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Cultural divide

Similar origins – different trajectories

Ferrero’s bid for Thornton’s marks the end of just over one century of history, as yet another British chocolate household name will be swept up by a foreign group, following in the footsteps of Cadbury in 2009 and Rowntree in 1988.  This will leave the relative newcomer Hotel Chocolat as the only significant specialised independent British owned chocolate manufacturer and retailer.

Thornton shop windowBoth Thornton and Ferrero began as little corner shops; their history is closely associated with their founding families.  But that is probably where the comparison stops.  Whereas Ferrero developed over the years into a formidable marketing machine, a game changer in the chocolate industry, Thornton remained anchored in tradition.  Oddly, it is that traditional image that appears to have attracted Ferrero; the remaining question being whether Ferrero will manage to brush away the “dusty” and “passé” aspects of that tradition, and fully exploit the concept of “authenticity” that underlies tradition.  Given their strong track-record as powerful communicators, transforming the image of Thornton’s is probably not beyond Ferrero’s reach, but it will be quite a task…

Once an up-market purveyor of luxurious chocolates, Thornton’s appears to have dispersed itself over the years, opening its own retail boutiques and diversifying into other categories of indulgent foods, notably ice cream.  In doing so, at no point did Thornton lead or even anticipate consumer trends, thereby missing the shift in taste preferences towards darker and more bitter chocolate compared to what consumers demanded in the 1980s and 1990s, and leaving the door open for the likes of Lindt to occupy that space.

Retail chains – Thornton’s last (and failed) attempt

With sales volumes declining below the critical mass that would be required to profitably run its large Derbyshire plant, and with insufficient cash-flow to justify its large network of retail boutiques, Thornton decided to aim for a step change in sales volumes by entering large retailers, without fully thinking through how their presence in hypermarkets and discount outlets might impact the brand’s already eroded premium image.  Transacting with giants such as Tesco requires a skill set, supply chain efficiencies and ways of working which Thornton appear not to have grasped, and therefore the mass retailer strategy that was supposed to revive Thornton after many years of continued declined turned out to be a failure.

There are only so many successive profit warnings a company can issue before it loses all credibility with its shareholders.  Thornton was getting to that point, and the arrival of Ferrero in that troubled environment can be considered as the deus ex machina  that will hopefully prevent Thornton’s from going into terminal decline.  By the own admission of Thornton’s former Chairman Peter Thornton, grandson of the chocolate maker’s founder, without Ferrero’s offer “The decline in performance would have continued and I think the decline would have been fatal.”

Radical change for Ferrero too

Yes, this stuff really tastes of hazelnuts
Yes, this stuff really tastes of hazelnuts!

The decision to make a significant acquisition to fuel growth marks a radical change in strategy by Giovanni Ferrero, months only after the passing away of his father who founded the company back in the 1940’s and became Italy’s richest citizen.  Until now, the Ferrero empire had grown organically and its acquisitions were focused on increasing production capacity and securing the supply of ingredients: today Ferrero is the world’s biggest consumer of hazelnuts, with 25% of the world’s annual supply used in its production plants. So why depart from such a brilliantly successful strategy?

Ferrero see value in Thornton's where the latter's shareholders had lost confidence (graph source Google finance)
An offer too good to refuse

Giovanni Ferrero argues that the acquisition of Thornton’s will pave the way for Ferrero to rapidly get a strong foothold in Britain, a market where the per capita consumption of chocolate and confectionery in general is high.  However, it did not take any acquisitions for Ferrero to become extremely successful in Germany where the retail scene is harsh and competitive, so why acquire a struggling company to develop in the UK?  Maybe there is an intention to gradually reduce the group’s reliance on Hazelnuts, the price of which has risen steadily in recent years.  That, combined with fluctuating costs of cocoa caused by failed crops and the risk of a global shortage within a decade, means that some diversification may pay dividends over time, branching out in sweets and other types of confectionery.

Seeking the common ground

In the meantime, it will be interesting to observe how the quintessentially British Thornton company will fold into the Ferrero Group which bears the hallmark of its founding family and of Giovanni Ferrero, heir of the Ferrero dynasty, who appears keen to affirm his strong leadership.  Ferrero have stated that the Derbyshire factory will be maintained, but have not commented on how much may change within its walls. However, as the world continues to gobble up ever increasing quantities of Nutella®, Kinder® chocolates and TicTac® sweets, the underused capacity in Derbyshire may be put to good use.

Importantly, no comment has been issued as to where the British company’s management will be located, nor what its remit will be within the Ferrero group.  That was probably wise as it may take a while to determine how much of a shake-up is required to rectify Thornton’s past errors, put the brand back onto a path for success, and use that platform as a Trojan Horse to accelerate the growth of Ferrero’s product portfolio in the UK.

Meanwhile, an imaginative competitor is succeeding where Thornton failed

Hotel Chocolat: a touch of class
Hotel Chocolat: a touch of class

An interesting example that brilliantly illustrates the value and potential of differentiation is the emergence and rapid growth in the UK of Hotel Chocolat since 2003.  Previously named Choc Express (see how some names can project a sense of premium exclusivity and others convey mere convenience), Hotel Chocolat opened its first retail boutique in Watford (not in London’s Bond Street which is more suited to super-premium brand Godiva), and has focused on the premium end of the chocolate market, with strong visual appeal and a packaging that is miles away from the traditional (boring) box of chocolates that can be found on any supermarket shelf.

Thornton's: traditional or "passé"?
Thornton’s: traditional or “passé”?

To further distance itself from mass market chocolate manufacturers, Hotel Chocolat acquired it’s own cocoa plantation on the West Indies island of St Lucia in 2006, on which it opened the Boucan Hotel four years ago.  So yes, there really is a “Hotel” Chocolat and, more importantly, there is a space on the seemingly mature and crowded chocolate and confectionery market in the UK for a new-comer that arrives with fresh, fun ideas and can satisfy the consumers’ desire for self-indulgence.  Hotel Chocolat received the Emerging Retailer of the Year award from Retail Week, and was also nominated as one of Britain’s CoolBrands®, voted for by marketing experts, business professionals and thousands of British consumers whose input was collected by the Superbrands UK panel.

A quick glance above at the illustrations of this year’s Thornton’s and Hotel Chocolat’s summer collections as published on their respective websites leaves no doubt as to which of those two brands has knocked the other off the pedestal of premium chocolate brands.

So what’s next?

As a privately owned company, Ferrero does not need to disclose its strategy to the world, and nobody at this stage can be certain of what is going through Giovanni Ferrero’s mind.  Does he really intend to revive the Thornton brand?  Can the Thornton retail outlets be used as a channel for a premium Ferrero/Thornton range whilst Nutella, Ferrero Rocher and Kinder® products continue to flow through high-street shops and retail chains?  How important are the Derbyshire factory and the know-how of some of its staff to Ferrero’s global manufacturing foot-print?

My many years spent at Diageo, and in United Distillers before that, have given me a number of opportunities to see how difficult, painstaking and costly it can be to attempt the revival of a tired brand.  Tired brands often enjoy a high level of notoriety, and many marketers will see this as a fantastic short-cut compared to the time and investment it usually takes to build any awareness of a new brand. But what if a brand is renowned for all the wrong reasons?  Changing well anchored perceptions can be more difficult that building a brand image from scratch.  If Ferrero manage that feat with Thornton’s, they will again have proved their marketing genius.

Meanwhile, let us hope that Thornton’s decline will not be accelerated by the upheaval caused by their integration into the Ferrero group, and that the latter will not get distracted by this integration to the detriment of its sharp marketing and sales focus.  That will depend on how well the post acquisition integration will be planned and orchestrated.

Broad smiles or an anxious rictus?

(Photo by Chesnot/Getty Images)

On 15th April, Nokia announced its intention to acquire Alcatel-Lucent in an all-share deal.  Nokia’s Risto Siilasmaa and CEO Rajeev Suri were seen exchanging a warm hand shake with Alcatel-Lucent’s Philippe Camus and CEO Michel Combes, all four gentlemen displaying beaming smiles as the news of their forthcoming merger hit the news wires and sent shock-waves across what is already an extremely consolidated industry.

That news was not completely unexpected: Nokia, and more particularly Alcatel-Lucent, have gone through some very painful and convoluted restructuring exercises these past few years, and are only now feeling the first early signs of some recovery.  Still, each has areas of weakness which the combination of both groups could potentially resolve.  Furthermore, wireless communication is an area that requires astronomical R&D budgets. As consumers begin to embrace 4G communication, the world’s leading providers are already putting the finishing touches to the future 5G, announced for the early 2020’s, and teaming up to finance those developments and rolling them out across the globe makes eminent sense. The business case for this merger is plain to see on paper, but whether the expected benefits will materialise during the implementation remains to be seen: several formidable challenges lie ahead.  None of them impossible, but each one of them pretty tough!

Nokia’s “open Sesame” to the USA may open doors for other players

Whereas Alcatel-Lucent has for years enjoyed strong market presence and excellent relationships with major telecommunications operators, Nokia has struggled to get anywhere in that area, allowing another Nordic company, Ericsson, to share that large and lucrative market with Alcatel-Lucent.  It is fair to say that Alcatel-Lucent’s saving grace in the USA is the fact that the world’s largest provider of wireless systems happens to be China’s Huawei, which is de facto barred from penetrating the United States’ market amid fears of industrial and political spying from a company that has close ties with the Chinese government.

By tying up with Alcatel-Lucent, Nokia will clearly be able to shoehorn itself into the lucrative American market, but whereas there were three non-Chinese suppliers of telecom equipment on that market, Nokia, Alcatel-Lucent and Ericsson, the merger will bring this down to two.  Who will the third provider be that is required for any fair tendering process?  As Huawei is likely to continue being denied access, the Nokia-ALU merger might create unforeseen potential for Samsung, thus far confined to the Asian market, to leap onto the American stage.

Once bitten, twice shy?  Not for Alcatel-Lucent!

Alcatel-Lucent, like most of the major telecommunication equipment providers, is today the result of a number of acquisitions and business integrations.  Alcatel and Lucent’s merger in 2006 triggered the merger of Nokia Networks with Germany’s Siemens.  As an after-shock five years later, Ericsson acquired Nortel’s wireless networking business, prompting Nokia to buy out Motorola’s infrastructure division…

Any M&A integration brings its own share of difficulties and struggles, but Alcatel-Lucent have suffered more than most; by comparison to the vision which was depicted back in 2006, the Alcatel-Lucent merger will be remembered in history as a failure.  Being viewed as a strategic asset by French Governments will have been both a blessing (too big and strategically important to be allowed to fail) and a curse (government intervention which would rather apply a dressing onto the wounds to hide them rather than approve a remedy that would cure the causes).  Almost ten years later, the cultural split between the former French iconic company and its American “spouse” is still prevalent.  Bringing in some “new blood” and an external perspective under the Nokia umbrella may provide a fantastic opportunity to lay a new base for the company’s culture and ways of working, away from the polarised Franco-American divide;  this would enable the combined group’s global ambition and cement the alliance to become a true powerhouse with unrivalled R&D capability.

Alternatively, the French government may continue to block any attempts to shape the Nokia-Alcatel-Lucent alliance as a world leader, by resisting any changes that might have the slightest detrimental impact on French jobs, pursuing the more self-centred goals of their re-election agenda. The weight of bureaucracy combined with restrictive labour-law practices might slow down the transformation of the business, and the new group could altogether miss the opportunity it is striving to capture in such a rapidly evolving market.

Finding ways to win in a particularly challenging sector

For over a decade, the internet and mobile communication sectors have been subjected to a pressure that is uncommon in other services: end users, be they consumers or corporations, expect the performance of their telecommunications and internet services to double in performance every 2-3 years, but without accepting to pay a single cent for that improvement.  Indeed, billions of consumers seem to consider access to the internet to be a natural right, in the same way as we can enjoy sunlight and air to breathe.

“Free” internet is a reality for numerous users, and we see huge resistance against attempts to introduce differentiated tariffs for heavy users compared to average users in the light of data streaming sites that require a very broad and steady flow of data to the end-users.

The frantic race to provide ever faster data transmission speeds without any price increases to users has evidently put tremendous pressure on the providers of the equipment required to provide those exponential service improvements.  This, coupled with the fact that revenues from data transmission did not follow the projections the telecom providers had forecasted a decade ago, means that the key source for potential margin improvement is to reduce the cost of the underlying infrastructure.

This is guaranteed to make life difficult for many years to come for the few telecom infrastructure providers left in this world, but combining that sharp commercial and cost cutting focus with the demands of a global M&A integration and transformation of business culture will indeed be a mammoth task.  Not impossible, but quite daunting nonetheless.

We must just hope that the authorities in Finland, and more particularly in France, do not prove to be the final straw on the camel’s back.  If Nokia-Alcatel-Lucent fail, we won’t be left with much of a choice on this planet.

 

 

 

Corn flakes, or honey and pistachio puff pastries?

After years of turmoil and instability in North Africa and the Middle East since the “Arab Spring”, the region is beginning to be seen my major western investors as again offering good long term potential, or at least worth taking a risk.  The fact that Coca-Cola is building a major bottling facility in Gaza is quite symptomatic of this new perception.

One Bowl of Corn Flakes on a White BackgroundIn late August, the world’s largest breakfast cereal producer Kellogg Co expressed its interest in acquiring all or at least a controlling stake in Egypt’s Bisco Misr, the country’s reputed manufacturer of confectionary, cakes and biscuits.

Within the vast geography that runs along north Africa to the Middle East, Egypt is evidently the focus of attention because its population of close to 90 million offers a huge market potential to providers of inexpensive everyday consumer goods.  Just the right thing for the likes of Kellogg’s breakfast cereals, and taking control of an Egyptian household name such as Bisco Misr therefore makes eminent sense.

However, being the world’s Nr 1 in an important consumer product segment and enjoying over 100 years of company history does not guarantee victory when it comes to seeking further expansion.  Abraaj Asset Management, the middle eastern private equity company founded in 2002 in Dubai now growing towards global presence with hubs in Istanbul, Mexico City, Mumbai, Nairobi and Singapore, is ideally placed to understand the needs and potential of their nearby rapidly developing economies. No sooner had Kellogg revealed their intentions regarding Bisco Misr, that Abraaj jumped into the game and has since kept beating each of Kellogg’s bids.

Bids for Egyptian Bisco Misr reach pharaonic heights

The regulators have set a deadline of 11th January 2015 for the bidding process to reach a conclusion; until then, the world will watch the Middle East’s largest private equity firm fight the world’s leading cereal manufacturer to see who will control what Egyptian consumers enjoy on their table for breakfast.

At the time of writing this article, the two bidders have already made four offers and there will be more as the deadline approaches.  So far, the price both bidders are prepared to pay for BIsco Misr has risen by over 20% since their first bid.

Source: Marketwatch.com
Source: Marketwatch.com

East is east – will the outcome confirm Rudyard Kipling’s vision?

This struggle between one of the western world’s giant household names and a middle eastern powerhouse is interesting in that it may reveal a lot about the region’s sentiment.  Commentators believe that a victory by Kellogg would improve western companies’ confidence and attract further western investment in the region.  On the other hand, Abraaj are committing to maintaining Bisco Misr’s Egyptian identity and its Egyptian management.  Much is written in the numerous articles recently published on this bidding battle about the west’s growing confidence towards the middle east, but not much is said about the other perspective, namely how populations in the Arab world might view the west after the uprising of the Arab spring some years ago.

For many, the west will be remembered for poking the fire and giving the population of many Arab nations the confidence of turning discontent into the outright uprising that spread like wild fire, which the west dubbed “The Arab Spring”.  Spring is the season of new life, a season of clement weather after harsh winters, the flourishing of Nature with the promise of rich crops and prosperity. Instead, having praised the courage and determination expressed in the uprising that toppled governments across the region, many people will feel that the west did not have much to offer as a substitute nor much support to evolve towards renewed stability and governance, propelling many of those countries towards a wide vacuum which has left the door open to the sprouting of every form of extremism.

The relevance of this historic background is that BIsco Misr might actually have a higher value if acquired by Abraaj Asset Management rather than by Kellogg, because there is a risk that some consumers may resent the sale of one of their much loved national brands to an American giant.  Food brands have this in particular that they can achieve the status of a national icon and consumers will then react very emotionally when such brands risk losing that national identity.  British consumers reacted strongly when their treasured Rowntree confectionary company was gobbled up by Swiss multinational Nestlé in 1988. Further highlighting the link between food brands and national identity, the Swiss didn’t react much in 1970 when Tobler, makers of the world famous Toblerone triangular chocolate bars, merged with Suchard, another Swiss company renowned for its chocolates as well as its iconic Sugus fruit candy; however those same Swiss consumers went ballistic twelve years later when Suchard-Tobler was acquired by Germany coffee giant Jacobs and the production of the treasured Sugus candy relocated abroad.

If a similar phenomenon can be expected in Egypt, Abraaj may be able to raise its bid for Bisco Misr beyond the level at which this acquisition could offer the Kellogg company any prospect of a profitable investment.  Clearly, an acquisition by Kellogg would provide Bisco Misr with access to considerable know-how and technology that would contribute to the company’s future development, but the next two weeks will tell us whether this can outweigh feelings of national pride and identity.

Whatever the outcome of the Kellogg Abraaj match, this take-over will set a precedent, either as an open invitation to other western companies to invest in Egypt, or to the contrary as a deterrent:  a polite sign that there is still much to do to rebuild trust towards the west in that part of the world.