Big business for small fries

The number of restaurant chains continues to grow, prospering many industries, from commercial real estate to cooking equipment, and we rarely notice french fries. If you ask the fast-food restaurant what is the most profitable? Perhaps many people do not know, of course, it is French fries! The purchase cost of a pound of French fries is about 0.76 US dollars, and the price per pound after the fast restaurant sells to customers is about 7--8 US dollars. This is simply profiteering! However, consumers seem to be very obsessed with this product. Although not so healthy, the fries of various restaurants are obviously branded, not ordinary goods. American consumers' consumption of French fries has been rising, which is clearly different from the trend of carbonated drinks in the beverage field.

The United States is the world's largest market for potato consumption. In the United States, nearly half of the potatoes are sold to consumers in the form of fresh potatoes, and the other half is sold in the form of frozen fries to chain restaurants and various retail channels. Globally, frozen French fries are a market of up to 13 billion US dollars. Considering that the price of retail terminals is much higher than the wholesale price, French fries are a large market of nearly 100 billion. Moreover, this market continues to grow.

Lamb Weston (Lamb Weston, hereinafter referred to as LW) is a company engaged in the production of frozen french fries. LW provides frozen fries in various forms to restaurants and various retail channels. In FY2016, LW's revenue was nearly US $ 3 billion, and EBITDA reached the US $ 593 million.

Frozen french fries are a highly concentrated industry, which is somewhat surprising. There are about 5 major players in the world, and the first two occupy major shares in major markets. In the United States, LW is the largest supplier of frozen french fries with a market share of 42%; while in the global market, LW has the second market share, accounting for 23%. It is believed that the US market contributed nearly 75% of EBITDA to LW, which is the core market of LW.

Under the oligopoly pattern, frozen chip producers get along quite well. Everyone is very cautious in expanding production, and the growth of production capacity is very limited. The price of retail terminals is much higher than the purchase price, and retail terminals always have pricing power. This frees frozen fries producers from the fate of commodity products. LW's financial data shows clear pricing power, with an EBITDA margin of up to 17.6%. This is largely due to economies of scale and cost control, as well as the cost of purchasing from potato growers is only $ 0.1 per pound, but can be sold to fast-food restaurants at $ 0.75 per pound.

LW's revenue growth mainly comes from endogenous growth, modest foreign mergers and acquisitions, and the growth of frozen fries consumption in emerging markets around the world. LW is deployed in major global markets, including China. In China, LW has a nearly 27% market share.

Thanks to the continuous expansion and industry integration of the fast-food industry, LW's revenue in the past 10 years has continued to grow, with a compound growth rate of nearly 6.3%.

Over the past three years, LW's EBITDA has continued to grow, with a compound growth rate of 8.7%.