(RTR) Nestle wants bigger piece of high-end chocolate

Nestle wants bigger piece of high-end chocolate

ZURICH/LONDON (Reuters) - Nestle's chief executive, who oversees a sprawling empire stretching from baby food to wrinkle treatment, admits to finding one of its oldest businesses, chocolate, a source of frustration.

Nestle is one of many consumer goods companies trying to tap interest in high-end, natural, artisan, exclusive or organic goods to augment packaged food sales that have been sluggish in Europe and North America since the global recession.

Its Nespresso brand enjoys a comfortable position at the high end of the coffee market, helped by exclusive distribution, break-through technology and ads with George Clooney. But the company has not done the same in chocolate.

"Premium chocolate is my small intimate frustration," Chief Executive Paul Bulcke told investors at a conference in Boston on June 4 where he also discussed the company's shrinking appetite for underperforming brands.

His revelation prompted renewed speculation the company, known for mass-market chocolate, may seek to buy its way into a bigger role in the premium sector, particularly in the United States. A Nestle spokesman declined to comment on any plans.

"I think there will be some sort of premium chocolate initiative on a global basis for the company over coming months and quarters," said Kepler Cheuvreux analyst Jon Cox. "And to be honest, about time too."

Nestle sold about 7.5 billion Swiss francs ($8.39 billion) of chocolate in 2013, accounting for about 8 percent of group sales. Its confectionery business is No. 3 behind Mondelez International and Mars in a global market with more than $196 billion in retail sales, according to Euromonitor International.

Over the last seven years, Nestle's confectionery business has grown at an average rate of 5.7 percent, below the group average of 6.3 percent, according to Vontobel analysts.

Gourmet chocolate, often made with higher cacao content and exotic flavors such as chilli or ginger, is still a small part of the market and boasts a range of independent players such as La Maison du Chocolat and Vosges.

But multinationals are increasingly present. Mondelez owns Green & Black's, Korea's Lotte owns Belgium's Guylian, Mars owns Pure Dark and Hershey Co owns Scharffen Berger.

Nestle also sells premium brands -- Switzerland's Cailler and Italy's Baci Perugina -- but the vast majority of sales come from mainstream brands such as Kit Kat, Aero, Crunch and Butterfinger.

"We're trying to answer that. It's going to be a long-term journey but we do have the quality in chocolate, we do have the knowledge, we do have the 'metier'. We just have to do it," Bulcke said, noting that part of the problem was the company's decentralized structure.

"Super-premium luxury chocolate brands should be monolithic worldwide, like Nespresso is. That goes against the DNA of our organisation, so we're going to have to find ways to go around that," he said.

TO BUILD OR BUY

The easiest way for Nestle to move upmarket in chocolate would be an acquisition, and rumors of its interest in Switzerland's Lindt & Spruengli and Italy's Ferrero have recurred over the years.

"What's interesting about both Lindt and Ferrero is both of those companies would fit beautifully into any of the other four big players," said Andrew Cosgrove, lead analyst at EY's global consumer products practice, referring to Mondelez, Mars, Nestle and Hershey. "But neither asset looks affordable or available in the short term."

Any buyer of Lindt, the maker of Lindor and Ghirardelli chocolates, would have to offer a hefty premium to its current market value of $12.8 billion, paying for the luxury positioning that lets Lindt generate high single-digit sales growth in developed markets, where mainstream peers see flat or low single-digit increases.

In October, Italian media said Nestle had offered to buy Ferrero, the family-controlled maker of Kinder chocolate, which bankers value at more than 10 billion euros ($13.5 billion). Ferrero denied the report.

Yet Bulcke's comments this week led some analysts to believe that acquisitions may be back on the agenda.

"Management appeared to acknowledge that an acquisition may eventually be needed in order for them to achieve scale and relevance (in the U.S. confectionery market)," Jefferies wrote in a note. Nestle remains open to bolt-on acquisitions, announcing a $1.4 billion deal last month to expand in injectible wrinkle treatments.

Other targets in chocolate could possibly include Godiva, though its owner, Turkish conglomerate Yildiz Holdings, in October sold a 20 percent stake of its food business Ulker Biskuvi.

Meanwhile Russell Stover, known for its boxed chocolates, is reportedly running a takeover auction that reports say has attracted interest from suitors including Hershey, Yildiz and private equity firms.

Hershey Chief Executive John P Bilbrey recognises the growth of the premium segment but explained in a February interview that mass brands still account for 85 percent of all chocolate sold, with the remainder evenly split between "super-premium" and "mass-premium" brands, which people trade up to in good economic times and down from in tough times.

"People ask me all the time 'what are you doing in premium, what are you doing in premium?'," Bilbrey said. "And I always reorient them. I say: 'I'm growing well in the biggest part of the market'

FT : UK ‘would not be freer’ after leaving EU

UK ‘would not be freer’ after leaving EU

The tussle between David Cameron, UK prime minister, and his allies over the leadership of the European Commission has triggered new questions over Britain’s future in the EU – with President Barack Obama warning last week against a UK exit. The complex choices that would surround any divorce will be set forth this month by a commission set up by the Centre for European Reform. For British proponents of an exit from Europe, the report will make unwelcome reading. Not only does the 92-page analysis argue that EU membership has been a "boon" for the UK economy, lifting its goods trade with other members by 55 per cent, generating increased inward investment and boosting the City of London, but it finds that many of the purported benefits of leaving are "illusory". Even within the rule-bound EU, Britain has managed to preserve the second most lightly regulated product market in the developed world, as well as levels of employment protection that are only marginally more restrictive than in the US or Canada – and well below those in France or Spain. Some of the most controversial EU rules – such as the working time directive – have had only a "marginal" effect on the labour market, according to its analysis, while in other areas, notably financial regulation, Britain has voluntarily gone further than EU minimum standards. "A bonfire of European rules would not transform Britain’s economic prospects," according to the report. "The idea that the UK would be freer outside the EU is based on a series of misconceptions". The CER, a think-tank that aims to make the EU more open and effective, drew on the contributions of 22 commissioners for its report. They included Sir Nigel Wicks, chairman of the British Bankers’ Association, Lord Monks, former general secretary of the Trades Union Congress, Sir Richard Lambert, a former CBI chief and FT editor, and Lord Mandelson, the Labour peer and former EU commissioner. In Britain, although some polls have tilted in favour of continued EU membership, the eurosceptic UK Independence party nearly doubled its seats in the EU parliamentary elections. Matthew Elliott, CEO of Businesses for Britain, a lobby group seeking renegotiation of the UK’s pact with the EU, said that "unwavering deference" to the idea that Britain must stay in the union was making it harder to secure a better arrangement. "The constant assumption that Brexit would be doom and apocalypse is ignoring the opportunity that we have to negotiate a radically more competitive deal," he said. However, the CER report highlights what it calls an "invidious choice" facing the negotiators of any split with Europe. If Britain seeks to benefit from the single market from outside the EU it will have to play by many of the rules it is seeking to escape – while having less influence over them. The flipside would be freedom from those rules, with loss of access to the single market. If Britain does leave, its options would include a Swiss-style deal based on bilateral agreements with the EU; a customs union of the kind Turkey has with the EU; or, like Norway, membership of the European Economic Area. However, the UK would still have to comply with the club’s rule book without having power to influence it. And it could find itself continuing to pay into the EU budget; a Norwegian-style deal would lower net contributions by only 9 per cent, while a Swiss arrangement would cut contributions by 55 per cent. The paper concludes that the only option that would make sense would be for Britain to go for as deep a free-trade agreement as possible with the EU and sign as many bilateral trade agreements with non-EU partners as can be secured. However, an FTA would still not leave Britain with complete regulatory freedom, as the EU would make demands on labour market rules, health and safety and competition policy, as well as product standards. Including Britain’s services sector in any FTA would be difficult, given the UK’s large trade surplus in services with the rest of the EU.

>>> UBS chief China economist Wang Tao: Sees 15% chance of slowdown in China pro

UBS chief China economist Wang Tao: Sees 15% chance of slowdown in China property development activities; Would drag down GDP growth rate to around 5% if happens - Chinese press
- Does not see China to experience a housing "crash", nor other financial crisis, like other emerging economies have experienced. 
- Current risks in housing market different from previous challenges; Current risks due to excess supply, slower growth of demand, but not tight govt policy. 
- Current situation could be a "structural turning point" for China housing market.

WSJ : Draghi Sparks Utility Stocks

Draghi Sparks Utility Stocks

A guy called Mario helping the Italians isn't the most startling proposition. But this one, Mr. Draghi who runs the European Central Bank, is also helping the Spanish, though; the Germans, not so much.

This concerns utilities in particular. The ECB's monetary-easing efforts, unveiled Thursday, should ensure that euro-zone interest rates remain very low and keep the door open to further measures, including quantitative easing.

That will provide an added boost to Italian utility Enel ENEL.MI +0.80% as well as Spain's Endesa, ELE.MC +0.68% which remains listed but is 92%-owned by Enel.

The ECB's effort to anchor interest rates near zero helps these companies in two ways. First, it will keep the pressure on Mediterranean countries' bond yields, giving their debt-laden governments more breathing room and thereby keeping a lid on sovereign risk. The fairly steady fall in the Italian benchmark bond yield since the summer of 2012, to less than 3% from over 6%, has coincided with a doubling of that country's stock market. Enel's stock has more than doubled.

Second, with interest rates suppressed amid ongoing unease about Europe's economic prospects, investors like dividend yields supported by the regulated utility business model. Enel's and Endesa's stocks both yield about 3.4% based on forward dividend estimates.

The switcheroo on U.S. Treasury yields, which have surprised by falling this year rather than rising, has worked wonders for American regulated utility stocks. Having spent much of 2013 treading water as expectations of tighter U.S. monetary policy increased, the sector is up more than 9% this year, nearly double the S&P 500's performance.

The shadow over all this is the euro zone itself. Electricity consumption peaked there in 2007 and, after a recovery in 2010, fell again. Italian and Spanish power demand peaked in 2007 and 2008, respectively. Besides moribund economies, renewable energy targets in European countries encourage the development of wind and solar power, which tend to depress electricity prices.

Yet on this front, Italy and Spain may be through the worst of the upheaval. This is why the ECB's move may still offer a tailwind to their utilities, but not to Germany's. Renewable energy already accounts for 32.5% and 36% of electricity output in Italy and Spain, respectively, according to Société Générale. That is well above their targets for 2020. In contrast, renewable energy's share of German power output is only about 23%, against a 2020 target of 35%.

The upshot is that Germany's energy mix is still evolving, which will put further pressure on demand from traditional power plants and pricing there in the years ahead.

Tellingly, estimates of forward earnings per share for Enel and Endesa, after falling steadily for two years, have bottomed out and started rising again.

Meanwhile, estimates for Germany's E.ON EOAN.XE +0.59% and RWE continue to decline. Their stocks will struggle to gain much traction from the ECB's new stance, while it should spark renewed momentum for their southern rivals.

FT : SABMiller to step up craft beer production

SABMiller to step up craft beer production

SABMiller, the world’s second-largest brewer by sales, is making an “intense” effort to ramp up its share of the US premium beer market, where it has been caught on the hop by the explosion of local high-price craft beers.
Alan Clark, chief executive, said in an interview that the producer of Miller Lite, Foster’s and Peroni is aiming for a market share “well north” of 20 per cent of the value of US premium beer market, from 14 per cent currently.

“We’ve got to shift our portfolio to premium. That’s clearly a priority that the team now understand and are working on it,” he said of the “intense activity” within MillerCoors, the group’s US joint venture. He gave no timeframe for the increase.
While one-third of beer volumes sold in the US is of premium beer, that category accounted for only 8 per cent of SABMiller’s sales.
The Monday Interview
Over the past 18 months, the group, which trails larger global rival Anheuser-Busch InBev in the US market, has launched a range of new varieties and brands, including Leinenkugel’s Summer Shandy, Batch 19, Third Shift and Blue Moon seasonal beers, and acquired Crispin Cider as a super premium cider.
Brewers are facing a slow decline in mature markets, such as the US and Europe where beer sales have been losing out to soft drinks and bottled water. Critics say this is partly because the big brewers have not been creative enough, leaving local craft brewers to step into the vacuum and gulp down 12 per cent of the market.
“Let’s take the criticism, that the scale brewers have been slow to innovate and to bring exciting, fresh and new brews. That’s probably correct,” said Mr Clark. “The reality, though, is we’ve recognised that and we’re moving very quickly.”
He said the largest craft beer in the US – Blue Moon Belgian White – “is ours” and that 25 per cent of last year’s growth in the US craft industry came from SABMiller brands.
However, the Brewers Association, the Colorado-based craft brewers trade body, has criticised multinational brewers, claiming they seek “to blur the lines between their crafty, craft-like beers and true craft beers from today’s small and independent brewers”.

FT : Can the Great Recession ever be repaired?

Can the Great Recession ever be repaired?

The US employment report on Friday was notable because it showed that the number of jobs in the American economy now exceeds the high point reached in January 2008 for the first time since the Great Recession. Another important signal that the economy is returning to normal, it might be claimed.

But a period of more than six years with zero growth in jobs in the American economy is anything but normal. According to the Economic Policy Institute in Washington, the US would need to create an extra 6.9 million jobs before the labour market could really be said to be back to normal, in the sense that all those who want employment would be fully satisfied.

The same point can be made about the path for real GDP in almost every developed economy since 2007. While several economies have now returned to their previous peak levels of output, very few have approached the previous long term trendlines which had been established for decades before that. For the developed economies as a whole, output remains about 12 per cent below these trendlines.

Because this level of output has never actually been attained in the real world, there is little sense of tangible loss about this, notably in the political sphere. Nevertheless, the opportunity cost could still be enormous.

The case for believing that the trendlines can indeed be re-attained is that this has always happened after recessions in the past, at least in the US, though it has sometimes taken many years, especially in the wake of financial crashes. The optimists say that none of the growth fundamentals in the system – the state of technological knowledge, the available labour force, and the amount of fixed investment that is profitable to deploy – has been permanently destroyed by the Great Recession. Therefore, they say, it is incumbent upon policy makers to try to re-attain the trendlines, rather than simply accepting the loss. Many central bankers, especially in the US and the UK, strongly believe this.

A more pessimistic view is that the Great Recession has resulted in a permanent (or at least very long lasting) loss of economic capacity, in which case it would be inflationary to attempt to re-attain previous trendlines. On this view, the global economy has now locked on to a different path, with its effective capacity being much lower than previous trends might imply. The latest estimates of capacity published by the IMF and OECD, who should be able to do this sort of work better than most, clearly imply this (see graph above).

An interesting paper released this week by Lawrence Ball at Johns Hopkins University examines the loss of capacity on a country-by-country basis. He does this by extrapolating the IMF/OECD estimates of potential GDP made prior to the Great Recession into the 2008-15 period, and then compares these with the latest published estimates. The difference between these two paths for potential GDP provide an estimate of the lost capacity due to the Great Recession. The results are truly alarming:



As the table shows, most of the decline in output relative to trend in 2013 is attributed to a drop in potential output (7.2 per cent). The US and the core euro area countries perform relatively well in the league table, while the UK and the stressed euro area economies perform badly.

Only about 2.6 per cent of the overall output loss in 2013 is attributed to an “output gap”, or a fall in output relative to potential. This segment is the only part that can rapidly be repaired by expansionary macro-economic policy, which in the current environment means monetary policy, since fiscal policy is still being tightened in most countries. The future growth rate in potential GDP has also dropped by 0.7 per cent a year in the developed economies, so the problem will keep getting worse from now on.

On the latest IMF/OECD forecasts, the output gap will drop to only 1.5 per cent by 2015, which implies that there will be little work left for monetary policy to do by then.

Lawrence Ball’s most interesting result is that there is a very strong association between the actual loss of output since 2007, and the loss in potential output. Those countries which best avoided the recession (eg Switzerland, Germany and Australia) have had the smallest loss of potential GDP, while those which suffered the deepest recession (mainly the stressed group within the euro area) have lost the most in potential GDP.

Ball concludes that “hysteresis effects” have been at work, implying that a demand shortfall in 2008-09 has had permanent effects on potential GDP via reduced labour participation, lower capital spending and reduced innovation and economic dynamism [1].

While Ball clearly believes that the direction of causation runs from the demand side to the supply side, it has to be admitted that these results are observationally equivalent to the opposite conclusion. It is possible that those countries which suffered the largest supply shocks then experienced the largest drop in output, even though there was no prior shortfall in demand. It seems to me far more difficult to make the argument work this way round, but economists should be humble about how much they really know about the causes of recessions [2].

Can anything be now done to reverse these losses in capacity? It is becoming increasingly clear that monetary policy alone will not work. Before too long, financial market bubbles will prevent that.

Some economists believe that the repair can only be accomplished with a much more active role for fiscal policy [3]. Although it is certainly a huge stretch to believe, even in hindsight, that the herculean losses in output since 2007 could all have been prevented by expansionary fiscal policy, the right type of fiscal policy reforms (tax cuts, infrastructure spending, work incentives and capital spending inducements) could now have benefits on both the supply and demand sides.

Those in charge of fiscal and monetary policy are barely, if at all, addressing these problems in their public pronouncements. In fact, a de facto consensus appears to be developing that the losses in potential GDP should be accepted as an unfortunate fact of life. It is a recipe for too easily accepting the second best.

FT : Hostile takeovers rise to 14-year high in M&A as confidence grows

Hostile takeovers rise to 14-year high in M&A as confidence grows

Hostile takeover offers are making up the greatest proportion of global deal activity in 14 years as resurgent economic confidence leads companies to resist friendly overtures from would-be acquirers and demand greater premiums.
The return of blockbuster takeover attempts by some of the world’s biggest corporations including Pfizer, the US drugmaker, is contributing to the overall value of hostile mergers and acquisitions activity even as the quantity of bids is tracking below previous years.

So far this year, 25 unsolicited attempts with a combined value of $290bn have been made. That amounts to about 19 per cent of the value of all M&A activity in 2014, according to data from Dealogic, the most in any year since at least 2000.
The pickup comes as companies become more optimistic about their futures and are increasingly looking at deals as a way to bolster their business instead of more conservative moves such as share buybacks or dividend payouts.
Hernan Cristerna, co-head of global M&A at JPMorgan, said: “The fact that there are more companies looking to make acquisitions is a function of a strong M&A market where companies feel more confident.”
Bill Anderson, head of Goldman Sachs’ defence practice, says that bursts of hostile deals typically come at the beginning and end of any sustained period of M&A activity, as companies move faster to execute takeovers.
“The factors for a wave like this have been there for a while – cheap debt, high corporate cash balances and an improving economy – but now shareholders are also pushing for sensible deals and rewarding those companies that do them.”
However, many unsolicited offers this year have so far failed to lead to deals as targets are also finding the confidence to remain independent and push for higher premiums from would-be acquirers.
What would have been the biggest deal this year ended with Pfizer being told that it would need to increase its £55-a-share offer to buy UK rival AstraZeneca by at least 10 per cent if it wanted to engage in formal negotiations.
Meanwhile, Charter Communications pursuit of rival cable group Time Warner Cable fell apart when the target agreed a friendly deal to be acquired by Comcast for $42.5bn.
Vikas Seth, co-head of Europe, Middle East and Africa and Global Markets M&A at Credit Suisse, said: “The ability to get an unsolicited deal done still remains as much of an art as a science.”
The biotechnology company Valeant is engaged in the largest active hostile takeover attempt as it has teamed up with activist investor Bill Ackman to pursue a $62bn deal with Allergan, the maker of Botox and other cosmetic drugs, which has thus far resisted a succession of takeover overtures.

>>> Japan BOJ Gov Kuroda: Stimulus launched last year achieved its goal of boost

Japan BOJ Gov Kuroda: Stimulus launched last year achieved its goal of boosting the real economy and ending deflation; 2% inflation target may take more than 2 years to reach - financial press

- Says: "One year has passed ...the policy has been having the intended effects leading to an improvement in financial markets, the real economy, prices... When the BOJ introduced QQE we declared we would intend to achieve a 2% inflation target basically within two years time... The policy of QQE will be maintained and will be continued until we achieve the 2% inflation target and also maintain a 2% inflation in a sustainable manner so it may take more than two years if necessary and anyway we are only half way... Even if the government objective of eliminating the primary deficit by 2020, even if that is achieved, debt will continue to rise and that could be a serious problem for the government as well as the economy."

>>> Barron's Summary

summary: Positive on MS, DHR, ODP, EOG; cautious on LMT, NOC, RTN

- Cover story: Positive on MS: Bank has changed from a run-and-gun investment bank and trading house with a midsize wealth management arm to a financial services company split almost evenly between retail brokerage and trading and managing capital for companies and institutions, which may be the new model for Wall Street success. 

- Features: Cautious on LMT, NOC, RTN: Defense companies could take a hit from cutbacks in government spending as money is channeled into growing medical and disability benefits for returning soldiers; Positive on DHR: Companys shares could rise nearly 20%, to $95, if its able to lift its acquisitions activity and if units such as water treatment, petroleum services, and medical diagnostics gain ground; Positive on ODP: Shares could see a 50% boost amid ongoing cost-savings efforts and a likely growth in sales as retailer focuses on its strong North American business; Positive on EOG: If surge in crude-oil production continues, exploration and production company could see a 32% jump in earnings this year. 

- Tech Trader: Positive on AAPL: Tiernan Ray says company is likely to see a massive number of customers upgrade to the iPhone 7, which could have a larger screen, and that an iWatch could produce $3.6B in additional annual profit, or about $4/share. 

- Trader: In spite of the spring rotation out of biotech and momentum shares, the broad market has been resilient, says Marc Pado, CEO of Dow Bull Advisors; Cautious on VRX: Though Wall Street loves the pharma giant, investors should look carefully at its results under GAAP to get a true picture of how its acquisitions strategy makes it seem more profitable than it is; Cautious on JE: Investors should focus on the declining customer net adds in companys core energy-market business; unless growth rate picks up, company could be in a bind, and for now shares arent worth the gamble. 

- Small Caps: Positive on BCC: Company is in solid financial shape, with net debt of $216M and expected free cash flow this year, and a buyback or dividend will likely boost the stock. 

- Mutual Funds: Interview with Frank Greywitt III and Manoj Patel, Managers, DWS RREEF Global Infrastructure (top ten holdings: AMT, National Grid, TransCanada, Enbridge, CCI, SE, Pembina Pipeline, SRE, SES, Atlantia); Interview with Michael Hasenstab, Chief Investment Officer, Franklin Templeton, who says Slivers of Chinas banking system are toxic, but its unlikely well see a systemic collapse. 

- Follow-Up: Cautious on TMUS: Telecom has done well by changing the way people buy smartphones, but the big question remains whether merger with Sprint will go through; Positive on BNP Paribas: Though penalties for breaking U.S. sanctions have tarnished banks outlook, it is still attractive, and worst-case scenario appears priced into stock, which could see 15-20% gains in 2015. 

- European Trader: Banks are potential winners following latest ECB prescriptions for growth (Positive on Credit Agricole, ING Groep, Erste Group Bank); Automakers Volkswagen and Daimler look like good values, and should each seen growth this year. Asian Trader: Japans economy may not be booming, but its growing, and corporations are using their cash to reward shareholders (Positive on Softbank, Panasonic). 

- Emerging Markets: Perus commodity-rich stock market fell sharply in March as copper prices dropped, but it has begun to battle back, and as one of South Americas most consistent growth engines is a better place than Brazil for investors. 

- Commodities: Cotton industry faces a problem as more apparel makers, fed up with high prices, move to man-made fibers such as polyester and rayon. Streetwise: Citigroupss Steven Englander says the Fed, fearful of damaging a still-fragile economy, may use volatility as a policy tool by creating uncertainty around the path to higher rates. 

- Special Report: Barrons list of the Top 100 Women Financial Advisors, led by Karen McDonald of Morgan Stanley, Susan Kaplan of Kaplan Financial Services, and Rebecca Rothstein of Merrill Lynch PBIG.