Arcor: Global Strategy and Local Turbulence (Abridged)

25 Pages·2009·0.37 MB·English

9-710-407
JULY 1, 2009

PANKAJ GHEMAWAT
MICHAEL G. RUKSTAD
JENNIFER L. ILLES
Arcor: Global Strategy and Local Turbulence
(Abridged)

These last few years have been spent constructing a Latin American Arcor. In the next five years, we are
going to have a global Arcor.
— Luis Pagani, President, Arcor Group
In May 2003, Argentina was still recovering from the devastating financial crisis that hit the
country in late 2001. The Argentine peso had devalued by 70%, the government had frozen all bank
withdrawals, and a wave of bankruptcies had ensued.
Arcor, principally a candy and chocolate manufacturer, was one of the Argentine companies that
had survived the crisis, but not without taking a major hit: its revenues from Argentina plummeted
from $650 million in 2001 to $300 million in 2002.1 International revenues increased from $350 million
to $450 million over that period, but the crisis interrupted Arcor’s expansion. Now that the Argentine
operations appeared to have stabilized, Luis Pagani, Arcor’s president, had to rethink the company’s
international strategy: where to sell, what products to offer, whether to emphasize brand building,
and how to manage the company’s growing international business.
The Confectionery Industry
In 2001, the confectionery industry had posted total revenues (at the retail level) of $125 billion.1
Chocolate confectionery accounted for 60% of the total and was growing at faster than 5% per year,
while sugar confectionery (candy) accounted for 40% and was growing at less than 1% per year.
North America and Western Europe combined to account for over two-thirds of the industry’s
revenues (see Exhibits 1a and 1b), with Northern Europeans such as the Swiss and the British,
consuming particularly large quantities of chocolate.2 Latin America accounted for roughly 10% of
revenues, with Brazil, Mexico, and Argentina ranking, in that order, as the largest markets in the
region. Asia accounted for roughly 10% of chocolate revenues and 20% of candy revenues, and
included some of the fastest growing markets in the world: China, India, and Vietnam.

1 Unless otherwise stated, all $ amounts refer to U.S. dollars. For monthly peso/dollar exchange rates over 1999–2003, see
Exhibit 11.
________________________________________________________________________________________________________________

Professors Pankaj Ghemawat and Michael G. Rukstad and Research Associate Jennifer L. Illes prepared the original version of this case, “Arcor:
Global Strategy and Local Turbulence.” This is the abridged version of that case. HBS cases are developed solely as the basis for class discussion.
Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.

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710-407 Arcor: Global Strategy and Local Turbulence (Abridged)
Chocolate products were divided into solid chocolate bars, molded chocolate, filled chocolate
(e.g., Snickers), and panned goods (e.g., M&Ms), while candy products included hard candy, soft
candy, chewing gum, and caramel. Chocolate was also segmented by quality which depended on the
ingredients used (particularly cocoa beans), their processing, and product shelf life.
Within developed markets, chocolate confectionery was generally more concentrated than candy
(see Exhibit 2).3 Developing markets presented a more mixed picture: consumers were more price-
sensitive there, and prices only one-third or one-quarter as high. Exhibit 3 depicts the cost and
margin structures for candy and chocolates for an emerging market producer such as Arcor
manufacturing and selling at home. Exhibit 4 summarizes the sales, employment, and product lines
of the world’s 25 largest confectionery manufacturers in 1999. The largest competitors derived more
than 80% of their revenues from chocolate as opposed to sugar confectionery.4 The three largest,
Nestlé, Kraft, and Mars, each sold $9–$10 billion worth of confectionery. Sales for the next three,
Ferrero, Hershey, and Cadbury Schweppes, fell in the $3–$5 billion range. Levels of
internationalization varied greatly even among the largest competitors: Nestlé and Kraft derived
more than 90% of their sales from outside their home markets, versus about 50% for Mars and
Cadbury Schweppes and 10% for Hershey.5 Internationalization had mostly taken the form of foreign
direct investment (FDI): international trade in confectionery amounted to just under 15% of the value
of world production.6 Both FDI and trade appeared to be regionalized. Thus, Canada and Mexico
accounted for the bulk of U.S. exports and imports.
The rest of this section describes the value chains for both chocolate and sugar confectionery.
Procurement
The main inputs for chocolate included cocoa, milk, and sugar, while inputs for candy included
sugar, glucose, and flavoring. For chocolate and hard candy, ingredients made up one quarter of the
total manufacturer’s price.7 Cocoa typically dominated ingredient costs for chocolate. Cocoa was
grown in a small number of tropical regions and was subject to significant price volatility based on
growing conditions. Four large companies, one of them Nestlé, accounted for 50% of all cocoa ground
in the world in 2001.8 Sugar, the key ingredient for candy, was less concentrated and was often
traded based on a world reference price. However, protectionism kept sugar prices at several times
world levels—recently, triple—in the United States and the European Union. Developing countries
practiced protectionism as well. Mexico, for example, imposed steep import tariffs on sugar, leading
to unpredictable domestic prices, sometimes even higher than in the United States. Argentina
imposed 23% tariffs on Brazilian sugar that benefited from better weather and subsidies for growing
sugarcane that were related to Brazil’s ethanol gasoline-substitution program and to political forces
favoring protection for sugar growers in the country’s sensitive northern region. However, these
tariffs had prompted an escalating trade dispute with Brazil about treaty obligations under Mercosur,
the free trade agreement among countries of the Southern Cone of Latin America.
Production
Producing chocolate was more complicated and investment-intensive than producing candy,
largely because of cocoa processing requirements. However, both processes were highly automated—
with multinationals running their machinery around the clock—and did not require much in the way
of labor or hard-to-find skills.9 In 2002, a world-scale chocolate line capable of producing 50 tons per
day or 16,000 tons per year might cost $9–$10 million, and a candy line of the same scale $2.5
million—although one-third of that scale might be efficient for candy.10 Multiple lines and
infrastructure could boost the cost of a world-class chocolate plant to as high as $100 million, but
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even the leading competitors varied greatly in terms of their production structures. Kraft, in the mid-
1990s, closed more than half its plants worldwide, including 14 of 20 in Europe, to “increase
economies of scale.”11 Mars produced the bulk of its products in the United States but had begun to
employ regional mandates, with one country, or a few, producing a product for a whole region.12
Nestlé, which had the most dispersed production structure, with operations in over 70 countries,
explained that “We could not have achieved growth simply through exports, since many countries
protect their own manufacturers by erecting customs barriers.”13
Channels and Distribution
In developed markets, supermarkets were the most important retail channel, accounting for 55%
of confectionery sales by value, followed by convenience stores (10%) and independent retailers (5%).
In emerging markets, distributors had to devote much more attention to serving a proliferation of
small, independent retailers. In Argentina, for example, 70% of confectionery goods were sold at
mom-and-pop shops or in kiosks, and only 10% of candy and 22% of chocolate was bought in
supermarkets.14 Distributors’ margins in emerging markets could be up to 20%, in return for
undertaking a relatively extensive set of tasks, versus margins of about 6% for distributors in
developed markets. In addition, large confectionary manufacturers often had exclusive distribution,
while smaller ones generally did not.
Marketing and Product Development
According to industry analysts, the confectionery industry in developed markets depended
heavily on advertising, while price competition “played a very secondary role.”15 Chocolate had 3%–
6% advertising-to-sales ratios in developed markets (putting chocolate in the top quartile of
manufacturing industries) and candy generally lagged behind (see Exhibit 5). Chocolate also seemed
more susceptible to product differentiation based on ingredient/product quality, brand longevity
(some chocolate brands were over 200 years old), and the viability of global branding. It was hard to
think of global candy products other than Chupa Chups’ lollipops and Ferrero’s Tic Tac. But in
chocolate, Mars alone had at least five global brands: Snickers, Mars, M&Ms, Twix, and Milky Way.
Annual advertising spending for Chocolate worldwide was nearly half-a-billion dollars of which
80%–90% was spent on television.16 Advertising levels tended to be significantly lower in emerging
markets, where purchases were mainly driven by price, particularly for low-income customers.17
Although the confectionery industry’s 1% R&D-to-sales ratio put it in the bottom half of all
manufacturing industries,18 new product development and product adjustments were still important.
In 2001, a brand new product required a $2 million investment and took about 18 months to develop;
alternatively, a minor product adjustment cost approximately $300,000 and took only six months.
Changing products for a local market (e.g., saltier for the United States, spicier for Mexico, and
sweeter for Europe) might simply require mixing different proportions of standard ingredients.
However, total technology investment for a customized ingredient mix and marketing expense to sell
a product globally could be as high as $100 million.19 In addition, failure rates on new confectionary
introductions were high.
The role of private labels in the food industry was also growing in developed markets. Typically
referred to as store brands, house brands, no-name generics, signature brands, or exclusive brands,
private label goods were sold by non-manufacturers that owned the name of the product or private
label (PL). Compared to widely available national brands, PLs were usually less expensive and
limited to a company’s distribution or licensed marketing area. According to ACNielsen, in 2003, US
sales of PL foods and beverages that exceeded $1 billion (including Wal-Mart) were milk,
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bread/baked goods, cheese, fresh eggs, carbonated beverages, and unprepared frozen meat/seafood.
The most popular PL food products by volume were fresh eggs, milk and sugar/sugar substitutes.20
According to a report by PriceWaterhouseCoopers, by 2010, the market value of private-label food
alone was expected to surpass $100 billion. The report stated that because of PLs, some retailers and
manufacturers crossed over into each other's industries, where they had traditionally been separate.
Also, in some cases, companies manufactured private-label products that competed with their own
branded goods. In other instances, retailers' manufacturing operations produced their own private-
label goods and supplied the products to others.
Arcor Group
Fulvio Pagani and two partners founded Arcor to manufacture candy in 1951 in Arroyito, a small
rural town in the interior province of Córdoba, in Argentina. The firm expanded gradually, from
serving the Cordovan market in the 1950s to other provincial Argentine markets in the 1960s, the
Buenos Aires market in the 1970s, and to markets in the Southern Cone of Latin America in the 1980s.
After Fulvio Pagani died in a car crash in late 1990, Luis Pagani, his eldest son who was
previously a sales director, took over Arcor (see Exhibit 6 for summary financials over this period).
By 1999, Arcor had significantly increased its domestic market share, to 54% in candy and 33% in
chocolate (see Exhibits 7a and 7b). Although major multinationals—Kraft, Danone, and Cadbury-
Schweppes—entered Argentina during the 1990s or expanded by acquiring large local companies,
Arcor built its market share through smaller acquisitions and capacity expansions. Internationally,
Arcor’s exports soared from about $25 million to $200 million during the 1990s, and stretched beyond
the Southern Cone. It had first attempted to export overseas in 1969, with an 80-ton candy shipment
to a U.S. distributor, but when the ship containing the cargo crossed the equator, the candy melted,
and it arrived in the United States as one solid block. By the end of the 1990s, though, Arcor exported
successfully to more than 100 countries, although volumes remained focused on the Americas. Arcor
also made large foreign investments, particularly in Chile and Brazil, each of which accounted for
roughly 10% of Arcor’s revenues of over $1 billion in 2000 (see Exhibit 8).21
Geographic diversification was accompanied by product diversification, principally at home. In
addition to offering a particularly wide array of chocolate and candy products (see Exhibit 4), Arcor
also sold cookies and crackers, and packaged foods (e.g., jam and canned fruit), representing more
than 1,500 SKUs in total. Each of these four product categories accounted for roughly one-quarter of
its domestic non-industrial sales (see Exhibit 9). Arcor owned 5 of the top 10 chocolate brands,
representing 25% of market value. The candy market was highly fragmented by brand and suited
Arcor’s signature strategy of high volumes across a broad variety of products. In terms of domestic
positioning, Arcor targeted good quality products at affordable prices—parity to 10% below
competitors’ prices—and with mass appeal. The rest of this section describes the distinctive features
of its domestic value chain, pre-crisis.
Suppliers
Throughout the 1960s and 1970s, the poor development of input markets in Argentina made
finding competitively priced ingredients and other supplies difficult, so Arcor acquired farmland and
constructed processing facilities of its own.22 By 2000, Arcor owned almost 400,000 acres of farmland
in Argentina; it produced its own sugar cane, milked its own cows, and used its own mills to extract
fructose and glucose from its corn and sorghum plantations. It was also vertically integrated into
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supplying its own electricity and packaging materials, some of which it also sold to third parties.23
Chocolate, however, had to be imported.
Production
Arcor’s production facility in Arroyito had been characterized—in the international business
press—as “the largest in the world” and “a model of efficiency.”24 Overall, there were 31 production
locations: 25 in Argentina, three in Chile, two in Brazil, and one in Peru.25 Arcor’s managers believed
that producing high volumes and utilizing in-house suppliers allowed Arcor to keep product costs
low. The potential for efficiency was enhanced by continuous investment in new equipment and
technology. In a five-year span prior to the crisis, Arcor reinvested over $600 million in acquiring,
building, and upgrading plants (Exhibit 10).26 Internationally, significant Chilean and Brazilian
capacity was added to Arcor’s network and accounted for about 20% of total production in 2002.
Channels and Distribution
Domestic distribution occurred via Arcor’s 160 exclusive third-party distributors who transported
boxes to their final destinations, 72% of which were independent family companies, such as kiosks or
mom-and-pop shops.27 The company also dealt directly with a number of wholesalers and
supermarkets. Arcor claimed 80% of shelf space in the interior of Argentina and 50% in Buenos Aires
and surrounding areas. Since the distributors served as the salespeople, promoters, and deliverers,
Arcor worked hard to train them, spending half a million dollars on distributor training a year, three
to four times more than many competitors, according to the company. Channels in other Latin
American markets resembled Argentina’s more closely than did those in developed markets.
Marketing and Product Development
Historically, Arcor had invested heavily in distribution and new product introductions rather
than advertising. In addition to being prolific at developing new product lines, Arcor also looked for
opportunities to extend existing lines, use new ingredients, or tailor an existing products for a new
countries or markets. It introduced approximately 120 new products each year. Thus, in 2002, Arcor
launched 50 new candy SKUs, while competitors launched around 10 each, and between 1998 and
2002, Arcor offered four times as many new chocolate products as competitors offered.28 Advertising
at the time a new product was first introduced had historically been quite limited. “It’s a complex
task because it takes longer to hire and train distributors to understand our product lines and our
distribution techniques than it takes to enter a market with a huge media blitz,” said Fernando Falco,
an Arcor General Manager. “However, it ensures that we don’t waste money, and it has been a very
successful strategy for the company.”29 Advertising expenditures had increased in the 1990s, though,
in response to increasing competition.
Argentina’s Financial Crisis and Arcor
Argentina, which shared the southernmost part of South America with Chile, was abundantly
endowed with agricultural resources. It ranked among the richest countries in the world through the
nineteenth century and the first few decades of the twentieth, but slipped into a long decline after the
Great Depression. More recently, the 1970s and particularly 1980s had seen tremendous economic
and political turmoil that appeared to draw to an end with the assumption of the presidency by
Carlos Menem in 1989. Menem launched a program of radical reform that involved privatizing
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virtually everything, including the postal system and the national oil company, encouraging
extensive foreign investment, lowering tariff rates, establishing a currency board that pegged the new
currency, the peso, at a one-for-one exchange rate to the U.S. dollar, and forbidding the central bank
from printing pesos in excess of its international reserves.30
For most of the 1990s, Argentina was seen as a successful case of reform because the fixed
exchange rate ended hyperinflation, reducing inflation to single digits.31 Nevertheless, economic
reforms stalled again by the end of the decade. In January 1999, a financial crisis hit Brazil and
Argentina, affecting both the countries exports dramatically; Argentina’s exports to Brazil fell by 30%.
This marked the beginning of a three-year negative GDP growth period. By 2001, uncertainty about
the growing public debt and the contracting economy led to a drop-off in government bond
purchases and to higher interest rates. Doubts about the currency peg’s durability and the financial
system’s ability to uphold dollar liabilities (backed significantly by peso assets, including government
debt) led to bank runs. In response, the Argentine government suspended payments on its external
debt and restricted bank withdrawals in December 2001. In January 2002, it abandoned the fixed
exchange rate. In the next few months, the peso depreciated 70% against the dollar (see Exhibit 11),
output declined by 15%, and unemployment surged to over 20%. At one point, Argentina had four
different presidents during a 10-day period.32 Relative calm set in by 2003, as Nestor Kirchner became
the new president and exports picked up.
Luis Pagani attributed Arcor’s ability to survive the crisis largely to its financial conservatism and
its people. At the height of the crisis, Arcor had net debts of $360 million ($260 of which was in U.S.
dollars) and a post-devaluation leverage ratio of 42%, versus an average of 177% for other Argentine
companies. By the end of 2002, Arcor was current on its interest payments thanks to its limited initial
leverage and the successful restructuring of $30 million in loans from foreign banks that were
originally due in mid-2002.
But the crisis required more than just financial renegotiation: its onset reduced Arcor’s domestic
volume by 40% in December 2001 relative to December 2000. Executives initially discussed idling
operations and running machinery less than 24 hours a day, seven days a week. They soon realized,
however, that reducing the utilization of the vertically-integrated capital-intensive facilities was not
an adequate solution: customer demand for lower price points would persist and had to be addressed
rather than ignored. They responded along multiple dimensions:
Products
Arcor executives began thinking about how to change products to appeal to customer’s new price
points. With their successful chewing gum, Top Line, for example, they considered reducing the
packages from six sticks to four or even two. Product adaptation was considered an easy process,
given Arcor’s experience in developing and producing a wide assortment of items that sold for just a
few cents apiece.
Procurement
Costs could also be reduced by changing the quantity and mix of inputs. The prices of some
inputs such as milk were essentially local. For others, local prices were related to world reference
prices, but the pass-through of exchange rate changes was expected to be variable. Thus, in the case of
sugar (and glucose), which Argentina exported and on which the government was likely to levy a
significant export tax, pass-through might be about 50%. In other words, an amount of sugar that cost
1 peso or dollar before the devaluation, after realignment, for a 3 peso-per-dollar exchange rate, cost 2
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pesos (or $0.67) rather than the 3 pesos that would be implied by 100% pass-through of the exchange
rate change. But for inputs such as cocoa, which was imported, pass-through was expected to be
100%. In addition, world cocoa prices had recently increased 80% in dollar terms because of crop
failures in the Ivory Coast.33 As a result, Arcor was considering replacing some of the chocolate in its
products with wafer, cream, and other fillings.
Production
Resizing and reformulation of products was costly, and the risk involved was heightened by the
rapidly changing environment. Arcor paid careful attention to competitors’ production changes; “The
multinationals are much bigger, and therefore, slower to react. They have centralized production and
are more standardized, which creates difficulty in tailoring products,” said Guillermo Ortiz de Rozas,
General Manager of New Businesses.34 According to him, competitors matched many of Arcor’s
moves, but with a lag of up to six months. Ortiz de Rozas attributed Arcor’s quicker responses on this
and other fronts to the fact that its management had a collective memory of past Argentine crises and
the company’s responses to them. He contrasted Arcor in this regard with multinationals’ local
operations: “Many managers of other companies were young and were not local. They had not
experienced earlier crises that Argentina had suffered and did not know how to react.”
Channels
The confectionery industry’s traditionally long payment terms for the organized trade, up to 90–
120 days, had to be shortened given the pressures imposed by a depreciating currency and capital
constraints. Arcor shortened its collection window to 35–40 days and stopped delivering to a major
retailer that did not comply with its new terms.
Marketing and Product Development
Immense instability created nearly continuous pressure on repricing. Arcor struggled to decide
whether to rely on raw material costs, the previous year’s product prices, or some other measure for
repricing. It also cut back on advertising and product development expenditures, and reoriented
them to focus even more on consumer value.
Governmental Relationships
The crisis also brought about numerous changes in government regulations, some of which were
not helpful. For example, as of 2001, exporters did not have to pay taxes until consumers bought their
products, but in January 2002, the government began requiring companies to pay taxes upon export,
further weakening their financing. Pagani, who became president of the Argentine Entrepreneurs
Association (AEA) in September 2002, hoped to use his position to push for export tax repeal,
exchange rate normalization, and a host of other business-friendly measures.
These adjustments notwithstanding, Arcor’s revenues from Argentina dropped from $650 million
in 2001 to $300 million in 2002. Over the same period, international revenues’ increased from 35% to
60%. As the crisis started to subside at the end of 2002 and the Argentine business slowly began to
recover, Luis Pagani was able to begin turning his attention back to Arcor’s international strategy.
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Plans for International Expansion
From the onset, Arcor’s vision had been “to become Latin America’s leading purveyor of
candy.”35 In the 1970s, Arcor began to emphasize sustained exports—“even under unfavorable
conditions” so as to maintain market access—and invested in small plants in two of Argentina’s
neighbors, Paraguay and Uruguay. In the early 1980s, it purchased Nechar, a small Brazilian candy
company, and built a chewing gum factory in Brazil. The gum factory doubled Arcor’s gum
production and the company began to use it to supply all of its South American markets. In the late
1980s, Arcor also set up a small plant in Chile, completing the process of establishing manufacturing
footholds in all the countries that would become members of Mercosur.
The process of international expansion continued in the 1990s, after Luis Pagani succeeded his
father as Arcor’s president. Anticipating further integration between Mercosur countries and
countries that belonged to the Andean Pact, Arcor established a commercial office in Bolivia and, in
1996, invested in a small plant in Peru. It also set up a subsidiary in Miami to distribute its products
in the United States and started to build up its exports outside the Americas. However, its largest
foreign investments came at the end of the decade. In 1998, Arcor invested approximately $200
million to acquire Chilean confectionery manufacturer Dos en Uno. In 1999, it opened a state-of-the-
art chocolate factory in Brazil, at a cost of about $50 million, as well as a large logistics center.
In 2000, Arcor added commercial offices in two other Andean Pact countries, Ecuador and
Colombia, and in Mexico. That year, 61% of Arcor’s total exports were to South American countries,
19% to North America and 7% to Central America and the Caribbean (see Exhibit 12).36 The fastest
growth, however, was taking place in the other regional markets that Arcor had recently entered.
According to the company, it had become “The Argentine Group with the greatest number of
[export] markets in the world” with exports to more than 100 countries.37
With the onset of the Argentine economic crisis, further internationalization was deemed
imperative. Arcor initially responded by adding employees and markets to its international division
and moving its international headquarters from Buenos Aires to Barcelona—although the Brazilian
and Chilean operations continued to report directly to corporate headquarters in Buenos Aires
(Exhibit 13a and Exhibit 13b). As conditions in Argentina began to stabilize, Pagani felt that it was
time for Arcor to map out its strategic options: which regional markets to emphasize, where to
manufacture, what products to offer, and whether to emphasize brand building or the private-label
business. However, resources were an issue because Pagani had originally envisioned funding
Arcor’s international expansion with an initial public offering (IPO) in 2004 or 2005—no longer a
viable option because of the crisis.
Latin America
Arcor was the largest sugar confectionery manufacturer in Latin America and ranked fourth in
terms of total confectionery sales, behind Nestlé, Kraft, and Warner-Lambert.38 Apart from its
domestic sales, Brazil and Chile were its largest markets in the region.
Brazil represented 45% of total Latin American confectionery volume and was roughly five times
the size of the Argentine market. However, the dollar term value of the Brazilian market had shrunk
significantly in 1998, as the Brazilian Real depreciated from 1 R/$ to about 3 R/$ by spring 2003—
(roughly the same devaluation experienced by the Argentine Peso since the end of 2001). Still, Arcor
continued to invest in Brazil; in December 2001, it purchased “Kid’s” and several other candy brands
with annual sales of about $30 million from Nestlé, raising its share of the Brazilian candy market to
10% and making it market leader. It also held a significant share—roughly 15%—of the Brazilian
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market for chewing gum. Its share in chocolate confectionery, largely sold through supermarkets
rather than the immediate consumption channels such as the kiosks that Arcor emphasized in
Argentina, was approximately 3%. In 2002, Arcor lost its bid to Nestle (26% market share) for loss-
making local chocolate manufacturer Garoto, which accounted for 19% of the local market. The
acquisition of Garoto for $250 million let Nestlé leapfrog Lacta, which had previously been acquired
by Kraft and accounted for 30% of the market, to become the market leader in Brazilian chocolate.39
This realignment was accompanied, however, by a bitter price war.
In Chile, which was less than half the size of the Argentine market, Arcor’s position largely
reflected its acquisition of Dos en Uno in 1998. In 2000, it held 83% of the Chilean market for gum,
was the second largest player in candy, with a share of 35% versus 38% for local competitor
Costa/Ambrosoli, and the third largest in chocolate, with a share of 26%, behind 36% for
Costa/Ambrosoli and 27% for Nestlé. It also held 14% of the Chilean market for biscuits, behind 38%
for Nestlé and 25% for Costa/Ambrosoli.
In the run-up to the crisis, Arcor had also begun to pay significant attention to the Mexican
market, which was roughly twice as large as the Argentina’s. As Pagani had explained in 2001, “The
company is evaluating the possibility of building a factory in Mexico within a few years. We can’t
think about leading Latin America without Mexico.”40 However, Arcor felt that it lacked a good
distribution model in Mexico and had not mastered local tastes (which included spicier items such as
jalapeño-flavored candy). Additionally, as Ortiz de Rozas explained, “There are two very big players
in Mexico. Bimbo, a Mexican conglomerate, has thousands of vans and large access to small mom-
and-pops, and Pepsi Co. has strong door-to-door capability.”41
The United States/Canada
The U.S. market for confectionery was nearly 10 times larger than the Argentine market in volume
terms and significantly larger still in value terms. Exhibit 14 summarizes U.S. domestic shipments,
exports, and imports and Exhibit 15 disaggregates U.S. imports of hard candy—more than one-half
of total U.S. confectionery import volume and more than three-quarters of U.S. imports of sugar
confectionery—by country of origin. Imports from the major source countries, including Argentina,
were subject to zero tariffs. However, transportation costs from Buenos Aires to New York for a 40-
foot container that might hold 17.8 tons of Arcor’s typical export mix stood at $1,700 per container in
the first quarter of 2003. Additional barriers facing Arcor in penetrating the U.S. market included
different distribution channels, with less volume flowing through immediate consumption channels
of the sort that Arcor had emphasized in much of South America, and the high value placed by U.S.
consumers on brands and on premium products. Furthermore, the level of concentration in the
chocolate confectionery segment was higher in the United States than in other major developed
markets, although the reverse was true in sugar confectionery (see Exhibit 2).
In order to penetrate the U.S. market, Arcor had, in 1993, set up what became a 20-person office in
Miami that oversaw the distribution of approximately 300 SKUs to an array of outlets. A web of U.S.
distributors supplied large supermarkets and wholesalers, while a group of brokers supplied smaller
independent outlets, which represented approximately 80% of Arcor’s 500 U.S. clients. In addition, as
Kees Bowkamp, U.S. General Sales Manager, noted, “More and more Buenos Aires-based employees
find themselves devoting parts of their workday to U.S. operations.”42
In the late 1990s, Arcor signed a supply contract with Wal-Mart, to sell its products under the
labels “Whisper” and “Sweet Enticement.” Whisper, which was essentially the same as a Bon O Bon,
“has had incredible success in the U.S., establishing Arcor as a serious player in the American
confectionery market,” according to Mike Filgueras, a North American sales manager.43 He added
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December 2013.
710-407 Arcor: Global Strategy and Local Turbulence (Abridged)
that Arcor sometimes bundled these private label products with other Arcor products to “help us
introduce new confectionery products into the U.S. market, while simultaneously pushing our
brand.”44 Additionally, in April 2001 Arcor signed an agreement with Brach’s Confections Inc. to
manufacture and export 30,000 tons of Brach’s candies, annually. This deal increased Arcor’s annual
exports by $40 million.45 Overall, by 2002, approximately 20% of Arcor’s exports—almost all from its
Argentine and Brazilian plants—were directed to the United States.
The Canadian market for confectionery was also larger than the Argentine market. In 2001, Arcor
opened a sales office in Toronto, and executives hoped to achieve $10 million in Canadian sales by
2004. According to Gustavo Bandino, the General Manager for Canada, Arcor’s Canadian strategy
would resemble its U.S. strategy, but “without overlooking the differences between each market. In
Canada, nearly 60% of the products sold in the supermarket bear a private brand.”46
Europe
Europe was the largest regional market for confectionery, particularly chocolate confectionery.
Transportation costs from Buenos Aires to the European gateway of Rotterdam for a 40-foot
container were lower than to New York: they stood at $1,610 per container in the first quarter of 2003.
However, Argentine exports to the European Union faced tariffs of about 35%.47 In addition, West
European markets were considered as competitive as the U.S. market, and even more oriented
towards premium products.
These barriers notwithstanding, Europe had recently assumed a much more important role in
Arcor’s international strategy. In 2002, it relocated its International Division from Buenos Aires to
Barcelona and recruited Alejandro Siniawski, formerly with Barcelona-based Chupa Chups—a
lollipop manufacturer that was less than one-half Arcor’s size but sold more than 90% of its
production outside its home market—to be its International Director. According to Horacio Aumann,
Arcor’s Argentina-based Export Manager, “We really wanted to move this base into Europe because
in the U.S. we have an 8-year history but in Europe we are starting from scratch.” 48 Siniawski would
head up Arcor’s 300-strong international sales force, recently redeployed to the field, and would be in
charge of market selection and development worldwide, excluding only the South American
countries in which Arcor operated manufacturing capacity (see Exhibit 13b). The Corporate Office in
Buenos Aires would allocate the orders generated by the International Division across Arcor’s
factories.
Within Europe, Arcor had begun, according to the European Director who served under
Siniawski, Gustavo D’Alessandro, to target five or six key markets in 2003.49
Asia
Asia was the third largest regional market for confectionery, after Europe and North America, and
was more oriented towards candy than chocolate. Prior to the crisis, Pagani had targeted Asia, along
with Europe, for penetration by Arcor, and the company continued to consider the region to be a
priority. “The size of the market is enormous, so it has big appeal for us. All the competitors have
gone there,” Guillermo Ortiz de Rozas explained.50 Arcor first entered the market using Sims, a
Chinese importer, and planned to continue with the importer model to gain a toehold of the market.
However, executives anticipated that the market would eventually call for local production and an
exclusive distribution network. In the near term, Arcor planned to open a sales office in Hong Kong
and to investigate other large Asian markets, such as Malaysia, Vietnam, Indonesia, and India. As
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This document is authorized for use only in Strategy by Michael Cronin at Open University from June 2013 to
December 2013.