Ruza acquisition shows that Nestle continues to invest in unhealthy food in emerging markets
- November 26, 2007
||company acquisition announced, November 2007
||Ruza Confectionery Factory (Russia), one of top 3 premium chocolate players in Moscow market (âRuzannaâ and âComilfoâ brands)
||Nestle Rossiya, local subsidiary of Nestle Group (Switzerland), multinational food group
||owners of RCF (Sergei Vorobyov and Rustam Suleimanov)
||acquisition of proximity brand, expansion in BRIC markets
||attractive valuation, good timing
||Ruza only has 3% value share in Russian confectionery, overall
We earlier predicted that Hershey would acquire Ruza, in response to the Hershey Foundationâs insistence that the company pursues international growth more aggressively. Senior executive departures at Hershey may have prevented that from happening. We certainly didnât think Nestle would emerge as the buyer; it seems their strategy of investing in the big developing markets has overridden their focus on âhealth and wellnessâ, this time. But unlike Hershey, Nestle doesnât need to acquire a platform in Russia. So, their other rationale would be to acquire a scalable bolt -on brand; in this respect Ruzaâs credibility is possibly weak.
Nestle Rossiya is already a big company, with 13 factories, sales of âŹ 1 bln and leading positions in Russiaâs coffee, chocolate, culinary products and infant nutrition markets. Ruza would make sense, as an acquisition for Nestle, if it was a strong and scalable local brand, that the group could commercialise better, and distribute beyond Moscow and St. Petersburg. But is that the case?
The first demerit is that Ruza is focused on the âgiftâ boxes and âat homeâ segments of chocolate confectionery, and so on pralines. These âlegacyâ segments are, or certainly will be, in decline in eastern Europe, just as they have been for a long time in developed markets. Itâs very difficult for a premium pralines brand to achieve âbreakthroughâ into growth areas like indulgence or snacking.
The second issue is authenticity and provenance. Just like A.Korkunov, which Wrigley acquired in Russia earlier this year, Ruza was established only in the late 1990s. Whatâs more, its identity is not entirely Russian; its main brand, âComilfoâ, is clearly derived from a French term applicable to civilized giving - âcomme il fautâ.
Thirdly, no matter how big Ruzaâs market share is in the premium chocolate segment in Moscow, the fact remains that it only has 3% value share of Russiaâs total chocolate market. Okay, so itâs growing this year by 40%, but from such a low base thatâs no big deal. Where is the critical mass ?
Thereâs a risk that the only scalable aspect of Ruza is its industrial capability (big shiny factory).
In terms of valuation, Wrigley paid a P/S of 3,0 for Korkunov; analysts predicted that Ruza would go for a P/S of 4,0. With Ruzaâs 40% growth rate, the difference between these two benchmarks might be âfudgedâ by taking prospective year and not, as in the case of Korkunov, previous year sales. Given the fundamentals, we think this is already a high valuation; possibly the real deal was at a lower price, especially if there wasnât as much buyer competition as expected.