Argentina isn't exactly just the other side of the Rio Grande. And with the peso pegged firmly to the dollar, U.S. manufacturers are increasingly shunning the South American country in favor of lower-cost locales. But none of that bothers Brach's Confections Inc.
In April, America's seventh-largest candymaker announced it would shut down its near-century-old factory in Chicago and outsource production to Grupo Arcor, Argentina's leading confectionery group. Under the $40 million-a-year deal, Arcor will make 30,000 tons of Brach's trademarked sweets. "We looked at firms in Mexico and elsewhere offering greater savings, but Arcor's reputation for quality and reliability mattered more," says Brach's President Kevin T. Kotecki.
HALFWAY THERE. For Arcor, the Brach's deal is the latest conquest in an ongoing crusade to capture new markets. Over the past decade, Arcor's exports have soared more than 700%. Last year, sales from outside Argentina accounted for 35% of its $1.1 billion in revenues. (The family-owned company does not report profits.) Arcor's sweets, which run the gamut from lollipops to chocolate Easter eggs, are now available in 105 countries, including emerging markets such as China, the Middle East, and Russia. The company also makes candy for Wal-Mart Stores Inc. (WMT) and Sara Lee Corp. (SLE) "There are around 200 countries in the world, so we figure we're about halfway to where we want to be," says Arcor President Luis Pagani.
Pagani's father, it seems, was an early convert to globalization. The son of an Italian immigrant founded Arcor in 1950, and the company quickly made a name for itself in Argentina. Yet unlike many other prominent businesses in the country, Arcor never banked on its grip on the domestic market lasting forever. In 1969, it sent its first shipment of caramels to the U.S. And in 1976, it inaugurated its first foreign factory in Paraguay. Today it has six plants in Latin America in addition to 25 in Argentina.
Going abroad was a visionary choice. By bucking the insular mindset that has characterized much of Argentine business, Arcor was one of the few local companies that managed to stay afloat amid a flood of cheap imports in the 1990s. Indeed, Argentina's economy might be faring better these days if more companies had followed Arcor's example and cast their net afar. Although the country boasts abundant natural resources and a skilled workforce, its exports contribute less than 10% to gross domestic product. By comparison, exports account for nearly 30% of GDP in neighboring Chile.
But Arcor still has a ways to go before it realizes its goal of becoming Latin America's leading purveyor of candy. It now ranks fourth in the region, behind Nestl? (NSRGY), Kraft (MO), and Warner-Lambert. Arcor has spent $1 billion in the past decade to modernize its facilities and introduce product lines. To raise more capital, Pagani plans to take the company public within the next two to three years.
Yet with consolidation in the global food industry gathering pace, experts wonder how long Arcor will be able to go it alone. "They have one of the largest distribution networks in Argentina plus important assets in other countries: There's not a multinational that wouldn't be interested," says Alyce Andrews, an analyst at Merrill Lynch & Co. in New York.
ROLE MODEL. Arcor still has some advantages over its larger competitors. Its candy factory in Arroyito, in the province of C?rdoba, is the largest in the world. The sprawling, 78,000-square-meter facility is a model of efficiency, churning out as much as 200 tons of sweets each day. "Quite frankly, they have the capacity and technology to do things we can't," says Brach's Kotecki.
Vertical integration also helps to hold down Arcor's production costs. Independently run units, all profitable in their own right, supply its factories with everything from sugar to electricity.
Arcor may well fall short of its ambitious goals. Yet in a country coming to grips with its past mistakes and engaged in a profound debate about its future, the candymaker's international foray could inspire others to take the plunge. By Joshua Goodman in Buenos Aires