Hershey's has an iconic brand that Mondelez now wants to compete with. Image source: Hershey's.
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In turning down Mondelez International's (NASDAQ: MDLZ) buyout offer, The Hershey Company (NYSE: HSY) has set itself up for a chocolate war.
The iconic American brand turned down a $23 billion cash and stock bid from its sometime rival, which included an offer to keep the company's headquarters in Hershey, Pennsylvania. An acquisition would have immediately given Mondelez a strong position in the U.S. chocolate market.
Currently, the company has a strong international presence with its Cadbury line, Milka chocolate bars, and its upscaleGreen & Blacks products, which contain no artificial colors, flavors, or preservatives. In the U.S., it has limited exposure in the mainstream chocolate market, but it does own Oreo, Chips Ahoy!, and Dentyne gum.
In apress release,Mondelez CEO Irene Rosenfeldexplained why her company wanted Hershey and what happens next:
Our proposal to acquire Hershey reflected our conviction that combining our two iconic American companies would create an industry leader with global scale in snacking and confectionery and a strong portfolio of complementary brands. Following additional discussions, and taking into account recent shareholder developments at Hershey, we determined that there is no actionable path forward toward an agreement. While we are disappointed in this outcome, we remain disciplined in our approach to creating value, including through acquisitions, and confident that our advantaged platform positions us well for top-tier performance over the long term.
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That's a very diplomatic way to say, "You don't want our money. Now we're gunning for you." Hershey saying no to a deal blocked Mondelez's easy path to the American chocolate eater and now the company has elected to take the hard road.
What is Mondelez doing?
Like trying to show up the girl or boy who would not go out with you by losing weight, buying better clothes, and dating someone even better looking, Mondelez wants to show up Hershey in its home market. To do that the company will be relying on one of the familiar brands it owns in order to introduce one which most Americans will not know.
The company, the second-largest confectionery company in the world, said in a call earlier this week, that it plans to bring its Milka Oreo chocolate bars to the U.S., Reuters reported. Already sold in more than 20 countries, Milka Oreo is targeted at the mainstream segment of the roughly $14 billion U.S. chocolate market, Mondelez said.
In addition to using Oreo to launch Milka, Mondelez also plans to expand its Green & Blacks product line in the U.S. and around the world.
Overall, the global company is not just targeting Hershey in its home market. Mondelez also plans on "strengthening its sales and distribution operations, enhancing in-store execution and chalking out better routes to market, especially in emerging markets," according to Reuters. It expects to also grow its e-commerce snack business to $1 billion in revenue by 2020.
This is going to be a fight
Hershey pretty emphatically turned down Mondelez and now it must fend off an aggressive new competitor. It will take time for any company to challenge Hershey's U.S. dominance, but pairing Milka with Oreo could lead consumers to try the new brand. That might be enough for Mondelez to begin building awareness for its chocolate line.
This will not be a short battle. Hershey owns an array of iconic products that Mondelez cannot easily counter simply by leaning on Oreo or its other brands. This battle should lead to increased innovation, more choice for consumers, and maybe a new player emerging in the U.S. chocolate market.
That may happen, but right now Hershey dominates the market while Mondelez merely has a good gimmick to try to wedge the door open. Whether that can lead to it building a major brand in the US. remains to be seen.
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Daniel Kline has no position in any stocks mentioned. He prefers British Cadbury bars (made by Mondolez) to the U.S. version made by Hershey. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.