Strategic acquisitions in Russian confectionery: join the queue…

Author: Irina Kazanchuk

Date published: 11 Jan 2008

The Russian confectionery market is likely to face further consolidation, led by Nestlé, Wrigley and Kraft. 2007 proved very eventful in terms of acquisitions and the opening of new production facilities by multinational corporations. That said, the redistribution of shares in the Russian confectionery market is far from finished and all the major players are still contemplating their rivals' next move.

Why acquire local confectionery players?

The Russian confectionery market is proving much more dynamic than those of Western Europe, witnessing constant value growth of more than 3% between 2006 and 2007. It is also the largest market in Eastern Europe, with a value approaching US$8.4 billion at fixed exchange rates. Moreover, retail value sales are forecast to grow at a CAGR of more than 5% in constant value terms over 2007-2012, with chocolate confectionery realising the strongest CAGR of nearly 7%. This strong performance is due to the growth of premium chocolate confectionery, which has been supported by the rising disposable incomes of Russian consumers.

The Russian confectionery market is characterised by the strong position of local producers offering a wide variety of products. Russian consumers are extremely loyal to local brands, as they are considered to be less “artificial”, fresher and using recipes that appeal to the domestic populace. As opposed to other consumer goods markets (especially non-food) where foreign products are considered of higher quality, many packaged foods of local origin enjoy a high degree of consumer loyalty. This is particularly true of chocolate confectionery.

In addition, many mainstream confectionery brands carry with them a high emotional value to Russian consumers. Many adult consumers are still very sentimental about chocolate confectionery brands such as Alenka, Mishka na Severe and Karakum as they invoke childhood memories.

Recent M&A developments

Wrigley hit a premium chocolate confectionery jackpot by buying Odintsovskaya KF OOO, with its A Korkunov brand, in January 2007. A Korkunov is a very popular chocolate confectionery brand in Russia. With this acquisition, Wrigley indicated its intention of becoming a significant player in Russia's chocolate confectionery market.

Nestlé proved quick to react by buying Ruzskaya Confectionery, a producer of a wide range of chocolate products under the ?omilfo and Ruzanna brands. With the help of the high-quality image of these two brands, Nestlé is planning to complement its premium chocolate brand portfolio in Russia.

Finally, in a recent interview with Russian business magazine Vedomosti, Cadbury Schweppes stated that it plans to use its existing production facilities to grow organically in Russia. However, fierce competition might push the company to resort to the acquisition of local players as it has done in other developing markets such as India.

Who is next?

Currently, four of the top five Russian confectionery players are multinational companies, with the exception of market leader Obiedinenye Konditery UK OOO. The domestic player held a 16% share of retail confectionery value sales in 2006, followed closely by Nestlé on 12%.

Obiedinenye Konditery has achieved such a strong position by uniting the facilities of 20 major local manufacturers to create a well-developed production and distribution infrastructure. The company certainly represents an interesting acquisition target, but it might prove challenging to manage for a more structured multinational buyer.

There also remain plenty of smaller successful companies, but their acquisition might not provide enough scope and depth to compete with the market leaders. Therefore, companies are likely to come up with interesting strategic partnerships and other creative ways of penetrating the lucrative Russian confectionery market.

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