BREVILLE CASHES IN ON COFFEE

In expanding beyond appliances, Breville aims to show the world how to make the perfect cup

Australian culture is something of an enigma, generating pride and an occasional cringe –often at the same time – but we’ve never previously seen it being touted as a competitive advantage. As Breville’s chief executive, Jim Clayton – an American who’s previously worked for LG in South Korea – puts it: “I’ve spent a fair amount of my career in American culture and Korean culture which, in my experience, sit at two opposite ends of a spectrum. Both have their advantages and disadvantages. The Australian culture sits in between [in] what, to me, feels like the ‘goldilocks zone’.”

What he means – we think – is that Americans are fundamentally led by innovation, figuring that if a product is good enough people will buy it, while Koreans are led by meeting perceived gaps in the market. Australians, on the other hand, are happy to take external cues while also giving free rein to innovation.

So, while we often downplay the prospects of Australian companies competing in the big wide world, it can also go the other way. Aussie companies as diverse as Aristocrat and

CSL have found winning formulas overseas. Breville aims to follow in their footsteps.

Even in the comparatively mature market of Australia and New Zealand, though, sales have risen at a respectable 4% a year over the past 10 years (and 7% a year over the past five), which points to another factor running in Breville’s favour.

Advancing technology is enabling the company to provide products that do more for a given price and therefore sell more easily. This effect has powered many companies over the past couple of decades – most obviously Apple, but also others as diverse as ResMed and ARB Corp.

Breville has been another beneficiary. Its latest automated coffee machine offers a touch screen allowing you to save up to eight personalised coffees. I want one … and I don’t even drink coffee.

This is the product of first-rate research and development (R&D) spending, which has almost tripled over the past five years, from 4.4% of revenue to 6.9%. Clayton says his target – based on what appears sustainable for successful product-based companies around the world – is to spend a combined 12% of revenue on R&D and marketing. When he joined in 2015 this figure was 8.5%, split roughly equally between the two. His hope appears to be for R&D to bridge the gap as marketing spend has fallen slightly over the past five years. In 2020, the combined total reached almost 11%.

For its next leg of growth, Breville aims to move away from the product, per se, and towards providing solutions, such as the perfect cup of coffee. Breville now operates a marketplace for coffee beans, coffee-making classes and a subscription service for maintenance products.

Bigger taste of technology

The acquisition of Seattle-based ChefSteps in July 2019 also plays into this. ChefSteps has only one product – the Joule sous vide cooking device that can be controlled via a smartphone app. But it also has an online community of more than a million users supplying recipes and cooking instructions that can be fed into the device.

With only about 20% of the content on ChefSteps related to sous vide cooking, Breville plans to tap into the rest of it, starting

this year with the Joule Oven Air Fryer Pro, a connected version of its Smart Oven Air.

With these products Breville will be latching onto another surge in value-enabling technology, the much-vaunted “internet of things”. Who knows where it will lead the company, but it’s a fair bet it will make for easier and tastier dinners and coffees, and people will be prepared to pay for that.

The company is also consolidating its brands and shifting more of its regions from a distribution model to direct sales, which should give it greater control.

The company’s two main brands are Breville and Sage, which are designed and developed in Australia and manufactured in China. These comprise the “global product” segment in the company’s accounts, which contributed 83% of revenue and operating profit in the six months to December.

Breville is sold directly to retailers in Australia, New Zealand and North America and via distributors to the rest of the world, excluding Europe, where it has shifted to a direct model under Sage in Germany, France, Austria and the Benelux region. Revenue is now twice its 2017 level. Additionally, and largely in Australia and New Zealand, the company distributes various products designed and developed by others under its own brands (eg, Breville and Kambrook) or theirs (eg, Nespresso). This forms the “distribution” segment in its accounts and provided the other 17% of revenue and profit in the first half of 2021.

Taking it to the world

The recent half-year result showed good progress, boosted by the working- from-home and “premiumisation” trends. In their home currencies, sales increased by 29% in the Americas, 50% in Asia Pacific and Australia and New Zealand, and 56% in Europe, the Middle East and Africa, to give 39% overall.

Measured in Australian dollars, revenue grew by 29%, while the earnings before interest and tax (EBIT) margin firmed by 0.1 percentage point, to 13.3%, to give an 30% increase in EBIT. Net profit rose by 29%.

The international expansion continues, and this year will see the company launch in Italy and Portugal (as Sage) and Mexico (as Breville). With annual revenues in North America and Europe amounting to only $1.15 and 30¢ per head of population, compared to over $5 in

Australia and New Zealand, there is a long potential runway ahead. Supporting it will be the continuing advancement of value-enabling technology, the shift towards a “solution-based” model and the unique Australian culture.

We wouldn’t bet against it. Unfortunately, though, we also find it hard to back at the current price.

In the recent half-year result, management raised full-year guidance from an operating profit of $128 million-$32 million to $136 million, which would imply earnings per share of around 68¢. The dividend policy was also adjusted down to a payout of 40% of EPS, from 70%. On the current price that would give an expensive-looking price-earnings multiple of around 41 and a dividend yield of about 1%.

If earnings were to grow at 10% a year and the multiple ends up at 30 in 10 years, you’d get a share price return of 6.7% a year, plus an average of around 1.7% a year in dividends, for a total of a bit over 8%.

Of course, there are risks to this, but they swing both ways: growth looks like it will be more like 15% for the next couple of years and if it keeps that up for much longer our 10% average for the next 10 years could look very conservative. We’d rather have that than the opposite, though, and we’d want to see the price below about $24 to get the projected return above 10%.

Breville is a fantastic Australian company. Here’s hoping.

James Carlisle is a senior analyst at Intelligent Investor (ASFL 282288), which is owned by InvestSMART Group.

Disclosure: The writer does not own shares in Breville, though other InvestSMART staff may.