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Transcript of Arcor
The Barcelona office would oversee sales operations in Africa and the Middle East
Arcor opened its first Canadian sales office in Toronto in 2001
Executives wanted to achieve $10 million in Canadian sales by 2004
Their plan for Canada was to use a similar strategy to the one it had used in the United States
In addition to the Latin American factories it built in the late 1990s, in 2000 Arcor opened commercial offices in Mexico, Colombia and Ecuador
By 2000 the company sent approximately 68% of total exports from all plants in Latin America
There was difficulty in Mexico because of two multinationals; Bimbo and Pepsi Co.
Arcor moved their headquarters from Buenos Aires to Barcelona
Because of the variety in industry structure and difference in local tastes if characterized each new market pursuing a different strategy for each market
Plans for Globalization
In 2001 exporters did not have to pay taxes until the consumer bought the product
In January of 2002 the government required that the company pay taxes upon export
In September 2002 Pagani became President of the Argentine Entrepreneurship Association
The AEA gave private business leaders the opportunity to promote private sector and help form and analyze public policies
At the end of 2002 the crisis began to subside and businesses began to slowly recover
Arcor decided to decrease the amount of chocolate in its products and add fillers
The decreased amount of chocolate went from 11% - 8%
All production costs were costly because of the day to day economic uncertainty it was all they had left to do.
Because of the onset crisis Arcor sold 40% less volume in Argentina in December 2001 than December 2000
Forced the company to analyze whether it could continue producing at pre-crisis levels
Customers were demanding cheaper prices.
Arcor needed to develop more cost efficient production processes
They contemplated reducing costs by changing the quantity and mix of inputs
Analysts estimated pass-through might be less than 50% in the case of sugar, which was an export so the government could levy a significant export tax. Less than 70% in the case of glucose , is derived from corn is another product of Argentina had a comparative advantage
Some imports such as cocoa would have a pass-through of 100%
The price of cocoa had increased to 80%
At the end of 2002 Arcor was current on its interest payments and still turning a profit
Employees wages were raised by 20%
Pagani attributed the company's survival partly to its people and financial conservatism
At the height of the crisis Arcor had net debts of $360 million ($260 million in U.S. dollars)
Post- devaluation leverage ratio was 42%
Banks gave Arcor $50 million in loans that were due in July 2002
In order for Arcor to avoid a catastrophe adjustments in strategy and further financial renegotiation was required
The Crisis of Arcor
Argentina was traditionally viewed as having a high standard or living and over half of the population was middle class.
Once the 1920’s rolled around and the international markets started to plunder during the great depression, and this was the beginning of the agricultural depression.
For 15 years there was turmoil and a lot of failed ideas. Then in 1945 Juan Peron was elected and he tried to stabilize the economy and bring back the middle class.
In 1974 and 1979 came the oil crises which plagued Argentina. This had led to hyperinflation, political assassinations, and economic decay.
The oil problem got worse when foreign oil reveres failed and international investors lost faith in the Argentine markets.
Carlos Menem was elected in 1989 and tried to fix the economy by privatizing and lowering tariffs. He also encouraged foreign investors to invest in everything from the airlines to the postal service.
In 1991 the peso was established and Menem tried to make it an even 1-1 exchange for American currency.
In 1998 the World Bank financial sector ranked Argentina second in quality of emerging markets.
The Argentina Financial Crisis
From 1960 to late 1980, Arcors marketing strategy was very unique because it didn’t exist. When they introduced a new product, almost no advertising was involved.
This strategy worked in the Latin American markets, but they were having trouble in international markets where their product was not very well known.
They took a huge step in January of 2001 when they launched their first website. This allowed retailers from other countries order their product at anytime.
By the late 1990’s, Arocr was making plans to expand to expand even more internationally.
Arcor would end candy to one of its 160 third-party distributors.
They were unique because over 70% of their products went to mom-and-pop shops or one of the over 100,000 kiosks in Argentina. The rest was sold to wholesalers and supermarkets.
Arcor was able to do this because they would train their distributors to act as sales representatives and promoters, they spend over $500,000 in distributor training.
Arcor faced challenges when the entered new markets outside of Latin America. Many stores vowed to sell other products so long as they didn’t directly compete with Arcor. Yet in the US for example, which prides itself on having a wide range of similar products to compare which ones were best.
Their 2.6-million square foot production facility in Arroyito was one of the largest plants in the world, and combined with all their other plants, they produced candy at an alarming rate.
Arcor believed that it wasn’t as much about technological advancements as much as it was about mass production. They produced high volumes and immediately sent the product to in-house suppliers.
By 2002 they manufactured candy at 31 separate plants, 25 of which are in Argentina.
In the 1990’s, they were one of very few companies who had the capital to increase the number of plants and upgrade their buildings during the increase in demand.
In the 1960-70’s there wasn’t a very diverse group of input markets in Argentina to find a fair price on ingredients; it was viewed as a monopoly where one group assigned whatever price they wanted.
Arcor decided to start from scratch and buy farmland and processing facilities of their own.
They manufactured a wide variety of good on their farms, but chocolate was not one of them.
Their farms began to grow at such an alarming rate that they were able to sell their extra products to third party clients for additional revenues.
Unlike the rest of the competitors, who started their business in a major city in Argentina, Arcor started from the interior and worked their way out to the bigger cities. 55% of their business came for the interior and 45% came from the Greater Buenos Aires area.
One of the largest expansions of the company took place in 1981 when the company built a chewing gum factory in Brazil as well as purchased a leading Brazilian candy company called Nechar.
In the early 1990’s, they spent $160 million to establish themselves in the Chilean market.
Their first attempt to export overseas in 1969 was an epic failure and cost them 175,000lbs of hard candies.
Yet by 1991 they had perfected their transportation, packaging, and sizes. They expanded to over 100 countries by 2000 and they saw a 23% increase in foreign sales in less than a decade.
Founded in 1951 by Fulvio Pagani and his partners in Arroyito, Argentina.
By the mid 1970’s Arcor was producing 130,000 pounds of candy per day and controlled 20% of the candy market and 8% of the chocolate market.
In December of 1990, Fulvio died in a car accident and the company was handed down to his oldest son Luis, who was sales director at the time.
Luis was a business man and knew he wanted to grow the company so big that it could go public.
The Arcor Group
New Product Development and Product Adjustments
Products must be changed in order to fit within the local market
Investments to do so are very costly
Advertising was relied upon heavily in developed markets, spending up to 6% of total revenues advertising
Due to regulatory barriers global marketing was difficult
Brand is much more important for chocolate than candy
Supermarkets account for 55% of sales by value
Convenience stores account for 10%
Independent retailers account for 5%
Mom-and-pop shops or kiosks account for 70%
Supermarkets account fr 10% of candy and 22% of chocolate
Distributors could earn up to a 20% margin in emerging markets vs. a 6% margin in developed countries
Channels and Distribution
Bulky raw materials are costly to transport
World-scale chocolate bar line could produce over 16,000 tons per year
Large-scale chocolate bar plant can produce up to 60,000 tons per year
Processes of making both chocolate and candy are highly automated and involve heavy machinery
Neither is labor intensive or requires hard-to-find skills
Cocoa, milk & sugar
Sugar, glucose & flavoring
Cocoa comes from tropical regions
Fillings were cheap
Nuts were more expensive than cocoa
Suppliers held contracts and were long-term
A large percentage of revenues come from outside markets:
Cadbury Schwepps: 50%
Different markets have different tastes
Markets & Products
Half new confectionary products are aimed at either children or teens
As on-the-go snacks became substitutes for confectionary products, producers needed to fight harder for impulse buyers
The Confectionary Industry
“Chocolate appeals to people around the world—from industrialized countries where it is a common treat to developing nations where it is a rare luxury for most.”
Consumption in large markets was beginning to platau, but consumption in smaller markets were growing.
The Confectionery Industry
Yearly consumptions total over 15 million tons of confectionary products worldwide
7 million tons chocolate
8 million tons candy
Northern Europeans consumed twice as much chocolate per capita than Americans
Within Latin America, Brazil is the largest confectionary market, followed by Mexico and Argentina
1997: Argentines spent $350 million on chocolate and $300 million on candy
The Confectionery Industry
May 2003: Argentina was slowly beginning to emerge from the country’s most devastating financial crisis
A half a year earlier, the crisis had peaked devaluing the peso by 70%
Arcor: Global Strategy and
In 2002 Arcor had plans to open a sales office in Hong Kong to establish a local presence and investigate other Asian markets such as Malaysia, Vietnam, Indonesia and India
U.S. customers consumed almost one-third of the total global confectionery market
In 1993 the company set up a 20 person North American division office in Miami which over saw approximately 300 SKUs
In 2002 approximately 20% of the Arcor exports went to the United States and almost were all produced at the Argentine or Brazilian plants
Mars, Hershey and Nestle held approximately 29%, 21% and 11% of the chocolate market
In the 1990s Arcor signed a supply contract with Wal-Mart to sell its products in the labels “whisper” and “sweet enticement”
This deal increased Arcors exports by $40 million
Because of immense instability Arcor had to adjust to daily change in distribution and retailer request
The ideal situation would be for Arcor to create independent benchmarks to avoid day to day price fluctuations
They decided to set prices according to raw material costs at time of reprising
Channels and Distribution
For all food groups in 1998, 55% of Argetines were brand focused and only 10% were price focused, the rest was both brand and price focused
By 2000, brand-focused consumers had dropped to 36% and price focused had increased to 17%
With their successful chewing gum they considered reducing the packages from 6 to 4 or 2 sticks per pack. They anticipated that lower priced smaller packages would be more attractive for poorer customers
They decided further expansion into non-Argetine markets would allow it to bring in more non peso revenues
Revenue in Argentina fell from $660 million to $300 million between 2001 and 2002, this was due to the peso devaluation
By 2002 domestic sales decreased to 40% and exports increased to 60%
Products and Market
In January of 1999, the financial crisis hit Brazil. Argentina at the time had over 30% of its national exports going to Brazil so the trade market to a big hit.
By 2001 the citizens were losing faith in their economy and stopped purchasing government bonds which increased the interest rates.
Argentines were afraid of losing everything so they rushed to banks and withdrew their accounts.
In the height of the crisis, the peso had depreciated by over 350% against the dollar.
Unemployment surged to 20%
In 2002 there was so much turmoil that 4 different presidents were elected in a 10-day period.
The Argentina Financial Crisis
Arcors goal was to offer “good quality products at an affordable price.”
They also wanted to strive for product variety and compete in every candy category they could.
In 2002 they offered 1,500 stock-keeping units in 4 different segments:
Sugar Confectionery (candy)
Cookies and Crackers
Packaged Foods (jam and canned fruits)
Arcors two main products were Bon O Bons and Tofi alfajores
They focused a lot of their efforts on variety and coming out with new products very frequently.
Products and Market
From 1991 to 1999, Arcors sales rose 300%
It boasted a 38.6% increase in GDP and a 23.5% confectionery industry increase.
It held a 54% volume share of the Argentine candy market and 33% of the chocolate market.
Produce 24 hrs per day, 7 days a week
Producing 50 tons per day would require $9 or $10 million
A candy plant that size would cost $2.5 million
In the mid-1990’s, many companies began downsizing
Hard candy, soft candy, chewing gum, caramel
Filled chocolate, panned goods, solid bars, molded
Chocolate is further segmented by quality using attributes including:
Markets & Products
US Top 4 chocolate manufacturers account for 86% of the market
US Top 4 candy manufacturers account for 17% of market
World Revenues (2001): $125 billion
$75 billion chocolate
$50 billion candy
North America & Western Europe was accountable for over two-thirds of the sales.
The Confectionery Industry
$9.3 billion in net sales
Export to 170 countries
Kraft & Mars
$9 billion in net sales
Latin America’s leading candy and chocolate manufacturer
Luis Pagani: President of Arcor Group
One of the few Argentine entrepreneurs remaining whose company was still financially stable
1999: prepared to implement his plan to increase presence in other regions
Plan was put on pause because of the domestic crisis