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After below expected growth during last month’s Full Year Results, Nestlé has announced a clean-up for its confectionery business. Premium brands are in, and mass are out.
Indeed this month the company announced the launch of premium Turkish chocolate brand Damak in the US in an attempt to tap into this profitable growth market, albeit late. Damak, a heritage brand well known in Turkish households for its indulgent pistachio flavour, has a clear USP for the US consumer. At the same time, Nestlé announced it will up its investment in Italian chocolate brand Baci Perugina to turn it into a truly global brand. This latter strategy in particular is key to setting forth Nestlé’s leadership in chocolate; given its size, Nestlé does not have many global brands.
Indeed looking at Nestlé’s ranking in chocolate confectionery, whilst strong in Latin America and India, it could address its weaker position in the US, China and parts of Europe. Moreover, whilst Kit Kat is the most geographically spread, many of its largest chocolate confectionery brands still have a limited global presence.
The chocolate brand is most famous for its chocolate ‘kisses’ filled with hazelnut, wrapped in a love note. As such the brand is an ideal premium chocolate gift known for its quality taste. For a number of markets, boxed assortments is expected to grow substantially. Nestlé’s development plan includes a €60 million investment for the first three years.
Whilst China, unsurprisingly, is expected to grow the strongest in terms of boxed assortments, competition is also fierce. With its exotic origins and strong Western appeal, chocolate confectionery is regarded as an ideal gift during the festive period. However, the leading chocolate confectionery manufacturers in China also keep a close eye on demand patterns for chocolate confectionery as a gift, with these sales estimated to account for some 30% of total chocolate sales.
Brazil might be a better target market at least for the initial stage as Nestlé already has a strong presence and can use its existing distribution network. Gift giving is also strongly rooted in Brazilian culture where Nestlé is already present with its Garoto brand, yet the brand is targeting the masses whilst Baci Perugina could target premium gifting, albeit a niche segment. That said, Brazil’s current slowdown might put Nestlé off greater investment.
Premium chocolates are also gaining popularity across tier one cities in India. Whilst Nestlé will face serious competition from leading rival Mondelez (Cadbury Glow) and at some distance, Ferrero, a premium product like Baci Perugina has potential to be a strong contender.
For all markets, whilst Baci Perugina has potential to be successful in the premium chocolate space, Nestlé is late to the game and faces serious competition from the likes of Ferrero, Lindt, as well as mass market rival Mondelez. Significant investment will be needed to create brand awareness from a low base in this competitive but profitable market. Something not beyond Nestlé’s capabilities.
Creating global brands enables Nestlé to communicate consistent messages to consumers in all export markets. Running a consistent global branding and advertising program reduces the cost and complexity of managing campaigns. Whilst Kit Kat does adapt messages to local preferences, it is a clear global brand leader setting the example for other Nestlé brands.
With growth slowing, especially in developed markets, future profits will have to come from higher margin foods which is the intention behind the launches of Damak in the US and wider expansion of the Baci Perugina brand. Whilst Nestlé’s vision to become the world’s leading health and nutrition company is one way of approaching growth through high margin (health) food, premiumisation is definitely another way. The trick is to be ‘mass premium’ so that Nestlé can still use its scale and existing distribution network.