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Lotte a possible candidate for troubled Darrell Lea, says analyst

By Oliver Nieburg+

13-Jul-2012

Could Darrell Lea form part of Lotte's expansion plan?
Could Darrell Lea form part of Lotte's expansion plan?

An analyst gives his tips on the possible suitors for Australian confectioner Darrell Lea, which entered administration this week and is looking for a buyer.

According to Jonathan Thomas, Asian confectioner Lotte seems the likeliest contender for Darrell Lea as it looks to expand its reach.

Lotte – prospective suitor

“One possible candidate could be Lotte, which is currently pursuing a global expansion strategy,” he told ConfectioneryNews.com.

South Korean –based Lotte acquired Wedel in Poland from Kraft Foods in 2010, following the latter’s Cadbury buy. Thomas believes Lotte could be looking to expand further.

“Although strongest in Australasia, Darrell Lea also has a presence in other parts of the world, e.g. North America, Europe and South Africa – this wide geographical footprint might appeal if Lotte is still seeking to reduce its reliance on its heartlands in the Far East,” he continued.

What’s on offer?

Darrell Lea appointed administrators PPB Advisory earlier this week and said it was preparing to sell the company.

The firm’s speciality chocolate and liquorice portfolio is sold in 69 franchise stores and 1,800 retail outlets across Australia, New Zealand and the USA.

The company holds a 1.6% share of the US $4bn Australian confectionery market, according to data from Euromonitor International

Darrell Lea employs around 700 people across its manufacturing base in Sydney and its retail network.

Darrell Lea manufactures most of its products from it factory in Kogarah, southern Sydney. It also outsources some production to other manufacturers.

Others in the running

Thomas said there may be others in the running for Darrell Lea, but he effectively ruled out the Australian confectionery market leaders.

“The Australian chocolate market is dominated by the likes of Cadbury/Kraft, Mars and Nestlé, and I wouldn’t expect any of them to register an interest since this might create concerns on competitive grounds,” he said.

The Australian confectionery market, which is expected to grow around 5% this year, is led by Mars. Cadbury is next largest player, while local manufacturer Natural Confectionery holds third place, according to Euromonitor.

Thomas said that another domestic Australian supplier, Fyna Foods, which has grown through acquisition during over the last decade, could also be a candidate for Darrell Lea.

“Whether it has the necessary expertise/resource to acquire a sizeable rival such as Darrell Lea is open to question, however,” he said.

What went wrong for Darrell Lea?

According to Thomas, Darrell Lea has reached tipping point by missing out on recent growth trends despite its strong heritage within the Australian confectionery industry.

He said the company had failed to spot rising demand for bite-sized and organic chocolate products and could have cannibalised some of its sales via their retail outlets by doing distribution deals with supermarkets.

Thomas added that any sale would see the business restructure.

“If the business is acquired, I would expect the company’s network of 1,800 stores would undergo, some form of rationalization, especially since Darrell Lea’s products are now being sold via a wider range of retail channels,” he concluded.

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