BRICs and beyond: Ferrero investment shines light on Mexican confectionery market

By Michelle Russell | 5 April 2012

Ferrero will look to make its mark in the Mexican confectionery market with its investment

Ferrero will look to make its mark in the Mexican confectionery market with its investment

Confectionery giant Ferrero last month announced plans to invest US$190m in the construction of a production facility in Mexico. Michelle Russell takes a looks at what impact the company might make in the country and the competition it will inevitably face.

Ferrero's investment in the construction of a production facility in Mexico may be seen by some as a statement of intent from the Italian confectionery giant.

However, industry watchers believe Ferrero may face some fierce competition from major confectionery players in its bid to make a serious impact on the Mexican market.

Last month, Ferrero announced plans to spend US$190m on the construction of a plant in San Josè Iturbide in the state of Guanajuato, 260km north of Mexico City. The facility will manufacture the firm's Kinder and Nutella products for the local market and for export to North America, with production expected to begin in May next year.

While Mexico is held up as an emerging market for many major international manufacturers, in confectionery the market is actually rather well-developed, making it hard for many new entrants to make a mark.

The site will be Ferrero's first manufacturing facility in Mexico, where it has been present since 1992 and has 24 distribution centres and six sales offices.

However, Jonathan Thomas, principal market analyst at Leatherhead Research, believes Ferrero is a relatively minor player in the Mexican chocolate confectionery market at the present time.

"Its share has increased over the last few years and obviously this latest development will probably accelerate that. But most of the big boys are there ... it's a combination of Mexican or Latin American companies, and also some of the multi-nationals like Nestle, which is fairly strong in Mexico."

According to figures from Datamonitor, Kraft Foods holds the largest slice of Mexico's confectionery market with a 26.2% share. Next come Grupo Bimbo, the Mexican bakery giant, and Mars Inc, both with 7% of the market.

While better known for its fresh bakery products, Bimbo also produces sugar confectionery and chocolates in partnership with Argentina-based Arcor

"Arcor is Latin America's biggest confectionery manufacturer," Thomas says. "They're headquartered in Argentina but are present in most of the region, and they've got a fairly strong position in Mexico."

Outside the top three, Thomas also believes companies such as Hershey, which is moving its operations into Mexico to service local demand, may make it more difficult for Ferrero to make the impact it may desire.

"Mexico is geographically close to Hershey's home market in the US and what it's being doing in recent years is scaling down its manufacturing base in the US and has transferred production to Monterrey, in Mexico as they see that as having cheaper costs," Thomas says.

"It has also brought some of its brands from the States like Hershey Kisses and Hersheys Bites."

Indeed, Ferrero, who could not be contact for further details on the investment, is certainly facing some stiff competition, but some industry watchers argue that although Kraft's market share is strong, it is not as direct, formidable competition for the Italian firm given its larger focus on sugar confectionery rather than chocolate.

Kraft sells brands including Trident, Clorets and Dentyne, amongst others, serving a growing demand for sugar confectionery in Mexico.

According to Datamonitor, sugar confectionery sales proved the most lucrative for the Mexican confectionery market in 2010, generating total revenues of $1.3bn, equivalent to 44.6% of the market's overall value.

Euromonitor analyst Ana Trulin, echoes Thomas' thoughts that Kraft may not be such a threat to Ferrero in Mexico's chocolate confectionery market, given its focus on gum in this region.

"I don't think that Kraft is a major competitor. I know that Kraft bought Cadbury, but Cadbury is more focused in the gum sector. I would think more about Mars, and Lindt whose chocolate is considered of very good quality. Lindt isn't a big player, but they are in the premium segment, and they have a huge distribution network and they know the consumer," Trulin told just-food.

According to Datamonitor, the Mexican confectionery market recorded a CAGR of 2.3% for the 2006-2010 period, generating total revenues of US$2.9bn.

For the five-year period 2010-2015, the market is expected to achieve a value of $3.2bn.

However, for Ferrero, its investment is not solely focused on the Mexican market. Its facility will form a base for US trading also.

The US and Canadian markets are expected to grow, with CAGRs of 2.8% and 1.7% respectively, over the same period, to reach respective values of $39.8bn and $2.9bn by 2015.

IBISWorld food industry analyst Mary Nanfelt believes this may work to the advantage of Ferrero, which has said around 30% of its production will be exported to North America.

"Fererro are primarily going to manufacture their Kinder and Nutella products, which will definitely benefit the company because US consumers are developing a more complex palette and they are becoming more interested in foreign products," Nanfelt told just-food.

"In addition, Americans are interested in high-quality chocolate products. Imports for chocolate products have increase by an average of 7.6% in the last five years ... so there is definitely a place for Ferrero in the US and I would believe in Mexico and Canada as well, essentially because Nutella is a unique product."

Nanfelt, however, believes Ferrero will face some stiff competition in the US.

"There are some large players such as Hershey and Kraft-owned Cadbury. There is also Mars and Nestle. But what's great is the products will be cheaper to ship if they're in Mexico and also production costs will be lower being based in Mexico. So Ferrero will be able to compete price-wise in the US market, but they will have to cater to a niche market if they want to make an impact because the chocolate industry in the US is so saturated."

The lion's share of Ferrero's business, however, will be conducted in Mexico - a market that, while expected to not grow as rapidly over the next four years - is showing potential for growth.

"The market did grow fairly steadily up until the downturn, but I think there are going to be lower growth levels, certainly over the next few years, as a knock on effect of the economic situation," Thomas told just-food. "But I do think it is a market that still shows some potential for growth given it has a fairly high percentage of children and young people, and of course young consumers are a key target market for confectionery."

"People are looking towards European brands, Swiss chocolate, products like that. And that trend may well improve as the economic situation improves and disposable income levels start rising. There is no reason why consumers might not turn back to more expensive forms of chocolate and Ferrero would be in an ideal position to take advantage of that."

In order for Ferrero to make its mark, however, Thomas suggests the company might look at acquiring "a few smaller players" in order to gain access to distribution networks and local brands and "consolidate its position" in the market.

Nonetheless, Thomas believes Ferrero has its work cut out if it wants to make a sizeable impact on the market any time soon.

"It'll probably take some time to build up market share. There is quite a lot of competition from local companies because tastes are slightly different in Latin America compared to places like Europe, so I wouldn't expect the competitive situation to change to any huge degree in the near future. They've got a lot of work to do."

Sectors: Confectionery, Emerging markets

Companies: Ferrero, Hershey, Arcor, Cadbury, Nestle, Kraft Foods, Grupo Bimbo, Mars Inc

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