So far it has been business as usual for the Cadbury brand following the Kraft merger but analysts say the UK confectionery market should be prepared for a flurry of M&A activity. Nick Hughes reports
This year will be remembered as the year the confectionery market changed forever.
The £11.9bn deal that saw Kraft swallow Cadbury not only ended the British confectioner's 186 years of independence, it also created a confectionery superpower to rival the combined Mars-Wrigley business.
With each commanding about 15% of global confectionery sales, the post-acquisition Mars and Kraft businesses dwarf their rivals. The third-biggest player, Nestlé, holds 8% of the market ahead of The Hershey Company (5%) and Ferrero (4%).
Given the gulf in size between the top two and the rest, you'd think the deal would have sparked a plethora of mergers and acquisitions since January. But so far, there's been nothing apart from renewed speculation that Nestlé is sizing up Hershey (see below).
Neither have there been any major sea changes in Cadbury's strategy, although, as we report this week, it has been forced to ditch its famous glass-and-a-half slogan, and price hikes and reductions in size are on the cards.
This doesn't mean the UK confectionery market has been unaffected by the deal, however, and paradoxically, it could be the very lack of a seismic shift at Cadbury that now encourages other confectionery companies to follow Kraft down the M&A road.
Apart from the brouhaha that greeted Kraft's u-turn on the Somerdale factory and the inevitable personnel upheaval involved in merging the two companies, it has been pretty much business as usual for Cadbury since the deal. In February, a few eyebrows were raised at Cadbury HQ when Kraft launched Milka into 45g countlines for the first time in the UK, supported by a £4.7m marketing campaign.
But their fears were allayed somewhat in June when Kraft made it clear that it views Cadbury as one of 10 power brands that will provide the backbone to its global confectionery business.
"Milka is a tiny brand in the UK compared with Cadbury Dairy Milk," adds a spokesman for the company. "Our focus will be on Cadbury that's where the scale is. Kraft has made it clear it fully supports the Cadbury brand and marketing activity and wishes to see that successful programme continue. With very few exceptions, the senior marketing managers in place are the same people who delivered such success in the past."
Underscoring its commitment, Kraft announced in May that it was closing its Cheltenham HQ next year and shifting its UK operations to Cadbury's offices in Bournville, which will become its global centre for chocolate R&D, and Uxbridge, while Cadbury's Science Centre in Reading has become a global technology centre.
"Uxbridge and Bournville are central to our future," says Kraft UK president Nick Bunker. "Everyone knows how strong the bond is between the British people and Cadbury, so there was never any discussion about it remaining our power brand here. Across Europe, we have strong national brand teams, driven by local tastes, who link into a central category team to share our best innovation ideas. The combination is about growth and we see big opportunities for Cadbury."
There are also synergies to be exploited. Kraft is currently looking into the possibility of using resealable packs, like those used for Kraft products, on Cadbury chocolate bars, for instance.
The big wins, however, will be on the global stage. "During the takeover battle for Cadbury, Kraft cited greater access to expanding international markets as one of the main benefits of the acquisition," says Euromonitor International in its article on Kraft's second-quarter results.
"On the basis of the first full quarterly results for joint operations, Cadbury boosted net revenues across all regions but most significantly in Kraft's Developing Markets reporting segment, where net revenues increased by 73.4%, including a 61.4 percentage point impact from Cadbury. Cadbury's operational infrastructure in emerging regions also provided an expanded platform to distribute the enlarged portfolio."
Of course, there has been a price to pay on the personnel front. As of July, about three quarters of Cadbury senior staff had left following the deal, and the unions claim the closure of Kraft's Cheltenham HQ could cost up to 500 jobs.
But the ramifications for the Cadbury brand have so far been pretty benign and the upsides for Kraft self-evident. The deal could yet pave the way for a flurry of M&A activity in the UK confectionery market, believe analysts. "It sends a pretty strong signal both to trade buyers and other private-equity buyers that maybe this is a good time to buy up businesses," says Will Hayllar, partner at OC&C.
Trade buyers have dominated confectionery M&A activity in recent years, taking advantage of the fact that, in the recession, private equity lacked the firepower to do top-end deals. But, as the markets recover, private equity is beginning to show renewed interest.
"We are talking to a lot of private equity houses who are looking for consolidation plays," confirms one corporate finance director. "Some are looking to take businesses from a to b, of which Dorset Cereals is a classic example, then sell it on for a high price, whereas others are saying there are sectors like confectionery where there are a lot of smaller players who are struggling for scale and ad spend, so why don't we put them together?"
The widening gap between the top two companies and the rest could also prompt second-tier trade buyers into action, adds Hayllar. "Some of the players in the next tier down, the likes of Ferrero and Perfetti, might feel as though they're getting left behind," he says. "You could see some of those businesses think more about whether they need to bulk up again through a merger in order to compete in their core markets."
There are still quite a lot of businesses that need more scale and who will find it more difficult to compete in an increasingly consolidated market without that scale, adds Trefor Griffiths, corporate finance director at Grant Thornton.
Tangerine, Big Bear, Zetar and Glisten are among the second-tier players that have in the past been active acquirers of smaller brands and they could well be in a financial position to strike again.
This March, Big Bear, which boasts Glacier Mints, Poppets and XXX Mints to its name, abandoned plans to launch on the AIM stockmarket, citing the volatility of markets, but with cash in the bank and relatively low debt levels, it could buy if it wanted to. The question is: does it want to?
"It's got to decide whether it's just going to sit there and hope somebody buys it or actually go on the acquisition trail again," says Simon Peacock, head of food and drink at Catalyst Partners.
One business that is likely to venture back into the market is Zetar, the investment vehicle that owns suppliers including licensed confectionery producer Kinnerton. The business is AIM-listed, giving it an immediate source of finance on the open market. "I wouldn't be surprised if Zetar makes two or three acquisitions over the next couple of years," says Peacock.
One of Zetar's major rivals, Glisten, was acquired by Iceland's Raisio Group. With the exchange rate favourable for foreign players, British businesses could be vulnerable to raids from overseas.
"We are seeing a lot of interest from overseas in UK assets," says Griffiths. "In confectionery there are buyers looking to get into the UK market via acquisition."
Tangerine is not for sale, insists Stephen Joseph, its executive chairman, but he admits the business would be an attractive proposition to a foreign investor. "It's always possible someone will come from overseas and want to establish a foothold in the UK by buying Tangerine, but we're not for sale."
Other businesses that could appeal to buyers both domestic and international include Ashbury Confectionery and House of Dorchester, which produces the Gordon Ramsay range of chocolates, says Peacock. Hayllar, meanwhile, sees the vertically integrated and rapidly growing Hotel Chocolat business as a brand that could potentially be of interest.
The big confectionery players could even be targets, says Euromonitor. "Many of them, for example Danone, Mars and Kraft, are still financially stretched with the purchase and integration costs of their latest market moves and are not likely to be able to contest any potential high-price takeover attempts by competitors," it says. However, finding strategically well fitting acquisition targets that don't involve major obstacles to takeover, such as ownership or structural issues, will be increasingly difficult, it argues.
Kraft got lucky with Cadbury. One of the key goals for global confectionery players is to achieve a good balance between chocolate, the biggest confectionery category, and gum, the most dynamic globally. Prior to the acquisition, Cadbury's confectionery portfolio was one of the most balanced around, generating about 40% of its revenues in chocolate and 40% in gum.
So far, the balance of power as far as the Cadbury and Kraft confectionery brands go remains in Cadbury's favour much to the relief of the British public. But there may yet be a shift.
"I think in certain areas, there's going to be a bit of a shake-up as Kraft and Cadbury sort out the brands they're going to support," says Joseph.
Either way, the impact of the deal is only just beginning to be felt on the UK confectionery market as a whole. With private equity and trade buyers keen not to cede further ground to the top two and to develop their own economies of scale, it is only a matter of time before M&A activity picks up and we see the next wave of consolidation begin in earnest.
Could Hershey hold key to the US for Nestlé?
Over the past two years Mars and Kraft have increased their hold on the global confectionery market to 15% each, dwarfing Nestlé's sub-8% share [Euromonitor].
The Kit Kat owner will be looking for ways to close the gap, and some analysts have said the acquisition of The Hershey Company which has a global share of roughly 5% would go a long way towards doing this. In August this year, Bloomberg.com reported that a New York-based analyst at Capstone Global Markets advised Hershey shares were a buy because their price didn't reflect the high probability of Nestlé making a bid.
Hershey has a low profile in the UK though this is set to change following the appointment last month of Euro Food Brands as its UK distributor but it is the biggest chocolate manufacturer in the US. It has global sales of more than $5bn a year, 85% of which is generated in the US. It manufactures Kit Kat for the US market under licence from Nestlé and also distributes Cadbury products in the US.
"Nestlé's weakest regional confectionery market is North America, where it commands a value share of just 4%," says Euromonitor analyst Ildikó Szalai. "Nestlé may consider reinforcing its position with a large-scale acquisition, with Hershey long considered its most likely target."
As the charitable Hershey Trust controls 80% of voting shares a hostile takeover is impossible, but analysts believe market pressures will increase the odds of a deal. And, with Nestlé expecting £28bn for the sale of its stock in eyecare business Alcon, an acquisition of some sort by the company is probably only be a matter of time.
Focus On Confectionery
This year will be remembered as the year the confectionery market changed forever.
The £11.9bn deal that saw Kraft swallow Cadbury not only ended the British confectioner's 186 years of independence, it also created a confectionery superpower to rival the combined Mars-Wrigley business.
With each commanding about 15% of global confectionery sales, the post-acquisition Mars and Kraft businesses dwarf their rivals. The third-biggest player, Nestlé, holds 8% of the market ahead of The Hershey Company (5%) and Ferrero (4%).
Given the gulf in size between the top two and the rest, you'd think the deal would have sparked a plethora of mergers and acquisitions since January. But so far, there's been nothing apart from renewed speculation that Nestlé is sizing up Hershey (see below).
Neither have there been any major sea changes in Cadbury's strategy, although, as we report this week, it has been forced to ditch its famous glass-and-a-half slogan, and price hikes and reductions in size are on the cards.
This doesn't mean the UK confectionery market has been unaffected by the deal, however, and paradoxically, it could be the very lack of a seismic shift at Cadbury that now encourages other confectionery companies to follow Kraft down the M&A road.
Apart from the brouhaha that greeted Kraft's u-turn on the Somerdale factory and the inevitable personnel upheaval involved in merging the two companies, it has been pretty much business as usual for Cadbury since the deal. In February, a few eyebrows were raised at Cadbury HQ when Kraft launched Milka into 45g countlines for the first time in the UK, supported by a £4.7m marketing campaign.
But their fears were allayed somewhat in June when Kraft made it clear that it views Cadbury as one of 10 power brands that will provide the backbone to its global confectionery business.
"Milka is a tiny brand in the UK compared with Cadbury Dairy Milk," adds a spokesman for the company. "Our focus will be on Cadbury that's where the scale is. Kraft has made it clear it fully supports the Cadbury brand and marketing activity and wishes to see that successful programme continue. With very few exceptions, the senior marketing managers in place are the same people who delivered such success in the past."
Underscoring its commitment, Kraft announced in May that it was closing its Cheltenham HQ next year and shifting its UK operations to Cadbury's offices in Bournville, which will become its global centre for chocolate R&D, and Uxbridge, while Cadbury's Science Centre in Reading has become a global technology centre.
"Uxbridge and Bournville are central to our future," says Kraft UK president Nick Bunker. "Everyone knows how strong the bond is between the British people and Cadbury, so there was never any discussion about it remaining our power brand here. Across Europe, we have strong national brand teams, driven by local tastes, who link into a central category team to share our best innovation ideas. The combination is about growth and we see big opportunities for Cadbury."
There are also synergies to be exploited. Kraft is currently looking into the possibility of using resealable packs, like those used for Kraft products, on Cadbury chocolate bars, for instance.
The big wins, however, will be on the global stage. "During the takeover battle for Cadbury, Kraft cited greater access to expanding international markets as one of the main benefits of the acquisition," says Euromonitor International in its article on Kraft's second-quarter results.
"On the basis of the first full quarterly results for joint operations, Cadbury boosted net revenues across all regions but most significantly in Kraft's Developing Markets reporting segment, where net revenues increased by 73.4%, including a 61.4 percentage point impact from Cadbury. Cadbury's operational infrastructure in emerging regions also provided an expanded platform to distribute the enlarged portfolio."
Of course, there has been a price to pay on the personnel front. As of July, about three quarters of Cadbury senior staff had left following the deal, and the unions claim the closure of Kraft's Cheltenham HQ could cost up to 500 jobs.
But the ramifications for the Cadbury brand have so far been pretty benign and the upsides for Kraft self-evident. The deal could yet pave the way for a flurry of M&A activity in the UK confectionery market, believe analysts. "It sends a pretty strong signal both to trade buyers and other private-equity buyers that maybe this is a good time to buy up businesses," says Will Hayllar, partner at OC&C.
Trade buyers have dominated confectionery M&A activity in recent years, taking advantage of the fact that, in the recession, private equity lacked the firepower to do top-end deals. But, as the markets recover, private equity is beginning to show renewed interest.
"We are talking to a lot of private equity houses who are looking for consolidation plays," confirms one corporate finance director. "Some are looking to take businesses from a to b, of which Dorset Cereals is a classic example, then sell it on for a high price, whereas others are saying there are sectors like confectionery where there are a lot of smaller players who are struggling for scale and ad spend, so why don't we put them together?"
The widening gap between the top two companies and the rest could also prompt second-tier trade buyers into action, adds Hayllar. "Some of the players in the next tier down, the likes of Ferrero and Perfetti, might feel as though they're getting left behind," he says. "You could see some of those businesses think more about whether they need to bulk up again through a merger in order to compete in their core markets."
There are still quite a lot of businesses that need more scale and who will find it more difficult to compete in an increasingly consolidated market without that scale, adds Trefor Griffiths, corporate finance director at Grant Thornton.
Tangerine, Big Bear, Zetar and Glisten are among the second-tier players that have in the past been active acquirers of smaller brands and they could well be in a financial position to strike again.
This March, Big Bear, which boasts Glacier Mints, Poppets and XXX Mints to its name, abandoned plans to launch on the AIM stockmarket, citing the volatility of markets, but with cash in the bank and relatively low debt levels, it could buy if it wanted to. The question is: does it want to?
"It's got to decide whether it's just going to sit there and hope somebody buys it or actually go on the acquisition trail again," says Simon Peacock, head of food and drink at Catalyst Partners.
One business that is likely to venture back into the market is Zetar, the investment vehicle that owns suppliers including licensed confectionery producer Kinnerton. The business is AIM-listed, giving it an immediate source of finance on the open market. "I wouldn't be surprised if Zetar makes two or three acquisitions over the next couple of years," says Peacock.
One of Zetar's major rivals, Glisten, was acquired by Iceland's Raisio Group. With the exchange rate favourable for foreign players, British businesses could be vulnerable to raids from overseas.
"We are seeing a lot of interest from overseas in UK assets," says Griffiths. "In confectionery there are buyers looking to get into the UK market via acquisition."
Tangerine is not for sale, insists Stephen Joseph, its executive chairman, but he admits the business would be an attractive proposition to a foreign investor. "It's always possible someone will come from overseas and want to establish a foothold in the UK by buying Tangerine, but we're not for sale."
Other businesses that could appeal to buyers both domestic and international include Ashbury Confectionery and House of Dorchester, which produces the Gordon Ramsay range of chocolates, says Peacock. Hayllar, meanwhile, sees the vertically integrated and rapidly growing Hotel Chocolat business as a brand that could potentially be of interest.
The big confectionery players could even be targets, says Euromonitor. "Many of them, for example Danone, Mars and Kraft, are still financially stretched with the purchase and integration costs of their latest market moves and are not likely to be able to contest any potential high-price takeover attempts by competitors," it says. However, finding strategically well fitting acquisition targets that don't involve major obstacles to takeover, such as ownership or structural issues, will be increasingly difficult, it argues.
Kraft got lucky with Cadbury. One of the key goals for global confectionery players is to achieve a good balance between chocolate, the biggest confectionery category, and gum, the most dynamic globally. Prior to the acquisition, Cadbury's confectionery portfolio was one of the most balanced around, generating about 40% of its revenues in chocolate and 40% in gum.
So far, the balance of power as far as the Cadbury and Kraft confectionery brands go remains in Cadbury's favour much to the relief of the British public. But there may yet be a shift.
"I think in certain areas, there's going to be a bit of a shake-up as Kraft and Cadbury sort out the brands they're going to support," says Joseph.
Either way, the impact of the deal is only just beginning to be felt on the UK confectionery market as a whole. With private equity and trade buyers keen not to cede further ground to the top two and to develop their own economies of scale, it is only a matter of time before M&A activity picks up and we see the next wave of consolidation begin in earnest.
Could Hershey hold key to the US for Nestlé?
Over the past two years Mars and Kraft have increased their hold on the global confectionery market to 15% each, dwarfing Nestlé's sub-8% share [Euromonitor].
The Kit Kat owner will be looking for ways to close the gap, and some analysts have said the acquisition of The Hershey Company which has a global share of roughly 5% would go a long way towards doing this. In August this year, Bloomberg.com reported that a New York-based analyst at Capstone Global Markets advised Hershey shares were a buy because their price didn't reflect the high probability of Nestlé making a bid.
Hershey has a low profile in the UK though this is set to change following the appointment last month of Euro Food Brands as its UK distributor but it is the biggest chocolate manufacturer in the US. It has global sales of more than $5bn a year, 85% of which is generated in the US. It manufactures Kit Kat for the US market under licence from Nestlé and also distributes Cadbury products in the US.
"Nestlé's weakest regional confectionery market is North America, where it commands a value share of just 4%," says Euromonitor analyst Ildikó Szalai. "Nestlé may consider reinforcing its position with a large-scale acquisition, with Hershey long considered its most likely target."
As the charitable Hershey Trust controls 80% of voting shares a hostile takeover is impossible, but analysts believe market pressures will increase the odds of a deal. And, with Nestlé expecting £28bn for the sale of its stock in eyecare business Alcon, an acquisition of some sort by the company is probably only be a matter of time.
Focus On Confectionery
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