Lack of obvious candidates drying up confectionery mergers, analyst

Ildikó Szalai, packaged food analyst at Euromonitor International, reports that the only company among the top 10 global players making an acquisitive move has been Lotte Group, with the purchase of Cadbury's E Wedel-branded confectionery operations in Poland from Kraft Foods for an undisclosed sum.

The business division was up for sale as a result of EU competition clearance following Kraft's acquisition of Cadbury.

“Although E Wedel represents Lotte's second acquisition in the European confectionery market following the purchase of Chocolaterie Guylian NV in 2008, the two acquisitions combined have not had a strong impact on significantly widening the company's geographical reach and reducing its reliance on the mature South Korean and Japanese markets,”​ commented Szalai.

Obstacles to takeover ​

She said that part of the reason for the lack of any further large-scale M&A deals so far in the confectionery arena may be the difficulty in identifying an acquisition target which is a good strategic fit and without any major obstacles to takeover in an already moderately consolidated market. ​

Szalai notes that the premium portfolio of Swiss confectioner Lindt & Sprüngli would be a valuable asset to many confectioners.

“However, the company has suffered badly from the recent economic downturn and the future of an exclusively premium portfolio in a post-recessionary era, with consumers more reluctant to return to earlier levels of spending, has to be seen and accurately assessed by any potential buyer,” ​she argues.

Organic expansion ​

Nevertheless, continued the sweets and chocolate market specialist, confectionery firms are still aiming to achieve larger scale and geographical reach but are doing so through other means such as distribution alliances to enter new markets or boosting output in developing regions, particularly in Russia, India and Brazil.

“Following the Kraft/Cadbury deal the consolidation trend was expected to continue to create larger economies of scale in production and wide geographic markets. ​

However, in the past nine months manufacturer focus has been on long-term plans to expand production capacity in emerging markets organically and enhance the presence of existing brand portfolios rather than accessing local infrastructure via purchasing diverse local brands,”​ observes Szalai.

Capacity upgrades ​

She notes that Ferrero, one of the frontrunners for Cadbury and a company that would have especially benefited from the strong market position Cadbury commands in India, is now investing in expanding its production capacity in that country, having firmed up plans for a new production facility in Maharashtra, with an investment of over US$125m.

Hershey had also been one of the interested parties in acquiring Cadbury in a bid to achieve instant international expansion.

However, instead of making a sizeable acquisition, said the analyst, the company's latest moves to expand the geographical reach of its products have included distribution alliances, in Europe with Euro Food Brands, and in India via its joint venture with Godrej.

In August, both Nestlé and Mars announced their intention to enhance their chocolate production in Russia, while Mars has also recently opened a chocolate factory in Dubai, investing some US$40m.

Furthermore, said the analyst, business-to-business supplier of chocolate and cocoa products, Barry Callebaut, has been enhancing its production capabilities this year in Latin America, specifically in Brazil and Mexico.

“The establishment of a plant in Brazil, in Extrema near São Paulo, will offer the Brazilian market the full product portfolio of traceable cocoa, semi-finished products and chocolate products. The new facility in Brazil follows the setting up of the Swiss firm's industrial chocolate facility in Mexico in the northeastern state of Nuevo León,”​ she reports

But Szalai said that, as yet, there have not been many examples of outright relocation of production from developed to developing markets.

“The only one has been the very highly publicised announcement of the relocation of Cadbury's Somerdale chocolate factory near Bristol to Skarbimierz, in Poland,”​ she added.