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  • Sep 22, 2014
  • Updated: 2:59am
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Nestle wants a bigger bite of luxury chocolate, may consider acquisitions

Analysts expect acquisitions after chief reveals 'frustration' over lack of high-end presence

PUBLISHED : Monday, 09 June, 2014, 3:29am
UPDATED : Monday, 09 June, 2014, 3:29am

Nestle chief executive Paul Bulcke, 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," Bulcke told an investor conference in Boston where he also discussed the firm's shrinking appetite for underperforming brands.

It's going to be a long-term journey but ... we do have the knowledge
Paul Bulcke, Nestle

His revelation prompted renewed speculation the company, known for mass-market chocolate, may seek to buy a bigger role in the premium sector, particularly in the United States.

"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 (HK$65 billion) of chocolate in 2013, accounting for about 8 per cent of group sales. Its confectionery business is No3 behind Mondelez International and Mars in a global market with more than US$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 cacao 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 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 and Crunch.

"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 'metier'. 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," he said.

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."

Lindt has a market value of US$12.8 billion and Ferrero, the family-controlled maker of Kinder chocolate, has been valued by bankers at more than €10 billion.

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