For decades, Ferrero International carved out a prominent and envious niche in U.S. confections selling its iconic line of Nutella chocolate and hazelnut spread, golden wrapped Ferrero Rochers and minty Tic Tacs.
But in recent years the premium candy giant has double downed on its U.S. presence through a series of high-profile deals topping $5 billion in value even while its competitors flee from the space or minimize their dependence on sweets as consumers turn to healthier snacks.
While the ambitious bet appears to be a radical departure from its conservative past or in stark contrast to current food trends, Ferrero's North American chief insists it's an opportunistic move and one that better positions the 73-year-old company for success.
"For us to be a global company, we have to have a good presence here in the United States," Paul Chibe, president and CEO of Ferrero North America, told Food Dive. "The United States has been a market where we had an opportunity to grow and kind of reach the same levels of development that we (have) in other parts of the world."
The family-owned Ferrero traces its roots back to 1946 in war-ravaged Italy. For much of its history, Fererro focused its attention on developing signature brands and carefully nurturing them through innovation — all while maintaining a cash-rich balance sheet, little debt and eschewing acquisitions in sharp contrast to other competitors in the confectionary space.
While the company remains focused on innovation, Ferrero has made M&A a more prominent part of its business strategy in an effort to exponentially boost revenue and keep the company competitive with larger candy giants such as Hershey and Mars.
Executives at Ferrero have set an ambitious goal to increase revenue by at least a methodically calculated 7.33% annually in order to double the size of the company in a decade — a target that likely would have been difficult to achieve with its previous roster of well-established brands.
"I wouldn't say that we've departed from what we were doing before. We're just doing more of it. We thought there was an opportunity to take these great iconic brands and turn them around and put them back on a growth track and do the things we're good at."
President and CEO, Ferrero North America
As other CPG companies reposition their portfolios, Chibe said Ferrero "took advantage" of the opportunity to acquire several mainstream brands ubiquitous among consumers in U.S. candy to complement its existing lineup in the $2.1 billion premium segment where it has a commanding presence. The company's success has been built on Ferrero's focus on innovation, quality and investing to foster long-term growth — a practice Chibe said will be implemented across its basket of recently acquired sweets.
"I wouldn't say that we've departed from what we were doing before. We're just doing more of it," Chibe said. "We thought there was an opportunity to take these great iconic brands and turn them around and put them back on a growth track and do the things we're good at."
Taking advantage of an opportunity
Ferrero's acquisition binge was punctuated in 2018 by its $2.8 billion purchase of Nestlé's U.S. chocolate business, a deal that added more than 20 American candy brands including Butterfinger, Baby Ruth, 100 Grand, SweeTarts and Nerds to the fold. A year earlier, it purchased Ferrara Candy, the maker of Brach's, Lemonheads and Red Hots, for a reported $1.3 billion, and Fannie May Confections for $115 million.
The deals helped Ferrero dramatically increase its size. It leapfrogged Mondelez to become the U.S.'s third largest candy company, according to Euromonitor International, with sales in the year ended August 31, 2018 of roughly $12 billion, an increase of 2.1% from the prior year.
Despite its recent deal-making in candy, Ferrero has looked for other complementary areas to expand its business. In April, Kellogg agreed to sell its cookie business and a host of other snacks and baked goods, a collection that included Keebler and Famous Amos, to Ferrero for $1.3 billion — the Italian company's first foray into the rapidly growing snack space in the United States.
Erin Lash, a director of consumer equity research at Morningstar, told Food Dive that as large CPG food companies focus on higher-growth areas or divest underperforming assets, Ferrero has been among the biggest beneficiaries.
"That's created an opportunity for consolidators like Ferrero to potentially scoop up assets," Lash said. "There are opportunities for growth, particularly behind firms that are investing behind product innovation" in areas such as taste, packaging or new offerings.
Ferrero's decision to spend billions on confections comes as companies such as Nestlé move away from candy or minimize their dependence on it through their own deals — a divergence that doesn't worry Chibe.
Hershey purchased SkinnyPop owner Amplify Snack Brands for $1.6 billion in 2017, and acquired Pirate Brands, the maker of better-for-you snacks such as Pirate's Booty, from B&G Foods for $420 million last September. Two years ago, Mars took a minority stake in healthy snacking company Kind and expanded its presence in pets, where it is already the biggest pet food manufacturer, with the addition of animal hospital chain VCA for about $7.7 billion.
"When you are a pure-play company (like Ferrero) it's easier to remain focused against your business than ... a company that is in 10 or 15 segments," Chibe said. "We're more focused and that focus permits us to pay specific attention to one business, and that gives us an opportunity."
Replicating prior success
But whether Ferrero will be able to replicate its past successes this time around is far from certain despite the potential growth opportunities that exist in the market, analysts said.
Bahige El-Rayes, a partner in the consumer and retail practice of A.T. Kearney, said Ferrero has a reputation as a secretive company that is able to shrewdly operate businesses under its oversight and do so efficiently and profitably.
A Forbes article in 2018 estimated Ferrero's profit margin at a healthy 10%, and reported at the time that it had billions of dollars in cash sitting its coffers, providing it plenty of financial powder to carry out some of the deals that have recently taken place.
"I have a feeling this is not going to have a particularly happy ending. These large, longstanding stakeholders aren't offloading these brands capriciously. They view them as being played out. My guess is they don't see organic growth as possible as you look toward the future, so they are taking their chips off the table."
Director of retail studies, Columbia University's business school
Ferrero has shown it can operate three big brands in the U.S. successfully, but now it is making a bet that it can do the same with a much bigger portfolio and do a better job than its previous owners, El-Rayes said. At the same time, it has become an even bigger global company operating multiple brands across a more expansive geographic footprint, a move that provides its own set of challenges, including varying consumer preferences across different regions.
"They’re in the confectionary business and there is no shame in it. They don’t need to be following the trends that everybody else is doing because I know every other company is saying that that business is not growing and is struggling and has weakness and consumers don’t want it," El-Rayes said. "But there is still growth in that segment. They can take share from others.”
Candy sales are still edging higher even as consumers gravitate toward healthier products such as bars and nuts, and the public decreases its sugar intake amid concerns over its impact on health.
Chocolate candy sales rose 0.7% to $14.2 billion in the 52-weeks ended April 21, well behind increases during the same period for gum of 2.4% and non-chocolate of 2.1%, according to data from IRI. Still, consumers are eager to indulge, leaving plenty of opportunity for Ferrero to grow and nab market share from its powerful rivals.
El-Rayes said whether Ferrero's decision to "double down on confectionery" pays off will depend on how well they are able to execute.
Candy is notoriously competitive, leaving branding and innovation as the primary ways for a product to separate itself from its competitors that are more or less making the same type of indulgence. Ferrero also has long enjoyed robust margins, but adding less premium products to its lineup could make it more difficult for the company to sustain them at the same robust levels.
Ferrero, El-Rayes said, will not only need to incorporate its highly roboticized and automated production plants to the confections it has acquired but innovate the lineup by introducing new packaging, extending brands through new offerings and refreshing recipes of already popular items — all while navigating rapidly changing consumer preferences.
The U.S. market is attractive to foreign players because of its huge size, said Mark Cohen, the director of retail studies at Columbia University's business school. Still, many companies across multiple industries, including confections, find that moving from one region to another like the U.S. can bring its share of unexpected challenges.
"I have a feeling this is not going to have a particularly happy ending" for Ferrero, Cohen told Food Dive. "These large, longstanding stakeholders aren't offloading these brands capriciously. They view them as being played out. My guess is they don't see organic growth as possible as you look toward the future, so they are taking their chips off the table."
Making sure fast growth doesn't sour
Chibe acknowledged that while Ferrero is growing fast, it's incumbent upon the sweets maker to carefully integrate and properly tap into synergies from its spate of recent deals.
"We've been growing significantly and that brings pressure points in the organization," he said. "It's just making sure we appropriately manage our growth and meet our customer and consumer needs while we are growing."
Chibe added that unlike large CPG food manufacturers who are subjected to short-term financial targets from public shareholders or dozens of brands competing for their attention, Ferrero can afford to be more patient. It can take a longer, more methodical approach to identifying ways to grow and create value.
"We're able to take our time and do things right. Sometimes the pressures of a public company make people short-sighted and do things that may not really be beneficial to businesses in the long term," he said. "We don't have that constraint."
In recent years, Ferrero has expanded the reach of Tic Tac with a gum variety, and just last month launched a mint that is 50% larger than the original and provides a longer-lasting flavor. In September, the company is rolling out Ferrero Golden Gallery Signature, a premium assortment of boxed chocolates.
The Kinder egg started hitting U.S. shelves in late 2017 after being sold for decades around the world, and American consumers can expect to see the Kinder Bueno — a milk or white chocolate covered wafer filled with hazelnut filling and drizzled with dark chocolate — that is popular in Europe, make its way to the U.S. in November.
It also has branched out into retail in the U.S. in 2017 with Nutella Cafes, and today operates locations in Chicago and New York.
"They're a big company, privately owned, doing $12 billion in worldwide sales," Howard Dorman, a partner at the food and beverage practice of Mazars USA, told Food Dive. "If they're going now try to relate to a younger market and new audiences, they're going to need continue to demonstrate that they can innovate."
Despite the pressure, Ferrero has taken a patient and measured approach in making changes to the brands it acquires.
In February, a revamped Butterfinger hit the shelves with higher-quality ingredients such as jumbo peanuts and a higher percentage of cocoa and milk in the chocolate coating. At the same time, Ferrero cut ingredients including the preservative TBHQ and hydrogenated oils. The changes reflect consumer demand, especially from millennials and Generation Zers, for more quality ingredients and ones that are recognizable and viewed as better for you.
A similar overhaul for Baby Ruth is in the works, with an updated recipe, a switch from smaller oil-roasted peanuts to jumbo-sized ones and new packaging that better preserves its freshness due out next year.
Chibe declined to outline Ferrero's long-term road map — not wanting to "lay out my strategy for Mars and Hershey" — on what other changes, if any, the company would make to the brands it has added to its portfolio or whether more acquisitions are in the pipeline for a company that once seemed destined to avoid them.
Regardless of its long-term plan, Ferrero now appears better positioned to compete with the confectionary giants that have long been synonymous with candy in the United States. Chibe even discussed the possibility that one day Hershey and Mars could be the ones chasing Ferrero to be the top candy company.
"They are still significantly bigger than us in this market but ... 30 years from now maybe it could be a possibility," he said. "You just have to stay focused on building your business day in and day out. With that long-term view, maybe some day we'll get there."