August 20, 2007

Luxury Chocolate is Piling on the Pounds As Godiva Becomes the Latest to Tempt Buyers

By richard lofthouse

NICOLAS Bouv, the European chief executive of Godiva, is so in love with the fine Belgian pralines his company makes that he has to ration himself to just two a day. Presented in gold boxes, they are sold for what feels like a king's ransom.

But Campbell, Godiva's American soupmaker owner, is less enamoured by fine chocolates. Although its confectionery business is thought to generate net profits of $55m (Pounds 27.5m, E40.5m) on annual sales of approximately $500m (around 7% of Campbell's 2006's $7.3bn revenues), its 11% margin is well short of the 16% average for the premium chocolate sector - and might explain why Campbell, which is refocusing on healthier drinks, soups and crackers, is considering offloading Godiva after 40 years of ownership.

Yet Godiva's compounded annual growth has been 8% to 10% over the past five years, far in excess of the miserly 2% experienced by mass- market confectionary brands, many of which are battling an increasingly health-conscious consumer on both sides of the Atlantic.

In other words, it's a great time to be Bouv and a rotten time to be Todd Stitzer, the US-born chief executive of Cadbury Schweppes (shortly to become just Cadbury when the drinks arm is sold off, assuming the deal is not derailed by credit markets turmoil). Stitzer may boast interim sales of Pounds 2.3bn, but interim pre- tax profits before exceptionals are down from Pounds 123m to Pounds 110m, for which rising costs are to blame.

The FTSE 100 company is also in the midst of a cost-cutting drive. The closure of 11 factories has been announced, as has the lay-off of 15% of its 60,000-strong workforce. You can buy 400g of Cadbury Dairy Milk for E3; the same weight in Godiva chocolate costs E30.

Most expect a frenzied interest if Campbell, as expected, opts to sell. Christopher Growe of AG Edwards & Sons, a St Louis-based broker, estimates that the US giant could fetch at least $1.1bn for Godiva, and probably more if a bidding war breaks out between suitors such as Mars, Cadbury, Hershey and Wrigley, the gum giant that unsuccessful tried to buy Hershey in 2002. Godiva would have to fetch $1.6bn to avoid dilution of Campbell's earnings.

Indeed, it is not only trade buyers that are likely to be interested: French luxury goods giant LVMH is another likely suitor. It demonstrates how chocolate has been transformed in recent years. US sales of premium chocolate doubled from 2001 through 2006 to $2.05bn, according to Mintel International, a Chicago research firm, growing at a much faster rate than traditional chocolates.

Europe in particular is a big growth market. Prior to Bouv's appointment two years ago, Godiva non-US operations were managed directly from New York, with limited success. The Parisian was hired with a remit to double international sales. Growth in Europe has been uneven but as Bouv, the former franchising and brand tsar for H"agen-Dazs, tells The Business: "We are the biggest premium chocolate brand in the world, and if you include duty free, we're present in all markets."

The French, Belgian and Swiss markets have proved tricky because of stiff competition but Russia is doing well, says Bouv, with a third store recently opened in Moscow to serve the city's newly rich. In London, there are eight Godiva boutiques and concessions, and Bouv wants to roll out a similar number in Germany and Spain. The challenge will be to maximise profits without sacrificing quality or exclusivity.

Not all markets have proved a success. China has failed to take off, despite its burgeoning middle class hungry for expensive European brands. Bouv insists it is only a matter of time - "as with Starbucks' arrival and coffee, I don't think they know what premium chocolate is, but they will" - but it is a key market that will need to be tapped.

Because of this a luxury goods company could make an ideal parent for Godiva; they understand the Chinese market well. But a traditional trade buyer should not be dismissed. Cadbury already has the upmarket Green & Blacks and runs a successful Chinese business, and with its drinks business offloaded, Godiva would make a neat fit.

Regardless who lands this choice morsel, Godiva's fate is a taste of what's to come for a confectionery industry set to move drastically upmarket.

Sweet and lowdown

- European consumers account for 80% of fair trade chocolate sales. The single largest market is the UK, accounting for a third

- Cocoa production is set to soar from 3.7m tonnes in 2007/8 to 4.1m tonnes in 2010/11, on the back of world economic growth averaging 4.7% per annum

- In 2006/7, however, world production fell 7% because of El Nino- related weather affecting Indonesia, Malaysia and Brazil

- The politically troubled Ivory Coast is the largest single source of global cocoa production, with a 37% share of overall global supply