Bunnies and Corporate Raiders

Lindt's Chocolate Blueprint for Nestle

Brand investment shows Schneider what's possible in confectionery.
At Closing, April 24th
75.38 CHF

With political and social turmoil on the rise in the U.S., you'd think chocolate consumption would be too.

But the American chocolate market declined in 2016, Lindt & Sprungli AG said Tuesday.

Despite this, and the drag from integrating its 2014 acquisition of Russell Stover, the maker of gold-wrapped Lindt bunnies increased North American organic sales by 3.4 percent. Nestle SA should take notice. 

Overall, Lindt organic sales growth was 6 percent, ahead of organic growth of 1.8 percent at Nestle's confectionery division and beating anemic levels across the broader consumer goods industry.

Sweet Spot

Lindt's decision to invest in premium chocolate is paying off with higher annual sales growth

Source: Bloomberg Intelligence

In fact, Lindt, the biggest maker of premium chocolate, shows just what can be achieved with investment in the business, particularly the more upmarket segment. Nestle's top-tier chocolate brand, Cailler, is a long way from this kind of market domination.

Lindt has been opening retail stores to develop its distribution. While this drags on the operating margin, it should help build its brands in the eyes of consumers. And with some U.S. apparel chains shutting stores, there is plenty of cheap real estate to exploit.

Small but Beautiful

Lindt has plenty of room to raise its share of the global chocolate market

Source: Euromonitor International

If Ulf Mark Schneider, the new chief executive of Nestle, decided to try to reinvigorate his company's confectionery arm, Lindt offers a blueprint. More investment in Cailler, together with developing distribution, could help.

So far, Schneider has appeared keen on confectionery. He said when Nestle announced 2016 earnings last month that there was no "flagrant" contradiction between chocolate and healthy eating.

What's in Store

Lindt's margin expansion is being held back by its strategy of opening retail stores

Source: Bloomberg Intelligence

But that was before Kraft Heinz's $143 billion tilt at Unilever. While the siege was short, it has focused minds within the consumer goods industry on delivering returns. As Gadfly has pointed out, that could mean assessing the future of slow-growth food assets. And with Nestle's confectionery arm worth up to $20 billion, according to Jefferies analysts, that division should be one of those under assessment.

Shares in Lindt trade on forward price to earnings ratio of 33 times, well ahead of Nestle's 21 times. Lindt deserves to be on a higher rating because its growth far surpasses what the big consumer goods groups have been posting lately. 

But that could be vulnerable if Nestle were to turn its considerable firepower onto making a push into premium chocolate. Schneider could certainly afford it: net debt is minimal, at less than one times Ebitda, plus the company is highly cash generative. 

The question is, does he want to? The renewed focus on Nestle's corporate structure increases the urgency for Schneider to make a decision. At least Lindt's performance shows that he has a clear choice: Invest in confectionery to boost growth and returns, or cut the calories.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Andrea Felsted in London at afelsted@bloomberg.net

    To contact the editor responsible for this story:
    Jennifer Ryan at jryan13@bloomberg.net

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