There are some trouble spots for Lance Inc.
, which is the bad news. The good news is that all of them can be fixed with some time and effort. Lance, once referred to as the “largest snack food manufacturer in the U.S.” bye Forbes saw some decreases in many areas of the company in fiscal year 1994. The company has shown might in the past. The might that is speak of is seen when looking at the competition that Lance goes to war with everyday in the supermarket and convenience stores.
Lance puts its products up against the mighty conglomerates such as Frito-Lay owned by PepsiCo, Borden, Nabisco, and Eagle. Lance has long been a family oriented business, and remains that today. Lance has presented consistent financial reports in the past. Increased competition in the snack food industry has caused some of the disappointing numbers that were seen in the 1994 financial statements. I am here to tell you the numbers you put up for fiscal year 1994 can be turned around and make fiscal year 1995 a profitable year for Lance Inc.
The first area I would like to focus on is the advertisement strategy. I read that the advertising campaign was resumed in 1994, this is a sector of your business that has been dormant for many years. Due to increased competition in the snack foods industry there is an urgent need for an aggressive ad campaign for your company. You may be asking yourself, “Won’t this campaign cost a lot of money, and therefore reduce are net income?” I am here to tell you that an aggressive ad campaign focused in the areas where your products are not selling well will increase the visibility of the product to the consumer and that increase sales dramatically. I can see a great opportunity in the expanded chocolate department. With this department newly renovated a push for those products in vending machines and convenience stores would be a wonderful opportunity to gain profits from the expanded sector of Lance. In conclusion, an aggressive advertising campaign would bring more of the competition’s consumers to Lance, giving your company more of the market share.
The second area of Lance that I would like to address is the ability to change, and the development and promotion of new products. In 1998 you, the Lance Company, make a corporate decision to make your snack foods healthier by making them low in cholesterol and low in fat. This was an excellent corporate decision seeing that the consumer economy was moving toward a healthier conscious life style. The other area I would like to discuss is the development of new products. When your company was founded Mr. Phillip L. Lance did not play follow the leader. He was an innovator. He decided that the Lance Company would be the first to package and sell peanut butter crackers. What I would like to encourage the Lance Company to do for fiscal year 1995 is to begin working and testing new products. If the product tests out well design and advertising campaign to draw attention to the new product. I believe that Lance gave up on a valuable product in the honey coated peanuts, that later swept the market when Anheuser-Busch’s Eagle Snacks marketed the “Honey-Roasted Peanuts”. Opportunities like these should not be passed up in the future. New products give recognition to other products and make them more profitable. I understand that at the time Lance’s advertising strategy was one of no advertising at all. With the advent of the advertising in the Lance Corporation again there are many opportunities for new product development.
The third point I would like to make about Lance is the culture in which the company is run. Lance is run with family orientation. This is a very good culture this company. The idea of “multiple management” is a great concept that needs to be expanded upon. I believe that incorporating more team work strategies would further improve employee morale and enthusiasm. Lance’s decision to have day to day and long-term decisions made by committees and not by individuals ensures that the decisions are right for the company over an extended period of time, the decisions are not shortsighted. Another important part of the culture is promotion from within the company. Internal promotion is an award that makes employees work hard to receive. However, I do believe that outsiders better fill certain positions. The decision to bring Richard A. Zimmerman on board is applauded. His thirty-five years of experience is a major plus for the Lance Corporation. Overall, the culture of Lance fosters enthusiasm among front-line employees and management alike. This enthusiasm ensures that Lance will have a steady stream of applicants for newly opened positions. The culture that was created in the early 1900s is still evident in today’s culture, and it is still working incredibly well!
Distribution methods that are used at Lance are a strong suit. In the snack food industry freshness is a quality that must not be overlooked. Having fresh products on the shelves at all times will bring about consumer loyalty, whereas the alternative will destroy the consumer base. Increasing competition in the snack food market has created less shelf space for different companies. As shelf space decreases so does the visibility of the product. In an industry that is driven by impulse buys shelf space and product visibility are musts. The method of providing your own racks for products creates your own shelf space and visibility. Having your own shelf space allows for new products to be very visible for impulse buys. The distribution methods employed by Lance are a model for the snack food market as shelf space becomes more and more cramped. These methods are another opportunity for Lance to gain more of the market share from your competitors.
So far I have talked about the many positive points of your company. Now comes the time that I need to talk about the reason I have been hired to do analyze your company. Stock performance of Lance has been declining in recent years. Stock price in 1993 ranged from $24.25, a high, to $19, a low. The information provided shows that for fiscal year 1994 your stock was trading in the range of $22.75, a high, to 18.75, a low, in the first quarter. Those numbers slipped to $18.875, a high, and $16.25, a low, in the fourth quarter of 1994. I have included a chart of stock performance that ranges from March of 1990 to December of 1994 (see appendix 1). This chart further stresses the dip in your stock price over the last few years. Some of the reasons that I have found to explain the dropping of your stock price have been your financial performance. For 1993 and 1994 your Economic Value Added (EVA) has been negative. Specifically, in 1993 your EVA was –2,604.44, and in 1994 it was –4,292.56 (I have included my calculations in Appendix 2). I also found some financial ratios in the January 3, 1994 issue of Forbes magazine and compared them to some of your competitors (I have included the pertinent portion of the Forbes article in Appendix 3). In the article I looked at the five year averages of your company, Lance, Hershey, and Wrigley. One ratio that struck me was the return on capital this ratio was only for the twelve month preceding the article. Lance had a five-year average of 11.2%, where Hershey had a return of 16%, and Wrigley had returns of 33.2%. This indicates to me that your company is having more trouble than your competitors in returning a profit for your given level of capital. When investors see this they see your competitors out performing you and are more likely to invest their money in other companies. Another ratio that I examined was the growth of sales, which would indicate to me growth in the market. While Hershey and Wrigley showed growth in sales over the last five years of 7.1% and 10.1%, respectively, Lance saw growth in sales of only 3.8%. Your company has seen a growth in sales, but not as large as the gains made by your competitors. I truly believe that this number can be increased by the aggressive advertising campaign that I talked about in length previously. Return on Equity is a key ratio for your company, seeing that is how you finance your company because you want to have no long-term debt. Hershey and Wrigley had ROE averages over five years of 18.4% and 32.8% respectively; your company had an ROE of 18.3%. Referring to Appendix 3 you can see that your ROE is about average for you industry. This tells me that your company does not have a high degree of financial risk associated with it. The last number that I looked at from the Forbes article was Profit Margin. Over the last twelve months Hershey and Wrigley saw profit margins of 8.4% and 12.3% respectively, Lance saw profit margins of only 6.9%. Again your company was behind many of your competitors in profit margin for fiscal year 1993. Your lower percentage of profit margin indicates that you are not generating as much profit for every dollar of sales as competitors. Profit margin is a key ratio that investors look at to determine if your company is profitable or not. Finally I have included a chart (Appendix 4) that compares your stock performance to the S&P 500. Looking at this chart it can be seen that from 1975 until now your stock has outperformed the S&P every year. This stock performance is appealing to investors. However, from 1991 until now investors have seen some decline in your stock performance when compared to the S&P 500.
In your letter to the stockholders, that you included in the packet sent to me, you stressed toward the end that it was a goal to keep your Company “financially strong and debt free.” In order to keep your company debt free your stock needs to gain strength to increase your equity base. I believe that the increase of advertising, the development of new products, minor changes to the corporate culture, and increasing the effectiveness of your distribution methods will bring about the increases that your company wants to see on the financial end, without giving up the dedication to the consumer.
Cite this Lance Inc 1995 Analysis
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