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A Historical Study of the Role of Cost Accounting on Performance in the UK Confectionery Market: The Experience of Cadbury and Rowntree 1919-38 Vaughn White PhD University of York Management June 2014 Abstract Rowntree’s and Cadbury’s emerged in the latter half of the nineteenth century as two of the UK’s major confectionery firms. By 1918 they had achieved national prominence through the manufacture and marketing of distinct products. Their growth during the interwar period reflected the broader development of non-durable consumer goods within the British economy. The increasing size and complexity of these companies -- a direct consequence of their commercial success -- meant that effective management became critical to their continued ability to compete in the UK confectionery market. In addition to competencies in production management, planning, sales, marketing, distribution and labour management, which became increasingly necessary for the successful control of growing firms, this thesis argues that cost accounting was also a key determinant of this success. Rowntree’s and Cadbury’s pursued different paths to the introduction and development of their respective cost accounting capabilities. This was reflected in the level of technical sophistication they had achieved by the outbreak of World War II. These important differences are identified and explained. The end of the Great War created a changed landscape for the UK confectionery industry and the response of the two companies to this new environment is assessed and explained by a wide range of comparable financial performance measures which were known to contemporaries. Using a wide range of accounting metrics this thesis argues that the prevailing view in the historiography -- that Cadbury’s achieved superior performance -- needs substantial re-assessment. The extent to which the role of cost accounting contributed to this performance is considered, including examples where failings played a part in inferior performance. This is an important addition to business history by the exploration of the role of cost accounting in an industry not previously studied, and its impact on performance that is considered in a wide context. 1 List of Contents Abstract 1 List of Figures 8 List of Tables 9 List of Appendices 11 Acknowledgements 12 Declaration 14 Introduction 15 Section 1 – Literature Review Chapter 1 – The External Environment 25 1.1 Introduction 25 1.2 Economic Factors 25 - Economic Growth & Industrial Development 25 - Living Standards 30 - Unemployment 32 - Transport 35 - Retail Trade 37 1.3 Socio-Cultural Factors 43 - Population & Demographics 43 - Consumerism 45 - Diet 48 - Advertising & Branding 50 1.4 Technological Factors 53 - Technological Development 53 - Confectionery Manufacturing Processes 54 - Confectionery Manufacturing Technology 56 - Packaging Technology 57 1.5 Conclusions 58 2 Chapter 2 – The UK Confectionery Market 60 2.1 Introduction 60 2.2 Raw Materials Foundation of the UK Confectionery Market 60 2.3 Market Structure & Definitions 64 2.4 Origins and Early Developments: up to 1870 64 2.5 Growth & Expansion: 1870-1914 71 2.6 Impact of the Great War: 1914-1918 79 2.7 Maturity & Mass Market: 1919-1938 82 1919-1923 82 1924-1929 85 1930-1934 88 1935-1938 93 2.8 Conclusions 96 Chapter 3 - Development of Cost Accounting and Financial Performance Analysis 98 3.1 Introduction – Cost Accounting 98 3.2 Development of Cost Accounting: Contemporary Literature 100 - Costing 100 - Distribution Costing 105 - Budgeting 108 3.3 Development of Cost Accounting: Business History Literature 114 - Business History Context of Cost Accounting 114 - Costing 114 - Distribution Costing 118 - Budgeting 119 3 - Alternative interpretations of the Business History view of the development of Cost Accounting 122 3.4 Conclusions 123 3.5 Introduction - Financial Performance Analysis 125 3.6 Development of Financial Performance Analysis: Contemporary Literature 116 3.7 Development of Financial Performance Analysis: Business History Literature 137 3.8 Conclusions 144 Section 2 – Fieldwork and Data Collection Chapter 4 - What was the extent of the development and implementation of Cost Accounting techniques adopted by Rowntree between 1869 and 1938? 146 4.1 Introduction 146 4.2 Foundations & Beginnings: 1869-1918 147 - Background 147 - Early Costing Activity 149 4.3 Progress: 1918-1938 156 - Organisational Context 156 - The Quest for Efficiency 159 - The Establishment of a Functional Cost Office 165 - Costing Procedures 170 - Budgeting 177 4.4 Conclusions 190 4 Chapter 5 - What was the extent of the development and implementation of Cost Accounting techniques adopted by Cadbury between 1861 and 1938? 193 5.1 Introduction 193 5.2 Foundations: 1861-1902 194 - Background 194 - Influences 197 - Early Costing Activity 201 5.3 Beginnings: 1903-1918 202 - Organisational Context 202 - The Establishment of the Cost Office 203 - Formalising Costing Procedures 207 - Early Quest for Efficiency 211 5.4 Progress: 1919-1938 216 - Further Quest for Efficiency 216 - Development of Costing Procedures 220 - Distribution Costing 237 - Budgeting 243 5.5 Conclusions 248 Section 3 – Data Analysis Chapter 6 - Evaluating the performance differences of Rowntree and Cadbury between 1919-38 251 6.1 Introduction 251 6.2 Methodology 251 6.3 Relationship Performance Measures Defined 255 6.4 Performance Analysis Summary 1919-38 259 6.5 Performance Analysis in Detail 267 - 1919-23 267 - 1924-28 270 5 - 1929-33 272 - 1934-38 276 6.6 Conclusions 279 Chapter 7 - What was the contribution of cost accounting techniques to the overall performance of Cadbury & Rowntree between 1919 and 1938? 282 7.1 Introduction 282 7.2 Pricing Decisions 282 7.3 Application and Measurement of Efficiency 286 7.4 Recognition and Control of Overheads 288 7.5 Budgeting and Forecasting 293 7.6 Conclusions 298 Section 4 – Conclusions Chapter 8 – Conclusions 300 8.1 Introduction 300 8.2 Relationship to the Environment 300 8.3 Organisational Capabilities 304 8.4 Formulation and Implementation of Strategy 306 8.5 Pathways to Cost Accounting 310 8.6 Cost Accounting Sophistication 312 8.7 Overall Implications for Cadbury and Rowntree 1919-38 317 8.8 Publications and Further Research 323 6 Appendices 325 List of References – Primary Sources 366 List of References – Secondary Sources 367 7 List of Figures Figure 1.1 Theories of Retail Institutional Change 38 Figure 2.1 Accra (Gold Coast) Cocoa Bean Prices: New York Market (U.S. cents per pound) 1910-1939 63 Figure 2.2 J.S. Fry & Sons: Sales 1822-1856 (in £) 68 Figure 3.1 The Du Pont Company: Relationships of Factors Affecting Return on Investment 138 Figure 4.1 Raw Material Ingredient Chocolate Costing 1870 149 Figure 4.2 Rowntree’s Rock Cocoa Ingredient Costing 1870 150 Figure 4.3 Creams Box Cost & Profitability 1878 151 Figure 4.4 Cost Sheet Results 1st. Half 1891 152 Figure 4.5 Elect Cocoa (Half Year 1904, 31st. Dec.) 155 Figure 4.6 Product: Venetian Creams – 15th. March 1913 156 Figure 4.7 Scope and Reporting Conventions of Cost Office 173 Figure 6.1 Ratio Analysis by Leading Contemporary Commentators 253 Figure 6.2 Primary & Supporting Ratios used in Analysis 255 Figure 6.3 UK Confectionery Market 1919-1938 (Sales in Tons) 261 Figure 6.4 UK Confectionery Market 1919-1938 (Sales in Revenues £m.) 262 Figure 6.5 UK Confectionery Market 1919-1938 (Sales in Revenues £/Ton)262 8 List of Tables Table 1.1 GDP Annual Growth Rates 1899-1937 26 Table 1.2 GDP and TFP Growth Rates 1856-1937 27 Table 1.3 Growth in Real Wages 1856-1938 30 Table 1.4 Life Expectancy and Infant Mortality Rates 1856-1939 31 Table 1.5 UK Regional Employment Rates 1929-1936 34 Table 1.6 Growth in the Number of Multiple and Shop Firms and Branches in the Confectionery Trade 1905-1939 41 Table 1.7 Growth in UK Population 1851-1941 43 Table 1.8 Changes in Social Classes 1861-1911 44 Table 1.9 Changes in Rural/Urban Population 1856-1911 44 Table 2.1 Analysis of Changes in % Share of World Cocoa Bean Production 1895-1939 62 Table 2.2 Total Exports of Swiss Confectionery 1890-1906 73 Table 3.1 Credit Barometrics 126 Table 3.2 Financial and Operating Ratios 128 Table 3.3 Historical Ratio Method 130 Table 3.4 Relative Values and Weights of Financial Ratios 131 Table 3.5 Higher Control – Financial Position Ratios 134 Table 3.6 Family Groups of Financial Ratios 136 Table 4.1 Sales Revenues of Fry, Cadbury and Rowntree (1870) 148 Table 5.1 Growth of Cadbury 1870-1900 196 Table 5.2 Comparison of percentage of profit made by trade on fancy boxes 208 Table 5.3 Comparison of Unloaders labour cost – before and after Reorganisation 214 9 List of Tables (continued) Table 5.4 Cost Office Reorganisation 230 Table 5.5 Railhead Depot Rollout Programme 1922-1932 239 Table 5.6 Distribution Cost per 100lbs. of Net Sales 240 Table 5.7 The Cost of Retailing 242 Table 7.1 Rowntree Total Number of Lines 1920-1935 285 10 List of Appendices Appendix 1 UK Confectionery Market Share 1900-1938 by Sales Value 325 Appendix 2 Confectionery Manufacturers in UK Market 1919-38 326 Appendix 3 Cadbury – Snip Cutting Machine Mechanisation 330 Appendix 4 Cadbury – Proportion of Sugar and Glucose 1907-1910 332 Appendix 5 Cadbury – Machinery Returns 1913 333 Appendix 6 Cadbury – Advertising Budget 1914-1916 334 Appendix 7 Cadbury – Balance Sheets 1919-1938 335 Appendix 8 Cadbury – Income Statements 1919-1938 339 Appendix 9 Rowntree – Balance Sheets 1919-1938 341 Appendix 10 Rowntree – Income Statements 1919-1938 345 Appendix 11 Performance Metrics 347 11 Acknowledgements There are many people who have contributed, either directly or indirectly, in the preparation of this thesis. Firstly I would like to thank my principal supervisor, Professor David Higgins (now of the University of Newcastle), for his limitless interest, advice, support, enthusiasm, humour, wisdom and unflinching faith in the appropriateness of the research.