In the spotlight - Arca takes bigger bite of snacks market with double-deal
Arca is the second-largest Coca-Cola bottler in Mexico and Latin America
Arca Continental's decision to acquire US-based Wise Foods and Ecuadorian snacks firm Inalecsa could come as a surprise, given that the Coca-Cola bottler's interests are primarily in the beverage sector. However, Michelle Russell suggests, the Mexican firm is likely to use the acquisitions to take its Mexican brands into new markets while also leveraging the capabilities of Wise and Inalecsa to boost its Mexican snacks presence.
Arca is the second-largest Coca-Cola bottler in Mexico and Latin America. It has operated in California and Texas for 25 years and is also active in Ecuador where the company generates around 11% of its annual sales.
The company's snacks presence, however, is currently limited to Mexico where it manufactures and distributes snacks under Bokados, the third-largest snack brand in the country.
Through its Inalecsa purchase, the bottler will take on some of Ecuador's leading snacks brands including Inacake, Tigreton, Tortolines, Riskos and Tornaditos. The firm employs 400 people and produces 8,000 tons of product for sale in Ecuador and Europe.
According to Euromonitor, Inalecsa is the largest local snacks producer in the country and has the fifth highest selling snacks brand (Tortolines) in Ecuador.
"Inalecsa is an Ecuadorian firm that has been in the country for over 20 years," the research firm tells just-food. "It is well-known and has many products that have strong positioning in the Ecuadorian market. The firm has the second highest sales in sweet and savoury snacks, with 22% of the market in value terms. In addition, Inalecsa is constantly innovating and has begun offering products with healthier ingredients like canola oil."
The Ecuadorian snacks market grew by 1% in 2012 in volume terms and 5% in value terms, and is expected to continue to grow "steadily", Euromonitor says, due to "stable consumer demand" primarily from younger consumers and lower-income consumers.
Both deals are expected to net Arca sales of close to US$400m in 2013, but it is the Wise Foods deal in North America that may prove the most lucrative for the firm.
Wise Foods, which Arca bought from private-equity firm Palladium Equity Partners, is the leading regional snacks brand in New York and number two overall brand. Headquartered in Pennsylvania, the company's products are distributed via a system of independent distributors and five company-owned distributor branches. It employs around 850 staff and produces nearly 40,000 tons per year.
Arca seemingly has major growth plans for Wise, describing the business as "a leading regional salty snack brand with a strong core market and national expansion potential".
But is Arca right to invest in the US market, one of the most mature and competitive snack markets in the world, host to a number of strong snack brands?
Arca CEO Francisco Garza-Egloff believes so. He says the acquisition provides the company with a "solid platform" that he says will bring innovation to its portfolio, product and brand expansion, in addition to "beneficial synergies and the sharing of best practices".
The Wise deal, he says, will "greatly expand" Arca's current operations and strengthen its marketing capabilities in its related businesses in the US.
"[The US] is extremely mature and saturated," IbisWorld analyst Agata Kaczanowska tells just-food. However, she adds: "[The Hispanic] segment of the market has been growing and is expected to continue to grow, so if the company can play its cards right and do the appropriate amount of marketing without going into the red, there's potential for them in the market."
There is considerable potential for Arca to expand Wise's line-up of Mexican snacks. This would enable the firm to offer a broader selection of ethnic products to the US Hispanic population, which has grown by around 43% in the last ten years, according to global industry research firm IbisWorld.
"We've seen quite a lot of growth in ethnic foods, especially in Hispanic foods and the reason for that is because the Mexican population in general has ballooned in the US during the past decade or so," Kaczanowska tells just-food.
"Not only is this the target audience for these food companies but also Hispanics have friends that share foods and cultural sharing that is leading to more American having Hispanic foods on a regular basis and buying them."
Euromonitor concurs that Arca's acquisition will position the company to benefit from growing demand for Hispanic foods. Arca could also capitalise on Wise's value credentials by adding new flavours and variants, the analyst suggests.
"Wise does have value going for it ... and it will likely have more areas of the country due to stores like Family Dollar, which are doing really well right now and are rapidly becoming a one stop shopping channel for consumers."
In this way, Arca is also well-positioned to grow Wise's existing brands by developing from regional to national distribution.
Additionally, Euromonitor adds that the deal will benefit Arca's Mexican portfolio: "Taking Arca's products to the US and taking advantage of the current position that Wise enjoys in the market, and also learning more about new flavours, new types of snacks and having a more extensive portfolio for Mexico in the long run."
Kaczanowska believes Arca might potentially consider future acquisitions in order to bolster its position further.
"[Acquisitions] are possible, particularly with companies entering the US market that are well-established outside. Companies tend to test the market and see what works and what doesn't work before fully integrating into it."
This is something she believes Arca is doing through its acquisition of Wise Foods.
"They're testing the US market to see if there is growth potential for them there ... it doesn't necessarily mean they are finished with the Mexican market."
And so as the Coca-Cola system in Mexico consolidates, it seems inevitable that Mexican bottlers, flush with cash, will be scouring for expansion opportunities. For Arca, this means taking a confident bite out of the snacks market, one which it clearly now sees a large part of its future lies.
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