The Hindu Business Line : Sweet-smart?

By acquiring a majority stake in Godrej Beverages & Foods, Hershey of the US hopes to exploit the Indian company's distribution network to further its global reach.

Richard H. Lenny, Chairman, President & CEO of The Hershey Company, and Adi Godrej, Chairman, Godrej group, at a press conference in Mumbai to announce the joint venture

Pronouncing the name of Ted J. Jastrzebski, Vice-President (International Finance & Planning), The Hershey Company, did not come easily to A. Mahendran, Director & Mentor, GBFL. After practising for a while, he finally got it right while addressing the press to announce the formation of the joint venture with Hershey. Having held several rounds of talks with Jastrzebski and his team in the recent past, the Godrej Director made sure he got his partner's name right and even admitted the efforts made towards this exercise.

As Jastrzebski and his Chairman, President & CEO, Richard H. Lenny took turns to address the press, both emphasised the synergies between themselves and the Godrej group in terms of their 100 years of existence with a strong leaning towards corporate leadership.

Finding the right partner took a while for Hershey, which was looking at growth outside the US.

After screening several potential partners, Hershey signed a memorandum of understanding with Godrej to enter the Indian market in December 2006. The formal announcement, however, came this month when Hershey picked up a 51 per cent stake in Godrej Beverages & Foods (GBFL) for $60 million. The remaining stake would be shared between Godrej Industries (43 per cent) and Mahendran (6 per cent). The new joint venture to manufacture and distribute confectionery, snacks and beverages will be called Godrej Hershey Beverages & Foods Ltd.

The alliance will give Hershey the advantage of leveraging GBFL's strong distribution network, while Godrej will gain from its partner's global brands and international technology to grow its foods and beverages business. As Adi Godrej, Chairman, Godrej Group, says, "This joint venture is a strategic fit in our growing portfolio of food businesses and gives us ready access to a strong portfolio of confectionery brands. The global brand equity and experience of Hershey and GBFL's Indian consumer understanding and distribution strength will complement each other well.''

The $5-billion Hershey Company is America's largest chocolate and sugar confectionery player. In the recent past, it announced a joint venture with Lotte to manufacture confectionery in China. Today, its other key markets outside the US include Canada and Mexico with almost 10 per cent of its annual turnover coming from outside the US.

The potential of the under-penetrated Indian chocolate market has lured the US-based multinational. "We see India as a terrific opportunity and a relatively underdeveloped chocolate market as compared to the $57-billion US market for chocolates,'' said Lenny, addressing a press conference to announce the joint venture with Godrej.

The per capita consumption of chocolate in India hovers at 0.14 gm, with Cadbury as the market leader with an almost 70 per cent share of the category. Hershey claims that it is here to grow the market rather than pose a threat to the leader. As Mahendran states, "Our purpose is to build the category and we see this as an opportunity to increase per capita consumption in the country. No way do we see ourselves as a threat to the existing players.'' But it is not as if the big players in the confectionery business will not feel the heat. Observes Nikhil Vora, Partner, SSKI Securities: "Hershey will bring in innovation which the existing players have not been able to do. In the next 3-5 years, it will grow the market faster but at the same time bring in competitive pressure for both Cadbury and Nestle, especially if it plans to have a manufacturing base in the country. Moreover, if Hershey were to enter the premium segment where there is already large price elasticity, the pressure would mount for the competitors.''

At the same time, Hershey will not be in a position to dismantle immediately the strong equity of the Indian chocolate and confectionery companies built over the years. Hershey would challenge the existing players in the long term but in the short term both Cadbury and Nestle would have a strong brand presence, points out an analyst at a stockbroking firm. Then there are others like ITC, who have been waiting to enter the segment. There are big players with deep pockets such as ITC who have been eyeing the category and the multinational's presence may not pose that much of a challenge, believe analysts.

As for the market leader, Cadbury, Hershey's entry is seen as a welcome move for the category. Anand Kripalu, Managing Director, Cadbury India said, "Hershey's is an American offering at this point in time, while Cadbury has a 50-year-old taste and legacy in this country.

There will be activity in this category and the market will explode, which will help the others. Competition is good for everyone and Hershey's entry will create excitement, making the category stronger."

Hershey is yet to firm up its sourcing strategy for the country. While there are long-term plans for manufacturing at Godrej's existing facilities at Mandideep in Madhya Pradesh and Chittoor in Andhra Pradesh, immediate imports of some of the Hershey brands may be used to bridge the gap before full-scale manufacturing starts in the country. As Mahendran explains, "There may be partial imports initially, or we may even bring in some raw materials and technology to make the Hershey brands here.''

Hershey intends bringing in some of its iconic brands such as Reese's, Kisses, Special Dark and Ice Breakers. Being looked upon as primarily a mass brand in the US, in India, there is the possibility of the company bringing in some of its low-cost chocolates. Lenny predicts the first couple of products could be Hershey's Syrup, followed by its milk mixers.

Hershey has to make sure its products are suited to the Indian palate. Its partner, Godrej, has already commissioned its ad agency Mudra to make a presentation on how to Indianise Hershey's portfolio.

As for Godrej, it would seek Hershey's help in beefing up its own portfolio. For instance, Mahendran says Godrej's existing beverage brands could be modified using the technological support of the beverage brands manufactured by Hershey's. Apart from aiding its beverage brands, Godrej expects to complement its Nutrine portfolio with Hershey's confectionery brands.

Considering there has been deceleration in hard-boiled confectionery compared to the healthy growth rates of chocolates (estimated at 10-12 per cent), GBFL expects to grow faster on the back of its new chocolates portfolio. Mahendran predicts that the Rs 400-crore company, which has been growing at 15-20 per cent, will double its growth rates in the next three years after adding chocolates as a new category.

In the future, GBFL expects to build itself as a complete packaged foods company with a large portfolio of products. It expects to have a "long-term association with Hershey", which hopefully will prove to be sweet for the Godrej Group.

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