A Sweet Deal? Ferrero's Nestlé Purchase Signals Shift In US Candy Market
After months of talks and speculation, Nestlé has agreed to sell its US confectionery unit to Nutella-maker Ferrero for $2.8 billion.
This is a big deal in a challenging US market, where chocolate sales have declined in recent years. It's also a significant move for Nestlé, whose brand name has become synonymous with chocolate and sweet snacks.
In reality, however, confectionery represents only 3% of Nestlé's US group sales, and the consumer goods company has outlined plans to focus on high-margin areas such as healthcare and pet food.
Ferrero, on the other hand, remains entirely a specialist confectionery company, and has been making moves to expand its portfolio in the US. Last October, the group announced plans to acquire US-based Ferrara Candy Company, which produces brands such as Trolli gummy sweets and Lemonheads, expressing an intention to expand its business further.
Giovanni Ferrero, executive chairman of the Ferrero Group, described the US as a "key strategic and attractive market," which will provide the company with further growth opportunities going forward.
In that market the Italian confectioner is currently best known for Tic Tac mints, Ferrero Rocher chocolates and Nutella hazelnut spread.
Once this deal has been finalised, Ferrero will become the third largest confectionery company in the US, behind Hershey and Mars, according to data from Euromonitor International.
After acquiring more than 20 confectionery brands from Nestlé, including Butterfinger, BabyRuth and 100Grand, Ferrero will have a 10.9% market share.
However, these brands have been struggling in recent years. In 2016, Nestlé's confectionery sales fell to $900 million, impacted by the competitive environment and low growth in the mainstream chocolate market.
Raphael Moreau, senior food and nutrition analyst at Euromonitor, warned that a successful turnaround and integration of Nestlé's brands into Ferrero's portfolio may be difficult.
“Nestlé’s most prominent chocolate confectionery brand in the US, Butterfinger, has suffered against brands with a more premium positioning including Lindt and against larger players such as Mars," he said.
But Ferrero's competitors also have challenges to overcome.
Swiss chocolate company Lindt & Sprüngli posted record results earlier this week, driven by growth in Europe and Asia, but its US business saw sales decline.
The group, which was the third largest player in the US confectionery market until the Ferrero-Nestlé deal, recorded a 1.6% organic decline in sales for the NAFTA region in 2017, despite double digit growth in Canada.
The chocolate-maker attributed this to a 'challenging US market', with its Lindt and Ghiradelli brands recording slight growth, but the Russell Stover business facing a decline in sales.
Meanwhile, market leader Hershey, who was named as a potential bidder for Nestlé's sweets early on, now seems to be branching out into other areas. In December, the group shifted focus to salty snacks with its $1.6 billion acquisition of Amplify Snack Brands, which is best known for SkinnyPop popcorn and Tyrell's potato chips/crisps.
Nestlé Moves On
As US consumers become more diet-conscious, consolidation of the candy market was perhaps inevitable. Nestlé announced its intention to step away from this area after a strategic review last summer, shifting focus to faster-growing categories.
"This move allows Nestlé to invest and innovate across a range of categories where we see strong future growth and hold leadership positions, such as pet care, bottled water, coffee, frozen meals and infant nutrition," said CEO Mark Schneider.
This divestment is the first major deal for Schneider, who became CEO of the company last year after a career in the medical and pharmaceutical industry. Under his leadership, Nestlé is also moving towards the health and wellness sector, as shown by the company's recent $2.3 billion acquisition of Canadian dietary-supplement business Atrium Innovations.
Paolo Leschiuta, senior credit officer at Moody's and lead analyst for Nestlé, noted that Ferrero deal will benefit Nestlé as it moves forward.
“The disposal is positive for Nestlé as proceeds will compensate for a number of recent acquisitions, alleviate some pressure on its credit metrics, and improve the group’s profitability and growth prospects,” he said.
© 2018 European Supermarket Magazine – your source for the latest retail news. Article by Sarah Harford. Click subscribe to sign up to ESM: The European Supermarket Magazine.