In Silver Blaze, the key clue that allowed Sherlock Holmes to solve his case was a dog that didn’t bark in the night.
Something similar could be said of Nestlé, as it ponders its response to Kraft’s £10.2bn bid for Cadbury. Paul Bulcke, Nestlé’s chief executive, took refuge in silence when asked whether he intended to get involved. “Allow me not to answer this; it would only increase speculation,” he said.
There’s more to this than bid etiquette. Kraft’s success would profoundly challenge Nestlé’s global strategy. It would deny the Swiss food company, once and for all, the right to sit at the top table of confectionery makers, an aim enshrined in its acquisition more than 20 years ago of the Rowntree business. If Nestlé wants to stay in the game, it must act. By choosing not to, it would be tacitly admitting that its corporate strategy has changed and that it will have to look elsewhere to fulfil its global ambitions.
Let’s go back a bit. In 1988, the year Nestlé acquired Rowntree (which had only just become a public company), the world of confectionery manufacturers was a very different place. For sure, then as now, it was populated by many famous brands, but these brands were, by and large, privately owned or closely held – typically by paternalistic family firms which had been doing the same thing for generations. In the United States there was Mars and Hershey’s; over here Cadbury, Rowntree, Terry’s; in Italy, Ferrero; in Switzerland, Jacob Suchard and Lindt; and so forth.
Nestlé was the exception that proved the rule. True, in origin, it was just like the rest: a family-run business founded by an individual entrepreneur – in this case Henri Nestlé. But by the Eighties, it had largely shed this heritage. Although big in chocolate, it was also a diversified food company, with an interest in cosmetics. It was well spread globally and was an evolved public company whose strategic aims were uninfluenced by philanthropic sentimentality or narrow family interests. In the acquisition of Rowntree, it could be argued, Nestlé took the first real step to becoming a global confectioner. Certainly, it fired a starting pistol whose shot has reverberated ever since. The race towards global consolidation in the confectionery business is only now moving into its final phase.
If that is so, you might reasonably object that Nestlé has not been particularly effective in achieving its aim. Even now it has only 7.6% of the worldwide market, according to Euromonitor, compared with, say, Mars – much later into the acquisition game – which now holds nearly 15%. You might also note that global consolidation in other sectors of the food industry, such as water, savoury snacks, pet food and ice cream, has proceeded much more smoothly, even though the process began more recently.
My observation on the first point is that being a catalyst doesn’t necessarily make you a winner. And on the second, that Nestlé (and everyone else for that matter) seems to have underestimated the formidable barriers blocking globalisation in the confectionery sector. I mean by that not only the problems represented by family ownership and regulatory issues but, until recently, the vertical organisation of the industry into chocolate, sugar and gum.
Nevertheless, whatever the mitigating circumstances, Nestlé the would-be premier global confectioner has allowed itself to be overtaken by events. Mars’ landmark acquisition of Wrigley in 2008 – which made it the new global supremo – must have been a profoundly unsettling event. And yet there was still room for manoeuvre. A successful acquisition of Cadbury by Kraft closes that off and, effectively, ends the consolidation game. The Kraft-Cadbury combo would, according to analysts, squeeze Mars into second place. Such would be the gap between the two leaders and Nestlé at number three that no further acquisition could bridge the gap – not even an improbable merger with the next biggest player, Hershey’s, which holds a near 5% market share.
A break-up deal, with Hershey’s taking Cadbury’s European confectionery interests and Nestlé the fast-growing gum business, starts to sound a lot more interesting. The Kraft proposal looks a good fit geographically and sectorally, but it has got a potential weakness.
But that does not mean Nestlé has no options. It has two: it can bark, or stay silent. Remaining silent means, in effect, that it has conceded. There is some logic in pursuing this course of action. Under chairman and former CEO Peter Brabeck-Letmathe, Nestlé has substantially redefined its corporate mission. It now prefers to be seen as a provider of “wellness” and nutrition. Arguably, confectionery does not fit comfortably into this strategic redefinition.
Alternatively, it can stay in the game by making life as difficult as possible for Kraft. Nestlé is in no position to act as white knight to Cadbury – there is too much overlap in their confectionery interests. But a break-up deal, with Hershey taking Cadbury’s European confectionery interests and Nestlé the fast-growing gum business, starts to sound a lot more interesting.
Unusually for a deal of this size the Kraft proposal looks a good fit geographically and sectorally with little to worry about from the regulator. But it has got a potential weakness: money, or rather the lack of it. By common consent, Kraft is playing a weak opening hand. Its bid is low, at 745p a share (analysts say 1000p would be nearer the winning ticket) and the cash element in the offer, at 40%, is too small to be tempting. Kraft is a cash-strapped company, already heavily indebted after buying Danone’s Lu biscuit operation. The multi-billion dollar question is: how far is Kraft able or prepared to go in seizing its prize?
Perhaps only Nestlé can help us answer that question. Whether or not it chooses to will tell us all we need to know about its future intentions in the confectionery sector.