Why Nestle Is Selling Butterfinger, KitKat, and Other American Favorites

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Food conglomerate Nestle (NASDAQOTH: NSRGY) recently announced that it's officially exiting the candy business in the U.S. While the Swiss name will no longer be attached to popular brands like Butterfinger, KitKat, Baby Ruth, and Wonka, Nestle's business will continue in America under a new guise.

Details of the deal

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Nestle's candy brands are being sold to Italy's privately-held food company Ferrero for $2.8 billion in cash. That price tag fetches the Italian family over 20 brands that pulled in about $900 million in sales in the U.S. during the 2016 fiscal year.

The deal, which is expected to close around the end of the first quarter 2018, helps Ferrero increase its presence in the U.S. Nestle's portfolio will be added to names like Tic Tac, Ferrero Rocher pralines, and Nutella. A Ferrero subsidiary also recently bought out the Brach's, Trolli, and Black Forest candy brands. After completing this latest acquisition, Ferrero will have bought its way into third place in the U.S. confectionery market.

What will happen to Nestle?

Nestle has been looking for an exit from American candy since last summer. Though the U.S. is the company's largest market for sweets, candy sales have been shrinking as American tastes trend toward healthier snacks. Under new CEO Ulf Mark Schneider's guidance, the company is overhauling its business to return to growth.

That means international candy is still in for Nestle, especially the popular Kit Kat brand. Stateside, a focus on alternative food categories will ensue. Nestle claims that 97% of American households contain one of its brands, which include diverse names like Purina, Nestle Pure Life, Coffee-mate, Gerber, and Stouffer's.

But through the first three quarters of 2017, North American sales have been flat. Leading food segments in the last reported quarter for Nestle were coffee creamers, pet care, and frozen food and pizza, while candy and ice cream were a drag. The hope is that unloading the underperforming segment will help the region's profits improve.

As for its growth strategy, the second half of 2017 was a busy one for Nestle. The company announced a number of investments and acquisitions in targeted food categories where it sees consumers flocking.

Nestle's strategy looks pretty clear: Junk food is out, healthier and all-natural food is in. The company is also bolstering its presence in the healthcare industry by way of nutrition-based research and supplements. While candy bearing the Nestle name in the U.S. will disappear, look for the brand on a growing number of better-for-you options at your local grocery store.

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Nicholas Rossolillo has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nestle. The Motley Fool has a disclosure policy.

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