New York, May 6 - The merger of two famous U.S. candy companies should make it easier to distribute venerable brands like M&Ms and Snickers in China, where the craving for chocolate has grown with the country's wealth.
Last week, privately held Mars Inc. teamed up with billionaire Warren Buffett to buy the top chewing gum manufacturer Wm Wrigley Jr Co for $23 billion.
The merger creates the No. 1 confectionary company in the world and increases M&Ms candy maker Mars' geographic base.
Chocolate confectionary retail sales in China reached $813 million in 2007 and were projected to climb 50 percent to $1.23 billion in 2012, Euromonitor International data showed.
With China's sweet tooth and Mars' increased marketing clout, world cocoa supplies could tighten temporarily and elevate chocolate prices, analysts said.
As Wrigley has a bigger presence in the world's most populated country China, the merger was expected to give Mars a marketing boost, analysts said.
"That should provide a very good growth vehicle for both of those companies as both being very mature companies, well-established industries," said Sterling Smith, vice-president with Futuresone in Chicago.
Smith said the merger could lead to a 5 percent increase in Chinese cocoa demand by the end of 2009.
"With China's population being so huge, a 5 percent or 7 percent increase in demand is enormous. If we see two years of 5 percent increases in a row, we could be looking at disturbing prices, potentially," Smith said.
Sterling projected the new cocoa plantations that would be required to meet any increase in demand from China would take years to establish and become productive, causing large price increases.
Wrigley is the top confectionary company in China, which had an estimated population of 1.3 billion in 2007. Wrigley had a 9.7 percent company share in Chinese confectionary retail sales in 2006, according to Euromonitor.
Mars is No. 5 for confectionary sales, at a 2.2 percent company share but it is the top chocolate company, accounting for 13.2 percent of chocolate retail sale value in China. This was a steady decline from 14.4 percent in 2001, Euromonitor data showed.
Western brands like M&Ms have done well in part by promoting their cartoon-like mascots as toys, said Matthew Crabbe, managing director of consumer research firm Access Asia.
The merged company could create scale and added presence, using strength in one brand to promote others. But Crabbe warned that any consumer backlash against one brand also could hurt the others, although currently there are no negative associations with any of the brands.
Chinese cocoa products suffered a public relations blow last year, when many cocoa domestic grinders were reported to have been using cocoa shells rather than beans to make powder for coating in chocolate making, beverages and ice cream. ID:nSP151678
COCOA DEMAND SEEN INCREASING, BUT SLOWLY
New York-based commodities analyst Judy Ganes-Chase of J Ganes Consulting said it was too early for the market to bid up the price of cocoa in response to a possible increase in cocoa demand in China as a result of the merger.
"It will increase but it's not a rapid-fire pace. Given the size of the population, even small percentages can add up to a lot of beans," Ganes-Chase said.
China's economy is rapidly growing and the standard of living for many has quickly improved.
"Once you get a chance to enjoy the finer things in life, why should the U.S. have the monopoly on zits," said Jack Scoville, a vice-president for Price Group in Chicago.
"Overall, demand for commodities in general, I expect to stay strong ... a lot of that is based on Far East demand and especially Chinese demand," Scoville said.
If chocolate continues to increase its popularity in Asia, there will be off-and-on shortages of cocoa over the next few years, he said.