Ferrero Would Fill Gaps in Nestlé’s Confectionery Division
Current news in the Italian media about a Nestlé takeover bid for Ferrero is not without any rationale from Nestlé’s side. Although Ferrero denies any approach the deal would address a number of weaknesses in Nestlé’s confectionery business but potentially could create incompatibilities with the company’s overarching wellness and nutrition strategy. Although there are a good number of benefits Nestlé would enjoy at the event of a takeover, however, the list of obstacles is also long, which includes Ferrero’s ownership status, no full insight into financial performance, and heavy developed markets bias.
Creation of the World’s Largest Chocolate Confectioner
Up until 2008, Nestlé was a close second contender in the fragmented global confectionery market. However, as a result of the intensifying consolidation it became a more distant third player. In 2012 however, Nestlé upped its presence through a bolt-on confectionery acquisition of Hsu-Fu-Chi Holding in China. Based on 2013 preliminary market value shares, a Nestlé-Ferrero merger would make Nestlé the top global player in chocolate confectionery with a near 20% market value share.
The acquisition would address a few weaknesses Nestlé currently has in its confectionery business, such as lack of a strong global premium chocolate label, at the same time as it would dilute its reliance on its KitKat label.
For the long term, sustainable-growth premium brands are crucial for manufacturers looking to tap into growth of chocolate confectionery and high operating margins. For example, the acquisitions of Godiva (by Yildiz Holding) and Guylian (by Lotte) in 2008 were good opportunities for companies looking to improve their portfolio mix and exploit the dynamism of the global market and the higher profit margins such categories offer.
Since 2008, Nestlé’s growth strategy has been centred on its aim to reposition itself to become the world’s leading wellness and nutrition company. Although this has not been its sole direction of growth; it has also made acquisitions in categories where it benefits more from large scale economies and high operational margins than health trends; for example, its 2011 purchase of Hsu-Fu-Chi Holdings Ltd, China’s second largest confectionery player and Yinlu Foods Group. The acquisition of Ferrero would not be strongly in line with its wellness strategy but would fill gaps in its confectionery operations.
Consolidation Central Market Theme in Confectionery
Consolidation has been a central theme of the global confectionery market development in recent years. After the significant Mars/Wrigley merger in 2008, the global confectionery market has seen further consolidation with Kraft’s takeover of Cadbury. Consequently Mondelez, a confectionery focused powerhouse of global brands, was created in 2012 when Kraft split in two.
Although Nestlé’s distant third position is not likely to get challenged through organic growth by other companies, however, without a significant scale acquisition in the category it will face strong challenges both from the leading Mondelez-Mars duo and rapidly growing local emerging market players.
For more information, please see the full report on Ferrero Group in Packaged Food.