What is the strategic significance of Hershey’s recent acquisition of Brazilian snack maker Visagis? John Kauke and André Williamson, Latin America specialists at Promar International, tackle this question. Their assessment builds on Latin America Snacks to 2010, a study Promar has just released.

Just last month we ‘prodded’ Hershey for not being sufficiently aggressive in Latin America. “The window is closing,” we insisted, for ‘Big Outsiders’ like Hershey to stake their ground in the region. And as it turns out,

Company Profile:

Hershey Foods Corporation

Hershey did. But how effective will Hershey’s move prove to be?

Hershey is the typical ‘Big Outsider:’ it has a strong presence in its home market (the US), but has traditionally done little beyond export to most other markets. With the exception of Mexico, Hershey’s efforts during the Latin American boom in the 1990s were all export based, and fairly small.

Hershey did intensify its activities in Brazil a few years ago, but continued to do so through exports – and this position must have come under increasing pressure as the Brazilian Real entered a free-fall, pricing Hershey’s products out of the market. The company may well have faced the choice to pull out altogether (squandering what brand equity it had built), or bite the bullet and ‘buy in’ to local production and distribution by acquiring a local player.

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By GlobalData

Now Hershey has bitten the bullet-at least a little of it.

Its US$18m purchase of Visagis, a traditional snack maker located near Brazil’s largest market, though fairly small, significantly changes Hershey’s equation as it signals a stronger commitment to the market.

The pluses:

  • Hershey gets a local production base in Brazil, near the country’s largest consumer market (São Paulo);
  • Hershey gets a company with some established (though limited) distribution channels;
  • Hershey can leverage Brazilian production into other Mercosur markets, duty free;
  • All else equal, this purchase is substantially cheaper in dollar terms than it would have been during the frenzied acquisition phase of the mid-1990s, thanks to the plummeting of the Real.

The minuses:

  • Visagis is not a major snack player, and barely qualifies as a medium-sized one. Granted, acquisition options have thinned considerably after the M&A activity of the last five years, but still.
  • As a corollary to this, Hershey will now directly face much larger, well entrenched, and better-positioned competitors. This will take stamina.
  • Hershey missed the opportunity to pick up some of Visagis’ specialty snacks – such as the panetonne line. True, this product is alien to Hershey’s current portfolio, but it is a product by which Visagis – with its Visconti brand – is well known; also, it is a more easily defensible niche market (certainly more so than chocolate, which is dominated in Brazil by three major companies that combine for over 90% share); and it means the loss of an opportunity for cross-pollinating Visagis’ own products elsewhere (for example, pushing the Panetonne as a seasonal alternative to the fruitcake in the US). By not taking some of the best-known products under the Visconti brand, Hershey is giving up some brand equity.
  • At the same time, Hershey appears to have failed to fully take control of the Visconti brand; according to public releases, it appears that the baked goods operation Hershey did not purchase will continue to use the Visconti name on its products.
  • By starting so small, Hershey will be at a bargaining disadvantage with local retail giants (compared to its competitors). And the distribution channels it acquired are unlikely to give it much penetration of the fragmented retail sector.

Overall, we think that more Latin American acquisitions need to be near the top of Hershey’s priority list. Moreover, we’re not sure just how much of Hershey’s purchasing decision was ‘reactive,’ (that is, driven by losses induced by foreign exchange shifts) vs. how much it was based on a pro-active, strategic assessment. A little bit of both, perhaps. Throw in a heavy dose of Hershey’s legendary caution and you get a small step, although a big one would have been preferable.

Still, a commitment is better than no commitment at all. From here, Hershey needs to aggressively build an ‘international identity’ through a commanding presence in this complex, expanding regional market.

This comment builds on an extensive new report published by Promar International, which can be reviewed in the just-food.com research store by clicking here.

To view related research reports, please follow the links below:-

The Future of Snack Markets in Latin America

The World Market for Confectionery Products

The Market for Confectionery in Latin America