Why Nestlé's Giant Move Makes Sense

January 13, 2010
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After its acquisition of Kraft Foods’ frozen pizza business, Nestlé’s footprint in the freezer case may be as big as King Kong’s.

After its acquisition of Kraft Foods’ frozen pizza business, Nestlé’s footprint in the freezer case may be as big as King Kong’s. Additionally, the purchase may allow the Swiss company to emerge as an even more powerful leader in the frozen pizza category than Kraft ever was and a potentially a more formidable competitor in the freezer case throughout North America, according to industry observers.

That’s because Nestlé already has a strong base in the freezer case with its Stouffer’s, Lean Cuisine and Hot Pockets lines, and there is a huge potential for the company to cross brand its products with the DiGiorno, California Pizza Kitchen, Tombstone and other brands that it’s adding to its portfolio, says Jerry Smiley, partner with Strategic Growth Partners in Roselle, Ill., and an analyst of the baking and frozen food markets.

“They can leverage some of their existing brands into the pizza category and take some of their pizza brands into food categories,” Smiley notes, such as moving the DiGiorno brand into the pocket sandwich or frozen entrée categories.

For frozen food challengers such as Schwan, the producer of Freschetta, Tony’s and Red Baron pizza that’s based in Marshall, Minn., Nestlé’s giant move might create even more potential difficulties, Smiley adds.

“While Schwan may benefit during the transition, longer term, it may be more challenging for them given Nestlé’s large frozen food base,” he says.

Nestlé has agreed to acquire Kraft Foods' frozen pizza business in the United States and Canada for $3.7 billion in cash. According to the company, this frozen pizza business provides a new strategic pillar to Nestlé’s frozen food portfolio in the United States and Canada, where the company has already established a leadership in prepared dishes and hand-held product categories.

Furthermore, Nestlé notes, the acquisition brings leadership in the frozen pizza category, where it only had a minor presence until now, and builds on Nestlé’s existing pizza know-how and operations in Europe.

“It is a natural fit with Nestlé’s focus on delivering convenient, premium, wholesome and nutritious frozen food for consumers around the world,” the company states.

Nestlé notes the transaction is subject to U.S. and Canadian regulatory approval and is expected to be completed later this year.

Several analysts have speculated that Kraft Foods made the deal to raise cash and bolster its bid for Cadbury, the global confectionery and snack maker, while eliminating Nestlé as a possible bidder. At this time like in any major deal, whether it’s in sports or in business, Smiley says, it’s clear what Nestlé is getting out of the transaction, but the chapter still isn’t closed about how the sales of its pizza business will pay off for Kraft in the long run.

“After a blockbuster trade, fans of both teams ask ‘who got the better end of the deal.’ After this one, I wonder if Kraft fans will wonder if the loss of the frozen pizza business is worth the addition of Cadbury [if acquired],” Smiley says. “I understand that Cadbury provides a global platform, but Kraft has been just so successful in pizza lately.”

On the operations side, the pending acquisition includes two of Kraft’s manufacturing facilities in Medford, Wis., and Little Chute, Wis., and the right to take on the leases for the pizza depots and delivery trucks. However, speculation also looms over the future for co-packers in the frozen pizza category, many of which have business deals with Kraft.

“Will Nestlé move to bring production in-house or continue ‘as is’?” Smiley asks. “I think Nestlé co-packs about at the same rate as Kraft.”
 
According to Nestlé, the United States is the largest pizza market in the world with consumer sales of about $37 billion. With estimated sales of $2.1 billion in 2009, Kraft Foods is the leader in the frozen pizza category and has experienced double-digit growth in the United States and Canada during the last four years.

Nestlé notes the DiGiorno and California Pizza Kitchen brands have driven the development of the premium segment, providing consumers with alternatives to eating out or buying home-delivered pizzas. The business also includes other strong brands with Tombstone and Jack’s. In addition, Delissio is the leading frozen pizza brand in Canada.

The business will be part of Nestlé USA.

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