Buying Wrigley, Mars is Poised for Gains in China
Posted on: Thursday, 8 May 2008, 06:00 CDT
The combination of two famous U.S. candy companies should make it easier to distribute brands like M&M's and Snickers in China, where the craving for chocolate has grown with the country's wealth.
Last week, Mars and Warren Buffett's holding company, Berkshire Hathaway, agreed to buy the chewing gum maker Wm. Wrigley Jr. for $23 billion.
The acquisition will create the world's No. 1 confectionery company and increase the geographic base of Mars, whose candies include M&M's.
Chocolate retail sales in China reached $813 million in 2007 and were projected to climb 50 percent to $1.23 billion in 2012, according to data from Euromonitor International.
With the Chinese sweet tooth and Mars's increased marketing power, world cocoa supplies could tighten temporarily and elevate chocolate prices, analysts said.
Because Wrigley has a bigger presence in China, Mars is expected to get a marketing boost with the purchase, analysts said.
"That should provide a very good growth vehicle for both of those companies, as both being very mature companies, well-established industries," said Sterling Smith, vice president of Futuresone in Chicago.
Smith said the combination could lead to a 5 percent increase in Chinese cocoa demand by the end of 2009.
"With China's population being so huge, a 5 percent or 7 percent increase in demand is enormous," he said. "If we see two years of 5 percent increases in a row, we could be looking at disturbing prices, potentially."
Sterling projected that new cocoa plantations, which would be required to meet any increase in demand from China, would take years to establish and become productive, causing large price increases.
Wrigley is the top candy company in China, which has a population of 1.3 billion. Wrigley had a 9.7 percent company share in Chinese retail candy sales in 2006, according to Euromonitor.
Mars is No. 5 for candy sales, with a 2.2 percent share, but it is the top chocolate company, accounting for 13.2 percent of retail chocolate sales in China. Its sales have steadily declined from 14.4 percent in 2001, Euromonitor data showed.
Western brands like M&Ms have done well in part by promoting their cartoonlike mascots as toys, said Matthew Crabbe, managing director of Access Asia, a consumer research company.
The combined candy company could create economies of scale and added presence, using strength in one brand to promote others.
But Crabbe warned that any consumer backlash against one brand could also hurt the others, although there are no negative associations with any of the brands.
Chinese cocoa products suffered a public relations setback last year when many domestic cocoa grinders were reported to have been using cocoa shells rather than beans to make powder for coating in chocolate making, beverages and ice cream.
Judy Ganes-Chase, a commodities industry analyst in New York at J. Ganes Consulting, said it was too early for the market to bid up the price of cocoa in response to a possible increase in cocoa demand in China as a result of the Wrigley purchase.
"It will increase but it's not a rapid-fire pace," she said. "Given the size of the population, even small percentages can add up to a lot of beans."
If chocolate continues to increase its popularity in Asia, there will be off-and-on shortages of cocoa over the next few years, said Jack Scoville, a vice president for Price Group in Chicago.
"Over all, demand for commodities in general, I expect to stay strong," he said. "A lot of that is based on Far East demand and especially Chinese demand."
Source: International Herald Tribune
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