Ferrero Spa

Ferrero SpA: internazionalization process Ferrero background The industry Ferrero was born in 1946 in Alba in Piedmont and its history can be seen, perhaps, as the most representative example of Italian capitalism. Since its establishment until today, different stages of development can be identified, each characterized by specific product, technological, commercial and organizational innovations. The company started its activities immediately after the World War II.

During this time, Piera and Pietro Ferrero were able to turn a small bar and pastry shop into a factory. These early and decisive steps are due to the products, in fact, “invented” by Pietro Ferrero, but also to the efficient sales network organized by his brother Giovanni. In 1950, in fact, Ferrero had its own and efficient distribution network with a fleet of vans that, in a few years, exceeded a thousand units and was able to deliver to shopkeepers fresh and perfect products.

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In the mid-fifties, the company began to exceed the national dimension to acquire a European one. In 1956, Ferrero opened a plant in Germany in Allendorf (about 150 km from Frankfurt), which would represent the first example of the internationalization of Italian industry in the confectionery sector. Ferrero began working with one product (the Cremalba) followed by the start of production of the Mon Cheri, that immediately gained significant market success.

In 1957, Michele Ferrero, Pietro’s son, assumed control of the company and was able to renew its facilities in order to encourage the increase of production: the greatest changes occurred with the use of increasingly sophisticated technologies and more efficient equipment. These are the years of Italian “reconstruction”, in which Ferrero developed new initiatives and new insights that made itself innovative on the market and allowed its continued growth, with greater flexibility, in the less immediate future. In fact, they created new products and improved existing ones.

In 1960, Ferrero opened new subsidiaries in France and Belgium. Within a few years, thanks to the preparation of an adequate commercial network, an expansion project that brought the company throughout the European continent was made: subsidiaries were opened in The Netherlands, Luxembourg, The United Kingdom, Austria, Denmark, Sweden and Switzerland. The company’s widespread presence in the European market became one of its strengths: in fact, it provided the stimulus to increase production and, above all, to incorporate the different tastes of foreign consumers in order to create new products that can completely satisfy them.

At the end of the sixties, the rapid expansion of the company and the results achieved in its first twenty years permitted Ferrero to work on the European market with eight companies. In Italy, the programs of growth paralleled to those undertaken abroad: in 1960 the system of Pozzuolo Martesana, near Milan, was inaugurated, which allows the company to expand its ability to offer and to obtain new customers. It worked with just one product, Brioss, which marked the onset of Ferrero products in the field of so-called bakery products. Next, it was opened a plant in Avellino (south of Italy) used for the processing of hazelnuts.

The sixties were years of “economic boom”, crucial for the entrepreneurial growth of Ferrero. The requests increased in volume as well as the demands of consumers in terms of quality and variety. There was a return to the chocolate and the company proceeded to the creation of new products: in 1964, it introduced Nutella. In those years, there was also the so-called “baby boom”, which implied recognition of the important role played by youngest people as consumers. This new market required new products in order to be satisfied and, in 1968, Kinder chocolate was launched.

Soon, this brand was identified with a full line of specialized food products for children, the Kinder Division. Kinder Division took shape within Ferrero in 1974, following, therefore, a clear business strategy that aimed to create a brand dedicated to children’s snacks and to meet the demand of this market segment. In this way, Ferrero opened a trend that has constantly enriched over the years, but only at the end of the seventies there was an impressive development of a high number of products. During this period, the birth rate of adult products was equally high and among the most significant ones, we can mention: Pocket Coffee, Tic

Tac, and Estathe. In 1969 Ferrero in USA was inaugurated, and this step marked the beginning of the expansion of the company worldwide. Subsequently, in fact, commercial companies were opened, some of which having manufacturing plants in Canada, Latin America, Southeast Asia and Australia. In the eighties, Ferrero was strategically located in all continents , but still overseas growth plans did not prevent the European activities (continuously growing), nor take away space for the Italian ones that realized two new plants in South Italy (in Balvano, in the province of Potenza and Sant Angelo dei Lombardi in the province of Avellino).

During this period, the strategic decision was developed to present to consumers their products (Nutella, Kinder, Tic Tac and Ferrero Rocher’s new praline) as “businesses” in their own right, able to repair themselves by adapting to the demands that come from new markets. The choice of independent brands, in fact, allows Ferrero to maximize the products and to build a relationship of trust with the consumers. In the nineties, Ferrero began opening up to Eastern Europe with the establishment of sales offices in Poland, Hungary and the Czech Republic in 1996, the new manufacturing plant in Bielsko, Poland was inaugurated.

The objective of this important investment was to ensure that the consumers in those areas can also enjoy the freshness of Ferrero products in every store. In 1997, Pietro and Giovanni Ferrero, Michael’s sons, became Chief Executive Officers of Ferrero International, the top holding company of the Group, strengthening an attitude that is still based on a solid family structure and able to ensure continued growth. The economic performance of Ferrero SpA Economical Indicators| 2001| 2003| 2004| 2005| 2008| Sales revenues EURO| 1. 603. 458| 962. 141| 1. 865. 146| 1. 942. 484| 2. 452. 97| Return on Investment (ROI,%)| -| 20,86| -| -| -| Return on Sales (ROS,%)| 10,17| 6,51| 9,18| 7,69| 5,22| Return on Equity (ROE,%)| 33,85| 18. 51| 39,42| 47,68| 22,35| Source: AIDA, Bureau Van Dick In 2010 the Italian company Ferrero Group has a turnover of 2. 338 million euros, with an increase of 3. 8 % over the previous year. Net income amounted to 133. 1 million and a cash flow of 216. 1 million euros. Ferrero SpA is controlled by P. Ferrero ; Company, headquartered in Alba (North West part of Italy), which in its turn is controlled by Ferrero International, holding of all Ferrero companies in the world.

The entire Ferrero Group ended the financial year 2009-2010 with a consolidated turnover up to 6. 62 billion euros, with an increase of 4. 3% over the previous year. The Group has, in the world, 38 operating companies, 3 R ; D centers, 15 plants. It is settled in Argentina, Brazil, Canada, Colombia, Ecuador, Mexico, Puerto Rico, the United States, South Africa and Cameroon, China, Hong Kong, India, Japan, South Korea, Singapore, Sri Lanka, Taiwan, the United Arab Emirates, and Australia. All over the world Ferrero has more than 21. 700 employees 1.

The multidimensionality of the strategy of production internationalization The strategy of internationalization of production of Ferrero SpA in the countries of Central and Eastern Europe has a multidimensional character because it is the result of various actions of foreign growth that take an important and significant role not only from the numerical point of view, that is the number of initiatives implemented and made by the company (Ferrero SpA is, in fact, in all countries of this geographic area), but above all, from the strategic point of view, that is differentiation and complementarity among the different purposes of foreign direct investment. In particular, two distinct modes of entry of Ferrero SpA in the markets of Central and Eastern Europe can be identified: on the one hand in the mid-nineties, an initiative of internationalization in Poland is started, in order to build a manufacturing plant for the production of specific product lines; on the other hand, a network of sales offices is gradually established in order to penetrate and directly manage individual national markets. Direct investment in production is aimed at the rationalization of manufacturing activities at the international level.

In fact, through this initiative, the company intends to increase its production capacity, in order to meet the growing demand from end-consumer markets of Central and Eastern Europe. This strategy, therefore, allows to directly supply these geographical areas, guaranteeing to the final consumers the same high quality standards of the Western productions. In other words, the determinants of this investment can be identified in the increased final demand from the consumer markets of individual countries, in the high quality level of the productions, and in the specific characteristics of the entire production process. Indeed, Ferrero SpA operates in the food sector that is typically configured as scale-intensive industry.

The production structure of the company is highly integrated, as all processes are carried out internally: from the selection and acquisition of raw materials, aspect for which the firm denotes special care and attention, to the products manufacture and their final packaging. The only external supply relationships are represented by the purchase of the necessary raw materials for the manufacture of final products and the purchase of materials for the packaging preparation. For these reasons, the strategy of internationalization of production is presented as necessary: on the one hand, it allows to increase the volume of production, ensuring the satisfaction of consumer demand and, on the other hand, it allows to be “closer” to the end markets , providing consumers with high quality products and achieving, through the reduction of logistics and transportation costs, minimization of total production costs. ———————————————— A new plant will produce Nutella and Kinder for Eastern European markets Ferrero plays the Polish card and invests 75 billion in Warsaw ————————————————- Ferrero will produce Nutella and Kinder Surprise even in Eastern Europe, more precisely in Poland. According to authoritative Polish sources, in fact, the Alba multinational has just begun construction of a factory at 40 km from Warsaw for which it is expected an initial investment of $ 50 million and which will occupy up to 300 employees. When asked about it, Ferrero Italy declined to comment.

This is the first direct investment in a country of the former communist bloc, the most significant ever made so far in the confectionery sector in Poland, that with nearly 40 million of consumers represents the largest market in Central and Eastern Europe and is therefore an important battlefield where all multinationals are measuring, from Pepsi Cola to Nestle, from Cadbury to Master Foods, to Kraft Jacob Suchard. The production will still be bound to all the countries of CEFTA (Central European Free Trade Agreement), a market that includes, in addition to Poland, Hungary, Czech Republic, Slovakia and Slovenia, countries that count more than 60 million people, apart from any enlargements to Bulgaria and Romania.

The free trade area, which is already on a progressive and rapid elimination of tariff and customs barriers, should take final shape in the next two to three years. It is not excluded, according to Polish sources, that the investment of Ferrero could increase at a later time. In that case, the Polish manufacturing base would also be needed to cover the huge market of Russia and former Soviet Republics, which would mean at least a doubling of the initial financial commitment. The factory will be built in Bielsko Duzy near Grojec (agricultural district that is really important for Poland and one of the largest in Europe for the production of apples) and should be ready by summer of next year.

The choice of a greenfield investment is part of an industrial strategy that is becoming common in Poland among international groups and that emphasizes the creation from scratch of production facilities, with full autonomy, then, in recruiting and training of labor and management. Different is the choice made in the same industry by Nestle and Pepsi Cola, who preferred to respectively take over Goplana and Wedel, two historic and prestigious Polish brands in the confectionery industry, and with them all the problems related to old production and management structures and to high unionization. So far, Ferrero was present in Poland since ’92 with a packaging factory of Tic Tac, which will be moved to the new settlement, and through the marketing of a range of five products (Tick tac, Raffaello, Nutella, Kinder Surprise and Kinder chocolate) .

The experiment launched four years ago has worked then, so much to justify a new and more consistent effort and another bet on the markets of the East: only in the last two years, Ferrero Polska would have almost quadrupled its turnover. According to estimations from industry experts, the chocolate market in Poland would be a turnover of about one billion dollars annually, with a good level of consumption per capita: three kilograms yearly against two kilograms in Italy ( 40% of household income is spent on food). The brakes on a even faster growth would derive from backwardness of large-scale distribution system, with very little national coverage compared only to Hungary and Czech Republic, and the lack of a proper cold chain.

The caution with which large distribution groups are moving, partly because of the considerable extension of territory and therefore of the amount of investment required, strongly influences the supply policy by the food and confectionery industry, driving up costs of logistics (warehousing and transportation) and distribution, that needs to introduce a excessive network of its own vendors. Il Sole 24 Ore, 28. 05. 1996 On the other hand, Ferrero SpA implements a contextual strategy of internationalization of production aimed at existing markets presence. In this way, the company not only manages to directly perform logistics and trade promotion functions, it can also strengthen its capacity to capture market information in order to ensure greater penetration of its products and a higher level of customer satisfaction.

Currently, Ferrero SpA is present with its own offices in all the countries of Central and Eastern Europe where only commercial and marketing activities are conducted. 2. The structure and operation of foreign distribution network: the direct control of sales and marketing activities The main determinant of international production strategy aimed at overseeing foreign markets implemented by Ferrero SpA is formed by high consumer demand. Behind the decision to establish a direct presence in Central and Eastern European countries there are not, therefore, reasons related to cost benefits or to investment attraction activities implemented by local institutions, but only a high market demand for the products made by the firm.

In particular, these products are placed in a foreign country under a phased approach: in the first phase, in response to a question that comes from indirect knowledge of the products that consumers acquire through the commercials broadcast by television channels of other countries, the company is an initial team of vendors, responsible for drawing up agreements with local distributors and to ensure availability of the first products to consumers located in more central areas of the country abroad. In the second step, Ferrero SpA strengthens its presence by setting up commercial structures responsible to develop and articulate the product distribution in other areas of the foreign country and to prepare the necessary promotional and advertising campaigns.

Following this activity of penetration of foreign markets that may seem “slow” but that, in fact, has delivered significant results, Ferrero SpA has, currently, a wide network of sales offices which, assuming the marketing activities, provide the direct foreign presence of the firm in various countries of Central and Eastern Europe. These structures are responsible for providing promotional and advertising camapaigns, for the preparation of points of sale, for management of relationships with local distributors and direct marketing of the farm’s products. This approach reflects the firm’s philosophy that, focused on high quality of the products, is manifested in the need for direct control of operations and distribution businesses.

Having control of the situation in each country is crucial to ensure to the final consumer the quality and freshness of the products. We can not leave the distribution in the hands of third parties. Because of the importance we place on quality and freshness of the product and, therefore, on the proximity to the final consumer, it is increasingly important to have an organization in each country. Then, let’s call them organizations, representative offices, companies, this does not matter. It is important, however, that our staff is always there, present in the area because we can not leave the distribution and product management in the hands of others. * The arguments et out below refer mainly to ‘internationalization of production of Ferrero SpA in the countries of CIS (Commonwealth of Independent States) and, in particular to the markets of Russia and Ukraine. For this reason, the foreign trade offices are totally controlled by Ferrero SpA , it does not hold any partnership or joint venture with foreign partners. In organizational terms, this vision of the internationalization process is manifested in the composition and origin of the local management, as people in charge of the exercise of executive functions of the various operating units abroad. In particular, such persons are generally derived from the company as Ferrero SpA chooses among its internal management personnel to be sent at foreign commercial offices for managing the distribution and marketing activities.

This happens for two types of reason: firstly, it is considered necessary that the leaders of foreign trade offices possess high experience and knowledge of the company, its values, its principles, its products and its modes of operating ; on the other hand, the local presence of staff from the company is deemed necessary to ensure an adequate level of control over distribution and sales, and to transfer to local staff the same business values and technical and managerial skills for the market relationship management. Instead, the operating personnel is almost exclusively local and is recruited within the country where the foreign sales headquarter is located. In structural terms, that is the number of employees, the size of each sales office is rather variable and directly related to the size of the foreign country and the specific mode of distribution.

In relation to the first aspect, the variables we can affect the size of the commercial structure consist of the geographical breadth of the country, the territorial dispersion of the population and the high number of potential consumers in the retail market. With reference to the second aspect, however, the size of the office is conditioned by the structure of direct or indirect distribution channel, which means, therefore, the use of its own sales force, and by the number of people that operates inside the distribution channel. This leads to a different structural configuration of the commercial presence of Ferrero SpA in the countries of Central and Eastern Europe, ranging from four units of Belarus, to the more than two hundred workers in the major countries (Poland, Hungary, etc.. ).

One of the main characteristics of these commercial sites is represented also by the absolute autonomy in operations and management. While selling the same product lines, adopting the same advertising campaigns and highlighting the same approach to distribution and trade marketing, these structures are independent compared to the other centers located in other countries in the same area. This is manifested by the impossibility of one distributor or a group of them to communicate and interact directly with a group of commercial offices in different countries. In this sense, each foreign unit can be considered as independent and directly manages its own logistics and local distribution network.

In the CIS (Commonwealth of Independent States), for example, the final products from establishments of Poland, Germany and Italy, are first stored in a Joint Logistics Centre and subsequently collected and distributed directly by each national business facility, through their own sales force or with the help of local distributors. This autonomy and independence does not occur, as already mentioned, because of the policies of the marketing mix, that are instead uniform and standardized. In terms of product policy, you can highlight, in fact, that the product marketed in the countries of Central and Eastern Europe is the same, in any respect, to that prevalent in Western consumer markets.

In other words, there is no qualitative or quantitative adaptation to the specific local market. This choice is obviously determined by the fundamentals of the business that determine how the production and distribution of Ferrero SpA should ensure a high quality of the final consumer product. Moreover, this standardization favors, in fact, even an immediate brand recognition and a unique and immediate perception of the high quality standards of the product itself. In terms of communication policies, the same strategic positioning of the product in all markets determines that the TV, radio or in print advertisements do not undergo profound changes.

In addition to the necessary adjustments due principally to the language of the country in which the message is broadcast, marketing communication involves not only the use of identical tools but also of the same commercials. The only transformation that is implemented in the company’s communication policy is related to the temporal sequence of messages, which must be consistent with the stage of the product life cycle in a given period and in a specific market. For this reason, in the initial phase of introducing the product on the market, spots that had been used previously for the launch of exact same product in other markets are broadcast, thus respecting the logical and temporal sequence of various advertising campaigns.

Following the description of the main features that distinguish the work done by foreign sales offices of Ferrero SpA, as part of a wider strategy of production internationalization, it is possible to reach the identification of possible future activities of production and distribution carried out by the company in the countries of Central and Eastern Europe. In relation to this aspect, it is believed that such competitive situations can develop a high final demand in the coming years. This expectation derives from the size of these markets and is determined above all by the expected increase in the levels of income per capita which could result in the future, as well as the increase in purchasing power, even a change in consumer habits.

Current levels of income do not allow, in fact, a high individual spending for products not covered and not be considered as basic necessities. At the time of the development of the economies of these countries should generate increased levels of income per capita, new market segments that currently appear only as potential could rise. These countries are made up of about 250 million people that represent a large consumer market. Income levels are still very low. However, these markets continue to be very important because they may develop over time and when they begin to wake up we must be there. This strategy is consistent with the competitive changing of the industry, as well as with the strategic conduct taken by international competitors.

The other competitors of Ferrero SpA, established by American and European multinational food, are already present in these regions and, like the company, have adopted similar conditions for entry and garrison of these markets. For this reason, direct foreign presence, management and control of the production, distribution and marketing activities and, most importantly, maintenance of high quality standards of the production can be viewed as competitive factors that, in future, may continue to promote the commercial success of Ferrero SpA in the countries of the ‘Central and Eastern Europe. Sources: * www. ferrero. com * AIDA, Bureau Van Dick ( financial website) * Il Sole 24 Ore (talian finacial newspaper) * Wikipedia-Ferrero SpA * Bloomberg website