with revenue contribution – at 63%, 19% and 18%, respectively in 2008. To reduce the impact of chestnut’s seasonality to ALN’s business, in 2009 we continued to develop and promote the convenience food segment and gradually increased its contribution to total revenue.
The average gross margin of convenience food products is around 23%, lower than chestnut products (25%-28%), but much higher than the frozen foods products (17%).”
He said he expects total revenue contribution from the convenience food segment will now consistently surpass that of frozen foods and become the second largest segment of the company.
Mr. Jin said another important aspect of American Lorain’s business remodeling involved keeping costs under control amid expansion to protect shareholder value.
“On production, to reduce capex and other fixed asset investment during a business expansion, starting from 2009 ALN used OEM and cooperation with third party manufactures, as well as leasing extra production lines to obtain additional capacity needed.”
“On sales, ALN is focusing on the Chinese domestic market. Since the end of 2008, we have been transferring part of the domestic sales from self-owned sales offices to third party agents to access new marketplaces and obtain new customers more effectively and efficiently. We will continue such transfers in 2010,” he said.
Cracking open new markets: Lorain is well-entrenched in China, but is also looking to expand overseas. Photo: company
2009: Year of transition, strategic adjustment
China's American Lorain was no different from any other consumer products firm and took a hit from the global economic crisis that took center across the world around the time of Beijing's hosting of the 2008 Summer Games.
But as most of its sales are in China, one of the first G20 economies to emerge from the downturn, the impact was limited.
The Shandong province-based producer of convenience foods, chestnut products and frozen foods soldin hypermarkets like Walmart and Metro across China still expects double digit top and bottom line results for full-year 2010.
For 2010, the company recently issued new guidance for total sales revenue of approximately 182-190 mln usd, representing a year-on-year increase of 25-30%. It also projects net income of approximately 17.8-19.0 mln.
"For fiscal year 2010, our revenue and net income projections are based on three major factors. First, our strategy of strengthening our domestic sales channels through shifting sales to agents will provide a wider distribution for our products with access to more supermarkets and convenience stores.
Chestnuts coasting in an open foyer: Lorain's legions processing its main product, chestnuts. Photo: company
"Second, our new agreements with popular chain restaurants in China, such as KUNGFU Catering Management and CSC Catering, will begin adding significant revenue in 2010. Third, our nationwide marketing campaign, funded by the recent private placement transaction which raised approximately 12 mln usd, will boost sales, particularly in the convenience food segment," Mr. Chen Si, Chairman and CEO of American Lorain said.
"We view our strong sales and earnings thus far in 2009 and our high expectations for full-year 2010 as validation of the effectiveness of our business model, our growth strategy and our commitment to providing the highest quality food products to customers."
Company CFO Mr. Jir told Nextnsight the firm had three major product segments: chestnuts, convenience foods and frozen foods, with revenue contribution – at 6%, 19% and18%, respectively in 2008.
"To reduce the impact of chestnut’s seasonality to ALN’s business, in 2009 we continued to develop and promote the convenience food segment and gradually increased its contribution to total revenue. The average gross margin of convenience food products is around 23%, lower than chestnut products (25%-28%), but much higher than the frozen foods products (17%).”
He said he expects total revenue contribution from the convenience food segment will now consistently surpass that of frozen foods and become the second largest segment of the company.
Cutting capex, protecting margins
Mr. Jin said another important aspect of American Lorain’s business remodeling involved keeping costs under control amid expansion to protect shareholder value.
"On production, to reduce capex and other fixed asset investment during a business expansion, starting from 2009 ALN used OEM and cooperation with third party manufactures to obtain additional capacity needed.
"On sales, ALN is focusing on the Chinese domestic market. Since the end of 2008, we have been transferring part of the domestic sales from self-owned sales offices to third party agents to access new marketplaces and obtain new customers more effectively and efficiently. We will continue such transfers in 2010,” he said.
He added that due to the financial crisis, American Lorain reduced capex in 2009 as compared with 2008, and that one of the firm’s strategies was to keep spending at a low level, lease additional production lines and cooperate with third parties to obtain extra capacity.
Continued focus on the home market
American Lorain has been thriving on cracking the China nut with chestnut, convenience and frozen food products since its founding, and the company is not interested in fixing what’s not broken anytime soon – i.e. it is happy to derive the bulk of its revenue from the PRC.
It would continue to derive the bulk of its revenue in the PRC and even planned to significantly boost sales at home going forward.
“Domestic sales will account for a higher percentage of total sales. However, ALN will continue to export to existing international clients as well as new clients. Our main export markets are Japan and Korea, but we are also exploring the US market which has significant opportunities for us, typically in the convenience foods products,” Mr. Jin said.
American Lorain currently exports to 42 countries, and also boasts a domestic sales network covering 26 provinces, cities and administrative regions.
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