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Cocoa Crossfire

Ferrero is aiming for an ever bigger share of the Indian market. But will Mondelēz let it?

Vishal Koul

Having moved to India barely a year ago, Roberto Grasso’s demeanour is that of a man who is still getting accustomed to his new surroundings. However, that does not hinder his enthusiasm as he shares his understanding of the domestic chocolate market, the Indian palate, evolution of modern trade and the importance of a cold chain. His company, Ferrero India, of which he is the chairman and managing director, has been in the country since 2004. It was a phase when the market was a duopoly and split quite disproportionately between Cadbury India (now known as Mondelēz India Foods) and Nestle India. The former had over 75% share of the market and had been around for almost six decades. On the face of it, the scenario looked anything but easy for a new entrant.

Today, after a decade, Ferrero has smartly grown to become a Rs.940 crore entity. This has resulted in an impressive 9.2% share of the market led primarily by Kinder Joy and Ferrero Rocher. The strategy adopted has involved reaching out to market opportunities that were still largely untapped and not adequately addressed by competition. In the case of Kinder Joy, the target was kids, while Ferrero, a brand that was in the past sold in the grey market, created a niche for itself in the sphere of gifting.

If Ferrero’s thinking was to look at a new segment altogether, it has not been quite the case with every multinational seeking a bite of this chocolate story. Mars, the world’s largest chocolate company, entered the market over a decade ago and has been slow to say the least. Its most prominent offering has been Snickers, a brand that is sold as a snack. This is not a new segment, with brands like Perk and Munch having created success stories out of it for a long time now. This is largely an impulse purchase and considered a quick solution to hunger pangs before a larger meal follows. 

Apart from Snickers, Mars Chocolate India’s portfolio in India has Galaxy and thus far, Mars has not managed to garner any serious market share — barely 1% — and is viewed as a company that is fairly conservative. The effect of the new entrants, however, has been the importance attached to innovation and this is something that has not missed the attention of Mondelēz and Nestle. They are now digging deep into their international repertoire with innovation as the centrepiece. Clearly, the die has been cast as both players fight not just to expand the market but regain some lost ground.

The big dunk 
Michele Ferrero, the owner of Ferrero was a man fascinated by innovation. He was well into his 70s running a very successful business empire, when the thought of entering tropical countries weighed on his mind. On the radar were India, Cameroon and South Africa, which were characterised by a climate that was hot and humid. He had an interesting challenge on hand, where his product offering needed to be innovative and taste great as well. Taking on the well-established players in a market like India with a me-too product was never going to work. The answer came in the form of Kinder Joy, a product with kids specifically in mind.

This was not a segment that Ferrero was familiar with, though the concept was not unknown. The company already had Kinder Surprise, a brand launched in the mid-70s in Italy. It had an egg-shaped chocolate shell outside with a plastic capsule inside containing a toy. In the tropical countries, that was a bad idea with the imminent danger of the chocolate melting. Kinder Joy was conceived with both the chocolate and toy but separated by distinct layers. Launched in India in 2007, its unique egg-shaped innovation soon caught the fancy of the market, especially, children.

By this time, Ferrero Rocher chocolates were already being imported and sold in India with Nutella, a chocolate-hazelnut spread and Tic Tac mints. Kinder Joy was being assembled in India and it was not before 2011 that it was manufactured out of its new factory in Baramati, a two hour drive from Pune. There was very little by way of competition for Kinder Joy barring Cadbury’s Gems.

By the time Kinder Joy was launched here, Cadbury India, as it was then known, was in the midst of a frenetic growth phase. From a turnover of Rs.1,058 crore in 2006, it surged 3.8x to Rs.4,066 crore in 2012. This coincided with the successful introduction of a premium brand like Silk and an innovative offering like Shots; both were under the Dairy Milk brand. According to a former company official, the big plan to supply visi coolers gained form and shape here. “As its brands led by Dairy Milk grew dramatically, the company left two segments open. One was for kids and the other could have been any offering that did not need refrigeration. This is where Kinder Joy’s story took off,” he explains. It was an opportunity that Ferrero latched on to quite gleefully.

Roberto Grasso, CMD, Ferrero India

“In India, we have adopted a blue ocean strategy and that means launching products at an affordable premium price,” says Grasso. Priced at Rs.40, this does not come cheap, but in the absence of competition, there is no basis for comparison either. Abraham Koshy, marketing professor at IIM-Ahmedabad, throws up a slightly different perspective and says the attraction in Kinder Joy is not the chocolate but the toy. “It is a smart strategy to incentivise children and has worked very well for brands like Gold Spot in the past. The fact is most chocolate players have never looked at this market with kids in mind,” he points out.

The added incentive is that the toy the kid gets is rarely the same. Ferrero India works very closely with its suppliers, both Indian and those who have moved from Italy to set up shop here, to manufacture a billion toys each year cutting across 350 models. From the time it was launched in 2007, Kinder Joy was sold as a unisex product. A small innovation was tried in 2014 to separate this on the basis of gender (blue for boys and pink for girls) and that has worked, with sales having taken off by over 60%. From a trade point of view, the shape allows Kinder Joy to be sold easily (it is normally stacked like eggs) and most importantly, it does not require refrigeration. “That really means any shopkeeper can sell the brand, which is the case today,” says Koshy. It is here where the brand’s in-store innovation becomes important. Placed strategically in a store and most often closest to where the shopkeeper sits, it is impossible to miss Kinder Joy. This comes from the insight that at least 70% of chocolate purchase is either impulse or pester power. 

Today, Kinder Joy is sold in 500,000 outlets, compared to 3,200,000 outlets across India that sell chocolates; of this it is estimated that the larger players reach out to close to 1,500,000. Grasso says there is need to work on the SKUs (stock keeping units) for rural India, which is the logical step forward. “Presently, we have two SKUs for the trade (96 pieces and 28 pieces) and we will obviously need something smaller for rural India,” he says. Of the company’s 9.2% market share, a little over 7% comes from Kinder Joy alone.

Abraham Koshy Professor, IIM Ahmedabad

That success enthused the company to launch Kinder Schoko-Bons, a praline or confectionery made of nut kernels, from its global portfolio. Grasso explains that to counter humidity, the company has developed a double packaging model. A 150-member packaging team in Italy works very closely with the team in India. “It took us two years to get it right on the packaging for this product. We have a lot of patience to go through the process by trial and error to come up with the right product and quality. Time is never a constraint for the research that goes into making a product perfect,” he says. That is obvious given that after having been in India for over a decade, the company still has a small portfolio. The strategy, according to Grasso, is not to have too many products and SKUs. “Each brand is a company for us. We will launch more brands in a couple of years to strengthen and enhance the Kinder brand. In that sense, Kinder will be our power brand and the pillar of our future,” he adds.

If that is true, the eponymous Ferrero Rocher spherical chocolate will still be limited to modern trade, as it is today. The brand has a 2% market share and its growth story has coincided with that of modern trade that took off around 2006-07. Though the brand was launched in India (still not manufactured, only repackaged here) in 2004, it was available at least three years prior at large departmental stores or at custom- notified shops. Its innovative packaging, which was a spherically shaped chocolate in a box with a whole roasted hazelnut, was easily recognisable. It soon became synonymous with gifting and the early momentum has helped the brand retain that positioning. At Rs.449 for a box of 16 pieces, it does not come cheap. To create a larger user base, it is sold in smaller quantity, like a box of five.

Ferrero Rocher is dependent on refrigeration and that is certainly a restriction on its availability. Grasso says there is no plan to go mass with the brand because of India’s climatic conditions. “It could adversely affect its freshness and will, therefore, be restricted to modern trade. Globally too, we withdraw our praline products like Ferrero Rocher in summer and bring them back in September,” shares Grasso. The company is a firm believer in the pull strategy instead of push. “That means the consumer will come looking for our product and this is how we do it worldwide as well.”

While Ferrero has managed to get its India piece together, Mars’ story has been quite insignificant. After entering the market in 2004, the year Ferrero came in as well, it had just one brand, Snickers before Galaxy was launched three years ago. Raghav Rekhi, the company’s marketing director, insists that his brands are relevant to the Indian market. “Our innovations have included the development of vegetarian versions of Snickers,” he says. So far, Mars has been importing its products. Its recent decision to set up a manufacturing base in Maharashtra at an investment of $160 million could make the whole story very interesting.

What’s up, big boy? 
Prashant Peres is ever-ready to grab a bite of any of the chocolates that his company sells. As director, marketing, (chocolates) Mondelēz India, he is sitting pretty with a 65% market share. Not too long ago, his company had a 75% share, though it is not something that bothers him greatly. “We have been at 65% for five years in an intensively competitive market and that in itself is an achievement,” he says.

Having been in India for as long as it has, Mondelēz is counting on its understanding of the Indian market. “That coupled with being a market leader in many parts of the globe is a lethal combination,” thinks Peres. That global equation changed substantially in 2010 with the acquisition of Cadbury by Kraft Foods. This deal also meant the launch of new products from the erstwhile Kraft portfolio like Oreo biscuits and Tang, a fruit-flavoured drink. 

A business like biscuits called for a different approach, which also resulted in some attention moving away from chocolates. The company now faced the challenge of protecting its dominance in chocolates and needing to grow the biscuit business from scratch. In the case of the latter, it is up against feisty players like Britannia and Parle, with ITC, a relatively late entrant, too, cornering over a 10% market share. According to the former Mondelēz official, it became difficult to simultaneously straddle a low-margin business like biscuits with chocolates known for higher margins. “Innovation suffered and there was constant pressure to protect margins at any costs. Price increases were then taken on fast moving brands like Eclairs, which was not received well by the trade or consumers,” he explains. Over time, more products from the international portfolio became the strategy for Mondelēz India.

Prashant Peres, director-marketing (chocolates), Mondelez IndiaOne key business pioneered by the then Cadbury India was gifting through the launch of Celebrations in 1997. This overall chocolate gifting market today stands at only Rs.400 crore, with Mondelēz accounting for almost 75% of it. By any yardstick, it is an extremely difficult business to be in. For one, it is highly seasonal starting from Raksha Bandhan to Diwali, which gives it a window of no more than six months. “Execution becomes very critical here and one has to get it right on freshness. There is no time for a correction if things do not work out,” says Peres. Besides, the biggest competition comes from sweets, which apart from being closer to the Indian palate, is largely unorganised, offering healthy margins to the trade. As a consequence, there is a serious battle for retail space during the festive season.

In more developed markets, gifting brings in at least 25% of the overall chocolate business, compared to just 6% in India. Mondelēz, on its part, has attempted to extend the gifting portfolio. In September 2014, it launched Cadbury Glow, a premium gifting chocolate, to coincide with the festive season. The chocolates were imported from Europe at a starting price of Rs.400-600 for a pack and a limited edition box for Rs.2,000. It was an experiment that bombed. “The question was whether the company wanted to build a separate brand or work off the premium factor established successfully by Silk. Eventually, we decided to migrate Glow to Silk Pralines,” says Peres. According to him, the approach has been to go mass with gifting and bring in a larger user base. “It is possible to pick up Celebrations at Rs.50, which is a great return gift or a gift in school. We need to increase the occasions of usage and going mass is the way to do it,” is his view. Mondelēz looks at gifting in three parts — Silk and pralines forming the premium end, dry fruits forming the mid-segment, and finally, Celebrations at the bottom end. 

If that is the story with gifting, the company is not exactly having it easy with kids. Peres says the kids segment is a bit of a misnomer. “We do not really define the kids segment unless it is associated with a toy. We always address a broader target audience,” he says. It has Gems, a brand that has been around since 1968. Over time, it launched variants like Gems Surprise, which came with a surprise toy, though success has been limited. As a part of a global policy, both Mondelēz and Nestle do not advertise on television channels that have kids as the primary audience. That has opened up the slot for Ferrero, which is not bound by any such restriction, and advertises quite heavily on kids channels. The rationale is clear — at least 50% of chocolates in India is consumed by the age group that is less than 14 years old. Not surprisingly, they account for a significant viewership of the audience for kids television channels. How this is eventually addressed by Kinder Joy’s rivals remains to be seen since it is a market too large to ignore.

Turning it on
Mondelēz’s flagship brand for many years has been Dairy Milk. Of the company’s Rs.4,960 crore that it makes from chocolates (it had a turnover of Rs.6,562 crore for 2015), this brand brings in at least Rs.3,300 crore. Extending its franchise has worked remarkably well. A case in point is Silk, which was launched in early 2010. Peres points to a phase about eight years ago when premiumisation was all about foreign chocolates. “That was the opportunity we spotted and Silk today, reaches out to that need,” he says. Today, Silk alone, launched as a premium offering under the dairy milk umbrella, is an Rs.600 crore brand. “It is the best chocolate money can buy,” boasts Peres. Silk starts off at Rs.60 for a 65 gram bar.

The strategy is clearly to strengthen its hold in the traditional business (both chocolate slabs or tablets like Dairy Milk and countlines or those eaten in one go like Five Star and more recently Fuse), where there is very little competition. Recent initiatives from Mondelēz have merely confirmed that with competition, too, not doing a whole lot. Galaxy, a slab from Mars, is still in its infancy after having been launched in late 2013, with Snickers being at best a fringe player. Mondelēz is using the laxity to bring in more products from its international portfolio for the local market. Take the case of Bubbly, an aerated chocolate, which was launched in mid-2015 at a starting price of Rs.70. Peres says the plan is to grow power brands. “Our market share for Dairy Milk, because of Silk, has grown from 28% to 41%,” he points out. Caramello, a chocolate with a centre filling, was launched before Bubbly and Marvellous Creations came in August this year, with the objective of building the premium segment.

In the case of countlines, the company is turning on the heat with the launch of Fuse. The brand hit the market this September and was part of Mondelēz’s international portfolio before being discontinued. Directly up against Snickers, Fuse, is positioned as a chocolate-coated peanut offering. “Our focus is on indulgence and that’s where Fuse fits in. We look at it as not just a snack but a feast,” says Peres with a grin. 

But much before Fuse there was Perk which was launched in 1996, a year after Nestle brought in KitKat to India. Cadbury had a strong presence in slabs/bars and countlines. The wafer segment was left open and KitKat encountered success in the first year itself due to its unique format. Perk came in to counter KitKat and this today is a Rs.1,200 crore market. Perk was still a very urban brand when Nestle brought in Munch in 1999 to target rural markets. It offered more grammage than Perk at the same price and intensified distribution. That strategy worked and Munch did very well. It is now the largest player with a share of 33-34%, while KitKat has 30% and Perk trails with 22%. Perk’s challenge was to first take on KitKat and then Munch. Fuse coming in might help Mondelēz compete more effectively against Nestle.

All not well
From a position where only Mondelēz was competition, Nestle, over the last few years, has had to contend with Ferrero, which has continuously eaten into its market. That, coupled with the crisis around Maggi noodles in the middle of last year, has hit the company hard. For 2015, its revenue from chocolate and confectionery business stood at Rs.1,110 crore, compared to Rs.1,253 crore for 2014 and Rs.1,286 crore for 2013. It is estimated that the confectionery part, which has Polo and Eclairs, brings in around Rs.200 crore. In that context, the overall chocolate business has struggled to grow. From 22-23%, Nestle’s market share in chocolates is down to 17-18%. 

Nestle primarily depends on KitKat and Munch to drive its chocolate business in India. Other brands in the roster such as Bar One, Alpino and Milkybar are very small in comparison and the two flagship brands almost equally contribute to its chocolate revenue. According to Nikhil Chand, general manager (chocolates & confectionery), Nestle India, brands like KitKat, a wafer chocolate or even white chocolate are unique offerings. “There is no real competition here and our task is to keep growing it,” he says.

Nestle has been quite active in bringing new products to the market and that includes KitKat Seasons, KitKat Dark Chocolate and many years ago, experimented with chocosticks, a liquid chocolate. These did not work as dark chocolate is still not very sought after. In fact, dairy giant Amul, too, ventured into dark chocolate around five years ago as there weren’t many players in the category. There was another strategic reason. “Dark chocolates have a lower milk proportion. A chocolate with a higher milk proportion needs a cold chain. We did not want to invest in a cold chain and therefore, went with dark chocolates, where refrigeration is not an issue,” reveals RS Sodhi, managing director, GCMMF. Amul’s overall chocolate business today, is around Rs.100 crore and Sodhi says dark chocolates could continue to drive it in the future.

Nikhil Chand, general manager, Nestle India

Like in the case of Amul, where the primary focus is milk and value-added products, chocolates are not the main profit engine for Nestle. Hence, Nestle has remained a distant second to Mondelēz. Without any serious investment in its brands, getting a share of the consumer’s wallet was always going to be difficult. “If you are the second largest in the market, premium pricing without any obvious product benefit is a bad idea,” says a Mondelēz distributor. According to him, Nestle is used to high margins in businesses like infant foods and using the same yardstick for chocolates. “That is very difficult to achieve when you are up against Cadbury, which offers brands across the price range,” he explains.

The bigger worry has been gifting where Nestle has tried hard with Alpino, a premium chocolate in a bon bon format. “Gifting chocolates is still occasion-based in India and casual gifting is still not very prevalent yet,” thinks Chand. While Nestle’s market share is under serious pressure, the company has a slightly different outlook. “What is important is that the overall market continues to grow with demand also increasing,” reminds Chand. 

Inside the filling
The chocolate war is at its most interesting point. Mondelēz and Ferrero, apart from protecting their turf, will look to get in more consumers. What stands out in this story is that Ferrero has created new segments and is forcing competition to play catch up. For instance, brand loyalty and hence, repeat value for Kinder Joy among children is very high. If Ferrero succeeded through innovation, it is now imperative for its rivals to do exactly that. That is perhaps the only way to get Ferrero out of its comfort zone.

Neha Nayak Consultant, MintelMondelēz has managed to surround the premium side of the business with many a product at several price points Neha Nayak, trend and innovation consultant at Mintel, a market intelligence firm says that tablets like Dairy Milk grew 10% in value terms in 2015, whereas the overall market dropped 4% in volume terms. “This only reflects premium variants are being preferred with the demand for mass market tablet chocolates going down,” she explains. Nayak points to how the demand for countlines (such as KitKat) is growing both in value and volume terms. 

At the bottom end, there is very little room to increase prices, while the premium customer is spoilt for choice. Getting both ends right is not just difficult but in fact, may not really be worth it either. 

Though one of the biggest worldwide, Mars is still the smallest here, but its plan to manufacture here is a signal of its intent. Even for Ferrero, the decision to set up a plant has only made Kinder Joy bigger. Prateek Srivastava, co-founder, Chapter Five Brand Solutions, a brand consultancy, sees a similarity between the premium chocolate business and the high-end liquor market. “There was an unwillingness to invest when the market was small. When it opened up, Pernod Ricard and Diageo put in serious money,” he says. With the recent entry of ITC in the premium segment, the game could well change. ITC launched its luxury chocolate brand, Fabelle, this May. “Two big players like Mars and ITC could change the story,” feels Srivastava. Clearly, the chocolate wars have just begun.


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