Company Trend Analysis - Nestl? Sheds Underperforming US Confectionery Business - JAN 2018

BMI View: Poor performance it its confectionery business in the US and a strategic move to build its healthy foods portfolio underpins Nestle 's decision to sell its US confectionery business. BMI notes a slowing growth outlook in the US chocolate and sweets sector, which we believe will lead to further consolidation in this segment.

Nestle is looking to sell its chocolate and candy operations in the US, on the back of prolonged weak performance. It plans to have the sale completed by the end of 2017. Nestle's US confectionery business, which recorded sales of CHF900mn (USD914mn) in FY2016 (ending December 2016), comprises brands such as Butterfinger, Baby Ruths , Nerds and Gobstopper. The company's decision to sell also supports our long-standing view that consolidation is needed in the US confectionary market (See: ' M&A Needed To Consolidate Struggling Confectionery Market ', July 21 2016) .

With total revenues for all its US operations of CHF26.7bn (USD27.1bn) in FY2016, the US is Nestle largest market, yet confectionery represents just 3% of total sales. Nestle cited weak consumer demand for confectionery in the US from Q117 to Q317 and attributed the disappointing result for its US confectionery segment to the fiercely competitive environment. Nestle is the fourth largest confectionery business, but continues to fall behind the top three, Mars, Hershey and Mondelez International, at a time when growth in the chocolate market is hard to come by. This has made it difficult for Nestle to grow or even retain its market share in the US confectionery market.

BMI highlights that firms operating in the US confectionary sector face a slowing growth outlook. We project the sales of chocolates and sweets growing by 3.4% y-o-y in 2017, and slow further to 3.2% in 2018, with an annual average increase of 2.8% y-o-y over 2019-2021.

US Chocolate Market Slowing
Chocolate, sweets and similar, sales (USDmn/ % y-o-y)
e/f= BMI estimate/forecast. Source: BMI/National Statistics

The sale of its US confectionery business is in line with Nestle's wider strategy of becoming more health and nutrition-focused. This is attributed to the healthification trend in developed consumer markets, where consumers are switching towards healthier food options and becoming more conscious of the foods consumed (see ' Food & Drink Mid-Year Update: Key Themes For 2017', July 5, 2017). This is prompting big food manufacturers, like Nestle, to build up their portfolio of healthy and nutritious food offerings.

Nestle has been involved in a string of acquisition deals to build its healthy foods portfolio. The company acquired Freshly, an online healthy ready meals food company, in June 2017 and Sweet Earth, a chilled vegan and vegetarian foods company, in September 2017 (see 'Food Manufacturers Respond To Vegan Trend', September 20, 2017).

Who will buy Nestle's US Confectionary Arm?

Among the companies rumoured to be likely to bid for the sale is Hershey, which we believe would be the most suitable fit for Nestle's confectionery business. Hershey, the maker of Reese's, Twizzlers and Hershey Kisses is the leading player in the US chocolate market. Ferrero, maker of Nutella and Tic Tacs, is another likely key contender after having acquired Ferrara Candy, known for Lemon-heads, from a private-equity owner in October 2017. Nestle has previously rebuffed a bid by Mondelez International to acquire Nestle's US confectionery business in 2016. Private equity firms are also expected to be interested in the deal.

Related Research:

  • M&A Needed To Consolidate Struggling Confectionery Market - July 21 2016

  • Mondelez M&A Cooled But Still Possible - October 10 2017