Nestlé vs. Ferrero: How Customers Guide a Company Towards Innovation

January 19, 2018

The big news in the confectionary world is that Nestlé, which started as a Swiss milk chocolate company in 1880, just sold its U.S. candy to Ferrero, the Italian family-owned company responsible for Nutella and Ferrero Rocher pralines. For $2.8 billion, Ferrero will acquire brands like Crunch Bar, Baby Ruth, Wonka and Butterfinger, which brought Nestlé $900 million in 2016. This is Ferrero’s third U.S. acquisition in the past year, and will make Ferrero third in the U.S. confectionary market behind Hershey and Mars.

The sale sets up an interesting comparison between the two company’s strategies; one taking a progressive path, and the other a traditional one. Their differences underline how understanding consumers stimulates innovation.

The sale is part of Nestlé’s strategy to move focus away from junk food and towards health and nutrition. Nestlé, the leading producer of packaged-foods, is adapting because it recognizes that consumers are increasingly health-conscious and the confectionary market continues to stagnate. Not only has Nestlé recently bought Blue Bottle Coffee, Chameleon Cold Brew, and Sweet Earth to strengthen its presence in the niche specialty goods market, they have also started exploring food’s role in wellness.

A major step towards the wellness sector was naming Ulf Mark Schneider, who came from the medical industry, as CEO. Then, Nestlé started buying and investing in companies researching how biotech can fortify foods. Nestlé is set to buy Atrium Innovations, which produces vitamins, probiotics, and meal replacements. Also, it’s rumored to be buying the Consumer Health Businesses of Merck, a science and technology company in healthcare, life science and performance materials. While Nestlé still focuses on its non-U.S. confectionary companies, these efforts show that Nestlé is also forging new paths for itself based on customer insight.

As Nestlé boldly looks to the future of the food and health sector, Ferrero continues to operate conservatively. Since 2015, Ferrero has been on a buying spree to expand its presence. Now, the group owns the Turkish hazelnut supplier Oltan, the British chocolate maker Thorntons, and the American candy makers Fannie May and Ferrara Candy. These acquisitions give Ferrero a strong footing in the market, however a really sluggish market. Low-end candy sales in North America are down.

For example, Lindt, the Swiss chocolate maker, reported that its 2017 sales in North America fell 1.6%, while they rose 12.4% in the rest of the world.

It’s an interesting step to buy a unit in which Nestlé saw no growth value, but it is a safe strategy. In a dwindling market, Ferrero is consolidating its control to stay afloat. There will always be a place for cheap sweet treats, and Ferrero will be part of that demand even if its unlikely to grow. But, it is disappointing that it is more focused on continuing down the same path, than coming up with ways to create new value.

This is another example of an Italian company not looking at the new consumers. Ferrero had tunnel vision entering the American market, and did not look around to see what Americans actually want. Italian companies have focused on creating the same products for years, maybe assuming there will always be a need. But, in the rapidly changing world, they need to adapt. The way to survive is not consolidating, but adapting to continue serving people’s changing needs.