Spanish lollipop maker Chupa Chups has embarked on an ambitious expansion plan, aimed at increasing its presence in key international markets such as Japan and Russia. The company is also working on new functional confectionery products, such as tooth-whitening lollipops, as Ivan Castano reports from Madrid.
Spain’s Chupa Chups is thinking big. After a two-year restructuring programme, the quintessential Spanish lollipop maker has embarked on a new and ambitious three-year expansion to boost its presence in international markets.
“We want to be to lollipops what Coca-Cola is to soft drinks or Gillette to shaving,” Xavier Bernat, the company’s president and son of late founder Enric Bernat, tells just-food. “We are fully focused on developing our brands and their geographic potential.”
Chupa Chups is well known for its original “Chupa Chups” lollipop that comes in 40 flavours boasting quirky Salvador Dali-inspired wrapping. But its new strategy focuses on launching new “value-added” products with functional or health-improving benefits. Indeed, the company is cooking up a new recipe for a functional lollipop with tooth-whitening and cavity-protection benefits to complement its existing Cremosa and Cuore di Frutta sugar-free pops. It has also repositioned its Smint sugar confectionery brand as “good for you” and plans to introduce new references under the category, which it markets to young adults.
Geographically, Chupa Chups has identified 22 key markets among the 150 countries where it is present. Its star markets are Australia, Japan, Mexico, the Middle East, Russia and South Korea. It is testing a distribution alliance with Spangler Candy to break into the competitive US market and has a similar commercial venture with Noodle maker Tingyi in China. “Russia is the biggest market in the world and we have been there since 1991,” says a company official who asked for anonymity. “We want to continue consolidating our leadership in lollipops and build on our strong brand image.”
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By GlobalDataLearning from previous mistakes
Chupa Chups hopes its new business model will brighten the future after an erroneous international expansion scheme in 2001 (aimed at doubling sales by cutting prices and investing in advertising) led to losses in 2002, prompting a strategic and management reshuffle. After closing a factory in France, selling non-core businesses and swapping assets between the group and the Bernat family estate, Chupa Chups got its act together in 2003, posting an €8m (US$10.3m) operating profit from a €15.3m operating loss in 2002. It also slashed debt to €45m from €120m and obtained a €75m loan against the family’s Batlló mansion, the famous Barcelona modernist building designed by Antoni Gaudí. Now the company has enough cash to finance its expansion needs without requiring outside funding, the official says. Most of the company’s cash flow will be reinvested in Research And Development (R&D) and new product branding, he adds.
Chupa Chups hopes the initiatives will help it break even this year. It expects net profits to account for 10% of sales by 2007. Sales should rise by up to 7% to €321m in 2004. Meanwhile, the global confectionery market should grow 1-2% annually in the next three years, the official says, so Chupa Chups “will be ahead of the growth curve”.
To build its global brand, Chupa Chups plans to increase advertising spending to publicise new products. The company has traditionally apportioned 15% of sales to marketing but this figure will rise as new confectionery products swirl from its factories. “The marketing will be more professional and less intuitive than in the past,” Bernat notes. Advertising will be more market specific and use fewer “out of the ordinary” messages, even if we have to “produce 20 commercials to select the proper one to be aired”.
Competition heats up
Despite its fresh strategy, Chupa Chups faces a competitive global confectionery market, particularly from major multinationals such as Mars and Tootsie Roll, which are also muscling in on functional foods. It also faces increasing rivalry from small mini-mint producers that the company admits are constantly coming up with new and more complex products.
That is already happening in Russia where mint makers are hitting the market with myriad new products. “The mint sector is booming and there are plenty of options to compete with Smint,” says Alexei Yazikov, an equities analyst with broker Aton Capital in Moscow. However, Chupa Chups’ strong presence in Russia should help it overcome competitive challenges, he says.
Chupa Chups entered Russia in 1991 and it now has a factory in St. Petersburg. The plant is one of the company’s biggest, alongside Villamayor in Catalonia. Chupa Chups churns out four billion lollipops a year. “They are very popular here and kids can access their products in every supermarket, kiosk or corner shop,” Yazikov notes. People go for something familiar and they’ve been here for more than 12 years.” He agrees that Russia’s sugar confectionery market (seen growing 10% annually) is booming and that international companies have been expanding aggressively, buying up local brands to snatch their piece of the pie.
Keeping it in the family
Multinationals’ deep pockets (and advertising spending power) is also helping them reign in the market, he adds, Chupa Chups being a case in point. Andy Smith, head of European consumer products analysis at Smith Barney research in London, says Chupa Chups’ high-innovation muscle and strong business record should help it succeed in future. Its interesting product mix also makes it a tasty long-term acquisition target.
“Their portfolio should be a lot more profitable than it is now and they are a bigger international player than they make themselves out to be,” Smith says. Chupa Chups’ expansion bid in functional foods is auspicious, he adds. However, the company will have to become adept at meeting the scientific obstacles involved in making such products tasty. “Experiments with functional foods have had a very patchy track record. Breath freshening, teeth whitening, extra minerals and vitamins, all of these will have resonance with consumers but it’s going to be challenging to make the products taste good,” Smith says.
Bernat is aware that “a functional candy is not fantastic unless it tastes great”, and the company is working to ensure such products pop out of the lab. Despite the high research expense involved, Bernat does not plan to team with another food player to develop the new confectionery. He also plans to keep Chupa Chups en la familia: “We have been successfully independent for more than 45 years. This is one of our most cherished family values and we plan to continue in that direction.”