After a lifetime of watching his late father grow the company, Steven Lavin is now chair of privately held OSI Group, which prepares food for brands like McDonald’s, Chipotle and Kraft Heinz.
By Chloe Sorvino, Forbes Staff
There may not be an American alive who hasn’t eaten something boiled, broiled, browned, barbecued or fried by OSI Group.
The privately held food manufacturer, with estimated 2022 revenue of $7.9 billion, started out by stamping fresh hamburger patties for McDonald’s on a 1955 handshake deal with the Golden Arches’ Ray Kroc. Over the years, OSI and its chief, Sheldon Lavin, expanded the relationship with McDonald’s to include just about McEverything. From there, it took on the world.
Today, OSI’s 65 plants in 18 countries can cook whatever meat a food company wants to sell. Though OSI has churned out DiGiorno frozen pizzas for Nestlé; steak, carnitas, barbacoa, sofritas, beans and salsas for Chipotle; Oscar Mayer wieners for Kraft Heinz; plant-based burgers for Impossible Foods; and truckloads of flatbreads, paninis, mac and cheese, soups, chili or just the meat that goes into the chili, McDonald’s has remained a loyal customer. In the process, OSI’s Shelly Lavin became a billionaire.
In May, Lavin died at age 90, and his son, Steven Lavin, took over as company chair. Though the younger Lavin is a lawyer by profession, he’s watched as his father grew OSI from a mom-and-pop shop called Otto & Sons into one of the world’s biggest food processors. Forbes estimates that with the death of Sheldon Lavin, Steven Lavin and his family are now worth more than $3.9 billion.
The transition of power at Aurora, Illinois-based OSI comes at a time when the winds of change are blowing with fury. The company’s advantages are many. Its sprawling scale gives it a pricing edge when it comes to attracting new business, and its impressively long client list and decades-long reputation for discretion — it uses a host of other companies’ secret recipes and guards them all closely — point to a continuation of current partnerships. But climate change threatens to upend the meat industry, with extreme weather expected to damage feed crops and dry up water for livestock. Food brands that supply grocery stores are cutting back on spending with a possible U.S. recession looming. Outside capital for expansion has gotten more expensive and tougher to secure. Commodity prices are rising and so are labor costs.
Steven Lavin told Forbes that his top priorities at OSI are growing the company, helping management find the right solutions for its customers and addressing food security. “I do not think in terms of barriers,” he told Forbes via email. “Where there is a challenge, there is an opportunity to turn that challenge into a benefit.”
Lavin, who controls the family’s trusts, has been a company director for years and was groomed by his father to be ready for this moment. At his side is David McDonald, now CEO after working at OSI for 36 years, most recently as chief operating officer. The two have a lot of room to grow, especially as the company invests in automation to improve efficiency and unlock fresh capacity in its factories. But as Lavin steers OSI, he’s bound to learn some things his father may not have taught him.
One lesson the older Lavin did impart: discretion. “I do control our collective ownership,” Steven Lavin told Forbes in an email. “Details on the estate are a private matter.”
Slim Margins
The Golden Arches has remained a significant portion of OSI’s business for almost 70 years. OSI’s profits from McDonald’s likely amount to around 3% of its sales. OSI’s overall profit margin is estimated to be 10%. That means OSI needs to protect brands’ recipes, strategies and other business information.
“They keep everybody’s secrets well,” said William Madden, senior partner at Whole Brain Consulting, which runs the country’s biggest food industry outsourcing firm.
Building on that, OSI has become the king of an industry where the biggest and most specialized operations tend to win the most business. The options for contract manufacturing span “the good and the bad,” but the alternative — a food brand building its own factory — makes even less sense, said Adam Waglay, cofounder and co-CEO of buyout firm Butterfly Equity.
“This is a game of scale,” Waglay told Forbes. “The danger is you have several really big players, like OSI, that do high-scale co-manufacturing. It’s a tough place to make money. The big players win that battle — on low cost of production and distribution.”
Humble Origin
OSI had its origin in a butcher shop, Otto & Sons, started by the German immigrant Kolschowsky family in 1909. Otto & Sons got its big shot when Kroc streamlined McDonald’s 150 fresh-beef suppliers from a complicated and unruly network of 150 around the country to just five. Otto & Sons was offered a slot, but the Kolschowskys needed money to build their first industrial-scale meat plant with the cryogenic flash-freezing capacity that Kroc wanted. Sheldon Lavin, then a 38-year-old banker, was hired in the late 1960s to figure out how to make the deal happen.
McDonald’s was so impressed by Sheldon’s work that it championed his taking a stake in the supplier, and by the late 1980s the banker was a partner with a one-half slice of the company. When he became CEO, the company changed its name to OSI, and Lavin eventually bought out the last of Otto’s sons to become majority owner.
Meanwhile, the younger Lavin earned a bachelor’s degree in accounting from the University of Illinois and then graduated from Loyola University School of Law in Chicago. He witnessed his father’s expansion of the company’s business with McDonald’s to Germany, Spain and countries in Central and South America. The elder Lavin spent years trying to predict where the chain would go next and flew around the world to meet with local meatpackers to size them up.
“We tried to follow McDonald’s and get all we could,” Sheldon Lavin told Harvard Business Review in a rare interview in 2001. “We use the term ‘McDonaldized’ because we understood McDonald’s goals, knew the system and what the company needed, and knew how to deal with them.”
Sheldon Lavin didn’t shy away from risky, capital-intensive projects when it came to keeping McDonald’s happy. That meant growing lettuce in China for Big Macs, helping to develop the first chicken nuggets, and experimenting with circular bacon.
As Steven Lavin set up his own Highland Park, Illinois-based law firm, focusing on finance and corporate litigation, his father expanded beyond McDonald’s. By 2000, some $650 million, or 15% of sales, came from other customers, such as KFC and Pizza Hut, as well as packaged food companies like ConAgra and Nestlé.
“They very much stay under the radar,” said Madden of Whole Brain Consulting. “When they have customers, they develop deep relationships.”
The full OSI customer list remains hidden from outsiders. But it’s obvious that the company’s connections are vast. OSI keeps stakes in a lot of firms across the food industry. Since 2006, for example, OSI has owned Amick Farms, one of America’s largest chicken farmers and processors. For years, OSI has also held a significant stake in Brazil’s second-largest meatpacker, Marfrig, which acquired the fourth-largest U.S. beef packer, National Beef, over several deals from 2018 to 2020. OSI previously held a seat on Marfrig’s board.
Modern Diet
Meanwhile, Steven Lavin made his own deals. He backed food- and ag-tech-focused investment firm Germin8 Ventures, founded by his son Michael Lavin. Germin8 has funded several artificial intelligence and big data startups, including an AI-enabled smart-farming platform, ranch- and crop-management software, a digital infrastructure for the grain industry and even a search engine that catalogs the molecular compounds of plants in the hope that the data can be used to “transform the modern diet.” Lavin is a director, general counsel and advisor.
Steven Lavin also cofounded and serves as a director of Silver Road Capital Group, which describes itself as a financial advisory firm which aims “to be a bridge between Israel and the world.” And he served as a director of the U.S. subsidiary of Israel-based Bank Leumi, starting in 2005, becoming the head of its board in 2012.
Luckily for Lavin, his father left behind a company that experts estimate holds a sizable pile of cash. Acquisitions help OSI stay ahead of competitors, which include contract-manufacturing firm Hearthside, which has grown quickly. It launched in 2009 and now books $4.3 billion in sales. The operation, owned by two private equity firms, has 41 plants in the U.S. and Europe.
One path forward for OSI is moving deeper into food brands that sell in retail stores instead of lower-margin, more cutthroat fast food. That would put OSI more directly into competition with the food brands themselves, according to consultant Kurt Schneider, a food scientist with more than 20 years of research and development experience.
Retail is a good place for OSI to make more profits going forward, Schneider said. He pointed to General Mills’ recent closure of a pet-food factory in favor of outsourcing to a private contractor. “Those are the kinds of clients that OSI would be dying to see,” said Schneider. “A whale like that could come in and doesn’t have any problem paying them the margins they need.”
The flipside is getting “handcuffed,” Schneider said. “OSI would have to fall in line with General Mills’ rules and regulations. You have to do it their way, or they’ll take their business elsewhere.” That, of course, is where OSI has excelled.
What’s next for the company? The tight-lipped Lavin waxes cryptic. “Thoughtful expansion and diversification have been demonstrated over time,” Lavin told Forbes, “and will continue forward.”
With assistance from Susan Radlauer.
MORE FROM FORBES
Read the full article here