Cloetta Fazer to close subsidiary in Poland

Related tags Cloetta fazer Economics Poland Economic growth

Cloetta Fazer, the Swedish confectionery group, has finally lost
patience with its perennially underperforming Polish unit, deciding
to close the Gdansk-based company after failing to elicit an
improvement in its performance, writes Chris Jones.

The company said that the Polish business would be closed sometime during 2005, with consultations with the labour unions commencing immediately after Easter and expected to close before the end of April 2005.

However, Cloetta Fazer will continue to sell its brands on the Polish market through a local distributor.

"Cloetta Fazer's strategy is to focus on the Group's strongest brands. We will continue to market and sell our prioritised brands on the Polish market through a local distributor. In the future, the Polish market will be supplied by the Group's units in Finland and Sweden. Together, these measures will provide a more cost-effective solution,"​ said company CEO Karsten Slotte.

The Polish subsidiary reported net sales of SEK169 million and a net loss of SEK10 million in 2004, and is expected to show a loss throughout the remainder of 2005, the company said. Added to costs arising from the wind-up of the subsidiary, this will have an estimated negative impact on Cloetta Fazer's earnings of around SEK50 million.

Cloetta Fazer has been active in the Polish market for several years, producing all the products it sells there from the Gdansk facility. Last year, it sold some 5,500 tonnes of confectionery products, down by 20 per cent from the previous year.

"The local management and employees in Poland have made an ambitious effort to reverse this negative trend, and it is deeply regretful that we now have to make this decision,"​ said Slotte.

The decision comes less than a year after Cloetta Fazer revealed it had big plans for the Polish market. Back in June 2004, Slotte told​ that the company was set to play a role in the consolidation of the fragmented market, focusing on the premium chocolate sector.

"In general there is over-production of confectionery products in Poland,"​ Slotte said at the time. "Under these circumstances, future consolidation within the market is an inevitability and Cloetta Fazer aims to play a key role in this future consolidation. This means that acquisitions are the most likely way of addressing the current problem of pricing levels within the sector."

Slotte's optimism at the time was based on the sheer size of the Polish market, at least in comparison to its core Scandinavian markets, and its level of economic development.

"For us Poland is a particularly interesting market,"​ said Slotte. "It has a population of 40 million, which is more than all the Scandinavian markets put together and the current level of economic growth means that there is plenty of potential, particularly in the premium sector, which is Cloetta Fazer's niche. We have now been present in this market for ten years, so our brand identity is strong. Added to this the fact that the country has growing income levels and that consumers are becoming more choosey about the type of chocolate they buy, we believe that our products will show increasing potential."

The future of the Gdansk facility was, however, called into question at the time, with Slotte saying that it showed little potential for expansion. But closing the facility down was not on the agenda - rather the company was looking for bolt-on acquisitions to complement the Gdansk plant.

That will clearly not happen now, but Cloetta Fazer still has around 10 per cent of the Polish chocolate market, making it a potentially interesting market for any company that can keep its costs under control. With chocolate consumption levels still relatively low - 5 to 6 kg per person per year compared to 12 to 13 kg in the UK, for example - the opportunity for growth would appear to be there, but with the Polish economy still struggling it is debateable how much interest there will be in the premium confectionery category on which Cloetta Fazer is focused.The company would appear to have understood this, with importing products allowing it to maintain its market share (without necessarily helping to increase it) at a fraction of the cost of local production, even taking into account the relative difference in Scandinavian and Polish production costs.

So a much more passive 'wait-and-see' attitude from Cloetta Fazer than the bullish stance of last June, but one which nonetheless shares the same belief that growth in the market will be possible. The question is, simply, how long will it take for that growth to begin?

Related topics Markets