Nestle aims for deep bite of chocolate market

Zurich/London:

Nestle’s chief executive, who oversees a sprawling empire stretching from baby food to wrinkle treatment, admits to finding one of its oldest businesses, chocolate, a source of frustration.

Nestle is one of many consumer goods companies trying to tap interest in high-end, natural, artisan, exclusive or organic goods to augment packaged food sales that have been sluggish in Europe and North America since the global recession. Its Nespresso brand enjoys a comfortable position at the high end of the coffee market, helped by exclusive distribution, breakthrough technology and ads with George Clooney.

But the company has not done the same in chocolate. “Premium chocolate is my small intimate frustration,” chief executive Paul Bulcke has said. His revelation prompted renewed speculation the company, known for mass-market chocolate, may seek to buy its way into a bigger role in the premium sector, particularly in the US.

“I think there will be some sort of premium chocolate initiative on a global basis for the company over coming months and quarters,” said Kepler Cheuvreux analyst Jon Cox. “And to be honest, about time too.”

Nestle sold about 7.5 billion Swiss francs ($8.39 billion) of chocolate in 2013, accounting for about 8 per cent of group sales. Its confectionery business is No. 3 behind Mondelez International and Mars in a global market with more than $196 billion in retail sales, according to Euromonitor International.

Over the last seven years, Nestle’s confectionery business has grown at an average rate of 5.7 per cent, below the group average of 6.3 per cent, according to Vontobel analysts. Gourmet chocolate, often made with higher cocoa content and exotic flavours such as chilli or ginger, is still a small part of the market and boasts a range of independent players such as La Maison du Chocolat and Vosges.

But multinationals are increasingly present. Mondelez owns Green & Black’s, Korea’s Lotte owns Belgium’s Guylian, Mars owns Pure Dark and Hershey Co. owns Scharffen Berger. Nestle also sells premium brands — Switzerland’s Cailler and Italy’s Baci Perugina — but the vast majority of sales come from mainstream brands such as Kit Kat, Aero, Crunch and Butterfinger.

“We’re trying to answer that. It’s going to be a long-term journey but we do have the quality in chocolate, we do have the knowledge, we do have the ‘métier’. We just have to do it,” Bulcke said, noting that part of the problem was the company’s decentralised structure.

“Super-premium luxury chocolate brands should be monolithic worldwide, like Nespresso is. That goes against the DNA of our organisation, so we’re going to have to find ways to go around that.”

The easiest way for Nestle to move upmarket in chocolate would be an acquisition, and rumours of its interest in Switzerland’s Lindt & Spruengli and Italy’s Ferrero have recurred over the years. “What’s interesting about both Lindt and Ferrero is both of those companies would fit beautifully into any of the other four big players,” said Andrew Cosgrove, lead analyst at EY’s global consumer products practice, referring to Mondelez, Mars, Nestle and Hershey. “But neither asset looks affordable or available in the short term.”

Any buyer of Lindt, the maker of Lindor and Ghirardelli chocolates, would have to offer a hefty premium to its current market value of $12.8 billion, paying for the luxury positioning that lets Lindt generate high single-digit sales growth in developed markets, where mainstream peers see flat or low single-digit increases.

In October, Italian media said Nestle had offered to buy Ferrero, the family-controlled maker of Kinder chocolate, which bankers value at more than 10 billion euros ($13.5 billion). Ferrero denied the report.