ZURICH, Switzerland (FNS) -- Through its Swiss unit, Kraft Jacobs Suchard, Philip Morris is charging toward dominance in the Eastern European chocolate market.
In a series of strategically swift acquisitions, the U.S.-based consumer products giant has been buying up confectionery manufacturing and distribution concerns across the region, which is home to 400 million consumers.
On Feb. 10, KJS spent $4.4 million U.S. to acquire an 82% stake in Poiana-Produse, Romania's leading chocolate manufacturer, under the country's privatization program. It will invest another $17 million to
modernize its two factories in Brasov, near Bucharest.
In a similar deal last November, KJS secured an 80% share in Bulgaria's leading chocolate producer, Republika, based in Svoge, near Sofia, for a combined investment of $16 million.
In all, KJS has accumulated nine confectionery businesses across Europe since it won Norway's Freia Marabou in a bidding war with Hershey 17 months ago.
Other stepping stones in Eastern Europe included Csemege, a confectionery factory in Budapest, Hungary; the confectionery producer Figaro in Bratislava, Slovakia; Olza, a leading Polish wafer producer, and the Kaunas confectionery business in Lithuania.
Adding in its chocolate businesses in Italy and the United Kingdom as well, KJS's confectionery sales for all of Europe reached $2.8 billion in 1993. So far it has poured $200 million in capital into the acquired Eastern European companies for structural upgrading and development.
Its Eastern European confectionery investment strategy is two-pronged: to develop existing local products through expansion and to strengthen local production bases and establish distribution networks for Philip Morris' own brands.
"We will continue to market local products such as [Republika's] Fine Milk Chocolate in Bulgaria, while starting to distribute some of our other fine products, such as Milka tablets and Prince Polo wafers," said Bernhard Huber, KJS vice president in charge of the Central and Eastern European regions.
Republika, founded in 1928, last year produced 8,000 tons of confectionery. It enjoys a strong market share in the chocolate confectionery segment and its high-quality products enjoy solid name recognition throughout Bulgaria and Ukraine.
Hubert called the Poiana acquisition "consistent with Jacobs Suchard's strategy to ensure a strong local production base in Romania." It appears a sure bet, since Poiana already controlled one-third of the total chocolate market, producing 12,000 tons of confectionery products in 1993, with sales of $14 million U.S.
Poiana will provide an ideal basis to establish import distribution facilities in Romania for KJS products such as Milka chocolate tablets, while facilitating the distribution of newly acquired Eastern brands, such as Africana tablets from Hungary, it was explained.
The Milka 100-gram chocolate tablet is the flagship product in Philip Morris' export maneuver into the East. This began in 1992 in Hungary and Poland and continued a year later in the Czech Republic and Slovakia, reaching the market through local distribution channels, including local wholesalers.
While Milka is more expensive than local brands, its market share so far has reached 5% and has reasonable potential to increase to 10%, Huber said.
"The main problem with exporting our own brands into the East revolves around the uncertainty with ever-changing duty and tax structures in these countries," he explained. "This has hampered strategic planning for long-term investment." Presently there is great uncertainty as to trade-relations agreements between the Czech Republic and Slovakia with regard to import duties, Huber mentioned as an example.
With such obstacles, the name of the game so far has been to "play it local," Huber explained, "concentrating our efforts on developing existing brands country by country."
So far it is hard to tell whether pan-European brands will emerge, but Milka is one judged to have strong potential. The Milka brand, whose lilac packaging and familiar cow logo date from 1901, had the strongest spillover from countries such as Austria.
Other market tests are being run to see what potential the brands from one country may have in another. Advertising will also take an increasingly central role, and TV opportunities in Poland, the Czech Republic and Slovakia will be sought.
Competition also may prove to be a hurdle as other leading chocolate manufacturers are now in the race. Nestle has been marketing its own version of the 100-gram chocolate bar since 1993 in Hungary, Poland and Russia. Masterfoods' Mars bar is another strong contender and so is Ferrero's Kinder chocolate brand.
British-based Cadbury, keenly aware of how swiftly KJS moved into these markets, has also entered the race with a market share goal of up to 25% during the next eight to 10 years, said Cadbury Central Europe's marketing manager, Laurence Bass.
"We believe we will appeal strongly to the Russian market with our brands such as Fruit and Nut, Picnic and Whisper," he said.
Cadbury's investment plans in the region begin with $15 million to $20 million in Poland, where it has acquired land for a new manufacturing site. A new facility there is expected to begin operations this September.
Cadbury hopes to set up additional manufacturing bases in Russia. Export networks are being developed in Bulgaria and Romania, moving beyond the old retail system of hard-currency stores to work with local private enterprises, including distributors and wholesalers. "Overall strategy," says Bass, "will be guided by where we feel we can sell molded blocks competitively in highly price-sensitive markets."