Lindt & Sprungli’s acquisition of US confectioner Russell Stover Candies has come as a surprise to analysts. It is the Swiss group’s first purchase for 16years and one in a developed, rather than emerging, market. However, Lindt believes it would be have been foolish to pass on the opportunity and expansion in developing markets is still on the cards. Hannah Abdulla finds out what prompted Lindt to dust off its chequebook.
Rumours the former owners of US confectioner Russell Stover Candies’ owners, the Ward family, were exploring the possibility of a sale started circulating in February and it did not come as too much of a surprise that Hershey was one of the names linked to the company. Russell Stover is one of the top three confectionery firms in the US after Mars Inc and Hershey itself.
This week, however, Swiss confectioner Lindt & Sprungli confirmed it had swooped to buy Russell Stover in its first purchase in 16 years. Lindt’s last acquisition was also in the US, when it snapped up high-end chocolate maker Ghirardelli. What prompted Lindt, which had kept its powder dry for so long, to pounce?
For Jonathan Feeney, analyst at Athlos Research, the reason is obvious. “It was a rare opportunity to secure a number three position in an important global confectionery market. While the economy broadly has been sputtering, chocolate has been a pocket of growth.”
The North American market is not a new playground for Lindt. The firm had already established a presence in the more premium ends of the market with its Lindt, Lindor and Ghirardelli brands.
However, the location of its latest deal did also cause some surprise. Prior to the deal, analysts had banked on Lindt perhaps making acquisitions in less developed markets.
“We assumed that any acquisition would come in emerging but large chocolate markets such as Russia and Brazil where Lindt’s position is more limited or in the UK, where it lacks production facilities,” Kepler Cheuvreux analyst Jon Cox said in a note to investors this week.
Stefan Kirk of M&A advisors Glenboden, who last year urged Lindt to turn to M&A to boost its top-line growth, admits developing markets might have been a better play. “We believe that Lindt is over-weight in Europe and the US. It would have been preferable to focus M&A in a developing market, especially Asia,” he says. “On the other hand [the acquisition] adds US$500m in sales which would have been very difficult in Asian confectionery M&A.”
So what did prompt the firm to dig deep into its pockets for Russell Stover? And why now?
A spokesperson for Lindt told just-food: “We have been waiting for a long time for the opportunity of an acquisition that showed a perfect match between our two companies and our two brand portfolios. It is not easy to find such a unique chance.”
Marcia Mogelonsky, senior research analyst at Mintel, says Russell Stover will give Lindt a much broader reach in the US market.
“Premium and entry-level premium were both covered through Lindt/Lindor and Ghirardelli. With Russell Stover and its Whitman brand as well, Lindt now has a presence in the mainstream mass market,” she says.
Feeney says Lindt would likely look to “reposition Russell Stover”. He says: “I think this might offer Lindt an opportunity to compete in some lower priced segments, but probably in a more premium way.”
What can Lindt offer to Russell Stover? Lindt can bring quality, branding expertise and stronger pricing, Feeney says.
Mogelonsky says a business like Russell Stover needs “good stewardship”. “Lindt’s strong management, its well established brands and its equally successful Ghirardelli lines demonstrate a knowledge of the US chocolate market at a number of points beyond what a mainstream brand such as Russell Stover would be able to experience,” she says.
Furthermore, Lindt’s plan to operate the brands as two separate entities will ensure the “premium” aspect of the Lindt name is maintained. Mogelonsky says Russell Stover will serve a valuable role as the “mainstream chocolate company”.
“It can keep the integrity and position of Lindt and Lindor as premium products, while reaping the substantial benefits of having a mainstream brand, under a mainstream label,” she says.
So what’s the verdict? Was it a good move? Would Lindt & Sprungli have been better off expanding further in the high-growth markets of Asia instead?
Feeney and Mogelonsky concede it is difficult to come to a conclusion. Feeney says there is an opportunity in the US to premiumise the more mainstream parts of the market to which the Russell Stover deal gives Lindt access.
Mogelonsky says Lindt could have considered making “more of a consolidated effort in Asia”, instead of investing in the US but suggests the company was pragmatic. “In the end, though, it seems to have taken a more conservative approach to acquisitions. Russell Stover was looking for a buyer; Lindt saw an opportunity.”
How does Lindt view Asia, a region where demand for chocolate is on the rise but where it has – so far – a limited presence? “Chocolate consumption does not have a very long tradition and is just coming up in consumer behaviour step-by-step,” says the Lindt spokesperson. “We are working on enhancing the brand awareness of Lindt, namely with our proprietary Lindt Boutiques and Lindt Chocolate Cafés, where we can demonstrate best the Swiss heritage, our know-how and passion for chocolate, as well as the high-quality values and the extensive product variety of Lindt.”
That is not to say Lindt is only growing piecemeal in emerging markets. In March, it set up a venture in Brazil with local player CRM Holding to grow its business there. However, Lindt’s acquisition of Russell Stover perhaps underlines a more cautious approach to growth, with the company turning again to the US, a more developed market but one it knows well and one where it still believes there is opportunity to grow.