Oetker has managed to grow share of Canadian pizza market

Oetker has managed to grow share of Canadian pizza market

Dr Oetker has taken over McCain Foods' North American pizza operations. But, with competition fierce and with growth in the sector hard to come by, has the German food giant made the right move? Hannah Abdulla explores.

Late last month, German food firm Dr Oetker announced it had swooped to buy McCain Foods' pizza operations in North America. The deal included two plants - one in New Brunswick, Canada and the other in New Jersey.

The purchase takes Dr Oetker up to three pizza production plants in the region. The most recent opened in May this year in Ontario, Canada and has a capacity to produce 50m pizzas a year. In a category where growth is sluggish at best, what prompted Dr Oetker to buy two more plants so soon after opening a facility? In contrast to some of its rivals, Dr Oetker has managed to increase sales in recent years.

In frozen pizza, Dr Oetker is the fifth-largest player in North America, behind McCain at four, then General Mills, The Schwan Food Co. and market leader Nestle, which dramatically increased its market share after the US$3.7bn takeover of the then Kraft Foods' North American frozen pizza business in 2010.

However, figures from Euromonitor indicate the frozen pizza market in North America has grown slowly in recent years, from $5.2bn in 2009 to $5.36bn in 2014.

Speaking to just-food, McCain said other parts of its business had stronger growth prospects. "We decided to sell our North American pizza business so that we could focus on other areas of our business with better opportunities for growth. Our North American pizza business represented a small part of our total business," a spokesperson said.

Lianne van den Bos, food analyst at Euromonitor, says McCain was seeing its share of the pizza market decline, suggesting its "mass-market" approach may have hit sales. In contrast, she asserts, the more premium nature of Dr Oetker's brands has appealed to consumers - particularly in Canada.

"The healthier option with a thinner crust and healthier toppings is doing well against the typical American big crust with lots of cheese and meat option. There is a higher demand for a more quality pizza rather than a lower price-point and promotional offers," van den Bos explains.

As a result, Dr Oetker has seen its market share increase, which is likely to have prompted its investment in production. On the other hand, Nestle and Schwan, as well as McCain, have seen their market share decline. While McCain wanted out, Dr Oetker saw an opportunity to boost its position in Canada through M&A, similar to Nestle's Kraft deal in the US four years ago.

In Canada, Nestle holds 41% of the frozen pizza market but the addition of number two player McCain's sales will see Dr Oetker grab the number one spot, van den Bos says.

Announcing the deal, Dr Oetker chairman Richard Oetker said the acquisition "suits our strategic goal of market leadership in Canadian frozen pizza market". However, the company declined a request for further comment on why it bought the McCain assets and its plans for them.

One key question for Dr Oetker is what it plans to do with the brands it is acquiring from McCain. Van den Bos believes Dr Oetker plans to "gradually phase out the McCain name and rebrand as Oetker" - a brand with a "good quality reputation in Canada" and one that offers a healthier "thin-crust style" approach that appeals to the Canadian consumer. But the McCain brand, despite signs of falling demand in recent years, resonates with consumers in Canada - something of which Dr Oetker must be aware. 

"McCain has been around for a few years and has built up that brand awareness. In a typical Canadian household, people know the McCain name," van den Bos says.

In its brief statement announcing the acquisition, Dr Oetker also said the deal would boost its business in the US. Chairman Richard Oetker claimed the deal would help "strengthen our position" in the north-eastern part of the US.

However, some analysts warn Dr Oetker is expanding in a category that have seen sales come under pressure as economic conditions in the US improved.

"When consumers had less disposable income during the recession, they tightened food budgets and bought frozen pizza as a cheap and convenient meal to eat at home, boosting demand. However, as the economy recovered, consumers returned to eating at expensive restaurants instead of buying frozen foods," IBISWorld analyst Olivia Tang observes.

Tang, however, does seem some bright spots for the frozen pizza category in the US. "More Americans will be busier as they return to work, prompting demand for convenient meals to prepare at home. Healthy and gourmet frozen pizza options will also grow in popularity, boosting demand," Tang says.

Van den Bos believes innovation will be vital for Dr Oetker's expanded business. The array of options available to the consumer - chilled lines, delivery, restaurant - means product development will be vital, particularly facing rivals like Nestle in a slow-growth sector.

"Competing so closely with Nestle, Dr Oetker can't keep selling the same product offering. It will have to offer gourmet-style, bite sizes, sharing pizza and create-your-own options. This will keep it dynamic," she says.

Sam Allen, an analyst at Canadean agrees. He says Dr Oetker has gone down the "health" route - with its ranges being lower in calories than its main market rivals - but may need to look at developing more indulgent options.

"As health is not a prime driver of consumption they should focus their efforts on more influential consumer desires. As much of the market is driven by consumers seeking a convenient, comforting treat, manufacturers should provide products offering indulgent qualities."

But Dr Oetker is showing signs of investment in NPD. In July, the firm announced an it would build a facility in Germany to "develop new food processing technology".

Above all, while the pizza markets of Canada and the US may not be growing rapidly, they are still markets where consumption is high. Van den Bos says Canada is the fourth-largest consumer of pizza globally. And in the US two of three households consumed frozen pizza in 2012 according to the US National Frozen Pizza Institute.

Looking ahead, while Dr Oetker said the McCain deal would benefit its business in the US, it is not one of the five largest players in the country's pizza sector. Van den Bos says Dr Oetker may be looking at  leadership in the US but that will be a challenge, with the market "very consolidated". For now, she says, consolidating its new leadership in Canada seems to be "the clear focus" for Dr Oetker.