How Ferrero India's surprise toy inside Kinder Joy helped it beat Nestle's chocolate division

MUMBAI/NEW DELHI: In a small factory on the outskirts of Pune, a handful of employees spends most of its time thrashing out innovative tiny toys. They send the toys to school kids for approval before these are mass-produced. That's still only half the job done. The toys are then sent to Baramati, a rural area some 100 kilometres from Pune, where the company in question, chocolatemaker Ferrero India, packs them as a surprise toy inside its Kinder Joy chocolate egg.

This surprise factor and other differentiation strategy in packaging and distribution seem to have paid off as Kinder, the German word for children, has helped the Italian chocolate maker beat Swiss giant Nestle's chocolate division in incremental sales growth last year.
Ferrero India - which also sells Nutella spread, Ferrero Rocher chocolate and Tic Tac breath mint in the country - added Rs 80 crore year-on-year to its revenues of nearly Rs 341 crore in the year ended August 2012, according to its recent filing with the Registrar of Companies.

NestleBSE 0.15 % India's chocolate division added Rs 69 crore in its kitty last year despite being three times bigger than Ferrero with sales of Rs 1,169 crore in the year ended December.

Experts attribute this largely to the firm's differentiation strategy. "Tic Tac has made its way into stationery shops, while the premium Rocher chocolate packs are available at small kirana stores as well," says an industry source. The ladoo-shaped Ferrero Rocher can be found on the shelves of even traditional mithai shops, which are otherwise considered direct rivals.

A Ferrero India spokesperson says, "Innovation and close attention to customer requirements have led to the creation of unique products." Ferrero India was set up about five years ago with headquarter in Bengaluru. After a brief market test in south India, it launched its products at the national level in May 2010. The firm makes Kinder Joy and Tic Tac at its Baramati factory. Officials close to the company say Rocher isn't the big focus of the company yet. Its Indian operations accounted for less than 1% of Ferrero International's revenues of 7.8 billion (approx Rs 55,000 crore) last year.

Ferrero managed to grow its India business more than 30% in spite of a slowdown in consumer spending as well as having its products priced at least 30% higher than the rival brands. Experts say catering to a niche segment worked in its favour as it largely averted direct competition with existing brands from Nestle and Cadbury. Ashutosh Chakradeo, head of buying and merchandising at HyperCITY Retail, a hypermarket format promoted by retail chain Shoppers Stop, says, "Ferrero Rocher as a product is a 365-day gifting option with an international halo around the brand with its premium positioning."

Debashish Mukherjee, partner and Asia foods head at consulting firm AT Kearney, says, Ferrero is catering to two large gaps that existed in the Indian market —"mid-premium gifting space as well as products specifically designed for kids in India." In fact, Rocher was a favourite gifting option even before Ferrero set up its operations in 2007.