Ferrero’s Acquisition Suggests Retailing could be a Priority for the Future

Ferrero’s Acquisition Suggests Retailing could be a Priority for the Future

Ferrero’s Acquisition Suggests Retailing could be a Priority for the Future

Jack SkellyAnalyst Insight by Jack Skelly – Food Analyst

 

The latest company to get on the acquisition bandwagon is Ferrero Group. The famous Italian confectioner has purchased a majority stake in UK chocolate retailer and manufacturer Thorntons for US$180 million. Whilst this may seem relatively small fry in the context of recent historic food takeovers, this has not prevented the story from generating significant press attention. The deal may raise eyebrows in puzzlement rather than shock – and with some justification. However, there is method in Ferrero’s decision, as it represents the realisation of two strategic priorities for the company.

Thorntons is far from the most attractive investment

Thorntons is in a bad state. Although the company has reported very modest sales growth from its retail operations, it has been unable to replicate this with profit growth, which fell 10% in 2014. This is despite the company’s efforts to rationalise the business, having closed over 20 stores each year since 2009. Thorntons is stuck between a rock and a hard place – on the one hand, its outlet offering is being undermined by the likes of Hotel Chocolat, which has similarly targeted the premium segment. On the other, the brand is losing orders from supermarkets, thus slowing down potential growth. Recently, the company lost orders from two of its biggest stockists. From the Thorntons perspective, the acquisition could not have come at a better time; for Ferrero, some would say it is targeting some extremely low-hanging fruit.

But the acquisition provides a pointer for Ferrero’s future direction

That would be unkind, however. The UK has emerged as a strategic priority for Ferrero. At 16%, the company’s sales growth in the country is far outpacing that in core Western European markets such as Germany, France and Italy. Evidence of this growth is visible on store shelves – Ferrero has launched a number of new products. Specifically, these launches have focussed on the prevalent trend towards product miniaturisation and sharing bags, with Ferrero Rocher now available in smaller boxes, for example.  That said, at US$280 million, the company’s sales are just a quarter of those achieved in Germany. Therefore, growth opportunities remain.

The move is also significant as it represents a concrete indication that Ferrero intends to move into retailing. As argued elsewhere, establishing its own retail stores is a good opportunity for Ferrero to increase growth. The Ferrero Rocher brand, which derives a large proportion of its sales from its reputation as a novel, premium product, would be an ideal fit for its own stores. Ferrero may also be able to launch other premium products through these stores that may be considered as too expensive for sale in grocery retail channels. Consequently, launching these products within its own retail outlets would increase brand awareness, which may then allow them to be distributed more widely.

A ground-breaking deal, or a damp squib?

A chocolate brand moving into retailing is not new. Indeed, the acquisition of Thorntons moves Ferrero into even more direct competition with Lindt, another mass-market premium company that has its own stores and cafeterias. Ferrero will now overtake Lindt’s chocolate confectionery sales in the UK, Western Europe’s largest confectionery market.

There is a lot of attention on this deal, but it is fraught with risks.  Thorntons is almost exclusively focussed on the UK market, and Ferrero’s retail arm will remain some distance behind that of its Swiss rival. If Ferrero wishes to expand its retailing arm globally, it is difficult to see the Thorntons brand taking hold in Western Europe, where premium tastes are well catered for. That said, there may be opportunities in other English speaking markets, as well as in Asia Pacific, where British brands possess a strong image of quality.  If, as the company has stated, Ferrero keeps the Thorntons brand, then placing Ferrero products in stores could cannibalise sales. From a global perspective, then, this currently registers as one of the most minor of ripples. Despite the risks, however, this small initial step may have significant consequences on Ferrero’s future.

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