Lindt's Acquisition Of Russell Stover Either Wise Or Disastrous, Experts Say

The hierarchy of the confectionery world shifted this week with the announcement that Swiss chocolate maker Chocoladefabriken Lindt & Sprüngli (SWX:LISN) will acquire the Kansas City-based chocolatier Russell Stover Candies.

By adding the privately held Russell Stover to its growing holdings, which already include the San Francisco-based mainstay Ghirardelli Chocolate Company, Lindt will become the third-largest chocolate maker in the United States.

The move, which Lindt announced Monday, will give the company greater access to the vast American chocolate market, as Russell Stover is the country’s largest boxed chocolate manufacturer, with numerous popular products including the Whitman’s Sampler, famously featured in the film “Forrest Gump.”

Russell Stover had revenue of about $500 million last year, and its acquisition will bring Lindt’s annual North America revenue to $1.5 billion in 2015, according to Lindt, which reported revenue of about $3.2 billion last year.

But some experts and observers say the move is not necessarily a savvy one for Lindt, given current trends within the chocolate industry.

Lindt’s announcement comes amid a recent rise in cocoa, dairy and nut prices, as well as transportation and packaging costs. The increase in these key costs has been so significant that it led Hershey Co. (NYSE:HSY) to announce Tuesday that it will raise the price of its candy by an average of 8 percent.

Meanwhile, prices and demand for boxed chocolate -- Russell Stover’s bread and butter -- are not keeping up with the jumps in commodity prices, suggesting that there is limited potential for big profits in the sector.

Craig Wolfe, president of the San Rafael, California-based chocolate company Cocoa Canard and a student of chocolate history, said he does not consider Lindt’s purchase of Russell Stover to be “a wise branding move." Russell Stover, said Wolfe, is seen as a less high-end product than Lindt.

“The cheap value chocolates to me are going to continue to lose market share. I think it goes against the core branding of a more quality upscale brand for Lindt,” he said. “I have no idea what they are thinking. It does not really get them huge extra market penetration as they are already in a lot of the places that Russell Stover is in. … To combine with Russell Stover not only cheapens the overall brand, but makes them that much more vulnerable to fluctuations in the confectionery industry.”

Omar Tatum, founder of Louisville Kentucky-based AmeriCandy Company, Inc., also said the acquisition of Russell Stover will not do much for the Swiss chocolatier in growth terms. That assertion is borne out by a November report by Euromonitor, which predicted that the value of the American boxed chocolate market will fall from $1.95 billion last year to $1.9 billion by 2018.

“Lindt is a very active Internet chocolate company while Russell Stover is mired in the 'drugstore' trade with very little to look forward to as to growth,” he said. “The candy industry as a whole has been losing direction for years with no hi-tech excitement moving it forward at home or abroad.”

But some experts believe that the acquisition will be a net positive for Lindt. Becca Niederkrom, a marketing consultant and head of the chocolate website ireallylovechocolate.com, called it a smart move given the economics of the American chocolate industry.

“As the middle classes are growing in other countries to now be able to afford these smaller luxuries, we see companies such as Hershey's -- who picked up Dagoba and Scharffen-Berger in the last decade -- and Mars Company continue to grow and tap in on this steady climb upward of the chocolate customer,” she said.

“And some might even say as the middle class declines in size in the U.S., many low-end products are flourishing along with an increased demand of luxury products -- a true divide that I believe Lindt is smart to cash in on.”

According to Red Peak Branding chief executive James Fox, the Russell Stover acquisition will likely turn out to be a boon for Lindt, as long as it ensures “that from a branding perspective the brands seem separate.”

“As we’re seeing in the market now post-recession, there’s a lot of bifurcation of brands,” Fox told the Wall Street Journal. "People want to save and buy high-end luxury goods and compromise on lower-end goods, so mid-tier brands are getting squeezed out of the equation. … From a business perspective, to have that lower-end priced item really helps.”

And overall chocolate profits are not expected to drop off anytime soon, according to the November Euromonitor report, which stated that “chocolate confectionery is expected to register constant value growth of 7 percent, to reach sales of US$18.6 billion.”

But the report did state that “higher prices and smaller pack sizes are expected to drive retail volume sales down by 1 percent over the forecast period.” Some observers believe Lindt would have been better off either expanding into growing and emerging chocolate markets in places like Asia or South America or entering new industries outside of confections, rather than pursuing a greater stake in the U.S. market.

“Look at chocolate history and you will see companies from Hershey, Kraft, Nestle, Rowntree’s, etc., always trying -- if they are going to expand -- to also expand out of the chocolate market to diversify,” Wolfe said. “The reason the cheaper companies can hold up prices when cocoa prices rise is they use cheaper ingredients to compensate. I agree, better to pursue moving the Lindt brand stronger into other countries and build up the quality angle in the U.S.”

Jon Cox, European consumer equities head at Kepler Cheuvreux, told Confectionery News that “strategically [the acquisition] probably makes sense” as it will help Lindt improve its position in the U.S. market. But he agreed with Wolfe’s contention that investing in another market may have been a better move.

“I would have preferred them to go for a Brazil or Russia, where they don’t have so much penetration,” he said.