Source: FBIF Food & Beverage Innovation (ID: FoodInnovation) On June 15, Nestlé announced a new strategic transformation plan, intending to sell its entire U.S. confectionery business. However, analysts strongly recommend that Nestlé further divest its global confectionery business. U.S. Confectionery Business for Sale Nestlé officially stated that it expects to sell its U.S. confectionery business by the end of this year, including 17 local chocolate and candy brands. According to Nestlé's latest annual report, its U.S. candy brands Butterfinger, Baby Ruth, and Crunch chocolate had sales of only 900 million Swiss francs (approximately $923 million) last year, while the Swiss food giant's total confectionery revenue was 8.8 billion Swiss francs [1]. The Financial Times reported that a Nestlé spokesperson said: "Rather than investing more to compete for the top spot in the U.S. confectionery market, Nestlé prefers to sell these businesses at this opportune time." The U.S. confectionery market is highly competitive, and facing rivals Mars, Hershey, and Mondelez, Nestlé only holds the fourth position in the U.S. market (Nestlé's well-known chocolate brands KitKat and Rolo mints are produced and sold in the U.S. by Hershey) [2]. Figure 1: U.S. chocolate market brand distribution. Source: Bloomberg, data from Euromonitor. Kepler Cheuvreux analyst Jon Cox predicts that Nestlé's U.S. confectionery division could be valued at around $2 billion [2]. Hershey would be the most likely buyer. According to company announcements, the chocolate brands Nestlé plans to sell include Butterfinger, Baby Ruth, 100 Grand, Skinny Cow, Raisinets, Chunky, Oh Henry!, and Sno-Caps, as well as candy brands Swee Tarts, Laffy Taffy, Nerds, Fun Dip, Pixy Stix, Gobstopper, Bottle Caps, Spree, and Runts. Pressure to Sell Global Confectionery Business However, SIC senior analyst Pablo Zuanic believes that acquiring only Nestlé's U.S. confectionery business would not bring substantial returns to Hershey. More problematic, after acquiring Nestlé's U.S. confectionery business, Hershey would face antitrust challenges. Currently, Hershey holds 36% of the U.S. chocolate market, while Nestlé's chocolate business holds about 3.3% market share. Therefore, Zuanic suggests that Hershey could consider acquiring Nestlé's global confectionery division for $17 billion to seek greater benefits. For Nestlé, even if it sells its U.S. confectionery business to another company, Hershey would still enjoy licenses for KitKat and Rolo, which had sales of $480 million last year, equivalent to 4.4% of the U.S. chocolate market [3]. Besides Hershey, Mondelez and Lindt have expressed interest in acquiring these assets. Lindt spent $1.3 billion to acquire Russell Stover in 2014, while Mondelez, after failing to acquire Hershey, spent $23 billion to merge with Oreo [2]. Mintel's chief insights officer noted that Hershey has recently been adjusting its strategy towards healthier products, so it may not be very interested in acquiring Nestlé's U.S. confectionery business. Another bidder, Mondelez, may be cautious about large-scale acquisitions given its recent series of mergers and unclear CEO succession [3]. However, Nestlé's U.S. confectionery business still has no shortage of buyers. Apart from Lindt, the Ferrero Group plans to increase investment in the U.S. market and introduce its children's chocolate brand Kinder Joy eggs to the U.S. market. If it is interested in the U.S. market, Nestlé's brands would be a good choice. Walmart is also interested in integrating these brands into its group [3].

Divesting Low-Growth Categories Benefits Nestlé More

However, selling the global confectionery business and abandoning low-growth categories may be more beneficial for Nestlé's long-term growth. In January, Mark Schneider became Nestlé's new CEO. The failed $143 billion acquisition of Unilever by Kraft Heinz made companies in the industry nervous; even leaders could become acquisition targets, prompting food companies to seek lower costs and higher profits to fend off external takeovers [4]. Mark took on the role at a critical time, facing immense pressure for profit growth. Although company announcements indicate that the current evaluation only covers the U.S. market and will be completed this year, Nestlé showed signs of divesting its global low-end confectionery business as early as last July. The Swiss giant sold six low-end chocolate brands in Italy, including Ressana and Fluxes, to Italian company Fida [5]. Figure 2: Nestlé CEO Mark Schneider. Source: Bloomberg. Vontobel Bank analyst Jean-Phillippe Bertschy believes this will be a new era for Nestlé, removing underperforming candy brands from the company. He also thinks Nestlé will evaluate and restructure other underperforming businesses, such as Herta, and its U.S. ice cream and frozen pizza brands [4]. Facing slowing global chocolate demand and consumers' increasing preference for healthy foods, Nestlé's premium chocolate strategy last year was not as successful as expected. In the U.S., Nestlé has found it increasingly difficult to get consumers to accept high-sugar snacks again. Therefore, divesting the declining chocolate and candy business may not be a bad thing for the food giant [6, 7]. Nutrition, Health, and Premium Products More Promising Nestlé's new CEO Mark told Bloomberg that while divesting the confectionery business, Nestlé will focus on high-profit or high-growth divisions, such as coffee and health foods. Schneider also said that divesting the confectionery business is just a small step in Nestlé's transformation, but it could be a big step towards a new Nestlé [4]. Just hours ago, Nestlé announced the acquisition of Freshly, a natural ready-to-eat company, to counter Amazon's acquisition of Whole Foods. The deal is worth $77 million, with plans for the company to reach a valuation of $510 million after an IPO. Nestlé's premium capsule coffee brand Nespresso has already become Nestlé's most successful online brand. Through direct control of online and offline channels and third-party capsules, Nestlé can more precisely manage costs and consumer taste preferences. Nespresso increases consumer loyalty by selling special capsule coffee machines and continuously introducing new capsules such as hot chocolate, tea, and infant formula [8]. After Nestlé released its company announcement, its Swiss shares rose 2%, from CHF 80.8 to CHF 82.4 per share. After acquiring Freshly, Nestlé's shares closed at CHF 84 (approximately $86), while its biggest competitor Mondelez International's shares fell 0.14% to close at $45.34. According to the latest Bloomberg data, Butterfinger and Crunch chocolate saw only 0.8% growth in the same period, compared to a 3% decline in 2015 [7]. Figure 3: Sales revenue growth rate of Butterfinger and Crunch chocolate. Source: Bloomberg. The weak sales of Nestlé chocolate also led to market enthusiasm when Nestlé announced its intention to sell its U.S. confectionery business. Figure 4: Global chocolate confectionery market distribution. Source: Bloomberg, data from Euromonitor. According to Euromonitor data, the U.S. confectionery market accounts for 19.9% of the world market, followed by China (9.0%). When Nestlé prepares to exit the U.S. confectionery market, it has already given up one-fifth of the world market [7]. According to Euromonitor data and Nestlé's annual report, the four fastest-growing areas for Nestlé in the future will be nutrition and health, emerging markets and products with broad consumer acceptance, premium foods, and outdoor foods. Dairy snacks are the fastest-growing category globally [9]. Therefore, even if Nestlé gives up the confectionery market, it will not significantly impact its final profits. -END-