What happens when two Nordic partners split?

The Nordic region’s largest chocolate and sugar confectionery player Cloetta Fazer has split. Yet another de-merger in the dynamic world of commerce, so what makes this story so tempting?

The company was formed after merging two giants – Cloetta of Sweden and Fazer Konfektyr of Finland in 2000. With a market share of 22 per cent, it became Nordic region’s largest chocolate and sugar Confectionery Company. Cloetta Fazer seemed unstoppable with its operations spread from Stockholm to Moscow. Twelve brands of the company dominated and still dominate the taste buds of Scandinavia -- Karl Fazer, Dumle and Geisha are the most popular. Then eight years later, they decided to part ways.

“The owners had a different view of the company`s future growth strategy. The business has been growing during the last eight years, and the results have been good, so the reason of de-merge doesn’t come from business issues,” claims Tom Lindblad, managing director, Cloetta Fazer. The reasoning is still very vague. Through the de-merger, the two separate companies -- Cloetta and Fazer Confectionery would be created. The company announced that the new Cloetta intends to apply for a listing on the OMX Nordic Exchange, Stockholm while Fazer Confectionery will be consolidated in the privately held Fazer Group.

How it all began

Fazer Group has been in the business of chocolate since 1922 when its founder Karl Fazer launched what was to become the company’s flagship product, Fazer Blue milk chocolate.

Karl Fazer was fascinated by all the pleasures that chocolate signified. His father had migrated to Russian Grand Duchy of Finland from Switzerland in 1844. When Karl Fazer decided to enter the business of pastries and chocolates, his father wasn’t quite pleased by his choice of vocation. However he was more bothered about his customer’s expectations than his father. “The Fazer company`s philosophy has always been to exceed our customers expectations. Quality is the most important argument for our products,” claims Lindblad.

By the turn of the century, Karl Fazer’s company was Finland’s largest in the confectionary business and had 203 employees. Today, despite the impending demerger, the company continues to be the largest in Finland with 42 per cent market share by volume. In Sweden, it controls 24 per cent of the confectionary market by volume. As of now, it has around 1,600 employees on its payroll.

Branding the chocolate

When Fazer Blue milk chocolate was launched, Karl Fazer decided that a blue colour on the wrapper would a symbol of patriotism – Finland had earned its independence only a few years earlier. From a single brand, today the company owns twelve prioritised brands are Karl Fazer, Kexchoklad, Dumle, Geisha, Polly, Ässä, Tutti Frutti, Pantteri/Salta Katten, Center, Marianne, Tyrkisk Peber and Plopp. Lindblad claims each of them are characterised by a high degree of innovation and strong market positions.

In 1967 Karl Fazer’s grandson Peter Fazer took a major step towards internationalising the company by establishing Karl Fazer AB in Sweden. Around 87 per cent of the total sales volume is sold in the Nordic countries, which make up the Group´s home market. The export markets account for 13 per cent of volume sales. Apart from Sweden and Finland, the company’s biggest markets are travel trade, Norway, Denmark, Russia, Estonia, Latvia, Poland and Czech Republic.

Market dynamics

The total Nordic confectionery market amounts to around 280,000 tonnes annually, according to data compiled by Cloetta Fazer from sources that include Delfi, ETL, MarkedsFakta. Sweden is the region’s largest single market, accounting for around a third of total consumption. Next largest is Finland, followed by Denmark and Norway. The largest export markets outside the Nordic region are the Baltic countries and Russia.

While the market on most Nordic countries are comparatively mature, with insignificant growth of around zero or a few per cent for several years, Finland has grown at an average of 2.5 per cent in the last five years. The Nordic countries account for roughly 2 per cent of total global confectionery consumption, claims the data.

Speaking on the company’s expansion strategy, Lindblad said, “We have an organic growth strategy for all exciting market, and we are also active in finding new markets.”

Cloetta Fazer retails its product through all major retailers in Nordic countries. The company feels it is important for all retail markets to have right products, interesting/strong branding and a professional way to work together.

Chocolates and their factories

Production started with a small chocolate factory at Pursimiehenkatu, Helsinki at the beginning of 20th century. According to last year’s figure, it produced 285 tonnes of confectionery on an average working day. As of now Cloetta Fazer has five production units in Sweden and Finland.

Cloetta Fazer manufactured a total of around 62,000 tonnes of chocolate and sugar confectionery in 2007. “After the de-merger of Cloetta Fazer, we will have factories only in Finland (3 factories). At the moment we don’t have plans to open new factories,” said Lindblad.

The company sources its raw materials – cocoa – from the narrow belt along the equator. When quizzed about Cloetta Fazer’s sourcing strategy, Lindblad said, “We are working a lot with sustainability in the Fazer group. We are also developing the purchasing process of cocoa, and that work we are doing together with our cocoa suppliers. Traceability is another very important issue that we are working with at the moment, but there is still some work to do in this area.”

Competing for the future

Lindblad claims all big confectionary companies are his competitors. After the de merger Fazer and Cloetta will compete with each other though each have their own territory. “We have to be ready for an even tougher competition in future. We have our roots in the Nordics, and we need to build our strengths and strategy based on that.”

The global economic slump has still not affected the company’s business, claims Lindblad. When asked whether developing markets like India would be a possible place for further growth, he said, “We don’t yet have a clear plan for India. India is a very interesting market, but we need first to analyze the market and trade better to make the decision of go or no go.”

Where does Fazer stand in the international chocolate industry in the next 10 years? “In the coming times, big companies will become bigger and there will be a lot of small local producers as well. We are following the situation and acquisitions in future may be possible,” said Lindblad.

Cloetta is expected to concentrate on its Swedish business and would continue to dominate it as a major player.