As The Hershey Co expands in international markets, attention has focused on high-growth opportunities such as China and Latin America. However, with macroeconomic factors weighing on its international performance this year, the company is wise to also pursue expansion in more stable overseas markets, such as Canada. While relatively small, last week’s Allan Candy Co acquisition is a solid move from the US Reese’s Pieces maker. Katy Askew reports.
Hershey confirmed last week that it has entered into a deal to acquire Canadian confectionery group Allan Candy Co. Hershey originally announced it had signed a purchase agreement with the company in September. Financial details of the transaction were not disclosed but the company did say that the deal will not impact 2014 earnings.
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Allan operates a 170,000 square foot facility located in Granby, Canada, and Hershey said that more than half of its capacity is dedicated to contract manufacturing for the larger US chocolate maker. Allan makes Hershey-owned candy brands Jolly Rancher and Lancaster caramels for North American markets, Hershey revealed.
The move, said to be valued at around US$28m, represents a relatively cost effective way to ramp-up Hershey’s sugar candy capacity. Following completion, Hershey will operate three production sites in Canada. Bulking out its manufacturing capabilities in Canada, the company’s second largest market behind the US, will therefore improve productivity and generate cost savings.
This is in line with Hershey’s strategy to boost the group’s long-term growth profile by optimising its North American manufacturing footprint and expanding overseas capabilities. The company aims to generate annual productivity savings of $60-70m, with savings to be reinvested in brand building and growth initiatives.
Capacity is just part of Hershey’s motivation. Allan Candy operates a number of “iconic” brands in Canada, including Allan Big Food, Laces and Hot Lips.
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By GlobalData“The acquisition of Allan Candy extends Hershey’s ability to serve consumers across Canada by adding a number of iconic Canadian confectionery brands to our portfolio,” Rohit Grover, VP of Hershey Canada, commented.
Founded in 1931, Allan is a leader in the Easter novelty chocolate segment. It is also the largest supplier of candy canes in Canada, selling around 80m candy canes in the country each year. This provides Hershey access to seasonal sales in the country, a segment of the confectionery sector in which Hershey has a limited footprint.
The Allan acquisition will strengthen Hershey’s long-term position in Canada, where it already benefits from highly recognisable brands. This is significant in the context of Hershey’s international growth profile.
Some years ago, Hershey set itself the task of growing overseas to reduce its reliance on US consumers. With a strong hand in the US, the company had a lot of room to grow its business internationally.
High-growth markets like China have caught the eye of commentators. Hershey has worked take advantage of the potential offered by the Asian market through various initiatives. These have included this year’s acquisition of Shanghai Golden Monkey (SGM), a deal that is expected to bring significant distribution benefits.
According to Athos analyst Johnathan Feeney, SGM should add 150bps to sales in 2015. “We’ve examined SGM extensively and believe the value of its traditional-heavy distribution remains widely underappreciated. Given the relative slowdown in U.S. innovation, the 2015 China Reese’s launch could be a significant offset,” he wrote in an investor note.
However, sluggishness in markets such as Brazil and Mexico prompted the US candy maker to lower its projections for international growth in its most recent financial update. The company now anticipates international sales to increase by low double digits – compared to prior guidance of around 15%. This highlights the difficulty of operating in economically volatile emerging markets.
Canada does not boast a rapidly expanding confectionery market. According to researchers at MarketLine, in the five years to 2013 the sector saw a compound annual growth rate of just 1.8%, with total sales rising to C$2.77bn. The industry is forecast to see a similar rate of growth – at around 2% – over the next five years, MarketLine suggests.
What the Canadian confectionery sector lacks in explosive growth potential it makes up for in stability. It is an affluent market where premiumisation trends will benefit Hershey and Allan’s premium-leaning mass market portfolio as well as bolster margins.
In short, purchasing Allan Candy increases Hershey’s exposure to a reliable market where share gains will lend Hershey’s international growth profile a degree of dependability.
