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Case Memo: Ferrero Group

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Case Memo: Ferrero Group

Ambitious Goals

The goals set out for Ferrero Group are definitively ambitious. Doubling revenue in a mature market by 2026 and achieving total sustainability in the raw materials supply and processing by 2020 are not small tasks, considering that the industry is in its maturity and possible decline. Moreover, reports of consumers preferences shifting toward healthier low-sugar and low-fat products make it even more challenging to find opportunities to maintain its extraordinary growth. The decision that Giovanni Ferrero and the group face going forward is how to ensure the long-term well-being of all the stakeholders. Ferrero Group can continue acquiring firms to stimulate growth, fall back onto the strategy of slower organic growth that his father Michele focused on or seek another option to drive growth.

Changing Preferences in a Mature Market

The chocolate industry is a highly competitive market in its maturity. Consumers are no longer satisfied with product quality, as reports indicate they are starting to take other factors into account when making a purchasing decision. Ethical branding is critical now to gain a competitive advantage as consumers are becoming more mindful of environmental and social issues associated with their purchases. Resembling Griffin’s Pyramid, there is a preference among consumers to support companies that are taking action to benefit society. A materiality matrix from Ferrero identified shared priorities of its stakeholders which included: products and ingredients safety and quality, nutrition and health, human rights, compliance with laws, responsible sourcing of materials, and responsible marketing. Sustaining this advantage, especially in a mature market, entails further differentiation through continued societal impact.

Recommendations

Going public is a real option that Ferrero Group must consider if it is serious about achieving its goals. While there may be a risk, especially for a firm whose margins are susceptible to price volatility, because of the decrease in free cash flow, the capital injection is needed to take on large projects that offer positive blended returns for its stakeholders and to grow. As impacting investing gains traction in mainstream investing communities, the risk of stock price underperformance is less of a concern, especially considering all the tangible steps Ferrero has taken to get closer to reaching its sustainability goal. Not only that, but effectively communicating these steps through reporting systems such as the GRI and SASB standards will allow investors to see with more clarity where cash flows are going. With the financing from the offering, the two opportunities we have identified that align with the culture and values of Ferrero are continuing acquisitions in its upstream supply chain to be able to better control and monitor activities, and to reposition itself to be not only a health and nutrition conscious company but also a leader in sustainability and ESG initiatives to all its stakeholders.

Empowering the Supply Chain

The supply chain of Ferrero and its sources of raw materials are already quite impressive. The company has taken on a leadership role in most of the agricultural sectors that are directly related to its activities. We believe that continuing this trend, and even going a step further, will be a catalyst for Ferrero to reach its goals. Its sourcing of palm oil and hazelnuts are already close to fully sustainable, we recommend that the group focus its efforts on its cocoa and sugar supplies.

While Ferrero has contributed substantially to working with ethical initiatives related to the cocoa industry, we believe that an upstream acquisition can be a profitable investment and allow them to implement its FACTS framework better, to enrich the local stakeholders. The price volatility of this input

should be enough motivation to step in to stabilize its costs, but the opportunity to provide more

infrastructure to empower local farmers and grow the industry act as an ethical motivator.

Sugar is the area in which we believe Ferrero can do more work. The unethical issues surrounding sugar cane plantations is an opportunity for Ferrero to show stakeholders its true values. Committing to education in this area can improve farming techniques for a crop that is extremely water intensive and promote environmental sustainability of ecosystem services. While there is a commitment to source an amount of certified

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