Case with Questions J Cadbury 1

j Case with questions Cadbury 1 Cadbury is a very well known British confectionery company. Originally a family fi rm started by John Cadbury and grounded in Quaker values and ideals, it started life in 1824 as a shop selling chocolate as a virtuous alternative to alcohol. It went on to become a large-scale manufacturer of chocolate based at the now legendary Bournville factory, built in 1879, and its picturesque workers’ village with its red-brick terraces, cottages, duck ponds and wide open parks. Over the next 100 years Cadbury developed the products that have become so familiar: Dairy Milk in 1905, Milk Tray in 1915, Flake in 1920, Creme Egg in 1923, Roses in 1938 and more. From 1969 it traded as Cadbury Schweppes plc until, in 2008, it separated its global confectionery business (which retained the name ‘Cadbury’) from its US beverages business, which was renamed Dr Pepper Snapple Group Inc. Cadbury Schweppes had already sold off most of its beverages businesses in other countries around the world, a process started in 1999 and concluded in 2009 with the sale of its Australian beverages business. The reason for the exit from the beverages business was to enable Cadbury to focus more clearly on what it saw as its core strengths in confectionery, and better enhance shareholder value. Beverages had become the ‘poor sister’ in the relationship, with a separate management structure but delivering growth below the targets for the company. In 2008 the newly de-merged Cadbury set as its goal maintaining its market leadership position, and leveraging its scale and advantaged positions so as to maximise growth and returns. Its vision was to become ‘the biggest and best confectionery company in the world’ and its governing objective was ‘to deliver superior shareholder returns’. To this end, Todd Stitzer, Cadbury’s Chief Executive, developed the company’s ‘Vision into Action’ plan for 2008 to 2011 which aimed to deliver six fi nancial targets: > Organic revenue growth of 4%–6% every year; > Total confectionery market share gain; > Trading operating margins improvement from around 10% to mid teens by 2011; > Strong dividend growth; > An effi cient balance sheet growth in return on invested capital (ROIC). By 2009 Cadbury was the second largest confectionery company in the world after Mars- Wrigley. It had a 10% share of the global market and held the number 1 or 2 positions in over 20 of the top 50 world confectionery markets, with strong brands in the markets for chocolate (Cadbury, Fry, Bournville, Green & Black’s and Jaffa), gum (Trebor, Trident and Hollywood Chewing Gum) and candy (Bassett’s and Maynards). It also generated 38% of its sales from new ‘emerging’ markets. Confectionery revenues grew by almost 6%, on P. Burns, Entrepreneurship and Small Business, 3rd edn © Palgrave Macmillan, 2011 average, between 2004 and 2009, despite the fact that most of Cadbury’s products were at the mature stage of their life cycle. This growth came from two sources: > organic growth, mainly through fi nding new channels of distribution; > acquisition of new brands. The company was also very focused on making cost and effi ciency savings, as aging products were produced at lower costs and supply chain savings were made. As a result the business was also hugely cash generative, giving the company between £300 and £400 million a year. So how did it use this cash surplus to generate continuing growth? As a starting point, Cadbury was looking for new markets for its products but most of these products already sold around the world. It, therefore, developed a two-pronged growth strategy, with both strands reliant upon the company’s strong cash fl ow. First, because about 70% of its products are bought on impulse, it looked for new channels of distribution so as to encourage sales, or ‘indulgence opportunities’ as they were called. Chocolate bars are now sold anywhere from petrol stations to off-licences and from restau- rants to pubs. Vending machines selling them can be found anywhere from factory fl oors to train stations. The second strand to the company’s strategy was buying into other related high-growth segments where the company can capitalise on its existing distribution chains or use new distribution chains to sell more of its existing products. The company has followed an acquisitions strategy for many years, in part to get into the fast-growing chewing gum market. In 2000 Cadbury bought Hollywood, the French gum maker, and Dandy, the Danish gum maker. In 2002 it purchased the US company, Adams, from Pfi zer. Adams’ brands include Halls, Trident, Dentyne, Bubbas, Clorets, Chiclets and Certs. It also purchased Intergum in Turkey and Kandia-Excelent in Romania. By 2008 gum and other ‘better for you’ products accounted for some 30% of confectionery sales. But there were other confectionery acquisitions such as Green & Black’s in 2005. These acquisitions made Cadbury the market leader in non-chocolate confectionery, including gum and ‘functional’ products such as sore throat remedies, and gave it a foothold in markets such as Japan and Latin America. The company managed each confectionery category – chocolate, gum and candy – on a global basis, focusing on markets where it saw itself as having a competitive advantage. It focused its resources on its top 13 brands, which accounted for around 50% of confectionery revenue in 2008. These brands grew at 10% in 2007 and 8% in 2008. Within this group, fi ve brands were judged to have the strongest potential in existing and new markets on a global basis – Cadbury, Trident, Halls, Green & Black’s and The Natural Confectionery Co. The remaining eight brands in the top thirteen were: Creme Egg and Flake in chocolate; Hollywood, Dentyne, Stimorol, Clorets and Bubbaloo in gum; and Eclairs in candy. Cadbury also focused on a limited number of markets in each category, based on their size or their potential for future scale and growth. Six countries – USA, UK, Mexico, Russia, India and China – were judged to have strong growth opportunities across all confectionery categories. Growth opportunities in other countries were more varied: chocolate in South Africa and Australia; gum in Brazil, France, Japan and Turkey; and candy in Brazil, France, South Africa and Australia. The company also focused its efforts on seven leading custom- ers and three trade channels which, together, accounted for 14% of confectionery revenue in 2008, showing growth of 8%. Its approach to entry into new markets was to use existing distribution strengths wher- ever possible. So, for example, the launch of gum in the UK market under the Trident brand complemented an existing strong presence in chocolate and candy. Cadbury’s ultimate aim is to have a strong position in all three confectionery categories in all the markets in which it operates. When it came to innovation, the number of smaller, ‘non-advantaged’ innovations were reduced. Instead resources were focused on larger innovations from which the company could derive competitive advantage. P. Burns, Entrepreneurship and Small Business, 3rd edn © Palgrave Macmillan, 2011 So has the strategy been successful? The 2009 results showed sales up once more by 5% (11% on actual currency base), with emerging markets showing growth of 9% and developed markets 2%. Chocolate represented 46% of revenues, gum 33% and candy 21%. Emerging markets represented 38% of revenues and developed markets 62%. Cadbury had held or gained market share in markets that generated over 70% of its revenues. Operating margins also improved to 13.5% due to both an improved gross margin and a reduction in sales, general and administrative costs. Recommended dividends were up 10% on 2008. However, we may never know whether the Vision into Action plan delivers its 2013 objec- tives because in 2010, following an acrimonious take-over battle, the US food giant, Kraft Foods, bought Cadbury for £11.5 billion, and de-listed the company from the UK stock ex- change. Todd Stitzer, architect of Cadbury’s strategy, resigned as Chief Executive following 27 years of service with the company, as did the Cadbury Chairman, Roger Carr. In a press release on 14 January 2010 Todd Stitzer commented: ‘Our performance in 2009 was outstanding. We generated good revenue growth despite the weakest economic conditions in 80 years. At the same time, our Vision into Action plan drove a 160 basis point improvement in margin to 13.5%, on an actual currency basis, delivering over 70% of our original target in half the time.’ 1 Investor information on Cadbury can be found on: www.cadburyinvestors.com 1 Product information can be found on: www.cadbury.com QUESTIONS 1 Research the Cadbury products that are available in your country and position them on the Boston matrix. 2 Are most of Cadbury’s products at the mature stage in their life cycle in your market? Give examples of how they can be mature in one market but different in another. 3 Using the Boston matrix, explain how Cadbury manages its product portfolio. P. Burns, Entrepreneurship and Small Business, 3rd edn © Palgrave Macmillan, 2011.

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