Nestlé Seeks to Square an Indulgent Circle Through its R&R Joint Venture and Premium Chocolate

It has been a busy few weeks for food behemoth Nestlé. Last week, the company announced that it would begin selling its premium chocolate brand, Callier, in Western Europe and North America. This week, it appears that the company is in advanced discussions to launch a joint venture with British ice cream manufacturer R&R, currently owned by private equity firm PAI Partners. Those whose memories last longer than two weeks will remember that the company has repeatedly stated that it aims to become a leading manufacturer in the health and wellness industry. So what does this move mean for the allegedly health-focussed Nestlé?

Indulgence still important for Nestlé

Although cynics may suggest that Nestlé has an extremely flabby definition of what constitutes “health”, the reality is that indulgence is an extremely important source of revenue for the company. In 2014, confectionery, ice cream and frozen dessert sales accounted for nearly a third – or US$24 billion – of the company’s total food sales. Indulgence is quite simply too big for Nestlé to ignore.

Of that US$24 billion, 49% stems from Western Europe and North America. However, these are two markets where many snacking companies are enduring a difficult time, with chocolate confectionery sales achieving just 2% and 4% CAGRs, respectively. By broadening the reach of Callier, Nestlé has smartly moved into the premium segment of chocolate, which is substantially outperforming the overall chocolate market in these two regions.

With regards to ice cream, Nestlé is looking to consolidate its share in a number of fast growing markets, including Egypt, Brazil, and Western Europe. Combined, ice cream and frozen desserts have grown by US$4.9 billion in these three markets between 2010 and 2015. In the latter two markets, the company is significantly overshadowed by Unilever, the world’s largest ice cream manufacturer with 21% global market share. Nestlé has been underperforming, seeing market share decline from 12% to 10% over the last five years.

All things considered, R&R appears to be an ideal fit

Nestlé has a long-standing working relationship with R&R, with whom it has licensing agreements in place in a number of countries. R&R is extremely strong in Western Europe, where it manufactures a vast range of private label products and ice cream for the likes of Mondelez and Mars, The company has needed to focus on reversing the fortunes of its ice cream business in Western Europe for some time. Thus, the joint venture is certainly in harmony with a strategic priority for Nestlé.

Ice Cream Sales in Priority Markets (US$ million) and Nestlé and Unilever % Market Share, 2015

Ice cream sales

Source: Euromonitor International

The partnership with R&R provides Nestlé with a number of options in ice cream. It could move into a more premium, dairy based ice cream mould. This is something that Unilever has had significant success with in relation to its Magnum, Carte D’Or and Ben & Jerry’s ranges, which have contributed an additional US$658 million in sales in Western Europe since 2015. However, given Unilever has so effectively cornered this market, an alternative option is to focus on the mass market. Given R&R has extensive expertise in producing private label goods, which are generally aimed at as wide an audience as possible, this could be logistically easier to achieve.

In the medium term, Nestlé certainly has the financial wherewithal to purchase R&R outright. Whether the company will do this is a different question. Certainly, it goes against the health message that features so prominently in Nestlé’s annual reports and investor calls. It may be that Nestlé will stay true to its newly found principles, and eventually spin off its ice cream division in several years’ time. However, considering R&R has already been subject to cost-cutting measures during the tenure of PAI Partners, it will be interesting to see how Nestlé could possibly improve efficiencies further, and how it could boost values further. Ultimately, with R&R providing such a useful fit, and with ice cream being such a significant cash generator, we may hear Nestlé continue with its Janus-faced approach to business for some time to come.