Farm Pride's winning strategy in the egg and spoon race of retail

Consumer preference for cage-free eggs has grown over the past few years. More than 60% of eggs sold in major supermarkets are cage free and the free-range egg market is expected to continue to grow 3% to 4% annually. 

In line with the changing market demands, there is now a plan to phase out all cage eggs from major retailers by 2036. 

For the key players in the Australian egg industry, worth approximately $1 billion annually, the plan will require a complete overhaul of their business models to meet the new requirements.

This follows a rough year for egg producers after they took a double hit from restaurant closures and huge culls to bird stock due to an avian flu outbreak.

Farm Pride (ASX: FRM), one of Australia’s biggest egg producers, has an innovative strategy that has seen the business come out on top of this egg and spoon race.

“We’ve fully recovered from pre-COVID sales and we’re growing that business quite strongly. Going forward, our focus is to re-establish our innovation programs, maximise our value-adding capability, and seek additional opportunities to reset our shell egg business with our retailers,” Farm Pride CEO Daryl Bird said.

In order to maintain a sustainable and profitable business moving forward, Farm Pride is looking to further capitalise on high-margin opportunities, including convenience products such as egg-based baking products, snacks, and sports nutritional drinks.

This strategy to push aggressively into the value-added, higher-margin product space is appealing to fund managers like Harley Grosser, founder and CIO of Capital H Management, who believes Farm Pride is undervalued at the moment.

The stock is currently trading at 30 cents. Mr Grosser said it should really be worth around 70 cents as it currently is, and the CEO’s strategy should push it up further.

“If the CEO really gets that value-added side of the business firing, which is 20 to 40% margin, then this business could eventually be doing the EBITDA it was doing back in 2016,” he said.

In 2016, Farm Pride recorded a historically high EBITDA of $10-12 million, which pushed stocks up to $2.50 each before the industry was set back by an outbreak of avian influenza and COVID-19.

“We think later this year there will be positive news flow around new product releases that the market is not anticipating and the stock is already very cheap,” Mr Grosser said.

“It’s not a commodity business any more, it’s a product differentiated by brand. That’s your real upside.” 

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