This report presents a strategic analysis of Cadbury plc, a leading confectionery company in the world. Though Cadbury has nearly 200 year of history, Cadbury plc has been trading for almost 2 years due to the demerger in 2008. With big restructuring and the uncertainty of global economic environment, Cadbury plc has performed very well since its foundation, particularly thanks to its clear strategy, Vision into Action plan. Recently, Cadbury plc is the takeover target of Kraft and the battle still goes on when the report is written. This report discusses the current competitive environment Cadbury operates in, its recent performances, its present strategies and some author's recommendations for its future development.
A business report on Cadbury plc
Introduction
Cadbury, whose history dates back to 1824 when John Cadbury opened a shop in Birmingham to sell cocoa and chocolate, is a leading confectionery corporation in the world. It makes and sells three types of products: chocolate, gum and candy. It used to be known as Cadbury Schweppes plc, with both confectionery business and beverage business. On 7 May 2008, the company went through a demerger, and the separation of confectionery business from Americas Beverages businesses brought the birth of Cadbury plc and its vision to be the largest and best confectionery company in the world at well. With nearly 200 years of heritage, Cadbury has expanded its business to be one of the world's largest confectionery corporations with operations in more than 60 countries, and currently it employs 45,000 people around the world (Cadbury Factsheet 2009). At present, Cadbury plc is listed on the London Stock Exchange and the New York Stock Exchange. This report presents a strategic analysis of the current Cadbury plc, specifically, the company's current competitive environment, its recent financial and operating performances, its present strategies, and finally some recommendations for its strategies in the near future.
Critical evaluation of Cadbury's current competitive environment
The confectionery market in which Cadbury plc operates in is a large and global one. Being the fourth largest packaged food market in the world, the confectionery market accounts for 9 percent of the packaged food market and has a retail value of around150 billion US dollars. It grows at a steady rate. In the confectionery market, chocolate contributes more than half of its market value while gum enjoys the fastest growth. The confectionery market as a whole is growing at about 5 percent per annum, which is faster than many other packaged food markets. Currently, developed markets represent about one third of the confectionery market, but grow at a slower rate than developing markets. In general, the confectionery market is fragmented in terms of participants. There are six main players (Cadbury, Mars-Wrigley, Nestle, Hershey, Kraft, and Ferrero) in the market accounting for more than 40 percent of the market. In the meantime, there are a lot of companies that only operate in regional or local markets. Hence, Cadbury competes with multinational, regional and local companies at the same time. Presently Cadbury plc enjoys more than 10 percent share in the world's confectionery market. Cadbury plc is the number one in candy and number two in gum. As for its chocolate share in the market, it is based on regional strengths, just like the other top five chocolate manufacturers. In addition, Cadbury plc holds the first or second places in more than 20 of the world's 50 biggest confectionery markets in terms of retail sales value, but with the globalization trend and competition intensify all the time, Cadbury plc always faces challenges almost every minute.
For the recent months, Cadbury plc has been the hostile takeover target in a takeover battle started by Kraft, the US food group. Wiggins (2010) reported on the 4th January that Kraft is working hard to raise funds of £10.3 billion for a hostile takeover offer to Cadbury before the deadline this month when the takeover battle is nearly its final stage. However, as Kraft only values Cadbury at only about 740 pence per share, the offer is expected not to succeed at the current conditions due to lack of sufficient support from shareholders of Cadbury for they believe the company is worth about 800 pence per share. Furthermore, although almost half of Cadbury's shareholders live in the US, quite a few of them do not want to switch their shares of Cadbury into those of Kraft as the latter has a slower earnings growth. Under such circumstances, Kraft is expected to extend the deadline for Cadbury's shareholders to tender their shares and possibly will wait to decide whether to increase the offer money until Cadbury's trading update on 15 January. On Cadbury's side, its final defense argument will be released on 12 January. In addition, its trading update is expected to give good news as Cadbury has already said the company is to meet new financial targets. So far no other formal bidders appear despite that Hershey and Ferrero said before they were considering an offer. With no counter-bidders at present, Kraft is less likely to overpay Cadbury. However, we cannot tell whether the takeover offer will really work out ultimately as things can change quickly, and we should wait and see.
Critical evaluation of Cadbury's recent operating and financial performances
In the fiscal year of 2007 Cadbury Schweppes created revenue of about £5 billion, mainly from chocolate, gum and candy. The confectionery part enjoyed a revenue growth of 7 percent, the highest for a decade up to then. In particular, gum led by Trident grew by 26 percent and chocolate led by Cadbury Dairy Milk grew by 5 percent. In addition, underlying confectionery margins before central and business improvement costs increased by 0.3 percent, which was to a large extent driven by the bigger increase of 0.8 percent in the second half of the fiscal year. In the meantime, Americas Beverages enjoyed a 4 percent increase in revenue, which was quite good in challenging markets. However, underlying beverage margins were impacted by bottler acquisitions and Accelerade launch costs. Although the underlying earnings per share for Cadbury Schweppes was up by 2 percent, reported earnings per share declined by 4 percent because of restructuring costs and 2006 profit on Europe Beverages sale. The Board showed great confidence in the company's prospects as the dividend level was increased by 11 percent from 14.0 pence to 15.5 pence. Furthermore, 2007 was a year of great significance in the history of Cadbury Schweppes as the Board made a decision in March to separate its confectionery business from beverage business. The demerger would bring an end to the nearly 40-years-old Cadbury Schweppes, subject to the approval of the company's shareholders, which made 2007 the last year for Cadbury Schweppes to present an annual report together. The demerger would give rise to the birth of Cadbury plc.
In 2008, Cadbury Schweppes went through a demerger and Cadbury began to focus on confectionery business by selling its beverage business. In consequence, Cadbury plc was founded and it started trading in May 2008. 2008 was a not easy year for almost every business when customers cut their spending or spent with greater caution due to the financial crisis and economic slowdown happening in every corner of the world. To make things worse, Cadbury plc faced challenges of increased cocoa prices and increased competitor concentration. Nevertheless, Cadbury plc performed quite well with revenues of £5.4 billion and underlying operating profit £638 million. Its confectionery revenues increased significantly by 15 percent. In 2008, Cadbury plc began to implement the first stage of its Vision into Action plan and achieved good results. Excluding the benefit of foreign exchange, the base business revenues went up by 7 percent, implying its organic growth surpassing its 4 percent to 6 percent target range for the second successive year. Its global market share grew by 0.4 percent to 10.5 percent. Cadbury also experienced an increase in its underlying operating margins of 1.8 percent to 11.9 percent, largely because of the restructuring and improvements in its underperforming markets. In addition, full-year dividend rose markedly by 6 percent to 16.4 pence and the payout ratio surpassed its medium term target of 40 to 50 percent. In 2008's unstable economic environment, Cadbury plc kept its interest cover at 7.6 times, its debt to EBITDA ratio at 2.1 times, and its credit rating at BBB. A ratio representing how effective Cadbury plc was at utilizing shareholders' investments is return on invested capital (ROIC). In 2008, the ratio rose by 1.1 percent, relatively a modest increase compared to the increase in revenue and profit. This is due to the fact that Cadbury made big investments in restructuring to benefit long term efficiency. In general, Cadbury plc maintained a relatively good balance of efficiency and prudence in 2008.
In 2009, the financial crisis and global economic slowdown gradually died away, but they still had some impacts. Nevertheless, Cadbury plc showed strong performance and their Vision into Action plan went well. For the first nine months of 2009, 45 percent of Cadbury's confectionery revenue came from chocolate, 34 percent from gum, and 21 percent from candy. When dividing revenue of the first half of the year 2009, developed markets such as Britain and Ireland, North America and Europe still accounted for the majority of it, around 64 percent. In the third quarter of 2009, Cadbury plc enjoyed a 7 percent increase in revenue, coming from a 7 percent growth in chocolate revenue, 4 percent in gum and 11 percent in candy. Besides, they year to date revenue grew by 5 percent and year to date underlying operating margin grew by over 1.8 percent. Cadbury's next trading update is expected to be released on 15 January 2010 and the company has already said that it is to meet its targets.
Critical evaluation of Cadbury's current corporate strategy
The demerger and reconstruction transformed the company into Cadbury plc to be a pure-play confectionery business. In order to "deliver superior shareowner returns by realizing the vision to be the world's biggest and best confectionery company" (Cadbury factsheet 2009), the Vision into Action (VIA) plan of Cadbury plc for 2008 to 2011 has been brought up to embody all aspects of its strategy so as to channel all its efforts to realize its vision.
At the heart of its Vision into Action plan is the performance scorecard, which has six financial targets: organic revenue growth of 4% to 6%, total confectionery share gain, mid-teens trading margins by end 2011, strong dividend growth, efficient balance sheet, and growth in ROIC (Cadbury factsheet 2009). The performance scorecard is designed to be delivered through a set of priorities, its sustainability commitments and its corporate culture.
The top one priority of Cadbury plc is reflected in the mantra "growth: fewer, faster, bigger, better", which aims to accomplish its objectives such as focusing on a fewer number of advantaged global and regional brands, making investments to get its new product developments into more markets at a faster rate, using joined up commercial and marketing programs to enjoy a bigger impact and underpinning the whole plan by executing its initiatives better. The following second priority is "efficiency: relentless focus on cost and efficiency", which shows the company's understanding that Cadbury plc not only need to grow faster, but also need to become more profitable. The third priority of Cadbury is "capabilities: ensure world-class quality", which requires, for example, ensuring that the company respond to changing customers and customer behavior as quickly as possible by developing new products or product extensions, or customizing global product platforms to new markets.
In addition, Currently Cadbury plc has six sustainability commitments, which are, "promote responsible consumption", "ensure ethical and sustainable sourcing", "priorities quality and safety", "reduce carbon, water use and packaging", "nurture and reward colleagues", and "invest in communities". Those sustainability commitments have been chosen because Cadbury believes them to be able to improve its business performance and its influence on the world as well. In other words, those sustainability commitments have been chosen so that Cadbury plc is able to grow sustainably to make sure its changes and growth are driven via a performance driven and values led corporate culture.
Cadbury's corporate culture is defined to be a performance driven and values led one. In other worlds, Cadbury plc attaches great importance to performance, quality, respect, integrity and responsibility. Though being a multinational business and having 45,000 employees all around the world, they strive to work as one team in spite of geographic and functional boundaries. Cadbury also works hard to create a working environment in which employees can have fun when at work. Besides, Cadbury plc fully understands that its success comes from the satisfaction with Cadbury of customers, suppliers, shareholders, employees and communities. The motto that once inspired Cadbury's founders, "Doing good is good for business", is still inspiring the current members of Cadbury plc who believe is indispensible to the company's growth and success.
Striving to create brands that people love, Cadbury plc understands that innovation is the heart of it. Hence, Cadbury is not just satisfied with its current portfolio of successful brands. Instead, it continues to invest heavily on technology of taste, flavor, packaging, process development and nutrition to keep its competitive advantage.
Recommendations for the future development of Cadbury plc
After some analysis of the current conditions of Cadbury plc, in this section, some recommendations for the future strategic direction of the company are presented. However, the takeover battle between Kraft and Cadbury has not finished yet up to the time when this report is written, and if Kraft successfully acquires Cadbury in the near future, the merger no doubt will bring some changes to Cadbury, and such changes are more or less difficult to anticipate to certain accuracy now. Hence, the following recommendations are based on the assumption that Cadbury plc would function more or less independently even it is acquired by Kraft.
The Vision into Action plan still is the governing strategy for Cadbury in the following two years in order to deliver superior shareholder returns. Specific strategies and measures are included in three priorities as listed in the balanced scorecard below.
Vision into Action
Strategy
Capabilities
Invest in innovation;
Streamline process and reduce costs.
Efficiency
Rationalize portfolio;
Optimize capital management.
Growth
Drive advantaged brands;
Increase market share.
Growth: in order to be the largest confectionery business in the world, Cadbury needs to increase its growth rate. Currently Cadbury plc has many brands of its three products (chocolate, gum and candy). It should drive its advantaged, consumer preferred brands and products to increase its sales. In addition, Cadbury should work hard to increase its market share via expanding its product platforms and seeking partnership or acquisition (Kraft can offer an opportunity if the acquisition works out).
Efficiency: for the last couple of years, some big changes happened to Cadbury and the global financial crisis did some damages, but Cadbury still showed strong performances. However, shareholder value did not grow as much as revenues. Hence, Cadbury should improve the efficiency of utilizing shareholders' resources. It ought to rationalize its portfolio of brands and cut some underperforming brands or markets. Besides, it should optimize its capital management.
Capabilities: high-quality products are the soul of a successful business. In order to create brands people love, Cadbury should continue to invest in innovation (new technology, new products, new flavor, etc.). At the same time, Cadbury ought to work hard to streamline its production process and reduce production costs.
To conclude, Cadbury plc should continue with its Vision into Action plan. As the global economical environment gets better gradually and the 2012 London Olympics gets nearer, Cadbury plc has great opportunities ahead.
